UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________.
Commission file number 0-10652
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NORTH VALLEY BANCORP
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(Exact name of registrant as specified in its charter)
California 94-2751350
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
300 Park Marina Circle, Redding, California 96001
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 226-2900
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Securities registered pursuant to Section 12(b) of the Act:
Title of class: Name of each exchange on which registered:
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Common Stock, no par value The NASDAQ Global Select Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold was
$163,077,186 as of June 30, 2007.
The number of shares outstanding of common stock as of February 28, 2008, were
7,416,066.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for the 2008 Annual Meeting
of Shareholders are incorporated by reference in Part III, Items 10, 11, 12, 13
and 14 of this Form 10-K.
TABLE OF CONTENTS
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Part I
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Item 1 Business 4
Item 1A Risk Factors 14
Item 1B Unresolved Staff Comments 16
Item 2 Properties 17
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Part II
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Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 19
Item 6 Selected Financial Data 21
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 7A Quantitative and Qualitative Disclosures About Market Risk 39
Item 8 Financial Statements and Supplementary Data 43
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 43
Item 9A Controls and Procedures 44
Item 9B Other Information 44
Part III
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Item 10 Directors, Executive Officers and Corporate Governance 44
Item 11 Executive Compensation 44
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 44
2
Item 13 Certain Relationships and Related Transactions, and Director
Independence 45
Item 14 Principal Accountant Fees and Services 45
Part IV
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Item 15 Exhibits and Financial Statement Schedules 46
Signatures 92
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Certain matters discussed or incorporated by reference in this Annual Report on
Form 10-K including, but not limited to, matters described in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations," are "forward-looking statements" within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. Such forward-looking statements may contain
words related to future projections including, but not limited to, words such as
"believe," "expect," "anticipate," "intend," "may," "will," "should," "could,"
"would," and variations of those words and similar words that are subject to
risks, uncertainties and other factors that could cause actual results to differ
materially from those projected. Factors that could cause or contribute to such
differences include, but are not limited to, the following: (1) variances in the
actual versus projected growth in assets; (2) return on assets; (3) loan and
lease losses; (4) expenses; (5) changes in the interest rate environment
including interest rates charged on loans, earned on securities investments and
paid on deposits; (6) competition effects; (7) fee and other noninterest income
earned; (8) general economic conditions nationally, regionally, and in the
operating market areas of the Company and its subsidiaries; (9) changes in the
regulatory environment; (10) changes in business conditions and inflation; (11)
changes in securities markets; (12) data processing problems; (13) a decline in
real estate values in the Company's operating market areas; (14) the effects of
terrorism, the threat of terrorism or the impact of the current military
conflict in Iraq and the conduct of the war on terrorism by the United States
and its allies, as well as other factors. The factors set forth under "Item 1A -
Risk Factors" in this report and other cautionary statements and information set
forth in this report should be carefully considered and understood as being
applicable to all related forward-looking statements contained in this report
when evaluating the business prospects of the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their nature,
they involve risks, uncertainties and assumptions. Actual results and
shareholder values in the future may differ significantly from those expressed
in forward-looking statements. You are cautioned not to put undue reliance on
any forward-looking statement. Any such statement speaks only as of the date of
the report, and in the case of any documents that may be incorporated by
reference, as of the date of those documents. We do not undertake any obligation
to update or release any revisions to any forward-looking statements, or to
report any new information, future event or other circumstances after the date
of this report or to reflect the occurrence of unanticipated events, except as
required by law. However, your attention is directed to any further disclosures
made on related subjects in our subsequent reports filed with the Securities and
Exchange Commission on Forms 10-K, 10-Q and 8-K.
General
North Valley Bancorp (the "Company") is a bank holding company registered with
and subject to regulation and supervision by the Board of Governors of the
Federal Reserve System (the "Board of Governors"). The Company was incorporated
in 1980 in the State of California. The Company owns 100% of its principal
subsidiaries, North Valley Bank ("NVB"), North Valley Trading Company ("Trading
Company"), which is inactive, North Valley Capital Trust I, North Valley Capital
Trust II, North Valley Capital Trust III, and North Valley Capital Statutory
Trust IV. On October 11, 2000, the Company completed its plan of reorganization
with Six Rivers National Bank. On January 2, 2002, Six Rivers National Bank
became a California State chartered bank and in conjunction with this charter
conversion, changed its name to Six Rivers Bank ("SRB"). On January 1, 2004, Six
Rivers Bank was merged with and into North Valley Bank with North Valley Bank as
the surviving institution. Former branches of Six Rivers Bank continued to
operate as Six Rivers Bank, a division of North Valley Bank until April 18,
2005. Since April 18, 2005, those branches have operated as North Valley Bank
branches. (For purposes herein, "NVB" shall refer to North Valley Bank including
the former branches of SRB and "SRB" will refer to the former branches and
operations of SRB). On August 31, 2004, the Company acquired Yolo Community Bank
("YCB") in a purchase transaction. Yolo Community Bank was a privately-held
California banking corporation that commenced operations in 1998 and was
headquartered in Woodland, California. Consideration paid was a combination of
$9.5 million in cash and 741,697 shares of the Company's common stock. Yolo
Community Bank changed its name to NVB Business Bank ("NVB BB") effective
February 11, 2005. After the close of business on June 30, 2006, NVB BB was
merged with and into North Valley Bank with North Valley Bank as the surviving
institution. The information contained herein contains the results of operations
of YCB from September 1, 2004.
4
On April 10, 2007, the Company entered into an Agreement and Plan of Merger
("Plan of Merger") with Sterling Financial Corporation, a Washington corporation
("Sterling"), pursuant to which the Company agreed to merge with and into
Sterling (with Sterling being the surviving corporation), subject to approval of
the proposed merger by the shareholders of the Company, the receipt of all
necessary regulatory approvals, and the satisfaction of other closing conditions
which are customary for such transactions. The shareholders of the Company
approved the proposed merger at a special meeting of shareholders held on July
31, 2007, but consummation of the merger remained subject to the receipt of all
necessary regulatory approvals (among other closing conditions). As of November
30, 2007, the deadline for closing specified in the Plan of Merger, Sterling had
not received the necessary regulatory approvals and informed the Company that
such approvals were not likely to be obtained in the near future, if at all.
Based on Sterling's failure to meet the November 30, 2007 deadline and the
advice of its financial and legal advisors, the Board of Directors of the
Company unanimously concluded that it would be in the best interests of the
Company and its shareholders to terminate the Plan of Merger and to continue to
operate as an independent banking institution. As a result, notice of
termination was given to Sterling, effective December 1, 2007, and on such date
the Plan of Merger became void and of no further effect (except for certain
limited purposes as set forth in the Plan of Merger).
At December 31, 2007 the Company had $949,019,000 in total assets, $746,253,000
in total loans and leases and $736,739,000 in total deposits. The Company does
not hold deposits of any one customer or group of customers where the loss of
such deposits would have a material adverse effect on the Company. The Company's
business is not seasonal.
NVB was organized in September 1972, under the laws of the State of California,
and commenced operations in February 1973. NVB is principally supervised and
regulated by the California Commissioner of Financial Institutions (the
"Commissioner") and conducts a commercial and retail banking business, which
includes accepting demand, savings, and money market rate deposit accounts and
time deposits, and making commercial, real estate and consumer loans. It also
issues cashier's checks and money orders, sells travelers' checks and provides
safe deposit boxes and other customary banking services. As a state-chartered
insured member bank, NVB is also subject to regulation by the Board of Governors
of the Federal Reserve System and its deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC") up to the legal limits thereupon. NVB
does not offer trust services or international banking services and does not
plan to do so in the near future.
NVB operates twenty-six banking offices in Shasta, Trinity, Humboldt, Del Norte,
Yolo, Solano, Sonoma, Placer, and Mendocino Counties, for which it has received
all of the requisite regulatory approvals. The headquarters office in Redding
opened in February 1973. In October 1973, NVB opened its Weaverville Office; in
October 1974, its Hayfork Office; in January 1978, its Anderson Office; and in
September 1979, its Enterprise Office (East Redding). On December 20, 1982, NVB
acquired the assets of two branches of the Bank of California: one located in
Shasta Lake and the other in Redding, California. On June 1, 1985, NVB opened
its Westwood Village Office in South Redding. On November 27, 1995, NVB opened a
branch located in Palo Cedro, California. On October 14, 1997, NVB relocated its
branch in Shasta Lake to a new facility. NVB opened two super-market branches in
1998 located in Cottonwood, California and Redding, California. On May 11, 1998,
NVB opened a Business Banking Center in Redding, California, to provide banking
services to business and professional clients. On August 13, 2001, the Business
Banking Center and the Company's Administrative offices moved to a new location
at 300 Park Marina Drive in Redding, California. On August 5, 2002, NVB opened
an Express Banking Center located at 2245 Churn Creek Road in Redding.
NVB has signed agreements with Essex National Securities, Inc., a registered
broker-dealer, ("Essex") whereby Essex provides broker/dealer services and
standardized investment advice to NVB customers. NVB shares in the fees and
commissions paid to Essex on a pre-determined schedule. In 2006, majority
ownership of Essex was acquired by Addison Avenue Financial Partners, a
subsidiary of the Addison Avenue Federal Credit Union.
Junior Subordinated Debentures
The Company owns the common stock of four business trusts that have issued an
aggregate of $31.0 million in trust preferred securities fully and
unconditionally guaranteed by the Company. The entire proceeds of each
respective issuance of trust preferred securities were invested by the separate
business trusts into junior subordinated debentures issued by the Company, with
identical maturity, repricing and payment terms as the respective issuance of
trust preferred securities. The aggregate amount of junior subordinated
debentures issued by the Company is $32.0 million, with the maturity dates for
the respective debentures ranging from 2031 through 2036. The Company may redeem
the respective junior subordinated debentures earlier than the maturity date,
with certain of the debentures being redeemable beginning in July 2006 and
others being redeemable beginning in April 2008, July 2009 and March 2011. For
more information about the trust preferred securities and the debentures see
Note 10 to the Notes to Consolidated Financial Statements.
5
Supervision and Regulation
The common stock of the Company is subject to the registration requirements of
the Securities Act of 1933, as amended, and the qualification requirements of
the California Corporate Securities Law of 1968, as amended. The Company is also
subject to the periodic reporting requirements of Section 13 of the Securities
Exchange Act of 1934, as amended, which include, but are not limited to, the
filing of annual, quarterly and other current reports with the Securities and
Exchange Commission.
NVB is licensed by the California Commissioner of Financial Institutions (the
"Commissioner"), NVB's deposits are insured by the FDIC, and NVB is a member of
the Federal Reserve System. Consequently, NVB is subject to the supervision of,
and is regularly examined by, the Commissioner and the Board of Governors of the
Federal Reserve System ("FRB" or "Board of Governors"). Such supervision and
regulation include comprehensive reviews of all major aspects of the Bank's
business and condition, including its capital ratios, allowance for loan and
lease losses and other factors. However, no inference should be drawn that such
authorities have approved any such factors. NVB is required to file reports with
the Commissioner and the FRB and provide such additional information as the
Commissioner and the FRB may require.
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Board of
Governors. The Company is required to obtain the approval of the Board of
Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving
effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the provisions of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994.
The Company, and its subsidiary, NVB, are deemed to be "affiliates" within the
meaning of that term as defined in the Federal Reserve Act. This means, for
example, that there are limitations (a) on loans between affiliates, and (b) on
investments by NVB in affiliates' stock as collateral for loans to any borrower.
The Company and its subsidiaries are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.
The Board of Governors and the FDIC have adopted risk-based capital guidelines
for evaluating the capital adequacy of bank holding companies and banks. The
guidelines are designed to make capital requirements sensitive to differences in
risk profiles among banking organizations, to take into account off-balance
sheet exposures and to aid in making the definition of bank capital uniform
internationally. Under the guidelines, the Company and its banking subsidiaries
are required to maintain capital equal to at least 8% of its assets and
commitments to extend credit, weighted by risk, of which at least 4% must
consist primarily of common equity (including retained earnings) and the
remainder may consist of subordinated debt, cumulative preferred stock, or a
limited amount of loan loss reserves. The Company and its banking subsidiaries
are subject to regulations issued by the Board of Governors and the FDIC, which
require maintenance of a certain level of capital. These regulations impose two
capital standards: a risk-based capital standard and a leverage capital
standard.
Assets, commitments to extend credit and off-balance sheet items are categorized
according to risk and certain assets considered to present less risk than others
permit maintenance of capital at less than the 8% ratio. For example, most home
mortgage loans are placed in a 50% risk category and therefore require
maintenance of capital equal to 4% of such loans, while commercial loans are
placed in a 100% risk category and therefore require maintenance of capital
equal to 8% of such loans.
Under the Board of Governors' risk-based capital guidelines, assets reported on
an institution's balance sheet and certain off-balance sheet items are assigned
to risk categories, each of which has an assigned risk weight. Capital ratios
are calculated by dividing the institution's qualifying capital by its
period-end risk-weighted assets. The guidelines establish two categories of
qualifying capital: Tier 1 capital (defined to include common shareholders'
equity and noncumulative perpetual preferred stock) and Tier 2 capital which
includes, among other items, limited life (and in case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserve for credit losses. Tier 2 capital may also include up
to 45% of the pretax net unrealized gains on certain available-for-sale equity
securities having readily determinable fair values (i.e. the excess, if any, of
fair market value over the book value or historical cost of the investment
security). The federal regulatory agencies reserve the right to exclude all or a
portion of the unrealized gains upon a determination that the equity securities
are not prudently valued. Unrealized gains and losses on other types of assets,
such as bank premises and available-for-sale debt securities, are not included
in Tier 2 capital, but may be taken into account in the evaluation of overall
capital adequacy and net unrealized losses on available-for-sale equity
securities will continue to be deducted from Tier 1 capital as a cushion against
risk. Each institution is required to maintain a risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
6
Under the Board of Governors' leverage capital standard, an institution is
required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be used
in place of quarterly average total assets on a case-by-case basis. The Board of
Governors and the FDIC have adopted a minimum leverage ratio for bank holding
companies as a supplement to the risk-weighted capital guidelines. The leverage
ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to total assets)
for the highest rated bank holding companies or those that have implemented the
risk-based capital market risk measure. All other bank holding companies must
maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital
ratios required for bank holding companies that have significant financial
and/or operational weakness, a high risk profile, or are undergoing or
anticipating rapid growth.
At December 31, 2007, NVB and the Company were in compliance with the risk-based
capital and leverage ratios described above. See Item 8, Financial Statements
and Supplementary Data and Note 18 to the Financial Statements incorporated by
reference therein, for a listing of the Company's and Bank's risk-based capital
ratios at December 31, 2007 and 2006.
The Board of Governors, the OCC and FDIC have adopted regulations implementing a
system of prompt corrective action for insured financial institutions pursuant
to Section 38 of the Federal Deposit Insurance Act and Section 131 of the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The
regulations establish five capital categories with the following
characteristics: (1) "Well capitalized" - consisting of institutions with a
total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "Adequately capitalized" - consisting of
institutions with a total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized"
institution; (3) "Undercapitalized" - consisting of institutions with a total
risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less
than 4%, or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized" - consisting of institutions with a total risk-based capital
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting
of an institution with a ratio of tangible equity to total assets that is equal
to or less than 2%. NVB is considered "well capitalized" under the framework for
prompt corrective action.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
7
Any financial institution which is classified as "critically undercapitalized"
must be placed in conservatorship or receivership within 90 days of such
determination unless it is also determined that some other course of action
would better serve the purposes of the regulations. Critically undercapitalized
institutions are also prohibited from making (but not accruing) any payment of
principal or interest on subordinated debt without the prior approval of the
FDIC and the FDIC must prohibit a critically undercapitalized institution from
taking certain other actions without its prior approval, including (1) entering
into any material transaction other than in the usual course of business,
including investment expansion, acquisition, sale of assets or other similar
actions; (2) extending credit for any highly leveraged transaction; (3) amending
articles or bylaws unless required to do so to comply with any law, regulation
or order; (4) making any material change in accounting methods; (5) engaging in
certain affiliate transactions; (6) paying excessive compensation or bonuses;
and (7) paying interest on new or renewed liabilities at rates which would
increase the weighted average costs of funds beyond prevailing rates in the
institution's normal market areas.
Under FDICIA, the federal financial institution agencies have adopted
regulations which require institutions to establish and maintain comprehensive
written real estate lending policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and reporting
requirements. FDICIA further generally prohibits an insured state bank from
engaging as a principal in any activity that is impermissible for a national
bank, absent an FDIC determination that the activity would not pose a
significant risk to the Bank Insurance Fund, and that the bank is, and will
continue to be, within applicable capital standards. Similar restrictions apply
to subsidiaries of insured state banks. The Company does not currently intend to
engage in any activities which would be restricted or prohibited under FDICIA.
The Federal Financial Institution Examination Counsel ("FFIEC") on December 13,
1996, approved an updated Uniform Financial Institutions Rating System
("UFIRS"). In addition to the five components traditionally included in the
so-called "CAMEL" rating system which has been used by bank examiners for a
number of years to classify and evaluate the soundness of financial institutions
(including capital adequacy, asset quality, management, earnings and liquidity),
UFIRS includes for all bank regulatory examinations conducted on or after
January 1, 1997, a new rating for a sixth category identified as sensitivity to
market risk. Ratings in this category are intended to reflect the degree to
which changes in interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and capital. The
revised rating system is identified as the "CAMELS" system.
The federal financial institution agencies have established bases for analysis
and standards for assessing a financial institution's capital adequacy in
conjunction with the risk-based capital guidelines, including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan, particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending to low
and moderate income individuals and businesses across a four-point scale from
"outstanding" to "substantial noncompliance," and are a factor in regulatory
review of applications to merge, establish new branches or form bank holding
companies. In addition, any bank rated in "substantial noncompliance" with the
CRA regulations may be subject to enforcement proceedings.
NVB currently has a rating of "satisfactory" for CRA compliance.
8
The Company's ability to pay cash dividends is subject to restrictions set forth
in the California General Corporation Law. Funds for payment of any cash
dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from the Company's subsidiary bank. The payment
of cash dividends and/or management fees by NVB is subject to restrictions set
forth in the California Financial Code, as well as restrictions established by
the FDIC. See Item 5 below for further information regarding the payment of cash
dividends by the Company and NVB.
The Patriot Act
On October 26, 2001, President Bush signed the USA Patriot Act (the "Patriot
Act"), which includes provisions pertaining to domestic security, surveillance
procedures, border protection, and terrorism laws to be administered by the
Secretary of the Treasury. Title III of the Patriot Act entitled, "International
Money Laundering Abatement and Anti-Terrorist Financing Act of 2001" includes
amendments to the Bank Secrecy Act which expand the responsibilities of
financial institutions in regard to anti-money laundering activities with
particular emphasis upon international money laundering and terrorism financing
activities through designated correspondent and private banking accounts.
Effective December 25, 2001, Section 313(a) of the Patriot Act prohibits any
insured financial institution such as North Valley Bank, from providing
correspondent accounts to foreign banks which do not have a physical presence in
any country (designated as "shell banks"), subject to certain exceptions for
regulated affiliates of foreign banks. Section 313(a) also requires financial
institutions to take reasonable steps to ensure that foreign bank correspondent
accounts are not being used to indirectly provide banking services to foreign
shell banks, and Section 319(b) requires financial institutions to maintain
records of the owners and agent for service of process of any such foreign banks
with whom correspondent accounts have been established.
Effective July 23, 2002, Section 312 of the Patriot Act created a requirement
for special due diligence for correspondent accounts and private banking
accounts. Under Section 312, each financial institution that establishes,
maintains, administers, or manages a private banking account or a correspondent
account in the United States for a non-United States person, including a foreign
individual visiting the United States, or a representative of a non-United
States person shall establish appropriate, specific, and, where necessary,
enhanced, due diligence policies, procedures, and controls that are reasonably
designed to detect and record instances of money laundering through those
accounts.
The Patriot Act contains various provisions in addition to Sections 313(a) and
312 that affect the operations of financial institutions by encouraging
cooperation among financial institutions, regulatory authorities and law
enforcement authorities with respect to individuals, entities and organizations
engaged in, or reasonably suspected of engaging in, terrorist acts or money
laundering activities. The Company and North Valley Bank are not currently aware
of any account relationships between North Valley Bank and any foreign bank or
other person or entity as described above under Sections 313(a) or 312 of the
Patriot Act.
Certain surveillance provisions of the Patriot Act were scheduled to expire on
December 31, 2005, and actions to restrict the use of the Patriot Act
surveillance provisions were filed by the ACLU and other organizations. In March
2006, after temporary extensions of the Patriot Act, Congress passed and
President Bush signed the "USA Patriot Act Improvement and Reauthorization Act
of 2005, and the related Amendments Act of 2006," which reauthorized all
expiring provisions of the Patriot Act by making permanent 14 of the 16
provisions and imposed a four-year expiration date in 2009 on the other two
provisions related to "roving surveillance" and production of business records.
The effects which the Patriot Act and any additional legislation enacted by
Congress may have upon financial institutions is uncertain; however, such
legislation could increase compliance costs and thereby potentially may have an
adverse effect upon the Company's results of operations.
The Sarbanes-Oxley Act of 2002
On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley
Act of 2002 (the "Act"), legislation designed to address certain issues of
corporate governance and accountability. The key provisions of the Act and the
rules promulgated by the SEC pursuant to the Act include the following:
o Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the
SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
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o Improved corporate responsibility through mandatory listing
standards relating to audit committees, certifications of periodic
reports by the CEO and CFO and making issuer interference with an
audit a crime.
o Enhanced financial disclosures, including periodic reviews for
largest issuers and real time disclosure of material company
information.
o Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud
lawsuits.
o Disclosure of whether a company has adopted a code of ethics that
applies to the company's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, and disclosure of any
amendments or waivers to such code of ethics.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an
"audit committee financial expert."
o A prohibition on insider trading during pension plan black-out
periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards of professional conduct for attorneys, requiring attorneys
having an attorney-client relationship with a company, among other
matters, to report "up the ladder" to the audit committee, to
another board committee or to the entire board of directors
regarding certain material violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities, reducing the filing deadline to
within 2 business days of the date on which an obligation to report
is triggered.
o Accelerated filing requirements for reports on Forms 10-K and 10-Q
by public companies which qualify as "accelerated filers," with a
phased-in reduction of the filing deadline for Form 10-K and Form
10-Q.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q
and 8-K, and any amendments to those reports, by "accelerated
filers" as soon as reasonably practicable after such reports and
material are filed with or furnished to the SEC.
o Rules requiring national securities exchanges and national
securities associations to prohibit the listing of any security
whose issuer does not meet audit committee standards established
pursuant to the Act.
The Company's securities are listed on the NASDAQ Global Select Market.
Consequently, in addition to the rules promulgated by the SEC pursuant to the
Act, the Company must also comply with the listing standards applicable to all
NASDAQ listed companies. The NASDAQ listing standards applicable to the Company
include standards related to (i) director independence, (ii) executive session
meetings of the board, (iii) requirements for audit, nominating and compensation
committee charters, membership qualifications and procedures, (iv) shareholder
approval of equity compensation arrangements, and (v) code of conduct
requirements that comply with the code of ethics under the Act.
The effect of the Act upon the Company is uncertain; however, the Company has
incurred and it is anticipated that it will continue to incur increased costs to
comply with the Act and the rules and regulations promulgated pursuant to the
Act by the Securities and Exchange Commission, NASDAQ and other regulatory
agencies having jurisdiction over the Company or the issuance and listing of its
securities. The Company does not currently anticipate, however, that compliance
with the Act and such rules and regulations will have a material adverse effect
upon its financial position or results of its operations or its cash flows.
The California Corporate Disclosure Act
Effective January 1, 2003, the California Corporate Disclosure Act (the "CCD
Act") required publicly traded corporations incorporated or qualified to do
business in California to disclose information about their past history,
auditors, directors and officers. Effective September 28, 2004, the CCD Act, as
currently in effect and codified at California Corporations Code Section 1502.1,
requires the Company to file with the California Secretary of State and disclose
within 150 days after the end of its fiscal year certain information including
the following:
o The name of the company's independent auditor and a description of
services, if any, performed for a company during the previous two
fiscal years and the period from the end of the most recent fiscal
year to the date of filing;
o The annual compensation paid to each director and the five most
highly compensated non-director executive officers (including the
CEO and CFO) during the most recent fiscal year, including all plan
and non-plan compensation for all services rendered to a company as
specified in Item 402 of Regulation S-K such as grants, awards or
issuance of stock, stock options and similar equity-based
compensation;
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o A description of any loans made to a director at a "preferential"
loan rate during the company's two most recent fiscal years,
including the amount and terms of the loans;
o Whether any bankruptcy was filed by a company or any of its
directors or executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been
convicted of fraud during the previous 10 years; and
o A description of any material pending legal proceedings other than
ordinary routine litigation as specified in Item 103 of Regulation
S-K and a description of such litigation where the company was found
legally liable by a final judgment or order.
The Company does not currently anticipate that compliance with the CCD Act will
have a material adverse effect upon its financial position or results of its
operations or its cash flows.
Competition
At June 30, 2007, commercial and savings banks in competition with the Company
had 457 banking offices in the counties of Del Norte, Humboldt, Mendocino,
Placer, Shasta, Solano, Sonoma, Trinity and Yolo where the Company operates. In
those 457 banking offices (which includes the Company's 26), there were $26.0
billion in total deposits of which the Company had an overall share of 2.85%.
Additionally, the Company competes with thrifts and, to a lesser extent, credit
unions, finance companies and other financial service providers for deposit and
loan customers.
Larger banks may have a competitive advantage over the Company because of higher
lending limits and major advertising and marketing campaigns. They also perform
services, such as trust services and international banking which the Company is
not authorized nor prepared to offer currently. The Company has arranged with
correspondent banks and with others to provide some of these services for their
customers. As of December 31, 2007, NVB's lending limit to any one borrower is
$30,211,000 on a fully secured basis and $18,126,000 on an unsecured basis.
These limits are adequate in most instances to compete for lending relationships
within the markets we currently serve.
In order to compete with the major financial institutions in its primary service
areas, the Company, through NVB, utilizes to the fullest extent possible, the
flexibility which is accorded by its independent status. This includes an
emphasis on specialized services, local promotional activity, and personal
contacts by the officers, directors and employees of the Company. NVB also seeks
to provide special services and programs for individuals in its primary service
area who are employed in the agricultural, professional and business fields,
such as loans for equipment, furniture, tools of the trade or expansion of
practices or businesses.
Banking is a business that depends heavily on net interest income. Net interest
income is defined as the difference between the interest rate paid to obtain
deposits and other borrowings and the interest rate received on loans extended
to customers and on securities held in the Bank's investment portfolio.
Commercial banks compete with savings and loan associations, credit unions,
other financial institutions and other entities for funds. For instance, yields
on corporate and government debt securities and other commercial paper affect
the ability of commercial banks to attract and hold deposits. Commercial banks
also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
Monetary and Fiscal Policies
The net interest income of the Company, and to a large extent, its earnings, are
affected not only by general economic conditions, both domestic and foreign, but
also by the monetary and fiscal policies of the United States as set by statutes
and as implemented by federal agencies, particularly the Federal Reserve Board.
The Federal Reserve Board can and does implement national monetary policy, such
as seeking to curb inflation and combat recession by its open market operations
in United States government securities, adjustments in the amount of interest
free reserves that banks and other financial institutions are required to
maintain, and adjustments to the discount rates applicable to borrowing by banks
from the Federal Reserve Board. These activities influence the growth of bank
loans, investments and deposits and also affect interest rates charged on loans
and paid on deposits. The nature and timing of any future changes in monetary
policies and their impact on the Company are not predictable.
