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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, 2003
-----------------
[ ] 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
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2751350
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
300 Park Marina Circle, Redding, California 96001
---------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 226 2900
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
No par value common stock
-------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
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
$88,988,790 as of June 30, 2003.
The number of shares outstanding of common stock as of March 15, 2004, were
6,530,390.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for the 2004 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
-----------------
Part I
- ------
Item 1 Description of Business 3
Item 2 Description of Properties 26
Item 3 Legal Proceedings 26
Item 4 Submission of Matters to a Vote of Security Holders 27
Part II
- -------
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 27
Item 6 Selected Financial Data 29
Item 7 Management's Discussion and Analysis of Financial
Condition and Results Of Operations 30
Item 7A Quantitative and Qualitative Disclosures About Market
Risk 42
Item 8 Financial Statements and Supplementary Data 42
Item 9 Changes In and Disagreements With Accountants on
Accounting And Financial Disclosure 43
Item 9A Controls and Procedures 43
Part III
- --------
Item 10 Directors and Executive Officers of the Registrant 44
Item 11 Executive Compensation 44
Item 12 Security Ownership of Certain Beneficial Owners and
Management 44
Item 13 Certain Relationships and Related Transactions 44
Item 14 Principal Accounting Fees and Services 44
Part IV
- -------
Item 15 Exhibits, Financial Statement Schedules and Reports on
Form 8-K 45
Financial Statements 46
Signatures 81
2
PART I
- ------
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
Certain statements in this Annual Report on Form 10-K (excluding
statements of fact or historical financial information) involve forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Shasta
County; volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; the California power crisis; the U.S. "war on terrorism" and
military action by the U.S. in the Middle East, and changes in the securities
markets. Therefore, the information set forth herein should be carefully
considered when evaluating the business prospects of the Company and its
subsidiaries. See also "Certain Additional Business Risks" on pages 24 through
25 herein, and other risk factors discussed elsewhere in this Report.
General
- -------
North Valley Bancorp (the "Company") is a bank holding company registered
with and subject to regulation and supervision by the Board of Governors of the
Federal Reserve System (the "Board of Governors"). The Company was incorporated
in 1980 in the State of California. On October 11, 2000, the Company completed
its plan of reorganization with Six Rivers National Bank. Unless otherwise
noted, the information contained herein has been restated on a historical basis
as a pooling of interests as if the Company and Six Rivers National Bank had
been combined for all periods presented. On January 2, 2002, Six Rivers National
Bank became a California State chartered bank and in conjunction with this
charter conversion, changed its name to Six Rivers Bank ("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
will continue to operate as Six Rivers Bank, a division of North Valley Bank.
(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.) The Company wholly owns its principal subsidiaries, North
Valley Bank ("NVB"), North Valley Trading Company ("Trading Company"), which is
inactive, Bank Processing, Inc. ("BPI"), a California corporation, North Valley
Capital Trust 1 and North Valley Capital Trust II. The sole subsidiary of NVB,
which is inactive, is North Valley Basic Securities (the "Securities Company").
At December 31, 2003, the Company had approximately 365 employees, (which
includes 318 full-time equivalent employees). None of the Company's employees
are represented by a union and management believes that relations with employees
are good.
NVB was organized in September 1972, under the laws of the State of
California, and commenced operations in February 1973. NVB is principally
supervised and regulated by the California Commissioner of Financial
Institutions (the "Commissioner") and conducts a commercial and retail banking
business, which includes accepting demand, savings, money market rate deposit
accounts, and time deposits, and making commercial, real estate and consumer
loans. It also offers installment note collections, issues cashier's checks and
money orders, sells travelers' checks and provides safe deposit boxes and other
customary banking services. As a state-chartered insured bank, NVB is also
subject to regulation by the Federal Deposit Insurance Corporation ("FDIC") and
its deposits are insured by the FDIC up to the legal limits thereupon. NVB does
not offer trust services or international banking services and does not plan to
do so in the near future.
3
NVB (excluding the former branches of SRB) operates fourteen banking
offices in Shasta and Trinity Counties, for which it has received all of the
requisite regulatory approvals. The headquarters office in Redding opened in
February 1973. In October 1973, NVB opened its Weaverville Office; in October
1974, its Hayfork Office; in January 1978, its Anderson Office; and in September
1979, its Enterprise Office (East Redding). On December 20, 1982, NVB acquired
the assets of two branches of the Bank of California: one located in Shasta Lake
and the other in Redding, California. On June 1, 1985, NVB opened its Westwood
Village Office in South Redding. On November 27, 1995, NVB opened a branch
located in Palo Cedro, California. On October 14, 1997, NVB opened a branch
located in Shasta Lake, California. NVB opened two super-market branches in 1998
located in Cottonwood, California, on January 20, 1998, and Redding, California,
on September 8, 1998. On May 11, 1998, NVB opened a Business Banking Center in
Redding, California, to provide banking services to business and professional
clients. On August 13, 2001, the Business Banking Center, North Valley Bancorp
Securities and the 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. On September
5, 2003, NVB closed escrow on a property located at 480 Pioneer Avenue,
Woodland, California for the express purpose of constructing a full-service
banking facility on this property.
Six Rivers National Bank was formed in 1989 as a national banking
association. On January 2, 2002, Six Rivers National Bank became a California
state-chartered bank and changed its name to Six Rivers Bank. As mentioned
above, on January 1, 2004, SRB was merged with and into NVB with NVB as the
surviving entity. SRB operates seven full service offices in Eureka (2),
Crescent City, Ferndale, Garberville, McKinleyville and Willits. In 1997, SRB
completed the purchase and conversion of four branches of Bank of America which
increased its presence from its original market of Humboldt and Del Norte
counties into Trinity County to the Northeast and Mendocino County to the South.
During the fourth quarter of 2000, the SRB Weaverville branch was sold which was
a condition to the closing of the plan of reorganization with the Company.
The Trading Company, incorporated under the laws of the State of
California in 1984, formed a joint venture to explore trading opportunities in
the Pacific Basin. The joint venture terminated in July 1986, and the Trading
Company is now inactive. The Securities Company, formed to hold premises
pursuant to Section 752 of the California Financial Code, is inactive. North
Valley Consulting Services was established as a consulting service for
depository institutions and in December 1988, changed its name to Bank
Processing, Inc. BPI was established as a bank processing service to provide
data processing services to other depository institutions, pursuant to Section
225.25(b)(7) of Federal Reserve Regulation Y and Section 4(c)(8) of the Bank
Holding Company Act of 1956, as amended ("BHCA").
BPI is currently processing daily applications for the Company where
entries are captured and files updated by the "Information Technology, Inc.,
(ITI) banking system," which includes: Demand Deposits (DDA), Savings Deposits
(SAV), Central Information Files (CIF), Mortgage Loans/Installment
Loans/Commercial Loans (LAS), Individual Retirement Accounts (IRA), and
Financial Information Statements, i.e., General Ledger (FMS). These data
processing activities do not involve providing hardware or software to banking
clients.
North Valley Capital Trust I is an unconsolidated Delaware business trust
wholly-owned by the Company and formed in 2001 for the exclusive purpose of
issuing Company obligated mandatorily redeemable cumulative Trust Preferred
Securities of Subsidiary Grantor Trust holding solely junior subordinated
debentures.
North Valley Capital Trust II is an unconsolidated Delaware business trust
wholly-owned by the Company and formed in 2003 for the exclusive purpose of
issuing Company obligated mandatorily redeemable cumulative Trust Preferred
Securities of Subsidiary Grantor Trust holding solely junior subordinated
debentures.
SRB and NVB have signed agreements with Essex National Securities
("Essex") whereby Essex provides brokerage services and standardized investment
advice to SRB customers at SRB's Main office located at 402 F Street, Eureka,
California and to NVB customers at NVB administrative offices located at 300
Park Marina Circle in Redding, California. SRB and NVB share in the fees and
commissions paid to Essex on a pre-determined schedule.
