FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED December 31, 1995
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Commission file number 0-10652
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NORTH VALLEY BANCORP
----------------------------------------------------
(Exact name of small business issuer in its charter)
California 94-2751350
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
880 E. Cypress Avenue, Redding, CA. 96002
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(Address of principal executive offices) (Zip code)
Issuer's telephone number (916) 221-8400
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Securities registered under Section 12(g) of the Exchange Act:
No par value common stock
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
------ -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
Total revenue for year ended December 31, 1995, was $ 20,099,000
-------------
The aggregate market value of the voting stock held by non-affiliates based on
the average bid and asked prices of such stock, was $ 28,208,000 as of November
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30, 1995.
The number of shares outstanding of common stock as of March 1, 1996, was
1,842,558.
- ----------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for the 1996 Annual Meeting
of Shareholders are incorporated by reference in Part III, Items 9, 10, 11, and
12 of this Form 10-KSB.
<PAGE>
TABLE OF CONTENTS
Page
----
Part I
Item 1 - Description of Business................... 2
Item 2 - Description of Property................... 26
Item 3 - Legal Proceedings ........................ 27
Item 4 - Submission of Matters to a Vote of
Security Holders ....................... 27
Part II
Item 5 - Market for Common Equity
and Related Stockholder Matters ...... 28
Item 6 - Management's Discussion and Analysis or
Plan of Operation ................... 29
Item 7 - Financial Statements ..................... 35
Item 8 - Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure ................... 35
Part III
Item 9 - Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section
16(a) of the Exchange Act............... 36
Item 10 - Executive Compensation ................... 36
Item 11 - Security Ownership of Certain
Beneficial Owners and Management.. 36
Item 12 - Certain Relationships and
Related Transactions .................. 37
Item 13 - Exhibits and Reports on Form 8-K.......... 37
Financial Statements................................. 87
Signatures .......................................... 106
- I -
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
North Valley Bancorp (the "Company") is a bank holding company
registered with and subject to regulation and supervision by the Board of
Governors of the Federal Reserve System (the "Federal Reserve"). The Company was
incorporated in 1980 in the State of California, and wholly owns its principal
subsidiaries, North Valley Bank (the "Bank"), North Valley Trading Company (the
"Trading Company"), and Bank Processing, Inc. The sole subsidiary of the Bank,
which is inactive, is North Valley Basic Securities (the "Securities Company").
As used herein, the terms "North Valley Bancorp" or the "Company" include the
subsidiaries of the Company and the term "Bank" includes the subsidiary of the
Bank, unless the context requires otherwise.
At December 31, 1995, the Company had approximately 131 employees
(which includes 114 full-time equivalent employees); the Company had total
consolidated assets of $235,072,000; before consolidation the Bank had total
assets of $234,313,000 and total deposits of $211,499,000; assets of the Trading
Company were $3,500; assets of Bank Processing, Inc., were $455,000; and assets
of the Securities Company were $1,000.
The Bank was organized in September, 1972, under the laws of the
State of California, and commenced operations in February, 1973. The Bank is
principally supervised and regulated by the California Superintendent of Banks
and conducts a commercial and retail banking business, which includes accepting
demand, savings, money market rate deposit accounts, and time deposits, and
making commercial, real estate and consumer loans. It also offers installment
note collections, issues cashier's checks and money orders, sells travelers'
checks and provides safe deposit boxes and other customary banking services. As
a federally insured bank, the Bank is also subject to regulation by the Federal
Deposit Insurance Corporation ("FDIC") and deposits are insured by the FDIC up
to the legal limits thereupon. The Bank does not offer trust services nor
international banking services and does not plan to do so in the near future.
The Bank operates nine banking offices in Shasta and Trinity
Counties, for which it has received all of the requisite regulatory approvals.
The headquarters office in Redding was opened in February, 1973. In October,
1973, the Bank 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, the Bank acquired the
assets of two branches of the Bank of California: one located in Central Valley
and the other in Redding, California. On June 1, 1985, the Bank opened its
Westwood Village Office in south Redding. On November 27, 1995, the Bank opened
a new branch located in Palo Cedro, California. During the year ended December
31, 1995, the Bank purchased, in the ordinary course of business, the Hayfork
branch for $134,000 which the Bank previously leased from a former Board member.
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 was 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, was inactive. North
Valley Consulting Services was established as a consulting service for
depository institutions. In
2
<PAGE>
December, 1988, North Valley Consulting Services changed its name to Bank
Processing, Inc. Bank Processing, Inc., 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").
Bank Processing, Inc., is utilizing "excess capacity" on their
system to process other depository institutions' data, and is currently
processing daily applications for the Bank and two other banks where entries are
captured and files updated by the "Liberty Banking Package," which include:
Demand Deposits (DDA), Savings Deposits (SAV), Central Information Files (CIF),
Mortgage Loans (MLA), Installment Loans (ILA), Commercial Loans (CLA),
Individual Retirement Accounts (IRA), and Financial Information Statement; i.e.,
General Ledger (FIS). The data processing activities do not involve providing
hardware or software.
At December 31, 1995, Bank Processing, Inc., had cash assets of
approximately $178,000.
On August 18, 1995, the Bank terminated its Nondiscretionary Full
Service Brokerage Agreement (the "Agreement") with PrimeVest Financial Services,
Inc. ("PrimeVest"), and entered into an Agreement with Linsco Private Ledger
("LPL"). The Agreement with LPL, dated August 18, 1995, provides for LPL to
furnish brokerage services and standardized investment advice to Bank customers
at an LPL office located at 1327 South Street, in the upstairs portion of North
Valley Bank. All investments recommended to Bank customers appear on an approved
list or are specially approved by LPL's central office. The Bank shares in the
fees and commissions paid to LPL on a pre-determined schedule.
The Company does not hold deposits of any one customer or group of
customers where the loss of such deposits would have an effect on the Company.
The Company's business is not seasonal.
Selected Statistical Data
The following tables present certain consolidated statistical
information concerning the business of the Company. This information should be
read in conjunction with the Consolidated Financial Statements and the notes
thereto and Management's Discussion and Analysis or Plan of Operation and other
information contained elsewhere herein. Averages are based on daily averages.
Tax-equivalent adjustments (using a 35% tax rate for 1995, 1994 and 1993) have
been made in calculating yields on tax-exempt securities.
3
<PAGE>
<TABLE>
AVERAGE BALANCES AND TAX-EQUIVALENT NET INTEREST MARGIN
The following table sets forth the Company's consolidated condensed
average daily balances and the corresponding average yields received and average
rates paid of each major category of assets, liabilities, and stockholders'
equity for each of the past three years.
<CAPTION>
1995 1994 1993
AVERAGE AVERAGE AVERAGE
AVERAGE INCOME/ RATES AVERAGE INCOME/ RATES AVERAGE INCOME/ RATES
(Dollars in thousands) BALANCE EXPENSE(1) EARNED/ BALANCE EXPENSE(1) EARNED/ BALANCE EXPENSE(1) EARNED/
PAID PAID PAID
================================ ============================= ===========================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold 17,742 1,040 5.86% 16,163 652 4.03% 24,644 728 2.95%
Available for sale securities:
U.S. Treasury securities 9,070 374 4.12% 22,228 923 4.15% 25,736 1,133 4.40%
U.S. Agencies 3,200 202 6.31% 3,060 150 4.90% 4,450 272 6.11%
Obligations of states and
political subdivisions 55 5 9.09%
Other investments 1,058 45 4.25% 396 9 2.27% 159 2 1.26%
------- ------ ---- ------- ------ ---- ------ ----- ----
Total available for sale
securities 13,383 626 4.68% 25,684 1,082 4.21% 30,345 1,407 4.64%
Held to maturity securities:
U.S. Agencies 5,594 353 6.31% 3,104 207 6.67%
Obligations of states and
political subdivisions 36,470 3,330 9.13% 31,902 2,897 9.08% 25,816 2,353 9.11%
------- ------ ---- ------- ------ ---- ------ ----- ----
Total held to maturity
securities 42,064 3,683 8.76% 35,006 3,104 8.87% 25,816 2,353 9.11%
Trading account securities 211 13 6.16% 39 1 2.56% 239 15 6.28%
Total loans 137,613 13,230 9.61% 114,577 10,347 9.03% 92,399 9,171 9.93%
------- ------ ---- ------- ------ ---- ------ ----- ----
Total interest earning assets/
interest income 211,013 18,592 8.81% 191,469 15,186 7.93% 173,443 13,674 7.88%
==== ==== ====
Nonearning assets 18,834 18,234 17,545
Less: Allowance for loan losses (1,259) (1,132) (1,115)
TOTAL ASSETS 228,588 208,571 189,873
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Deposits
Transaction 36,520 867 2.37% 25,903 808 3.12% 22,758 799 3.51%
Savings & Money Market 44,123 1,248 2.83% 48,124 1,368 2.84% 45,042 1,403 3.11%
Time 100,345 5,444 5.43% 81,844 3,284 4.01% 72,437 3,053 4.21%
------- ------ ---- ------- ------ ---- ------ ----- ----
Total interest bearing
deposits/interest expense 180,988 7,559 4.18% 155,871 5,460 3.50% 140,237 5,255 3.75%
----- ===== ----- ==== ----- ====
Non interest-bearing deposits 24,826 33,535 32,700
Other noninterest-bearing
liabilities 2,800 2,286 2,086
------- -------- -------
TOTAL LIABILITIES 208,614 191,692 175,023
Shareholders' equity 19,974 16,879 14,850
------- -------- -------
Total Liabilities and
and Stockholders' Equity 228,588 208,571 189,873
======= ======== =======
Net Interest Income and Margin(3) 11,033 5.23% 9,726 5.08% 8,419 4.85%
====== ===== ===== ==== ===== ====
<FN>
(1) Tax-equivalent basis
(2) Loans on nonaccrual status have been included in the computation of average
balances.
(3) Net interest margin is determined by dividing net interest income by total
average interest earning assets.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
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.
<CAPTION>
1995 versus 1994 1994 versus 1993 1993 versus 1992
---------------------------- ------------------------------ -------------------------------
Total Total Total
Average Average Increase Average Average Increase Average Average Increase
(Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest on Federal funds sold 93 295 388 (342) 266 (76) 148 (74) 74
Interest on available for sale
securities:
U.S. Treasury securities (543) (6) (549) (146) (64) (210) -- -- --
U.S. Agencies 9 43 52 (68) (54) (122) -- -- --
Obligations of states and
political subdivisions 5 0 5 -- -- -- -- -- --
Other investments 28 8 36 5 2 7 -- -- --
------ ----- ----- ----- ---- ----- ----- ----- ----
Total available for sale
securities (501) 45 (456) (209) (116) (325) 402 (298) 104
Interest on held to maturity
securities:
U.S. Agencies 157 (11) 146 207 0 207 -- -- --
Obligations of states and
political subdivisions 417 16 433 552 (8) 544 -- -- --
------ ----- ----- ----- ---- ----- ----- ----- ----
Total held to maturity
securities 574 5 579 759 (8) 751 539 (52) 487
Interest on trading account
securities 11 1 12 (5) (9) (14)
Interest on total loans 2,215 668 2,883 2,003 (827) 1,176 212 (783) (571)
------ ----- ----- ----- ---- ----- ----- ----- ----
Total interest income 2,391 1,015 3,406 2,206 (694) 1,512 1,301 (1,207) 94
------ ----- ----- ----- ---- ----- ----- ------ ----
INTEREST EXPENSE
Interest bearing liabilities
Deposits
Transaction 252 (193) 59 98 (89) 9 60 55 115
Savings & Money Market (113) (7) (120) 88 (123) (35) 270 (188) 82
Time 1,004 1,156 2,160 377 (146) 231 221 (648) (427)
------ ----- ----- ----- ---- ----- ----- ----- ----
Total interest expense 1,143 956 2,099 563 (358) 205 551 (781) (230)
------ ----- ----- ----- ---- ----- ----- ----- ----
Change in net interest income 1,249 58 1,307 1,643 (336) 1,307 750 (426) 324
====== ===== ===== ===== ==== ===== ===== ===== ====
<FN>
(1) The change in interest due to both rate and volume has been allocated to
volume.
</FN>
</TABLE>
5
<PAGE>
Investment Securities:
The Company accounts for investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The Company's policy with
regard to investments is as follows:
TRADING SECURITIES are carried at fair value. Gains and losses on
sales and changes in market value are included in other operating
income.
AVAILABLE FOR SALE SECURITIES are carried at fair value and
represent securities not classified as trading securities nor as
held-to-maturity securities. Unrealized gains and losses resulting
from changes in fair value are recorded, net of tax, as a separate
component of stockholders' equity. Gains or losses on disposition
are recorded in other operating income based on the net proceeds
received and the carrying amount of the securities sold, using the
specific identification method.
HELD TO MATURITY SECURITIES are carried at cost adjusted for
amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income. The Company's policy
of carrying such investment securities at amortized cost is based
upon its ability and management's intent to hold such securities to
maturity.
At December 31, the amortized cost of securities and their
approximate fair value were as follows (in thousands):
AVAILABLE FOR SALE SECURITIES: 1995
----------------------------------------------
Carrying
Gross Gross Amount
Amortized Unrealized Unrealized (Approximate
Cost Gains Losses Fair Value)
U.S. Treasury securities $ 2,000 $ 2 $ 1,998
Securities of U.S. government
agencies and corporations 5,000 $ 6 39 4,967
Other securities 5,512 227 20 5,719
------- ------- ------- -------
$12,512 $ 233 $ 61 $12,684
======= ======= ======= =======
1994
----------------------------------------------
U.S. Treasury securities $12,015 $ 276 $11,739
Securities of U.S. government
agencies and corporations 2,000 153 1,847
Other securities 312 $ 57 369
------- ------- ------- -------
$14,327 $ 57 $ 429 $13,955
======= ======= ======= =======
6
<PAGE>
HELD TO MATURITY SECURITIES:
1995
-----------------------------------------------------
Carrying Gross Gross Approximate
Amount Unrealized Unrealized Fair
(Amortized Cost) Gain Losses Value
U. S. Agencies $ 1,598 $ 2 $ 1,600
Obligations of states and
political subdivisions 33,619 1,846 $ 8 35,457
------- ------- ------- -------
Total $35,217 $ 1,848 $ 8 $37,057
======= ======= ======= =======
1994
-----------------------------------------------------
U. S. Agencies $ 7,000 $ 38 $ 6,962
Obligations of states and
political subdivisions 34,374 $ 506 819 34,061
------- ------- ------- -------
$41,374 $ 506 $ 857 $41,023
======= ======= ======= =======
Gross realized gains on sales of available-for-sale securities were as follows:
1995 1994
Gross realized gains:
U.S. government and agency securities $ 31 $ 11
==== ====
There were no gross realized losses on sale of available-for-sale
securities in 1995 or 1994.
The Bank's policy requires that management determine the appropriate
classification of securities at the time of purchase. If management has the
intent and the Company has the ability at the time of purchase to hold
securities until maturity, they are classified as investments held to maturity,
and carried at amortized historical cost. Securities to be held for indefinite
periods of time and not intended to be held to maturity are classified as
available for sale and carried at market value. Securities held for indefinite
periods of time include securities that management intends to use as part of its
asset/liability management strategy and that may be sold in response to changes
in interest rates, resultant prepayment risk, and other factors related to
interest rate and resultant prepayment risk changes.
In November 1995, the FASB issued additional implementation guidance
regarding the previously issued SFAS No. 115. In accordance with this guidance
and prior to December 31, 1995, companies were allowed a one-time reassessment
of their classification of securities and were required to account for any
resulting transfers at fair value. Transfers from the held-to-maturity category
that result from this one-time reassessment will not call into question the
intent to hold other securities to maturity in the future. Accordingly, the
Company transferred approximately $5,012,000 of securities from held to maturity
to available for sale to allow the Company greater flexibility in managing its
interest rate risk and liquidity.
7
<PAGE>
Available-for-sale securities were adjusted to fair value and stockholders'
equity was increased by $52,276, net of income taxes of $22,191, respectively.
The following table sets forth the maturities of investment
securities at December 31, 1995, and the weighted average yields of such
securities. Tax-equivalent adjustments have been made in calculating yields on
obligations of state and political subdivisions.
<TABLE>
Maturity Distribution and Yields of Investment Securities:
<CAPTION>
Held to Maturity Available for Sale
------------------------ ------------------------
Weighted Weighted
Average Amortized Average Amortized
Yield(1) Cost Yield(1) Cost
1995 1995 1995 1995
---- ---- ---- -----
December 31 (Dollars in thousands)
- -----------
<S> <C> <C> <C> <C>
U.S. Treasury obligations
Due within one year -- -- 4.50% $ 2,000
Due after one year but within five years -- -- -- --
Due after five years but within ten years -- -- -- --
Due after ten years -- -- -- --
---- ------- ---- -------
Total -- -- 4.50% 2,000
U.S. government agency securities
Due within one year -- -- 4.20% 1,000
Due after one year but within five years 6.58% $ 1,598 5.72% 2,000
Due after five years but within ten years -- -- 7.02% 2,000
Due after ten years -- -- -- --
---- ------- ----- -------
Total 6.58% 1,598 5.94% 5,000
State and municipal bonds
Due within one year 7.61% 1,603 7.60% 1,145
Due after one year but within five years 9.71% 7,075 6.85% 426
Due after five years but within ten years 9.38% 14,869 8.16% 1,032
Due after ten years 9.06% 10,072 8.67% 2,410
---- ------ ---- ------
Total 9.27% 33,619 8.16% 5,013
Other securities
Due within one year -- -- 2.81% 499
Due after one year but within five years -- -- -- --
Due after five years but within ten years -- -- -- --
Due after ten years -- -- -- --
---- ------- ---- -------
Total -- -- 2.81% 499
---- ------- ---- -------
9.15% $35,217 6.47% $12,512
==== ======= ==== =======
<FN>
- -------------
(1) Tax-equivalent basis at fiscal year end.
</FN>
</TABLE>
8
<PAGE>
Loan Portfolio
The Company originates loans for business, consumer and real estate
activities. Such loans are concentrated in Shasta and Trinity Counties and
neighboring communities. Substantially all loans are collateralized. Generally
real estate loans are secured by real property. Commercial and other loans are
secured by bank deposits or business or personal assets. The Company's policy
for requiring collateral is through analysis of the borrower, the borrower's
industry and the economic environment in which the loan would be granted. The
loans are expected to be repaid from cash flows or proceeds from the sale of
selected assets of the borrower.
<TABLE>
Major classifications of loans at December 31 are summarized as
follows (in thousands):
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 53,044 $ 46,347 $ 38,897 $ 37,599 $ 34,914
Real estate - construction 2,838 2,333 1,754 1,070 1,928
Real estate - mortgage 41,967 30,366 16,467 14,435 15,931
Installment 39,034 36,185 31,836 30,201 27,443
Other 12,888 11,899 11,875 10,923 8,307
-------- -------- -------- -------- --------
Total loans receivable 149,771 127,130 100,829 94,228 88,523
Less:
Allowance for loan losses 1,325 1,144 1,066 1,105 897
Deferred loan fees 638 523 306 -- --
-------- -------- -------- -------- --------
Net loans receivable $147,808 $125,463 $ 99,457 $ 93,123 $ 87,626
======== ======== ======== ======== ========
</TABLE>
At December 31, 1995 and 1994, the Bank serviced real estate loans
and loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $93,563,000 and $100,090,000,
respectively.
The Bank was contingently liable under letters of credit issued on
behalf of its customers in the amount of $439,000 and $331,000 at December 31,
1995 and 1994, respectively. At December 31, 1995 commercial and consumer lines
of credit, and real estate loans of approximately $18,918,000 and $1,524,000,
respectively, were undisbursed. These instruments involve, to varying degrees,
elements of credit and market risk in excess of the amounts recognized in the
balance sheet. The contractual or notional amounts of these transactions express
the extent of the Bank'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
The following table shows the maturity of loans (excluding
residential mortgages of 1-4 family residences, installment loans and lease
financing) outstanding as of December 31, 1995. Also provided are the amounts
due after one year classified according to the sensitivity to changes in
interest rates:
9
<PAGE>
<TABLE>
Maturing
Within After One After
One Year Through Five Years Five Years Total
-------- ------------------ ---------- -----
(Millions of dollars)
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 8,495 $17,549 $27,000 $53,044
Real Estate - construction 2,838 2,838
------- ------- ------- -------
$11,333 $17,549 $27,000 $55,882
======= ======= ======= =======
Loans maturing after one year with:
Fixed interest rates 9,181 6,897
Variable interest rates 8,368 20,103
------- ------
$17,549 $27,000
======= ========
</TABLE>
Impaired, Nonaccrual, Past Due, Restructured Loans, and Other Real Estate Owned
At December 31, 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 was approximately
$1,715,000. Of that balance approximately $1,078,000 has a related valuation
allowance of $254,000. The remaining $637,000 did not require a valuation
allowance. For the year ended December 31, 1995, the average recorded investment
in loans for which impairment has been recognized was approximately $1,473,000.