11
Deposit Insurance
The Federal Deposit Insurance Reform Act of 2005 (the "Reform Act") had the
effect of merging the Bank Insurance Fund and the Savings Association Insurance
Fund into a new Deposit Insurance Fund ("DIF"). This change was made effective
on March 31, 2006. The FDIC released final regulations under the Reform Act on
November 2, 2006 that establish a revised risk-based deposit insurance
assessment rate system for members of the DIF to insure, among other matters,
that there will be sufficient assessment income for repayment of DIF obligations
and to further refine the differentiation of risk profiles among institutions as
a basis for assessments. Under the new assessment rate system, the FDIC set the
assessment rates (effective January 1, 2007) for most institutions from $0.05 to
$0.07 per $100 of insured deposits and established a Designated Reserve Ratio
("DRR") for the DIF during 2007 of 1.25% of insured deposits.
The new assessment rate system consolidates the nine categories of the prior
assessment system into four categories (Risk Categories I, II, III and IV) and
three Supervisory Groups (A, B and C) based upon institution's capital levels
and supervisory ratings. Risk Category I includes all well capitalized
institutions with the highest supervisory ratings. Risk Category II includes
adequately capitalized institutions that are assigned to Supervisory Groups A
and B. Risk Category III includes all undercapitalized institutions that are
assigned to Supervisory Groups A and B and institutions assigned to Supervisory
Group C that are not undercapitalized but have a low supervisory rating. Risk
Category IV includes all undercapitalized institutions that are assigned to
Supervisory Group C. NVB does not expect its assessment for 2008 compared to its
assessment for 2007 to increase by an amount that will have a material adverse
effect on the Company's results of operations.
Interstate Banking
Since 1996, California law implementing certain provisions of prior federal law
has (1) permitted interstate merger transactions; (2) prohibited interstate
branching through the acquisition of a branch business unit located in
California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition of or merger with an existing
whole bank, which has been in existence for at least five years.
National Banks
The federal financial institution agencies, especially the OCC and the Board of
Governors, have taken steps to increase the types of activities in which
national banks and bank holding companies can engage, and to make it easier to
engage in such activities. The OCC has issued regulations permitting national
banks to engage in a wider range of activities through subsidiaries. "Eligible
institutions" (those national banks that are well capitalized, have a high
overall rating and a satisfactory or better CRA rating, and are not subject to
an enforcement order) may engage in activities related to banking through
operating subsidiaries subject to an expedited application process. In addition,
a national bank may apply to the OCC to engage in an activity through a
subsidiary in which the bank itself may not engage.
Glass-Steagall Act
The Financial Services Modernization Act of 1999 (the "FSMA") eliminated most of
the remaining depression-era "firewalls" between banks, securities firms and
insurance companies which was established by Banking Act of 1933, also known as
the Glass-Steagall Act ("Glass-Steagall). Glass-Steagall sought to insulate
banks as depository institutions from the perceived risks of securities dealing
and underwriting, and related activities. The FSMA repealed Section 20 of
Glass-Steagall, which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can now
acquire securities firms or create them as subsidiaries, and securities firms
can now acquire banks or start banking activities through a financial holding
company. The FSMA includes provisions which permit national banks to conduct
financial activities through a subsidiary that are permissible for a national
bank to engage in directly, as well as certain activities authorized by statute,
or that are financial in nature or incidental to financial activities to the
same extent as permitted to a "financial holding company" or its affiliates.
This liberalization of United States banking and financial services regulation
applies both to domestic institutions and foreign institutions conducting
business in the United States. Consequently, the common ownership of banks,
securities firms and insurance firms is now possible, as is the conduct of
commercial banking, merchant banking, investment management, securities
underwriting and insurance within a single financial institution using a
"financial holding company" structure authorized by the FSMA.
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Prior to the FSMA, significant restrictions existed on the affiliation of banks
with securities firms and on the direct conduct by banks of securities dealing
and underwriting and related securities activities. Banks were also (with minor
exceptions) prohibited from engaging in insurance activities or affiliating with
insurers. The FSMA removed these restrictions and substantially eliminated the
prohibitions under the Bank Holding Company Act on affiliations between banks
and insurance companies. Bank holding companies, which qualify as financial
holding companies through an application process, can now insure, guarantee, or
indemnify against loss, harm, damage, illness, disability, or death; issue
annuities; and act as a principal, agent, or broker regarding such insurance
services.
In order for a commercial bank to affiliate with a securities firm or an
insurance company pursuant to the FSMA, its bank holding company must qualify as
a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Board of Governors a certification to such effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
"closely related to banking" which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of FSMA was to require that federal financial institution and
securities regulatory agencies prescribe regulations to implement the policy
that financial institutions must respect the privacy of their customers and
protect the security and confidentiality of customers' non-public personal
information. These regulations will require, in general, that financial
institutions (1) may not disclose non-public personal information of customers
to non-affiliated third parties without notice to their customers, who must have
opportunity to direct that such information not be disclosed; (2) may not
disclose customer account numbers except to consumer reporting agencies; and (3)
must give prior disclosure of their privacy policies before establishing new
customer relationships.
Discharge of Materials into the Environment
Compliance with federal, state and local regulations regarding the discharge of
materials into the environment may have a substantial effect on the capital
expenditure, earnings and competitive position of the Company in the event of
lender liability or environmental lawsuits. Under federal law, liability for
environmental damage and the cost of cleanup may be imposed upon any person or
entity that is an "owner" or "operator" of contaminated property. State law
provisions, which were modeled after federal law, are substantially similar.
Congress established an exemption under Federal law for lenders from "owner"
and/or "operator" liability, which provides that "owner" and/or "operator" do
not include "a person, who, without participating in the management of a vessel
or facility, holds indicia of ownership primarily to protect his security
interests in the vessel or facility."
In the event that the Company was held liable as an owner or operator of a toxic
property, it could be responsible for the entire cost of environmental damage
and cleanup. Such an outcome could have a serious effect on the Company's
consolidated financial condition depending upon the amount of liability assessed
and the amount of cleanup required.
The Company takes reasonable steps to avoid loaning against property that may be
contaminated. In order to identify possible hazards, the Company requires that
all fee appraisals contain a reference to a visual assessment of hazardous waste
by the appraiser. Further, on loans proposed to be secured by industrial,
commercial or agricultural real estate, an Environmental Questionnaire must be
completed by the borrower and any areas of concern addressed. Additionally, the
borrower is required to review and sign a Hazardous Substance Certificate and
Indemnity at the time the note is signed.
If the investigation reveals and if certain warning signs are discovered, but it
cannot be easily ascertained, that an actual environmental hazard exists, the
Company may require that the owner/buyer of the property, at his/her expense,
have an Environmental Inspection performed by an insured, bonded environmental
engineering firm acceptable to the Company.
13
Other Legislation and Regulation
Certain legislative and regulatory proposals that could affect the Company and
banking business in general are periodically introduced before the United States
Congress, the California State Legislature and Federal and state government
agencies. It is not known to what extent, if any, legislative proposals will be
enacted and what effect such legislation would have on the structure, regulation
and competitive relationships of financial institutions. It is likely, however,
that such legislation could subject the Company and its subsidiary banks to
increased regulation, disclosure and reporting requirements and increase
competition and the Company's cost of doing business.
In addition to legislative changes, the various federal and state financial
institution regulatory agencies frequently propose rules and regulations to
implement and enforce already existing legislation. It cannot be predicted
whether or in what form any such rules or regulations will be enacted or the
effect that such and regulations may have on the Company and its subsidiary
bank.
Employees
At December 31, 2007, the Company had approximately 432 employees, (which
includes 397 full-time equivalent employees). None of the Company's employees
are represented by a labor union and management considers its relations with
employees are good.
Website Access
Information on the Company and its subsidiary banks may be obtained from the
Company's website www.novb.com. Copies of the Company's annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments thereto are available free of charge on the website as soon as they
are published by the SEC through a link to the Edgar reporting system maintained
by the SEC. Simply select the "About NVB Bancorp" menu item, then click on
"Shareholder Relations" and then select the "SEC Filings" link. Also made
available through the Company's website are the Section 16 reports of ownership
and changes in ownership of the Company's common stock which are filed with the
Securities and Exchange Commission by the directors and executive officers of
the Company and by any persons who own more than ten percent of the outstanding
shares of such stock. Information on the Company website is not incorporated by
reference into this report.
ITEM 1A. RISK FACTORS
In addition to the risks associated with the business of banking generally, as
described above under Item 1 (Description of Business), the Company's business,
financial condition, operating results, future prospects and stock price can be
adversely impacted by certain risk factors, as set forth below, any one of which
could cause the Company's actual results to vary materially from recent results
or from the Company's anticipated future results.
Dependence on Key Employees. The Company and its subsidiaries are dependent on
the successful recruitment and retention of highly qualified personnel. Our
ability to implement our business strategies is closely tied to the strengths of
our chief executive officer and other key officers. Our key officers have
extensive experience in the banking industry which is not easily replaced.
Business banking, one of the Company's principal lines of business, is dependent
on relationship banking, in which Company personnel develop professional
relationships with small business owners and officers of larger business
customers who are responsible for the financial management of the companies they
represent. If these employees were to leave the Company and become employed by a
local competing bank, the Company could potentially lose business customers. In
addition, the Company relies on its customer service staff to effectively serve
the needs of its consumer customers. The Company very actively recruits for all
open positions and management believes that employee relations are good.
Growth Strategy. The Company pursued and continues to pursue a growth strategy
which depends primarily on generating an increasing level of loans and deposits
at acceptable risk levels. The Company may not be able to sustain this growth
strategy without establishing new branches or new products. Therefore, the
Company may expand in our current market by opening or acquiring branch offices
or may expand into new markets or make strategic acquisitions of other financial
institutions or branch offices. This expansion may require significant
investments in equipment, technology, personnel and site locations. The Company
cannot assure you of our success in implementing our growth strategy without
corresponding increases in our noninterest expenses. In addition, growth through
acquisitions represents a component of our business strategy. The need to
integrate the operations and personnel of acquired banks and branches may not
always be successfully accomplished. Any inability to improve operating
performance through integration and/or merger of operations, functions or banks
could increase expenses and impact the Company's performance.
14
Governmental Fiscal and Monetary Policies. The business of banking is affected
significantly by the fiscal and monetary policies of the federal government and
its agencies. Such policies are beyond the control of the Company. The Company
is particularly affected by the policies established by the Board of Governors
in relation to the supply of money and credit in the United States. The
instruments of monetary policy available to the Board of Governors can be used
in varying degrees and combinations to directly affect the availability of bank
loans and deposits, as well as the interest rates charged on loans and paid on
deposits, and this can and does have a material effect on the Company's
business, results of operations and financial condition.
Geographic Concentration. All of the business of the Company is located in the
State of California and the banking offices of the Company are located in the
Northern California Counties of Shasta, Trinity, Humboldt, Del Norte, Yolo,
Solano, Sonoma, Placer and Mendocino. As a result, our financial condition,
results of operations and cash flows are subject to changes in the economic
conditions in those counties. Our success depends upon the business activity,
population, income levels, deposits and real estate activity in these markets,
and adverse economic conditions could reduce our growth rate, or affect the
ability of our customers to repay their loans, and generally impact our
financial condition and results of operations. Economic conditions in the State
of California are subject to various uncertainties at this time, including the
budgetary and fiscal difficulties facing the State Government. The Company can
provide no assurance that conditions in the California economy will not
deteriorate or that such deterioration will not adversely affect the Company.
Commercial Loans. As of December 31, 2007, approximately 12% of our loan
portfolio consisted of commercial business loans, which may have a higher degree
of risk than other types of loans. This increased credit risk is a result of
several factors, including the concentration of principal in a limited number of
loans and borrowers, the mobility of collateral, the effect of general economic
conditions and the increased difficulty of evaluating and monitoring these types
of loans. In addition, unlike residential mortgage loans, which generally are
made on the basis of the borrower's ability to make repayment from his or her
employment and other income and which are secured by real property whose value
tends to be more easily ascertainable, commercial business loans typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself and the general economic environment. If the cash
flow from business operations is reduced, the borrower's ability to repay the
loan may be impaired.
Real Estate Values. A large portion of the loan portfolio of the Company is
dependent on real estate. At December 31, 2007, real estate served as the
principal source of collateral with respect to approximately 77% of the
Company's loan portfolio. A substantial decline in the economy in general, or a
decline in real estate values in the Company's primary operating market areas in
particular, could have an adverse effect on the demand for new loans, the
ability of borrowers to repay outstanding loans, the value of real estate and
other collateral securing loans and the value of mortgage-backed securities
included in the available-for-sale investment portfolio, as well as the
Company's financial condition and results of operations in general and the
market value for Company Common Stock. Acts of nature, including fires,
earthquakes and floods, which may cause uninsured damage and other loss of value
to real estate that secures these loans, may also negatively impact the
Company's financial condition.
Construction and Development Loans. At December 31, 2007, real estate
construction loans totaled $225.8 million, or 30% of the total loan portfolio.
Residential construction loans, including land acquisition and development,
totaled $163.6 million or 72% of the Company's real estate construction
portfolio, and 22% of the total loan portfolio. Construction, land acquisition
and development lending involve additional risks because funds are advanced on
the security of the project, which is of uncertain value prior to its
completion. Because of the uncertainties inherent in estimating construction
costs, as well as the market value of the completed project and the effects of
governmental regulation on real property, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related
loan-to-value ratio. As a result, speculative construction loans often involve
the disbursement of substantial funds with repayment dependent, in part, on the
completion of the project and the ability of the borrower to sell the property,
rather than the ability of the borrower or the guarantor to repay the principal
and interest. If our appraisal of the value of the completed project proves to
be overstated, we may have inadequate security for the repayment of the loan
upon completion of construction of the project. If we are forced to foreclose on
a project prior to or at completion due to a default, there can be no assurance
that we will be able to recover all of the unpaid balance of, and accrued
interest on, the loan, a well as related foreclosure and holding costs. In
addition, we may be required to fund additional amounts to complete the project
and may have to hold the property for an unspecified period of time.
15
Allowance for Loan and Lease Losses. Like all financial institutions, the
Company maintains an allowance for loan and lease losses to provide for loan or
lease defaults and non-performance, but its allowance for loan and lease losses
may not be adequate to cover actual loan and lease losses. In addition, future
provisions for loan and lease losses could materially and adversely affect the
Company and therefore the Company's operating results. The Company's allowance
for loan and lease losses is based on prior experience, as well as an evaluation
of the risks in the current portfolio. The amount of future losses is
susceptible to changes in economic, operating and other conditions, including
changes in interest rates that may be beyond the Company's control, and these
losses may exceed current estimates. Federal regulatory agencies, as an integral
part of their examination process, review the Company's loans and allowance for
loan and lease losses. Although we believe that the Company's allowance for loan
and lease losses is adequate to cover current losses, we cannot assure you that
it will not further increase the allowance for loan and lease losses or that
regulators will not require it to increase this allowance. Either of these
occurrences could materially and adversely affect the Company's earnings.
Dilution of Common Stock. Shares of the Company's common stock eligible for
future sale could have a dilutive effect on the market for the common stock and
could adversely affect the market price. The Articles of Incorporation of the
Company authorize the issuance of 20,000,000 shares of common stock, of which
7,413,066 were outstanding at December 31, 2007. Pursuant to its stock option
plans, at December 31, 2007, the Company had outstanding options to purchase
723,642 shares of common stock. As of December 31, 2007, 1,162,649 shares of
common stock remained available for grants under the Company's stock option
plans. Sales of substantial amounts of the Company common stock in the public
market could adversely affect the market price of common stock.
Operating Losses. The Company is subject to certain operations risks, including,
but not limited to, data processing system failures and errors and customer or
employee fraud. The Company maintains a system of internal controls to mitigate
against such occurrences and maintains insurance coverage for such risks, but
should such an event occur that is not prevented or detected by the Company's
internal controls, uninsured or in excess of applicable insurance limits, it
could have a significant adverse impact on the Company's business, financial
condition or results of operations.
Business Confidence Uncertainty. The terrorist actions on September 11, 2001,
and thereafter, plus military actions taken by the United States in Afghanistan,
Iraq and elsewhere, have had significant adverse effects upon the United States
economy. Whether terrorist activities in the future and the actions taken by the
United States and its allies in combating terrorism on a worldwide basis will
adversely impact the Company, and the extent of such impact, is uncertain.
However, such events have had and may continue to have an adverse effect on the
economy in the Company's market areas. Such continued economic deterioration
could adversely affect the Company's future results of operations by, among
other matters, reducing the demand for loans and other products and services
offered by the Company, increasing nonperforming loans and the amounts required
to be reserved for loan losses, reducing the value of collateral held as
security for the Company's loans, and causing a decline in the Company's stock
price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
No comments have been submitted to the registrant by the staff of the Securities
and Exchange Commission.
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ITEM 2. DESCRIPTION OF PROPERTIES
At December 31, 2007, the net book value of the Company's properties (including
land and buildings) and its furniture, fixtures and equipment was $12,431,000.
The Company's principal executive and administrative office is located in a
leased building at 300 Park Marina Circle, Redding, Shasta County, California.
The following table sets forth information about the Company's premises, both
owned and leased. The leases indicated below expire between June, 2008 and
December, 2015. The Company believes that it will be able to renew the leases or
obtain comparable premises as and when they expire.
Description Office Type Owned/Leased
- ------------------------------ ------------------------------ --------------
Redding Branch Owned
Westwood Branch Leased
Shasta Lake Branch Owned
Country Club Branch Owned
Weaverville Branch Owned
Hayfork Branch Owned
Buenaventura Supermarket Branch Leased
Anderson Branch Owned
Enterprise Branch Owned
Cottonwood Supermarket Branch Leased
Palo Cedro Branch Leased
Churn Creek Branch Owned
Redding Warehouse Storage Facility Leased
Park Marina Circle Administrative/ Branch Leased
Park Marina Branch Leased
Data Processing/Administrative Data Processing/Administrative Owned
Eureka Mall Branch Leased
McKinleyville Branch Leased
Crescent City Branch Owned
Eureka Downtown Branch Owned
Ferndale Branch Owned
Garberville Branch Leased
Willits Branch Owned
Woodland Administrative/ Branch Leased
Fairfield Branch Leased
Roseville Branch Leased
Santa Rosa Branch Leased
Ukiah Branch Leased
From time to time, the Company, through NVB, acquires real property through
foreclosure of defaulted loans. The policy of the Company is not to use or
permanently retain any such properties but to resell them when practicable.
17
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or against
any of its property. The Company, because of the nature of its business, is
generally subject to various legal actions, threatened or filed, which involve
ordinary, routine litigation incidental to its business. Although the amount of
the ultimate exposure, if any, cannot be determined at this time, the Company,
based on the advice of counsel, does not expect that the final outcome of
threatened or filed suits will have a materially adverse effect on its
consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of North Valley Bancorp was held on Thursday,
December 20, 2007. Shareholders of the Company approved the following proposals:
1. To elect the following six (6) nominees as Director of the Company for a
one year term:
Michael J. Cushman
William W. Cox
Dante W. Ghidinelli
Kevin D. Hartwick
Roger B. Kohlmeier
Dolores M. Vellutini
The term of office of the following directors continued after the Annual
Meeting: J.M. "Mike" Wells, Jr., Royce L. Friesen, and Martin A. Mariani.
2. To ratify the appointment of Perry-Smith LLP as Independent Auditor for
the Company for 2007.
Results of the election are presented below:
Annual Meeting of Shareholders
------------------------------
Thursday, December 20, 2007
Total Shares Outstanding: 7,374,884
Total Shares Voted: 5,536,095 75%
Proposal 1:
Percent of Percent of Percent of
Nominees For Quorum Withheld Quorum Abstain Quorum
- --------------------- --------- ---------- -------- ---------- ------- ----------
Michael J. Cushman 5,243,233 94.7% 292,862 5.3%
William W. Cox 5,364,825 96.9% 171,270 3.1%
Dante W. Ghidinelli 5,370,974 97.0% 165,121 3.0%
Kevin D. Hartwick 5,379,199 97.2% 156,896 2.8%
Roger B. Kohlmeier 5,376,199 97.1% 159,896 2.9%
Doloroes M. Vellutini 5,375,874 97.1% 160,221 2.9%
Proposal 2:
Perry-Smith LLP 5,483,854 99.1% 9,387 0.2% 42,854 0.8%
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The North Valley Bancorp common stock is listed and trades on the NASDAQ Global
Select Market 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,
2007 as reported on the NASDAQ Global Select Market and the cash dividends
declared on the common stock during the same period.
Price of
Common Stock Cash
------------------ Dividends
High Low Declared
------- -------- ---------
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
Fourth Quarter 23.60 12.13 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
The Company had approximately 801 registered shareholders of record as of
December 31, 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 18 to the Consolidated Financial Statements for
information related to dividend matters including information regarding certain
limitations on payment of dividends.
19
Performance Graph
The following graph compares our cumulative total stockholder return since
December 31, 2002 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, 2002.
Total Return Performance
[GRAPHIC CHART OMITTED]
Period Ending
---------------------------------------------------------------
Index 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07
- ---------------------------------------------------------------------------------------------
North Valley Bancorp 100.00 130.34 169.81 159.20 168.90 122.09
NASDAQ Composite 100.00 150.01 162.89 165.13 180.85 198.60
SNL Bank $500M-$1B Index 100.00 144.19 163.41 170.41 193.81 155.31
SNL Western Bank Index 100.00 135.46 153.94 160.27 180.84 151.05
20
ITEM 6. SELECTED FINANCIAL DATA
NORTH VALLEY BANCORP
(Dollars in thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31 2007 2006 2005 2004 2003
----------- ----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS
Total interest income $ 59,524 $ 57,179 $ 50,678 $ 38,937 $ 35,100
Total interest expense 18,638 14,685 9,703 7,507 7,527
----------- ----------- ----------- ----------- -----------
Net interest income 40,886 42,494 40,975 31,430 27,573
Provision for loan and lease losses 2,050 975 930 271 -
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan and lease losses 38,836 41,519 40,045 31,159 27,573
Total noninterest income 11,159 12,650 11,214 9,456 11,265
Total noninterest expense 40,386 39,615 37,592 28,658 27,262
----------- ----------- ----------- ----------- -----------
Income before provision for income taxes 9,609 14,554 13,667 11,957 11,576
Provision for income taxes 3,075 4,158 4,518 3,578 3,605
----------- ----------- ----------- ----------- -----------
Net income $ 6,534 $ 10,396 $ 9,149 $ 8,379 $ 7,971
=========== =========== =========== =========== ===========
Performance ratios:
Return on average assets 0.72% 1.15% 1.01% 1.08% 1.19%
Return on average equity 8.31% 14.48% 13.42% 16.54% 16.66%
Capital ratios:
Risk based capital:
Tier I (4% minimum ratio) 12.00% 10.21% 10.12% 10.60% 12.34%
Total (8% minimum ratio) 10.43% 11.88% 11.92% 11.73% 13.77%
Leverage ratio 10.29% 9.66% 8.87% 7.89% 8.49%
BALANCE SHEET DATA AT DECEMBER 31
Total assets $ 949,019 $ 905,673 $ 918,415 $ 866,231 $ 677,693
Investment securities and federal funds sold $ 104,372 $ 144,323 $ 172,149 $ 219,734 $ 224,010
Net loans and leases $ 735,498 $ 650,962 $ 616,648 $ 546,128 $ 372,660
Deposits $ 736,739 $ 750,288 $ 746,690 $ 711,654 $ 598,314
Shareholders' equity $ 81,471 $ 75,491 $ 71,801 $ 65,448 $ 46,053
COMMON SHARE DATA
Earnings per share (1)
Basic $ 0.89 $ 1.41 $ 1.23 $ 1.24 $ 1.19
Diluted $ 0.86 $ 1.36 $ 1.17 $ 1.17 $ 1.13
Book value per share (2) $ 10.99 $ 10.34 $ 9.58 $ 8.95 $ 7.10
Cash dividends per share $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40
Dividend payout ratio 45.12% 29.41% 34.20% 34.20% 35.40%
Shares outstanding 7,413,066 7,300,914 7,497,599 7,311,726 6,488,073
(1) All share and per share amounts have been adjusted to give effect to a
three for two stock split on May 15, 2003.
(2) Represents shareholders' equity divided by the number of shares of common
stock outstanding at the end of the period indicated.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed or incorporated by reference in this Annual Report on
Form 10-K including, but not limited to, matters described in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations," are "forward-looking statements" within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. Such forward-looking statements may contain
words related to future projections including, but not limited to, words such as
"believe," "expect," "anticipate," "intend," "may," "will," "should," "could,"
"would," and variations of those words and similar words that are subject to
risks, uncertainties and other factors that could cause actual results to differ
materially from those projected. Factors that could cause or contribute to such
differences include, but are not limited to, the following: (1) variances in the
actual versus projected growth in assets; (2) return on assets; (3) loan and
lease losses; (4) expenses; (5) changes in the interest rate environment
including interest rates charged on loans, earned on securities investments and
paid on deposits; (6) competition effects; (7) fee and other noninterest income
earned; (8) general economic conditions nationally, regionally, and in the
operating market areas of the Company and its subsidiaries; (9) changes in the
regulatory environment; (10) changes in business conditions and inflation; (11)
changes in securities markets; (12) data processing problems; (13) a decline in
real estate values in the Company's operating market areas; (14) the effects of
terrorism, the threat of terrorism or the impact of the current military
conflict in Iraq and the conduct of the war on terrorism by the United States
and its allies, as well as other factors. The factors set forth under "Item 1A -
Risk Factors" in this report and other cautionary statements and information set
forth in this report should be carefully considered and understood as being
applicable to all related forward-looking statements contained in this report
when evaluating the business prospects of the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their nature,
they involve risks, uncertainties and assumptions. Actual results and
shareholder values in the future may differ significantly from those expressed
in forward-looking statements. You are cautioned not to put undue reliance on
any forward-looking statement. Any such statement speaks only as of the date of
the report, and in the case of any documents that may be incorporated by
reference, as of the date of those documents. We do not undertake any obligation
to update or release any revisions to any forward-looking statements, or to
report any new information, future event or other circumstances after the date
of this report or to reflect the occurrence of unanticipated events, except as
required by law. However, your attention is directed to any further disclosures
made on related subjects in our subsequent reports filed with the Securities and
Exchange Commission on Forms 10-K, 10-Q and 8-K.
Critical Accounting Policies
General. North Valley Bancorp's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). The financial information contained within our financial statements is,
to a significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a
liability. We use historical loss factors as one factor in determining the
inherent loss that may be present in our loan and lease portfolio. Actual losses
could differ significantly from the historical factors that we use. Other
estimates that we use are related to the expected useful lives of our
depreciable assets. In addition, GAAP itself may change from one previously
acceptable method to another method. Although the economics of our transactions
would be the same, the timing of events that would impact the accounting for
such transactions could change.
A summary of the Company's most significant accounting policies and accounting
estimates is contained in Note 1 to the consolidated financial statements. An
accounting estimate recognized in the financial statements is a critical
accounting estimate if the accounting estimate requires management to make
assumptions about matters that are highly uncertain at the time the accounting
estimate is made and different estimates that management could reasonably have
used in the current period, or changes in the accounting estimate that are
reasonably likely to occur from period to period, would have a material impact
on the presentation of the Company's financial condition, changes in financial
condition, or results of operations. Management considers the Company's
allowance for loan and lease losses, pro forma costs related to the Company's
share-based payments programs, and management's assessment of goodwill and
investment impairment to be critical accounting policies.
22
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 Accountings Standards (SFAS) No. 5 "Accounting for Contingencies,"
which requires that losses be accrued when they are probable of occurring and
estimable; and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," which requires that losses be accrued on impaired loans (as defined)
based on the differences between the value of collateral, present value of
future cash flows or values that are observable in the secondary market and the
loan balance.