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.
4
Selected Statistical Data
- -------------------------
The following tables present certain consolidated statistical information
concerning the business of the Company. This information should be read in
conjunction with the Consolidated Financial Statements and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
operations and other information contained elsewhere herein. Averages are based
on daily averages.
5
Average Balances and Tax-equivalent Net Interest Margin
-------------------------------------------------------
The following table sets forth the Company's consolidated condensed
average daily balances and the corresponding average yields received and average
rates paid of each major category of assets, liabilities, and stockholders'
equity for each of the past three years (in thousands).
2003 2002 2001
------------------------------- ----------------------------- -----------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- ------- --------- -------- ------- --------- -------- -------
Assets
Federal funds sold $ 55,817 $ 596 1.07% $ 22,504 $ 346 1.54% $ 20,814 $ 674 3.24%
Investments:
Taxable securities 110,264 4,251 3.86% 79,847 4,224 5.29% 73,045 4,762 6.64%
Non-taxable securities(1) 23,054 1,913 8.30% 26,756 2,312 8.64% 27,594 2,468 8.94%
FNMA Preferred Stock (1) 8,639 494 5.71% 395 24 6.08% -- -- 0.00%
Interest bearing deposits
in other financial
institutions 477 16 3.35% 737 43 5.83% 2,072 73 3.52%
--------- -------- ------- --------- -------- ------- --------- -------- -------
Total investments 142,434 6,674 4.69% 107,735 6,603 6.13% 102,711 7,303 7.11%
Total loans and leases (2)(3) 399,217 28,595 7.16% 424,272 32,738 7.72% 378,190 32,671 8.64%
--------- -------- ------- --------- -------- ------- --------- -------- -------
Total interest-earning
Assets/interest income 597,468 $ 35,865 6.00% 554,511 $ 39,687 7.16% 501,715 $ 40,648 8.10%
Non-earning assets 80,622 71,656 66,422
Allowance for loan and
lease losses (6,734) (6,256) (5,335)
--------- --------- ---------
Total assets $ 671,356 $ 619,911 $ 562,802
========= ========= =========
Liabilities and
Stockholders' Equity
Transaction accounts $ 151,390 $ 835 0.55% $ 119,081 $ 1,008 0.85% $ 94,857 $ 1,439 1.52%
Savings and money market 148,315 1,262 0.85% 131,354 1,536 1.17% 108,986 2,650 2.43%
Time deposits 166,206 3,456 2.08% 177,775 5,293 2.98% 202,721 10,463 5.16%
other borrowed funds 34,421 1,974 5.73% 37,852 1,955 5.17% 15,106 923 6.12%
--------- -------- ------- --------- -------- ------- --------- -------- -------
Total interest-bearing
liabilities/interest expense 500,332 7,527 1.50% 466,062 9,792 2.10% 421,670 15,475 3.67%
Non-interest bearing deposits 117,287 100,567 83,226
other liabilities 5,906 6,703 7,056
--------- --------- ---------
Total liabilities 623,525 573,332 511,952
Stockholders' equity 47,831 46,579 50,850
--------- --------- ---------
Total liabilities and
stockholders equity $ 671,356 $ 619,911 $ 562,802
========= ========= =========
Net interest income / spread $ 28,338 4.50% $ 29,895 5.06% $ 25,173 4.43%
======== ======= ======== ======= ======== =======
Net interest margin (4) 4.74% 5.39% 5.02%
======= ======= =======
(1) Tax-equivalent basis; non-taxable securities are exempt from federal
taxation.
(2) Loans on nonaccrual status have been included in the computations of
average balances.
(3) Includes loan fees of $228, $337 and $509 for the years ended December 31,
2003, 2002 and 2001, respectively
(4) Net interest margin is determined by dividing net interest income by total
average interest earning assets.
6
Rate Volume Analysis of changes in Net Interest Income
The following table summarizes changes in net interest income resulting
from changes in average asset and liability balances (volume) and changes in
average interest rates. The change in interest due to both rate and volume has
been allocated to the change in volume (in thousands).
2003 Compared to 2002 2002 Compared to 2001
------------------------------- -------------------------------
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ---------- ------- ------- ----------
Interest income
Interest on fed funds sold $ 356 $ (106) $ 250 $ 26 $ (354) $ (328)
Interest on investments:
Taxable securities 1,173 (1,146) 27 360 (898) (538)
Non-taxable securities (307) (92) (399) (72) (84) (156)
FNMA preferred stock 471 (1) 470 24 -- 24
Interest bearing
deposits in other
financial institutions (9) (18) (27) (78) 48 (30)
------- ------- ------- ------- ------- -------
Total investments 1,328 (1,257) 71 234 (934) (700)
Interest on loans and
leases (1,795) (2,348) (4,143) 3,556 (3,489) 67
------- ------- --------- ------- ------- --------
Total interest income $ (111) $(3,711) $(3,822) $ 3,816 $(4,777) $ (961)
------- ------- ------- ------- ------- -------
Interest expense
Transaction accounts $ 178 $ (351) $ (173) $ 205 $ (636) $ (431)
Savings and money market 144 (418) (274) 262 (1,376) (1,114)
Time deposits (241) (1,596) (1,837) (743) (4,427) (5,170)
other borrowed funds (197) 216 19 1,175 (143) 1,032
------- ------- ------- ------- ------- -------
Total interest expense $ (116) $(2,149) $(2,265) $ 899 $(6,582) $(5,683)
------- ------- ------- ------- ------- -------
Total change in net
interest income $ 5 $(1,562) $(1,557) $ 2,917 $ 1,805 $ 4,722
======= ======= ======= ======= ======= =======
Investment Securities:
- ----------------------
The Company's policy regarding investments is as follows:
Trading Securities are carried at fair value. Changes in fair value are
included in other operating income. The Company did not have any securities
classified as trading at December 31, 2003, 2002, and 2001.
Available for Sale Securities are carried at fair value and represent
securities not classified as trading securities nor as held to maturity
securities. Unrealized gains and losses resulting from changes in fair value are
recorded, net of tax, within accumulated other comprehensive income, which is a
separate component of stockholders' equity, until realized. Gains or losses on
disposition are recorded in other operating income based on the net proceeds
received and the carrying amount of the securities sold, using the specific
identification method.
Held to Maturity Securities 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.
At December 31, the amortized cost of securities and their approximate
fair value were as follows (in thousands):
7
Carrying
Gross Gross Amount
Available for sale securities: Amortized Unrealized Unrealized (Fair
Cost Gains Losses Value)
--------- ---------- ---------- ---------
December 31, 2003
Securities of U.S. government
agencies and corporations $ 12,574 $ 73 $ (14) $ 12,633
obligations of states and
political subdivisions 25,903 1,133 (94) 26,942
Mortgage-backed securities 133,760 424 (1,408) 132,776
Corporate securities 6,027 273 (26) 6,274
Other securities 13,127 27 (734) 12,420
--------- --------- --------- ---------
$ 191,391 $ 1,930 $ (2,276) $ 191,045
========= ========= ========= =========
December 31, 2002
Securities of U.S. government
agencies and corporations $ 11,220 $ 9 $ -- $ 11,229
obligations of states and
political subdivisions 23,580 1,138 (67) 24,651
Mortgage-backed securities 59,915 1,108 (4) 61,019
Corporate securities 8,976 520 -- 9,496
Other securities 4,088 -- (8) 4,080
--------- --------- --------- ---------
$ 107,779 $ 2,775 $ (79) $ 110,475
========= ========= ========= =========
December 31, 2001
Securities of U.S. government
agencies and corporations $ 1,991 $ 78 $ -- $ 2,069
obligations of states and
political subdivisions 28,085 1,074 (254) 28,905
Mortgage-backed securities 70,331 601 (81) 70,851
Corporate securities
9,946 20 (241) 9,725
Other securities 88 -- (12) 76
--------- --------- --------- ---------
$ 110,441 1,773 $ (588) $ 111,626
========= ===== ========= =========
Held to maturity securities: Carrying
Amount Gross Gross
(Amortized Unrealized Unrealized Fair
Cost) Gains Losses Value
--------- ---------- ---------- ---------
December 31, 2003
obligations of states and
political subdivisions $ 1,455 $ 376 $ -- $ 1,831
========= ========= ========= =========
December 31, 2002
obligations of states and
political subdivisions $ 1,455 $ 388 $ -- $ 1,843
========= ========= ========= =========
December 31, 2001
obligations of states and
political subdivisions $ 1,455 $ 486 $ -- $ 1,941
========= ========= ========= =========
The policy of the Company requires that management determine the
appropriate classification of securities at the time of purchase. If management
has the intent and the Company has the ability at the time of purchase to hold
securities until maturity, they are classified as investments held to maturity,
and carried at amortized cost. Securities to be held for indefinite periods of
time and not intended to be held to maturity are classified as available for
sale and carried at market value. Securities held for indefinite periods of time
include securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, resultant prepayment risk, and other related factors.