During the portion of the year that the loans were impaired the Company
recognized approximately $205,000 of interest income.
Nonperforming loans at December 31 are summarized as follows (in
thousands):
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Nonaccrual loans $282 $421 $334 $351 $534
Loans 90 days past due but
still accruing interest 15 22 84 82 --
Restructured loans -- -- 27 31
Other real estate owned 87 -- -- 4 59
---- ---- ---- ---- ----
Total $384 $443 $418 $464 $624
==== ==== ==== ==== ====
If interest on nonaccrual loans had been accrued, such income would
have approximated $37,000 in 1995, $33,000 in 1994 and $39,000 in 1993. Interest
income of $8,000 in 1995, $19,000 in 1994, and $23,000 in 1993 was recorded when
it was received on the nonaccrual loans.
At December 31, 1995, there were no commitments to lend additional
funds to borrowers whose loans were classified as nonaccrual.
The following sentence is a forward-looking statement. There were
approximately $160,000 in loans that were not disclosed in the above table as of
December 31, 1995, where known information about possible credit problems of
borrowers causes management to have serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms and which may become
non-performing. Changes in general or local economic conditions or specific
industry segments, rising interest rates, declines
10
<PAGE>
in real estate values and acts of nature could have an adverse effect on the
ability of borrowers to repay outstanding loans and the value of real estate and
other collateral securing such loans.
<TABLE>
Summary of Loan Loss Experience:
The following table summarizes the Company's loan loss experience
for the years ended December 31:
<CAPTION>
December 31 (dollars in thousands) 1995 1994 1993 1992 1991
- ---------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average amount of gross loans outstanding $137,613 $114,577 $ 92,399 $ 90,262 $ 86,019
Balance of allowance for loan losses
at beginning of period 1,144 1,066 1,105 897 865
Loans charged off:
Commercial, financial and agricultural 139 39 61 67 288
Real Estate - construction 0 0 0 0 0
Real Estate - mortgage 27 0 0 6 0
Installment 106 125 107 92 97
Other 9 21 21 16 6
-------- -------- -------- -------- --------
Total loans charged off 281 185 189 181 391
Recoveries of loans previously
charged off:
Commercial, financial and agricultural 52 10 21 12 10
Real Estate - construction 0 0 2 1 17
Real Estate - mortgage 9 -0- 0 5 2
Installment 23 12 16 8 12
Other 3 1 1 3 2
-------- -------- -------- -------- --------
Total recoveries of loans
previously charged off 87 23 40 29 43
-------- -------- -------- -------- --------
Net loans charged off 194 162 149 152 348
Provisions for loan losses 375 240 110 360 380
-------- -------- -------- -------- --------
Balance of allowance for loan losses
at end of period $ 1,325 $ 1,144 $ 1,066 $ 1,105 $ 897
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding .14% .14% .16% .17% .40%
Allowance for loan losses to
total loans .88% .90% 1.06% 1.17% 1.01%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank maintains an allowance for possible loan losses
("Allowance") to provide for possible loan losses in the loan portfolio.
Additions to the Allowance are made by charges to operating expense in the form
of a provision for possible loan losses. Loans are charged against the Allowance
when management believes that the collectibility of the principal is unlikely,
while any recoveries are credited to the Allowance.
The Company evaluates the adequacy of its Allowance by specific
categories of loans rather than on an overall basis. In determining the adequacy
of the Allowance, management considers such factors as the Bank's lending
policies, historical loan loss experience, non-performing loans and problem
credits, evaluations made by bank regulatory authorities, assessment of economic
conditions, and other appropriate data in its attempt to identify the risks in
the loan portfolio. While these factors are essentially judgmental, the
management of the Company believes that its Allowance at December 31, 1995, was
adequate against foreseeable losses in its loan portfolio at that time. The risk
of nonpayment of loans is inherent to commercial banking and while management
has procedures in place to indentify loans with more than a normal risk of
default, it is not always possible to identify all such potential problem
credits. To some extent, the degree of risk perceived is taken into account in
establishing the structure of, and interest rates
11
<PAGE>
and security for, specific loans and various types of loans. The Bank also
attempts to minimize its credit risk exposure by use of thorough loan
application, approval and review procedures.
<TABLE>
The following table shows the allocation of the Company's allowance
for loan losses and the percent of loans in each category to total loans at the
dates indicated (dollars in thousands).
<CAPTION>
December 31 1995 1994 1993 1992 1991
--------------- -------------- ---------------- -------------- --------------
Allowance % Allowance % Allowance % Allowance % Allowance %
for of for of for of for of for of
Losses Loans Losses Loans Losses Loans Losses Loan Losses Loans
------ ----- ------ ----- ------ ----- ------ ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Categories:
Commercial, financial and agricultural $875 66% $583 51% $593 39% $387 40% $396 39%
Real estate mortgage and construction 106 8% 114 10% 41 18% 30 16% 35 20%
Installment and other 344 26% 447 39% 432 43% 277 44% 270 41%
Unallocated -0- -- -0- -- -0- -- 411 -- 196 --
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total $1,325 100% $1,144 100% $1,066 100% $1,105 100% $897 100%
====== === ====== === ====== === ====== === ==== ===
</TABLE>
The Allowance totaled $1,325,000, or .88% of total loans
outstanding at December 31, 1995. Based on management's evaluation of the
current loan portfolio and economic trends during 1995, the Bank made a
provision to its Allowance of $375,000 and was due primarily to the increase in
loan volume. Management's continuing evaluation of the loan portfolio and
assessment of current economic conditions will dictate future funding levels.
Certificates of Deposit
Maturities of time certificates of deposit of $100,000 or more
outstanding at December 31, 1995 are summarized as follows (dollars in
thousands):
$100,000+ Time
Certificates of Deposit
- ------------------------------------------------------------
Remaining maturities:
Three months or less $ 8,849
Over three through six months 7,655
Over six through twelve months 519
Over twelve months 321
--------
TOTAL $17,344
========
As of December 31, 1995, the Company did not have any brokered
deposits. In general, it is the Company's policy not to accept brokered
deposits.
12
<PAGE>
Return on Equity and Assets:
The following table sets forth certain financial ratios for the
Company:
December
----------------------------
1995 1994 1993
---- ---- ----
Return on average equity (net income
divided by average equity) 20.44% 19.03% 20.28%
Return on average assets (net income
divided by average total assets) 1.79% 1.54% 1.59%
Equity to assets ratio (average equity
divided by average total assets) 8.74% 8.09% 7.82%
Dividend payout ratio (dividends
divided by net income) 23.27% 26.53% 26.83%
Short Term Borrowings
At December 31, 1995, 1994 and 1993, the Bank did not have any
short term borrowings outstanding.
SUPERVISION AND REGULATION
THE EFFECT OF GOVERNMENT POLICY ON BANKING
The earnings and growth of the Bank are affected not only by local
market area factors and general economic conditions, but also by government
monetary and fiscal policies. For example, the Board of Governors of the Federal
Reserve System ("FRB") influences the supply of money through its open market
operations in U.S. Government securities and adjustments to the discount rates
applicable to borrowings by depository institutions and others. Such actions
influence the growth of loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and impact of future
changes in such policies on the business and earnings of the Bank cannot be
predicted.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Company is particularly
susceptible to being affected by the enactment of federal and state legislation
which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities or enhancing the competitive position
of other financial institutions. Any change in applicable laws or regulations
may have a material adverse effect on the business and prospects of the Company.
In response to various business failures in the savings and loan industry and,
more recently, in the banking industry, in December 1991, Congress enacted, and
the President signed into law, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FDICIA substantially revised the bank
regulatory framework and deposit insurance funding provisions of the Federal
Deposit Insurance Act and made revisions to several other federal banking
statutes.
13
<PAGE>
Implementation of the various provisions of FDICIA is subject to
the adoption of regulations by the various regulatory agencies and to certain
phase-in periods. The effect of FDICIA on the Company and the Bank cannot be
determined until after all the implementing regulations are adopted by the
agencies.
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
The Company is a bank holding company subject to the Bank Holding
Company Act of 1956, as amended ("BHCA"). The Company reports to, registers
with, and may be examined by, the FRB. The FRB also has the authority to examine
the Company's subsidiaries. The costs of any examination by the FRB are payable
by the Company.
The FRB has significant supervisory and regulatory authority over
the Company and its affiliates. The FRB requires the Company to maintain certain
levels of capital. See "Capital Standards." The FRB also has the authority to
take enforcement action against any bank holding company that commits any unsafe
or unsound practice, or violates certain laws, regulations or conditions imposed
in writing by the FRB. See "Prompt Corrective Action and Other Enforcement
Mechanisms."
Under the BHCA, a company generally must obtain the prior approval
of the FRB before it exer cises a controlling influence over a bank, or acquires
directly or indirectly, more than 5% of the voting shares or substantially all
of the assets of any bank or bank holding company. Thus, the Company is required
to obtain the prior approval of the FRB before it acquires, merges or
consolidates with any bank or bank holding company; any company seeking to
acquire, merge or consolidate with the Company also would be required to obtain
the approval of the FRB.
The Company is generally prohibited under the BHCA from acquiring
ownership or control of more than 5% of the voting shares of any company that is
not a bank or bank holding company and from engaging directly or indirectly in
activities other than banking, managing banks, or providing services to
affiliates of the holding company. A bank holding company, with the approval of
the FRB, may engage, or acquire the voting shares of companies engaged, in
activities that the FRB has determined to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. A bank holding
company must demonstrate that the benefits to the public of the proposed
activity will outweigh the possible adverse effects associated with such
activity.
The FRB generally prohibits a bank holding company from declaring
or paying a cash dividend which would impose undue pressure on the capital of
subsidiary banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's financial position. The
FRB's policy is that a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality and overall financial
condition.
Transactions between the Company and the Bank are subject to a
number of other restrictions. FRB policies forbid the payment by bank
subsidiaries of management fees which are unreasonable in amount or exceed the
fair market value of the services rendered (or, if no market exists, actual
costs plus a reasonable profit). Additionally, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit, sale or lease of property, or
furnishing of services. Subject to certain limitations, depository institution
subsidiaries of bank holding companies may extend credit to, invest in the
securities of, purchase assets from, or issue a guarantee, acceptance, or letter
of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with
14
<PAGE>
affiliates may not exceed 10% of the capital stock and surplus of the
institution, and the aggregate of such transactions with all affiliates may not
exceed 20% of the capital stock and surplus of such institution. The Company may
only borrow from depository institution subsidiaries if the loan is secured by
marketable obligations with a value of a designated amount in excess of the
loan. Further, the Company may not sell a low-quality asset to a depository
institution subsidiary.
Generally, a bank holding company and its subsidiaries are
prohibited from engaging in tie-in arrangements in connection with the extension
of credit, sale or lease of property or furnishing of services. The FRB,
however, has adopted a rule, effective September 2, 1994, amending the
anti-tying provisions to permit a bank or bank holding company to offer a lower
price on a loan, deposit or trust service (traditional bank product), or on
securities brokerage services, on the condition that the customer obtain a
traditional bank product from an affiliate. Additionally, as of January 23,
1995, a bank holding company, or a nonbank subsidiary, may offer lower prices on
any of its products or services on the condition that the customer obtain
another product or service from such company or any of its nonbank affiliates,
provided that all products offered in the package arrangement are separately
available for purchase.
The Company is a bank holding company within the meaning of Section
3700 of the California Financial Code. As such the Company and the Bank are
subject to examination by, and may be required to file reports with, the
California Superintendent of Banks (the "Superintendent"). Regulations have not
yet been proposed or adopted, and no other steps have been taken, to implement
the Superintendent's power under this statute.
BANK REGULATION AND SUPERVISION
The Bank is subject to regulation, supervision and regular
examination by the California Superintendent of Banks (the "Superintendent") and
the Federal Deposit Insurance Corporation (the "FDIC"). The regulations of these
agencies affect most aspects of the Bank's business and prescribe permissible
types of loans and investments, the amount of required reserves, requirements
for branch offices, the permissible scope of the Bank's activities and various
other requirements. While the Bank is not a member of the FRB, it is also
subject to certain regulations of the FRB dealing primarily with check clearing
activities, establishment of banking reserves, Truth-in-Lending (Regulation Z),
Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B).
The activities of the Bank are also regulated by state law. Under
California law, the Bank is subject to various restrictions on, and requirements
regarding, its operations and administration including the maintenance of branch
offices and automated teller machines, capital and reserve requirements,
deposits and borrowings, stockholder rights and duties, and investment and
lending activities. Whenever it appears that the contributed capital of a
California bank is impaired, the Superintendent shall order the bank to correct
such impairment. If a bank is unable to correct the impairment, such bank is
required to levy and collect an assessment upon its common shares. If such
assessment becomes delinquent, such common shares are to be sold by the bank.
California law permits a state chartered bank to invest in the
stock and securities of other corporations, subject to a state chartered bank
receiving either general authorization or, depending on the amount of the
proposed investment, specific authorization from the Superintendent. FDICIA,
however, imposes limitations on the activities and equity investments of state
chartered, federally insured banks. The limitations on equity investments were
effective December 19, 1991, and the limitations on activities
15
<PAGE>
became effective December 19, 1992. The FDIC rules on investments prohibit a
state bank from acquiring an equity investment of a type, or in an amount, not
permissible for a national bank. Non-permissible investments must be divested by
state banks no later than December 19, 1996. FDICIA prohibits a state bank from
engaging as a principal in any activity that is not permissible for a national
bank, unless the bank is adequately capitalized and the FDIC approves the
activity after determining that such activity does not pose a significant risk
to the deposit insurance fund. The FDIC rules on activities generally permit
subsidiaries of banks, without prior specific FDIC authorization, to engage in
those that have been approved by the FRB for bank holding companies because such
activities are so closely related to banking to be a proper incident thereto.
Other activities generally require specific FDIC prior approval, and the FDIC
may impose additional restrictions on such activities on a case-by-case basis in
approving applications to engage in otherwise impermissible activities.
On November 29, 1994, the Office of the Comptroller of the Currency
("OCC") published a notice of proposed rulemaking to revise and streamline its
procedures with respect to corporate activities of national banks. The OCC
stated that such revised standards would allow the OCC to approve, on a
case-by-case basis, the entry of bank operating subsidiaries into a business
incidental to banking, including activities in which the parent bank is not
permitted to engage. Such a standard, if adopted, could allow a national bank to
conduct an activity approved for a bank holding company through a bank operating
subsidiary.
CAPITAL STANDARDS
The FDIC and other federal banking agencies have risk-based capital
adequacy guidelines intended to provide a measure of capital adequacy that
reflects the degree of risk associated with a banking organization's operations
for both transactions reported on the balance sheet as assets and transactions,
such as letters of credit and recourse arrangements, which are recorded as off
balance sheet items. Under these guidelines, nominal dollar amounts of assets
and credit equivalent amounts of off balance sheet items are multiplied by one
of several risk adjustment percentages, which range from 0% for assets with low
credit risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as business loans.
In determining the capital level the Bank is required to maintain,
the FDIC does not, in all respects, follow generally accepted accounting
principles ("GAAP") and has special rules which have the effect of reducing the
amount of capital it will recognize for purposes of determining the capital
adequacy of the Bank. These rules are called Regulatory Accounting Principles
("RAP"). In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to classified
assets. Future changes in FDIC regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Company to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk-adjusted assets and off
balance sheet items. The regulators measure risk-adjusted assets and off balance
sheet items against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists
of common stock, retained earnings, noncumulative perpetual preferred stock and
minority interests in certain subsidiaries, less most other intangible assets.
As of January 27, 1995, net unrealized holding losses on available-for-sale
equity
16
<PAGE>
securities with readily determinable fair value must be deducted in determining
Tier 1 capital. Additionally as of April 1, 1995, for Tier 1 capital purposes,
deferred tax assets that can only be realized if an institution earns sufficient
taxable income in the future will be limited to the amount that the institution
is expected to realize within one year, or ten percent of Tier 1 capital,
whichever is less. Tier 2 capital may consist of a limited amount of the
allowance for possible loan and lease losses, cumulative preferred stock, term
preferred stock, term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital are
subject to certain other requirements and limitations of the federal banking
agencies. Since December 31, 1992, the federal banking agencies have required a
minimum ratio of qualifying total capital to risk-adjusted assets and off
balance sheet items of 8%, and a minimum ratio of Tier 1 capital to
risk-adjusted assets and off balance sheet items of 4%.
In addition to the risked-based guidelines, federal banking
regulators require banking organizations to maintain a minimum amount of Tier 1
capital to total average assets, referred to as the leverage ratio. For a
banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total average assets must be 3%. It is improbable, however, that an
institution with a 3% leverage ratio would receive the highest rating by the
regulators since a strong capital position is a significant part of the
regulators' rating. For all banking organizations not rated in the highest
category, the minimum leverage ratio must be at least 100 to 200 basis points
above the 3% minimum. Thus, the effective minimum leverage ratio, for all
practical purposes, must be at least 4% or 5%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly above the minimum
guidelines and ratios.
<TABLE>
The following tables present the capital ratios for the Company and
the Bank, compared to the standards for well-capitalized depository
institutions, as of December 31, 1995 (amounts in thousands except percentage
amounts).
<CAPTION>
The Company
------------------------------------------------------------------------------
Actual Well Minimum
------------------------------ Capitalized Capital
Capital Ratio Ratio Requirement
------- ----- ----- ------------
<S> <C> <C> <C> <C>
Leverage ..................................... $20,852 8.87% 5.0% 4.0%
Tier 1 Risk-Based ............................ 20,852 12.76 6.0 4.0
Total Risk-Based ............................. 22,177 13.57 10.0 8.0
The Bank
------------------------------------------------------------------------------
Actual Well Minimum
------------------------------ Capitalized Capital
Capital Ratio Ratio Requirement
------- ----- ----- ------------
Leverage ..................................... $19,563 8.36% 5.0% 4.0%
Tier 1 Risk-Based ............................ 19,563 12.05 6.0 4.0
Total Risk-Based ............................. 20,888 12.86 10.0 8.0
</TABLE>
In addition, FDICIA requires the regulators to improve capital
standards to take account of risks other than credit risk. In late 1994, the
federal banking agencies published final regulations relating to capital
standards and the risks arising from the concentration of credit and
nontraditional activities. The final
17
<PAGE>
regulations did not include any quantitative assessment for these risks, but
listed these items, as well as an institution's ability to manage these risks,
as subjective factors that the regulators will consider in assessing an
individual bank's overall capital adequacy.
On August 2, 1995 the federal banking agencies (excluding the Office
of Thrift Supervision ("OTS")) published final regulations to take account of
interest rate risk in calculating risk based capital. These final regulations
constitute the first step of a two-step process for implementing the minimum
capital standards for interest rate risk exposures. The first step consists of
revising the capital standards of the banking agencies to explicitly include a
bank's exposure to declines in the economic value of its capital due to changes
in interest rates as a factor that the banking agencies will consider in
evaluating a bank's capital adequacy.
This final rule does not codify a measurement framework for assessing
the level of a bank's interest rate risk exposure. The information and exposure
estimates collected through a new proposed supervisory measurement process,
described in the banking agencies' joint policy statement on interest rate risk,
would be one quantitative factor used to determine the adequacy of an individual
bank's capital for interest rate risk. The focus of that proposed process is on
a bank's economic value exposure. Other quantitative factors include the bank's
historical financial performance and its earnings exposure to interest rate
movements. Examiners also will consider qualitative factors, including the
adequacy of the bank's internal interest rate risk management. The banking
agencies intend for this case-by-case approach for assessing a bank's capital
adequacy for interest rate risk to be a transitional arrangement.