The allowance for loan and lease losses is established through a provision for
loan and lease losses based on management's evaluation of the risks inherent in
the loan and lease portfolio. In determining levels of risk, management
considers a variety of factors, including, but not limited to, asset
classifications, economic trends, industry experience and trends, geographic
concentrations, estimated collateral values, historical loan and lease loss
experience, and the Company's underwriting policies. The allowance for loan and
lease losses is maintained at an amount management considers adequate to cover
losses in loans and leases receivable which are considered probable and
estimable. While management uses the best information available to make these
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.
Stock Based Compensation. At December 31, 2007, the Company had three
stock-based compensation plans: the North Valley Bancorp 1989 Director Stock
Option Plan, the 1998 Employee Stock Incentive Plan and the 1999 Director Stock
Option Plan, which are described more fully in Note 1 and 13 to the Consolidated
Financial Statements included herein in Item 8 - Financial Statements and
Supplementary Data. Prior to January 1, 2006, the Company accounted for the
plans under the recognition and measurement provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations, as permitted by Financial Accounting Standards Board
("FASB") Statement No. 123, Accounting for Stock-Based Compensation ("Statement
123") and FASB Statement No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. Effective January 1, 2006, the Company adopted the
fair value recognition provisions of FASB Statement No. 123(R), Share-Based
Payment ("Statement 123 (R)"), using the modified prospective transition method.
Under this transition method, compensation cost recognized in fiscal year 2006
and 2007 includes: (a) compensation cost for all share-based payments vesting
during 2006 that were granted prior to, but not yet vested as of, January 1,
2006 based on the grant-date fair value estimated in accordance with the
original provisions of Statement 123 and (b) compensation cost for all
share-based payments vesting during 2006 and 2007 that were granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of Statement 123(R).
Critical assumptions that are assessed in computing the fair value of
share-based payments include stock price volatility, expected dividend rates,
the risk free interest rate and the expected lives of such options. Compensation
cost recorded is net of estimated forfeitures expected to occur prior to
vesting. For further information on the computation of the fair value of
share-based payments, see Note 1 and 13 to the Consolidated Financial
Statements.
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 YCB. The value of goodwill is
ultimately derived from the Company's ability to generate net earnings after the
acquisition. A decline in net earnings could be indicative of a decline in the
fair value of goodwill and result in impairment. For that reason, goodwill is
assessed for impairment at a reporting unit level at least annually. Management
conducted its assessment of impairment during the fourth quarter of 2007 and
based on its evaluation determined that there was no impairment.
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.
During the fourth quarter of 2007, the Company recognized impairment on its FNMA
Preferred Stock of $1,716,000. The Company had purchased 100,000 shares of this
security in June 2003 at par, $50.00 per share, and took a write-down to its
December 31, 2007 market value of $32.84 per share.
23
Accounting for Income Taxes. The Company files its income taxes on a
consolidated basis with its subsidiary. The allocation of income tax expense
(benefit) represents each entity's proportionate share of the consolidated
provision for income taxes.
The Company applies the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are calculated by applying applicable tax
laws to the differences between the financial statement basis and the tax basis
of assets and liabilities. The effect on deferred taxes of changes in tax laws
and rates is recognized in income in the period that includes the enactment
date. On the consolidated balance sheet, net deferred tax assets are included in
other assets.
The provisions of Financial Accounting Standards Board (FASB) Interpretation No.
48, Accounting for Uncertainty in Income Taxes (FIN 48) have been applied to all
tax positions of the Company as of January 1, 2007. FIN 48 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. Only tax positions that met the more-likely-than-not
recognition threshold on January 1, 2007 were recognized or continue to be
recognized upon adoption. The benefit of a tax position is recognized in the
financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheet along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination. Interest expense associated with unrecognized tax
benefits is classified as interest expense in the consolidated statement of
income. Penalties associated with unrecognized tax benefits is classified as
other expense in the consolidated statement of income.
Business Organization
North Valley Bancorp (the "Company") is a bank holding company for NVB, a
state-chartered, Federal Reserve Member bank. NVB operates out of its main
office located at 300 Park Marina Circle, Redding, CA 96001, with twenty-six
branches in Northern California including two supermarket branches. The
Company's principal business consists of attracting deposits from the general
public and using the funds to originate commercial, real estate and installment
loans to customers, who are predominately small and middle market businesses and
middle income individuals. The Company's primary source of revenues is interest
income from its loan and investment securities portfolios. The Company is not
dependent on any single customer for more than ten percent of its revenues.
The acquisition of Yolo Community Bank ("YCB") on August 31, 2004 was accounted
for under the purchase method of accounting. YCB changed its name to NVB
Business Bank ("NVB BB") effective February 11, 2005. After the close of
business on June 30, 2006, NVB BB was merged into North Valley Bank.
On April 10, 2007, the Company entered into an Agreement and Plan of Merger
("Plan of Merger") with Sterling Financial Corporation, a Washington corporation
("Sterling"), pursuant to which the Company agreed to merge with and into
Sterling (with Sterling being the surviving corporation), subject to approval of
the proposed merger by the shareholders of the Company, the receipt of all
necessary regulatory approvals, and the satisfaction of other closing conditions
which are customary for such transactions. The shareholders of the Company
approved the proposed merger at a special meeting of shareholders held on July
31, 2007, but consummation of the merger remained subject to the receipt of all
necessary regulatory approvals (among other closing conditions). As of November
30, 2007, the deadline for closing specified in the Plan of Merger, Sterling had
not received the necessary regulatory approvals and informed the Company that
such approvals were not likely to be obtained in the near future, if at all.
Based on Sterling's failure to meet the November 30, 2007 deadline and the
advice of its financial and legal advisors, the Board of Directors of the
Company unanimously concluded that it would be in the best interests of the
Company and its shareholders to terminate the Plan of Merger and to continue to
operate as an independent banking institution. As a result, notice of
termination was given to Sterling, effective December 1, 2007, and on such date
the Plan of Merger became void and of no further effect (except for certain
limited purposes as set forth in the Plan of Merger).
24
Overview
For the year ended December 31, 2007, the Company recorded net income of
$6,534,000 for a decrease of $3,862,000, or 37.1%, from the $10,396,000 reported
in 2006. Diluted earnings per share were $0.86 for 2007, a 36.8% decrease from
the $1.36 for 2006. For 2007, the Company realized a return on average
shareholders' equity of 8.31% and a return on average assets of 0.72%, as
compared to 14.48% and 1.15% for 2006.
During 2007, total assets increased $43,346,000, or 4.8%, to $949,019,000 at
year end. The Company was successful in moving more of its earning assets into
the loan portfolio as loans increased $86,460,000, or 13.1%, and totaled
$746,253,000 at December 31, 2007. The loan to deposit ratio at year end 2007
was 101.3% as compared to 87.9% at year end 2006. Total deposits declined
$13,549,000, or 1.8%, to $736,739,000 at year end 2007. For the year ended
December 31, 2007, the Company declared quarterly dividends totaling $2,948,000,
or $0.40 per share, to stockholders of the Company.
The overall economic environment began to slow in the second quarter of 2007 in
the Company's primary market area. The slowdown has continued into 2008, and
management expects a continued slowing trend throughout the year. Interest and
fees earned on loans and leases increased $3,471,000, or 6.9%, to $53,712,000 in
2007. Increased loan volume accounted for $3,311,000 of the increase. Although
the Federal Reserve Board's Open Market Committee (FOMC) reduced rates 100 basis
points in three rate changes during the last four months of 2007, the average
yield on the Company's loan and lease portfolio increased to 7.85% from 7.82% in
2006. The rate increase added $160,000 to interest income on loans. On a
tax-equivalent basis, interest on investments and other earning assets decreased
$1,408,000 to a total of $5,973,000 due primarily to a lower volume of
investment securities.
Due to the higher interest rates throughout most of 2007, the average rate paid
on interest bearing liabilities increased to 2.91% from 2.32% in 2006. The
higher rates accounted for $3,409,000 of the $3,953,000, or 86.2%, of the total
increase in interest expense for the year. Average total interest bearing
liabilities increased $7,459,000 in 2007.
The net interest margin for 2007 was 5.09% which was a 31 basis point decrease
from the net interest margin of 5.40% achieved in 2006. The net interest margin
contracted each quarter throughout 2007 as the increase in the cost of interest
bearing deposits and borrowed funds outpaced the increases in the yields on
earning assets through the year.
Loan portfolio quality remained good throughout 2007 although the effect of the
economy and the real estate market resulted in an increase in the ratio of
nonperforming and restructured loans to total loans at December 31, 2007 to
0.24% compared to 0.07% at 2006 year-end.
Results of Operations
Net Interest Income and Net Interest Margin (fully taxable equivalent basis).
Net interest income is the difference between interest earned on loans and
investments and interest paid on deposits and borrowings, and is the primary
revenue source for the Company. Net interest margin is net interest income
expressed as a percentage of average earning assets. These items have been
adjusted to give effect to $559,000, $723,000 and $759,000 in taxable-equivalent
interest income on tax-free investments for the years ending December 31, 2007,
2006 and 2005.
Net interest income for 2007 was $41,445,000, a $1,772,000, or a 4.1%, decrease
from net interest income of $43,217,000 in 2006. Interest income increased
$2,181,000, or 3.8%, to $60,083,000 in 2007 due primarily to higher volume of
earning assets, the change in mix of those assets to higher yielding loans and
secondarily due to slightly increased yields on earning assets. The average
loans outstanding increased $42,339,000, or 6.6%, to $684,506,000. This higher
loan volume added $3,311,000 to interest income. The average yield earned on the
loan portfolio increased 3 basis points to 7.85% for 2007. This increase added
$160,000 to interest income. The total increase to interest income from the loan
portfolio was $3,471,000, which was offset in part by the effect of lower
average balances in the investment portfolio. The average balance of the
investment portfolio decreased $30,788,000, or 20.2%, which accounted for a
$1,489,000 decrease in interest income somewhat offset by the increase in
average yield of 7 basis points, or $81,000. Yields earned on the investment
portfolio in 2007 increased by 7 basis points to 4.90% as some of the lower
yield and shorter duration securities matured.
25
Interest expense in 2007 increased $3,953,000, or 26.9%, to $18,638,000. The
largest increase was in time certificates of deposits as the average rates paid
on these accounts increased 88 basis points to 4.60%. This rate increase added
$1,918,000 to interest expense. The next largest increase to interest expense
was related to an increase in average rate paid on savings and money market
accounts, which increased 54 basis points to 1.88%. This rate increase added
$1,057,000 to interest expense which was slightly offset due to lower average
balances in 2007 compared to 2006. The average rate paid on borrowings increased
37 basis points to 5.87% for 2007 compared to 5.50% for 2006. This increase in
average rate paid was more than offset by a decrease in average balance of
borrowed funds in 2007 compared to 2006.
The net interest margin for 2007 decreased 31 basis points to 5.09% from 5.40%
in 2006. The net interest margin for the 4th quarter of 2007 was 4.89%, which
was a 52 basis point decline from 5.41% in the 4th quarter of 2006 and a 17
basis point decline from the 3rd quarter of 2007.
In 2006, net interest income was $43,217,000 an increase of $1,483,000, or 3.6%,
from $41,734,000 for 2005. The increase in net interest income in 2006 was due
to an increase in interest income of $6,465,000 partially offset with an
increase in interest expense of $4,982,000. During 2006, average
interest-earning assets increased by $567,000 from 2005 and the average yield on
those assets increased from 6.43% in 2005 to 7.23% in 2006. The increase in net
interest income during 2006 was primarily due to a larger volume of loans as a
percentage of earning assets compared to 2005.
Average interest-bearing liabilities decreased from $634,467,000 in 2005 to
$633,461,000 in 2006. The average rate paid on interest-bearing liabilities
increased from 1.53% in 2005 to 2.32% in 2006 resulting in an increase in
interest expense of $4,982,000.
The net interest margin for 2006 was 5.40% as compared to 5.22% for 2005. The
increase in the net interest margin in 2006 was largely a result of the increase
in average loans and an increase in yield on loans partially offset by an
increase in rate paid on interest bearing liabilities.
The following table sets forth the Company's consolidated condensed average
daily balances and the corresponding average yields received and average rates
paid of each major category of assets, liabilities, and stockholders' equity for
each of the past three years.
26
Average Daily Balance Sheets
(Dollars in thousands, except percentages)
2007 2006 2005
------------------------------ ------------------------------- -----------------------------
Average Yield/ Interest Average Yield/ Interest Average Yield/ Interest
Balance Rate Amount Balance Rate Amount Balance Rate Amount
---------- ------ -------- ---------- ------ --------- --------- ------ --------
Assets
Federal funds sold $ 7,586 5.25% $ 398 $ 5,747 4.87% $ 280 $ 17,704 3.10% $ 548
Investments:
Taxable securities 94,475 4.37% 4,130 117,894 4.25% 5,011 155,477 3.82% 5,944
Nontaxable securities(1) 20,917 6.78% 1,418 22,864 6.87% 1,570 24,536 6.93% 1,700
FNMA preferred stock (1) 6,622 6.42% 425 12,049 6.64% 800 12,039 6.40% 771
Interest earning deposits N/A - N/A - 85 2.35% 2
---------- -------- ---------- --------- --------- --------
Total investments 122,014 4.90% 5,973 152,807 4.83% 7,381 192,137 4.38% 8,417
Total loans and leases (2)(3) 684,506 7.85% 53,712 642,167 7.82% 50,241 590,313 7.19% 42,472
---------- -------- ---------- --------- --------- --------
Total earning assets/interest
income 814,106 7.38% 60,083 800,721 7.23% 57,902 800,154 6.43% 51,437
Nonearning assets 100,205 108,884 111,591
Allowance for loan and
lease losses (9,025) (8,332) (7,585)
---------- ---------- ---------
Total nonearning assets 91,180 100,552 104,006
Total assets $ 905,286 $ 901,273 $ 904,160
========== ========== =========
Liabilities and Stockholders'
Equity
Transaction accounts $ 157,197 0.48% $ 753 $ 166,156 0.37% $ 616 $ 195,468 0.43% $ 833
Savings and money market 193,498 1.88% 3,646 202,722 1.34% 2,713 202,727 0.85% 1,727
Time deposits 219,685 4.60% 10,098 179,832 3.72% 6,697 158,988 2.40% 3,813
Other borrowed funds 70,540 5.87% 4,141 84,751 5.50% 4,659 77,284 4.31% 3,330
---------- -------- ---------- --------- --------- --------
Total interest bearing
liabilities/interest expense 640,920 2.91% 18,638 633,461 2.32% 14,685 634,467 1.53% 9,703
-------- --------- --------
Noninterest bearing deposits 174,457 185,281 190,183
Other liabilities 11,242 10,736 11,349
---------- ---------- ---------
Total liabilities 826,619 829,478 835,999
---------- ---------- ---------
Stockholders' equity 78,667 71,795 68,161
---------- ---------- ---------
Total liabilities and
stockholders' equity 905,286 901,273 904,160
========== ========== =========
Net interest income $ 41,445 $ 43,217 $ 41,734
======== ========= ========
Net interest spread 4.47% 4.91% 4.90%
====== ====== ======
Net interest margin (4) 5.09% 5.40% 5.22%
====== ====== ======
- --------------------------------------------------------------------------------
(1) Tax-equivalent basis; nontaxable 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 $1,524, $1,347, and $2,099 for years ended December
31, 2007, 2006 and 2005.
(4) Net interest margin is determined by dividing net interest income by total
average earning assets.
27
The following table summarizes changes in net interest income resulting from
changes in average asset and liability balances (volume) and changes in average
interest rates. The change in interest due to both rate and volume has been
allocated to the change in rate.
Changes in Volume/Rate
(Dollars in thousands)
2007 Compared to 2006 2006 Compared to 2005
-------------------------------- ------------------------------
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- ------- ---------- ------- ------- ----------
Interest Income
Interest on Federal funds sold $ 90 $ 28 $ 118 $ (371) $ 103 $ (268)
Interest on investments:
Taxable securities (995) 114 (881) (1,436) 503 (933)
Nontaxable securities (134) (18) (152) (116) (15) (131)
FNMA preferred stock (360) (15) (375) 1 28 29
Interest bearing deposits in other
financial institutions (2) (2)
-------- ------- ---------- ------- ------- ----------
Total investments (1,489) 81 (1,408) (1,553) 516 (1,037)
Interest on loans and leases 3,311 160 3,471 3,728 4,042 7,770
-------- ------- ---------- ------- ------- ----------
Total interest income 1,912 269 2,181 1,804 4,661 6,465
-------- ------- ---------- ------- ------- ----------
Interest Expense
Transaction accounts $ (33) $ 170 $ 137 $ (126) $ (91) $ (217)
Savings and money market (124) 1,057 933 986 986
Time deposits 1,483 1,918 3,401 500 2,384 2,884
Other borrowed funds (782) 264 (518) 322 1,007 1,329
-------- ------- ---------- ------- ------- ----------
Total interest expense 544 3,409 3,953 696 4,286 4,982
-------- ------- ---------- ------- ------- ----------
Total change in net interest income $ 1,368 $(3,140) $ (1,772) $ 1,108 $ 375 $ 1,483
======== ======= ========== ======= ======= ==========
Provision for Loan and Lease Losses. The provision for loan and lease losses
corresponds to management's assessment as to the inherent risk in the portfolio
for potential losses. The provision adjusts the balance in the allowance for
loan and lease so that the allowance is adequate to provide for the potential
losses based upon historical experience, current economic conditions, the mix in
the portfolio and other factors necessary in estimating these losses. For
further information, see discussion under "Allowance for Loan and Lease Losses"
on page 35.
The Company provided $2,050,000 in 2007, $975,000 in 2006 and $930,000 in 2005
for loan and lease losses. Loan charge-offs, net of recoveries were $126,000 in
2007, $8,000 in 2006 and $283,000 in 2005. The ratio of net charge-offs to
average loans and leases outstanding were 0.02% in 2007, 0.00% in 2006 and 0.05%
in 2005. The ratio of the allowance for loan and lease losses to total loans and
leases was 1.44% in 2007, 1.34% in 2006 and 1.26% in 2005.
28
Noninterest Income. The following table is a summary of the Company's
noninterest income for the years ended December 31(in thousands):
2007 2006 2005
-------- -------- --------
Service charges on deposit accounts $ 6,870 $ 6,437 $ 5,540
Other fees and charges 3,730 3,186 2,653
Increase in cash value of life insurance 1,276 1,211 1,078
Gain on sale of loans 153 399 690
(Loss) gain on sales, calls and impairment of securities (1,752) (3) 117
Other 882 1,420 1,136
-------- -------- --------
Total $ 11,159 $ 12,650 $ 11,214
======== ======== ========
Total noninterest income decreased $1,491,000, or 11.8%, to $11,159,000 in 2007
from $12,650,000 for the year ended December 31, 2006. Increase in income from
the service charges on deposit accounts and other fees and charges were due to
increased debit card activity, specifically point-of-sale and foreign ATM use.
Noninterest income from gain on sale of loans decreased in 2007 due to less
origination of loans for sale and the decision in the fourth quarter of 2006 to
retain these loans in the portfolio. Our mortgage strategy shifted at the end of
2006 and throughout 2007 to retain these conforming loans in the portfolio that
in the past were sold to Freddie Mac to better diversify the loan portfolio and
also add fixed rate mortgages in an anticipation of a declining rate
environment, but continue to sell the jumbo mortgage loans. The decrease in
other income was largely due to a gain on sale of Bank property in 2006 and a
decrease in sales volumes of annuity and security products to customers during
2007. The increase in the loss on sales, calls and impairment of securities is a
result of a fourth quarter 2007, pre-tax write-down of $1,716,000 of a FNMA
Preferred Stock investment identified as impaired. The Company had purchased
100,000 shares of the security in June 2003 at par, $50.00 per share, and took a
write-down to its December 31, 2007 market value of $32.84 per share. This
impairment was the primary reason for the decrease in noninterest income. In
2006, noninterest income increased $1,436,000, or 12.8%, to $12,650,000 from
$11,214,000 in 2005. The increase in 2006 was mainly the result of increases in
service charges on deposit accounts and an increase in other fees and charges.
These increases were partially offset by a decrease in gains on loan sales
recorded in 2006 compared to 2005. In 2005, the Company was selling nearly all
fixed rate 30- and 15- mortgages to reduce interest rate risk and keep the
duration of the loan portfolio relatively short during 2005. Other noninterest
income increased in 2006 compared to 2005 due to a gain on sale of Bank
property.
Noninterest Expense. The following table is a summary of the Company's
noninterest expense for the years ended December 31 (in thousands):
2007 2006 2005
-------- -------- --------
Salaries and benefits $ 21,674 $ 21,775 $ 19,784
Occupancy 3,075 3,023 2,724
Data processing 2,227 2,300 1,928
Equipment 2,029 2,153 2,160
Professional services 1,572 1,583 1,546
ATM and online banking 986 845 755
Marketing 959 1,139 1,011
Operations expense 881 848 953
Printing and supplies 700 715 606
Amortization of intangibles 651 651 651
Director 579 575 361
Postage 524 563 584
Messenger 348 289 490
Other 4,181 3,156 4,039
-------- -------- --------
Total $ 40,386 $ 39,615 $ 37,592
======== ======== ========
29
Total noninterest expense increased $771,000, or 2.0%, to $40,386,000 in 2007
compared to $39,615,000 in 2006. The largest increase was in other noninterest
expense which increased $1,025,000, or 32.5% primarily driven by certain merger
and acquisition expenses of $760,000 associated with the terminated merger with
Sterling Financial Corporation. Salary and benefits decreased $101,000, or 0.5%,
due to a reduction in total FTE's for the Company offset by normal salary and
benefit cost increases. Professional services were flat year-over-year but
include $378,000 of expenses associated with the terminated merger with Sterling
Financial Corporation. The primary reason for the year-over-year increase in
total noninterest expense of $771,000 was the $1,242,000 of merger-related
expenses, as most of the other noninterest expenses showed modest increases or
decreases in 2007 compared to 2006.
Total noninterest expense increased $2,023,000, or 5.4%, to $39,615,000 in 2006
compared to $37,592,000 in 2005. The largest increase was in salaries and
benefits which increased $1,991,000, or 10.1%. Salary increases were due to the
Company's continued investment in higher growth markets by hiring seasoned
lenders that specialize in business lending in Placer County, higher benefit
costs, stock option expense due to SFAS 123(R) and general merit increases. Data
processing and occupancy expense also increased, consistent with the Company's
decision to enter into higher growth markets.
Income Taxes. The provision for income taxes for the year ended December 31,
2007 was $3,075,000 as compared to $4,158,000 for the same period in 2006 and
$4,518,000 for 2005. The effective income tax rate for state and federal income
taxes was 32.0% for the year ended December 31, 2007, compared to 28.6%, for the
same period in 2006, and 33.1% for the same period in 2005. The Company's
effective tax rate increased in 2007 compared to 2006 due to the change in
accounting estimate made in 2006. Following the filing of the Company's 2005 tax
returns during the third quarter of 2006, management 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.
These changes reduced the 2006 tax provision by approximately $691,000, and
reduced the effective tax rate incurred for the year.
The difference in the effective tax rate compared to the combined Federal and
State statutory tax rate of 42.05% is primarily the result of California
interest and jobs credits resulting from hiring and lending in California
"Enterprise Zones," the Company's investment in municipal securities and other
equity securities that qualify for the dividend received deduction and the
earnings from the cash surrender value of life insurance policies. Interest
earned on municipal securities and the dividends received deduction are exempt
from federal income tax. Earnings on life insurance policies are exempt from
both federal income and California franchise tax. As such, all of these
investment strategies lower the Company's effective tax rate.
Balance Sheet Analysis
North Valley Bancorp had total assets of $949,019,000 at December 31, 2007
compared to $905,673,000 at December 31, 2006, representing an increase of
$43,346,000, or 4.8%. The average balance of total assets for 2007 was
$905,286,000, which was an increase of $4,013,000, or 0.5%, from the average
total asset balance of $901,273,000 in 2006.
Investment Securities. During 2007, the Company used liquidity from the
investment securities portfolio to provide a funding source for the increase in
the loan portfolio. Consequently, the investment securities portfolio decreased
$29,281,000 from year end 2006 to a total of $104,372,000 at December 31, 2007.
The investment portfolio had decreased $30,696,000 in 2006 to a total of
$133,653,000 at December 31, 2006 attributable to the Company's use of the
liquidity to fund $35,281,000 in loan growth during the year.
The Company's policy regarding investments is as follows:
Trading securities are carried at fair value. Changes in fair value are included
in other operating income. The Company did not have any securities classified as
trading at December 31, 2007, 2006 and 2005.
Available-for-sale securities are carried at fair value and represent securities
not classified as trading securities nor as held to maturity securities.
Unrealized gains and losses resulting from changes in fair value are recorded,
net of tax, within accumulated other comprehensive income (loss), which is a
separate component of stockholders' equity, until realized. Gains or losses on
disposition are recorded in other operating income based on the net proceeds
received and the carrying amount of the securities sold, using the specific
identification method.
30
Held-to-maturity securities are carried at cost adjusted for amortization of
premiums and accretion of discounts, which are recognized as adjustments to
interest income. The Company's policy of carrying such investment securities at
amortized cost is based upon its ability and management's intent to hold such
securities to maturity.
The amortized cost of securities and their approximate fair value are summarized
in the following table (in thousands):
December 31,
------------------------------
2007 2006 2005
-------- -------- --------
Available-for-Sale (Amortized Cost)
Obligations of U.S. Government agencies $ 9,783 $ 22,645 $ 31,104
Obligations of states and political subdivisions 20,563 21,957 23,473
Mortgage-backed securities 69,433 86,028 105,935
Corporate securities 6,009 5,998 7,994
-------- -------- --------
$105,788 $136,628 $168,506
======== ======== ========
Available-for-Sale (Fair Value)
Obligations of U.S. Government agencies $ 9,784 $ 21,799 $ 29,863
Obligations of states and political subdivisions 21,078 22,560 23,931
Mortgage-backed securities 68,140 83,224 102,479
Corporate securities 5,339 5,988 7,985
-------- -------- --------
$104,341 $133,571 $164,258
======== ======== ========
Held-to-Maturity (Amortized Cost)
Mortgage-backed securities $ 31 $ 82 $ 91
======== ======== ========
Held-to-Maturity (Fair Value)
Mortgage-backed securities $ 31 $ 81 $ 88
======== ======== ========
The policy of the Company requires that management determine the appropriate
classification of securities at the time of purchase. If management has the
intent and the Company has the ability at the time of purchase to hold debt
securities until maturity, they are classified as investments held to maturity,
and carried at amortized cost. Debt securities to be held for indefinite periods
of time and not intended to be held to maturity and equity securities are
classified as available for sale and carried at market value. Securities held
for indefinite periods of time include securities that management intends to use
as part of its asset/liability management strategy and that may be sold in
response to changes in interest rates, resultant prepayment risk, and other
related factors.
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 December 31, 2007 the Company held 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.
31
Management carefully evaluated the FNMA preferred stock to determine whether the
decline in fair value below the amortized cost value of these securities is
other-than-temporary. Among other items, management considers relevant
accounting literature which included SFAS No. 115, Statement of Auditing
Standard ("SAS") No. 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 amortized cost
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
Management concluded the security was impaired and recorded a $1,716,000 pre-tax
write-down of the security through income to its December 31, 2007 market value
of $32.84 per share. The Company has the intent and ability to continue to hold
this security. However, it may elect to divest of this security at any time.
The following table shows estimated fair value of our investment securities,
exclusive of equity securities with a fair value of $6,250,000, by year of
maturity as of December 31, 2007. Expected maturities, specifically of
mortgage-backed securities, may differ significantly from contractual maturities
because borrowers may have the right to prepay with or without penalty.
