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, 2004
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
----------------------- --------------------
Commission file number 0-10652
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NORTH VALLEY BANCORP
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(Exact name of registrant as specified in its charter)
California 94-2751350
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
300 Park Marina Circle, Redding, California 96001
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 226 2900
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
No par value common stock
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(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
$85,636,853 as of June 30, 2004.
The number of shares outstanding of common stock as of March 14, 2005, were
7,344,858.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for the 2005 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
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CONTENTS
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Part I
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Item 1 Business 3
Item 2 Properties 26
Item 3 Legal Proceedings 26
Item 4 Submission of Matters to a Vote of Security Holders 27
Part II
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Item 5 Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 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
Item 9B Other Information
Part III
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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 and Related Stockholder Matters 44
Item 13 Certain Relationships and Related Transactions 44
Item 14 Principal Accounting Fees and Services 44
Part IV
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Item 15 Exhibits, Financial Statement Schedules 45
Signatures 81
2
PART I
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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 the 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 and lease 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
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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 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). On August 31, 2004, the Company acquired Yolo Community
Bank ("YCB") in a purchase transaction. The information contained herein
contains the results of operations of YCB from September 1, 2004. The Company
wholly owns its principal subsidiaries, NVB, YCB, North Valley Trading Company
("Trading Company"), which is inactive, Bank Processing, Inc. ("BPI"), a
California corporation, North Valley Capital Trust I, North Valley Capital Trust
II and North Valley Capital Trust III. The sole subsidiary of NVB, which is
inactive, is North Valley Basic Securities (the "Securities Company").
At December 31, 2004, the Company had approximately 390 employees,
(which includes 370 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, and money market rate
deposit accounts and time deposits, and making commercial, real estate and
consumer loans. It also issues cashier's checks and money orders, sells
travelers' checks and provides safe deposit boxes and other customary banking
services. As a state-chartered insured member bank, NVB is also subject to
regulation by the Federal Reserve Bank ("FRB") and its deposits are insured by
the Federal Deposit Insurance Corporation ("FDIC") up to the legal limits
thereupon. NVB does not offer trust services or international banking services
and does not plan to do so in the near future.
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 relocated its branch
in Shasta Lake to a new facility . 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 purchased vacant land located at 480 Pioneer Avenue, Woodland,
California for the purpose of constructing a full-service banking facility on
this property in the future as the need arises. The second quarter of 2005 NVB
plans to open loan production offices in Ukiah and Santa Rosa.
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.
Yolo Community Bank was a privately-held California banking corporation
that commenced operations in 1998 and is headquartered in Woodland, California.
On August 31, 2004, the Company acquired YCB in a purchase transaction.
Consideration paid was a combination of $9.5 million in cash and 741,697 shares
of the Company's common stock. YCB offers primarily commercial banking services
to small and medium sized businesses through their branches in Woodland,
Fairfield, and Roseville, California. On February 11, 2005, the name Yolo
Community Bank was changed to "NVB Business Bank."
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, North Valley Capital Trust II and North
Valley Capital Trust III are unconsolidated Delaware business trusts
wholly-owned by the Company and formed in 2001, 2003 and 2004, respectively, for
the exclusive purpose of issuing Company obligated mandatorily redeemable
cumulative Trust Preferred Securities of the related Subsidiary Grantor Trust
holding solely junior subordinated debentures.
NVB and YCB have signed agreements with Essex National Securities
("Essex") whereby Essex provides brokerage services and standardized investment
advice to NVB customers at NVB administrative offices in Redding, California,
SRB customers at SRB's Main office located in Eureka, California and to YCB's
customers at YCB's main office in Woodland, California. NVB and YCB share in the
fees and commissions paid to Essex on a pre-determined schedule.
4
The Company does not hold deposits of any one customer or group of
customers where the loss of such deposits would have a material adverse effect
on the Company. The Company's business is not seasonal.
Selected Statistical Data
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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
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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).