On January 1, 2001, the Company transferred $25,471,000 of certain
securities from the held to maturity to the available for sale classification at
fair value upon adoption and as allowed by SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities. The unrealized gains on the
securities transferred were $1,115,000. The net unrealized gains and losses are
8
recorded net of tax within accumulated other comprehensive income (loss), which
is a separate component of stockholders' equity.
The following table shows estimated fair value of our investment
securities (other than equity securities with a fair value of approximately
$12,420,000) by year of maturity as of December 31, 2003. 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 After Five
Within One Through Through After
One Year Five Years Ten Years Ten Years Total
-------- ----------- ---------- --------- ---------
Available for Sale Securities
Securities of U.S. government agencies and
corporations $ 9,700 $ 2,933 $ $ $ 12,633
Mortgage-backed securities 6,118 48,744 10,136 67,779 132,777
Tax-exempt securities 1,503 5,982 1,911 17,546 26,942
Corporate securities 4,062 2,211 6,273
-------- -------- -------- -------- --------
Total securities available for sale $ 21,383 $ 59,870 $ 12,047 $ 85,325 $178,625
======== ======== ======== ======== ========
Weighted average yield 4.80% 4.03% 3.93% 4.10% 4.15%
Held to Maturity Securities
Tax-exempt securities $ 1,831 $ 1,831
======== ========
Weighted average yield 10.03% 10.03%
Loan and Lease Portfolio
- ------------------------
The Company originates loans for business, consumer and real estate
activities and leases for equipment purchases. Such loans and leases are
concentrated in the primary markets in which the Company operates. Substantially
all loans are collateralized. Generally, real estate loans are secured by real
property. Commercial and other loans are secured by bank deposits or business or
personal assets and leases are generally secured by equipment. The Company's
policy for requiring collateral is through analysis of the borrower, the
borrower's industry and the economic environment in which the loan would be
granted. The loans are expected to be repaid from cash flows or proceeds from
the sale of selected assets of the borrower.
9
Major classifications of loans and leases at December 31 are summarized as
follows (in thousands):
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Commercial, financial and agricultural $ 36,997 $ 40,683 $ 49,248 $ 53,617 $ 49,925
Real estate - commercial 163,474 159,946 99,164 90,041 80,681
Real estate - construction 37,566 25,388 9,764 4,794 4,049
Real estate - mortgage(1) 54,588 104,590 109,830 100,937 82,202
Installment 62,609 87,710 113,970 105,393 92,973
Direct financing leases 689 1,795 3,454 5,183 5,395
Other 23,214 24,271 11,588 9,727 15,434
--------- --------- --------- --------- ---------
Total loans and leases receivable 379,137 444,383 397,018 369,692 330,659
Allowance for loan and lease losses (6,493) (6,723) (5,786) (4,964) (4,606)
Deferred loan costs (fees) 16 183 (210) (69) (229)
--------- --------- --------- --------- ---------
Net loans and leases $ 372,660 $ 437,843 $ 391,022 $ 364,659 $ 325,824
========= ========= ========= ========= =========
(1) Includes loans held for sale, as applicable
At December 31, 2003 and 2002, the Company serviced real estate loans and
loans guaranteed by the Small Business Administration which it had sold to the
secondary market of approximately $129,485,000 and $100,234,000. respectively.
The Company was contingently liable under letters of credit issued on
behalf of its customers for $4,819,000 and $2,461,000 at December 31, 2003 and
2002, respectively. At December 31, 2003, commercial and consumer lines of
credit, and real estate loans of approximately $26,492,000 and $60,817,000, were
undisbursed. At December 31, 2002, commercial and consumer lines of credit, and
real estate loans of approximately $28,637,000 and $37,938,000, were
undisbursed. These instruments involve, to varying degrees, elements of credit
and market risk more than the amounts recognized in the balance sheet. The
contractual or notional amounts of these transactions express the extent of the
Company's involvement in these instruments and do not necessarily represent the
actual amount subject to credit loss.
Maturity Distribution and Interest Rate Sensitivity of Loans and Commitments
- ----------------------------------------------------------------------------
The following table shows the maturity of certain loan categories and
commitments. Excluded categories are residential mortgages of 1-4 family
residences, installment loans and lease financing outstanding as of December 31,
2003. Also provided with respect to such loans and commitments are the amounts
due after one year, classified according to the sensitivity to changes in
interest rates (in thousands):
After
One
Through After
Within Five Five
One Year Years Years Total
-------- ------- ------- -------
Commercial, financial and Agricultural $20,730 $11,291 $ 4,976 $36,997
Real Estate - construction 26,442 10,931 193 37,566
Loans maturing after one year with:
Fixed interest rates $20,286 $ 5,169 $25,455
Variable interest rates 1,936 $ 1,936
10
Certificates of Deposit
- -----------------------
Maturities of time certificates of deposit outstanding of less than
$100,000 and $100,000 or more at December 31, 2003 are summarized as follows (in
thousands):
Remaining maturities: $100,000 Less than
or more $100,000
-------- ---------
Three months or less $ 15,406 $ 44,159
over three through twelve months 31,964 55,953
over one year through three years 4,078 11,736
over three years -- 111
-------- ---------
Total $ 51,448 $ 111,959
======== =========
As of December 31, 2003, the Company did not have any brokered deposits.
In general, it is the Company's policy not to accept brokered deposits.
Other Borrowed Funds
- --------------------
Other borrowings outstanding as of December 31, 2003 consist of a loan
from the Federal Reserve Bank ("FRB") in the form of Treasury Tax and Loan notes
which are generally required to be repaid within 30 days from the transaction
date as well as Federal Home Loan Bank ("FHLB") advances. The following table
summarizes these borrowings (in thousands):
2003 2002 2001
------- ------- -------
Short-Term borrowings:
FHLB advances $ 7,500 $23,500 $ 7,000
FRB loan 259 89 254
------- ------- -------
Total Short-Term borrowings $ 7,759 $23,589 $ 7,254
======= ======= =======
Long-Term Borrowings:
FHLB advances $ 1,700 $ 9,299 $13,393
------- ------- -------
Total Long-Term borrowings $ 1,700 $ 9,299 $13,393
======= ======= =======
The FHLB advances are collateralized by loans and securities pledged to
the FHLB. The following is a breakdown of rates and maturities (dollars in
thousands):
Short Term Long Term
---------- ---------
Amount $ 7,500 $ 1,700
Maturity 2004 2005
Average Rates 4.208% 4.450%
11
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
- ---------------------
2003 2002 2001
-------- -------- --------
Average balance during the year $ 19,798 $ 26,108 $ 1,957
Average interest rate for the year 3.41% 2.53% 5.00%
Maximum month-end balance during the year $ 32,792 $ 27,000 $ 18,100
Average rate as of December 31, 4.21% 2.40% 3.31%
Certain Contractual Obligations
- -------------------------------
The following chart summarizes certain contractual obligations of the
company as of December 31, 2003:
(dollars in thousands) Less More
than one 1-3 3-5 than 5
Total year years years years
----- -------- ----- ----- ------
Subordinated Debentures, fixed rate of
10.25% payable on 2031 $10,310 $10,310
Subordinated Debentures, floating rate
of 6.448% payable on 2033 6,186 6,186
FHLB loan, fixed rate of 4.17% payable
on February 22, 2005 1,500 1,500
FHLB loan, fixed rate of 6.55% payable
on October 3, 2005 200 200
Operating lease obligations 2,656 593 1,164 899
Deferred compensation(1) 2,118 110 221 82 1,705
Supplemental retirement plans(1) 2,517 202 395 236 1,684
------- ------- ------- ------- -------
Total $25,487 $ 905 $ 3,480 $ 1,217 $19,885
======= ======= ======= ======= =======
(1) These amounts represent known certain payments to participants under the
company's deferred compensation and supplemental retirement plans. See
Note 13 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.