Tax-equivalent adjustments have been made in calculating yields on tax exempt
securities.
Contractual Maturity Distribution and Yields of Investment Securities (in
thousands):
After One After Five
Within Through Through After Ten
One Year Five Years Ten Years Years Total
-------- ---------- --------- ---------- ---------
Available for sale securities:
Obligations of U.S. government agencies $ 1,988 $ 1,546 $ 3,534
Obligations of states and political subdivisions 2,529 5,773 11,851 925 21,078
Mortgage-backed securities 136 53,833 14,160 11 68,140
Corporate securities 5,339 5,339
-------- ---------- --------- ---------- ---------
Total securities available for sale $ 4,653 $ 61,152 $ 26,011 $ 6,275 $ 98,091
======== ========== ========= ========== =========
Weighted average yield 4.86% 4.22% 5.24% 5.20% 4.58%
Held to maturity securities:
Mortgage-back securities $ 31 $ 31
======== ========== ========= ========== =========
Weighted average yield 2.31% 2.31%
Loan and Lease Portfolio. The loan and lease portfolio increased $86,460,000, or
13.1%, in 2007 and totaled $746,253,000 at December 31, 2007. During 2006, loans
increased $35,281,000, or 5.6%, to $659,793,000 from $624,512,000 at December
31, 2005. Loans are the Company's largest and highest yielding component of
earning assets and as such loan growth is desirable subject to acceptable levels
of credit risk. The loan to deposit ratio as of December 31, 2007 was 101.3%
compared to 87.9% at December 31, 2006.
The Company originates loans for business, consumer and real estate activities
and leases for equipment purchases. Such loans and leases are concentrated in
the primary markets in which the Company operates. Substantially all loans and
leases are collateralized. Generally, real estate loans are secured by real
property. Commercial and other loans are secured by bank deposits or business or
personal assets and leases are generally secured by equipment. The Company's
policy for requiring collateral is through analysis of the borrower, the
borrower's industry and the economic environment in which the loan or lease
would be granted. The loans and leases are expected to be repaid from cash flows
or proceeds from the sale of selected assets of the borrower.
32
Major classifications of loans and leases at December 31 are summarized as
follows (in thousands):
2007 2006 2005 2004 2003
--------- --------- --------- --------- ---------
Commercial $ 92,419 $ 78,122 $ 63,088 $ 54,903 $ 36,997
Real estate - commercial 297,272 263,323 245,610 224,476 163,474
Real estate - construction 225,758 213,199 199,129 115,518 37,566
Real estate - mortgage 50,131 40,487 39,500 73,007 54,588
Installment 41,161 27,951 40,818 53,185 62,609
Direct financing leases 1,307 1,985 3,120 3,790 689
Other 39,297 35,828 33,890 29,838 23,214
--------- --------- --------- --------- ---------
Total loans and leases receivable 747,345 660,895 625,155 554,717 379,137
Deferred loan (fees) costs, net (1,092) (1,102) (643) (1,372) 16
Allowance for loan and lease losses (10,755) (8,831) (7,864) (7,217) (6,493)
--------- --------- --------- --------- ---------
Net loans and leases $ 735,498 $ 650,962 $ 616,648 $ 546,128 $ 372,660
========= ========= ========= ========= =========
At December 31, 2007 and 2006, the Company serviced real estate - mortgage loans
and loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $97,059,000 and $108,931,000,
respectively.
The Company was contingently liable under letters of credit issued on behalf of
its customers for $10,314,000 and $13,067,000 at December 31, 2007 and 2006,
respectively. At December 31, 2007, commercial and consumer lines of credit, and
real estate loans of approximately $79,024,000 and $134,570,000, respectively,
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,
respectively, were undisbursed. These instruments involve, to varying degrees,
elements of credit and market risk more than the amounts recognized in the
balance sheet. The contractual or notional amounts of these transactions express
the extent of the Company's involvement in these instruments and do not
necessarily represent the actual amount subject to credit loss. However, at
December 31, 2007 and 2006, no losses are anticipated as a result of these
commitments.
Real estate commercial loans, commercial loans and real estate construction
loans increased $33,949,000, or 12.9%, $14,297,000, or 18.3%, and $12,559,000,
or 5.9%, respectively, for the year ended December 31, 2007. The increases in
real estate commercial loans, commercial loans, and real estate construction for
the year ended December 31, 2007 are primarily due to loan growth in the
commercial banking offices in Santa Rosa, Redding, and Roseville, California.
Real Estate Mortgage loans increased $9,644,000, or 23.8%, as a result of the
Company's strategy at the end of 2006 and throughout 2007 to retain these
conforming loans in the portfolio that in the past were sold to Freddie Mac to
better diversify the loan portfolio and also add fixed rate mortgages in an
anticipation of a declining rate environment. Installment loans increased
$13,210,000, or 47.3%, due to the Company's decision to resume purchasing
indirect auto contracts at the end of 2006. However, effective in January 2008,
the Company has discontinued its purchases of indirect auto contracts.
Maturity Distribution and Interest Rate Sensitivity of Loans and Commitments.
The following table shows the maturity of certain loan categories and
commitments. Also provided with respect to such loans and commitments are the
amounts due after one year, classified according to the sensitivity to changes
in interest rates (in thousands):
33
After One
Within Through After
One Year Five Years Five Years Total
------------ ------------ ------------ ------------
Commercial $ 45,861 $ 28,016 $ 18,542 $ 92,419
Real estate - commercial 8,608 19,476 269,188 297,272
Real estate - construction 183,206 34,161 8,391 225,758
Real estate - mortgage 2,894 5,183 42,054 50,131
Installment 2,152 18,147 20,862 41,161
Direct financing leases - 263 1,044 1,307
Other 289 910 38,098 39,297
------------ ------------ ------------ ------------
$ 243,010 $ 106,156 $ 398,179 $ 747,345
============ ============ ============ ============
Loans maturing after one year with:
Fixed interest rates $ 70,492 $ 91,203 $ 161,695
Variable interest rates 35,664 306,976 342,640
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 original contractual terms of the loan or lease agreement. The
measurement of impaired loans and leases is generally based on the present value
of expected future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans and leases are measured for
impairment based on the fair value of the collateral.
At December 31, 2007 and 2006, the recorded investment in loans and leases for
which impairment has been recognized was approximately $1,608,000 and $72,000,
respectively. Of the 2007 balance, there was a related valuation allowance of
$83,000. Of the 2006 balance, the $72,000 in impaired loans had a related
valuation allowance of $36,000. The Company experienced an increase in
nonaccrual loans in 2007 compared to 2006 mainly due to a slowing economy. Of
the $1,608,000, 73.0% of it is centered in three relationships, two of which are
single-family mortgage loans, and the third is a commercial real estate loan.
For the years ended December 31, 2007, 2006 and 2005, the average recorded
investment in loans and leases for which impairment had been recognized was
approximately $1,572,000, $63,000 and $791,000. During the portion of the year
that the loans and leases were impaired, the Company recognized interest income
of approximately $38,000, $9,000 and $6,000 for cash payments received in 2007,
2006 and 2005.
Loans and leases on which the accrual of interest has been discontinued are
designated as nonaccrual loans and leases. Accrual of interest on loans and
leases is discontinued either when reasonable doubt exists as to the full and
timely collection of interest or principal, or when a loan or lease becomes
contractually past due by 90 days or more with respect to interest or principal
(except that when management believes a loan is well secured and in the process
of collection, interest accruals are continued on loans deemed by management to
be fully collectible). When a loan or lease is placed on nonaccrual status, all
interest previously accrued but not collected is reversed against current period
interest income. Income on such loans and leases is then recognized only to the
extent that cash is received and where the future collection of principal is
probable. Interest accruals are resumed on such loans and leases when, in the
judgment of management, the loans and leases are estimated to be fully
collectible as to both principal and interest.
34
Nonperforming assets at December 31 are summarized as follows (in thousands):
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
Nonaccrual loans and leases $ 1,608 $ 72 $ 686 $ 1,155 $ 1,615
Loans and leases past due 90 days or more
and still accruing interest 156 403 67 1,015 1,395
-------- -------- -------- -------- --------
Total nonperforming loans and leases 1,764 475 753 2,170 3,010
Other real estate owned 902 902 902 - -
-------- -------- -------- -------- --------
Total nonperforming assets $ 2,666 $ 1,377 $ 1,655 $ 2,170 $ 3,010
======== ======== ======== ======== ========
If interest on nonaccrual loans and leases had been accrued, such income would
have approximated $49,000 in 2007, $10,000 in 2006 and $6,000 in 2005. Interest
income of $38,000 in 2007, $9,000 in 2006 and $6,000 in 2005 was recorded when
it was received on the nonaccrual loans and leases.
Based on its review of impaired, past due and nonaccrual loans and leases and
other information known to management at the date of this report, in addition to
the nonperforming loans and leases included in the above table, management has
not identified other loans and leases about which it has serious doubts
regarding the borrowers' ability to comply with present loan repayment terms,
such that said loans and leases might subsequently be classified as
nonperforming.
At December 31, 2007, there were no commitments to lend additional funds to
borrowers whose loans or leases were classified as nonaccrual.
Other real estate owned at December 31, 2007 was $902,000, consisting of land
originally purchased for bank expansion, which management now intends to sell as
the land is no longer needed.
35
Allowance for Loan and Lease Losses. The following table summarizes the
Company's loan and lease loss experience for the years ended December 31
(dollars in thousands):
2007 2006 2005 2004 2003
---------- ---------- ---------- ---------- ----------
Average loans and leases outstanding $ 684,506 $ 642,167 $ 590,313 $ 438,044 $ 399,217
Allowance for loan and lease losses at
beginning of period 8,831 7,864 7,217 6,493 6,723
Loans and leases charged off:
Commercial 123 47 204 219 63
Real estate - construction
Real estate - mortgage 53 2
Installment 132 211 398 609 715
Other 9 139
---------- ---------- ---------- ---------- ----------
Total loans and leases charged off 255 258 602 890 919
---------- ---------- ---------- ---------- ----------
Recoveries of loans and leases previously
charged off:
Commercial 22 125 167 128 527
Real estate - construction
Real estate - mortgage 5 16
Installment 107 125 147 175 138
Other 5 16 8
---------- ---------- ---------- ---------- ----------
Total recoveries of loans and leases
previously charged off 129 250 319 324 689
--------------------------------------------------------------
Net loans and leases charged off 126 8 283 566 230
Provisions for loan and lease losses 2,050 975 930 271 -
Allowance acquired (YCB) - - 1,019 -
---------- ---------- ---------- ---------- ----------
Balance of allowance for loan and lease
losses at end of period $ 10,755 $ 8,831 $ 7,864 $ 7,217 $ 6,493
========== ========== ========== ========== ==========
Ratio of net charge-offs to average loans
and leases outstanding 0.02% 0.00% 0.05% 0.13% 0.06%
Allowance for loan and lease losses to
total loans and leases 1.44% 1.34% 1.26% 1.30% 1.71%
The allowance for loan and lease losses is established through a provision for
loan and lease losses based on management's evaluation of the risks inherent in
the loan and lease portfolio. In determining levels of risk, management
considers a variety of factors, including, but not limited to, asset
classifications, economic trends, industry experience and trends, geographic
concentrations, estimated collateral values, historical loan and lease loss
experience, and the Company's underwriting policies. The allowance for loan and
lease losses is maintained at an amount management considers adequate to cover
losses in loans and leases receivable, which are considered probable and
estimable. While management uses the best information available to make these
estimates, future adjustments to allowances may be necessary due to economic,
operating, regulatory, and other conditions that may be beyond the Company's
control. The Company also engages a third party credit review consultant to
analyze the Company's loan and lease loss adequacy. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically reviews 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.
36
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 probable losses in various segments
or pools within the loan and lease portfolio. The loss factor for
each segment or pool is multiplied by the portfolio segment (e.g.
multifamily permanent mortgages) balance to derive the formula
allowance amount. The loss factors are updated periodically by the
Company to reflect current information that has an effect on the
amount of loss inherent in each segment.
The formula allowance is adjusted for qualitative factors that are
based upon management's evaluation of conditions that are not
directly measured in the determination of the formula and specific
allowances. The evaluation of inherent loss with respect to these
conditions is subject to a higher degree of uncertainty because they
are not identified with specific problem credits or historical
performance of loan and lease portfolio segments. The conditions
evaluated in connection with the unallocated allowance at December
31, 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 in Northern California
o Loan volumes and concentrations, including trends in
past due and nonperforming loans
o Seasoning of the loan portfolio
o Status of the current business cycle
o Specific industry or market conditions within portfolio
segments
o Model imprecision
2. Specific Allowance
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to an
individually impaired credit. In other words, these allowances are
specific to the loss inherent in a particular loan. The amount for a
specific allowance is calculated in accordance with SFAS No. 114,
"Accounting By Creditors For Impairment Of A Loan."
The $10,755,000 in formula and specific allowances reflects management's
estimate of the inherent loss in various pools or segments in the portfolio and
individual loans and leases, and includes adjustments for general economic
conditions, trends in the portfolio and changes in the mix of the portfolio.
Management anticipates continued growth in commercial lending and commercial
real estate and to a lesser extent consumer and real estate mortgage lending. As
a result, future provisions will be required and the ratio of the allowance for
loan and lease losses to loans and leases outstanding may increase to reflect
increasing concentrations, loan type and changes in economic conditions.
37
The following table shows the allocation of the Company's allowance and the
percent of loans in each category to the total loans at December 31 (dollars in
thousands).
December 31, 2007 December 31, 2006 December 31, 2005 December 31, 2004 December 31, 2003
-------------------- -------------------- -------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
loans in loans in loans in loans in loans in
each each each each each
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
------- ----------- ------- ----------- ------- ----------- ------- ----------- ------- -----------
Balance Applicable
to:
Commercial $ 1,645 12.4% $ 1,291 11.8% $ 696 10.1% $ 519 9.9% $ 698 9.8%
Real estate -
commercial 3,462 39.8% 3,256 39.9% 3,056 39.3% 3,763 40.5% 2,689 43.1%
Real estate -
construction 4,025 30.2% 2,105 32.3% 2,012 31.9% 1,106 20.8% 530 9.9%
Real estate -
mortgage 242 6.7% 150 6.1% 97 6.3% 181 13.1% 212 14.4%
Installment 725 5.5% 429 4.2% 684 6.5% 729 9.6% 1,107 16.5%
Other 455 5.4% 390 5.7% 407 5.9% 442 6.1% 64 6.3%
Unallocated 201 1,210 912 477 1,193
------- ----------- ------- ----------- ------- ----------- ------- ----------- ------- -----------
Total $10,755 100.0% $ 8,831 100.0% $ 7,864 100.0% $ 7,217 100.0% $ 6,493 100.0%
======= =========== ======= =========== ======= =========== ======= =========== ======= ===========
Deposits. Deposits represent the Company's primary source of funds. They are
primarily core deposits in that they are demand, savings and time deposits
generated from local businesses and individuals. These sources are considered to
be relatively stable as they are mostly derived from long-term banking
relationships. During 2007, total deposits decreased $13,549,000, or 1.8%, to
$736,739,000 compared to $750,288,000 at December 31, 2006. The decrease in
deposits was due to decreases in noninterest-bearing demand deposits of
$27,227,000, or 14.0%, interest-bearing demand deposits of $13,883,000, or 8.6%,
money market deposits of $2,543,000, or 2.3%, and savings deposits of
$13,098,000, or 15.0%, mostly offset by the increase in time deposits of
$43,202,000, or 21.9%. The Company experienced a shift in deposits from
noninterest-bearing demand deposits and interest-bearing demand to time deposits
as time deposit rates increased while interest bearing demand deposit rates
remained relatively unchanged. The shift in deposit mix has resulted in
noninterest-bearing demand deposits representing 22.8% of total deposits at
December 31, 2007 compared to 26.0% of total deposits at December 31, 2006.
During 2006, total deposits increased $3,598,000, or 0.5%, to $750,288,000
compared to $746,690,000 at December 31, 2005. The increase in deposits was due
to increases in time deposits of $28,140,000, noninterest-bearing deposits of
$8,287,000 and savings of $967,000, mostly offset by the decrease in
interest-bearing demand of $33,796,000. The Company experienced a shift in
deposits from interest-bearing demand to time deposits as time deposit rates
increased while interest bearing demand deposit rates remained relatively
unchanged.
The following table summarizes the Company's deposits at the indicated dates (in
thousands):
December 31,
---------------------------------
2007 2006 2005
--------- --------- ---------
Noninterest-bearing demand $ 167,615 $ 194,842 $ 186,555
Interest-bearing demand 147,056 160,939 194,735
Savings 181,192 196,833 195,866
Time certificates 240,876 197,674 169,534
--------- --------- ---------
Total deposits $ 736,739 $ 750,288 $ 746,690
========= ========= =========
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 $81,471,000 as
of December 31, 2007, as compared to $75,491,000 at December 31, 2006.
38
The increase was the result of net income of $6,534,000, stock based
compensation expense of $368,000, stock option exercises of $1,072,000, and
change in accumulated other comprehensive income of $954,000, mostly offset by
cash dividends of $2,948,000. Under current regulations, management believes
that the Company meets all capital adequacy requirements.
The following table displays the Company's capital ratios at December 31, 2007
(dollars in thousands).
Minimum
for Capital
Adequacy
Capital Ratio Purposes
-------- ----- -----------
Company:
Tier 1 capital (to average assets) $ 93,954 10.29% 4.00%
Tier 1 capital (to risk weighted assets) $ 93,954 10.43% 4.00%
Total capital (to risk weighted assets) $108,098 12.00% 8.00%
Impact of Inflation. Impact of inflation on a financial institution differs
significantly from that exerted on an industrial concern, primarily because a
financial institution's assets and liabilities consist largely of monetarily
based items. The relatively low proportion of the Company's fixed assets
(approximately 1.3% at December 31, 2007) reduces both the potential of inflated
earnings resulting from understated depreciation and the potential
understatement of absolute asset values.
Subsequent event - Cash Dividend. On February 27, 2008, the Company declared a
cash dividend of $0.10 per share. The dividend is payable on April 1, 2008 to
holders of record at the close of business on March 14, 2008.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Overview. The Company constantly monitors earning asset and deposit levels,
developments and trends in interest rates, liquidity, capital adequacy and
marketplace opportunities with the view towards maximizing shareholder value and
earnings while maintaining a high quality balance sheet without exposing the
Company to undue market risk. Management responds to all of these to protect and
possibly enhance net interest income while managing risks within acceptable
levels as set forth in the Company's policies. In addition, alternative business
plans and contemplated transactions are also analyzed for their impact. This
process, known as asset/liability management is carried out by changing the
maturities and relative proportions of the various types of loans, investments,
deposits and other borrowings.
Market Risk. Market risk results from the fact that the market values of assets
or liabilities on which the interest rate is fixed will increase or decrease
with changes in market interest rates. If the Company invests in a fixed-rate,
long term security and then interest rates rise, the security is worth less than
a comparable security just issued because the older security pays less interest
than the newly issued security. If the security had to be sold before maturity,
then the Company would incur a loss on the sale. Conversely, if interest rates
fall after a fixed-rate security is purchased, its value increases, because it
is paying at a higher rate than newly issued securities. The fixed rate
liabilities of the Company, like certificates of deposit and fixed-rate
borrowings, also change in value with changes in interest rates. As rates drop,
they become more valuable to the depositor and hence more costly to the Company.
As rates rise, they become more valuable to the Company. Therefore, while the
value changes when rates move in either direction, the adverse impacts of market
risk to the Company's fixed-rate assets are due to rising rates 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.
39
Mismatch Risk. The second interest-related risk, mismatched risk, arises from
the fact that when interest rates change, the changes do not occur equally in
the rates of interest earned and paid because of differences in the contractual
terms of the assets and liabilities held. A difference in the contractual terms,
a mismatch, can cause adverse impacts on net interest income.
The Company has a certain portion of its loan and lease portfolio tied to the
national prime rate. If these rates are lowered because of general market
conditions, e.g., the prime rate decreases in response to a rate decrease by the
Federal Reserve Open Market Committee ("FOMC"), these loans will be repriced. If
the Company were at the same time to have a large proportion of its deposits in
long-term fixed-rate certificates, interest earned on loans would decline while
interest paid on the certificates would remain at higher levels for a period of
time until they mature. Therefore, net interest income would decrease
immediately. A decrease in net interest income could also occur with rising
interest rates if the Company had a large portfolio of fixed-rate loans and
leases and securities that was funded by deposit accounts on which the rate is
steadily rising.
This exposure to mismatch risk is managed by attempting to match the maturities
and repricing opportunities of assets and liabilities. This may be done by
varying the terms and conditions of the products that are offered to depositors
and borrowers. For example, if many depositors want shorter-term certificates
while most borrowers are requesting longer-term fixed rate loans, the Company
will adjust the interest rates on the certificates and loans to try to match up
demand for similar maturities. The Company can then partially fill in mismatches
by purchasing securities or borrowing funds from the FHLB with the appropriate
maturity or repricing characteristics.
Basis Risk. The third interest-related risk, basis risk, arises from the fact
that interest rates rarely change in a parallel or equal manner. The interest
rates associated with the various assets and liabilities differ in how often
they change, the extent to which they change, and whether they change sooner or
later than other interest rates. For example, while the repricing of a specific
asset and a specific liability may occur at roughly the same time, the interest
rate on the liability may rise one percent in response to rising market rates
while the asset increases only one-half percent. While the Company would appear
to be evenly matched with respect to mismatch risk, it would suffer a decrease
in net interest income. This exposure to basis risk is the type of interest risk
least able to be managed, but is also the least dramatic. Avoiding
concentrations in only a few types of assets or liabilities is the best means of
increasing the chance that the average interest received and paid will move in
tandem. The wider diversification means that many different rates, each with
their own volatility characteristics, will come into play.
Net Interest Income and Net Economic Value Simulations. The tool used to manage
and analyze the interest rate sensitivity of a financial institution is known as
a simulation model and is performed with specialized software built for this
specific purpose for financial institutions. This model allows management to
analyze the three specific types of risks; market risk, mismatch risk, and basis
risk.
To quantify the extent of all of these risks both in its current position and in
transactions it might make in the future, the Company uses computer modeling to
simulate the impact of different interest rate scenarios on net interest income
and on net economic value. Net economic value or the market value of portfolio
equity is defined as the difference between the market value of financial assets
and liabilities. These hypothetical scenarios include both sudden and gradual
interest rate changes, and interest rate changes in both directions. This
modeling is the primary means the Company uses for interest rate risk management
decisions.
The hypothetical impact of sudden interest rate shocks applied to the Company's
asset and liability balances are modeled quarterly. The results of this modeling
indicate how much of the Company's net interest income and net economic value
are "at risk" (deviation from the base level) from various sudden rate changes.
Although interest rates normally would not change in this sudden manner, this
exercise is valuable in identifying risk exposures. The results for the
Company's December 31, 2007 analysis indicates the following results for changes
in net economic value and changes in net interest income over a one-year period
given the same interest rate shocks. Management believes that short and medium
term interest rates will continue to decline throughout the end of the year.
Shocked Shocked
by -2% by +2%
------- -------
Net interest income -1.7% -0.8%
Net economic value -3.7% -3.6%
40
For the modeling, the Company has made certain assumptions about the duration of
its non-maturity deposits that are based on an analysis performed on the
Company's database to determine average length of deposit accounts. This
assumption is important to determining net economic value at risk. The Company
has compared its assumptions with those used by other financial institutions.
Liquidity. The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors and borrowers.
Collection of principal and interest on loans, the pay-downs and maturities of
investment securities, deposits with other banks, customer deposits and short
term borrowing, when needed, are primary sources of funds that contribute to
liquidity. Unused lines of credit from correspondent banks to provide federal
funds for $24,765,000 as of December 31, 2007 were available to provide
liquidity. In addition, NVB is a member of the Federal Home Loan Bank ("FHLB")
providing an additional line of credit of $57,287,000 secured by first deeds of
trust on eligible 1-4 unit residential loans and qualifying investment
securities. The Company also had a line of credit with the Federal Reserve Bank
("FRB") of $1,844,000 secured by first deeds of trust on eligible commercial
real estate loans. As of December 31, 2007, borrowings of $87,192,000 were
outstanding in advances with the FHLB and Federal funds purchased through a
correspondent bank, and $31,961,000 was outstanding in the form of Subordinated
Debentures.
The Company manages both assets and liabilities by monitoring asset and
liability mixes, volumes, maturities, yields and rates in order to preserve
liquidity and earnings stability. Total liquid assets (cash and due from banks,
federal funds sold, and investment securities) totaled $132,941,000 and
$175,149,000, or 14.0% and 19.3% of total assets at December 31, 2007 and
December 31, 2006, respectively. Total liquid assets for December 31, 2007 and
December 31, 2006 include investment securities of $31,000 and $82,000
respectively, classified as held to maturity based on the Company's intent and
ability to hold such securities to maturity.
Core deposits, defined as demand deposits, interest bearing demand deposits,
regular savings, money market deposit accounts and time deposits of less than
$100,000, continue to provide a relatively stable and low cost source of funds.
Core deposits totaled $632,236,000 and $673,303,000 at December 31, 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.
Certificates of Deposit. Maturities of time certificates of deposit outstanding
of less than $100,000 and $100,000 or more at December 31, 2007 are summarized
as follows (in thousands):
$100,000 Under
and over $100,000
------------ ------------
Three Months or Less $ 43,662 $ 51,570
Over Three Months Through Twelve Months 57,349 77,091
Over One Year Through Three Years 2,629 7,093
Over Three Years 863 619
------------ ------------
Total $ 104,503 $ 136,373
============ ============
As of December 31, 2007, the Company did not have any brokered deposits. The
Company's policy limits the use of brokered deposits to 10% of total assets.
41
Other Borrowed Funds. Other borrowings outstanding as of December 31, 2007, 2006
and 2005 consist of Federal Home Loan Bank ("FHLB") advances and Federal funds
purchased. The following table summarizes these borrowings (in thousands):
2007 2006 2005
---------------------------------
Short-term borrowings:
FHLB advances $ 86,957 $ 25,000 $ 31,500
Federal funds 235
--------- --------- ---------
Total short-term borrowings $ 87,192 $ 25,000 $ 31,500
========= ========= =========
Long-term borrowings:
FHLB advances $ - $ 12,500 $ 25,000
--------- --------- ---------
Total long-term borrowings $ - $ 12,500 $ 25,000
========= ========= =========
Total borrowed funds $ 87,192 $ 37,500 $ 56,500
========= ========= =========
The FHLB advances of $86,597,000 at December 31, 2007 carry an average interest
rate of 3.46%, mature in 2008, and are collateralized by loans and securities.
Federal funds purchased are generally for one-day periods.
The following table provides information related to the Company's short-term
borrowings under its security repurchase arrangements and lines of credit for
the periods indicated (in thousands):
Short-term borrowings
2007 2006 2005
---------- ---------- --------
Average balance during the year $ 38,579 $ 15,362 $ 30,327
Average interest rate for the year 4.41% 5.25% 2.73%
Maximum month-end balance during the year $ 87,192 $ 46,560 $ 32,000
Average rate as of December 31, 3.46% 5.36% 3.49%
42
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the company as
of December 31, 2007 (in thousands):
Less than More than
Total one year 1-3 years 3-5 years 5 years
-------- --------- --------- --------- ---------
Subordinated Debentures, fixed rate of 10.25% payable on 2031 $ 10,310 $ 10,310
Subordinated Debentures, floating rate of 6.45% payable on 2033 6,186 6,186
Subordinated Debentures, floating rate of 7.95% payable on 2034 5,155 5,155
Subordinated Debentures, floating rate of 6.16% payable on 2036 10,310 10,310
FHLB loan, fixed rate of 4.41% payable on January 7, 2008 12,500 12,500
FHLB loan, fixed rate of 3.30% payable on January 25, 2008 12,500 12,500
Operating lease obligations 3,558 1,273 1,527 553 205
Deferred compensation(1) 2,986 377 263 249 2,097
Supplemental retirement plans(1) 4,633 234 458 458 3,483
-------- --------- --------- --------- ---------
Total $ 68,138 $ 26,884 $ 2,248 $ 1,260 $ 37,746
======== ========= ========= ========= =========
(1) These amounts represent known certain payments to participants under the
Company's deferred compensation and supplemental retirement plans. See Note 12
in the financial statements at Item 15 of this report for additional information
related to the Company's deferred compensation and supplemental retirement plan
liabilities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required by this item are set forth following Item 15
of this Form 10-K, and are incorporated herein by reference.