The second step will consist of a proposed rule that would establish
an explicit minimum capital charge for interest rate risk, based on the level of
a bank's measured interest rate risk exposure. The banking agencies intend to
implement this second step at some future date, after the banking agencies and
the banking industry have gained more experience with the proposed supervisory
measurement and assessment process.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
FDICIA requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of FDICIA. An
insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
"Well capitalized" "Adequately capitalized"
- ------------------ ------------------------
Total risk-based capital of at least Total risk-based capital of at least 8%;
10%; Tier 1 risk-based capital of at least 4%;
Tier 1 risk-based capital of at least and
6%; and Leverage ratio of at least 4%.
Leverage ratio of at least 5%.
18
<PAGE>
"Undercapitalized" "Significantly undercapitalized"
- ------------------ --------------------------------
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than Tier 1 risk-based capital less than 3%;
4%; or or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
- -----------------------------
Tangible equity to total assets less
than 2%.
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it will be
closely monitored by the appropriate federal banking agency. Undercapitalized
institutions must submit an acceptable capital restoration plan with a guarantee
of performance issued by the holding company. Further restrictions and sanctions
are required to be imposed on insured depository institutions that are
critically undercapitalized. The most important additional measure is that the
appropriate federal banking agency is required to either appoint a receiver for
the institution within 90 days, or obtain the concurrence of the FDIC in another
form of action.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted. Additionally, a holding company's
inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action against
the holding company.
SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions on transactions
and required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
19
<PAGE>
In addition to the statutory limitations, FDICIA originally required
the federal banking agencies to prescribe, by regulation, standards for all
insured depository institutions for such things as classified loans and asset
growth. The Riegle Community Development and Regulatory Improvement Act of 1994
(RCDRIA) amended FDICIA to (a) authorize the agencies to establish safety and
soundness standards by regulation or by guideline for all insured depository
institutions; (b) give the agencies greater flexibility in prescribing asset
quality and earnings standards and (c) eliminate the requirement that such
standards apply to depository institution holding companies.
On July 10, 1995 the federal banking agencies published Interagency
Guidelines Establishing Standards for Safety and Soundness. By adopting the
standards as guidelines, the agencies retained the authority to require an
institution to submit to an acceptable compliance plan as well as the
flexibility to pursue other more appropriate or effective courses of action
given the specific circumstances and severity of an institution's noncompliance
with one or more standards.
In December 1992, the federal banking agencies issued final
regulations prescribing uniform guidelines for real estate lending. The
regulations, which became effective on March 19, 1993, required insured
depository institutions to adopt written policies establishing standards,
consistent with such guidelines, for extensions of credit secured by real
estate.
The federal banking agencies amended their regulations as of June 7,
1994, regarding the requirements for appraisals of "real estate related
financial transactions" for federally regulated financial institutions. A
federally related transaction is any real estate related financial transaction
for which an appraisal is required. An appraisal must be conducted by either
state certified or state licensed appraisers for all such transactions unless an
exemption applies. The more common exemptions relate to (i) transactions valued
at $250,000 or less; (ii) business loans valued at $1 million or less and not
dependent upon real estate as the primary source of repayment; or (iii)
transactions which are not secured by real estate. Appraisals performed in
connection with federally related transactions must also comply with the
agencies' appraisal standards.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
The power of the board of directors of an insured depository
institution to declare a cash dividend or other distribution with respect to
capital is subject to statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the earnings, financial
condition and cash needs of the institution, as well as general business
conditions. FDICIA prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions, including dividends, if, after such transaction,
the institution would be undercapitalized.
Regulators also have authority to prohibit a depository institution
from engaging in business practices which are considered to be unsafe or
unsound, possibly including payment of dividends or other payments under certain
circumstances even if such payments are not expressly prohibited by statute.
In addition to the restrictions imposed under federal law, banks
chartered under California law generally may only pay cash dividends to the
extent such payments do not exceed the lesser of retained earnings of the bank
or the bank's net income for its last three fiscal years (less any distributions
to shareholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the
prior approval of the Superintendent in an amount not
20
<PAGE>
exceeding the greatest of the bank's retained earnings, the bank's net income
for its last fiscal year, or the bank's net income for its current fiscal year.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
FDICIA established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. FDICIA also provides authority for special assessments against
insured deposits. No assurance can be given at this time as to what the future
level of premiums will be.
As required by FDICIA, the FDIC adopted a transitional risk-based
assessment system for deposit insurance premiums which became effective January
1, 1993. On November 14, 1995 the Board of Directors of the FDIC adopted a
resolution to reduce to a range of 0 to 27 basis points the assessment rates
applicable to deposits assessable by the BIF for the semiannual assessment
period beginning January 1, 1996. This reduction represents a downward
adjustment of 4 basis points from the preceding BIF assessment rate schedule. On
June 30, 1995 the BIF reserve ratio stood at nearly 1.29 percent. The new
assessment schedule would retain the risk based characteristics of the current
system.
At the same time the Board adopted the new rate schedule, it also
amended the FDIC's assessment regulations to permit the Board to make limited
adjustments to the schedule without notice-and-comment rulemaking. Any such
adjustments can be made as the board deems necessary to maintain the BIF reserve
ratio at the designated reserve ratio ("DRR") and can be accomplished by Board
resolution. Under this provision, any such adjustment must not exceed an
increase or decrease of 5 basis points and must be uniform across the rate
schedule.
The amount of an adjustment adopted by the Board is to be determined
by the following considerations: (a) the amount of assessment revenue necessary
to maintain the reserve ratio at the DRR and (b) the assessment schedule that
would generate such amount of assessment revenue considering the risk profile of
BIF members. In determining the relevant amount of assessment revenue, the Board
is to consider BIF's expected operating expenses, case resolution expenditures
and income, the effect of assessments on BIF members' earnings and capital, and
any other factors the Board may deem appropriate.
FDICIA required insured depository institutions to undergo a
full-scope, on-site examination by their primary federal banking agency at least
once every 12 months. A transition rule allowed for examination of certain well
capitalized and well managed institutions every 18 months until December 31,
1993. In 1994, the exemption for smaller institutions, which allowed a
substitution of an 18 month schedule for the 12 month examination schedule for
qualified smaller institutions, was amended to increase the asset threshold from
$100 million to $250 million. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate federal
banking agency against each institution or affiliate as it deems necessary or
appropriate.
21
<PAGE>
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
On March 8, 1994, the federal Interagency Task Force on Fair Lending
issued a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment, and evidence of disparate impact.
In 1995, new compliance and examination guidelines for the CRA were
promulgated by each of the federal banking regulatory agencies, fully replacing
the prior rules and regulatory expectations with new ones ostensibly more
performance based than before. The guidelines provide for streamlined
examinations of smaller institutions.
RECENTLY ENACTED LEGISLATION
On September 29, 1994 the President signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"). This
legislation amended the Bank Holding Company Act, the National Bank Act and the
Federal Deposit Insurance Act to provide for interstate banking and branching.
Subject to certain deposit concentration limits, the legislation
generally permits bank holding companies to acquire banks in any state,
beginning September 29, 1995. Further, the Act provides that beginning June 1,
1997 a bank may merge with a bank in another state so long as both states have
not opted out of interstate branching by May 31, 1997. States may enact laws
permitting interstate acquisitions before June 1, 1997. The appropriate federal
banking agency may also approve the establishment by a bank of a de novo branch
in another state in which the bank does not maintain a branch if a state
expressly opts-in to de novo branching. Once a bank has established a de novo
branch in a host state, it may establish or acquire additional branches any
place in such state permitted to a bank located in that state.
On September 29, 1995 the Caldera, Weggeland, and Killea California
Interstate Banking and Branching Act of 1995 became effective. This legislation
was designed to implement important features of the IBBEA, to make changes
required by the new interstate banking and branching schemes, and to repeal or
modify provisions of the Banking Law which are obsolete or impose undue
regulatory burdens.
The main features of this legislation are (a) out-of-state banks that
wish to establish a California branch office to conduct core banking business
must first acquire an existing 5 year old California bank or industrial loan
company by merger or purchase; (b) California state-chartered banks will be
empowered to conduct various authorized branch-like activities on an agency
basis through affiliated and unaffiliated insured depository institutions in
California and other states and (c) the Superintendent will be authorized to
approve an interstate acquisition or merger which would result in a deposit
concentration exceeding 30% if
22
<PAGE>
the Superintendent finds that the transaction is consistent with public
convenience and advantage. The legislation also contains extensive provisions
governing intrastate and interstate (a) intra-industry sales, mergers and
conversions between banks and between industrial loan companies and (b)
inter-industry transactions involving banks, savings associations and industrial
loan companies.
On September 23, 1994, the President signed into law the Riegle
Community Development and Regulatory Improvement Act of 1994. This legislation
established a government corporation and authorized federal funds to be spent
for projects in which a Community Development Financial Institution ("CDFI") is
involved. The legislation permits a CDFI to form a community partnership with a
bank or a holding company to pursue the development of a project for which
federal funding is sought.
The legislation also authorizes funds to be spent pursuant to the
Bank Enterprise Act of 1991, to provide an incentive for bank and thrift
investments in targeted activities within qualified distressed communities.
Insured depository institutions may earn assessment credits by engaging in new
lending in economically under-served areas. Further, the legislation amended
various statutory reporting obligations and other rules impacting various
paperwork requirements and examination cycles.
In October 1995, the Governor of California approved the State Bank
Parity Act. This legislation cures several longstanding disparities between
state and national charters and enacts a "wild card" statute giving the
Superintendent discretionary regulatory authority to address future disparities.
PENDING LEGISLATION
There are a number of pending legislative proposals to reform the
Glass-Steagall Act to allow affiliations between banks and other firms engaged
in "financial activities," including insurance companies and securities firms.
Glass-Steagall reform will likely be affected by a bank insurance powers case
currently pending before the U.S. Supreme Court, which could potentially give
national banks greater opportunities to sell traditional insurance products,
such as life, automobile, and property and casualty policies. In a similar case
last year, the Court upheld an OCC determination that national banks may sell
annuities.
There is legislation currently pending in Congress which would reduce
paperwork and additional regulatory burdens for depository institutions. This
pending legislation would eliminate numerous regulatory requirements mandated by
laws such as the Real Estate Settlement Procedures Act, the Truth in Savings
Act, and the Truth in Lending Act.
Further, under this pending legislation, the Community Reinvestment
Act ("CRA") would be amended to preclude federal banking regulators from
imposing additional burdens, record keeping or reporting requirements on
financial institutions. The legislation also provides for self-certification of
CRA compliance by certain "satisfactory" or "outstanding" financial institutions
with assets of $250 million or less, subject to certain public notice
requirements. Further, the legislation provides that examination ratings would
become conclusive, obviating the need for an institution to have to reprove its
performance in an application proceeding.
Congress is also considering legislation to rebuild the
undercapitalized Savings Association Insurance Fund ("SAIF"). One proposed plan
would capitalize the fund with a one-time charge on SAIF-insured institutions of
about 85 basis points. Under such plans the annual interest due on the bonds
issued by the
23
<PAGE>
Financing Corporation ("FICO") as part of the savings and loan bailout would be
spread to BIF-insured institutions, and the thrift and bank insurance funds
would be merged.
Additional legislation pending in Congress would provide
environmental cleanup liability limitations for lenders and fiduciaries under
the Comprehensive Environmental Response, Compensation and Liability Act, as
well as other federal and state environmental protection laws.
Similarly, pending California legislation would provide lenders and
fiduciaries a clear "road map" of how they may deal with real property
contaminated by toxics and avoid liability as an "owner" or "operator" under
various state environmental laws. This is a measure which should benefit banks
of all sizes. Approval is expected during 1996.
In 1995, Superintendent Conrad W. Hewitt announced a major regulatory
reform project to reduce the number of regulations and the amount of regulatory
burdens imposed by the State Banking Department's regulations. Although we
cannot predict the consequences of this announcement, it is possible that the
result will be a decrease in the amount of regulatory burdens imposed under the
Department's banking regulations.
While the effect of such proposed legislation and regulatory reform
on the business of the Bank cannot be accurately predicted at this time, it
seems likely that a significant amount of consolidating in the banking industry
will occur throughout the decade.
ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement of Financial Accounting Standards No. 122,
Accounting for Mortgage Servicing Rights (SFAS No. 122) in May 1995, which must
be adopted by the Company effective January 1, 1996. SFAS No. 122 requires that
the Company recognize as a separate asset rights to service mortgage loans for
others, whether those servicing rights are originated or purchased. Previously,
only purchased servicing rights were capitalizable as an asset. SFAS No. 122
also requires that capitalized servicing rights be assessed for impairment based
on fair value, rather than an estimate of undiscounted future cash flows. The
adoption of SFAS No. 122 is not expected to have a material effect on the
Company or its operations.
The FASB issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123) in October 1995. The new
standard defines a fair value method of accounting for stock options and other
equity instruments, such as stock purchase plans. Under this method,
compensation cost is measured based on the fair value of the stock award when
granted and is recognized as an expense over the service period, which is
usually the vesting period. This standard will be effective for the Company
beginning January 1, 1996, and requires measurement of awards made beginning in
1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net income and
earnings per share as if the company had applied the new method of accounting.
The Company intends to follow these disclosure requirements for its employees'
stock plans. As a result, adoption of the new standard will not impact reported
earnings or earnings per share, and will have no effect on the Company's cash
flows.
24
<PAGE>
COMPETITION
The Bank's primary market area consists of Shasta and Trinity
Counties. The banking business in California generally, and specifically in the
Bank's primary market area, is highly competitive with respect to both loans and
deposits. The business is dominated by a relatively small number of major banks
which have many offices operating over wide geographic areas. Many of the major
commercial banks offer certain services (such as international, trust and
securities brokerage services) which are not offered directly by the Bank. By
virtue of their greater total capitalization, such banks have substantially
higher lending limits than the Bank and substantial advertising and promotional
budgets.
However, smaller independent financial institutions also represent a
competitive force. To illustrate the Bank's relative market share, total
deposits in banks in Shasta County, California, at June 30, 1995 (more recent
data is not yet available) approximated $1,267,592,000. The Bank's deposits at
June 30, 1995 represented approximately 13.67% of such figure.
To compete with major financial institutions in its service area, the
Bank relies upon specialized services, responsive handling of customer needs,
local promotional activity, and personal contacts by its officers, directors and
staff, as opposed to large multi-branch banks, most of which compete primarily
by rate and location of branches. For customers whose loan demands exceed the
Bank's lending limits, the Bank seeks to arrange for such loans on a
participation basis with its correspondent banks or other independent commercial
banks.
In the past, an independent bank's principal competitors for deposits
and loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, credit card companies,
and even retail establishments have offered new investment vehicles, such as
money-market funds, which also compete with banks for deposit business. The
direction of federal legislation in recent years seems to favor competition
between different types of financial institutions and to foster new entrants
into the financial services market, and it is anticipated that this trend will
continue.
The enactment of the IBBEA as well as the California Interstate
Banking and Branching Act of 1995 will likely increase competition within
California. Regulatory reform, as well as other changes in federal and
California law will also affect competition. While the impact of these changes,
and of other proposed changes, cannot be predicted with certainty, it is clear
that the business of banking in California will remain highly competitive.
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 and the
Bank 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 who 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
25
<PAGE>
primarily to protect his security interests in the vessel or facility." The
wording of this exemption is subject to conflicting interpretations among the
Federal Courts and has therefore generated uncertainty within the financial and
lending communities, particularly with regard to the extent to which a secured
creditor may undertake activities to oversee the affairs of the borrower without
"participating in the management" of a facility. Congress is currently
addressing lender liability under environmental laws, and it is expected that
the lender exemption will be clarified. There is no assurance, however, that
such clarification will be made, and, if made, that it will be favorable to
lenders. Thus, the scope of lender liability under federal and state law remains
an open question.
In the event the Bank 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 Bank takes reasonable steps to avoid loaning against property
that may be contaminated. In order to identify possible hazards, the Bank
requires that all fee appraisals contain a reference to a visual assessment of
hazardous waste by the appraiser.
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 Bank may require that the owner/buyer of the property, at
their expense, have an Environmental Inspection performed by an insured, bonded
environmental engineering firm acceptable to the Bank.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive office is located at 880 E. Cypress
Avenue, Redding, Shasta County, California. The office, which occupies
approximately 2,100 square feet of space, is located within the Enterprise
Office of its subsidiary, North Valley Bank.
The Bank owns the land and building on which its headquarters office
is located at 880 E. Cypress Avenue, Redding, California, as well as the land
and buildings on which the Hayfork, Anderson, Weaverville, Redding and Country
Club (Bechelli Lane) branches are located. On February 2, 1990, the Bank
completed construction on a 6,000 square foot building adjacent to the 880 E.
Cypress location. Such building, owned by the Bank and located at 836 E. Cypress
Avenue, currently houses Bank Processing, Inc., and the Bank's Customer Service
centers. Construction costs were approximately $376,000. The Shasta Dam (Central
Valley), Palo Cedro and Westwood Village branches as well as the warehouse
facilities for the Bank located at 1401 Gold Street, Redding, California, are
located in leased facilities or on leased land with various lease expiration
dates through August 14, 2005.
During the year ended December 31, 1995, the Company spent $54,400
for rental of the Hayfork, Shasta Dam, Westwood Village, Palo Cedro offices, and
the warehouse of the Bank. Net occupancy
26
<PAGE>
expenses for all facilities for the year ended December 31, 1995, were $422,000.
In the opinion of management, the properties are adequately covered by
insurance.
From time to time, the Bank acquires real property through
foreclosure of defaulted loans. The Bank's policy is not to use or permanently
retain any such properties but to resell them when practicable.
Permissible investments of banks and bank holding companies are
subject to regulation and limitation by Federal and State agencies. For example,
federal law prohibits the Bank from making any investment which is prohibited
for national banks. See Financial Condition in Item 6, Management's Discussion
and Analysis or Plan of Operation for more information on investments in loans
and securities. See "Supervision and Regulation" in Item 1, Description of
Business, for additional information related to investment policies.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company
or against any of its property. The Bank, 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 advise of counsel, does not expect that the final outcome
of threatened or filed suits will have a materially adverse effect on its
consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this Form 10-KSB.
27
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
North Valley Bancorp's common stock is listed on the Electronic
Bulletin Board under the symbol (NOVB) and is not listed on the NASDAQ national
market.
<TABLE>
The following table summarizes trades of which the Company had
knowledge, setting forth the high and low bid prices, reflects inter-dealer
prices, without retail mark-up, mark down or commission and may not represent
actual transactions for the periods indicated. The prices and volumes indicated
below have been restated to reflect the three-for-two stock split effected in
the form of a 50% stock dividend on November 1, 1995.
<CAPTION>
Bid Price of
Quarter Ended: Common Stock Approximate Cash
-------------- ---------------------- Trading Dividends
Low High Volume Declared
--- ---- ------ --------
<S> <C> <C> <C> <C>
March 31, 1994 $ 11.75 $ 13.50 102,431 --
June 30, 1994 12.75 14.00 53,840 .23
September 30, 1994 13.50 14.00 29,781 --
December 31, 1994 13.50 14.50 71,597 .23
March 31, 1995 14.25 15.75 77,895 --
June 30, 1995 15.00 16.50 12,906 .25
September 30, 1995 16.00 17.25 5,122 --
December 31, 1995 19.00 19.50 44,051 .27
</TABLE>
- -----------------------------------
The above information was provided by Hoefer & Arnett, Inc., Sutro &
Co. and the Company, based upon trades of which management was aware, and does
not include purchases of stock pursuant to the exercise of employee stock
options or other private transactions.
The Company had approximately 955 shareholders of record as of February
23, 1996.
See "Supervision and Regulation -- Restrictions on Dividends and Other
Distributions" and "Bank Regulation and Supervision" in Item 1, Description of
Business, for information related to shareholder and dividend matters including
information on limitations on dividends.
28
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
North Valley Bancorp (the "Company") is a bank holding company for
North Valley Bank (the "Bank"), a state-nonmember bank. The Company's
consolidated net income, assets, and equity are derived primarily from its
investment in the Bank. The Bank operates out of its main office located at 880
E. Cypress Avenue, Redding, California 96002 with seven additional branches
located in Shasta County and two branches in Trinity County. The Bank's consumer
financial services include residential real estate loans, retail deposit
services, mutual fund products and consumer finance. Financial services for
businesses include commercial loans, Small Business Administration (SBA) loans,
and deposit services.
The following discussion should be read in connection with the
consolidated Financial Statements and notes there to included elsewhere herein
which are incorporated by reference herein.