2004 2003 2002
----------------------------- ----------------------------- -----------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- --------- ---- --------- --------- ---- --------- --------- ----
Assets
Federal funds sold $ 26,225 $ 323 1.23% $ 55,817 $ 596 1.07% $ 22,504 $ 346 1.54%
Investments:
Taxable securities 187,680 7,080 3.77% 110,264 4,251 3.86% 79,847 4,224 5.29%
Non-taxable securities(1) 28,160 2,152 7.64% 23,054 1,913 8.30% 26,756 2,312 8.64%
FNMA Preferred Stock (1) 12,040 648 5.38% 8,639 494 5.71% 395 24 6.08%
Interest bearing deposits
in other financial
institutions 288 8 2.78% 477 16 3.35% 737 43 5.83%
--------- --------- ---- --------- --------- ---- --------- --------- ----
Total investments 228,168 9,888 4.33% 142,434 6,674 4.69% 107,735 6,603 6.13%
Total loans and leases(2)(3) 438,044 29,602 6.76% 399,217 28,595 7.16% 424,272 32,738 7.72%
--------- --------- ---- --------- --------- ---- --------- --------- ----
Total interest-earning
assets/interest income 692,437 39,813 5.75% 597,468 35,865 6.00% 554,511 39,687 7.16%
--------- --------- ---------
Non-earning assets 91,805 80,622 71,656
Allowance for loan and
lease losses (6,638) (6,734) (6,256)
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Total assets $ 777,604 $ 671,356 $ 619,911
========= ========= =========
Liabilities and
Stockholders' Equity
Transaction accounts $ 179,474 863 0.48% $ 151,390 835 0.55% $ 119,081 1,008 0.85%
Savings and money market 176,745 1,178 0.67% 148,315 1,262 0.85% 131,354 1,536 1.17%
Time deposits 157,522 2,637 1.67% 166,206 3,456 2.08% 177,775 5,293 2.98%
Other borrowed funds 63,966 2,829 4.42% 34,421 1,974 5.73% 37,852 1,955 5.17%
--------- --------- ---- --------- --------- ---- --------- --------- ----
Total interest-bearing
liabilities/interest expense 577,707 7,507 1.50% 500,332 7,527 1.50% 466,062 9,792 2.10%
--------- --------- ---------
Non-interest bearing deposits 139,417 117,287 100,567
Other liabilities 9,825 5,906 6,703
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Total liabilities 726,949 623,525 573,332
Stockholders' equity 50,655 47,831 46,579
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Total liabilities and
stockholders equity $ 777,604 $ 671,356 $ 619,911
========= ========= =========
Net interest income / spread $ 32,306 4.25% $ 28,338 4.50% $ 29,895 5.06%
========= ==== ========= ==== ========= ====
Net interest margin (4) 4.67% 4.74% 5.39%
==== ==== ====
(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 $825, $228 and $337 for the years ended December 31,
2004, 2003 and 2002, 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).
2004 Compared to 2003 2003 Compared to 2002
-------------------------------------- --------------------------------------
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ---------- ---------- ---------- ---------- ----------
Interest income
Interest on fed funds sold $ (364) $ 91 $ (273) $ 356 $ (106) $ 250
Interest on investments:
Taxable securities 2,920 (91) 2,829 1,173 (1,146) 27
Non-taxable securities 390 (151) 239 (307) (92) (399)
FNMA preferred stock 183 (29) 154 471 (1) 470
Interest bearing deposits in other
financial institutions (5) (3) (8) (9) (18) (27)
---------- ---------- ---------- ---------- ---------- ----------
Total investments 3,488 (274) 3,214 1,328 (1,257) 71
Interest on loans and leases 2,617 (1,610) 1,007 (1,795) (2,348) (4,143)
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 5,741 (1,793) 3,948 (111) (3,711) (3,822)
---------- ---------- ---------- ---------- ---------- ----------
Interest expense
Transaction accounts 135 (107) 28 178 (351) (173)
Savings and money market 190 (274) (84) 144 (418) (274)
Time deposits (145) (674) (819) (241) (1,596) (1,837)
Other borrowed funds 1,307 (452) 855 (197) 216 19
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 1,487 (1,507) (20) (116) (2,149) (2,265)
---------- ---------- ---------- ---------- ---------- ----------
Total change in net interest income $ 4,254 $ (286) $ 3,968 $ 5 $ (1,562) $ (1,557)
========== ========== ========== ========== ========== ==========
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, 2004, 2003, and 2002.
Available for Sale Securities are carried at fair value and represent
securities not classified as trading securities nor as held to maturity
securities. Unrealized gains and losses resulting from changes in fair value are
recorded, net of tax, within accumulated other comprehensive income (loss),
which is a separate component of stockholders' equity, until realized. Gains or
losses on disposition are recorded in other operating income based on the net
proceeds received and the carrying amount of the securities sold, using the
specific identification method.
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.