Subordinated Debentures
- -----------------------
The Company formed North Valley Capital Trust I and North Valley Capital
Trust II (the "Trusts") as special purpose entities ("SPE"). The Trusts are
Delaware business trusts wholly owned by the Company and formed for the purpose
of issuing Company obligated mandatorily redeemable cumulative Trust Preferred
Securities (Trust Preferred Securities). Proceeds from the issuance of the Trust
Preferred Securities were used to invest in junior subordinated debentures of
the Company (Subordinated Debentures). Proceeds from the issuance of the
Subordinated Debentures have been used by the Company for various corporate
matters including stock repurchases. For financial reporting purposes, the
Subordinated Debentures are included in the consolidated balance sheet. Under
applicable regulatory guidelines all of the Trust Preferred Securities currently
qualify as Tier I capital.
During the third quarter of 2001, North Valley Capital Trust I issued
10,000 Trust Preferred Securities with a liquidation value of $1,000 for gross
proceeds of $10,000,000. The entire proceeds of the issuance were invested by
North Valley Capital Trust I in $10,000,000 aggregate principal amount of 10.25%
subordinated debentures due in 2031 (the Subordinated Debentures) issued by the
Company. The Subordinated Debentures represent the sole assets of North Valley
Capital Trust I. The Subordinated Debentures mature in 2031, bear interest at
the rate of 10.25%, payable semi-annually, and are redeemable by the Company at
a premium beginning on or after 2006 based on a percentage of the principal
amount of the Subordinated Debentures stipulated in the Indenture Agreement,
12
plus any accrued and unpaid interest to the redemption date. The Subordinated
Debentures are redeemable at 100 percent of the principal amount plus any
accrued and unpaid interest to the redemption date at any time on or after 2011.
The Trust Preferred Securities are subject to mandatory redemption to the extent
of any early redemption of the Subordinated Debentures and upon maturity of the
Subordinated Debentures on 2031.
Holders of the Trust Preferred Securities are entitled to cumulative cash
distributions at an annual rate of 10.25% of the liquidation amount of $1,000
per security. The Company has the option to defer payment of the distributions
for a period of up to five years, as long as the Company is not in default in
the payment of interest on the Subordinated Debentures. The Company has
guaranteed, on a subordinated basis, distributions and other payments due on the
Trust Preferred Securities (the Guarantee). The Guarantee, when taken together
with the Company's obligations under the Subordinated Debentures, the Indenture
Agreement pursuant to which the Subordinated Debentures were issued and the
Company's obligations under the Trust Agreement governing the subsidiary trust,
provide a full and unconditional guarantee of amounts due on the Trust Preferred
Securities.
During the second quarter of 2003, North Valley Capital Trust II issued
6,000 Trust Preferred Securities with a liquidation value of $1,000 for gross
proceeds of $6,000,000. The entire proceeds of the issuance were invested by
North Valley Capital Trust I in $6,000,000 aggregate principal amount of 6.448%
subordinated debentures due in 2033 (the Subordinated Debentures) issued by the
Company. The Subordinated Debentures represent the sole assets of North Valley
Capital Trust II. The Subordinated Debentures mature in 2033, bear an initial
interest rate of 6.448%, payable semi-annually, and are redeemable by the
Company at par beginning on or after April 10, 2008, plus any accrued and unpaid
interest to the redemption date. The Trust Preferred Securities are subject to
mandatory redemption to the extent of any early redemption of the Subordinated
Debentures and upon maturity of the Subordinated Debentures on 2033.
Holders of the Trust Preferred Securities are entitled to cumulative cash
distributions at an annual rate of 6.448% of the liquidation amount of $1,000
per security. The Company has the option to defer payment of the distributions
for a period of up to five years, as long as the Company is not in default in
the payment of interest on the Subordinated Debentures. The Company has
guaranteed, on a subordinated basis, distributions and other payments due on the
Trust Preferred Securities (the Guarantee). The Guarantee, when taken together
with the Company's obligations under the Subordinated Debentures, the Indenture
Agreement pursuant to which the subordinated Debentures were issued and the
Company's obligations under the Trust Agreement governing the subsidiary trust,
provide a full and unconditional guarantee of amounts due on the Trust Preferred
Securities.
Supervision and Regulation
- --------------------------
The common stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and the qualification
requirements of the California Corporate Securities Law of 1968, as amended. The
Company is also subject to the periodic reporting requirements of Section 13 of
the Securities Exchange Act of 1934, as amended, which include, but are not
limited to, the filing of annual, quarterly and other current reports with the
Securities and Exchange Commission.
NVB 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
13
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the provisions of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994.
The Company, and any subsidiaries, which it may acquire or organize, are
deemed to be "affiliates" of NVB within the meaning of that term as defined in
the Federal Reserve Act. This means, for example, that there are limitations (a)
on loans by NVB to 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, the OCC and the FDIC have adopted risk-based
capital guidelines for evaluating the capital adequacy of bank holding companies
and banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to aid in making the definition of bank capital
uniform internationally. Under the guidelines, the Company and its banking
subsidiaries are required to maintain capital equal to at least 8.0% of its
assets and commitments to extend credit, weighted by risk, of which at least
4.0% must consist primarily of common equity (including retained earnings) and
the remainder may consist of subordinated debt, cumulative preferred stock, or a
limited amount of loan loss reserves. The Company and its banking subsidiaries
are subject to regulations issued by the Board of Governors, the OCC and the
FDIC, which require maintenance of a certain level of capital. These regulations
impose two capital standards: a risk-based capital standard and a leverage
capital standard.
Assets, commitments to extend credit and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of such loans.
Under the Board of Governors' risk-based capital guidelines, assets
reported on an institution's balance sheet and certain off-balance sheet items
are assigned to risk categories, each of which has an assigned risk weight.
Capital ratios are calculated by dividing the institution's qualifying capital
by its period-end risk-weighted assets. The guidelines establish two categories
of qualifying capital: Tier 1 capital (defined to include common shareholders'
equity and noncumulative perpetual preferred stock) and Tier 2 capital which
includes, among other items, limited life (and in case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserve for credit losses. Tier 2 capital may also include up
to 45% of the pretax net unrealized gains on certain available-for-sale equity
securities having readily determinable fair values (i.e. the excess, if any, of
fair market value over the book value or historical cost of the investment
security). The federal regulatory agencies reserve the right to exclude all or a
portion of the unrealized gains upon a determination that the equity securities
are not prudently valued. Unrealized gains and losses on other types of assets,
such as bank premises and available-for-sale debt securities, are not included
in Tier 2 capital, but may be taken into account in the evaluation of overall
capital adequacy and net unrealized losses on available-for-sale equity
securities will continue to be deducted from Tier 1 capital as a cushion against
risk. Each institution is required to maintain a risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
Under the Board of Governors' leverage capital standard, an institution is
required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be used
in place of quarterly average total assets on a case-by-case basis. The Board of
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)
14
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, 2003, NVB, SRB and the Company were in compliance with the
risk-based capital and leverage ratios described above. See Item 8, Financial
Statements and Supplementary Data and Note 19 to the Financial Statements
incorporated by reference, therein, for a listing of the Company's risk-based
capital ratios at December 31, 2003 and 2002.