The following table discloses the Company's condensed selected unaudited
quarterly financial data for each of the quarters in the two-year period ended
December 31, 2007.
For the Quarter Ended
----------------------------------------------------------------------------------------
December September June March December September June March
(In thousands except per share data) 2007 2007 2007 2007 2006 2006 2006 2006
-------- --------- -------- -------- --------- --------- -------- --------
Interest income $ 15,345 $ 15,083 $ 14,600 $ 14,496 $ 15,036 $ 14,506 $ 14,010 $ 13,627
Interest expense 5,133 4,838 4,508 4,159 4,140 3,996 3,315 3,234
-------- --------- -------- -------- --------- --------- -------- --------
Net interest income 10,212 10,245 10,092 10,337 10,896 10,510 10,695 10,393
Provision for loan and
lease losses 1,200 850 50 555 370 -
Noninterest income 1,505 3,350 3,170 3,134 3,239 3,598 3,015 2,798
Noninterest expense 9,943 9,481 10,732 10,230 9,860 9,859 9,880 10,016
-------- --------- -------- -------- --------- --------- -------- --------
Income before provision for
income taxes 574 3,264 2,530 3,241 4,225 3,694 3,460 3,175
Provision for income taxes (1) 184 1,044 810 1,037 1,171 775 1,166 1,046
-------- --------- -------- -------- --------- --------- -------- --------
Net income $ 390 $ 2,220 $ 1,720 $ 2,204 $ 3,054 $ 2,919 $ 2,294 $ 2,129
======== ========= ======== ======== ========= ========= ======== ========
Earnings per share:
Basic $ 0.05 $ 0.30 $ 0.23 $ 0.30 $ 0.42 $ 0.40 $ 0.31 $ 0.28
======== ========= ======== ======== ========= ========= ======== ========
Diluted $ 0.05 $ 0.29 $ 0.22 $ 0.29 $ 0.40 $ 0.39 $ 0.30 $ 0.27
======== ========= ======== ======== ========= ========= ======== ========
(1) The provision for income taxes for the quarter ended September 30, 2006
was reduced by approximately $456,000 due to previously overstated
provision for income taxes as a result of an underestimate of California
job credits and an overestimate of the federal statutory tax rate. See
discussion under "Income Taxes" on page 30.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
43
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Disclosure controls and procedures are
designed with the objective of ensuring that information required to be
disclosed in reports filed by the Company under the Exchange Act, such as this
Annual Report, is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures are also designed with the
objective of ensuring that such information is accumulated and communicated to
management, including the Chief Executive Officer and the Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures. The Company's management,
including the Chief Executive Officer and the Chief Financial Officer, evaluated
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act) as of December 31, 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.
Internal Control over Financial Reporting. Management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Management's statement as to the framework
used to evaluate the effectiveness of, and management's assessment of the
effectiveness of, the Company's internal control over financial reporting as of
December 31, 2007, appears in this report at page 47 and is incorporated here by
this reference. The Company's independent registered public accounting firm that
audited the consolidated financial statements included in this annual report has
issued a report on the Company's internal control over financial reporting which
appears on page 48 of this report and is incorporated here by this reference.
There was no change in the Company's internal control over financial reporting
that occurred during the quarter ended December 31, 2007 that has materially
affected or is reasonable likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning directors and executive officers required by this
item is incorporated by reference from the section of the Company's Definitive
Proxy Statement for the 2008 Annual Meeting of Shareholders of the Company to be
filed with the Securities and Exchange Commission (the "Commission") entitled
"Election of Directors" (not including the share information included in the
beneficial ownership tables nor the footnotes thereto nor the subsections
entitled "Committees of the Board of Directors," "Compensation Committee
Interlocks and Insider Participation" and "Meetings of the Board of Directors")
and the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section of the Company's Definitive Proxy Statement for the 2008 Annual Meeting
of Shareholders of the Company to be filed with the Commission entitled
"Executive Compensation" and the subsection entitled "Election of Directors -
Compensation Committee Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from sections
of the Company's Definitive Proxy Statement for the 2008 Annual Meeting of
Shareholders of the Company to be filed with the Commission, entitled "Election
of Directors - Security Ownership of Certain Beneficial Owners and Management,"
as to share information in the tables of beneficial ownership and footnotes
thereto and "Securities Authorized for Issuance Under Equity Compensation Plan."
44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated by reference from the
section of the Company's Definitive Proxy Statement for the 2008 Annual Meeting
of Shareholders of the Company to be filed with the Commission, entitled
"Certain Relationships and Related Transactions."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference from the
section of the Company's Definitive Proxy Statement for the 2008 Annual Meeting
of Shareholders of the Company to be filed with the Commission, entitled
"Principal Accounting Fees and Services."
45
PART IV
ITEM 15. EXHIBITS AND, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of the report:
1. Financial Statements
Document Title Page
-------------- ----
Report of Management on Internal Control Over Financial Reporting 47
Report of Independent Registered Public Accounting Firm 48
Report of Independent Registered Public Accounting Firm 49
Consolidated Balance Sheets as of December 31, 2007 and 2006 50
Consolidated Statements of Income for the Years Ended December 2007, 2006 and 2005 51
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended
December 31, 2007, 2006 and 2005 52
Consolidated Statements of Cash Flows for the Years ended December 31, 2007,
2006 and 2005 53
Notes to Consolidated Financial Statements 54
2. Schedules: see (c) below
3. Exhibits: see Index to Exhibits at page 84
(b) Exhibits
See Index to Exhibits at page 84 of this Annual Report on Form 10-K,
which is incorporated herein by reference
(c) Financial Statement Schedules
Not applicable
46
Report of Management on Internal Control Over Financial Reporting
-----------------------------------------------------------------
Financial Statements
Management of North Valley Bancorp and its subsidiaries (the Company) is
responsible for the preparation, integrity and fair presentation of its
published consolidated financial statements as of December 31, 2007, and for the
year then ended. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and, as such, include amounts based on informed judgments and estimates
made by management.
The consolidated financial statements have been audited by an independent
accounting firm registered with the Public Company Accounting Oversight Board,
which was given unrestricted access to all financial records and related data,
including minutes of all meetings of the Board of Directors and committees of
the Board. Management believes that all representations made to the independent
auditors during their audit were valid and appropriate.
Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate
internal control over financial reporting for the Company, as such term is
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
The Company's management, including the chief executive officer and chief
financial officer, has assessed the effectiveness of the Company's internal
control over financial reporting presented in conformity with accounting
principles generally accepted in the United States of America. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control -
Integrated Framework. Based on this assessment, management believes that, as of
December 31, 2007, the Company's internal control over financial reporting is
effective based on those criteria.
Perry-Smith LLP, the independent registered public accounting firm that audited
the consolidated financial statements included in this Annual Report under Item
8, "Financial Statements and Supplementary Data" has issued a report with
respect to the Company's internal control over financial reporting. This report
follows.
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
North Valley Bancorp
We have audited North Valley Bancorp and subsidiaries (the "Company")
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("the COSO
criteria"). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the
accompanying Report of Management on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, North Valley Bancorp and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2007, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of North Valley Bancorp and subsidiaries as of December 31, 2007 and
2006, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2007 and our report dated March 12, 2008 expressed an
unqualified opinion.
/s/ Perry-Smith LLP
Sacramento, California
March 12, 2008
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
North Valley Bancorp
We have audited the accompanying consolidated balance sheets of North
Valley Bancorp and subsidiaries (the "Company") as of December 31, 2007 and 2006
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2007. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
North Valley Bancorp and subsidiaries as of December 31, 2007 and 2006 and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), North Valley Bancorp and
subsidiaries' internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 12, 2008 expressed an unqualified opinion on the
effectiveness of North Valley Bancorp's and subsidiaries internal control over
financial reporting.
/s/Perry-Smith LLP
Sacramento, California
March 12, 2008
49
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 AND 2006
(In thousands except share data)
- --------------------------------------------------------------------------------
2007 2006
------------ -------------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 28,569 $ 30,826
Federal funds sold - 10,670
------------ -------------
Total cash and cash equivalents 28,569 41,496
Investment securities available for sale, at fair value 104,341 133,571
Investment securities held to maturity, at amortized cost 31 82
Loans and leases 746,253 659,793
Less: Allowance for loan and lease losses (10,755) (8,831)
------------ -------------
Net loans and leases 735,498 650,962
Premises and equipment, net 12,431 13,797
Accrued interest receivable 3,912 3,838
Other real estate owned 902 902
FHLB and FRB stock and other securities 6,238 5,495
Bank-owned life insurance policies 30,526 29,483
Core deposit intangibles, net 1,236 1,886
Goodwill 15,187 15,187
Other assets 10,148 8,974
------------ -------------
TOTAL ASSETS $ 949,019 $ 905,673
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 167,615 $ 194,842
Interest-bearing 569,124 555,446
------------ -------------
Total deposits 736,739 750,288
Other borrowed funds 87,192 37,500
Accrued interest payable and other liabilities 11,656 10,433
Subordinated debentures 31,961 31,961
------------ -------------
Total liabilities 867,548 830,182
------------ -------------
Commitments and Contingencies (Note 16)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: authorized 5,000,000 shares; none
outstanding - -
Common stock, no par value: authorized 20,000,000 shares; outstanding
7,413,066 and 7,300,914 at December 31, 2007 and 2006 40,642 39,202
Retained earnings 42,212 38,626
Accumulated other comprehensive loss, net of tax (1,383) (2,337)
------------ -------------
Total stockholders' equity 81,471 75,491
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 949,019 $ 905,673
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
50
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In thousands except per share data)
- --------------------------------------------------------------------------------
2007 2006 2005
------------ ----------- ------------
INTEREST INCOME:
Interest and fees on loans and leases $ 53,712 $ 50,241 $ 42,472
Interest on investments:
Taxable interest income 4,450 5,606 6,518
Nontaxable interest income 964 1,052 1,140
Interest on federal funds sold and repurchase agreements 398 280 548
----------------------------------------
Total interest income 59,524 57,179 50,678
----------------------------------------
INTEREST EXPENSE:
Deposits 14,497 10,026 6,373
Subordinated debentures 2,438 2,456 1,708
Other borrowings 1,703 2,203 1,622
----------------------------------------
Total interest expense 18,638 14,685 9,703
----------------------------------------
NET INTEREST INCOME 40,886 42,494 40,975
PROVISION FOR LOAN AND LEASE LOSSES 2,050 975 930
----------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 38,836 41,519 40,045
----------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 6,870 6,437 5,540
Other fees and charges 3,730 3,186 2,653
Earnings on cash surrender value of life insurance policies 1,276 1,211 1,078
Gain on sale of loans 153 399 690
(Loss) gain on sales, calls and impairment of securities (1,752) (3) 117
Other 882 1,420 1,136
----------------------------------------
Total noninterest income 11,159 12,650 11,214
----------------------------------------
NONINTEREST EXPENSES:
Salaries and employee benefits 21,674 21,775 19,784
Occupancy expense 3,075 3,023 2,724
Furniture and equipment expense 2,029 2,153 2,160
Other 13,608 12,664 12,924
----------------------------------------
Total noninterest expenses 40,386 39,615 37,592
----------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 9,609 14,554 13,667
PROVISION FOR INCOME TAXES 3,075 4,158 4,518
----------------------------------------
NET INCOME $ 6,534 $ 10,396 $ 9,149
========================================
Per Share Amounts
Basic Earnings Per Share $ 0.89 $ 1.41 $ 1.23
----------------------------------------
Diluted Earnings Per Share $ 0.86 $ 1.36 $ 1.17
----------------------------------------
Cash Dividends Per Common Share $ 0.40 $ 0.40 $ 0.40
----------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
51
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In thousands except share data)
- --------------------------------------------------------------------------------
Accumulated
Common Stock Other
---------------------- Retained Comprehensive
Shares Amount Earnings Income (Loss) Total
---------- --------- ---------- -------------- ---------
Balance January 1, 2005 7,311,726 $ 37,917 $ 28,403 $ (872) $ 65,448
Comprehensive income:
Net income 9,149 9,149
Other comprehensive loss, net of tax of $(1,094):
Net unrealized loss on available for sale securities,
net of reclassification adjustment of $70 (1,574) (1,574)
---------
Total comprehensive income 7,575
---------
Stock options exercised, net of shares tendered 187,723 1,109 1,109
Stock-based compensation expense 8,550 182 182
Tax benefit derived from exercise of stock options - 656 656
Repurchase of common stock (10,400) (54) (134) (188)
Cash dividends on common stock (2,981) (2,981)
---------------------- ----------------------------------------
Balance December 31, 2005 7,497,599 39,810 34,437 (2,446) 71,801
Adoption of Staff Accounting Bulletin No. 108 400 400
Comprehensive income:
Net income 10,396 10,396
Other comprehensive income, net of tax of $487:
Net unrealized gain on available for sale securities,
net of reclassification adjustment of $2 642 642
---------
Total comprehensive income 11,038
---------
Adjustment to initially recognize the unfunded status of
the supplemental retirement plan, net of tax of $370 (533) (533)
Stock options exercised, net of shares tendered 96,115 521 521
Stock-based compensation expense 7,200 293 293
Tax benefit derived from exercise of stock options - 174 174
Repurchase of common stock (300,000) (1,596) (3,674) (5,270)
Cash dividends on common stock (2,933) (2,933)
---------------------- ----------------------------------------
Balance December 31, 2006 7,300,914 39,202 38,626 (2,337) 75,491
Comprehensive income:
Net income 6,534 6,534
Other comprehensive income, net of tax of $660:
Net unrealized gain on available for sale securities,
net of reclassification adjustment of $(1,034) 950 950
---------
Total comprehensive income 7,484
---------
Adjustment for the change in the unfunded status of
the supplemental retirement plan, net of tax of $3 4 4
Stock options exercised, net of shares tendered 104,952 899 899
Stock-based compensation expense 7,200 368 368
Tax benefit derived from exercise of stock options 173 173
Cash dividends on common stock (2,948) (2,948)
---------------------- ----------------------------------------
Balance December 31, 2007 7,413,066 $ 40,642 $ 42,212 $ (1,383) $ 81,471
====================== ========================================
The accompanying notes are an integral part of these consolidated financial
statements.
52
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (in thousands)
- --------------------------------------------------------------------------------
2007 2006 2005
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,534 $ 10,396 $ 9,149
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,184 2,330 2,242
Amortization of premium on securities 53 99 261
Amortization of core deposit intangible 650 651 779
Provision for loan and lease losses 2,050 975 930
Loss (gain) on sale, calls and impairment of securities 1,752 3 (117)
Gain on sale of loans (153) (399) (690)
Gain on sale of premises and equipment (3) (218) (37)
FHLB stock dividends (187) (229) (115)
Deferred tax provision (1,906) (1,000) 1,156
Stock-based compensation expense 368 293 182
Excess tax benefit from exercise of stock options (173) (174) -
Effect of changes in:
Accrued interest receivable (74) (4) (671)
Other assets (969) 682 (1,609)
Accrued interest payable and other liabilities 1,397 (1,420) 1,486
-------- -------- --------
Net cash provided by operating activities 11,523 11,985 12,946
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities - (98) (3,462)
Proceeds from sales of available for sale securities - 46 20,007
Proceeds from maturities/calls of available for sale securities 29,035 31,836 35,376
Proceeds from maturities/calls of held to maturity securities 50 - 12
(Purchases) proceeds of FHLB and FRB stock and other securities (555) 397 (722)
Net change in interest bearing deposits in other financial institutions - - 500
Net increase in loans and leases (86,432) (34,891) (70,760)
Proceeds from sales of premises and equipment - 422 37
Purchases of premises and equipment (815) (1,385) (4,996)
-------- -------- --------
Net cash used in investing activities (58,717) (3,673) (24,008)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (13,549) 3,598 35,036
Proceeds from issuance of subordinated debentures - - 10,310
Net change in other borrowed funds 49,692 (19,000) (1,094)
Cash dividends paid (2,948) (2,933) (2,232)
Repurchase of common shares - (5,270) (188)
Exercise of stock options, including tax benefit 1,072 695 1,109
-------- -------- --------
Net cash provided by (used in) financing activities 34,267 (22,910) 42,941
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (12,927) (14,598) 31,879
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 41,496 56,094 24,215
---------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 28,569 $ 41,496 $ 56,094
=================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 18,938 $ 14,352 $ 9,562
Income taxes 5,812 6,790 4,831
Noncash investing and financing activities:
Net change in unrealized gain (loss) on available for sale
investment securities 950 1,191 (2,668)
Transfer from loans to other real estate owned - - -
Cash dividends declared 739 729 749
Tax benefit from stock options exercised 173 174 656
The accompanying notes are an integral part of these consolidated financial
statements.
53
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - North Valley Bancorp (the "Company") is a bank
holding company registered with and subject to regulation and supervision
by the Board of Governors of the Federal Reserve System. North Valley
Bancorp was incorporated in 1980 in the State of California for the
purpose of acquiring North Valley Bank ("NVB") in a one-bank holding
company reorganization. NVB was organized in 1972 as a California
state-chartered bank. On October 11, 2000, the Company completed its plan
of reorganization with Six Rivers National Bank ("SRNB"), which then
became a wholly-owned subsidiary of North Valley Bancorp. This
reorganization was completed under the pooling-of-interests method of
accounting for business combinations. In January 2002, SRNB converted from
a national association to a California state-chartered bank and changed
its name to Six Rivers Bank ("SRB"). On January 1, 2004, SRB was merged
with and into NVB in a transaction between entities under common control
accounted for similar to a pooling of interests. (For purposes herein,
"NVB" shall refer to North Valley Bank including the former branches of
SRB and "SRB" will refer to the former branches and operations of SRB).
From 2001 to 2005, the Company formed North Valley Capital Trust I, North
Valley Capital Trust II, North Valley Capital Trust III, and North Valley
Capital Statutory Trust IV (collectively, the Trusts) which are Delaware
statutory business trusts formed for the exclusive purpose of issuing and
selling Trust Preferred Securities. Bank Processing, Inc. is an inactive
wholly-owned subsidiary of North Valley Bancorp. On August 31, 2004, the
Company acquired Yolo Community Bank ("YCB") in a transaction accounted
for under the purchase method of business combinations. Yolo Community
Bank changed its name to NVB Business Bank ("NVB BB") effective February
11, 2005. After the close of business on June 30, 2006, NVB BB was merged
into North Valley Bank.
The Company's principal business consists of attracting deposits from the
general public and using the funds to originate commercial, real estate
and installment loans to customers, who are predominately small and middle
market businesses and middle income individuals. The Company's primary
source of revenues is interest income from its loan and investment
securities portfolios. The Company is not dependent on any single customer
for more than ten percent of the Company's revenues. NVB operates 26
branches, including two supermarket branches, in Northern California.
General - The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of America
and prevailing practices within the banking industry.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Consolidation and Basis of Presentation - The consolidated financial
statements include North Valley Bancorp and its wholly owned subsidiaries:
NVB and its wholly owned subsidiary, North Valley Basic Securities; Bank
Processing, Inc. ("BPI"); and North Valley Trading Company. Bank
Processing, Inc., North Valley Trading Company and North Valley Basic
Securities did not have any activity in 2007, 2006 and 2005. All material
intercompany accounts and transactions have been eliminated in
consolidation.
For financial reporting purposes, the Company's investments in the Trusts
of $961,000 are accounted for under the equity method and, accordingly,
are not consolidated and are included in other assets on the consolidated
balance sheet. The subordinated debentures issued and guaranteed by the
Company and held by the Trusts are reflected as debt on the Company's
consolidated balance sheet.
Disclosures About Segments of an Enterprise - The Company uses the
"management approach" for reporting business segment information. The
management approach is based on the segments within a company used by the
chief operating decision-maker for making operating decisions and
assessing performance. Reportable segments are based on such factors as
products and services, geography, legal structure or any other manner by
which a company's management distinguishes major operating units.
Utilizing this approach, management has determined that the Company has
only one reportable segment.
Reclassifications - Certain amounts in 2006 and 2005 have been
reclassified to conform with the 2007 consolidated financial statement
presentation.
54
Cash and Cash Equivalents - For the purposes of the consolidated statement
of cash flows, cash and cash equivalents have been defined as cash, demand
deposits with correspondent banks, cash items, settlements in transit, and
federal funds sold and repurchase agreements. Generally, federal funds are
sold for one-day periods and repurchase agreements are sold for eight to
fourteen-day periods. Cash equivalents have remaining terms to maturity of
three months or less from the date of acquisition.
Reserve Requirements. The Company is subject to regulation by the Federal
Reserve Board. The regulations require the Company to maintain certain
cash reserve balances on hand or at the Federal Reserve Bank (FRB). At
December 31, 2007 and 2006, the Company had reserves of $631,000 and
$557,000. As compensation for check-clearing services, additional
compensating balances of $1,000,000 at December 31, 2006 were maintained
with the FRB. There was not a requirement for a compensating balance at
December 31, 2007.
Investment Securities - The Company accounts for its investment securities
as follows:
Trading securities are carried at fair value. Changes in fair value
are included in noninterest income. The Company did not have any
securities classified as trading at December 31, 2007 and 2006.
Available for sale securities are carried at estimated fair value
and represent securities not classified as trading securities nor as
held to maturity securities. Unrealized gains and losses resulting
from changes in fair value are recorded, net of tax, as a net amount
within accumulated other comprehensive income (loss), which is a
separate component of stockholders' equity.
Held to maturity securities are carried at cost adjusted for
amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income. The Company's policy
of carrying such investment securities at amortized cost is based
upon its ability and management's intent to hold such securities to
maturity.
Management determines the appropriate classification of its investments at
the time of purchase and may only change the classification in certain
limited circumstances. All transfers between categories are accounted for
at fair value. As of and for the year ended December 31, 2007 and 2006,
there were no transfers of securities between categories.
Gains or losses on disposition are recorded in noninterest income based on
the net proceeds received and the carrying amount of the securities sold,
using the specific identification method. Interest earned on investment
securities is reported in interest income, net of applicable adjustments
for accretion of discounts and amortization of premiums.
Investment securities are evaluated for other-than-temporary impairment on
at least a quarterly basis and more frequently when economic or market
conditions warrant such an evaluation to determine whether a decline in
their value below amortized cost is other than temporary. Management
utilizes criteria such as the magnitude and duration of the decline and
the intent and ability of the Company to retain its investment in the
issues for a period of time sufficient to allow for an anticipated
recovery in fair value, in addition to the reasons underlying the decline,
to determine whether the loss in value is other than temporary. The term
"other than temporary" is not intended to indicate that the decline is
permanent, but indicates that the prospects for a near-term recovery of
value is not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value of
the investment. Once a decline in value is determined to be other than
temporary, the value of the security is reduced and a corresponding charge
to earnings is recognized.
Loans and Leases - Loans and leases are reported at the principal amount
outstanding, net of unearned income, including net deferred loan fees, and
the allowance for loan and lease losses.
Interest on loans is calculated using the simple interest method on the
daily balance of the principal amount outstanding.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full and timely
collection of interest or principal, or when a loan becomes contractually
past due by 90 days or more with respect to interest or principal. When a
loan is placed on nonaccrual status, all interest previously accrued but
not collected is reversed against current period interest income. Income
on such loans is then recognized only to the extent that cash is received
and where the future collection of principal is probable. Interest
accruals are resumed on such loans when, in the judgment of management,
the loans are estimated to be fully collectible as to both principal and
interest.
55
Direct financing leases are carried net of unearned income. Income from
leases is recognized by a method that approximates a level yield on the
outstanding net investment in the lease.
The Company may purchase loans or acquire loans through a business
combination for which differences exist between the contractual cash flows
and the cash flows expected to be collected due, at least in part, to
credit quality. When the Company acquires such loans, the yield that may
be accreted (accretable yield) is limited to the excess of the Company's
estimate of undiscounted cash flows expected to be collected over the
Company's initial investment in the loan. The excess of contractual cash
flows over cash flows expected to be collected may not be recognized as an
adjustment to yield, loss, or a valuation allowance. Subsequent increases
in cash flows expected to be collected generally should be recognized
prospectively through adjustment of the loan's yield over its remaining
life. Decreases in cash flows expected to be collected should be
recognized as an impairment. The Company may not "carry over" or create a
valuation allowance in the initial accounting for loans acquired under
these circumstances. At December 31, 2007 and 2006, there were no loans
being accounted for under this policy.
Deferred Loan Fees - Loan fees and certain related direct costs to
originate loans are deferred and amortized to income by a method that
approximates a level yield over the contractual life of the underlying
loans. The unamortized balance of deferred fees and costs is reported as a
component of net loans.
Loan Sales and Servicing - The Company originates and sells residential
mortgage loans to Freddie Mac and others. The Company retains the
servicing on certain loans that are sold. Deferred origination fees and
expenses are recognized at the time of sale in the determination of the
gain or loss. Upon the sale of these loans, the Company's investment in
each loan is allocated between the servicing retained and the loan, based
on the relative fair value of each portion. The gain (loss) is recognized
at the time of sale based on the difference between the sale proceeds and
the allocated carrying value of the related loans sold. The fair value of
the contractual servicing is reflected as a servicing asset, which is
amortized over the period of estimated net servicing income using a method
approximating the interest method. The servicing asset is included in
other assets on the consolidated balance sheet, and is evaluated for
impairment on a periodic basis.
Allowance for Loan and Lease Losses - The allowance for loan and lease
losses is maintained to provide for losses related to impaired loans and
leases and other losses that can be reasonably expected to occur in the
normal course of business. The allowance for loan and lease losses is
established through a provision for loan and lease losses charged to
operations. Loans and leases are charged against the allowance for loan
and lease losses when management believes that the collectibility of the
principal is unlikely or, with respect to consumer installment loans,
according to an established delinquency schedule. Management attributes
formula reserves to different types of loans using percentages which are
based upon perceived risk associated with the portfolio and underlying
collateral, historical loss experience, and vulnerability to existing
economic conditions, which may affect the collectibility of the loans.
Specific reserves are allocated for impaired loans and leases which have
experienced a decline in internal grading and when management believes
additional loss exposure exists. The unallocated allowance is based upon
management's evaluation of various conditions that are not directly
measured in the determination of the formula and specific allowances. The
evaluation of inherent losses with respect to these conditions is subject
to a higher degree of uncertainty because they are not identified with
specific problem credits or portfolio segments. Although the allowance for
loan and lease losses is allocated to various portfolio segments, it is
general in nature and is available for the loan and lease portfolio in its
entirety. The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans and leases. Actual
amounts could differ from those estimates.
The Company considers a loan or lease impaired if, based on current
information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according
to the contractual terms of the loan or lease agreement. The measurement
of impaired loans and leases is generally based on the present value of
expected future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans and leases are measured
for impairment based on the fair value of the collateral.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation, which is computed principally on the
straight-line method over the estimated useful lives of the respective
assets. Leasehold improvements are amortized on the straight-line method
over the shorter of the estimated useful lives of the improvements or the
terms of the respective leases. The Company evaluates premises and
equipment for financial impairment as events or changes in circumstances
indicate that the carrying amount of such assets may not be fully
recoverable.