Net Income Summary
Consolidated net income in 1995 was $4,083,000, an increase of 27.1%
over the $3,212,000 reported in 1994. Earnings per share, as adjusted to give
effect to the three-for-two stock split effected in the form of a 50% stock
dividend, increased to $2.20 compared to $1.74 in 1994. Return on average assets
increased to 1.79%, from 1.54% for 1994. Return on average shareholders' equity
increased to 20.44% from 19.03% for 1994.
Net Interest Income
Net interest income, the difference between the yield earned on
interest-earning assets and the interest rate paid on interest-bearing
liabilities, is the principal component of the Company's earnings. Non taxable
income derived from investment securities has been adjusted to a taxable
equivalent rate. Increased loan volume and a higher rate environment in 1995
caused an increase in total interest income to $18,592,000 in 1995 compared to
$15,186,000 in 1994, or a 22.4% increase. Average rates paid on deposits
increased during 1995 by 68 basis points while average interest bearing deposits
increased by 16.1% resulting in an increase in interest expense to $7,559,000 in
1995 as compared to $5,460,000 in 1994. The increase in loans and yields on
interest earning assets offset the increases in deposit balances and interest
paid for interest bearing deposits resulting in an increase of $1,307,000 in net
interest income (FTE) to $11,033,000 as compared to $9,726,000 in 1994.
Net interest margin (determined by dividing net interest income by
total average interest-earning assets) was 5.23% for 1995, as compared to 5.08%
at year end 1994. The increase in 1995 is attributed to an increase in loans
while deposit increases were offset by an increase in the net spread, the
difference between rates earned on interest earning assets and rates paid on
deposits, in 1995. The interest spread was 4.63 in 1995 and 4.43 in 1994.
29
<PAGE>
Non-Interest Income
Non-interest income was $2,630,000 in 1995 as compared to $2,477,000
in 1994, a $153,000 (6.2%) increase. The growth in service charges on deposit
accounts was primarily due to an increase in deposit accounts and the collection
of service fees for overdrafts.
A summary of non-interest income for the past three years is
presented below:
Non-Interest Income
(in thousands) 1995 1994 1993
---- ---- ----
Service charges on deposit accounts $1,342 $1,245 $1,184
Other fees and charges 546 523 535
Gain on sale of loans 160 164 325
Gain on sale of securities 42 11 157
Other 540 534 475
------ ------ ------
Total Non-interest income $2,630 $2,477 $2,676
====== ====== ======
Non-Interest Expense
Non-interest expense totaled $6,412,000 for 1995 compared to
$6,404,000 in 1994. Salaries and employee benefits increased in 1995 to
$3,679,000 compared to $3,523,000 in 1994, primarily due to normal salary
increases, employer taxes, net pension cost for the supplemental retirement
plans for directors and key executives, and the opening of a new branch in Palo
Cedro in late 1995.
Occupancy and equipment expenses increased as a result of the opening
of the Palo Cedro branch.
FDIC and California State Banking assessments decreased to $249,000
in 1995 compared to $430,000 in 1994. The FDIC determined that the Bank
Insurance Fund (BIF) was fully recapitalized at the end of May 1995. As a
result, on August 8, 1995 the FDIC reduced the assessment rates for well
capitalized institutions to $.04 per $100 in domestic deposits from $.23
effective June 1, 1995. The Company paid $.23 per $100 in deposits for the first
five months of 1995 and $.04 per $100 for the remaining seven months as compared
to paying $.23 per $100 in deposits for the full year in 1994, resulting in a
$181,000 decrease in FDIC premiums for 1995. For the six month assessment period
beginning January 1, 1996, the FDIC reduced the assessment rate to $.00 per $100
in domestic deposits.
The Company improved its efficiency ratio (derived by dividing total
non-interest expenses by net interest income exclusive of provision for loan
losses and non-interest income) in 1995 of 51.1% compared to 57.2% in 1994. The
efficiency ratio is a measurement as to how efficiently the Company allocates
its resources.
A summary of non-interest expense for the past three years is
presented below:
30
<PAGE>
Non-Interest Expense
(in thousands) 1995 1994 1993
---- ---- ----
Salaries & employee benefits $3,679 $3,523 $3,423
Occupancy expense 422 406 393
Furniture & equipment expense 451 424 385
Professional services 151 142 156
Data processing expenses 249 229 220
Printing & supplies 216 195 174
Postage 160 144 153
FDIC & State banking assessments 249 430 387
ATM expense 134 128 111
Other 701 783 768
------ ------ ------
Total Non-interest expense $6,412 $6,404 $6,170
====== ====== ======
Income Taxes
The effective income tax rate for state and federal income tax was
29% in 1995, compared to 29.4% in 1994. The decrease in the effective rate in
1995 over 1994 is mainly due to the impact of an increase in tax-exempt interest
income. Income taxes are based on income reported in the consolidated financial
statements using the effective tax rate.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The
cumulative effect of adopting SFAS No. 109 on the Company's financial statements
was to increase income from continuing operations by $127,000 ($0.07 per share)
in 1993.
Impaired, Nonaccrual, Past Due, Restructured Loans and Other Real Estate Owned
At December 31, 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, was approximately $1,715,000. Of that
balance approximately $1,078,000 has a related valuation allowance of $254,000.
The remaining $637,000 did not require a valuation allowance. For the year ended
December 31, 1995, the average recorded investment in loans for which impairment
has been recognized was approximately $1,473,000. During the portion of the year
that the loans were impaired the Company recognized approximately $205,000 of
interest income.
Nonaccrual loans are loans on which the accrual of interest has been
discontinued. Accrual of interest is discontinued on a loan when management
believes that borrowers' financial condition is such that the collection of
interest is doubtful, or when a loan becomes contractually past due by 90 days
or more with respect to interest or principal. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is reversed
against current period interest income. Income on such loans is then recognized
only to the extent that cash is received and where the future collection of
principal is probable. Interest accruals are resumed on such loans when in the
judgement of management, the loans are estimated to be fully collectible as to
both principal and interest.
The Company's allowance for loan losses is maintained at a level
deemed by management to be adequate to provide for possible losses in the loan
portfolio based on the Bank's current loan portfolio
31
<PAGE>
performance, anticipated growth in the portfolio, prevailing economic
conditions, historical credit loss experience, and other factors deemed
appropriate by management.
A summary of non-performing assets the past three years is presented
below:
Non-Performing Assets (in thousands) 1995 1994 1993
---- ---- ----
Nonaccrual loans $282 $421 $334
Accruing loans past due 90 days
or more 15 22 84
Restructured loans -- -- --
Other real estate owned 87 -- --
---- ---- ----
Total $384 $443 $418
==== ==== ====
Allowance for Loan Losses
As of December 31, 1995, the allowance for possible loan losses was
$1,325,000 as compared to the December 31, 1994 amount of $1,144,000. When a
loan is deemed uncollectible by management it is charged against the allowance
for loan losses. Any recoveries on previously charged off loans are credited
back to the allowance. Net charge-offs were $194,000, $162,000, and $149,000 in
1995, 1994, and 1993, respectively. Additions to the allowance for loan losses
are charged against income. A provision for loan losses of $375,000, $240,000
and $110,000 was charged to income in 1995, 1994, and 1993, respectively.
Management's assessment of the diversification of the portfolio, the
levels of non-performing loans, and other economic factors which may have an
effect on the quality of the portfolio determines the future funding levels of
the allowance.
Liquidity and Interest Rate Sensitivity
Management's primary objective is to maximize shareholders' value
while maintaining adequate liquidity and manage interest rate risk (IRR).
Liquidity management represents the Company's ability to provide funds to
support asset growth and satisfy cash flow requirements created by fluctuations
in deposits and to meet borrowers' credit needs. Effective liquidity management
insures that sufficient funds are available to comply with demands from
depositors, borrowers and other commitments on a timely basis. Collection of
principal and interest on loans, the liquidations of investment securities,
deposit inflow and short term borrowing when needed are primary sources of funds
that contribute to liquidity. Unused lines of credit from correspondent banks to
provide federal funds in the amount of $9,000,000 as of December 31, 1995, were
available to provide liquidity. In addition, the Bank is a member of the Federal
Home Loan Bank ("FHLB") System providing an additional line of credit of
$5,020,000 secured by first deeds of trust on eligible 1-4 unit residential
loans. The Company had not borrowed from FHLB as of December 31, 1995.
The Company manages both assets and liabilities to preserve liquidity
and earnings stability. Total liquid assets (cash and due from banks, federal
funds sold, and investment securities) totaled $76,369,000 and $78,326,000 (or
32.49% and 36.61% of total assets) at December 31, 1995 and 1994, respectively.
Total liquid assets for 1995 and 1994 include investment securities of
$35,217,000 and $41,374,000, respectively, classified as held to maturity based
on the Company's intent to hold such securities to maturity.
32
<PAGE>
The Company's ability to generate retail core deposits consisting of
demand deposits, NOW, regular savings, money market deposit accounts and time
deposits of less than $100,000 provides a continued source of liquidity. Core
deposits totaled $193,731,000 and $179,759,000 at year end 1995 and 1994.
In assessing liquidity, historical information such as seasonal loan
demand, local economic cycles and the economy in general are considered along
with current ratios, management goals and unique characteristics of the Bank.
The Company is in compliance with policies relating to liquidity.
Interest rate management focuses on the repricing characteristics of
the Bank's assets and liabilities. IRR management's primary objective is to
ensure that both assets and liabilities react to changes in interest rates to
minimize the effects of interest rate movements on net interest income. The
primary tool for IRR measurement is an asset liability simulation model. The
model projects changes by analyzing the mix and repricing characteristics of
interest rate sensitive assets and liabilities using multipliers (how interest
rates change when Fed Funds rate changes by 1%) and lags (time it takes for
rates to change after Fed Funds rate changes). The model simulates the effects
on net interest income when the Fed Funds rate experiences a 1% increase or
decrease compared to current levels.
<TABLE>
The following table shows the interest sensitive assets and
liabilities gap, which is the measure of interest sensitive assets over interest
bearing liabilities, for each individual repricing period on a cumulative basis:
<CAPTION>
December 31, 1995 Within 3 3 months 1-5 5+
(in thousands) months to 1 Year Years Years TOTAL
------ --------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Held to maturity securities $ 970 $ 633 $ 8,673 $24,941 $ 35,217
Available for sale
securities 1,998 2,767 2,408 5,511 12,684
Fed Funds Sold 16,600 -0- -0- -0- 16,600
Loans 52,013 17,735 44,887 35,136 149,771
------- --------- -------- ------- --------
Total earning assets $ 71,581 $ 21,135 $ 55,968 $65,588 $214,272
======= ========= ======== ======= ========
INTEREST BEARING LIABILITIES:
Interest bearing demand
deposits $ -0- $ 36,612 $ -0- $ -0- $ 36,612
Savings deposits -0- 41,882 -0- -0- 41,882
Time deposits 41,444 61,440 4,691 -0- 107,575
-------- --------- -------- ------- --------
Total interest bearing
liabilities $ 41,444 $ 139,934 $ 4,691 $ -0- $186,069
======== ========= ======== ======= ========
INTEREST SENSITIVITY
GAP $ 30,137 $(118,799) $ 51,277 $65,588
CUMULATIVE INTEREST
RATE SENSITIVITY GAP $30,137 $ (88,662) $(37,385) $28,203
</TABLE>
33
<PAGE>
At December 31, 1995, the gap table indicates the Company as
liability sensitive in the twelve month period. Interest rate sensitivity
measured by the gap method does not consider the impact of different multipliers
(how interest rates change when Fed Funds rate changes by 1%) and lags (time it
takes for rates to change after Fed Funds rate changes). The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant and may be affected by many factors, including the behavior
of customers in response to changes in interest rates. This table should,
therefore, be used only as a guide as to the possible effect changes in interest
rates might have on the net margins of the Company. The Company's model analyzes
the impact on earnings of future rate changes by including factors for lags and
multipliers for key bank rates. Both methods of measuring interest rate
sensitivity do not take into account actions taken by management to modify the
effect to net interest income if interest rates were to rise or fall.
Even though the Bank had a negative gap in the twelve month period as
of December 31, 1995, the asset liability simulation model showed the Bank was
slightly asset sensitive in 1995. Due to an increasing rate environment in 1995,
the Bank's asset sensitive posture had a positive impact on net interest margins
as predicted by the asset liability simulation model.
Financial Condition
Total assets at December 31, 1995, were $235,072,000, representing an
increase of 9.9% over December 31, 1994 assets of $213,956,000. Increased
deposits were used to fund a 10.2% increase in average earning assets in 1995.
Investment securities and federal funds sold totaled $64,501,000 at
December 31, 1995, compared to $64,829,000 at December 31, 1994. The Company is
a member of Federal Home Loan Bank and holds $662,000 in FHLB stock. Additional
information regarding investment securities held by the Company at year end 1995
are set forth in Note 3 of "Notes to Consolidated Financial Statements".
During 1995, net loans increased 17.8% to $147,808,000 from
$125,463,000 for the same period in 1994. Loans are the Company's major
component of earning assets. Real estate loans increased $11,601,000 primarily
in one to four family real estate mortgage loans. The Bank's average loan to
deposit ratio was 66.86% and 60.49% in 1995 and 1994, respectively. Additional
information regarding loans is shown in Note 4 of the "Notes to Consolidated
Financial Statements".
Funding for increased loan activity came from reductions in
investment securities and increases in deposits. Total deposits increased
$17,534,000 in 1995 to $211,075,000, as compared to $193,541,000 in 1994 for the
same period. The majority of the increase was in interest-bearing instruments.
The Company maintains capital to support capital needs, future growth
and dividend payouts while maintaining the confidence of depositors and
investors by increasing shareholders' value. Shareholders' equity increased to
$20,973,000 as of December 31, 1995, as compared to $17,926,000 for year end
1994. This increase was primarily attributable to retention of earnings offset
by $950,000 in dividends to shareholders.
Banking regulators require bank holding companies and banks to
maintain total capital to at least 8% of their assets, weighted by risk. At
least 4% of the total 8% ratio must consist of Tier 1 capital (primarily
shareholders' equity).
34
<PAGE>
In addition, applicable law requires bank holding companies and banks
to maintain a minimum leverage ratio. The leverage ratio is measured by the
ratio of Tier 1 capital to adjusted average assets.
The table below provides a comparison of the Company's risk based
capital ratio and leverage ratio to the minimum regulatory guidelines for the
periods indicated:
MINIMUM
REGULATORY
1995 1994 REQUIREMENTS
----- ----- --------------
RISK-BASED CAPITAL RATIOS:
Tier 1 12.76% 13.09% 4.00%
Total 13.57% 13.91% 8.00%
LEVERAGE RATIO 8.87% 8.49% 3.00%-5.00%
The following table provides a comparison of the Bank's risk based
capital ratio and leverage ratio to the minimum regulatory guidelines for the
periods indicated:
MINIMUM
REGULATORY
1995 1994 REQUIREMENTS
----- ----- ------------
RISK-BASED CAPITAL RATIOS:
Tier 1 12.05% 12.24% 4.00%
Total 12.86% 13.07% 8.00%
LEVERAGE RATIO 8.36% 7.90% 3.00%-5.00%
Impact of Inflation
Impact of inflation on a financial institution differs significantly
from that exerted on an industrial concern, primarily because its assets and
liabilities consist largely of monetary items. The relatively low proportion of
the Bank's fixed assets (approximately 1.6% at December 31, 1995) reduces both
the potential of inflated earnings resulting from understated depreciation and
the potential understatement of absolute asset values.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements required by this item are set forth
following Item 13 of this Form 10-KSB, and are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
35
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information concerning directors and executive officers required
by this item is incorporated by reference from the section of the Company's
Definitive Proxy Statement for the 1996 Annual Meeting of Shareholders of the
Company to be filed with the Securities and Exchange Commission (the
"Commission") entitled "Election of Directors" (not including the share
information included in the beneficial ownership table nor the footnotes thereto
or the subsection entitled "Committees of the Board of Directors").
The following table sets forth certain information concerning the
executive officers of the Company.
Name Age Position(s) Since
- ---- --- ----------- -----
Donald V. Carter 56 Director, President and 1986
Chief Executive Officer
James F. Cowee, Jr. 59 Executive Vice President and 1986
Chief Financial Officer
Fred A. Drake 57 Senior Vice President and 1986
Cashier
Robert G. Jones 47 Senior Vice President and 1986
Loan Administrator
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
from the section of the Company's Definitive Proxy Statement for the 1996 Annual
Meeting of Shareholders of the Company to be filed with the Commission entitled
"Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
from sections of the Company's Definitive Proxy Statement for the 1996 Annual
Meeting of Shareholders of the Company to be filed with the Commission, entitled
"Principal Shareholders" and "Election of Directors", as to share information in
the table of beneficial ownership and footnotes thereto.
36
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
from the section of the Company's Definitive Proxy Statement for the 1996 Annual
Meeting of Shareholders to be filed with the Commission, entitled "Certain
Relationships and Related Transactions".
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
See Index to Exhibits at page 38 of this Annual Report on Form 10-KSB, which is
incorporated herein by reference.
(B) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last
quarter of 1995.
37
<PAGE>
INDEX OF EXHIBITS
Exhibit Sequential
No. Exhibit Name Page No.
- --------------------------------------------------------------------------------
3(a) Articles of incorporation, as amended.
Incorporated by reference from Exhibit 3(a)
to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1986,
filed with the Commission (hereinafter,
"1986 10-K"). *
3(b) By-Laws, as amended. Incorporated by reference
from Exhibit 3(b) to the Company's 1986 10-K. *
10(a) Employment Agreement of Donald V. Carter.
Incorporated by reference from Exhibit 10(b) to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, filed with the
Commission (hereinafter, the "1987 10-K"). *
10(b) Addendum to Employment Agreement of Donald V.
Carter dated December 31, 1995. 42
10(c) Employment Agreement of James F. Cowee.
Incorporated by reference from Exhibit 10(d) to the
Company's 1987 10-K. *
10(d) Addendum to Employment Agreement of James F.
Cowee dated January 5, 1996. 43
10(e) 1979 Amended Stock Option Plan. Incorporated
by reference from Exhibit 10(c) to the Company's 1986 10-K. *
10(f) Form of Incentive Stock Option Agreement.
Incorporated by reference from Exhibit 10(g) to
the Company's 1987 10-K. *
10(g) Form of Non-Qualified Stock Option Agreement.
Incorporated by reference from Exhibit 10(h)
to the Company's 1987 10-K. *
38
<PAGE>
Exhibit Sequential
No. Exhibit Name Page No.
- --------------------------------------------------------------------------------
10(h) North Valley Bancorp 1989 Employee Stock Option
Plan, as amended. Incorporated by reference from
Exhibit 4.5 to Post-Effective Amendment No. One to
the Company's Registration Statement on Form S-8
(No. 33-32787) filed with the Commission on
December 26, 1989 (hereinafter, the "1989 S-8
Amendment"). *
10(i) North Valley Bancorp 1989 Employee Nonstatutory
Stock Option Agreement. Incorporated by ref-
erence from Exhibit 4.3 to the 1989
S-8 Amendment. *
10(j) North Valley Bancorp 1989 Director Stock Option
Plan, as amended. Incorporated by reference
from Exhibit 4.6 to the 1989 S-8 Amendment. *
10(k) North Valley Bancorp 1989 Director Nonstatutory
Stock Option Agreement. Incorporated by refer-
ence from Exhibit 4.4 to the 1989 S-8 Amendment. *
10(l) Employee Stock Ownership Plan and Trust
Agreement, as amended. Incorporated by reference
from Exhibit 10(d) to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1984 (hereinafter, the "1984 10-K"). *
10(m) Deferred Salary Profit-Sharing Thrift Plan, as
amended and restated as of January 1, 1987.
Incorporated by reference from Exhibit 10(m) to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993 (hereinafter, the
"1993 10-K"). *
10(n) Management Incentive Plan. Incorporated by
reference from Exhibit 10(c) to the Company's 1984 10-K. *
10(o) Supplemental Executive Retirement Plan. Incor-
porated by reference from Exhibit 10(I) to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988 (hereinafter,
the "1988 10-K"). *
39
<PAGE>
Exhibit Sequential
No. Exhibit Name Page No.
- --------------------------------------------------------------------------------
10(p) Executive Deferred Compensation Plan. Incor-
porated by reference from Exhibit 10(j) to the
Company's 1988 10-K. *
10(q) Supplemental Retirement Plan for Directors.