The Board of Governors, the OCC and FDIC have adopted regulations
implementing a system of prompt corrective action pursuant to Section 38 of the
Federal Deposit Insurance Act and Section 131 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five
capital categories with the following characteristics: (1) "Well capitalized" -
consisting of institutions with a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater, and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive; (2)
"Adequately capitalized" - consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not meet
the definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than 8%, a
Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less
than 4%; (4) "Significantly undercapitalized" - consisting of institutions with
a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically
undercapitalized" - consisting of an institution with a ratio of tangible equity
to total assets that is equal to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
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
15
institution from taking certain other actions without its prior approval,
including (1) entering into any material transaction other than in the usual
course of business, including investment expansion, acquisition, sale of assets
or other similar actions; (2) extending credit for any highly leveraged
transaction; (3) amending articles or bylaws unless required to do so to comply
with any law, regulation or order; (4) making any material change in accounting
methods; (5) engaging in certain affiliate transactions; (6) paying excessive
compensation or bonuses; and (7) paying interest on new or renewed liabilities
at rates which would increase the weighted average costs of funds beyond
prevailing rates in the institution's normal market areas.
Under FDICIA, the federal financial institution agencies have adopted
regulations which require institutions to establish and maintain comprehensive
written real estate lending policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and reporting
requirements. FDICIA further generally prohibits an insured state bank from
engaging as a principal in any activity that is impermissible for a national
bank, absent FDIC determination that the activity would not pose a significant
risk to the Bank Insurance Fund, and that the bank is, and will continue to be,
within applicable capital standards. Similar restrictions apply to subsidiaries
of insured state banks. The Company does not currently intend to engage in any
activities, which would be restricted or prohibited under FDICIA.
The Federal Financial Institution Examination Counsel ("FFIEC") on
December 13, 1996, approved an updated Uniform Financial Institutions Rating
System ("UFIRS"). In addition to the five components traditionally included in
the so-called "CAMEL" rating system which has been used by bank examiners for a
number of years to classify and evaluate the soundness of financial institutions
(including capital adequacy, asset quality, management, earnings and liquidity),
UFIRS includes for all bank regulatory examinations conducted on or after
January 1, 1997, a new rating for a sixth category identified as sensitivity to
market risk. Ratings in this category are intended to reflect the degree to
which changes in interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and capital. The
revised rating system is identified as the "CAMELS" system.
The federal financial institution agencies have established bases for
analysis and standards for assessing a financial institution's capital adequacy
in conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending to
low and moderate income individuals and businesses across a four-point scale
from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form bank
holding companies. In addition, any bank rated in "substantial noncompliance"
with the CRA regulations may be subject to enforcement proceedings.
The Company's ability to pay cash dividends is subject to restrictions set
forth in the California General Corporation Law. Funds for payment of any cash
dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from each of the Company's subsidiary banks.
The payment of cash dividends and/or management fees by NVB 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.
16
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 creates a
requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that
establishes, maintains, administers, or manages a private banking account or a
correspondent account in the United States for a non-United States person,
including a foreign individual visiting the United States, or a representative
of a non-United States person shall establish appropriate, specific, and, where
necessary, enhanced, due diligence policies, procedures, and controls that are
reasonably designed to detect and record instances of money laundering through
those accounts.
The Company and its subsidiaries are not currently aware of any account
relationships between the Company and its subsidiaries and any foreign bank or
other person or entity as described above under Sections 313(a) or 312 of the
Patriot Act. The terrorist attacks on September 11, 2001 have realigned national
security priorities of the United States and it is reasonable to anticipate that
the United States Congress may enact additional legislation in the future to
combat terrorism including modifications to existing laws such as the Patriot
Act to expand powers as deemed necessary. The effects which the Patriot Act and
any additional legislation enacted by Congress may have upon financial
institutions is uncertain; however, such legislation would likely increase
compliance costs and thereby potentially have an adverse effect upon the
Company's results of operations.
The Sarbanes-Oxley Act of 2002
- ------------------------------
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the "Act")
on July 30, 2002, which responds to recent issues in corporate governance and
accountability. Among other matters, key provisions of the Act and rules
promulgated by the Securities and Exchange Commission pursuant to the Act
include the following:
o Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of non-audit
services provided to audit clients and to require such services to be
pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the
CEO and CFO and making issuer interference with an audit a crime.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes and
increases in the statute of limitations for securities fraud lawsuits.
17
o Disclosure of whether a company has adopted a code of ethics that applies
to the company's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, and disclosure of any amendments or waivers to such code of
ethics. The disclosure obligation becomes effective for fiscal years
ending on or after July 15, 2003. The ethics code must contain written
standards that are reasonably designed to deter wrongdoing and to promote:
o Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships;
o Full, fair, accurate, timely, and understandable disclosure in reports and
documents that a registrant files with, or submits to, the Securities and
Exchange Commission and in other public communications made by the
registrant;
o Compliance with applicable governmental laws, rules and regulations;
o The prompt internal reporting to an appropriate person or persons
identified in the code of violations of the code; and
o Accountability for adherence to the code.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an "audit
committee financial expert." The disclosure obligation becomes effective
for fiscal years ending on or after July 15, 2003. To qualify as an "audit
committee financial expert," a person must have:
o An understanding of generally accepted accounting principles and
financial statements;
o The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting
issues that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by the registrant's
financial statements, or experience actively supervising one or more
persons engaged in such activities;
o An understanding of internal controls and procedures for financial
reporting; and
o An understanding of audit committee functions.
o A person must have acquired the above listed attributes to be deemed to
to qualify as an "audit committee financial expert" through any one or
more of the following:
o Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant or auditor or
experience in one or more positions that involve the performance of
similar functions;
o Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor or
person performing similar functions;
o Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing or
evaluation of financial statements; or
o Other relevant experience.
o The rule contains a specific safe harbor provision to clarify that the
designation of a person as an "audit committee financial expert" does not
cause that person to be deemed to be an "expert" for any purpose under
Section 11 of the Securities Act of 1933, as amended, or impose on such
person any duties, obligations or liability greater that the duties,
obligations and liability imposed on such person as a member of the audit
committee and the board of directors, absent such designation. Such a
designation also does not affect the duties, obligations or liability of
any other member of the audit committee or board of directors.
o A prohibition on insider trading during pension plan black-out periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards on professional conduct for attorneys requiring attorneys
having an attorney-client relationship with a company, among other
matters, to report "up the ladder" to the audit committee, another board
committee or the entire board of directors certain material violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing deadline to within
2 business days of the date a transaction triggers an obligation to
report.
18
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers" to be phased-in over a
four year period reducing the filing deadline for Form 10-K reports from
90 days after the fiscal year end to 60 days and Form 10-Q reports from 45
days after the fiscal quarter end to 35 days.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q and
8-K, and any amendments to those reports, by "accelerated filers" as soon
as reasonably practicable after such reports and material are filed with
or furnished to the Securities and Exchange Commission.
o Rules requiring national securities exchanges and national securities
associations to prohibit the listing of any security whose issuer does not
meet audit committee standards established pursuant to the Act. These
proposed rules would establish audit committee:
o Independence standards for members;
o Responsibility for selecting and overseeing the issuer's independent
accountant;
o Responsibility for handling complaints regarding the issuer's
accounting practices;
o Authority to engage advisers; and
o Funding requirements for the independent auditor and outside
advisers engaged by the audit committee.