Other Real Estate Owned - Real estate acquired through, or in lieu of,
loan foreclosures is expected to be sold and is recorded at its fair value
less estimated costs to sell (fair value). The amount, if any, by which
the recorded amount of the loan exceeds the fair value less estimated
costs to sell are charged to the allowance for loan or lease losses, if
necessary. After foreclosure, valuations are periodically performed by
management with any subsequent write-downs recorded as a valuation
allowance and charged against operating expenses. Operating expenses of
such properties, net of related income, are included in other expenses and
gains and losses on their disposition are included in other income and
other expenses.
56
FHLB and FRB stock and Other Securities - The Company purchases restricted
stock in the Federal Home Loan Bank of San Francisco (FHLB), the Federal
Reserve Bank (FRB) and others as required to participate in various
programs offered by these institutions. These investments are carried at
cost and may be redeemed at par with certain restrictions.
Core Deposit Intangibles - These assets represent the excess of the
purchase price over the fair value of the tangible net assets acquired
from a branch acquisition by SRB and the estimated fair value of the
deposit relationships acquired in the acquisition of YCB and is being
amortized by the straight-line method. The cost assigned to the branch
acquisition intangible was $3,252,000 with accumulated amortization of
$3,000,000 at December 31, 2007. It is being amortized at $504,000 per
year with the remaining amortization of $252,000 to be recognized in 2008.
The YCB core deposit intangible was recorded at $1,421,000 in August, 2004
with accumulated amortization of $437,000 at December 31, 2007. It is
being amortized at $146,000 per year over an estimated life of ten years
with a remaining amortization period of approximately seven years.
Amortization expense on these intangibles was $650,000 for each of the
years ended December 31, 2007, 2006, and 2005, respectively. Amortization
expense over the next five years is expected to be approximately $398,000
in 2008 and $146,000 in years 2009 through 2012. Management evaluates the
recoverability and remaining useful life annually to determine whether
events or circumstances warrant a revision to the intangible asset or the
remaining period of amortization. There were no revisions resulting from
management's assessment in 2007, 2006 or 2005.
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 fair values assigned to assets acquired and
liabilities assumed in transactions accounted for under the purchase
method of accounting. Goodwill was recorded in the Company's acquisition
of YCB. The value of goodwill is ultimately derived from the Company's
ability to generate net earnings after the acquisition. A decline in net
earnings could be indicative of a decline in the fair value of goodwill
and result in impairment. For that reason, goodwill will be assessed for
impairment at a reporting unit level at least annually. There was no
impairment resulting from management's assessment in 2007, 2006 or 2005.
Accounting for Defined Benefit Pension and Other Post Retirement Plans -
In September 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other
Post Retirement Plans - an amendment of FASB Statements No. 87, 88, 106,
and 132R. This statement requires the recognition of the funded status of
a defined benefit plan on the balance sheet of the plan sponsor, and that
gains or losses and prior service costs or credits that arise during the
period that are not recognized as net period benefit expenses be recorded
in other comprehensive income. In addition, benefit plan assets and
obligations should generally be measured as of the fiscal year-end
statement of financial position. Disclosure is required in the notes to
the financial statements about certain effects on net periodic benefit
cost for the next fiscal year that arise from delayed recognition of the
gains or losses. Under the provision of SFAS No. 158, the Company was
required to recognize the underfunded status of its supplemental
retirement plan as a liability in the consolidated balance sheet as of
December 31, 2006 and to recognize subsequent changes in that funded
status through other comprehensive income. For the years ended December
31, 2007 and 2006, the amount recognized through other comprehensive
income was $4,000 and ($533,000), respectively.
Income Taxes - The Company files its income taxes on a consolidated basis
with its subsidiaries. The allocation of income tax expense (benefit)
represents each entity's proportionate share of the consolidated provision
for income taxes.
The Company applies the asset and liability method to account for income
taxes. Deferred tax assets and liabilities are calculated by applying
applicable tax laws to the differences between the financial statement
basis and the tax basis of assets and liabilities. The effect on deferred
taxes of changes in tax laws and rates is recognized in income in the
period that includes the enactment date. On the consolidated balance
sheet, net deferred tax assets are included in other assets.
On January 1, 2007, the Company adopted Financial Accounting Standards
Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"). 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 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. In addition, FIN 48
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
57
The provisions of FIN 48 have been applied to all tax positions of the
Company as of January 1, 2007. Only tax positions that met the
more-likely-than-not recognition threshold on January 1, 2007 were
recognized or continue to be recognized upon adoption. The Company
previously recognized income tax positions based on management's estimate
of whether it was reasonably possible that a liability has been incurred
for unrecognized income tax benefits by applying FASB Statement No. 5,
Accounting for Contingencies. The adoption of FIN 48 did not have a
material impact on the Company's financial position, results of operations
or cash flows.
When tax returns are filed, it is highly certain that some positions taken
would be sustained upon examination by the taxing authorities, while
others are subject to uncertainty about the merits of the position taken
or the amount of the position that would be ultimately sustained. The
benefit of a tax position is recognized in the financial statements in the
period during which, based on all available evidence, management believes
it is more likely than not that the position will be sustained upon
examination, including the resolution of appeals or litigation processes,
if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more
than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with
tax positions taken that exceeds the amount measured as described above is
reflected as a liability for unrecognized tax benefits in the accompanying
balance sheet along with any associated interest and penalties that would
be payable to the taxing authorities upon examination.
Interest expense associated with unrecognized tax benefits is classified
as interest expense in the consolidated statement of income. Penalties
associated with unrecognized tax benefits are classified as other expense
in the consolidated statement of income.
Earnings per Share - Basic earnings per share (EPS), which excludes
dilution, is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Company. The treasury stock method has been applied to
determine the dilutive effect of stock options in computing diluted EPS.
Earnings per share is retroactively adjusted for stock dividends and stock
splits for all periods presented.
Stock-Based Compensation - At December 31, 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 stock must be paid for
in full at the time the option is exercised. Prior to January 1, 2006,
compensation expense was not recognized in the financial statements for
options under the Employee plan. Compensation expense was recognized in
the financial statements for the Director Plans over the vesting period
for the difference between the fair value of the shares at the date of the
grant and the exercise price which is equal to 85% of the fair value. 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
December 31, 2007.
Prior to January 1, 2006, the Company accounted for the plans under the
recognition and measurement provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations, as permitted by Financial Accounting Standards
Board ("FASB") Statement No. 123, Accounting for Stock-Based Compensation
("Statement 123") and FASB Statement No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. Effective January 1, 2006, the
Company adopted the fair value recognition provisions of FASB Statement
No. 123(R), Share-Based Payment ("Statement 123 (R)"), using the modified
prospective transition method. Under this transition method, compensation
cost recognized in fiscal year 2006 and 2007 includes: (a) compensation
cost for all share-based payments vesting during 2006 and 2007 that were
granted prior to, but not yet vested as of, January 1, 2006 based on the
grant-date fair value estimated in accordance with the original provisions
of Statement 123; and, (b) compensation cost for all share-based payments
vesting during 2006 and 2007 that were granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of Statement 123(R). The Company has elected the alternative
method prescribed by FASB Staff Position No. FAS 123(R)-3, Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards, commonly referred to as the "short-cut" method, for accounting for
the tax consequences of share-based awards.
58
As a result of adopting Statement 123(R) on January 1, 2006, the Company's
income before provision for income taxes and net income for 2006 was
$170,000 and $121,000 lower, respectively, and for 2007, was $247,000 and
$168,000 lower, respectively, than if it had continued to account for
share-based compensation under APB Opinion No. 25. Basic and diluted
earnings per share would have been $0.02 higher than reported,
respectively, in both 2006 and 2007, if the Company had continued to
account for share-based compensation under APB Opinion No. 25.
Statement 123(R) requires the cash flows resulting from the tax benefits
from tax deductions in excess of the compensation cost recognized for
those options (excess tax benefits) to be classified as a cash flow from
financing activities in the statement of cash flows.
Determining Fair Value
The fair value of each option award is estimated on the date of grant
using a Black-Scholes-Merton based option valuation model that uses the
assumptions discussed below. This fair value is then amortized on a
straight-line basis over the requisite service periods of the awards,
which is generally the vesting period.
Expected Term - The Company's expected term represents the period that the
Company's stock-based awards are expected to be outstanding and was
determined based on the "simplified" method as outlined in Staff
Accounting Bulletin ("SAB") No. 107.
Expected Volatility - The Company uses the trading history of the common
stock of the Company in determining an estimated volatility factor when
using the Black-Scholes-Merton option-pricing formula to determine the
fair value of options granted.
Expected Dividend - The Company estimates the expected dividend based on
its historical experience of dividends declared per year, giving
consideration to any anticipated changes and the estimated stock price
over the expected term based on historical experience when using the
Black-Scholes-Merton option-pricing formula.
Risk-Free Interest Rate - The Company bases the risk-free interest rate
used in the Black-Scholes-Merton option-pricing formula on the implied
yield currently available on U.S. Treasury zero-coupon issues with the
same or substantially equivalent remaining term as the expected term of
the options.
Estimated Forfeitures - When estimating forfeitures, the Company considers
voluntary and involuntary termination behavior as well as analysis of
actual option forfeitures.
The fair value of each option is estimated on the date of grant with the
following assumptions:
2007 2006 2005
---------- ------- --------
Average dividend yield 2.25% 2.27% 2.25%
Expected volatility 23.51% 15.24% 15.50%
Average risk-free interest rate 4.85% 3.64% 3.58%
Expected option life 6.25 years 7 years 7 years
Weighted average grant date fair value $5.26 $2.97 $3.26
Pro Forma
The following table illustrates the effect on net income and earnings per
share for 2005 if the Company had applied the fair value recognition
provisions of Statement 123 to options granted under the Company's stock
option plans:
59
2005
---------
Net income, as reported $ 9,149
Add: total stock-based compensation expense included in net income, net of tax $ 107
Deduct: total stock-based compensation expense determined under the fair
value based method for all awards, net of tax (497)
---------
Net income, pro forma $ 8,759
=========
Basic earnings per share:
As reported $ 1.23
Pro forma $ 1.18
Diluted earnings per share:
As reported $ 1.17
Pro forma $ 1.13
Comprehensive Income - Comprehensive income includes net income and other
comprehensive income or loss, which represents the change in its net
assets during the period from nonowner sources. The components of other
comprehensive income or loss for the Company include the unrealized gain
or loss on available-for-sale securities and adjustments to the minimum
pension liability and are presented net of tax. Comprehensive income is
reported on the consolidated statement of changes in stockholders' equity.
Cumulative Effect of Adopting Staff Accounting Bulletin 108 - In September
2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements ("SAB 108"). The interpretations in this Staff Accounting
Bulletin are being issued to address diversity in practice in quantifying
financial statement misstatements and the potential under current practice
to build up improper amounts on the balance sheet. Management adopted the
provisions of SAB 108 at December 31, 2006.
Historically, the Company evaluated uncorrected differences utilizing the
rollover approach. Management believed that the impact of differences
related to income taxes was immaterial to prior fiscal years under the
rollover method. Under SAB 108 management must assess materiality using
both the rollover method and the iron-curtain method. Under the
iron-curtain method, the cumulative effect of tax differences was material
to the Company's 2006 consolidated financial statements and, therefore,
management recorded an adjustment to increase the opening 2006 retained
earnings balance in the amount of $400,000 and decrease other liabilities
by an equal amount, in accordance with the implementation guidance on SAB
108.
New Accounting Pronouncements -
Fair Value Measurements
-----------------------
In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair
Value Measurements. SFAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 applies whenever other standards require (or
permit) assets or liabilities to be measured at fair value but does not
expand the use of fair value in any new circumstances. In this standard,
the FASB clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing the asset or
liability. In support of this principle, SFAS 157 establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions. The provisions of SFAS 157 are effective for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. The provisions should be
applied prospectively, except for certain specifically identified
financial instruments. The Company adopted SFAS 157 on January 1, 2008 and
management does not believe its adoption will have a material impact on
the Company's financial position, results of operations or cash flows.
60
The 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 Company
adopted SFAS 159 on January 1, 2008 and management did not elect the fair
value option for any of its financial instruments.
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
--------------------------------------------------------------------------
Endorsement Split-Dollar Life Insurance Arrangements
----------------------------------------------------
In September 2006, the FASB ratified the consensuses reached by the Task
Force on Issue No. 06-4 (EITF 06-04), Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements. A question arose when an employer enters into an
endorsement split-dollar life insurance arrangement related to whether the
employer should recognize a liability for the future benefits or premiums
to be provided to the employee. EITF 06-04 indicates that an employer
should recognize a liability for future benefits and that a liability for
the benefit obligation has not been settled through the purchase of an
endorsement type policy. An entity should apply the provisions of EITF
06-04 either through a change in accounting principle through a
cumulative-effect adjustment to retained earnings as of the beginning of
the year of adoption or a change in accounting principle through
retrospective application to all prior periods. The provisions of EITF
06-04 are effective for fiscal years beginning after December 15, 2007.
The Company adopted the provisions of EITF 06-04 on January 1, 2008 and
management determined that the adoption of EITF 06-04 will not have an
impact on the financial position, results of operations or cash flows of
the Company.
Accounting for Business Combinations
------------------------------------
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), Business Combinations ("SFAS No. 141R").
SFAS No. 141(R), among other things, establishes principles and
requirements for how the acquirer in a business combination (i) recognizes
and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquired
business, (ii) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase, and (iii)
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The Company is required to adopt SFAS No. 141(R) for all
business combinations for which the acquisition date is on or after
January 1, 2009. Earlier adoption is prohibited. This standard will change
the accounting treatment for business combinations on a prospective basis.
61
2. INVESTMENT SECURITIES
At December 31, the amortized cost of investment securities and their
estimated fair value were as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
December 31, 2007
Available-for-Sale:
Obligations of U.S. government agencies $ 3,499 $ 46 $ (11) $ 3,534
Obligations of state and political subdivisions 20,563 526 (11) 21,078
Mortgage-backed securities 69,433 57 (1,350) 68,140
Corporate debt securities 6,009 (670) 5,339
Equity securities 6,284 (34) 6,250
----------- ---------- ---------- ----------
$ 105,788 $ 629 $ (2,076) $ 104,341
=========== ========== ========== ==========
Held-to-Maturity:
Mortgage-backed securities $ 31 $ - $ - $ 31
=========== ========== ========== ==========
December 31, 2006
Available-for-Sale:
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
=========== ========== ========== ==========
Held-to-Maturity:
Mortgage-backed securities $ 82 $ - $ (1) $ 81
=========== ========== ========== ==========
Net unrealized losses on available for sale securities totaling $1,447,000
and $3,057,000 were recorded, net of $593,000 and $1,252,000 in tax
benefits, as accumulated other comprehensive loss within stockholders'
equity at December 31, 2007 and 2006, respectively.
Proceeds on sales, calls or maturities of securities categorized as
available for sale were $29,035,000, $31,882,000 and $55,383,000 in 2007,
2006 and 2005, respectively. Gross realized gains on sales or calls of
securities categorized as available for sale securities were $3,000,
$25,000 and $297,000 in 2007, 2006 and 2005, respectively. Gross realized
losses on sales, impairment or calls of securities categorized as
available for sale securities were $1,755,000, $28,000 and $180,000 in
2007, 2006 and 2005, respectively.
There were no sales or gross realized gains or losses on calls of held to
maturity securities in 2007, 2006 and 2005. There were no transfers
between available for sale and held to maturity investment securities in
2007, 2006, and 2005.
The following tables show gross unrealized losses and the estimated fair
value of available for sale investment securities, aggregated by
investment category, for investment securities that are in an unrealized
loss position at December 31, 2007 and 2006 (in thousands). Unrealized
losses for held to maturity investment securities during the same period
were not significant.
62
December 31, 2007
- -----------------
Less than 12 Months 12 Months or Longer Total
----------------------- ----------------------- -----------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
----------------------- ----------------------- -----------------------
Description of Securities
Obligations of U.S. government
agencies $ - $ - $ 1,988 $ 11 $ 1,988 $ 11
Obligations of states and political
subdivisions 2,737 11 2,737 11
Mortgage-backed securities 341 1 58,269 1,349 58,610 1,350
Corporate debt securities 5,339 670 5,339 670
Equity securities 3,250 34 3,250 34
----------------------- ----------------------- -----------------------
Total temporarily impaired
securities $ 5,680 $ 671 $ 66,244 $ 1,405 $ 71,924 $ 2,076
======================= ======================= =======================
December 31, 2006
- -----------------
Less than 12 Months 12 Months or Longer Total
----------------------- ----------------------- -----------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
----------------------- ----------------------- -----------------------
Description of Securities
Obligations of U.S. government
agencies $ - $ - $ 7,396 $ 105 $ 7,396 $ 105
Obligations of states and political
subdivisions 3,550 40 3,550 40
Mortgage-backed securities 82,015 2,824 82,015 2,824
Corporate debt securities 2,972 17 2,972 17
Equity securities 10,273 767 10,273 767
----------------------- ----------------------- -----------------------
Total temporarily impaired
securities $ - $ - $ 106,206 $ 3,753 $ 106,206 $ 3,753
======================= ======================= =======================
U.S. Government Agency Securities
Management believes that the unrealized losses on the Company's investment
in U.S. government agency securities is caused by interest rate changes
and is not attributable to changes in credit quality. The Company's
investment in U.S government agency securities include four securities
which were in a loss position for twelve months or more, none of which are
individually significant. Additionally, the contractual cash flows of
these investments are guaranteed by an agency of the U.S. government and
thus it is expected that the securities would not be settled at any price
less than the amortized cost of the Company's investment. The Company has
the ability and intent to hold those investments until at least a recovery
of fair value or until maturity. The Company does not consider these
investments to be other-than-temporarily impaired at December 31, 2007.
Obligations of States and Political Subdivisions
Management believes that the unrealized losses on the Company's investment
in obligations of states and political subdivisions is caused by interest
rate changes, and is not attributable to changes in credit quality. The
Company's investments in obligations of states and political subdivisions
includes 10 securities which were in a loss position for twelve months or
more, none of which are individually significant. The Company has the
ability and intent to hold these investments until at least a recovery of
fair value or to maturity or call and expects to collect all amounts due.
The Company does not consider these securities to be
other-than-temporarily impaired at December 31, 2007.
Government Guaranteed Mortgage Backed Securities
Management believes that the unrealized losses on the Company's investment
in government guaranteed mortgage-backed securities is caused by interest
rate change and is not attributable to changes in credit quality. These
investments include 36 securities which were in a loss position for twelve
months or more, none of which are individually significant. Investments in
these securities in a loss position for less than twelve months were not
significant. Additionally, the contractual cash flows of these investments
are guaranteed by an agency of the U.S. government and thus it is expected
that the securities would not be settled at any price less than the
amortized cost of the Company's investment. The Company has the ability
and intent to hold those investments until at least a recovery of fair
value or until maturity. The Company does not consider these investments
to be other-than-temporarily impaired at December 31, 2007.
63
Corporate Debt Securities
As of December 31, 2007, there were no corporate debt securities in a loss
position for twelve months or more, and two corporate debt securities that
were in a loss position for less than twelve months. The Company has the
ability and intent to hold those investments until at least a recovery of
fair value or until maturity. The Company does not consider these
investments to be other-than-temporarily impaired at December 31, 2007.
Equity Securities
Management believes that the unrealized losses on the Company's investment
in equity securities, after the impairment loss taken during 2007
discussed below, is caused by interest rate increases and is not
attributable to changes in credit quality. These investments include two
securities which were in a loss position for twelve months or more, two of
which are individually significant as discussed below. Management has the
ability and intent to hold these investments until at least a recovery of
fair value or until maturity.
At December 31, 2007 the Company held 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.
Management carefully evaluated the FNMA preferred stock to determine
whether the decline in fair value below the amortized cost value of these
securities is other-than-temporary. Among other items, management
considers relevant accounting literature which included SFAS No. 115,
Statement of Auditing Standard ("SAS") No. 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 amortized cost
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
Management concluded the security was impaired and recorded a $1,716,000
pre-tax write-down of the security through income to its December 31, 2007
market value of $32.84 per share. The Company has the intent and ability
to continue to hold this security. However, it may elect to divest of this
security at any time.
Maturities
The Company invests in collateralized mortgage obligations ("CMOs") issued
by the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation and Government National Mortgage Association. Actual
maturities of CMOs and other securities may differ from contractual
maturities because borrowers have the right to prepay mortgages without
penalty or call obligations with or without call penalties. The Company
uses the "Wall Street" consensus average life at the time the security is
purchased to schedule maturities of these CMOs and adjusts scheduled
maturities periodically based upon changes in the Wall Street estimates.
Contractual maturities of held to maturity and available for sale
securities (other than equity securities with an amortized cost of
approximately $6,284,000 and a fair value of approximately $6,250,000) at
December 31, 2007, are shown below (in thousands).
64
Held to Maturity Available for Sale
--------------------------- -------------------------------
Amortized Cost Estimated Estimated
(Carrying Fair Amortized Fair Value
Amount) Value Costs (Carrying Amount)
-------------- ---------- ----------- -----------------
Due in 1 year or less $ 31 $ 31 $ 4,660 $ 4,653
Due after 1 year through 5 years 61,652 61,152
Due after 5 years through 10 years 26,267 26,011
Due after 10 years 6,925 6,275
-------------- ---------- ----------- ----------------
$ 31 $ 31 $ 99,504 $ 98,091
============== ========== =========== ================
At December 31, 2007 and 2006, securities having fair value amounts of
approximately $68,410,000 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.
3. LOANS AND LEASES
The Company originates loans for business, consumer and real estate
activities and leases for equipment purchases. Such loans and leases are
concentrated in Yolo, Solano, Placer, Sonoma, Shasta, Humboldt, Mendocino,
Trinity and Del Norte Counties and neighboring communities. Substantially
all loans are collateralized. Generally, real estate loans are secured by
real property. Commercial and other loans are secured by bank deposits,
real estate or business or personal assets. Leases are generally secured
by equipment. The Company's policy for requiring collateral reflects the
Company's analysis of the borrower, the borrower's industry and the
economic environment in which the loan would be granted. The loans and
leases are expected to be repaid from cash flows or proceeds from the sale
of selected assets of the borrower.
Major classifications of loans and leases at December 31 were as follows
(in thousands):
2007 2006
------------- -------------
Commercial $ 92,419 $ 78,122
Real estate - commercial 297,272 263,323
Real estate - construction 225,758 213,199
Real estate - mortgage 50,131 40,487
Installment 41,161 27,951
Direct financing leases 1,307 1,985
Other 39,297 35,828
------------- -------------
747,345 660,895
Deferred loan (fees) costs, net (1,092) (1,102)
Allowance for loan and lease losses (10,755) (8,831)
------------- -------------
$ 735,498 $ 650,962
============= =============
At December 31, 2007 and 2006, the Company serviced real estate loans and
loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $97,059,000 and $108,931,000,
respectively.
Salaries and employee benefits totaling $793,000, $933,000 and $1,191,000
have been deferred as loan origination costs for the years ended December
31, 2007, 2006 and 2005, respectively.
Certain real estate loans receivable are pledged as collateral for
available borrowings with the FHLB, FRB, and certain correspondent banks.
Pledged loans totaled $203,662,000 and $110,010,000 at December 31, 2007
and 2006 (see note 9).
65
The components of the Company's direct financing leases at December 31 are
summarized below (in thousands):
2007 2006
------- -------
Future minimum lease payments $ 1,337 $ 2,012
Residual interests 14
Initial direct costs 1
Unearned income (30) (42)
------- -------
$ 1,307 $ 1,985
======= =======
Future minimum lease payments are as follows (in thousands):
2008 $ 322
2009 251
2010 192
2011 192
2012 192
Thereafter 188
-------
Total $ 1,337
=======
Changes in the allowance for loan and lease losses for the years ended
December 31 were as follows (in thousands):
2007 2006 2005
-------- -------- --------
Balance, beginning of year $ 8,831 $ 7,864 $ 7,217
Provision 2,050 975 930
Loans charged-off (255) (258) (602)
Recoveries on loans previously
charged-off 129 250 319
-------- -------- --------
Balance, end of year $ 10,755 $ 8,831 $ 7,864
-------- -------- --------
4. IMPAIRED AND NONPERFORMING LOANS AND LEASES
At December 31, 2007 and 2006, the recorded investment in impaired loans
and leases was approximately $1,608,000 and $72,000, respectively. Of the
2007 and 2006 balance, there was a related valuation allowance of $83,000
and $36,000, respectively. For the years ended December 31, 2007, 2006 and
2005, the average recorded investment in impaired loans and leases was
approximately $1,572,000, $63,000 and $791,000. During the portion of the
year that the loans and leases were impaired, the Company recognized
interest income of approximately $38,000, $9,000 and $6,000 for cash
payments received in 2007, 2006 and 2005.
66
Nonperforming loans and leases include all such loans and leases that are
either on nonaccrual status or are 90 days past due as to principal or
interest but still accrue interest because such loans are well-secured and
in the process of collection. Nonperforming loans and leases at December
31 are summarized as follows (in thousands):
2007 2006
-------- ---------
Nonaccrual loans and leases $ 1,608 $ 72
Loans and leases 90 days past due but
still accruing interest 156 403
-------- ---------
Total nonperforming loans and leases $ 1,764 $ 475
======== ========
Interest income forgone on nonaccrual loans or leases approximated $49,000
in 2007, $10,000 in 2006 and $6,000 in 2005.
At December 31, 2007, there were no commitments to lend additional funds
to borrowers whose loans or leases were on nonaccrual status.
5. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are
summarized as follows (in thousands):
2007 2006
-------- --------
Land $ 2,239 $ 2,239
Buildings and improvements 8,286 8,239
Furniture, fixtures and equipment 19,063 18,415
Leasehold improvements 3,469 3,374
Construction in progress 8 5
-------- --------
33,065 32,272
Accumulated depreciation and amortization (20,634) (18,475)
-------- --------
Total premises and equipment $ 12,431 $ 13,797
======== ========
Depreciation and amortization included in occupancy and equipment expense
totaled $2,184,000, $2,330,000 and $2,154,000 for the years ended December
31, 2007, 2006 and 2005, respectively.
6. OTHER ASSETS
Major classifications of other assets at December 31 were as follows (in
thousands):
2007 2006
-------- --------
Deferred taxes $ 6,444 $ 5,189
Prepaid expenses 1,018 975
Mortgage servicing asset 677 834
Other 2,009 1,976
-------- --------
Total other assets $ 10,148 $ 8,974
======== ========
Originated mortgage servicing assets totaling $30,000, $147,000 and
$298,000 were recognized during the years ended December 31, 2007, 2006
and 2005, respectively. Amortization of mortgage servicing assets totaled
$187,000, $176,000 and $95,000 for the years ended December 31, 2007, 2006
and 2005, respectively. There were no impairment charges to mortgage
servicing assets during the years ended December 31, 2007, 2006 and 2005.
67
7. DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $104,503,000 and $76,985,000 at December 31, 2007 and
2006. Interest expense incurred on such time certificates of deposit was
$4,386,000, $2,631,000 and $1,349,000 for the years ended December 31,
2007, 2006 and 2005. At December 31, 2007, the scheduled maturities of all
time deposits were as follows (in thousands):
Years Amount
---------- --------------
2008 229,671
2009 8,130
2010 1,592
2011 1,244
2012 233
Thereafter 6
--------------
$ 240,876
==============
8. LINES OF CREDIT
At December 31, 2007, the Company had the following lines of credit with
correspondent banks to purchase federal funds (in thousands):
Description Amount Expiration
- ----------- ------------- ----------
Unsecured $ 10,000 6/30/2008
Unsecured 15,000 7/31/2008
Secured:
First deeds of trust on eligible 1-4 unit residential loans 57,287 Monthly
First deeds of trust on eligible commercial real estate loans 1,844 Monthly
Securities Backed Credit Program 10,401 Monthly
9. BORROWING ARRANGEMENTS
Other borrowed funds include FHLB advances and Federal funds purchased.