Incorporated by reference from Exhibit 10(k)
to the Company's 1988 10-K. *
10(r) Hayfork Branch Lease. Incorporated by reference
from Exhibit 10.8 to the Company's Registration
Statement on Form S-14 (No. 2-72518) filed with
the Commission on May 28, 1981. *
10(s) Central Valley Branch Lease. Incorporated by
reference from Exhibit 19(n) to the Company's
1987 10-K. *
10(t) Westwood Village Branch Lease. Incorporated
by reference from Exhibit 10(o) to the Company's
1987 10-K. *
10(u) Warehouse Facility Lease. Incorporated by
reference from Exhibit 10(p) to the Company's
1987 10-K. *
10(v) Legal Services Agreement with Wells, Wingate,
Small & Graham. Incorporated by reference from
Exhibit 10(q) to the Company's 1987 10-K. *
10(w) PrimeVest Financial Services, Inc. Nondiscre-
tionary Full Service Brokerage Agreement.
Incorporated by reference from Exhibit 10(w) to the
Company's 1993 10-K. *
10(x) Employee Stock Ownership Plan, as amended and
restated as of January 1, 1987. Incorporated by
reference from Exhibit 10(x) to the Company's
1993 10-K. *
10(y) Amendment No. 1 to the Amended & Restated Deferred
Salary Profit Sharing Thrift Plan. Incorporated by
reference from Exhibit 10(y) to the Company's 1993 10-K. *
40
<PAGE>
Exhibit Sequential
No. Exhibit Name Page No.
- --------------------------------------------------------------------------------
10(z) Amendment No. 2 to the Amended & Restated Deferred
Salary Profit Sharing Thrift Plan. Incorporated by
reference from Exhibit 10(z) to the Company's 1993 10-K. *
10(aa) Employment Agreement of Fred A. Drake. Incorporated by
reference from Exhibit 10(aa) to the Company's 1993 10-K. *
10(bb) Addendum to Employment Agreement of Fred A. Drake
dated January 5, 1996. 44
10(cc) Employment Agreement of Robert Jones. Incorporated by
reference from Exhibit 10(cc) to the Company's 1993 10-K. *
10(dd) Addendum to Employment Agreement of Robert Jones
dated January 5, 1996. 45
10(ee) Amendment No. 3 to the Employee Stock Ownership Plan.
Incorporated by reference from Exhibit 10(ee) to the
Company's 1994 10-K. *
10 (ff) Palo Cedro Lease. 46
10 (gg) Sales Agreement with Federated Securities Corp. 61
10 (hh) Linsco/Private Ledger, Inc. Full Service Brokerage
Agreement. 68
21 List of Subsidiaries. 85
- ------------------
* Previously filed.
------------------------
A D D E N D U M
TO
EMPLOYMENT AGREEMENT
-------------------------
This ADDENDUM is to that certain Employment Agreement dated February 1,
1986, by and between NORTH VALLEY BANCORP, NORTH VALLEY BANK ("Employer") and
DONALD V. CARTER ("Employee").
1. Pursuant to an Addendum to the employment contract dated July 1,
1989, the Board of Directors determined that the term of the employment contract
would be extended to December 31, 1998.
2. Paragraph 6 of the Employment Agreement is modified to read as
follows:
VACATION The employee shall be entitled to vacation pursuant to the
provisions of the vacation policies established by the Bank plus two additional
weeks.
DATED: December 31, 1995
EMPLOYER: EMPLOYEE:
NORTH VALLEY BANCORP
By: /s/ RUDY V. BALMA /s/ Donald V. Carter
------------------------ --------------------------
Rudy V. Balma Donald V. Carter
Chairman of the Board
NORTH VALLEY BANK
By: /s/ RUDY V. BALMA
------------------------
Rudy V. Balma
Chairman of the Board
EXHIBIT 10(b)
42
<PAGE>
A D D E N D U M
TO EMPLOYMENT AGREEMENT
THIS ADDENDUM is to that certain Employment Agreement dated February
10, 1986, by and between NORTH VALLEY BANK ("Employer") and JAMES P. COWEE, JR.
("Employee").
THE PARTIES MUTUALLY AGREE to modify said Agreement in the following
manner:
1. Paragraph 4 is amended to read as follows: Salary. As compensation
for the services rendered by him under this Agreement, the Employee shall be
entitled to an annual salary of $98,340 per year.
2. Paragraph 6 of the Employment Agreement is modified to read as
follows:
VACATION The employee shall be entitled to vacation pursuant to the
provisions of the vacation policies established by the Bank plus two additional
weeks.
IN ALL OTHER RESPECTS, the terms and conditions of said Agreement shall
continue in full force and effect.
DATED: January 5, 1996.
EMPLOYER: EMPLOYEE:
NORTH VALLEY BANK /s/ JAMES F. COWEE, JR.
--------------------------------
By: /s/ DONALD V. CARTER James F. Cowee, Jr.
- --------------------------------
Donald V. Carter, President
43 EXHIBIT 10(d)
<PAGE>
A D D E N D U M
TO EMPLOYMENT AGREEMENT
THIS ADDENDUM is to that certain Employment Agreement dated July 27,
1989, by and between NORTH VALLEY BANK ("Employer") and FRED DRAKE ("Employee").
THE PARTIES MUTUALLY AGREE to modify said Agreement in the following
manner:
1. Paragraph 4 is amended to read as follows: Salary. As compensation
for the services rendered by him under this Agreement, the Employee shall be
entitled to an annual salary of $85,728 per year.
IN ALL OTHER RESPECTS, the terms and conditions of said Agreement shall
continue in full force and effect.
DATED: January 5, 1996.
EMPLOYER: EMPLOYEE:
NORTH VALLEY BANK
/s/ FRED A. DRAKE
By /s/ DONALD V. CARTER ----------------------
- ---------------------------- Fred A. Drake
Donald V. Carter, President
44 EXHIBIT 10(bb)
<PAGE>
A D D E N D U M
TO EMPLOYMENT AGREEMENT
THIS ADDENDUM is to that certain Employment Agreement dated July 25,
1989, by and between NORTH VALLEY BANK ("Employer") and ROBERT JONES
("Employee").
THE PARTIES MUTUALLY AGREE to modify said Agreement in the following
manner:
1. Paragraph 4 is amended to read as follows: Salary. As compensation
for the services rendered by him under this Agreement, the Employee shall be
entitled to an annual salary of $75,816 per year.
IN ALL OTHER RESPECTS, the terms and conditions of said Agreement shall
continue in full force and effect.
DATED: January 5, 1996.
EMPLOYER: EMPLOYEE:
NORTH VALLEY BANK /s/ ROBERT JONES
----------------------------
By /s/ DONALD V. CARTER Robert Jones
- ----------------------------
Donald V. Carter, President
45 EXHIBIT 10(dd)
<PAGE>
LEASE AGREEMENT
THIS LEASE, made and entered into this 15th day of August, 1995, between Donlon
H. Gabrielsen & Agnes H. Gabrielsen as Co-Trustees under the Gabrielsen Family
Trust dated October 20, 1992, hereinafter collectively referred to as "Landlord"
and North Valley Bank, a California Banking Corporation, hereinafter
collectively referred to as "Tenant".
WITNESSETH:
1. PREMISES. Landlord hereby leases to Tenant, and Tenant hereby hires from
Landlord, the premises hereinafter called the "Premises" in the PALO CEDRO
SHOPPING CENTER, hereinafter called the "Shopping Center", in the City of Palo
Cedro, County of Shasta, State of California, consisting of the area known as
9334A Deschutes Road, as shown on Exhibit "A" attached hereto, containing
approximately 3,000 square feet of building area and 1080 square feet of covered
drive-through area. Exhibit "A" is for the purpose of identification only. This
Lease provides no rights for Tenant to any part of the Shopping Center, other
than the Premises. Tenant acknowledges that the site plan for the Shopping
Center is tentative and that Landlord may change the shape, size, location,
number and extent of the improvements or tenancies now existing or presently
contemplated and eliminate or add any improvements to any portion of the
Shopping Center, except that any such exterior changes by Landlord within forty
(40) feet of the premises demised herein shall be subject to approval by Tenant,
which approval shall not be unreasonably withheld.
2. TERM. Commencement of Term, Commencement of Rent, and Termination Date of
Term.
a. Commencement of Term: This Lease shall be binding when executed and
the term of this Lease shall commence on the date possession of the Premises is
delivered to Tenant by Landlord for Tenant to complete improvements, in
accordance with Exhibit "B" attached hereto and made part hereof.
b. Commencement of Rent: Tenant's obligation for the payment of rent
and additional rent shall commence upon the earlier of the following dates,
hereinafter called "Rent Commencement Date":
i) The date when Tenant opens for business in the premises; or
ii) The sixtieth (60th) day following the date possession of the
premises is delivered to Tenant.
c. Termination of Term: This Lease shall terminate on the last day of
the one hundred twentieth (120th) complete calendar month following the Rent
Commencement Date.
3. CONDITION OF PREMISES. Tenant agrees and acknowledges that it has completely
inspected the Premises and accepts the same in the condition in which they are
now, subject to Tenant inspection of Landlord work to be completed in accordance
with Exhibit "B", and that if for any reason Landlord cannot deliver possession
of said Premises in accordance with paragraph 2, this Lease shall not be
voidable nor shall Landlord be liable to Tenant for any loss resulting
therefrom, but Landlord shall use its best efforts to deliver possession of the
Premises within one hundred twenty (120) days of Commencement of Term, which if
not so delivered to Tenant, this Lease shall terminate.
4. RENT.
A. Fixed Rent. For each and every calendar month during the term of
this Lease, commencing on the Rent Commencement Date, without offset or
deduction, Tenant shall pay to Landlord, on or before the first day of each
month, without notice or demand, fixed rent as follows:
MONTHS:
1-12 Two Thousand Three Hundred Five Dollars and No Cents ($2,305.00)
13-12 During the following monthly period:
13-36, 37-60, 61-84, 85-108, 109-120,
the Fixed Rent of Two Thousand Three Hundred Five Dollars ($2,305.00) per month
payable
46 EXHIBIT 10(ff)
<PAGE>
for the Premises shall be subject to adjustment in proportion to the changes
in the Consumer Price Index, provided however, that in no event shall the
Fixed Rent increase more than five percent (5%) per two-year period or two and
a half percent (2.5%) for the first year. Such adjustment shall be made by
multiplying the fixed rent due during the previous period by a fraction, the
numerator of which is the value of the Consumer Price Index for the calendar
month two (2) months preceding the calendar month for which such adjustment is
to be made, and the denominator of which is the value of such index for the
calendar month one (1) year prior to the index month used for the numerator
for the first year and for two years prior thereafter. The Consumer Price
Index to be used is the Consumer Price Index, West - C (Cities in the West
with a population of 50,000 to 330,000), All Urban Consumers - All Items,
published monthly by the United States Department of Labor, in which 1982-84
equals 100. In no event shall the Fixed Rent due in any year be less than two
thousand three hundred five dollars (2,305.00) per month.
If the obligation to pay rent shall commence upon a day other than the
first day of the calendar month, then the Tenant shall pay, upon such
commencement date, a pro-rata portion of the base rent on a per diem basis
(based upon a 30-day month) with respect to the fractional part of the
calendar month preceding the commencement of the first full calendar month of
the obligation to pay rent hereunder.
B. Percentage Rate. This section deleted.
C. Past Due Payments. Every installment of rent and every other payment
due hereunder from Tenant to Landlord which shall not be paid within ten (10)
days after the same shall have become due and payable shall bear interest at the
rate of one per cent (1%) per month, or at such other maximum rate as shall be
allowed by California law, or any successor or substitute law, from the date
that the same shall have become due and payable, until paid. It is also agreed
that since collection of any amount past due will impose an administrative cost
on Landlord, in addition to any fees of collection agents or attorneys, or other
out-of-pocket costs, Tenant will pay to Landlord, a sum to reimburse Landlord
for such actual attendant costs. Said interest and any actual attendant costs
shall be considered as additional rent.
5. USE. Tenant agrees to use the Premises solely for the operation of a staffed
retail bank branch and general offices providing commercial and personal
financial services and including automatic teller machines. Tenant, shall
continuously conduct such business on the Premises throughout the term of this
Lease, and shall keep the Premises open for business at all times when a
majority of the other retail bank branches of Tenant in Shasta County are open
for business. Tenant will not use, or permit or suffer the use of the Premises
for any other business or purpose. Tenant shall conduct its business on the
Premises under the trade name of:
" North Valley Bank ".
- ----------------------------------------------------------------------------
Tenant shall at all times employ sufficient personnel for the efficient service
of its customers and, generally, employ its best judgment and efforts to operate
the business on the Premises competitively. Tenant shall keep all signs and
lighting on the Premises turned on at all times when a majority of the stores in
the Shopping Center are open for business. Tenant shall keep its Premises clean,
and free of rubbish. Tenant agrees to abide by rules established by Landlord for
general cleanliness of, and collection of rubbish in, the Shopping Center.
Tenant shall not commit or suffer to be committed any waste upon the Premises or
any nuisance or other act or thing which may disturb the quite enjoyment of any
person within five hundred (500) feet of the boundary of the Shopping Center.
Tenant shall make no changes in Tenant's use of the Premises, as permitted
herein, without Landlord's prior written consent. Landlord's consent shall not
be unreasonably withheld.
Tenant shall not perform any act or carry on any practice which may injure any
of the improvements in the Shopping Center or be a nuisance or menace to other
tenants of the Shopping Center. Tenant shall neither own nor operate any
underground storage tank or keep any Hazardous Materials, as defined below
(including without limitation, vehicle fuel, petroleum, or other petroleum
product). No auction, fire or bankruptcy sales may be conducted on the Premises
without the prior written consent of Landlord. Tenant will not, without the
prior written consent of Landlord, install any exterior decorations or painting
or install any radio or television antennae, loud-speakers, sound amplifiers, or
any device on the roof or exterior
2
47
<PAGE>
walls of any of the buildings in the Shopping Center. No loud-speakers, radios
or other means of broadcasting to be heard outside the Premises shall be used by
Tenant. Tenant shall not use any false or misleading advertising, or engage in
any unfair trade practices injurious to other tenants of the Shopping Center.
Tenant shall not install or permit the installation of any coin or token
operated vending, amusement, or gambling machines in or about the Premises
without the prior written consent of Landlord.
Tenant shall, at Tenant's sole cost and expense, comply with all statutes,
ordinances and requirements of all county, state and federal authorities now in
force, or which may hereafter be in force, pertaining to the Premises. Without
limiting the generality of the foregoing, Tenant shall keep and maintain the
Premises, including without limitation, the groundwater on, or under the
Premises, in compliance with, and shall not cause or permit the same to be in
violation of, any federal, state or local laws, ordinances or regulations, now
or hereafter in effect relating to environmental conditions, industrial hygiene
or Hazardous Materials, as hereinafter defined, on, under, or about the
Premises, including without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section
9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C., 6901, et
seq., the Hazardous Materials Transportation Act, 49 U.S.C., Section 6901, et
seq., The Clean Water Act, 33 U.S.C., Section 1251, et seq., The Clean Air Act,
42 U.S.C., Section 7401, et seq., The Toxic Substances Control Act, 15 U.S.C.,
Sections 300f through 300j, and any similar state and local laws and ordinances
and the regulations now or hereafter adopted, published, and/or promulgated
pursuant thereto (collectively, the "Hazardous Materials Laws").
Tenant shall not use, generate, manufacture, treat, handle, refine, produce,
process, store, discharge, release, dispose of or allow to exist on, under or
about the Premises, any flammable explosives, radioactive materials, asbestos,
organic compounds known as polychlorinated biphenyl's, chemicals known to cause
cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes,
hazardous or toxic substances or related materials, vehicle fuel, petroleum or
other related petroleum products including without limitation, any substances
defined as or included in the definition of "Hazardous Substances", "Hazardous
Waste", "Hazardous Materials", or "Toxic Substances" under the Hazardous
Materials Law (collectively, "Hazardous Materials") except in compliance with
all applicable laws.
If after receiving written notice from a county, state or federal authority or
Landlord of infractions of or failure to meet any requirement of such authority,
Tenant refuses or neglects to comply with the requirement, Landlord may, at its
sole discretion, enter the Premises and make such repairs or take any other
action necessary, to achieve such compliance on Tenants behalf, and Tenant
hereby waives any right to claim or bring an action at law against Landlord
based upon any injury or loss resulting from Landlord's action hereunder. Tenant
further agrees to pay Landlord's costs for making such repairs or taking any
other action, any penalties, liabilities, response costs (including all out of
pocket litigation costs and reasonable attorney's fees), plus administrative
costs and overhead, as additional rent, upon receipt of a bill therefor from
Landlord. Tenant's obligations to comply with all statutes, ordinances and
requirements of all county, state and federal authorities to the extent
applicable and to pay Landlord's costs, any penalties, and response costs plus a
surcharge, as set forth herein, shall survive the termination of this Lease or
the transfer of any real property contained in the Shopping Center. The
provisions of this paragraph shall not apply to any "Hazardous Materials" that
affected the premises prior to commencement of this lease.
Tenant shall immediately notify Landlord in writing of (i) any and all
enforcement, clean-up, removal, removal, mitigation or other governmental or
regulatory actions instituted, contemplated or threatened pursuant to any
Hazardous Materials Laws affecting the premises; (ii) all claims made or
threatened by any third party against Tenant, the Premises, or the Shopping
Center relating to damage, contribution, cost recovery, compensation, loss or
injury resulting from any Hazardous Materials (the matters set forth in clauses
(i) and (ii) above are hereinafter referred to as "Hazardous Materials Claims")
and (iii) Tenant's discovery of any occurrences or conditions on the Premises,
Shopping Center or any real property adjoining or in the vicinity of the
Premises which could subject Tenant, the Premises, or the Shopping Center to any
restrictions on ownership, occupancy, transferability or use of the Premises of
Shopping Center under any Hazardous Materials Laws.
6. UTILITY CHARGES. All charges, including assessments or environmental quality
charges, for electricity, water, gas, telephone, sewer service, garbage and any
other utility
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services used by Tenant in connection with its occupancy or use of the Premises,
together with connection and service charges and all costs of operating and
maintaining the equipment therefor, shall be paid by Tenant.
7. REPAIRS. During the entire term of this Lease, Tenant shall at its sole cost
and expense keep, maintain, repair and replace the Premises and every part
thereof, including but not limited to, all plate glass and other glazing, show
windows and entrance doors, fixtures, equipment and appurtenances thereof
(including lighting and plumbing fixtures, signs and any air conditioning
system) and FIoor covering, in good and sanitary order, condition and repair fit
for occupancy (including reasonably periodic painting and termite and other pest
treatment of the interior), and cause the Premises to conform to the
requirements of any governmental authority by reason of the use to which Tenant
may put the Premises, and engage a responsible maintenance contractor to keep
all mechanical equipment operating at a maximum efficiency at all times; except
that Tenant shall not be obligated to make structural alterations or repairs
(i.e. foundations, support columns, FIoor but not FIoor coverings), and upon the
expiration or any earlier termination of this Lease, Tenant shall deliver the
Premises to Landlord in good and sanitary order, condition and repair,
reasonable wear expected, and put all such equipment in as good working order
and condition as the same was in at the start of the Lease or any subsequent
installation date, reasonable wear expected. Without limiting the generality of
the foregoing, Tenant shall at its sole cost and expense perform each and every
obligation set forth in this Lease. Tenant shall not make any changes, or
additions to the Premises without the prior written consent of the Landlord,
which consent shall not be unreasonably withheld. All additions made by Tenant
shall become part of the Premises and shall be the property of Landlord, except
for trade fixtures such as ATM machines, vault doors, safes and similar
equipment which Tenant may remove or shall remove upon request by Landlord.
Tenant shall not permit any lien to stand against the Premises for labor or
material furnished or claim to have been furnished to Tenant or at its
discretion or sufferance. If any such lien shall be filed against the Premises,
Tenant shall cause the same to be discharged within the ten (10) days after
actual notice of such filing, by payment, deposit or bond. Landlord shall have
the right to post and keep posted on the Premises any notices which Landlord may
deem to be proper for protection from liens. The right to approve and control
all signs and advertising devices on or visible from the exterior of the
Premises is reserved by Landlord.