On November 4, 2003, the Securities and Exchange Commission adopted
changes to the standards for the listing of issuer securities by the New York
Stock Exchange and NASDAQ Stock Market. The revised standards for listing
conform to and supplement Rule 10A-3 under the Securities Exchange Act of 1934,
as amended, which the Securities and Exchange Commission adopted in April 2003
pursuant to the Act.
The Company's securities are listed on the NASDAQ Stock Market.
Consequently, in addition to the rules promulgated by the Securities and
Exchange Commission pursuant to the Act, the Company must also comply with
revised listing standards applicable to NASDAQ listed companies. Generally,
listed companies must comply with the revised listing standards by the first
annual meeting of shareholders following January 15, 2004. The revised NASDAQ
listing standards applicable to the Company include the following:
o A majority of directors of a listed company must be "independent", which
excludes:
o Any director who is, or at any time in the past three years was,
employed by a listed company, its parent or a subsidiary;
o Any director or any family member who received payments in excess of
$60,000 in the current year or prior three years from a listed
company, its parent or a subsidiary;
o Any director whose family member is employed or during the last three
years was employed as an executive officer of a listed company, its
parent or a subsidiary;
o Any director or any family member who is a partner, controlling
shareholder or executive officer of an organization to which a listed
company made payments or from which a listed company received
payments, for services or property, in the current year or prior three
years in excess of the greater of $200,000 or 5% of the recipient's
consolidated gross revenues in the year of payment;
o Any director or any family member who is employed as an executive
officer of another organization where during the current year or prior
three years an executive officer of a listed company served on the
compensation committee of such organization; and
o Any director or any family member who is a partner of the outside
auditor of a listed company or was a partner or employee of the listed
company's auditor and worked on the company's audit in the prior three
years.
o Independent directors of a listed company must meet alone in executive
sessions at least two times annually.
19
o Listed companies must certify adoption of a resolution or written charter
dealing with nominations of directors and select nominees for election as
directors either by determination of a majority of independent directors
or by a nominating committee consisting solely of independent directors,
with certain exceptions.
o Compensation of a listed company's chief executive officer must be
determined either by a majority of independent directors or by a
compensation committee consisting solely of independent directors, with
certain exceptions.
o The audit committee of a listed company, subject to certain exceptions,
must comply with requirements that include:
o The committee be comprised of at least three independent directors
who have not participated in the preparation of financial statements
for the company, its parent or subsidiaries during the last three
years;
o Each director must be able to read and understand financial
statements;
o At least one director must meet the "financial sophistication"
criteria which the company must certify;
o The committee must adopt a written charter; and
o The committee is responsible for the review and approval of all
related-party transactions, except those approved by another board
committee comprised of independent directors.
o The adoption or amendment of any equity compensation arrangement
after June 30, 2003, such as a stock option plan, requires shareholder
approval, subject to certain exemptions.
o A code of conduct must be adopted by May 4, 2004 that (i) complies with
the code of ethics requirements of the Act; (ii) covers all directors,
officers and employees; (iii) includes an enforcement mechanism; and (iv)
permits only the board of directors to grant waivers from or changes to
the code of conduct affecting directors and executive officers and
requires prompt disclosure thereof on a Form 8-K filing with the
Securities and Exchange Commission.
The effect of the Act upon the Company is uncertain; however, it is likely
that the Company will incur increased costs to comply with the Act and the rules
and regulations promulgated pursuant to the Act by the Securities and Exchange
Commission and other regulatory agencies having jurisdiction over the Company.
The Company does not currently anticipate, however, that compliance with the Act
and such rules and regulations will have a material adverse effect upon its
financial position or results of its operations or its cash flows.
The California Corporate Disclosure Act
- ---------------------------------------
On September 28, 2002, California Governor Gray Davis signed into law the
California Corporate Disclosure Act (the "CCD Act"), which became effective
January 1, 2003. The CCD Act requires publicly traded corporations incorporated
or qualified to do business in California to disclose information about their
past history, auditors, directors and officers. The CCD Act requires the Company
to disclose:
o The name of the company's independent auditor and a description of
services, if any, performed for the company during the previous 24 months;
o The annual compensation paid to each director and executive officer,
including stock or stock options not otherwise available to other company
employees;
o A description of any loans made to a director at a "preferential" loan
rate during the previous 24 months, including the amount and terms of the
loans;
20
o Whether any bankruptcy was filed by a company or any of its directors or
executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been convicted
of fraud during the previous 10 years; and
o Whether a company violated any federal securities laws or any securities
or banking provisions of California law during the previous 10 years for
which the company was found liable or fined more than $10,000.
The Company does not currently anticipate that compliance with the CCD Act
will have a material adverse effect upon its financial position or results of
its operations or its cash flows.
Competition
- -----------
At June 30, 2003, commercial and savings banks in competition with the
Company, NVB and SRB, had forty four banking offices in Shasta and Trinity
Counties where NVB operates its fourteen banking offices and there were
fifty-six competing offices of commercial and savings bank offices in Del Norte,
Mendocino and Humboldt Counties where SRB operates its seven banking offices.
Additionally, the Company competes with thrifts and, to a lesser extent, credit
unions, finance companies and other financial service providers for deposit and
loan customers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services and international banking which the Company is
not authorized nor prepared to offer currently. The Company has arranged with
correspondent banks and with others to provide some of these services for their
customers. For borrowers requiring loans in excess of each subsidiary bank's
legal lending limit, the Company has offered, and intend to offer in the future,
such loans on a participating basis with correspondent banks and with other
independent banks, retaining the portion of such loans which is within the
applicable lending limits. As of December 31, 2003, NVB's and SRB's aggregate
legal lending limits to a single borrower and such borrower's related parties
were $6,458,000 and $3,236,000 on an unsecured basis and $10,763,000 and
$5,393,000 on a fully secured basis, based on regulatory capital of $43,054,000
and $20,643,000, respectively.
In order to compete with the major financial institutions in its primary
service areas, the Company, through its subsidiary banks, utilizes to the
fullest extent possible, the flexibility which is accorded by its independent
status. This includes an emphasis on specialized services, local promotional
activity, and personal contacts by the officers, directors and employees of the
Company. The Company's subsidiary bank 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 each subsidiary bank's
portfolio. Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits. Commercial
banks also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
The net interest income of the Company, and to a large extent, its
earnings, are affected not only by general economic conditions, both domestic
and foreign, but also by the monetary and fiscal policies of the United States
as set by statutes and as implemented by federal agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession by its
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial institutions
are required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on the Company are not
predictable.
In 1996, pursuant to Congressional mandate, the FDIC reduced bank deposit
insurance assessment rates to a range from $0 to $0.27 per $100 of deposits,
dependent upon a bank's risk. Based upon the above risk-based assessment rate
21
schedule, NVB's current capital ratios and NVB's current levels of deposits, NVB
anticipates no change in the assessment rate applicable during 2004 from that in
2003.
Since 1996, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located
in California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition of or merger with an existing
whole bank, which has been in existence for at least five years.
The federal financial institution agencies, especially the OCC and the
Board of Governors, have taken steps to increase the types of activities in
which national banks and bank holding companies can engage, and to make it
easier to engage in such activities. The oCC has issued regulations permitting
national banks to engage in a wider range of activities through subsidiaries.
"Eligible institutions" (those national banks that are well capitalized, have a
high overall rating and a satisfactory or better CRA rating, and are not subject
to an enforcement order) may engage in activities related to banking through
operating subsidiaries subject to an expedited application process. In addition,
a national bank may apply to the OCC to engage in an activity through a
subsidiary in which the bank itself may not engage.