7
At December 31, the amortized cost of securities and their approximate
fair value were as follows (in thousands):
Gross Gross Carrying
Available for sale securities: Amortized Unrealized Unrealized Amount
December 31, 2004 Cost Gains Losses (Fair Value)
------------ ------------ ------------ ------------
Securities of U.S. government agencies
and corporations $ 19,118 $ 17 $ (211) $ 18,924
Obligations of states and political subdivisions 30,147 1,035 (46) 31,136
Mortgage-backed securities 148,160 206 (1,812) 146,554
Corporate securities 7,989 104 8,093
Other securities 15,127 34 (907) 14,254
------------ ------------ ------------ ------------
$ 220,541 $ 1,396 $ (2,976) $ 218,961
============ ============ ============ ============
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
============ ============ ============ ============
Held to maturity securities: Carrying
Amount Gross Gross
(Amortized Unrealized Unrealized
Cost) Gains Losses Fair Value
December 31, 2004 ------------ ------------ ------------ ------------
Obligations of states and political subdivisions $ 133 $ (2) $ 131
============ ============ ============ ============
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
============ ============ ============ ============
The policy of the Company requires that management determine the
appropriate classification of securities at the time of purchase. If management
has the intent and the Company has the ability at the time of purchase to hold
debt securities until maturity, they are classified as investments held to
maturity, and carried at amortized cost. Debt securities to be held for
indefinite periods of time and not intended to be held to maturity and equity
securities are classified as available for sale and carried at market value.
Securities held for indefinite periods of time include securities that
management intends to use as part of its asset/liability management strategy and
that may be sold in response to changes in interest rates, resultant prepayment
risk, and other related factors.
8
Investment securities are evaluated for other-than-temporary impairment
on at least a quarterly basis and more frequently when economic or market
conditions warrant such an evaluation to determine whether a decline in their
value below amortized cost is other than temporary. Management utilizes criteria
such as the magnitude and duration of the decline and the intent and ability of
the Bank to retain its investment in the issues for a period of time sufficient
to allow for an anticipated recovery in fair value, in addition to the reasons
underlying the decline, to determine whether the loss in value is other than
temporary. The term "other than temporary" is not intended to indicate that the
decline is permanent, but indicates that the prospects for a near-term recovery
of value is not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value of the
investment. Once a decline in value is determined to be other than temporary,
the value of the security is reduced and a corresponding charge to earnings is
recognized.
At December 31, 2004, the Company held $161,506,000 of available for
sale investment securities in an unrealized loss position of which $131,818,000
were in a loss position for less than twelve months and $29,688,000 were in a
loss position and had been in a loss position for twelve months or more.
Management periodically evaluates each investment security for other than
temporary impairment, relying primarily on industry analyst reports, observation
of market conditions and interest rate fluctuations. Management believes it will
be able to collect all amounts due according to the contractual terms of the
underlying investment securities and that the noted decline in fair value is
considered temporary and due only to interest rate fluctuations.
Included in the above securities at December 31, 2004 were 100,000
shares of FNMA, Series M perpetual preferred stock. The coupon rate is fixed at
4.75% with a taxable-equivalent yield of 6.33%. The securities are owned at par,
or $50.00 per share, for a total investment of $5,000,000 and an unrealized loss
of $865,000 at December 31, 2004. The securities are callable at par on June 1,
2008. The market value per share as of December 31, 2004 was $41.35 per share.
Management carefully evaluated the FNMA preferred stock to determine
whether the decline in fair value below book value of these securities is
other-than-temporary. Among other items, management reviewed relevant accounting
literature which included SFAS No. 115, Statement of Auditing Standard ("SAS")
92, and Staff Accounting Bulletin ("SAB") No. 59. In conducting this assessment,
management evaluated a number of factors including, but not limited to:
o How far fair value has declined below book value
o How long the decline in fair value has existed
o The financial condition of the issuer
o Rating agency changes on the issuer
o Management's intent and ability to hold the security for a period of
time sufficient to allow for any anticipated recovery in fair value
Based on this evaluation, management concluded that these securities
were deemed to be temporarily impaired. Management's assessment weighed heavily
on the duration of the loss, normal market fluctuations during this holding
period, FNMA's response to its weaker financial condition, analysis of FNMA by
rating agencies and investment bankers and the prospects for changes in
long-term interest rates.