The following table summarizes these borrowings at December 31 (in
thousands):
2007 2006
----------- ------------
Short-term borrowings:
FHLB advances $ 86,957 $ 25,000
Federal funds 235
----------- ------------
Total short-term borrowings $ 87,192 $ 25,000
=========== ============
Long-term borrowings:
FHLB advances $ 12,500
----------- ------------
Total long-term borrowings $ - $ 12,500
=========== ============
Total borrowed funds $ 87,192 $ 37,500
=========== ============
68
The FHLB advances of $86,957,000 at December 31, 2007 carry an average
interest rate of 3.46%, mature in 2008 and are collateralized by loans and
securities. Federal funds purchased are generally for one-day periods.
10. SUBORDINATED DEBENTURES
The Company owns the common stock of four business trusts that have issued
an aggregate of $31.0 million in trust preferred securities fully and
unconditionally guaranteed by the Company. The entire proceeds of each
respective issuance of trust preferred securities were invested by the
separate business trusts into junior subordinated debentures issued by the
Company, with identical maturity, repricing and payment terms as the
respective issuance of trust preferred securities. The aggregate amount of
junior subordinated debentures issued by the Company is $32.0 million,
with the maturity dates for the respective debentures ranging from 2031
through 2036.
The trust preferred securities issued by the trusts are currently included
in Tier 1 capital in the amount of $27,611,000 and in Tier 2 capital in
the amount of $3,389,000 for purposes of determining Leverage, Tier 1 and
Total Risk-Based capital ratios. Beginning March 31, 2009, a more
restrictive formula must be used to determine the amount of trust
preferred securities that may be included in regulatory Tier 1 capital. At
that time, trust preferred securities equal to no more than 25% of the sum
of all core capital elements, which generally is defined as shareholders'
equity less goodwill and any related deferred income tax liability will be
allowed in Tier 1 capital. The regulations currently in effect only limit
the amount of trust preferred securities that may be included in Tier 1
capital to 25% of the sum of core capital elements without a deduction for
goodwill. Management has determined that the Company's Tier 1 capital
ratios would remain above the regulatory minimum had the modification of
the capital regulations been in effect at December 31, 2007.
The following table summarizes the terms of each subordinated debenture
issuance (dollars in thousands):
Fixed or Amount at December 31,
Date Variable Current Rate Redemption -------------------------
Series Issued Maturity Rate Rate Index Date 2007 2006
- ----------------------- -------- -------- --------- ------- ------------- ------------ --------- -------------
North Valley Capital
Trust I 7/16/01 7/25/31 Fixed 10.25% N/A 7/25/11 $ 10,310 $ 10,310
North Valley Capital
Trust II 3/28/03 4/24/33 Variable 6.45% LIBOR + 3.25% 4/24/08 6,186 6,186
North Valley Capital
Trust III 4/20/04 4/24/34 Variable 7.95% LIBOR + 2.80% 7/23/09 5,155 5,155
North Valley Capital
Statutory Trust IV 12/29/05 3/15/36 Variable 6.16% LIBOR + 1.33% 3/15/11 10,310 10,310
--------- -----------
$ 31,961 $ 31,961
========= ===========
Deferred costs related to the Subordinated Debentures, which are included
in other assets in the accompanying consolidated balance sheet, totaled
$295,000 and $390,000 at December 31, 2007 and 2006, respectively.
Amortization of the deferred costs was $95,000, $91,000 and $75,000 for
the years ended December 31, 2007, 2006 and 2005, respectively.
69
11. INCOME TAXES
The provision for income taxes for the years ended December 31, was
as follows (in thousands):
2007 2006 2005
------------ ------------ -----------
Current:
Federal $ 4,042 $ 4,192 $ 2,647
State 949 966 715
------------ ------------ -----------
Total 4,991 5,158 3,362
------------ ------------ -----------
Deferred tax (benefit):
Federal (1,398) (974) 1,067
State (518) (26) 89
------------ ------------ -----------
Total (1,916) (1,000) 1,156
------------ ------------ -----------
Total provision for income taxes $ 3,075 $ 4,158 $ 4,518
============ ============ ===========
The effective federal tax rate for the years ended December 31, differs
from the statutory tax rate as follows:
2007 2006 2005
------------ ------------ -----------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes net of Federal income tax benefit 2.9% 1.9% 3.8%
Tax exempt income (7.9%) (5.8%) (6.0%)
Change in estimate of Federal effective tax rate 0.0% (2.5%) 0.0%
Other 2.0% (0.1%) 0.3%
------------ ------------ -----------
Effective tax rate 32.0% 28.6% 33.1%
============ ============ ===========
70
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax asset at December
31 are as follows (in thousands):
2007 2006
-------- --------
Deferred tax assets:
Allowance for loan and lease losses $ 4,930 $ 4,048
Accrued pension obligation 1,712 1,587
Underfunded pension obligation 368 370
Deferred compensation 1,250 1,188
Deferred loan fees and costs 20 256
Discount on acquired loans 172 222
Unrealized loss on available for sale securities 593 1,252
Stock based compensation 55 248
Other 1,191 53
-------- --------
Total deferred tax assets $ 10,291 $ 9,224
-------- --------
Deferred tax liabilities:
Tax depreciation in excess of book depreciation 1,247 1,452
FHLB stock dividend 425 285
Originated mortgage servicing rights 310 382
Market to market adjustment 1,450 1,406
California franchise tax 193 21
Core deposit intangibles (39) 134
Deferred loan fees and costs 131 230
Other 130 125
-------- --------
Total deferred tax liabilities $ 3,847 $ 4,035
-------- --------
Net deferred tax asset $ 6,444 $ 5,189
======== ========
The Company believes that it is more likely than not that it will realize
the above deferred tax assets in future periods; therefore, no valuation
allowance has been provided against its deferred tax assets.
71
On January 1, 2007, the Company adopted Financial Accounting Standards
Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"). FIN 48 requires a certain methodology for measuring and
reporting uncertain tax positions, as well as disclosures regarding such
tax positions. The Company and its subsidiaries file income tax returns in
the United States and California jurisdictions. There are currently no
pending federal or local income tax examinations by tax authorities. With
few exceptions, the Company is no longer subject to the examination by
federal taxing authorities for the years ended before December 31, 2004
and by state and local taxing authorities for years before December 31,
2003. The Company's primary market areas are designated as "Enterprise
Zones" and the Company receives tax credits for hiring individuals in
these markets and receives an interest deduction for loans made in
designated enterprise zones. The tax credits and interest deductions are
significant to the Company in reducing its effective tax rate. These
positions could be challenged by the California Franchise Tax Board, and
an unfavorable adjustment could occur. The California Franchise Tax Board
is currently conducting examinations of the State of California returns
for 2003 and 2004. The Company determined its unrecognized tax benefit to
be $703,000 at December 31, 2007. A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows: (in thousands)
Balance at January 1, 2007 $ 685
Additions based on tax positions related to the current year 71
Additions for tax positions of prior years -
Reductions for tax positions of prior years (53)
Settlements -
------
Balance at December 31, 2007 $ 703
======
During the year ended December 31, 2007, the Company was not assessed any
interest and penalties. The Company had approximately $218,000 and
$198,000 for the payment of interest and penalties accrued at December 31,
2007 and 2006, respectively.
12. RETIREMENT AND DEFERRED COMPENSATION PLANS
Substantially all employees with at least one year of service participate
in a Company-sponsored employee stock ownership plan (ESOP). The Company
made discretionary contributions to the ESOP for the years ended December
31, 2007, 2006 and 2005 of $195,000, $195,000 and $250,000. At December
31, 2007 and 2006, the ESOP owned approximately 176,000 shares of the
Company's common stock.
The Company maintains a 401(k) plan covering employees who have completed
1,000 hours of service during a 12-month period and are age 21 or older.
Voluntary employee contributions are partially matched by the Company. The
Company made contributions to the plan for the years ended December 31,
2007, 2006 and 2005 of $310,000, $313,000 and $163,000, respectively.
The Company has a nonqualified executive deferred compensation plan for
key executives and directors. Under this plan, participants voluntarily
elect to defer a portion of their salary, bonus or fees and the Company is
required to credit these deferrals with interest. The Company's deferred
compensation obligation of $2,986,000 and $2,638,000 as of December 31,
2007 and 2006, respectively, is included in accrued interest payable and
other liabilities. The interest cost for this plan was $273,000, $228,000
and $193,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.
72
The Company has a supplemental retirement plan for key executives, certain
retired key executives and directors. These plans are nonqualified defined
benefit plans and are unsecured and unfunded. The Company has purchased
insurance on the lives of the participants and holds policies with cash
surrender values of $30,526,000 and $29,483,000 at December 31, 2007 and
2006, respectively. The related accrued pension obligation of $4,633,000
and $4,403,000 as of December 31, 2007 and 2006, respectively, is included
in accrued interest payable and other liabilities.
The following tables set forth the status of the nonqualified supplemental
retirement defined benefit pension plans at or for the year ended December
31 (in thousands):
Pension Benefits
------------------------
2007 2006
---------- ----------
Change in projected benefit obligation:
Projected obligation at beginning of year $ 4,476 $ 4,299
Service cost 620 490
Interest cost 283 269
Benefit payments (735) (315)
Actuarial gains (11) (267)
---------- ----------
Projected benefit obligation at end of year $ 4,633 $ 4,476
Accumulated benefit obligation at end of year $ 3,482 $ 3,573
Change in plan assets:
Fair value of plan assets at beginning of year $ - $ -
Employer contributions 736 315
Benefit payments (736) (315)
---------- ----------
Fair value of plan assets at end of year $ - $ -
========== ==========
Funded status $ (4,633) $ (4,476)
========== ==========
Items not yet recognized as a component of net
periodic pension cost
Development of prior service cost
Prior year balance 175 206
Current year amortization (31) (31)
---------- ----------
Prior service cost 144 175
Development of actuarial loss/(gain)
Prior year balance 795 1,120
Current year amortization (31) (58)
Gain arising during current period (11) (267)
---------- ----------
Actuarial loss 753 795
---------- ----------
Total 897 970
========== ==========
Amounts recognized in the balance sheet consist of:
Current liability $ (234) $ (638)
Noncurrent liability (4,399) (3,838)
---------- ----------
Total pension liability (4,633) (4,476)
Accumulated other comprehensive income 897 970
---------- ----------
Net amount recognized $ (3,735) $ (3,506)
========== ==========
73
2007 2006 2005
---------- ---------- ----------
Components of net periodic benefits cost:
Service cost $ 620 $ 490 $ 277
Interest cost 283 269 195
Amortization of transition obligation/(asset) 25
Amortization of prior service cost 31 31 31
Amortization of actuarial loss 31 58
---------- ---------- ----------
Net periodic benefit cost $ 965 $ 848 $ 528
========== ========== ==========
Other comprehensive (loss) income $ (73) $ 961 $ 4
========== ========== ==========
Amounts included in AOCI expected to be recognized during the next fiscal year
Prior service cost $ 31 $ 31
Actuarial loss $ 29 $ 1,287
2007 2006 2005
---------- ---------- ----------
Assumptions used to determine benefit obligations as of end of fiscal year
and used in computing net periodic benefit cost
Measurement Date 12/31/2007 12/31/2006 12/31/2005
Discount rate 6.50% 6.50% 6.50%
Expected return on assets N/A N/A N/A
Rate of compensation increase 8.00% 8.00% 8.00%
Estimated costs expected to be accrued in 2008 are $923,000. The following
table presents the benefits expected to be paid under the plan in the
periods indicated (in thousands):
Year Pension Benefits
----------- ----------------
2008 $ 234
2009 $ 229
2010 $ 229
2011 $ 229
2012 $ 229
2013 - 2017 $ 3,632
74
13. STOCK-BASED COMPENSATION
During 2007, 2006 and 2005, each director was awarded 900 shares of common
stock, resulting in an additional 7,200, 7,200 and 8,550 shares being
issued. Compensation cost related to these awards was recognized based on
the fair value of the shares at the date of the award.
Under the Company's stock option plans as of December 31, 2007, 1,162,649
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 Aggregate
Exercise Contractual Intrinsic
Options Price Term Value ($000)
--------- -------- ----------- ------------
Outstanding, January 1, 2005 1,057,748 $ 8.55
Granted 76,899 18.96
Exercised (203,464) 6.98
Expired or canceled (34,623) $ 15.03
---------
Outstanding December 31, 2005 896,560 $ 9.51
Granted 62,157 17.27
Exercised (141,106) 9.60
Expired or canceled (38,899) $ 16.41
---------
Outstanding December 31, 2006 778,712 $ 9.77
Granted 63,613 20.41
Exercised (104,952) 8.32
Expired or canceled (13,731) $ 18.85
---------
Outstanding December 31, 2007 723,642 $ 10.75 4 years $ 2,647
========= ======== =========== ============
Fully vested and exercisable at December 31, 2007 626,379 $ 9.48 3 years $ 2,647
========= ======== =========== ============
Options expected to vest 97,263 $ 18.93 8 years $ -
========= ======== =========== ============
Information about stock options outstanding at December 31, 2007 is
summarized as follows:
Average Average
Average Exercise Exercise
Remaining Price of Price of
Range of Options Contractual Options Options Options
Exercise Prices Outstanding Life (Years) Outstanding Exercisable Exercisable
- --------------- ----------- ------------ ----------- ----------- -----------
$ 5.36-10.63 315,251 1 $ 7.70 315,251 $ 7.70
$ 6.59- 6.67 23,000 2 $ 6.61 23,000 $ 6.61
$ 7.58- 8.87 124,953 3 $ 7.94 124,953 $ 7.94
$ 9.40 15,761 4 $ 9.40 15,761 $ 9.40
$ 10.24-13.06 66,900 5 $ 11.65 66,900 $ 11.65
$ 15.72 21,062 6 $ 15.72 16,849 $ 15.72
$ 16.18-19.86 37,523 7 $ 18.96 23,313 $ 18.87
$ 16.38-18.62 54,379 8 $ 17.28 25,631 $ 17.24
$ 16.20-24.75 64,813 9 $ 19.99 14,721 $ 19.69
75
The aggregate intrinsic value is calculated as the difference between the
exercise price of the underlying awards and the quoted price of the
Company's common stock for options that were in-the-money at December 31,
2007. The intrinsic value of options exercised during the years ended
December 31, 2007, 2006 and 2005 totaled $1,068,000, $1,111,000 and
$2,343,000, respectively. The total fair value of the shares that vested
during the years ended December 31, 2007, 2006 and 2005 totaled $247,000,
$170,000 and $390,000, respectively.
The compensation cost that has been charged against income for stock based
compensation was $368,000 for the year ended December 31, 2007. Income tax
benefits recognized in the Statement of Changes in Equity for the year
ended December 31, 2007 totaled $173,000.
At December 31, 2007, the total unrecognized compensation cost related to
stock-based awards granted to employees under the Company's stock option
plans was $358,000. This cost 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.
Cash received from stock option exercises under the Company's option plans
for 2007 and 2006 was $899,000 and $521,000, respectively. SFAS 123(R)
requires the cash flows resulting from the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as a cash flow from financing
activities in the consolidated statement of cash flows. These excess tax
benefits from stock option exercises under the stock option plans totaled
$173,000 and $174,000 for 2007 and 2006, respectively.
14. STOCK REPURCHASE PLAN
The Board of Directors approved a plan to repurchase up to 4%, or
approximately 300,000 shares of the outstanding common stock of the
Company in 2006. Stock repurchases were made from time to time on the open
market. The timing of the purchases and the exact number of shares
purchased was dependent on market conditions. The share repurchase program
did not include specific price targets or timetables and could have been
suspended at any time. During 2006 all 300,000 shares were repurchased for
$5,270,000 at an average price of $17.57 per share.
15. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
options or other contracts to issue common stock were exercised and
converted into common stock.
There was no difference in the numerator used in the calculation of basic
earnings per share and diluted earnings per share. The denominator used in
the calculation of basic earnings per share and diluted earnings per share
for each of the years ended December 31 is reconciled as follows (in
thousands):
2007 2006 2005
------- -------- -------
Calculation of Basic Earnings Per Share:
Numerator - net income $ 6,534 $ 10,396 $ 9,149
Denominator - weighted average common shares outstanding 7,361 7,380 7,424
------- -------- -------
Basic earnings per share $ 0.89 $ 1.41 $ 1.23
======= ======== =======
Calculation of Diluted Earnings Per Share:
Numerator - net income $ 6,534 $ 10,396 $ 9,149
Denominator:
Weighted average common shares outstanding 7,361 7,380 7,424
Dilutive effect of outstanding options 273 258 374
------- -------- -------
Weighted average common shares outstanding
and common share equivalents 7,634 7,638 7,798
------- -------- -------
Diluted earnings per share $ 0.86 $ 1.36 $ 1.17
======= ======== =======
76
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal actions arising from normal business
activities. Management, based upon the advice of legal counsel, believes
that the ultimate resolution of all pending legal actions will not have a
material effect on the Company's financial position or results of its
operations or its cash flows.
The Company has operating leases for certain premises and equipment. These
leases expire on various dates through 2015 and have various renewal
options ranging from 3 to 15 years. Rent expense for such leases for the
years ended December 31, 2007, 2006 and 2005 was $1,316,000, 1,259,000 and
$1,241,000.
The following schedule represents the Company's noncancelable future
minimum scheduled lease payments at December 31, 2007 (in thousands):
Future Lease Payments
------------------------
2008 $ 1,273
2009 993
2010 534
2011 183
2012 183
Thereafter 392
--------
Total $ 3,558
========
The Company was contingently liable under letters of credit issued on
behalf of its customers in the amount of $10,314,000 and $13,067,000 at
December 31, 2007 and 2006. At December 31, 2007, commercial and consumer
lines of credit and real estate loans of approximately $79,024,000 and
$134,570,000 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 represent future cash requirements. The
Company evaluates each potential borrower and the necessary collateral on
an individual basis. Collateral varies, but may include real property,
bank deposits, debt securities, equity securities or business or personal
assets.
Standby letters of credit are conditional commitments written by the
Company to guarantee the performance of a customer to a third party. These
guarantees are issued primarily relating to inventory purchases by the
Company's commercial customers and such guarantees are typically short
term. Credit risk is similar to that involved in extending loan
commitments to customers and the Company, accordingly, uses evaluation and
collateral requirements similar to those for loan commitments. Virtually
all of such commitments are collateralized. The fair value of the
liability related to these standby letters of credit, which represents the
fees received for issuing the guarantees, was not significant at December
31, 2007 and 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 December 31, 2007 and
2006, 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% and 78% of the Company's loan
portfolio at December 31, 2007 and 2006. 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.
77
17. RELATED PARTY TRANSACTIONS
At December 31, 2007 and 2006, certain officers, directors and their
associates and principal shareholders were indebted to the Company for
loans made on substantially the same terms, including interest rates and
collateral, as comparable transactions with unaffiliated parties.
A summary of activity for the years ended December 31, 2007 and 2006 is as
follows (in thousands; renewals are not reflected as either new loans or
repayments):
2007 2006
----------- ----------
Beginning balance $ 8,759 $ 4,332
Borrowings 1,391 4,969
Repayments (1,656) (542)
----------- ----------
$ 8,494 $ 8,759
=========== ==========
Undisbursed commitments $ 1,111 $ -
=========== ==========
18. REGULATORY MATTERS
The Company and NVB are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and, possibly, additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and NVB must meet specific capital
guidelines that involve quantitative measures of the Company's and NVB's
assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and NVB's capital
amounts and NVB's prompt corrective action classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and NVB to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2007, that the Company and NVB meet all capital adequacy
requirements to which they are subject.
The most recent notifications from the Federal Deposit Insurance
Corporation for NVB as of December 31, 2007 categorized NVB as
well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well-capitalized NVB must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed NVB's category.
The Company's and NVB's actual capital amounts (in thousands) and ratios
are also presented in the following tables.
78
To be Well Capitalized
For Capital Under Prompt Corrective
Adequacy Purposes Action Provisions
Actual ------------------- -----------------------
------------------- Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
--------- ------- -------- -------- ---------- ----------
Company
As of December 31, 2007:
Total capital (to risk weighted assets) $ 108,098 12.00% $ 72,065 8.00% N/A N/A
Tier 1 capital (to risk weighted assets) $ 93,954 10.43% $ 36,032 4.00% N/A N/A
Tier 1 capital (to average assets) $ 93,954 10.29% $ 36,522 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 December 31, 2007:
Total capital (to risk weighted assets) $ 105,715 11.73% $ 72,099 8.00% $ 90,124 10.00%
Tier 1 capital (to risk weighted assets) $ 94,960 10.54% $ 36,038 4.00% $ 54,057 6.00%
Tier 1 capital (to average assets) $ 94,960 10.43% $ 36,418 4.00% $ 45,523 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%
The Company's ability to pay cash dividends is dependent on dividends paid
to it by NVB and limited by California law. Under California law, the
holders of common stock of the Company are entitled to receive dividends
when and as declared by the Board of Directors, out of funds legally
available, subject to certain restrictions. California General Corporation
Law prohibits the Company from paying dividends on its common stock
unless: (i) its retained earnings, immediately prior to the dividend
payment, equals or exceeds the amount of the dividend or (ii) immediately
after giving effect to the dividend, the sum of the Company's assets
(exclusive of goodwill and deferred charges) would be at least equal to
125% of its liabilities (not including deferred taxes, deferred income and
other deferred liabilities) and the current assets of the Company would be
at least equal to its current liabilities, or, if the average of its
earnings before taxes on income and before interest expense for the two
preceding fiscal years was less than the average of its interest expense
for the two preceding fiscal years, at least equal to 125% of its current
liabilities.
The Company's ability to pay dividends is also limited by certain
covenants contained in the indentures relating to trust preferred
securities that have been issued by four business trusts and corresponding
junior subordinated debentures. The Company owns the common stock of the
four business trusts. The indentures provide that if an Event of Default
(as defined in the indentures) has occurred and is continuing, or if the
Company is in default with respect to any obligations under our guarantee
agreement which covers payments of the obligations on the trust preferred
securities, or if the Company gives notice of any intention to defer
payments of interest on the debentures underlying the trust preferred
securities, then the Company may not, among other restrictions, declare or
pay any dividends.
Dividends from NVB to the Company are restricted under certain federal
laws and regulations governing banks. In addition, California law
restricts the total dividend payments of any bank to the lesser of the
bank's retained earnings or the bank's net income for the latest three
fiscal years, less dividends previously declared during that period, at
any time without the prior approval of the California Department of
Financial Institutions. As of December 31, 2007, the maximum amount
available for dividend distributions by NVB to the Company under these
restrictions was approximately $15.7 million.
79
19. OTHER NONINTEREST EXPENSES
The major classifications of other noninterest expenses for the years
ended December 31 were as follows (in thousands):
2007 2006 2005
---------- ---------- ---------
Data processing 2,227 2,300 1,928
Professional services 1,572 1,583 1,546
ATM and on-line banking 986 845 755
Marketing expense 959 1,139 1,011
Operations expense 881 848 953
Merger expense 760 - -
Printing and supplies 700 715 606
Amortization of intangibles 651 651 651
Director expense 579 575 361
Postage 524 563 584
Loan expense 419 434 574
Other 3,350 3,011 3,955
---------- ---------- ---------
$ 13,608 $ 12,664 $ 12,924
========== ========== =========
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by
using available market information and appropriate valuation
methodologies. Although management uses its best judgment in assessing
fair value, there are inherent weaknesses in any estimation technique that
may be reflected in the fair values disclosed. The fair value estimates
are made at a discrete point in time based on relevant market data,
information about the financial instruments, and other factors. Estimates
of fair value of financial instruments without quoted market prices are
subjective in nature and involve various assumptions and estimates that
are matters of judgment. Changes in the assumptions used could
significantly affect these estimates. Estimates of fair value have not
been adjusted to reflect tax ramifications or changes in market conditions
subsequent to December 31, 2007; therefore, estimates presented herein are
not necessarily indicative of amounts which could be realized in a current
transaction.
The following assumptions were used as of December 31, 2007 and 2006 to
estimate the fair value of each class of financial instruments for which
it is practicable to estimate that value.
(a) Cash and Cash Equivalents - The carrying amount represents a
reasonable estimate of fair value.
(b) Investment Securities - The fair value of held to maturity
securities are based on quoted market prices, if available. If
a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Available for sale securities are carried at fair value. The
carrying value of FHLB, FRB, and other securities represents a
reasonable estimate of fair value.
(c) Loans and Leases - Commercial loans, residential mortgages,
construction loans and direct financing leases are segmented
by fixed and adjustable rate interest terms, by maturity, and
by performing and nonperforming categories.
The fair value of performing loans and leases is estimated by
discounting contractual cash flows using the current interest
rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Assumptions regarding credit risk, cash flow, and discount
rates are determined using available market information.
The fair value of nonperforming loans and leases is estimated
by discounting estimated future cash flows using current
interest rates with an additional risk adjustment reflecting
the individual characteristics of the loans.
80
(d) Bank-owned Life Insurance - The carrying amount and estimated
fair values are based on current cash surrender values at each
reporting date provided by the insurers.
(e) Mortgage servicing assets - The fair value of mortgage
servicing assets is estimated using projected cash flows
adjusted for the effects of anticipated prepayments, using a
market discount rate.
(f) Deposits - Noninterest-bearing and interest-bearing demand
deposits and savings accounts are payable on demand and their
carrying values are assumed to be at fair value. The fair
value of the core deposit intangible has not been included as
a component of the fair value estimate. The fair value of time
deposits is based on the discounted value of contractual cash
flows. The discount rate is based on rates currently offered
for deposits of similar size and remaining maturities.
(g) Other Borrowed Funds - The fair value of other borrowed funds
is estimated by discounting the contractual cash flows using
the current interest rate at which similar borrowings for the
same remaining maturities could be made.
(h) Subordinated Debentures - The fair value of the subordinated
debentures is estimated by discounting the contractual cash
flows using the current interest rate at which similar
securities with the same remaining expected life could be
made.
(i) Commitments to Fund Loans/Standby Letters of Credit - The fair
values of commitments are estimated using the fees currently
charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present
creditworthiness of the counterparties. The differences
between the carrying value of commitments to fund loans or
stand by letters of credit and their fair value are not
significant and therefore not included in the following table.
(j) Accrued Interest Receivable/Payable - The carrying amount of
accrued interest receivable and accrued interest payable
represents a reasonable estimate of fair value.