On November 12, 1999, President Clinton signed into law The Financial
Services Modernization Act of 1999 (the "FSMA"). The FSMA eliminated most of the
remaining depression-era "firewalls" between banks, securities firms and
insurance companies which was established by Banking Act of 1933, also known as
the Glass-Steagall Act ("Glass-Steagall). Glass-Steagall sought to insulate
banks as depository institutions from the perceived risks of securities dealing
and underwriting, and related activities. The FSMA repeals Section 20 of
Glass-Steagall, which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can now
acquire securities firms or create them as subsidiaries, and securities firms
can now acquire banks or start banking activities through a financial holding
company. The FSMA includes provisions which permit national banks to conduct
financial activities through a subsidiary that are permissible for a national
bank to engage in directly, as well as certain activities authorized by statute,
or that are financial in nature or incidental to financial activities to the
same extent as permitted to a "financial holding company" or its affiliates.
This liberalization of United States banking and financial services regulation
applies both to domestic institutions and foreign institutions conducting
business in the United States. Consequently, the common ownership of banks,
securities firms and insurance firms is now possible, as is the conduct of
commercial banking, merchant banking, investment management, securities
underwriting and insurance within a single financial institution using a
"financial holding company" structure authorized by the FSMA.
Prior to the FSMA, significant restrictions existed on the affiliation of
banks with securities firms and on the direct conduct by banks of securities
dealing and underwriting and related securities activities. Banks were also
(with minor exceptions) prohibited from engaging in insurance activities or
affiliating with insurers. The FSMA removes these restrictions and substantially
eliminates the prohibitions under the Bank Holding Company Act on affiliations
between banks and insurance companies. Bank holding companies, which qualify as
financial holding companies through an application process, can now insure,
guarantee, or indemnify against loss, harm, damage, illness, disability, or
death; issue annuities; and act as a principal, agent, or broker regarding such
insurance services.
In order for a commercial bank to affiliate with a securities firm or an
insurance company pursuant to the FSMA, its bank holding company must qualify as
a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Board of Governors a certification to such effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
"closely related to banking" which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act is to require that federal financial
institution and securities regulatory agencies prescribe regulations to
implement the policy that financial institutions must respect the privacy of
their customers and protect the security and confidentiality of customers'
non-public personal information. These regulations will require, in general,
22
that financial institutions (1) may not disclose non-public personal information
of customers to non-affiliated third parties without notice to their customers,
who must have opportunity to direct that such information not be disclosed; (2)
may not disclose customer account numbers except to consumer reporting agencies;
and (3) must give prior disclosure of their privacy policies before establishing
new customer relationships.
The Company, NVB, and SRB have not determined whether they may seek to
acquire and exercise new powers or activities under the FSMA, and the extent to
which competition will change among financial institutions affected by the FSMA
has not yet become clear.
Certain legislative and regulatory proposals that could affect the
Company and banking business in general are periodically introduced before the
United States Congress, the California State Legislature and Federal and state
government agencies. It is not known to what extent, if any, legislative
proposals will be enacted and what effect such legislation would have on the
structure, regulation and competitive relationships of financial institutions.
It is likely, however, that such legislation could subject the Company and its
subsidiary banks to increased regulation, disclosure and reporting requirements
and increase competition and the Company's cost of doing business.
In addition to legislative changes, the various federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such and regulations may have on the Company and its
subsidiary banks.
The effect of the Act upon corporations is uncertain; however, it is
likely that compliance costs may increase as corporations modify procedures if
required to conform to the provisions of the Act. The Company does not currently
anticipate that compliance with the Act will have a material effect upon its
financial position or results of its operations or its cash flows.
Discharge of Materials into the Environment
- -------------------------------------------
Compliance with federal, state and local regulations regarding the
discharge of materials into the environment may have a substantial effect on the
capital expenditure, earnings and competitive position of the Company in the
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.
23
If the investigation reveals and if certain warning signs are discovered,
but it cannot be easily ascertained, that an actual environmental hazard exists,
the Company may require that the owner/buyer of the property, at his/her
expense, have an Environmental Inspection performed by an insured, bonded
environmental engineering firm acceptable to the Company.
California Power Crisis
- -----------------------
During 2001, the State of California experienced serious periodic electric
power shortages. It is uncertain whether or when these shortages will occur
again. The Company and its subsidiaries could be materially and adversely
affected either directly or indirectly by a severe electric power shortage if
such a shortage caused any of its critical data processing or computer systems
and related equipment to fail, or if the local infrastructure systems such as
telephone systems should fail, or the Company's and its subsidiaries'
significant vendors, suppliers, service providers, customers, borrowers, or
depositors are adversely impacted by their internal systems or those of their
respective customers or suppliers. Material increases in the expenses related to
electric power consumption and the related increase in operating expense could
also have an adverse effect on the Company's future results of operations.
Certain Additional Business Risks
- ---------------------------------
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
The Company and its subsidiaries are dependent on the successful
recruitment and retention of highly qualified personnel. Business banking, one
of the Company's principal lines of business, is dependent on relationship
banking, in which Company personnel develop professional relationships with
small business owners and officers of larger business customers who are
responsible for the financial management of the companies they represent. If
these employees were to leave the Company and become employed by a local
competing bank, the Company could potentially lose business customers. In
addition, the Company relies on its customer service staff to effectively serve
the needs of its consumer customers. Since overall employment levels are near
their modern-day low, this begins to be a risk to the Company that must be
mitigated. The Company very actively recruits for all open position and
management believes that employee relations are good.
Shares of Company Common Stock eligible for future sale could have a
dilutive effect on the market for Company Common Stock and could adversely
affect the market price. The Articles of Incorporation of the Company authorize
the issuance of 20,000,000 shares of common stock, of which 6,488,073 were
outstanding at December 31, 2003. Pursuant to its stock option plans, at
December 31, 2003, the Company had outstanding options to purchase 997,976
shares of Company Common Stock. As of December 31, 2003, 341,366 shares of
Company Common Stock remained available for grants under the Company's stock
option plans. Sales of substantial amounts of Company Common Stock in the public
market could adversely affect the market price of Common Stock.
A large portion of the loan portfolio of the Company is dependent on real
estate. At December 31, 2003, real estate served as the principal source of
collateral with respect to approximately 57% of the Company's loan portfolio. A
worsening of current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and the value of the available-for-sale investment portfolio, as well as the
Company's financial condition and results of operations in general and the
market value for Company Common Stock. Acts of nature, including fires,
earthquakes and floods, which may cause uninsured damage and other loss of value
to real estate that secures these loans, may also negatively impact the
Company's financial condition.
The Company is subject to certain operations risks, including, but not
limited to, data processing system failures and errors and customer or employee
fraud. The Company maintains a system of internal controls to mitigate against
such occurrences and maintains insurance coverage for such risks, but should
such an event occur that is not prevented or detected by the Company's internal
controls, uninsured or in excess of applicable insurance limits, it could have a
significant adverse impact on the Company's business, financial condition or
results of operations.
24
The terrorist actions on September 11, 2001, and thereafter, plus military
actions taken by the United States in Afghanistan, Iraq and elsewhere, have had
significant adverse effects upon the United States economy. Whether terrorist
activities in the future and the actions taken by the United States and its
allies in combating terrorism on a worldwide basis will adversely impact the
Company, and the extent of such impact, is uncertain. However, such events have
had and may continue to have an adverse effect on the economy in the company's
market areas. Such continued economic deterioration could adversely affect the
company's future results of operations by, among other matters, reducing the
demand for loans and other products and services offered by the company,
increasing nonperforming loans and the amounts reserved for loan losses, and
causing a decline in the Company's stock price.
Recent Accounting Pronouncements
- --------------------------------
In December, 2003, the FASB revised FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). This interpretation of
Accounting Research Bulletin No. 51, Consolidated Financial Statements,
addresses consolidation by business enterprises of a variable interest entity
(VIE) that posses certain characteristics. A company that holds variable
interests in an entity will need to consolidate that entity if the company's
interest in the VIE is such that the company will absorb a majority of the VIE's
expected losses and or receive a majority of the VIE's expected residual
returns, if they occur. The Company adopted FIN 46 on December 31, 2003.