9
The following table shows estimated fair value of our investment
securities (other than equity securities with a fair value of approximately
$14,254,000) by year of maturity as of December 31, 2004. 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):
Within One After One After Five After Ten Total
Year Through Five Through Ten Years
Years Years
------------ ------------ ------------ ------------ ------------
Available for Sale Securities
Securities of U.S. government
agencies and corporations $ 2,488 $ 16,436 $ 18,924
Mortgage-backed
securities 2,385 71,350 $ 65,262 $ 7,557 146,554
Tax-exempt securities 1,029 6,715 5,018 18,374 31,136
Corporate securities 2,105 3,009 2,979 8,093
------------ ------------ ------------ ------------ ------------
Total securities available
for sale $ 5,902 $ 96,606 $ 73,289 $ 28,910 $ 204,707
============ ============ ============ ============ ============
Weighted average yield 3.26% 3.59% 4.11% 4.56% 3.90%
------------ ------------ ------------ ------------ ------------
Held to Maturity Securities
Tax-exempt securities $ 131 $ 131
============ ============ ============ ============ ============
Weighted average yield 4.18% 4.18%
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 and leases are collateralized. Generally, real estate loans are
secured by real property. Commercial and other loans are secured by bank
deposits or business or personal assets and leases are generally secured by
equipment. The Company's policy for requiring collateral is through analysis of
the borrower, the borrower's industry and the economic environment in which the
loan or lease would be granted. The loans and leases are expected to be repaid
from cash flows or proceeds from the sale of selected assets of the borrower.
10
Major classifications of loans and leases at December 31 are summarized
as follows (in thousands):
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Commercial, financial and agricultural $ 54,903 $ 36,997 $ 40,683 $ 49,248 $ 53,617
Real estate - commercial 224,476 163,474 159,946 99,164 90,041
Real estate - construction 115,518 37,566 25,388 9,764 4,794
Real estate - mortgage 73,007 54,588 104,590 109,830 100,937
Installment 53,185 62,609 87,710 113,970 105,393
Direct financing leases 3,790 689 1,795 3,454 5,183
Other 29,838 23,214 24,271 11,588 9,727
---------- ---------- ---------- ---------- ----------
Total loans and leases receivable 554,717 379,137 444,383 397,018 369,692
Allowance for loan and lease losses (7,217) (6,493) (6,723) (5,786) (4,964)
Deferred loan and lease (fees) costs (1,372) 16 183 (210) (69)
---------- ---------- ---------- ---------- ----------
Net loans and leases $ 546,128 $ 372,660 $ 437,843 $ 391,022 $ 364,659
========== ========== ========== ========== ==========
At December 31, 2004 and 2003, the Company serviced real estate loans
and loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $105,205,000 and $129,485,000,
respectively.
The Company was contingently liable under letters of credit issued on
behalf of its customers for $4,933,000 and $4,819,000 at December 31, 2004 and
2003, respectively. At December 31, 2004, commercial and consumer lines of
credit, and real estate loans of approximately $46,199,000 and $121,471,000,
respectively, were undisbursed. At December 31, 2003, commercial and consumer
lines of credit, and real estate loans of approximately $26,492,000 and
$60,817,000, respectively, were undisbursed. These instruments involve, to
varying degrees, elements of credit and market risk more than the amounts
recognized in the balance sheet. The contractual or notional amounts of these
transactions express the extent of the Company's involvement in these
instruments and do not necessarily represent the actual amount subject to credit
loss.
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,
2004. 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):
Within After One After
One Year Through Five Years Five Years Total
----------------------------------------------------------
Commercial, financial and
agricultural $ 30,184 $ 18,979 $ 5,740 $ 54,903
Real Estate - construction 72,504 40,611 2,403 115,518
Loans maturing after one year with:
Fixed interest rates $ 20,414 $ 2,530 $ 22,944
Variable interest rates 39,176 5,613 $ 44,789
11
Certificates of Deposit
- -----------------------
Maturities of time certificates of deposit outstanding of less than
$100,000 and $100,000 or more at December 31, 2004 are summarized as follows (in
thousands):
Remaining maturities: $100,000 Less than
or more $100,000
------------ ------------
Three months or less $ 17,823 $ 39,505
Over three through twelve months 26,065 57,540
Over one year through three years 5,509 10,645
Over three years 331 275
------------ ------------
Total $ 49,728 $ 107,965
============ ============
As of December 31, 2004, 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, 2004, 2003 and
2002 consist of a loan from the Federal Reserve Bank ("FRB") in the form of
Treasury Tax and Loan notes which are generally required to be repaid within 30
days from the transaction date as well as Federal Home Loan Bank ("FHLB")
advances. The following table summarizes these borrowings (in thousands):
2004 2003 2002
---------- ---------- ----------
Short-Term borrowings:
FHLB advances $ 20,094 $ 7,500 $ 23,500
FRB loan 259 89
---------- ---------- ----------
Total Short-Term borrowings $ 20,094 $ 7,759 $ 23,589
========== ========== ==========
Long-Term Borrowings:
FHLB advances $ 37,500 $ 1,700 $ 9,299
---------- ---------- ----------
Total Long-Term borrowings $ 37,500 $ 1,700 $ 9,299