8. INSURANCE AND CASUALTY. All risk of damage to property in or about the
Premises from any cause and to whomever belonging, and all risk of injury to or
death of a person or persons in the Premises or in or about the ATM machines
from any cause is hereby assumed by Tenant. Tenant agrees to waive and to
indemnify and defend Landlord and agent of Landlord against all claims arising
out of any such damage, injury or death and hold Landlord harmless from, any
liability and expense whatsoever, including but not limited to, reasonable
attorney's fees, arising out of such damage, injury or death. Tenant shall
during the term of this Lease maintain in force a policy of insurance, issued by
insurance companies with general policyholder's rating of not less than A and a
financing rating of AAA as rated in the most current available "Best Insurance
Reports" and qualified to do business in California, insuring Tenant against
liability for the injury to, or death of a person or persons and damage to
property occurring in or about the Premises. The liability of the insurer under
such policy or policies shall not be less than Two Million Dollars
($2,000,000.00) for combined single limits each occurrence, bodily injury and
property damage liability. Such policy shall name Landlord and agent of
Landlord, if any, as additionally insured parties. The adequacy of the coverage
afforded by said public liability insurance and property damage liability
insurance shall be subject to review by the Landlord from time to time, and if
it appears in such a review that a prudent businessman in California operating a
similar business to that operated by Tenant on the Premises, would increase the
limits of his public liability insurance and/or property damage liability
insurance, Tenant shall, to that extent, forthwith increase such limits. All
public liability and property damage policies shall contain a provision that the
Landlord, although named as an insured, shall nevertheless be entitled to
recovery under said policies for any loss occasioned to it, its agents and
employees, by reason of the negligence of the Tenant. As often as any such
policy shall expire or terminate, renewal or additional policies shall be
procured and maintained by Tenant in like manner and to like extent. All
policies of insurance delivered to Landlord must contain a provision that the
company writing said policy will give to Landlord no less than ten (10) days
notice in writing in advance of any cancellation or lapse or the effective date
of any reduction in the amounts or change in coverage of such insurance. All
public liability, property damage and other causality policies shall be written
as primary policies,
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not contributing with and not in excess of coverage which Landlord may carry.
Tenant shall also maintain in force during the term of this Lease all insurance
required under the California Labor Code, Sections 3200 through 6208, and under
any other similar law, ordinance or regulation which may be necessary to protect
Landlord against any liability under such law, ordinance or regulation arising
from occupancy of Tenant on the premises.
Landlord shall keep that part of the Center in which Tenant's Premises are
located insured against loss or damage by fire, with an all risk coverage
endorsement, in an amount equal to at least eighty per cent (80%) of the
insurable value thereof, plus such other insurance (e.g., against vandalism,
malicious mischief, loss of rents, sprinkler leakage, etc.) as Landlord may deem
appropriate. Tenant shall pay to Landlord as additional rent hereunder its
proportionate share of the fire, all risk coverage and other insurance coverage
in which the Premises are located within ten (10) days after Tenant's receipt of
Landlord's invoice therefor. Such portion shall be determined as follows: Tenant
shall pay that portion as shall be equal to the product obtained by multiplying
the total amount due by a fraction, the numerator of which shall be three
thousand five hundred and forty (3,540) square feet of the Premises and the
denominator, the gross FIoor area of all stores in the Shopping Center so
insured. All insurance policies insuring property of Tenant located on the
Premises shall, if obtainable without additional expense, provide that the
insurer shall not acquire by subrogation any right of recovery which Tenant has
expressly waived prior to the occurrence of the loss. Without limiting the
generality of the foregoing above, Tenant hereby waives any right of recovery
against Landlord for any loss or damage to such property of Tenant. Any
insurance policy carried by Landlord insuring the Premises against loss or
damage by fire or other hazards shall, if obtainable without additional expense
to Landlord, provide that the insurer shall not acquire by subrogation any right
of recovery which Landlord has expressly waived prior to the occurrence of the
loss. Landlord hereby waives any right of recovery against Tenant to the extent
of actual recovery under any such policy for any such loss or damage to the
premises.
Should the Premises be partially destroyed during the term of this Lease from
any cause, Landlord shall forthwith repair the same if such repairs can be made,
under applicable laws and regulations, within sixty (60) days after the date of
such partial destruction, but such partial destruction shall in no way affect
this Lease except that, (unless the damage is the result of the negligence or
willful misconduct of Tenant or Tenant's employees, licensees, concessionaires,
subleases, assignees, agents or invitees of Tenant), Tenant shall be entitled to
a proportionate reduction of the fixed rent until such repairs have been
substantially completed. If such repairs cannot, for any reason, be made within
a sixty (60) day period, Landlord may nevertheless, at its option make the same
within a reasonable time, with this Lease to continue in full force and effect
with the fixed rent to be proportionately reduced as above. If Landlord does not
elect to make repairs which cannot be made within said sixty (60) day period, or
if the required repairs cannot be made under applicable laws and regulations,
this Lease may be terminated by either party by giving written notice to the
other. Any provisions given herein notwithstanding, if the building of which the
Premises are a part is destroyed to the extent of at least thirty three per cent
(33%) of the replacement cost, Landlord may elect to terminate this Lease,
whether the Premises are injured or not; further, Landlord shall not be required
to make any repairs hereunder during the last two (2) years of the term of this
Lease, and that if during those two (2) years Landlord decides not to make
repairs, this Lease shall terminate, and Landlord shall not be obligated to
restore, repair or replace any property of Tenant.
9. TAXES. All property taxes levied against the Premises during the term of this
Lease will be paid by Tenant. For each tax year during the term hereof, Tenant
shall pay Landlord as additional rent hereunder the total dollar amount of real
property taxes levied with respect to the Premises. If the Premises are assessed
with other property as part of one or more parcels, Tenant shall pay that
portion of the tax which is reasonably allocated to the Premises. "Real Property
Taxes" are defined as real property taxes and general and special assessments,
sewer and water bonds, and charges levied or assessed, by any governmental
agency with respect to the Premises, taxes of every kind and nature whatsoever,
other than state and federal income taxes measured by the net income of Landlord
from all sources, levied or assessed entirely or partly in lieu of existing or
additional real property ad valorem taxes and the land and building in which the
Premises are situated or upon or measured by rental payable hereunder, at the
cost of contesting by the amount or validity of any such tax, assessment or
charge. The additional rent payable in respect of each tax year shall be paid to
Landlord within fifteen (15) days from receipt of billing by Tenant. Before
delinquency, Tenant shall pay all taxes and similar charges
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levied upon or assessed against equipment, furniture, fixtures, inventory, and
other property of Tenant situated on the Premises during the term of this Lease,
and upon demand shall reimburse Landlord for any and all taxes payable by
Landlord attributable to the cost of value of equipment, furniture, fixtures and
other property of Tenant located on the Premises or by the cost of value of any
leasehold improvements made in or to the Premises by or for Tenant, other than
work by Landlord, if any, regardless of whether title to such improvements shall
be in Landlord or Tenant.
10. COMMON AREAS. The common areas in the Shopping Center shall be for the
non-exclusive use of customers of Tenant in common with the customers of other
tenants of the Shopping Center and others and Landlord shall keep such areas
landscaped, paved, marked, lighted and cleaned. Tenant agrees to pay to
Landlord, as additional rental, upon demand, a proportionate share of all costs
and expenses of operating, managing and maintaining the Shopping Center,
determined by multiplying such costs and expenses by a fraction, the numerator
of which is three thousand five hundred and forty (3,540) square feet, and the
denominator of which is the total leasable building area of the Shopping Center,
as such may exist from time to time in the Shopping Center. The cost of common
area maintenance and operation of the Shopping Center shall mean, without
limitation, the total cost and expense incurred by Landlord in operating and
maintaining the Shopping Center, specifically including without limitation:
taxes levied with respect to the common areas; the cost of water and
electricity; gardening and landscaping; the cost of public liability, property
damage, and all risk casualty and hazard insurance (including standard fire and
extended coverage with a loss of rents endorsement), providing such coverage and
in such amounts of coverage as Landlords shall determine or otherwise be
required to carry; re-striping, repairing and otherwise resurfacing parking
areas; maintenance and repairs of all exterior walls (excluding storefronts),
all roofs (except if such maintenance is required by a structural fault),
directional signs and markers, lighting fixtures (including equipment and bulb
replacement) water, electrical, sewer and storm drain and other utility lines;
refuse and garbage removal; janitorial services and supplies; all billing,
bookkeeping, auditing, management and legal expenses; the cost of supplies and
small tools to accomplish all maintenance services; the reasonable cost of
services contracted out, such as but not limited to security, fire sprinkler
system monitoring and maintenance, direction or controlling of parking,
groundskeeping, tree trimming or termite or other pest treatment service,
governmental and other inspection fees. In addition, Landlord may establish and
maintain a reserve fund for major expenses such as repaving of parking areas or
re-roofing of building. The term "taxes levied with respect to the common areas"
as used in the foregoing sentence shall mean real property taxes, general and
special assessments and charges levied or assessed by any governmental agency
with respect to the common areas, personal property taxes on personal property
of Landlord used in the operation of the Shopping Center, taxes of every kind
and nature whatsoever, other than state and federal income taxes measured by the
net income of Landlord from all sources levied or assesses wholly or partly in
lieu of existing or additional real or personal property ad valorem taxes on the
common areas of such personal property, and parking surcharge or similar
imposition now or hereafter imposed by any governmental agency, and the cost of
contesting by appropriate proceedings the amount of validity of any of the
aforementioned taxes, assessments or charges. The share for Tenant of such costs
and expenses of maintaining and operating such common areas may be estimated by
Landlord, subject to adjustment in future billing to Tenant. After the end of
each year, Landlord shall compute the costs and expenses of maintaining the
areas referred to in this paragraph during the preceding year. If the share for
Tenant of such costs and expenses is greater or less than the sum previously
billed to and paid by Tenant during said year, the difference shall be paid by
or credited to Tenant. Tenant shall insure that no employees, licensees,
suppliers, concessionaires, sublessees, or assignees of Tenant park their
vehicles in the Shopping Center except in areas designated by Landlord for
employee parking. The right is reserved by Landlord to promulgate reasonable
regulations for use of the common areas including, but not limited to, the
making of reasonable charges for the use thereof, as Landlord may solely deem to
be in the best interest of the Shopping Center (See Exhibit "E" for current
rules and regulations). Tenant agrees to be bound by such regulations. By
definition, "common areas" shall mean all parts and facilities in the Shopping
Center designated from time to time by Landlord for the common use and benefit
of tenants of the Shopping Center and their customers, employees, and invitees.
The common areas shall include to the extent the same designated, but are not
limited to, parking areas, mail areas, roof areas, and landscaped areas. At all
times, exclusive control of the common areas shall be by Landlord and at any
time, Landlord may make any changes in the best interest of the Shopping Center.
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11. MODIFICATION OF COMMON AREAS. Tenant shall make no changes in the common
areas and shall make no changes to the Premises which may cause or result in the
need to make any changes in the common areas, or result in the Shopping Center,
including its on-site and off site improvements, not being in full compliance
with all municipal, county, state, federal, or other governmental ordinances,
codes, statutes, regulations or other regulatory requirements, (referred to in
this Lease as "Governmental Requirements"). Landlord makes no warranty that
Tenant's intended use and occupancy of the Premises shall be in compliance with
or permitted by applicable Governmental Requirements, and Tenant shall be
responsible and pay for the cost of complying with all Governmental Requirements
which arise from Tenant's use and occupancy of the premises.
12. CONDEMNATION. In the event that all or any part of the Premises shall be
condemned and taken by eminent domain or be conveyed to any entity having such
power under threat of exercise thereof, this Lease shall automatically terminate
as to the portion of the Premises which is condemned. The entire compensation
payable in respect of such condemnation shall be paid to Landlord, and Tenant
hereby irrevocably assigns to Landlord any right to such compensation to which
Tenant may become entitled, except as to any part thereof attributable to the
taking of property of Tenant. If a part of the Premises is condemned and the
portion of the Premises remaining will not be reasonably suitable for the
operation of Tenant, this Lease may be terminated by either Landlord or Tenant
at any time within forty-five (45) days after the date of possession by
condemnor. If this Lease is not so terminated or if the remaining part of the
Premises will be reasonably suitable for the operation of Tenant, this Lease
shall continue in full force and effect as to such remaining part; provided,
however, that the fixed rent shall be reduced in the same proportion that the
FIoor area included in the Premises is reduced by such condemnation.
13. DEFAULT. In the event that at any time Tenant shall fail to perform or
comply with any covenant or condition required under this Lease, Landlord may,
upon ten days notice or demand cure such breach for the account and at the
expense of Tenant, with or without exercising any other right available. If,
because of such breach, Landlord incurs any expense whatsoever, all such costs
and damages incurred by Landlord, together with interest thereon at the rate of
ten per cent (10%) per annum shall be immediately due and payable by Tenant to
Landlord. Tenant shall be in default under this Lease if Tenant fails or omits
to pay any rent or other sum payable hereunder for a period of ten (10) days
after the same is due; or if Tenant shall make a transfer contrary to the
provisions of this Lease or shall abandon or vacate the premises; or fails to
observe, keep or perform any of the other terms, covenants, agreements or
conditions contained herein after thirty (30) days written notice of such
failure by Landlord, or if Tenant shall file a petition in any court having for
its purpose the adjudication of Tenant as bankrupt or insolvent, or the
reorganization or liquidation of its assets; or any such petition shall be filed
against Tenant and the proceedings not be dismissed within sixty (60) days after
the filing of the same; or if a receiver shall be appointed with authority to
take possession of the premises; or a writ or process of attachment or execution
shall be levied on the leasehold estate created hereby and not be released or
satisfied within sixty (60) days thereafter; or if Tenant shall make a transfer
in fraud of creditors or an assignment of its property for the benefit of its
creditors.
In the event of any default, Landlord may, at its option, terminate this Lease
by giving written notice to Tenant. Landlord may then or at any time thereafter,
re-enter the Premises and remove therefrom, all persons and property and
repossess the Premises, without prejudice to any other remedies that Landlord
may have. Landlord shall also have the rights provided by the California Code of
Civil Procedure, Sections 1161 & 1161.1. In the event that the Landlord elects
to terminate this Lease, Tenant shall be liable for the payments and rents
unpaid prior to the termination and for all expenses and other damages, both
direct and consequential, suffered by Landlord as a result of the early
termination of this Lease, irrespective of whether they were incurred before or
after terminating the Lease. If Tenant breaches this Lease and abandons the
Premises and Landlord does not elect to terminate this Lease for such breach and
abandonment, this Lease shall continue in full force and effect and Landlord
shall have all of the rights provided by California Code of Civil Procedure
Section 1161. Landlord may also relet Premises as attorney-in-fact for Tenant
for such term, which may extend beyond the term of this Lease, and upon such
other terms and conditions as Landlord may deem appropriate without any
obligation to Tenant. Landlord may do all things reasonably necessary for such
reletting, including repair and renovation, and Tenant shall reimburse Landlord
on demand for all costs incurred by Landlord in connection therewith. The
foregoing, notwithstanding, Landlord may
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at any time elect to terminate this Lease for any previous breach or default
hereunder by Tenant which remains uncured or for any subsequent breach or
default. In order to establish the rent due under a termination of this Lease,
or if Tenant abandons the Premises, the monthly rent shall be the sum of the
fixed rent; plus common area, insurance, and tax charges during the twelve (12)
preceding months.
14. ASSIGNMENT AND SUBLETTING. Tenant shall not sell, assign, sublet, encumber
or otherwise transfer this Lease or any of its interest herein unless and until
the prior written consent of Landlord is first had and obtained. Said consent of
Landlord shall not be unreasonably withheld.
Notwithstanding the above, no such written consent of Landlord shall be required
if the assignment or transfer is required by Tenant's internal reorganization or
merger with or acquisition by another banking institution or bank holding
company of comparable or greater net assets than Tenant, however, Tenant shall
notify Landlord in writing at least thirty (30) days prior to any assignment or
transfer meeting the above requirements.
Any such consented-to assignment or subletting shall not relieve Tenant of its
primary obligation under this lease, unless Landlord shall otherwise consent in
writing, and any assignee or subtenant of Tenant must agree in writing to be
bound by all of the terms and provisions hereof.
15. Relocation. This section deleted.
16. SUCCESSORS. All rights and duties of tenant and Landlord hereunder shall
insure to the benefit of and be binding upon their respective heirs, executors,
administrators, successors in interest and assigns, subject, however, to the
provisions of paragraph 13 and 21 hereof.
17. PROM0TION FUND. Tenant may, but shall not be obligated to contribute to a
promotion fund to be administered by Landlord for the promotion or benefit of
the Shopping Center (the "Promotion Fund"). Tenant agrees to advertise Tenant's
business in the Premises in advertising designated or sponsored by Landlord
and/or a majority of the Tenant's in the Shopping Center at a cost not to exceed
six hundred dollars ($600.00) per year.
18. NON-COMPETITION. This section deleted.
19. ENTRY RIGHT. Landlord or its duly authorized agents may enter the Premises
at all reasonable times during business hours or at any time in the event of an
emergency. Tenant hereby waives any claim for damages for any loss occasioned by
any such entry.
20. NOTICES. All notices and rentals required hereunder shall be sent by first
class mail addressed as follows: If to the Landlord, to GABRIELSEN & COMPANY,
1100 LARKSPUR LANDING CllRCLE, SUITE 108, LARKSPUR, CA 94939-1827, and if to
Tenant, at the Premises or at such other addresses as may be from time to time
as specified by notice.
21. MERGER. Should this Lease be surrendered by Tenant or mutually cancelled,
this shall not cause a merger, but shall, at the option of the Landlord, operate
as an assignment to Landlord of any or all such subtenancies.
22. SALE. If Landlord shall sale or transfer or terminate the interest of
Landlord in the Premises at any time hereafter, regardless of cause, Landlord
shall be released from any further liability to Tenant except any claim that has
accrued on or before the date of such transfer or termination.
23. SURRENDER. At the expiration of this Lease term, or any earlier termination,
Tenant shall immediately surrender and deliver up the Premises to Landlord and
remove from the Premises all personal property of Tenant and repair all damage
to the Premises resulting from such removal. Any holding over by Tenant after
the expiration of the term shall not constitute a renewal or extension hereof or
give Tenant any rights to the Premises. It is understood and agreed that
Landlord will not renew or extend the term of this Lease, unless Landlord
hereafter agrees in writing to do so.
24. NON-WAIVER. No failure by Landlord to demand performance by Tenant of any
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covenant of this Lease, shall be construed as a waiver thereof, nor shall any
practice between the parties hereto be construed to waive the right of Landlord
to enforce performance by Tenant of all terms of this Lease. No acceptance of
rent with knowledge of any breach shall be deemed a waiver thereof.
25. SECURITY DEPOSIT. This section deleted.
26. NO PARTNERSHIP. By entering into this Lease, there is no intention to create
a partnership and the parties state specifically that they are not partners.
27. SEVERABILITY CLAUSE. If any term or provision of this Lease or the
applicability thereof to any person or circumstance shall, to any extent be
invalid or unenforceable, the remainder of this Lease or the application of such
term or provisions to persons other to those as to which it is held invalid or
unenforceable shall not be affected thereby, and each term and provision of this
Lease shall be valid and be enforced to the fullest extent permitted by law, and
this lease shall remain in full force and effect.
28. TIME. Time is of the essence of this agreement and of each and every
provision hereof.
29. SUBORDINATION. Tenant shall, when requested by Landlord, promptly execute
and deliver such written instruments as shall be deemed necessary to subordinate
this Lease to all mortgages or other instruments in the nature of a mortgage,
provided that the holder of such mortgage or other secured party agrees in
writing with Tenant, in the event of a foreclosure or similar action, to
recognize Tenant, so long as Tenant is not in default hereunder, pursuant to the
terms of this Lease.
30. ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS. Tenant shall, upon not less
than fifteen (15) days prior written request by Landlord, execute, acknowledge
and deliver to Landlord a statement in writing, certifying that this Lease is
unmodified and in full force and effect; that Tenant has no defenses, offsets or
counterclaims against its obligations to pay the fixed annual rent and
additional rent or to perform its other covenants under this Lease; that there
are no uncured defaults of Landlord or Tenant under this Lease (or, if there
have been any modifications, that this Lease is in full force and effect as
modified and stating that the modifications and, if there are any defenses,
offsets, counterclaims or defaults, setting them forth in reasonable detail);
and the dates to which the annual fixed rent, additional rent and other charges
have been paid. Any such statement delivered pursuant to this Paragraph 30, may
be relied upon by any prospective purchaser or mortgagee of the Premises or any
prospective assignee of any such mortgage. At any time during the term of this
Lease, Tenant shall, upon fifteen (15) days prior written notice from Landlord,
provide Landlord with a current financial statement and financial statements of
the two (2) years prior to the current financial statement year. Such statement
shall be prepared in accordance with generally accepted accounting principles
and, if such is the normal practice of Tenant, shall be audited by an
independent certified public accountant.