Adoption of this standard required the Company to deconsolidate its investment
in North Valley Capital Trust I and North Valley Capital Trust II. The
deconsolidation of the Trusts, formed in connection with the issuance of Trust
Preferred Securities, appears to be an unintended consequence of FIN 46. In
management's opinion, the effect of deconsolidation on the Company's financial
position and results of operations was not material. In addition, management
does not believe that the Company has any VIEs that would be consolidated under
the provisions of FIN 46.
In July 2003, the Board of Governors of the Federal Reserve Systems issued
a supervisory letter instructing bank holding companies to continue to include
Trust Preferred Securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of the accounting changes resulting from FIN
46 and, if necessary or warranted, provide further appropriate guidance. There
can be no assurance that the Federal Reserve will continue to allow institutions
to include Trust Preferred Securities in Tier 1 capital for regulatory capital
purposes.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. For mandatorily redeemable
financial instruments of a nonpublic entity, this Statement shall be effective
for existing or new contracts for fiscal periods beginning after December 15,
2004. The Company adopted the provisions of this Statement on July 1, 2003 and,
in management's opinion, adoption of the Statement did not have a material
effect on the Company's consolidated financial position or results of
operations.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. This Statement amends and
clarifies the accounting for derivative instruments by providing guidance
related to circumstances under which a contract with a net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. The Statement also
clarifies when a derivative contains a financing component. The Statement is
intended to result in more consistent reporting for derivative contracts and
must be applied prospectively for contracts entered into or modified after June
30, 2003, except for hedging relationships designated after June 30, 2003. In
management's opinion, adoption of this Statement did not have a material impact
on the Company's consolidated financial position or results of operations.
25
ITEM 2. DESCRIPTION OF PROPERTIES
- ----------------------------------
The Company's principal executive and administrative office is located in
a leased building at 300 Park Marina Circle, Redding, Shasta County, California.
The following table sets forth information about the Company's premises:
Description Office Type Owned/Leased
- -------------------------------------------------------------------------
North Valley Bank:
Redding Branch Owned
Westwood Branch Leased
Shasta Lake Branch Owned
Country Club Branch Owned
Weaverville Branch Owned
Hayfork Branch Owned
Buenaventura Supermarket Branch Leased
Anderson Branch Owned
Enterprise Branch Owned
Cottonwood Supermarket Branch Leased
Palo Cedro Branch Leased
Churn Creek Branch Owned
Woodland Land-Future Branch Owned
Redding Warehouse Storage Facility Leased
Park Marina Circle Administrative/Limited Leased
Use Branch
Park Marina Limited Used Branch Leased
BPI Data Processing/Administrative Owned
Six Rivers Bank:
Eureka Mall Branch Leased
McKinleyville Branch Leased
Crescent City Branch Owned
Eureka Downtown Branch Owned
Ferndale Branch Owned
Garberville Branch Leased
Willits Branch Owned
On January 1, 2004, SRB was merged with and into North Valley Bank with
North Valley Bank as the surviving corporation. Effective with such merger, the
branch premises described above as owned or leased by SRB became owned or leased
by North Valley Bank.
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.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There are no material legal proceedings pending against the Company or
against any of its property. The Company, because of the nature of its business,
is generally subject to various legal actions, threatened or filed, which
involve ordinary, routine litigation incidental to its business. Some of the
pending cases seek punitive damages in addition to other relief. Although the
amount of the ultimate exposure, if any, cannot be determined at this time, the
Company, based on the advice of counsel, does not expect that the final outcome
of threatened or filed suits will have a materially adverse effect on its
consolidated financial position.
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this Form 10-K.
PART II
- -------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The North Valley Bancorp common stock is listed and trades on the Nasdaq
National Market under the symbol "NOVB". The shares were first listed with the
Nasdaq Stock Market in April 1998.
The following table summarizes the Common Stock high and low trading
prices traded during the two year period ended December 31, 2003 as reported on
the Nasdaq Stock Market and the cash dividends declared on the common stock
during the same period. All per share data has been retroactively restated to
give effect for the three-for-two stock split approved by the Board of Directors
on March 11, 2003 and payable in the form of a stock dividend to shareholders of
record on April 15, 2003.
Price of Common
Stock Cash
----------------------- Dividends
Quarter Ended: High Low Declared
-------- --------- ---------
March 31, 2002 $ 11.07 $ 9.02 $ 0.08
June 30, 2002 11.51 10.54 0.08
September 30, 2002 11.33 10.03 0.08
December 31, 2002 12.07 10.37 0.09
March 31, 2003 $ 13.71 $ 12.14 $ 0.10
June 30, 2003 16.97 13.76 0.10
September 30, 2003 16.25 14.92 0.10
December 31, 2003 16.01 15.15 0.10
The Company had approximately 988 shareholders of record as of March 12,
2004.
The Company's primary source of funds for payment of dividends to its
shareholders is the receipt of dividends from NVB and SRB. The payment of
dividends by a California State chartered bank is subject to various legal and
regulatory restrictions. See "Supervision and Regulation" in Item 1, Description
of Business, for information related to shareholder and dividend matters
including information regarding certain limitations on payment of dividends.
The following tables summarize the fourth quarter stock repurchase
activity for the Company's current Stock Repurchase Program.
Total
Number of Maximum
Shares Number of
Purchased Shares that
Average as Part of May Yet be
Price Publicly Purchased
Total Number Paid per Announced Under the
Period of Shares Share Plans Plan
- ------ ------------ -------- --------- -----------
October 1 thru 31, 2003 0
November 1 thru 30, 2003 81,200 $ 15.97 2,397,521 27,954
December 1 thru 31, 2003 17,500 $ 15.98 2,415,021 10,454
The above repurchase program - announced on July 28, 2003 - is the seventh
such plan announced by the Company since May of 2001. The program calls for the
repurchase of up to 3.0% of the Company's outstanding shares, or 199,154 shares.
27
The repurchases will be made from time to time by the Company in the open market
as conditions allow. All such transactions will be structured to comply with
Securities and Exchange Commission Rule 10b-18 and all shares repurchased under
this program will be retired. The number, price and timing of the repurchases
shall be at the Company's sole discretion and the program may be re-evaluated
depending on market conditions, liquidity needs or other factors. The Board of
Directors, based on such re-evaluations, may suspend, terminate, modify or
cancel the program at any time without notice.
28
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
North Valley Bancorp & Subsidiaries
(dollars in thousands except per share data)
FOR THE YEAR ENDED DECEMBER 31 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Total interest income $ 35,100 $ 38,902 $ 39,811 $ 39,966 $ 36,279
Total interest expense 7,527 9,792 15,475 16,235 14,029
---------- ---------- ---------- ---------- ----------
Net interest income 27,573 29,110 24,336 23,731 22,250
Provision for loan and lease
losses -- 1,795 1,370 1,670 1,262
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan and lease
losses 27,573 27,315 22,966 22,061 20,988
Total non interest income 11,265 9,313 8,852 6,872 5,368
Total non interest expense 27,262 24,728 22,090 24,236 18,281
---------- ---------- ---------- ---------- ----------
Income before provision for income 11,576 11,900 9,728 4,697 8,075
taxes
Provision for income taxes 3,605 3,836 3,062 1,609 2,331
---------- ---------- ---------- ---------- ----------
Net Income $ 7,971 $ 8,064 $ 6,666 $ 3,088 $ 5,744
========== ========== ========== ========== ==========
Performance ratios:
Return on average assets 1.19% 1.30% 1.18% 0.58% 1.13%
Return on average equity 16.66% 17.31% 13.11% 5.82% 11.35%
Capital Ratios:
Risk based capital:
Tier 1 (4% Minimum Ratio) 12.34% 11.33% 11.57% 13.05% 13.37%
Total (8% Minimum Ratio) 13.77% 12.58% 12.82% 14.30% 14.44%