========== ========== ==========
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 $ 20,094 $ 37,500
Maturity 2005 2006-2008
Average Rates 2.18% 2.76%
12
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
2004 2003 2002
---------- ---------- ----------
Average balance during the year $ 4,990 $ 19,798 $ 26,108
Average interest rate for the year 3.23% 3.41% 2.53%
Maximum month-end balance during the year $ 32,000 $ 32,792 $ 27,000
Average rate as of December 31, 2.29% 4.21% 2.40%
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the
company as of December 31, 2004:
(dollars in thousands) Less than More than
Total one year 1-3 years 3-5 years 5 years
------------ ------------ ------------ ------------ ------------
Subordinated Debentures, fixed rate of
10.25% payable on 2031 $ 10,310 $ 10,310
Subordinated Debentures, floating rate of
6.448% payable on 2033 6,186 6,186
Subordinated Debentures, floating rate of
5.4925% payable on 2034 5,155 5,155
FHLB loan, fixed rate of 2.18% payable on
January 26, 2006 12,500 12,500
FHLB loan, fixed rate of 2.81% payable on
January 26, 2007 12,500 12,500
FHLB loan, fixed rate of 3.30% payable on
January 25, 2008 12,500 12,500
Operating lease obligations 5,251 1,113 2,233 1,315 590
Deferred compensation(1) 2,305 203 330 222 1,550
Supplemental retirement plans(1) 2,758 220 358 277 1,903
------------ ------------ ------------ ------------ ------------
Total $ 69,465 $ 1,536 $ 27,921 $ 14,314 $ 25,694
============ ============ ============ ============ ============
(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.
13
Subordinated Debentures
The Company formed North Valley Capital Trust I, North Valley Capital
Trust II, and North Valley Trust III (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 partial funding of the YCB
acquisition and 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 per
security for gross proceeds of $10,000,000. The entire proceeds of the issuance
were invested by North Valley Capital Trust I in $10,000,000 aggregate principal
amount of 10.25% subordinated debentures due in 2031 (the Subordinated
Debentures) issued by the Company. The Subordinated Debentures represent the
sole assets of North Valley Capital Trust I. The Subordinated Debentures mature
in 2031, bear interest at the rate of 10.25%, payable semi-annually, and are
redeemable by the Company at a premium beginning on or after 2006 based on a
percentage of the principal amount of the Subordinated Debentures stipulated in
the Indenture Agreement, plus any accrued and unpaid interest to the redemption
date. The Subordinated Debentures are redeemable at 100 percent of the principal
amount plus any accrued and unpaid interest to the redemption date at any time
on or after 2011. The Trust Preferred Securities are subject to mandatory
redemption to the extent of any early redemption of the Subordinated Debentures
and upon maturity of the Subordinated Debentures on 2031.
Holders of the Trust Preferred Securities are entitled to cumulative
cash distributions at an annual rate of 10.25% of the liquidation amount of
$1,000 per security. The Company has the option to defer payment of the
distributions for a period of up to five years, as long as the Company is not in
default in the payment of interest on the Subordinated Debentures. The Company
has guaranteed, on a subordinated basis, distributions and other payments due on
the Trust Preferred Securities (the Guarantee). The Guarantee, when taken
together with the Company's obligations under the Subordinated Debentures, the
Indenture Agreement pursuant to which the Subordinated Debentures were issued
and the Company's obligations under the Trust Agreement governing the subsidiary
trust, provide a full and unconditional guarantee of amounts due on the Trust
Preferred Securities.
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 II 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.
During the second quarter of 2004, North Valley Capital Trust III
issued 5,000 Trust Preferred Securities with a liquidation value of $1,000 for
gross proceeds of $5,000,000. The entire proceeds of the issuance were invested
by North Valley Capital Trust III in $5,000,000 aggregate principal amount of
3.970% subordinated debentures due in 2034 (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 2034, bear an
initial interest rate of 3.97%, payable quarterly, and are redeemable by the
14
Company at par beginning on or after May 5, 2009, 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 2034.
Holders of the Trust Preferred Securities are entitled to cumulative
cash distributions at an annual rate of 3.97% 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.
YCB is licensed by the California Commissioner of Financial
Institutions (the "Commissioner"), YCB's deposits are insured by the FDIC, and
YCB is not a member of the Federal Reserve System. Consequently, YCB is subject
to the supervision of, and is regularly examined by, the Commissioner and the
FDIC. Such supervision and regulation include comprehensive reviews of all major
aspects of the 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. YCB is
required to file reports with the Commissioner and the FDIC and provide such
additional information as the Commissioner and the FDIC may require.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Board of
Governors. The Company is required to obtain the approval of the Board of
Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving
effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the provisions of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994.