(Dollars in thousands)
2007 2006
---------------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ ---------- -----------
FINANCIAL ASSETS
Cash and cash equivalents $ 28,569 $ 28,569 $ 41,496 $ 41,496
FHLB, FRB and other securities 6,238 6,238 5,495 5,495
Securities:
Available for sale 104,341 104,341 133,571 133,571
Held to maturity 31 31 82 81
Loans and leases 735,498 741,694 650,962 648,129
Bank owned life insurance 30,526 30,526 29,483 29,483
Mortgage servicing assets 677 798 834 841
Accrued interest receivable 3,912 3,912 3,838 3,838
FINANCIAL LIABILITIES
Deposits $ 736,739 $ 737,021 $ 750,288 $ 749,562
Other borrowed funds 87,192 87,191 37,500 37,253
Subordinated debentures 31,961 29,105 31,961 33,252
Accrued interest payable 1,423 1,423 1,723 1,723
- --------------------------------------------------------------------------------
81
21. PARENT COMPANY ONLY - CONDENSED FINANCIAL INFORMATION
The condensed financial statements of North Valley Bancorp are presented
below (in thousands):
CONDENSED BALANCE SHEET
DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------
2007 2006
------------- -------------
ASSETS
Cash and cash equivalents $ 4,744 $ 2,170
Available for sale securities at fair value -
Investments in banking subsidiaries 110,088 104,067
Investments in other subsidiaries 2 12
Investment in unconsolidated subsidiary grantor trusts 961 961
Other assets 187 1,055
------------- -------------
Total assets $ 115,982 $ 108,265
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividend payable $ 739 $ 729
Subordinated debentures 31,961 31,961
Other liabilities 1,811 84
Stockholders' equity 81,471 75,491
------------- -------------
Total liabilities and stockholders' equity $ 115,982 $ 108,265
============= =============
CONDENSED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
--------------------------------------------------------------------------
2007 2006 2005
------------- ------------- -------------
INCOME:
Dividends from subsidiaries $ 5,000 $ 10,000 $ 4,500
Other income 10,737 10,413
------------- ------------- -------------
Total income 5,000 20,737 14,913
EXPENSE:
Interest on subordinated debentures 2,438 2,456 1,708
Salaries and employee benefits 9,258 8,517
Legal and accounting 906 988 1,259
Other 1,926 3,205 2,836
Merger and acquisition expense 761 - -
Tax benefit (2,498) (2,052) (1,631)
------------- ------------- -------------
Total expense 3,533 13,855 12,689
Income before equity in undistributed income of subsidiaries 1,467 6,882 2,224
Equity in undistributed (distributed) income of subsidiaries 5,067 3,514 6,925
------------- ------------- -------------
Net income 6,534 10,396 9,149
Other comprehensive income (loss), net of tax 954 109 (1,574)
------------- ------------- -------------
Total comprehensive income $ 7,488 $ 10,505 $ 7,575
============= ============= =============
82
CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
--------------------------------------------------------------------------
2007 2006 2005
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,534 $ 10,396 $ 9,149
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in (undistributed) distributed income of
subsidiaries (5,067) (3,514) (6,925)
Loss on sales of securities - 24 -
Stock-based compensation expense 368 293 182
Effect of changes in:
Other assets 868 552 1,274
Other liabilities 1,737 (834) 32
------------- ------------- -------------
Net cash provided by operating activities 4,440 6,917 3,712
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale securities - - -
Proceeds from maturities of available for sale securities - - 153
Proceeds from sales of available for sale securities - 25 -
Sale or repayment of investments in subsidiaries 10 622 -
Investment in and acquisition of subsidiaries - - (10,600)
Investment in unconsolidated subsidiary grantor trusts - - (310)
------------- ------------- -------------
Net cash provided by (used in) investing activities 10 647 (10,757)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (2,948) (2,933) (2,232)
Proceeds from issuance of subordinated debentures - - 10,310
Repurchase of common stock - (5,270) (189)
Exercise of stock options, including tax benefit 1,072 695 1,108
------------- ------------- -------------
Net cash (used in) provided by financing activities (1,876) (7,508) 8,997
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,574 56 1,952
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,170 2,114 162
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,744 $ 2,170 $ 2,114
============= ============= =============
22. SUBSEQUENT EVENT
On February 27, 2008, the Company declared a cash dividend of $0.10 per
share. The dividend is payable on April 1, 2008 to holders of record at
the close of business on March 14, 2008.
83
INDEX OF EXHIBITS
Sequential
Exhibit No. Exhibit Name Page No
- ----------- ------------ -----------
2(a) Agreement and Plan of Reorganization and Merger, dated as of October 3, 1999 *
(incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form
8-K filed with the Commission on October 12, 1999).
2(b) Addendum to Agreement and Plan of Reorganization and Merger dated as of September *
25, 2000 (incorporated by reference from Exhibit 2.7 to the Company's Current
Report on Form 8-K filed with the Commission on September 29, 2000).
2(c) Agreement and Plan of Merger dated April 23, 2004, by and between North Valley *
Bancorp and Yolo Community Bank (incorporated by reference from Exhibit 99.54 to
the Company's Current Report on Form 8-K filed with the Commission on April 26,
2004).
2(d) Agreement and Plan of Reorganization dated April 10, 2007, between Sterling *
Financial Corporation and North Valley Bancorp (incorporated by reference from
Exhibit 99.128 to the Company's Current Report on Form 8-K filed with the
Commission on April 11, 2007). Terminated effective December 1, 2007.
3(a) Amended and Restated Articles of Incorporation of North Valley Bancorp *
(incorporated by reference from Exhibit 3(i) to the Company's Quarterly Report on
Form 10-Q filed with the Commission for the period ended June 30, 1998).
3(b) Certificate of Amendment of Amended and Restated Articles of Incorporation of North *
Valley Bancorp.
3(c) By-laws of North Valley Bancorp, as amended and restated. *
4(a) Amended and Restated Declaration of Trust (North Valley Capital Trust I) dated July *
16, 2001 (incorporated by reference from Exhibit 4(a) to the Company's Annual
Report on Form 10-K filed with the Commission for the year ended December 31,
2001).
4(b) Indenture (North Valley Capital Trust I) dated July 16, 2001 (incorporated by *
reference from Exhibit 4(b) to the Company's Annual Report on Form 10-K filed with
the Commission for the year ended December 31, 2001).
4(c) Junior Subordinated Debt security of North Valley Bancorp (incorporated by *
reference from Exhibit 4(c) to the Company's Annual Report on Form 10-K filed with
the Commission for the year ended December 31, 2001).
4(d) Guarantee Agreement for North Valley Capital Trust I (North Valley Bancorp) dated *
July 16, 2001 (incorporated by reference from Exhibit 4(d) to the Company's Annual
Report on Form 10-K filed with the Commission for the year ended December 31,
2001).
4(e) Amended and Restated Declaration of Trust (North Valley Capital Trust II) dated *
April 10, 2003 (incorporated by reference from Exhibit 4(e) to the Company's
Quarterly Report on Form 10-Q filed with the Commission for the period ended March
31, 2004).
84
4(g) Guarantee Agreement for North Valley Capital Trust II (North Valley Bancorp) dated *
April 10, 2003 (incorporated by reference from Exhibit 4(g) to the Company's
Quarterly Report on Form 10-Q filed with the Commission for the period ended March
31, 2004).
4(h) Amended and Restated Declaration of Trust (North Valley Capital Trust III) dated *
May 5, 2004 (incorporated by reference from Exhibit 4(h) to the Company's Quarterly
Report on Form 10-Q filed with the Commission for the period ended March 31, 2005).
4(i) Indenture (North Valley Capital Trust III) dated May 5, 2004 (incorporated by *
reference from Exhibit 4(i) to the Company's Quarterly Report on Form 10-Q filed
with the Commission for the period ended March 31, 2005).
4(j) Guarantee Agreement for North Valley Capital Trust III (North Valley Bancorp) dated *
May 5, 2004 (incorporated by reference from Exhibit 4(j) to the Company's Quarterly
Report on Form 10-Q filed with the Commission for the period ended March 31, 2005).
4(k) Amended and Restated Declaration of Trust (North Valley Capital Statutory Trust IV) *
dated December 29, 2005 (incorporated by reference from Exhibit 99.94 to the
Company's Current Report on Form 8-K filed with the Commission on January 5, 2006)
4(l) Indenture (North Valley Capital Statutory Trust IV) dated December 29, 2005 *
(incorporated by reference from Exhibit 99.95 to the Company's Current Report on
Form 8-K filed with the Commission on January 5, 2006).
4(m) Guarantee Agreement for North Valley Capital Statutory Trust IV (North Valley *
Bancorp) dated December 29, 2005 (incorporated by reference from Exhibit 99.96 to
the Company's Current Report on Form 8-K filed with the Commission on January 5,
2006).
4(n) Junior Subordinated Debt Security Due 2036 (North Valley Capital Statutory Trust *
IV) (incorporated by reference from Exhibit 99.96 to the Company's Current Report
on Form 8-K filed with the Commission on January 5, 2006).
4(o) Capital Security Certificate (North Valley Capital Statutory Trust IV) *
(incorporated by reference from Exhibit 99.96 to the Company's Current Report on
Form 8-K filed with the Commission on January 5, 2006).
10(a) Shareholder Protection Rights Agreement, dated September 9, 1999 (incorporated by *
reference from Exhibit 4 to the Company's Current Report on Form 8-K filed with the
Commission on September 23, 1999).
10(b) North Valley Bancorp 1989 Employee Stock Option Plan, as amended (incorporated by *
reference from Exhibit 4.1 to Post-Effective Amendment No. One to the Company's
Registration Statement on Form S-8 (No. 33-32787) filed with the Commission on
December 26, 1989). **
10(c) North Valley Bancorp 1989 Employee Nonstatutory Stock Option Agreement *
(incorporated by reference from Exhibit 4.3 to Post-Effective Amendment No. One to
the Company's Registration Statement on Form S-8 (No. 33-32787) filed with the
Commission on December 26, 1989). **
85
10(d) North Valley Bancorp 1989 Director Stock Option Plan, as amended (incorporated by *
reference from Exhibit 4.2 to Post-Effective Amendment No. One to the Company's
Registration Statement on Form S-8 (No. 33-32787) filed with the Commission on
December 26, 1989). **
10(e) North Valley Bancorp 1989 Director Nonstatutory Stock Option Agreement *
(incorporated by reference from Exhibit 4.4 to Post-Effective Amendment No. One to
the Company's Registration Statement on Form S-8 (No. 33-32787) filed with the
Commission on December 26, 1989). **
10(f) North Valley Bancorp Employee Stock Ownership Plan, amended and restated as of **
January 1, 1999 (incorporated by reference from Exhibit10 (f) to the Company's
Quarterly Report on Form 10-Q filed with the Commission for the period ended March
31, 2005).
10(g) First Amendment to North Valley Bancorp Employee Stock Ownership Plan, dated **
October 24, 2002 (incorporated by reference from Exhibit10 (f) to the Company's
Quarterly Report on Form 10-Q filed with the Commission for the period ended March
31, 2005).
10(h) Second Amendment to North Valley Bancorp Employee Stock Ownership Plan, dated **
November 17, 2003 (incorporated by reference from Exhibit10 (f) to the Company's
Quarterly Report on Form 10-Q filed with the Commission for the period ended March
31, 2005).
10(i) Third Amendment to North Valley Bancorp Employee Stock Ownership Plan, effective **
September 1, 2004(incorporated by reference from Exhibit10 (f) to the Company's
Quarterly Report on Form 10-Q filed with the Commission for the period ended March
31, 2005).
10(j) Supplemental Executive Retirement Plan (incorporated by reference from Exhibit *
10(i) to the Company's Annual Report on Form 10-K filed with the Commission for the
year ended December 31, 1988). **
10(k) Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10(j) *
to the Company's Annual Report on Form 10-K filed with the Commission for the year
ended December 31, 1988). **
10(l) Supplemental Retirement Plan for Directors (incorporated by reference from Exhibit *
10(k) to the Company's Annual Report on Form 10-K filed with the Commission for the
year ended December 31, 1988). **
10(m) Deleted.
10(n) Executive Deferred Compensation Plan, effective January 1, 1989, restated April 1, *
1995 (incorporated by reference from Exhibit 10(dd) to the Company's Annual Report
on Form 10-KSB filed with the Commission for the year ended December 31, 1997). **
10(o) Directors' Deferred Compensation Plan, effective April 1, 1995 (incorporated by *
reference from Exhibit 10(ee) to the Company's Annual Report on Form 10-KSB filed
with the Commission for the year ended December 31, 1997). **
10(p) Umbrella TrustTM for Directors, effective April 1, 1995 (incorporated by reference *
from Exhibit 10(ff) to the Company's Annual Report on Form 10-KSB filed with the
Commission for the year ended December 31 1997). **
10(q) Umbrella TrustTM for Executives, effective April 1, 1995 (incorporated by reference *
from Exhibit 10(gg) to the Company's Annual Report on Form 10-KSB filed with the
Commission for the year ended December 31, 1997). **
86
10(s) North Valley Bancorp 1998 Employee Stock Incentive Plan, as amended through July *
26, 2001 (incorporated by reference from Exhibit 99.1 to the Company's Registration
Statement on Form S-8 (No. 333-65950) filed with the Commission on July 26, 2001).
**
10(t) North Valley Bancorp 1999 Director Stock Option Plan (incorporated by reference *
from Exhibit 99.1 to the Company's Registration Statement on Form S-8 (No.
333-65948) filed with the Commission on July 26, 2001). **
10(u) Amendment No. Two to the North Valley Bancorp 1989 Director Stock Option Plan *
(incorporated by reference from Exhibit 10(v) to the Company's Annual Report on
Form 10-K filed with the Commission for the year ended December 31, 1998). **
10(v) Branch Purchase and Assumption Agreement dated as of September 15, 2000, between *
North Valley Bancorp and Scott Valley Bank (incorporated by reference from Exhibit
99.19 to the Company's Current Report on Form 8-K filed with the Commission on
September 29, 2000).
10(w) Form of Executive Deferred Compensation Agreement executed in December 2000 between *
North Valley Bank and each of Michael J. Cushman, Sharon L. Benson, Jack R. Richter
and Eric J. Woodstrom (incorporated by reference from Exhibit 10(y) to the
Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 2001).**
10(x) Form of Director Deferred Fee Agreement executed in December 2000 between North *
Valley Bank and each of Rudy V. Balma, William W. Cox, Royce L. Friesen, Dan W.
Ghidinelli, Thomas J. Ludden, Douglas M. Treadway and J.M. Wells, Jr. (incorporated
by reference from Exhibit 10(aa) to the Company's Annual Report on Form 10-K filed
with the Commission for the year ended December 31, 2001).**
10(y) Form of Director Deferred Fee Agreement executed in December 2000 between Six *
Rivers National Bank and each of Kevin D. Hartwick, William T. Kay, Jr., J. Michael
McGowan, Warren L. Murphy and Dolores M. Vellutini (incorporated by reference from
Exhibit 10(bb) to the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001).**
10(z) Form of Employment Agreement executed in January 2001 between North Valley Bancorp *
and each of Michael J. Cushman, Jack R. Richter, Eric J. Woodstrom, Edward J.
Czajka and Sharon L. Benson (incorporated by reference from Exhibit 10(cc) to the
Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 2001).**
10(aa) Deleted.
10(bb) Form of Salary Continuation Agreement executed in October 2001 between North Valley *
Bancorp and each of Michael J. Cushman, Jack R. Richter, Eric J. Woodstrom, Edward
J. Czajka and Sharon L. Benson (incorporated by reference from Exhibit 10(ee) to
the Company's Annual Report on Form 10-K filed with the Commission for the year
ended December 31, 2001).**
10(cc) Park Marina Lease dated July 23, 2001, between The McConnell Foundation and North *
Valley Bancorp for 300 Park Marina Circle, Redding, California 96001 (incorporated
by reference from Exhibit 10(ff) to the Company's Annual Report on Form 10-K filed
with the Commission for the year ended December 31, 2001).
10(dd) Form of Salary Continuation Agreement executed in October 2001 between Six Rivers *
National Bank and each of Russell Harris and Margie L. Plum (incorporated by
reference from Exhibit 10(gg) to the Company's Annual Report on Form 10-K filed
with the Commission for the year ended December 31, 2001).**
87
10(ee) Form of Executive Deferred Compensation Agreement executed in January 2001 between *
North Valley Bank and Edward J. Czajka (incorporated by reference from Exhibit
10(hh) to the Company's Annual Report on Form 10-K filed with the Commission for
the year ended December 31, 2001.)**
10(ff) Form of Executive Deferred Compensation Agreement executed in December 2001 between *
North Valley Bank and each of Michael J. Cushman, Sharon L. Benson, Jack R.
Richter, Edward J. Czajka and Eric J. Woodstrom (incorporated by reference from
Exhibit 10(ii) to the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001).**
10(gg) Form of Executive Deferred Compensation Agreement executed in January 2002 between *
Six Rivers National Bank and Russell Harris (incorporated by reference from Exhibit
10(jj) to the Company's Annual Report on Form 10-K filed with the Commission for
the year ended December 31, 2001).**
10(hh) Form of Director Deferred Fee Agreement executed in December 2001 between North *
Valley Bank and each of Rudy V. Balma, William W. Cox, Royce L. Friesen, Dan W.
Ghidinelli, Thomas J. Ludden, Douglas W. Treadway and J.M. Wells, Jr. (incorporated
by reference from Exhibit 10(kk) to the Company's Annual Report on Form 10-K filed
with the Commission for the year ended December 31, 2001).**
10(ii) Director Deferred Fee Agreement executed in December 2001 between Six Rivers *
National Bank and each of Kevin D. Hartwick, William T. Kay, Jr., John J. Gierek,
Jr., Warren L. Murphy and Dolores M. Vellutini (incorporated by reference from
Exhibit 10(ll) to the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001).**
10(jj) Information services contract with Information Technology, Inc. dated June 17, 2002 *
(incorporated by reference from Exhibit 10(mm) to the Company's Annual Report on
Form 10-K filed with the Commission for the year ended December 31, 2002).
10(kk) Form of Employment Agreement executed in March 2004 between North Valley Bancorp *
and Russell Harris (incorporated by reference from Exhibit 10(jj) to the Company's
Annual Report on Form 10-K filed with the Commission for the year ended December
31, 2003).**
10(ll) Form of Employment Agreement dated August 31, 2004 between North Valley Bancorp and *
Yolo Community Bank and John A. DiMichele (incorporated by reference from Exhibit
99.71 to the Company's Quarterly Report on Form 10-Q filed with the Commission for
the period ended September 30, 2004).**
10(mm) Executive Deferred Compensation Agreement dated December 31, 2004 between North *
Valley Bancorp and John A. DiMichele (incorporated by reference from Exhibit 10(nn)
to the Company's Current Report on Form 8-K filed with the Commission on January 4,
2005).**
10(nn) Severance and Release Agreement (effective as of February 4, 2005) between John A. *
DiMichele and North Valley Bancorp and NVB Business Bank, formerly named Yolo
Community Bank (incorporated by reference from Exhibit 99.78 to the Company's
Current Report on Form 8-K filed with the Commission on March 9, 2005).**
10(oo) Executive Deferred Compensation Agreement dated December 31, 2004 between North *
Valley Bancorp and Leo J. Graham (incorporated by reference from Exhibit 10(oo) to
the Company's Current Report on Form 8-K filed with the Commission on January 4,
2005).**
10(pp) Director Deferred Fee Agreement dated December 31, 2004 between North Valley *
Bancorp and Martin Mariani (incorporated by reference from Exhibit 10(pp) to the
Company's Current Report on Form 8-K filed with the Commission on January 4,
2005).**
10(qq) Amendment No. 1 to Park Marina Lease, dated July 24, 2003, between The McConnell *
Foundation and North Valley Bancorp (incorporated by reference from Exhibit 10(kk)
to the Company's Annual Report on Form 10-K filed with the Commission for the year
ended December 31, 2003).
88
10(rr) Cottonwood Branch sublease extension agreement dated August 7, 2003, between North *
Valley Bank and North State Grocery, Inc. (incorporated by reference from Exhibit
10(ll) to the Company's Annual Report on Form 10-K filed with the Commission for
the year ended December 31, 2003).
10(ss) Westwood Branch lease agreement dated December 1, 2003, between North Valley Bank *
and Daha Investments (incorporated by reference from Exhibit 10(mm) to the
Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 2003).
10(tt) Lease Agreement for 618 Main Street, Woodland, California, dated February 26, 2004, *
between Yolo Community Bank and Thomas and Margaret Stallard (incorporated by
reference from Exhibit 10(mm) to the Company's Annual Report on Form 10-K filed
with the Commission for the year ended December 31, 2004).
10(uu) Lease Agreement for 626, 628 Main Street, 400 Second Street, Woodland, California, *
dated February 26, 2004, between Yolo Community Bank and Thomas and Margaret
Stallard (incorporated by reference from Exhibit 10(mm) to the Company's Annual
Report on Form 10-K filed with the Commission for the year ended December 31,
2004).
10(vv) Lease for 100 B Street, Suite 110, Santa Rosa, California, dated October 19, 2004, *
between North Valley Bank and Sonja Valentina LLC (incorporated by reference from
Exhibit 10(mm) to the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2004).
10(ww) Lease for 375 North Sunrise Blvd., Suite 100, Roseville, California, dated January *
7, 2005, between Yolo Community Bank and MW Investments (incorporated by reference
from Exhibit 10(mm) to the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2004).
10(xx) Office Building Lease for 101 North State Street, Suite A, Ukiah, California, dated *
November 3, 2004, between North Valley Bank and Southport Land & Commercial
Company, Inc (incorporated by reference from Exhibit 10(mm) to the Company's Annual
Report on Form 10-K filed with the Commission for the year ended December 31,
2004).
10(yy) Lease for 711 Jefferson Street, Suite A, Fairfield, California, dated September 30, *
2004, between Yolo Community Bank and JLC Contracting, Inc (incorporated by
reference from Exhibit 10(mm) to the Company's Annual Report on Form 10-K filed
with the Commission for the year ended December 31, 2004).
10(zz) North Valley Bancorp 401(k) Plan, amended and restated effective September 1, 2004 **
(incorporated by reference from Exhibit 10(mm) to the Company's Annual Report on
Form 10-K filed with the Commission for the year ended December 31, 2004).
10(aaa) Fourth Amendment to North Valley Bancorp Employee Stock Ownership Plan, effective **
March 28, 2005 (incorporated by reference from Exhibit 10(aaa) to the Company's
Quarterly Report on Form 10-Q filed with the Commission for the period ended March
31, 2005).
10(bbb) Lease for 100 B Street, Suite 360, Santa Rosa, California, dated April 15, 2005, *
between North Valley Bank and Sonja Valentina LLC (incorporated by reference from
Exhibit 10(bbb) to the Company's Quarterly Report on Form 10-Q filed with the
Commission for the period ended March 31, 2005).
10(ccc) Lease for 2515 Park Marina Drive, Suite 102, Redding, California dated March 15, *
2005, between the McConnell Foundation and North Valley Bancorp (incorporated by
reference from Exhibit 10(ccc) to the Company's Quarterly Report on Form 10-Q filed
with the Commission for the period ended March 31, 2005).
89
10(eee) Form of Executive Employment Agreement between North Valley Bancorp for Scott *
Louis, Roger Nash, and Gary Litzsinger (incorporated by reference from Exhibit
99.91 to the Company's Quarterly Report on Form 10-Q filed with the Commission for
the period ended September 30, 2005).**
10(fff) Amendment to information services contract with Information Technology, Inc. dated *
June 17, 2002 (incorporated by reference from Exhibit 99.92 to the Company's
Quarterly Report on Form 10-Q filed with the Commission for the period ended
September 30, 2005).
10(ggg) North Valley Bancorp Salary Continuation Plan with Jack R. Richter, dated December *
31, 2005 (incorporated by reference from Exhibit 99.102 to the Company's Current
Report on Form 8-K filed with the Commission on January 6, 2006).**
10(hhh) First Amendment to North Valley Bancorp Employee (401K) Plan, effective April 28, **
2005.
10(iii) Second Amendment to North Valley Bancorp Employee (401K) Plan, effective April 28, **
2005.
10(jjj) Third Amendment to North Valley Bancorp Employee (401K) Plan, effective December **
30, 2005.
10(kkk) Fifth Amendment to North Valley Bancorp Employee Stock Ownership Plan, effective **
June 4, 2005.
10(lll) North Valley Bancorp Director Deferred Fee Plan, Amended and Restated effective *
January 1, 2007 (incorporated by reference from Exhibit 99.124 to the Company's
Current Report on Form 8-K filed with the Commission on February 28, 2007).**
10(mmm) North Valley Bancorp Executive Deferred Commission Plan, Amended and Restated *
effective January 1, 2007 (incorporated by reference from Exhibit 99.125 to the
Company's Current Report on Form 8-K filed with the Commission on February 28,
2007).**
10(nnn) North Valley Bancorp Salary Continuation Plan, Amended and Restated effective *
January 1, 2007 (incorporated by reference from Exhibit 99.126 to the Company's
Current Report on Form 8-K filed with the Commission on February 28, 2007).**
10(ooo) Fifth Amendment to North Valley Bancorp Employee (401K) Plan, effective as of **
September 1, 2004 (incorporated by reference from Exhibit 99.127 to the Company's
Current Report on Form 8-K filed with the Commission on February 28, 2007).
10(ppp) First Amendment to the North Valley Bancorp Employee Stock Ownership Plan, as **
Amended and Restated effective January 1, 2006 (incorporated by reference from
Exhibit 99.134 to the Company's Current Report on Form 8-K filed with the
Commission on May 1, 2007).
10(qqq) North Valley Bancorp Salary Continuation Plan, Amended and Restated effective *
January 1, 2007 (incorporated by reference from Exhibit 99.136 to the Company's
Current Report on Form 8-K filed with the Commission on June 15, 2007).**
10(rrr) Form of Amendment of the North Valley Bancorp Employee Stock Ownership Plan **
(incorporated by reference from Exhibit 99.137 to the Company's Current Report on
Form 8-K filed with the Commission on July 3, 2007).
10(sss) Lease for 1828-1844 Park Marina Drive, Redding, California, dated July 30, 2007 *
(incorporated by reference from Exhibit 99.143 to the Company's Quarterly Report on
Form 10-Q filed with the Commission for the period ended September 30, 2007).
10(ttt) North Valley Bancorp Salary Continuation Plan, Amended and Restated effective *
January 1, 2007 (incorporated by reference from Exhibit 99.146 to the Company's
Current Report on Form 8-K filed with the Commission on January 4, 2008).**
90
10(uuu) North Valley Bancorp Executive Deferred Compensation Plan, Amended and Restated *
effective January 1, 2007 (incorporated by reference from Exhibit 99.147 to the
Company's Current Report on Form 8-K filed with the Commission on January 4,
2008).**
14 North Valley Bancorp Corporate Governance Code of Ethics (incorporated by reference *
from Exhibit 14 to the Company's Quarterly Report on Form 10-Q filed with the
Commission for the period ended March 31, 2004).
21 List of Subsidiaries.
23 Consent of Perry-Smith LLP
31 Rule 13a-14(a) / 15d-14(a) Certifications
32 Section 1350 Certifications
- -----------
*Previously filed.
** Indicates management contract or compensatory plan or arrangement.
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTH VALLEY BANCORP
By:
/s/ MICHAEL J. CUSHMAN
- ----------------------------------------------------
Michael J. Cushman
President and Chief Executive Officer
/s/ KEVIN R. WATSON
- ----------------------------------------------------
Kevin R. Watson
Executive Vice President and Chief Financial Officer
DATE: March 12, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
/s/ J. M. Wells, Jr. Director March 12, 2008
- ------------------------
J. M. Wells, Jr.
/s/ Michael J. Cushman Director, President and Chief March 12, 2008
- ------------------------ Executive Officer (Principal
Michael J. Cushman Executive Officer)
/s/ William W. Cox Director March 12, 2008
- ------------------------
William W. Cox
/s/ Royce L. Friesen Director March 12, 2008
- ------------------------
Royce L. Friesen
/s/ Dan W. Ghidinelli Director March 12, 2008
- ------------------------
Dan W. Ghidinelli
/s/ Kevin D. Hartwick Director March 12, 2008
- ------------------------
Kevin D. Hartwick
/s/ Roger B. Kohlmeier Director March 12, 2008
- ------------------------
Roger B. Kohlmeier
/s/ Martin A. Mariani Director March 12, 2008
- ------------------------
Martin A. Mariani
/s/ Dolores M. Vellutini Director March 12, 2008
- ------------------------
Dolores M. Vellutini
/s/ Kevin R. Watson Executive Vice President and March 12, 2008
- ------------------------ Chief Financial Officer
Kevin R. Watson (Principal Financial Officer &
Principal Accounting Officer)
92