31. ATTORNEYS' FEES. In case Landlord shall, without fault on its part, be made
a party to any litigation commenced by or against Tenant arising out of Tenants
occupancy of the Premises or any act of Tenant concerning the Premises of this
Lease, or in case suit shall be brought for recovery of possession of said
Premises, for the recovery of rent or any other amount due under the provisions
of this Lease, or because of the breach of any other covenant herein contained,
on the part of Tenant to be kept or performed, and a breach shall be
established, Tenant shall pay to Landlord all expenses incurred in connection
therewith, including a reasonable attorneys' fee. In case suit shall be brought
by Tenant against Landlord for breach of any of Landlord's covenants herein
contained and a breach shall be established, Landlord shall pay to Tenant all
expenses incurred therefor, including a reasonable attorney's fee.
32. LICENSES. Immediately after execution of this Lease, Tenant at its sole cost
and expense shall petition all appropriate governmental agencies for the purpose
of obtaining all variances, appropriate licenses, and zoning, rezoning, use,
building and other permits ("variances, licenses, and permits") necessary for
Tenant's intended use of the Premises. Tenant at its sole cost and expense shall
comply with all conditions and requirements imposed by such governmental
agencies as conditions for the granting of such variances, licenses, and
permits. Tenant shall
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notify Landlord in writing when all the necessary variances, licenses, and
permits have been obtained. If Tenant is unable to obtain such variances,
licenses, and permits, or any of them, within sixty (60) days after the date of
this Lease, or if Tenant does not fully comply with the terms and conditions
imposed upon such variances, licenses, and permits, or any of them, within
thirty (30) days after obtaining such variances, licenses, and permits, then
Landlord may at any time prior to Tenant's obtaining all such variances,
licenses, and permits and full compliance with the terms and conditions thereof,
elect to terminate this Lease by giving written notice of termination to the
other party.
33. REMODELING. Tenant to remodel and complete the Premises at its sole cost and
expense, except that Landlord shall contribute Fifteen Thousand Dollars and No
Cents ($15,000.00) towards Tenant's Work, as defined in Exhibit "B" attached.
Payment to Tenant by Landlord shall be made after Tenant opens for business in
the Premises and upon Landlord's receipt of a recorded Certificate of Completion
and certified costs and lien releases from the general contractor.
(a) Prior to construction, Tenant shall furnish to Landlord plans and
specifications for all work to be performed, which plans and specifications
shall be attached hereto as Exhibit D and made a part of this Lease.
(b) All such plans and specifications shall fully comply with all
governmental requirements of the County of Shasta, State of California, and
shall not result in Landlord incurring any cost or expense in connection with
the Shopping Center, the common areas, or the premises.
(c) Tenant shall not commence the work to be performed or installation
of any tenant improvements without Landlord's prior written approval of Tenant's
final plans and specifications.
(d) SIGNS: Tenant shall erect a sign over Tenant's storefront, securely
attached to and parallel to said walls. Such sign shall be no larger than
permitted by Landlord and shall be subject to Landlord's prior written approval,
which approval Landlord shall not be unreasonably withheld. Tenant shall not
erect any signs other than customary trade signs identifying its business.
Tenant shall remove all signs at the termination of this Lease and shall repair
any damage caused by such removal. Tenant shall, at Tenant's sole cost and
expense, obtain all approvals required by the local governing authority(ies)
prior to installing any such sign. In the event Landlord elects to remodel the
exterior of the Shopping Center and/or revise the general sign program of the
Shopping Center and such event requires Tenant to remodel or replace the above
referenced Tenant sign, Tenant shall bear all expenses in connection with the
removal and reinstallation of Tenant's sign.
34. COMMENCEMENT OF REMODELING. Tenant shall commence construction of Tenant's
improvements not later than ten (10) days after receiving all said variances,
licenses, and permits, including governmental approval of Tenant's signage.
Landlord has the right to approve Tenant's signs; however, such approval shall
not be unreasonably withheld.
35. AIR CONDITIONING. Landlord shall maintain in good condition, repair and
working order the heating, ventilating, and air conditioning (HVAC) unit on the
Premises for a period of one (1) year from the Commencement of Term, after which
Tenant agrees at its sole cost and expense to maintain said unit and to have
same serviced under a maintenance contract by a licensed HVAC contractor. Copies
of said maintenance contract will be sent to Landlord upon receipt by Tenant.
36. OBLIGATIONS. The obligations of each of the parties signing hereinafter
under this Lease shall be joint and several.
37. GOVERNING LAW. This Lease shall be interpreted and construed under the laws
of the State in which the Premises are situated.
38. EXCLUSIVE PROVISION. So long as Tenant is not in default of the terms of
this Lease, Landlord agrees that, during the first five (5) years of the term
hereof, Landlord shall not,
10
55
<PAGE>
except with written consent of Tenant first had and obtained, grant a lease for
space in the Shopping Center to any party whose use is as a staffed retail bank
branch providing commercial and personal financial services as now conducted by
Tenant; nor shall Landlord grant the above use to the tenants currently
occupying space in the Shopping Center. The above provision shall not apply to
the investment, industrial, or mortgage banking or supplemental operations of
the current and/or future tenants in the Shopping Center.
39. CO-TENANCY/TENANT RIGHT TO TERMINATE. If and only if the Holiday Market
currently operating at 9350 Deschutes Road in the Shopping Center closes for
business for a continuous period in excess of six (6) months, excluding periods
of time related to reconstruction due to damage, destruction, or remodeling, and
is not replaced by a comparable tenant in a majority of their premises, then
Tenant shall have the right to terminate this Lease within ninety (90) days of
above-referenced six (6) month period by giving ninety (90) days prior written
notice to Landlord. If Tenant does not terminate this Lease in accordance with
the above, then this Lease shall continue in full force and effect.
40. OPTION TO EXTEND. So long as Tenant is not in default of the terms this
Lease, Tenant may have the option to extend this Lease upon the same terms and
conditions, except as to Fixed Rent, for two (2) additional periods of five (5)
years each, commencing at midnight on the date on which the prior term of this
Lease terminates, in accordance with Paragraph 2.C herein above.
During each five (5) year extension period (the "Extension Term"), if exercised,
the Fixed Rent shall be equivalent to the Fair Market Rental Value of the
Premises as of the date of expiration of the prior term. The Fair Market Rental
Value of the Premises shall be determined taking into consideration the Fixed
Rental rates at the time in question of other leases which are comparable in
size, location and use to the size, location and use of the Premises.
Notice to exercise each Extension Term shall be given no later than one (1) year
before the end of the prior term. Tenant shall exercise its option to extend the
Lease for each Extension Term by giving Landlord written notice of such
exercise. If Tenant fails to give such notice as provided above, Tenant shall be
deemed to have waived its rights to this extension option. Beginning no later
than one (1) year prior to the expiration of the prior term, Landlord and Tenant
shall use their best efforts to reach agreement with regard to the amount of
Fixed Rent which equals the Fair Market Rental Value of the Premises for each
five (5) year extension period. If agreement is so reached, Landlord and Tenant
shall thereupon execute an amendment to this Lease setting forth said agreement.
If agreement is not so reached within ninety (90) days, then within twenty (20)
days thereafter, Landlord and Tenant shall each appoint by written notice to the
other a real estate appraiser to appraise the Premises and set the Fixed Rent
for the Extension Term. If one but not both parties so appoints an appraiser,
the single appraiser shall be the sole appraiser and shall set the Fixed Rent
within thirty (30) days after said twenty (20) day period. If two appraisers are
so appointed, they shall meet promptly after their appointment and set the Fixed
Rent for said period. If said two appraisers are unable to agree within thirty
(30) days after the second appraiser has been appointed, they shall appoint a
third appraiser within ten (10) days after the end of said thirty (30) day
period, and if they are unable to agree on a third appraiser, either of the
parties after giving ten (10) days written notice to the other party may apply
to the presiding judge of the Superior Court of Shasta County, acting in his
individual and non-official capacity, for the selection of the third appraiser.
The third appraiser shall be a person who has not previously acted in any
capacity for either party. Within thirty (30) days after the selection of the
third appraiser, a majority of the appraisers shall set the Fixed Rent in
question. If the majority of the appraisers are unable to agree upon the Fixed
Rent, at the end of said thirty (30) day period each appraiser shall advise the
parties in writing of his Fixed Rent figure, and the Fixed Rent for the period
in question shall be the average of the two such figures nearest in amount.
After the Fixed Rent has been set, the appraisers shall immediately notify the
parties thereof in writing. The decision of the appraisers or a majority of them
shall be final, conclusive and binding upon both parties and may be enforced in
any court having jurisdiction thereof whether or not one party fails to
participate in the appraisal process. Landlord and Tenant shall each pay
one-half (1/2) of the cost of the appraisers' fees and one-half (1/2) of any
charge by the presiding judge for appointing the third appraiser. Attorneys'
fees in connection with such appraisers' determination of Fixed Rent shall be
borne by the party incurring them. All appraisers hereunder shall be members of
the American Institute of Real Estate Appraisers or any successor organization
who are familiar with appraisal procedures and
11
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with commercial property values in the area of the Premises. If for any reason
beyond the reasonable control of Landlord and Tenant the Fixed Rent has not been
determined prior to the period to which it is applicable, Tenant shall continue
paying Fixed Rent during that period at the former rate until the Fixed Rent
rate is determined. As soon as the Fixed Rent has been determined, the Fixed
Rent due from Tenant for the period in question shall be adjusted accordingly,
if appropriate, retroactive to the commencement date of said period.
Notwithstanding anything to the contrary herein, in no event shall the Fixed
Rent during each Extension Term be less than the Fixed Rent for the first year
of the term hereof.
41. COMPLETE AGREEMENT. No oral agreements exist between Landlord and Tenant
affecting this Lease, and this Lease supersedes and cancels any previous
understandings. There are no representations between Landlord and Tenant other
than those contained in this Lease, and Tenant has not relied on representations
not set forth in this Lease. Time is of the essence hereof. If any of the
provisions contained in this Lease shall for any reason be held to be invalid,
illegal or unenforceable in any way, such invalidity, or unenforceability shall
not affect any other provisions of this Lease, and this Lease shall be construed
as if such said provisions had not been contained herein.
IN WITNESS WHEREOF, The parties have executed this Lease in duplicate as of the
day and year first written above.
TENANT: LANDLORD:
North Valley Bank, Gabrielsen Family Trust
a California Banking dated October 20, 1992
Corporation
/s/ DONALD V. CARTER /s/ DONLON H. GABRIELSEN
- ---------------------- --------------------------
Donald V. Carter, Donlon H. Gabrielsen,
President and Chief Co-Trustee
Executive Officer
8-9-95 8-15-95
- ---------------------- ---------------------------
Date Date
/s/ AGNES H. GABRIELSEN
---------------------------
Agnes H. Gabrielsen
Co-Trustee
8-15-95
---------------------------
Date
12
57
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Exhibit A schematic goes here
58
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EXHIBIT "B"
To North Valley Bank
WORK BY LANDLORD
1. Landlord shall provide a Heating, Ventilating and Air Conditioning
(HVAC) system adequate to heat and cool premises in as new condition.
2. Landlord will relocate or remove existing propane tank and adjust
the level of sewer manholes for non-interference with drive-through lane, if
required.
WORK BY TENANT IN PREMISES
I. Tenant's work is defined as ALL work necessary to complete the
construction of the premises in accordance with the approved plans (defined to
be such plans and specifications prepared by Tenant and finally approved by
Landlord in writing in the manner hereafter provided).
2. All Tenant's work shall be strictly in accordance with the
requirements of all governing codes and ordinances, all underwriters, Landlord's
insurance carrier or rating organization, any standard or general design
specification set forth by Landlord, all public utility companies serving the
Shopping Center, and Landlord's mortgage lender(s), if any. Tenant shall obtain
permits and approvals from all authorities for its work and shall obtain a
Certificate of Occupancy at completion. Tenant shall make arrangements for
separate metering of all utilities not supplied by Landlord and, at Landlord's
option, re-registering meter(s) for utilities supplied by Landlord (or Landlord
may make such arrangements on behalf of Tenant) and Tenant shall pay all
charges, cost of meters and connection fees for same. All fire protection
equipment, required by any governmental entity, shall be the sole responsibility
of Tenant.
3. Tenant's work shall specifically conform to the following general
criteria:
a) All tenant signing and storefront work shall be in conformity
with Landlord's standard specifications and criteria to be issued.
b) Tenant improvements shall include restroom(s) for customers of
Tenant and Tenant's employees designed to governing codes,
c) The customer area shall have suitable finished FIooring material
approved by Landlord's architect.
d) No mezzanine space (for either selling or storage purposes) may
be constructed without Landlord's specific approval. In the event of an
approval, Landlord shall be entitled to rent for any such mezzanine space in an
amount to be agreed upon.
e) Tenant shall not use or install during construction any Hazardous
Materials in the premises.
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EXHIBIT "E"
PALO CEDRO SHOPPING CENTER
EMPLOYEE AND TENANT PARKING RULES AND REGULATIONS
The following rules and regulations are specifically designed for the Palo Cedro
Shopping Center located at Highway 44 and Deschutes Road.
1. All tenants and employees of tenants are required to park in the areas
specifically designated as "Employee Parking" on the following page/site
plan.
2. All spaces designated as "Handicapped" may be subject to any and all laws
applicable within the County of Shasta for similarly designated Public
Parking. The Shasta County Sheriff may issue citations for violations of
these zones.
3. All other specially designated areas, such as red, yellow, green or white
zones, may be subject to any and all laws applicable within the County of
Shasta for similarly designated Public Parking. The Sheriff may issue
citations for violations of these zones.
4. All areas not designated as "Employee Parking" or as one of the zones
indicated in number three above will be considered Public Parking Areas,
intended for the use of customers only. Public Parking is limited to three
(3) hours. Vehicles exceeding the limit may be removed at the vehicle
owner's expense.
5. Tenants or tenant employees parking in the Public Parking Areas are
considered to be in default of the Common Area clause of their respective
Lease.
The above regulations may be amended or changed from time to time by Landlord.
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SALES AGREEMENT WITH FEDERATED SECURITIES CORP.
This Agreement is entered into between the financial institution
executing this Agreement ("Financial Institution") and Federated Securities
Corp. ("FSC") for the mutual funds (referred to individually as the "Fund" and
collectively as the "Funds") for which FSC serves as Distributor of shares of
beneficial interest or capital stock ("Shares"). The Funds include, but are not
limited to, those offered as part of the Liberty Family of Funds and the
Fortress Investment Program.
1. Status of Financial Institution as "Bank" or Registered Broker-Dealer.
The Financial Institution represents and warrants to FSC that:
(a) It is either a "bank" as that term is defined in Section 3(a)(6)
of the Securities Exchange Act of 1934 ("Exchange Act") or a
broker-dealer registered with the Securities and Exchange
Commission.
(b) If the Financial Institution is a "bank", it is a duly organized
and validly existing bank in good standing under the laws of the
jurisdiction in which it is organized The Financial institution
agrees to give written notice to FSC promptly in the event that it
shall cease to be a "bank" as defined in Section 3(a)(6) of the
Exchange Act. In that event this Agreement shall be automatically
terminated upon such written notice.
(c) If the Financial Institution is a registered broker-dealer, it is
a member of the NASD and it agrees to abide by all of the rules
and regulations of the NASD including without limitation, the NASD
Rules of Fair Practice. The Financial Institution agrees to notify
FSC immediately in the event of (1) its expulsion or suspension
from the NASD, or (2) its being found to have violated any
applicable federal or state law, rule or regulation arising out of
its activities as a broker-dealer or in connection with this
Agreement, or which may otherwise affect in any material way its
ability to act in accordance with the terms of this Agreement. The
Financial Institution's expulsion from the NASD will automatically
terminate this Agreement immediately without notice. Suspension of
the Financial Institution from the NASD for violation of any
applicable federal or state law, rule or regulation will terminate
this Agreement effective immediately upon FSC's written notice of
termination to the Financial Institution.
2. Financial Institution Acts as Agent for its Customers.
The parties agree that in each transaction in the Shares of any Fund:
(a) the Financial Institution is acting as agent for the customer; (b) each
transaction is initiated solely upon the order of the customer; (c) as between
the Financial Institution and its customer, the customer will have full
beneficial ownership of all Shares of the Funds; (d) each transaction shall be
for the account of the customer and not for the Financial Institution's account;
and (e) each transaction shall be without recourse to the Financial Institution
provided that the Financial Institution acts in accordance with the terms of
this Agreement. The Financial Institution shall not have any authority in any
transaction to act as FSC's agent or as agent for the Funds.
3. Execution of Orders for Purchase and Redemption of Shares.
(a) All orders for the purchase of any Shares shall be executed at the
then current public offering price per share (i.e., the net asset
value per share plus the applicable sales load, if any) and all
orders for the redemption of any Shares shall be executed at the
net asset value per share, plus any applicable redemption charge
in each case as described in the prospectus of the Fund. FSC and
the Funds reserve the right to reject any purchase request at
their sole discretion. If required by law, each transaction shall
be confirmed in writing on a fully disclosed basis and, if
confirmed by FSC, a copy of each confirmation shall be sent
simultaneously to the Financial Institution if the Financial
Institution so requests.
(b) The procedures relating to all orders and the handling of them
will be subject to the terms of the prospectus of each Fund and
FSC's written instructions to the Financial Institution from time
to time.
61 EXHIBIT 10(gg)
<PAGE>
(c) Payments for Shares shall be made as specified in the applicable
Fund prospectus. If payment for any purchase order is not received
in accordance with the terms of the applicable Fund prospectus,
FSC reserves the right without notice, to cancel the sale and to
hold the Financial Institution responsible for any loss sustained
as a result thereof.
(d) The Financial Institution agrees to provide such security as is
necessary to prevent any unauthorized use of the Funds'
recordkeeping system, accessed via any computer hardware or
software provided to the Financial Institution by FSC.
4. Fees Payable to the Financial Institution from Sales Loads.
(a) On each order accepted by FSC, in exchange for the performance of
sales and/or administrative services, the Financial Institution
will be entitled to receive from the amount paid by the Financial
Institution's customer the applicable percentage of the sales
load, if any, as established by FSC. The sales loads for any Fund
shall be those set forth in its prospectus. The portion of the
sales load payable to the Financial Institution may be changed at
any time at FSC's sole discretion upon thirty (30) days' notice to
the Financial Institution.
(b) Transactions may be settled by the Financial Institution: (1) by
payment of the full purchase price to FSC less an amount equal to
the Financial Institution's applicable percentage of the sales
load, or (2) by payment of the full purchase price to FSC in which
case FSC shall pay to the Financial Institution, not less
frequently than monthly, the aggregate fees due it on orders
received and settled.
5. Payment of Other Administrative Fees to the Financial Institution.
The Financial Institution agrees to render or cause to be rendered such
administrative support services to the Funds for the accounts of the Financial
Institution's customers who are shareholders of the Funds, as the parties
mutually agree are necessary to facilitate the opening and closing of accounts,
entering of purchase and redemption transactions, transferring of funds,
recordkeeping and accounting, distribution of prospectuses and shareholder
reports, and communicating with shareholders. During the term of this Agreement
FSC will pay the Financial Institution fees for each Fund established by FSC in
a written schedule delivered to the Financial Institution pursuant to this
Agreement. These fees may be changed at any time at FSC's sole discretion upon
thirty (30) days' written notice to the Financial Institution.
6. Payment of Rule 12b-1 Fees to the Financial Institution.
Subject to and in accordance with the terms of each Fund prospectus and
the Rule 12b-1 Plan, if any, adopted by resolution of the Board of Directors or
Trustees, and the shareholders of any Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, FSC may pay fees for sales and/or administrative
support services to certain financial institutions (such as banks and
securities, dealers). The Financial Institution may serve as an Administrator in
accordance with the terms of the form of Rule 12b-1 Agreement attached as
Appendix A, for all of its customers who purchase Shares of any Funds whose
prospectuses provide for the use of Administrators.
7. Delivery of Prospectuses to Customers.
The Financial Institution will deliver or cause to be delivered to each
customer, at or prior to the time of any purchase of Shares, a copy of the
prospectus of the Fund. The Financial Institution shall not make any
representations concerning any Shares other than those contained in the
prospectus of the Fund or in any promotional materials or sales literature
furnished to the Financial Institution by FSC or the Fund.