The Company, and its subsidiaries, NVB and YCB, are deemed to be
"affiliates" within the meaning of that term as defined in the Federal Reserve
Act. This means, for example, that there are limitations (a) on loans between
affiliates, and (b) on investments by NVB or YCB 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.
15
The Board of Governors and the FDIC have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding companies and
banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to aid in making the definition of bank capital
uniform internationally. Under the guidelines, the Company and its banking
subsidiaries are required to maintain capital equal to at least 8.0% 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 and the FDIC, which
require maintenance of a certain level of capital. These regulations impose two
capital standards: a risk-based capital standard and a leverage capital
standard.
Assets, commitments to extend credit and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of such loans.
Under the Board of Governors' risk-based capital guidelines, assets
reported on an institution's balance sheet and certain off-balance sheet items
are assigned to risk categories, each of which has an assigned risk weight.
Capital ratios are calculated by dividing the institution's qualifying capital
by its period-end risk-weighted assets. The guidelines establish two categories
of qualifying capital: Tier 1 capital (defined to include common shareholders'
equity and noncumulative perpetual preferred stock) and Tier 2 capital which
includes, among other items, limited life (and in case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserve for credit losses. Tier 2 capital may also include up
to 45% of the pretax net unrealized gains on certain available-for-sale equity
securities having readily determinable fair values (i.e. the excess, if any, of
fair market value over the book value or historical cost of the investment
security). The federal regulatory agencies reserve the right to exclude all or a
portion of the unrealized gains upon a determination that the equity securities
are not prudently valued. Unrealized gains and losses on other types of assets,
such as bank premises and available-for-sale debt securities, are not included
in Tier 2 capital, but may be taken into account in the evaluation of overall
capital adequacy and net unrealized losses on available-for-sale equity
securities will continue to be deducted from Tier 1 capital as a cushion against
risk. Each institution is required to maintain a risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
Under the Board of Governors' leverage capital standard, an institution
is required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be used
in place of quarterly average total assets on a case-by-case basis. The Board of
Governors and the FDIC have adopted a minimum leverage ratio for bank holding
companies as a supplement to the risk-weighted capital guidelines. The leverage
ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to total assets)
for the highest rated bank holding companies or those that have implemented the
risk-based capital market risk measure. All other bank holding companies must
maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital
ratios required for bank holding companies that have significant financial
and/or operational weakness, a high risk profile, or are undergoing or
anticipating rapid growth.
At December 31, 2004, NVB, YCB and the Company were in compliance with
the risk-based capital and leverage ratios described above. See Item 8,
Financial Statements and Supplementary Data and Note 18 to the Financial
Statements incorporated by reference, therein, for a listing of the Company's
risk-based capital ratios at December 31, 2004 and 2003.
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
16
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
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.
17
The Federal Financial Institution Examination Counsel ("FFIEC") on
December 13, 1996, approved an updated Uniform Financial Institutions Rating
System ("UFIRS"). In addition to the five components traditionally included in
the so-called "CAMEL" rating system which has been used by bank examiners for a
number of years to classify and evaluate the soundness of financial institutions
(including capital adequacy, asset quality, management, earnings and liquidity),
UFIRS includes for all bank regulatory examinations conducted on or after
January 1, 1997, a new rating for a sixth category identified as sensitivity to
market risk. Ratings in this category are intended to reflect the degree to
which changes in interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and capital. The
revised rating system is identified as the "CAMELS" system.
The federal financial institution agencies have established bases for
analysis and standards for assessing a financial institution's capital adequacy
in conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending
to low and moderate income individuals and businesses across a four-point scale
from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form bank
holding companies. In addition, any bank rated in "substantial noncompliance"
with the CRA regulations may be subject to enforcement proceedings. NVB and YCB
currently have a rating of "satisfactory" for CRA compliance.
The Company's ability to pay cash dividends is subject to restrictions
set forth in the California General Corporation Law. Funds for payment of any
cash dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from each of the Company's subsidiary banks.
The payment of cash dividends and/or management fees by NVB and YCB is subject
to restrictions set forth in the California Financial Code, as well as
restrictions established by the FDIC. See Item 5 below for further information
regarding the payment of cash dividends by the Company and NVB.
The Patriot Act
- ---------------
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled, "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.
Section 313(a) of the Patriot Act prohibits any insured financial
institution such as NVB and YCB 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.
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
18
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 banking 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 addressed certain matters of corporate governance
and accountability. Among other matters, key provisions of the Act and rules
promulgated by the Securities and Exchange Commission pursuant to the Act
include the following:
o Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by
the CEO and CFO and making issuer interference with an audit a crime.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud
lawsuits.
o Disclosure of whether a company has adopted a code of ethics that
applies to the company's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, and disclosure of any amendments
or waivers to such code of ethics. The disclosure obligation became
effective for fiscal years ending on or after July 15, 2003.
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 became
effective for fiscal years ending on or after July 15, 2003.
o A prohibition on insider trading during pension plan black-out
periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards on professional conduct for attorneys requiring attorneys
having an attorney-client relationship with a company, among other
matters, to report "up the ladder" to the audit committee, another
board committee or the entire board of directors certain material
violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing deadline to
within 2 business days of the date a transaction triggers an
obligation to report.
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers".
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.
19
The Securities and Exchange Commission has 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 were required to 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.
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
20
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
- ---------------------------------------
The California Corporate Disclosure Act (the "CCD Act"), 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;
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, 2004, commercial and savings banks in competition with the
Company had 287 banking offices in the counties of Del Norte, Humboldt,
Mendocino, Placer, Shasta, Solano, Trinity and Yolo where the Company operates.
In those 287 banking offices (which includes the Company's 23) there were $14.3
billion in total deposits of which the Company had an overall share of 4.96%
Additionally, the Company competes with thrifts and, to a lesser extent, credit
unions, finance companies and other financial service providers for deposit and
loan customers.
Larger banks may have a competitive advantage over the Company because
of higher lending limits and major advertising and marketing campaigns. They
also perform services, such as trust services and international banking which
the Company is not authorized nor prepared to offer currently. The Company has
arranged with correspondent banks and with others to provide some of these
services for their customers. For borrowers requiring loans in excess of each
21
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, 2004, NVB's
and YCB's aggregate legal lending limits to a single borrower and such
borrower's related parties were $9,330,000 and $1,578,000 on an unsecured basis
and $15,550,000 and $2,630,000 on a fully secured basis, based on regulatory
capital of $62,201,000 and $10,521,000, 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 schedule, NVB's and YCB's current capital ratios and NVB's and
YCB's current levels of deposits, NVB and YCB 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.
The Financial Services Modernization Act of 1999 (the "FSMA")
eliminated most of the remaining depression-era "firewalls" between banks,
securities firms and insurance companies which was established by Banking Act of
1933, also known as the Glass-Steagall Act ("Glass-Steagall). Glass-Steagall
sought to insulate banks as depository institutions from the perceived risks of
securities dealing and underwriting, and related activities. The FSMA repealed
Section 20 of Glass-Steagall, which prohibited banks from affiliating with
22
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 removeed these restrictions and
substantially eliminated the prohibitions under the Bank Holding Company Act on
affiliations between banks and insurance companies. Bank holding companies,
which qualify as financial holding companies through an application process, can
now insure, guarantee, or indemnify against loss, harm, damage, illness,
disability, or death; issue annuities; and act as a principal, agent, or broker
regarding such insurance services.
In order for a commercial bank to affiliate with a securities firm or
an insurance company pursuant to the FSMA, its bank holding company must qualify
as a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Board of Governors a certification to such effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
"closely related to banking" which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of FSMA was to require that federal financial
institution and securities regulatory agencies prescribe regulations to
implement the policy that financial institutions must respect the privacy of
their customers and protect the security and confidentiality of customers'
non-public personal information. These regulations will require, in general,
that financial institutions (1) may not disclose non-public personal information
of customers to non-affiliated third parties without notice to their customers,
who must have opportunity to direct that such information not be disclosed; (2)
may not disclose customer account numbers except to consumer reporting agencies;
and (3) must give prior disclosure of their privacy policies before establishing
new customer relationships.
The Company, NVB, and YCB 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.
23
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.
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
24
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 7,311,726 were
outstanding at December 31, 2004. Pursuant to its stock option plans, at
December 31, 2004, the Company had outstanding options to purchase 1,057,748
shares of Company Common Stock. As of December 31, 2004, 986,581 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, 2004, real estate served as the principal source of
collateral with respect to approximately 75% of the Company's loan portfolio. A
worsening of current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and the value of the available-for-sale investment portfolio, as well as the
Company's financial condition and results of operations in general and the
market value for Company Common Stock. Acts of nature, including fires,
earthquakes and floods, which may cause uninsured damage and other loss of value
to real estate that secures these loans, may also negatively impact the
Company's financial condition.
The Company is subject to certain operations risks, including, but not
limited to, data processing system failures and errors and customer or employee
fraud. The Company maintains a system of internal controls to mitigate against
such occurrences and maintains insurance coverage for such risks, but should
such an event occur that is not prevented or detected by the Company's internal
controls, uninsured or in excess of applicable insurance limits, it could have a
significant adverse impact on the Company's business, financial condition or
results of operations.
The terrorist actions on September 11, 2001, and thereafter, plus
military actions taken by the United States in Afghanistan, Iraq and elsewhere,
have had significant adverse effects upon the United States economy. Whether
terrorist activities in the future and the actions taken by the United States
and its allies in combating terrorism on a worldwide basis will adversely impact
the Company, and the extent of such impact, is uncertain. However, such events
have had and may continue to have an adverse effect on the economy in the
company's market areas. Such continued economic deterioration could adversely
affect the Company's future results of operations by, among other matters,
reducing the demand for loans and other products and services offered by the
company, increasing nonperforming loans and the amounts reserved for loan
losses, and causing a decline in the Company's stock price.
Recent Accounting Pronouncements
- --------------------------------
Other-Than-Temporary Impairment of Securities
- ---------------------------------------------
In June 2004, the Financial Accounting Standards Board (FASB) ratified
Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of
Other-than-Temporary Impairment and Its Application to Certain Investments (EITF
03-1). EITF 03-1 includes additional guidance for evaluating and recording
impairment losses on debt and equity investments, as well as disclosure
requirements for investments that are deemed to be temporarily impaired. The
proposed guidance indicates that an investor must have the intent and ability to
hold an investment until a forecasted recovery of the fair value up to or beyond
the cost of the investment in order to determine that any impairment is
temporary. In September 2004, the FASB delayed the effective date of the
recognition and measurement guidance of EITF 03-1, pending further
deliberations. The disclosures for investments that are deemed temporarily
impaired are included in Note 3 to the consolidated financial statements. Once
the FASB has reached a final decision on the measurement and recognition
provisions, management of the Company will evaluate the impact of the adoption
of EITF 03-1.
25
Share-Based Payments
- --------------------
In December 2004 the FASB issued Statement Number 123 (revised 2004)
(FAS 123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to
recognize compensation expense in an amount equal to the fair value of
share-based payments such as stock options granted to employees. The Company is
required to apply FAS 123 (R) on a modified prospective method. Under this
method, the Company is required to record compensation expense (as previous
awards continue to vest) for the unvested portion of previously granted awards
that remain outstanding at the date of adoption. In addition, the Company may
elect to adopt FAS 123 (R) by restating previously issued financial statements,
basing the expense on that previously reported in their pro forma disclosures
required by FAS 123. FAS 123 (R) is effective for the first reporting period
beginning after June 15, 2005. Management has not completed its evaluation of
the effect that FAS 123 (R) will have, but believes that the effect will be
consistent with its previous pro forma disclosures.
Accounting for Certain Loans or Debt Securities Acquired in a Transfer
- ----------------------------------------------------------------------
In December 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer
(SOP). This SOP addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investor's initial
investment in loans or debt securities (loans) acquired in a transfer if those
differences are attributable, at least in part, to credit quality. It also
includes such loans acquired in purchase business combinations. This SOP does
not apply to loans originated by the entity. This SOP limits the yield that may
be accreted and requires that the excess of contractual cash flows over cash
flows expected to be collected not be recognized as an adjustment of yield, loss
accrual, or valuation allowance.
This SOP prohibits "carrying over" or creation of valuation allowances
in the initial accounting for loans acquired in a transfer that are within its
scope. The prohibition of the valuation allowance carryover applies to the
purchase of an individual loan, a pool of loans, a group of loans, and loans
acquired in a purchase business combination.
This SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004. In management's opinion, the adoption of this
pronouncement will not have a material impact on the Company's financial
position or results of operations.
26
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/ Branch Leased
Park Marina Branch Leased
BPI Data Processing/Administrative Owned
Ukiah Loan Production Office Leased
Santa Rosa Loan Production Office Leased
Eureka Mall Branch Leased
McKinleyville Branch Leased
Crescent City Branch Owned
Eureka Downtown Branch Owned
Ferndale Branch Owned
Garberville Branch Leased
Willits Branch Leased
Yolo Community Bank:
Woodland Administrative/ Branch Leased
Roseville Branch Leased
Fairfield Branch Leased
From time to time, the Company, through NVB and YCB, 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.
27
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.
ITEM 4. SUBMISSION