8. Indemnification.
(a) The Financial Institution shall indemnify and hold harmless FSC,
each Fund, the transfer agents of the Funds, and their respective
subsidiaries, affiliates, officers, directors, agents and
employees from all direct or indirect liabilities, losses or costs
(including attorney's fees) arising from, related to or otherwise
connected with: (1) any breach by the Financial Institution of any
provision of this Agreement, or (2) any actions or omissions of
FSC, any Fund, the transfer
62
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agents of the Funds and their subsidiaries, affiliates, diretors,
agents and employees in reliance upon any oral, written or
computer or electronically transmitted instructions believed to be
genuine and to have been given by or on behalf of the Financial
Institution.
(b) FSC shall indemnify and hold harmless the Financial Institution
and its subsidiaries, affiliates, officers, directors, agents and
employees from and against any and all direct or indirect
liabilities, losses or costs (including attorneys' fees) arising
from, related to or otherwise connected with: (1) any breach by
FSC of any provision of this Agreement; or (2) any alleged untrue
statement of a material fact contained in any Fund's Registration
Statement or Prospectus, or as a result of or based upon any
alleged omission to state a material fact required to be stated,
or necessary to make the statements not misleading.
(c) The agreement of the parties in this Paragraph to indemnify each
other is conditioned upon the party entitled to indemnification
(Indemnified Party) giving notice to the party required to provide
indemnification (Indemnifying Party) promptly after the summons or
other first legal process for any claim as to which indemnity may
be sought is served on the Indemnified Party. The Indemnified
Party shall permit the Indemnifying Party to assume the defense of
any such claim or any litigation resulting from it, provided that
counsel for the Indemnifying Party who shall conduct the defense
of such claim or any litigation shall be approved by the
Indemnified Party (which approval shall not unreasonably be
withheld), and that the Indemnified Party may participate in such
defense at its expense. The failure of the Indemnified Party to
give notice as provided in this subparagraph (c) shall not relieve
the Indemnifying Party from any liability other than its indemnity
obligation under this Paragraph. No Indemnifying Party, in the
defense of any such claim or litigation, shall, without the
consent of the Indemnified Party, consent to entry of any judgment
or enter into any settlement that does not include as an
unconditional term the giving by the claimant or plaintiff to the
Indemnified Party of a release from all liability in respect to
such claim or litigation.
(d) The provisions of this Paragraph 8 shall survive the termination
of this Agreement.
9. Customer Names Proprietary to the Financial Institution.
(a) The names of the Financial Institution's customers are and shall
remain the Financial Institution's sole property and shall not be
used by FSC or its affiliates for any purpose except the
performance of its duties and responsibilities under this
Agreement and except for servicing and informational mailings
relating to the Funds. Notwithstanding the foregoing, this
Paragraph 9 shall not prohibit FSC or any of its Affiliates from
utilizing the names of the Financial Institution's customers or
any purpose if the names are obtained in any manner other than
from the Financial Institution pursuant to this Agreement.
(b) Neither party shall use the name of the other party in any manner
without the other party's written consent. except as required by
any applicable federal or state law, rule or regulation and except
pursuant to any mutually agreed upon promotional programs.
(c) The provisions of this Paragraph 9 shall survive the termination
of this Agreement.
10. Solicitation of Proxies.
The Financial Institution agrees not to solicit or cause to be
solicited directly, or indirectly, at any time in the future, any proxies from
the shareholders of any or all of the Funds in opposition to proxies solicited
by management of the Fund or Funds, unless a court of competent jurisdiction
shall have determined that the conduct of a majority of the Board of Directors
or Trustees of the Fund or Funds constitutes willful misfeasance, bad faith,
gross negligence or reckless disregard of their duties. This Paragraph 10 will
survive the term of this Agreement.
11. Certification of Customers' Taxpayer Identification Numbers.
The Financial Institution agrees to obtain any taxpayer identification
number certification from its customers required under Section 3406 of the
Internal Revenue Code, and any applicable Treasury regulations, and to provide.
FSC or its designee with timely written notice of any failure to obtain such
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taxpayer identification number certification in order to enable the
implementation of any required backup withholding.
12. Notices.
Except as otherwise specifically provided in this Agreement, all
notices required or permitted to be given pursuant to this Agreement shall be
given in writing and delivered by personal delivery or by postage prepaid,
reqistered or certified United States first class mail, return receipt
requested, or by telex, telegram or similar means of same day delivery (with a
confirming copy by mail as provided herein.) Unless otherwise notified in
writing, all notices to FSC shall be given or sent to FSC at its offices located
at Federated Investors Tower, Pittsburgh, PA 15222-3779, and all notices to the
Financial Institution shall be given or sent to it at its address shown below.
13. Termination and Amendment.
(a) This Agreement shall become effective in this form as of the date
set forth below and may be terminated at any time by either party
upon thirty (30) days' prior notice to the other party. This
Agreement supersedes any prior sales agreements between the
parties.
(b) This Agreement may be amended by FSC from time to time by the
following procedure. FSC will mail a copy of the amendment to the
Financial Institution's address, as shown below. If the Financial
Institution does not object to the amendment within thirty (30)
days after its receipt, the amendment will become part of the
Agreement. The Financal Institution's objection must be in writing
and be received by FSC within such thirty (30) days.
14. Governing Law.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Pennsylvania.
NORTH VALLEY BANK
Financial Institution Name
(Please Print or Type)
880 E. Cypress Ave.
----------------------------
Address
Redding CA 96002
----------------------------
City State Zip Code
Date: 9/26/95 By: /s/ J.F. COWEE
----------- ------------------------
Authorized Signature
Executive Vice President
------------------------
Title
J.F. Cowee
------------------------
Please Print or Type Name
FEDERATED SECURITIES CORP.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By: /s/ RICHARD B. FISHER
------------------------
Richard B. Fisher, President
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Appendix A
RULE 12b-1 AGREEMENT
This Agreement is made between the Financial Institution executing this
Agreement ("Administrator") and Federated Securities Corp.("FSC") for the mutual
funds (referred to individually as the "Fund" and collectively as the "Funds")
for which FSC serves as Distributor of shares of beneficial interest or capital
stock ("Shares") and which have adopted a Rule 12b-1 Plan ("Plan") and approved
this form of agreement pursuant to Rule 12b-1 under the Investment Company Act
of 1940. In consideration of the mutual covenants hereinafter contained, it is
hereby agreed by and between the parties hereto as follows:
1. FSC hereby appoints the Administrator to render or cause to be
rendered sales and administrative support services to the Funds and their
shareholders.
2. The services to be provided under Paragraph 1 may include, but are
not limited to, the following:
a) communicating account openings through computer terminals located
on the Administrator's premises ("computer terminals"), through a
toll-free telephone number or otherwise;
b) communicating account closings through the computer terminals,
through a toll-free telephone number or otherwise;
c) entering purchase transactions through the computer terminals,
through a toll-free telephone number or otherwise;
d) entering redemption transactions through the computer terminals,
through a toll-free telephone number or otherwise;
e) electronically transferring and receiving funds for Fund Share
purchases and redemptions, and confirming and reconciling all such
transactions;
f) reviewing the activity in Fund accounts;
g) providing training and supervision of its personnel;
h) maintaining and distributing current copies of propectuses and
shareholder reports;
i) advertising the availability of its sevices and products;
j) providing assistance and review in designing materials to send to
customers and potential customers and developing' methods of
making such materials accessible to customers and potential
customers; and
k) responding to customers' and potential customers questions about
the Funds.
The services listed above are illustrative. The Administrator is not required to
perform each service and may at any time perform either more or fewer services
than described above.
3. During the term of this Agreement FSC will pay the Administrator
fees for each Fund as set forth in a written schedule delivered to the
Administrator pursuant to this Agreement. FSC's fee schedule for Administrator
may be changed by FSC sending a new fee schedule to the Administrator pursuant
to Paragraph 12 of this Agreement. For the payment period in which this
Agreement becomes effective or terminates, there shall be an appropriate
proration of the fee on the basis of the number of days that the Rule 12b-1
Agreement is in effect during the period.
4. The Administrator will not perform or provide any duties which would
cause it to be a fiduciary under Section 4975 of the Internal Revenue Code, as
amended. For purposes of that Section, the Administrator understands that any
person who exercises any discretionary authority or discretionary control with
respect to any individual retirement account or its assets, or who renders
investment
A-1
65
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advice for a fee, or has any authority or responsibility to do so, or has any
discretionary authority or discretionary responsibility in the administration of
such an account, is a fiduciary.
5. The Administrator understands that the Department of Labor views
ERISA as prohibiting fiduciaries of discretionary ERISA assets from receiving
administrative service fees or other compensation from funds in which the
fiduciary's discretionary ERISA assets are invested. To date, the Department of
Labor has not issued any exemptive order or advisory opinion that would exempt
fiduciaries from this interpretation. Without specific authorization from the
Department of Labor, fiduciaries should carefully avoid investing discretionary
assets in any fund pursuant to an arrangement where the fiduciary is to be
compensated by the fund for such investment. Receipt of such compensation could
violate ERISA provisions against fiduciary self-dealing and conFIict of interest
and could subject the fiduciary to substantial penalties.
6. The Administrator agrees not to solicit or cause to be solicited
directly, or indirectly, at any time in the future, any proxies from the
shareholders of any time all of the Funds in opposition to proxies solicited by
management of the Fund or Funds, unless a court of competent jurisdiction shall
have determined that the conduct of a majority of the Board of Directors or
Trustees of the Fund or Funds constitutes willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties. This paragraph 6 will survive
the term of this Agreement.
7. With respect to each Fund, this Agreement shall continue in effect
for one year from the date of its execution, and thereafter for successive
periods of one year if the form of this Agreement is approved at least annually
by the Directors or Trustees of the Fund, including a majority of the members of
the Board of Directors or Trustees of the Fund who are not interested persons of
the Fund and have no direct or indirect financial interest in the operation of
the Fund's Plan or in any related documents to the Plan ("Disinterested
Directors or Trustees") cast in person at a meeting called for that purpose.
8. Notwithstanding paragraph 7, this Agreement may be terminated as
follows:
a) at any time, without the payment of any penalty, by the vote of a
majority of the Disinterested Directors or Trustees of the Fund or
by a vote of a majority of the outstanding voting securities of
the Fund as defined in the Investment Company Act of 1940 on not
more than sixty (60) days' written notice to the parties to this
Agreement;
b) automatically in the event of the Agreement's assignment as
defined in the Investment Company Act of 1940 or upon the
termination of the "Adiministrative Support and Distributor's
Contract" or "Distributor's Contract" between the Fund and FSC;
and
c) by either party to the Agreement without cause by giving the other
party at least sixty (60) days' written notice of its intention to
terminate.
9. The termination of this Agreement with respect to any one Fund will
not cause the Agreement's termination with respect to any other Fund.
10. The Administrator agrees to obtain any taxpayer identification
number certification from its customers required under Section 3406 of the
Internal Revenue Code, and any applicable Treasury regulations, and to provide
FSC or its designee with timely written notice of any failure to obtain such
taxpayer identification number certification in order to enable the
implementation of any required backup withholding.
11. This Agreement supersedes any prior service agreements between the
parties for the Funds.
12. This Agreement may be amended by FSC from time to time by the
following procedure. FSC will mail a copy of the amendment to the
Administrator's address, as shown below. If the Administrator does not object to
the amendment within thirty (30) days after its receipt, the amendment will
become part of the Agreement. The Administrator's objection must be in writing
and be received by FSC within such thirty days.
A-2
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<PAGE>
13. This Agreement shall be construed in accordance with the Laws of
the Commonwealth of Pennsylvania.
NORTH VALLEY BANK
----------------------------------
Adminstrative
880 E. Cypress Ave.
----------------------------------
Address
Redding CA 96002
----------------------------------
City State Zip Code
Dated: 9/26/95 By: /s/ J.F. Cowee
-------------- -------------------------------
Authorized Signature
Executive Vice President
-------------------------------
Title
J. F. Cowee
-------------------------------
Print Name of Authorized Signature
FEDERATED SECURITIES CORP.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By: /s/ Richard Fisher
----------------------------
Richard B. Fisher, President
A-3
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<PAGE>
FINANCIAL INSTITUTION SERVICES AGREEMENT
This Agreement made and entered into this 18 day of August, 1995, by and
between North Valley Bank, a financial institution ("FI") and LINSCO/PRIVATE
LEDGER, a California corporation.
W I T N E S S E T H:
WHEREAS, FI desires to provide its customers with broker/dealer services on
the premises of FI; and
WHEREAS, LINSCO/PRIVATE LEDGER is a registered broker/dealer in the business
of providing fully disclosed broker/dealer services to customers through its
Registered Representatives ("Registered Representatives"); and
WHEREAS, LINSCO/PRIVATE LEDGER desires to establish and monitor operations
of a branch office ("Branch Office") of LINSCO/PRIVATE LEDGER on the premises of
FI in accordance with the terms of this Agreement (the "Program").
NOW, THEREFORE, for good and valuable consideration and in consideration of
the mutual covenants and agreements made herein, FI and LINSCO/PRIVATE LEDGER
hereby agree as follows:
1. TERM: OPENING OF BRANCH OFFICES AT FI LOCATIONS.
This Agreement shall continue for a period of three (3) years from the
date first written above (the Primary Term), and shall renew
automatically for additional three (3) year periods unless written notice
is given by either party to the other stating the party's intention not
to renew and said notice shall have been given at least forty five (45)
days prior to the expiration of the then current term of this Agreement
or unless terminated as set forth in the termination provisions in this
Agreement. As soon as practical after the date of this Agreement
LINSCO/PRIVATE LEDGER shall assist FI in opening and monitoring
operations of such on-site LINSCO/PRIVATE LEDGER Branch Offices at such
FI locations ("FI Locations") as the parties may determine from time to
time.
2. BRANCH OFFICE OPERATIONS.
a. All Branch Office operations with respect to services offered and
provided to customers shall be conducted solely in accordance with
the Program. No changes or modifications to the Program shall be made
or implemented without the prior written approval of LINSCO/PRIVATE
LEDGER.
EXHIBIT 10(hh) 68
<PAGE>
Any change in the Program which LINSCO/PRIVATE LEDGER deems necessary
or desirable to maintain or effect compliance with applicable laws,
rules or regulations or otherwise desirable in connection with Branch
Office operations shall be promptly implemented. All policies,
procedures and instructions of LINSCO/PRIVATE LEDGER made in
accordance with this Agreement or in exercise of LINSCO/PRIVATE
LEDGER's Branch Office supervisory functions shall be promptly
implemented.
b. The opening and carrying of each customer account shall be initially
approved by the Branch Manager, who shall also be a Registered
Representative, ("Branch Manager") of the Branch Office generating
such account, and the Branch Manager shall promptly forward all
appropriate information regarding each new account to LINSCO/PRIVATE
LEDGER. No customer account at any Branch Office shall be opened or
maintained unless and until LINSCO/PRIVATE LEDGER shall have given
its final approval, which it shall not unreasonably withhold, for the
opening and maintenance of such account.
c. Mailing of any general or pre-printed correspondence, communication,
solicitation materials, advertising or other written or printed
communication respecting investments, LINSCO/PRIVATE LEDGER, any
Branch Office, or the business of any Branch Office shall be
undertaken from a Branch Office only after such communication shall
have been approved in writing in advance by LINSCO/PRIVATE LEDGER.
All individualized correspondence shall be approved in advance by the
Branch Manager. All such communications to Branch Office customers
shall include, in the discretion of LINSCO/PRIVATE LEDGER, the names
of LINSCO/PRIVATE LEDGER and FI, in accordance with and subject to
the regulations and policies of the Securities and Exchange
Commission ("SEC"), National Association of Securities Dealers, Inc.
("NASD") and applicable state securities laws and regulations ("State
Law").
d. The Branch Manager of each Branch Office shall promptly forward to
LINSCO/PRIVATE LEDGER all data and documents, including, but not
limited to, new account forms, orders, cash account agreements, all
mutual fund and partnership applications and other data and
documents, as shall be necessary or appropriate to permit
LINSCO/PRIVATE LEDGER to
2
69
<PAGE>
review and approve the opening and carrying of each Branch Office
customer's account and which will enable LINSCO/PRIVATE LEDGER and/or
the clearing broker/dealer selected by LINSCO/PRIVATE LEDGER to
service Branch Office customers.
e. All Program brokerage and securities related activities of Branch
Offices shall be conducted through LINSCO/PRIVATE LEDGER Registered
Representatives.
f. No Branch Office shall handle any customers' funds or securities. All
general securities transactions for Branch Office customers shall be
effected through clearing brokers designated by LINSCO/PRIVATE
LEDGER. In connection with each general securities transaction, the
customer shall forward all original stock certificates and other
instruments and all funds directly to the clearing broker/dealer
involved in such transaction. In connection with each
subscription-type investment, the customer shall forward all
instruments and all funds directly to the issuer involved in such
transaction.
g. All Branch Office operations shall be conducted in accordance with
federal securities laws, rules of the SEC and NASD and State Law. All
customer complaints or errors with respect to customer accounts shall
promptly be reported by the Registered Representative to the Branch
Manager who will promptly report the matter to LINSCO/PRIVATE LEDGER.
h. Each Branch Office shall be open for business during the regular
business hours of FI and at such other business hours as
LINSCO/PRIVATE LEDGER and FI may mutually agree upon from time to
time.
i. All Registered Representatives and other on-site personnel
implementing the Program shall at all times be and remain employees
of FI. Registered Representatives shall be on an independent
contractor basis with LINSCO/PRIVATE LEDGER.
j. No Branch Office or Registered Representative operating at a Branch
Office shall engage in any options or commodity activity except at
the specific request of Branch Office customers and with the express
prior approval of LINSCO/PRIVATE LEDGER.
3
70
<PAGE>
3. LINSCO/PRIVATE LEDGER OBLIGATIONS AND SERVICES.
a. LINSCO/PRIVATE LEDGER will provide through its independent contractor
Registered Representatives brokerage services for the depositors and
other customers of FI and the general public at the Branch Offices,
each of which may be designated by LINSCO/PRIVATE LEDGER as an Office
of Supervisory Jurisdiction and managed by an NASD Series 24 licensed
registered principal who shall be designated as the Branch Office
Manager. Each Registered Representative shall enter into a licensing
agreement with LINSCO/PRIVATE LEDGER that outlines this relationship.
Through the Branch Offices, LINSCO/PRIVATE LEDGER shall provide the
following products in accordance with the Program:
1) Equity Securities
2) Debt Securities
3) Open-end/closed-end Mutual Funds
4) Public Limited Partnerships
5) Life Insurance and Annuities
b. LINSCO/PRIVATE LEDGER at its expense shall be responsible for
supervising the Program customer operations of the Branch Offices in
accordance with applicable federal securities law, rules of the SEC
and NASD and State Law. Such responsibility shall include review of
all Program marketing, advertising and promotional materials.
c. LINSCO/PRIVATE LEDGER shall be responsible for the training and
supervision of Registered Representatives to the extent of their
securities related activities in implementing the Program.
d. LINSCO/PRIVATE LEDGER agrees to provide at its expense to the Branch
Offices pursuant to the Program, all necessary back office operations
for the Branch Offices, including order processing with respect to
stocks and bonds, recording of orders, participation in appropriate
selling agreements with vendors to which LINSCO/PRIVATE LEDGER is or
in the future is a party; assistance in resolving Branch Office
customer account problems, and such other basic back office services
as are reasonably necessary for the operation of the Branch Offices
and which LINSCO/PRIVATE LEDGER generally provides its customers
and/or Registered Representatives in the conduct of LINSCO/PRIVATE
LEDGER business. LINSCO/PRIVATE LEDGER retains the right to terminate
any Registered Representative consistent with Paragraph 7c.
4
71
<PAGE>
4. ACCESS TO RECORDS.
FI agrees to permit any officer or authorized designee of LINSCO/PRIVATE
LEDGER and at LINSCO/PRIVATE LEDGER's request, any representative of any
governmental agency, exchange or association having regulatory
jurisdiction over the affairs of LINSCO/PRIVATE LEDGER or the Branch
Office, or any firm of independent accountants retained for the purpose
of conducting an audit of the financial affairs of LINSCO/PRIVATE LEDGER,
full and complete access to and the right to inspect and to receive
copies of any and all books and records relating to any Branch Office.
Each party shall give the other prompt notice of any governmental agency,
exchange or association request for such access and at the request of
LINSCO/PRIVATE LEDGER shall coordinate all such inquiries and responses
with LiNSCO/PRIVATE LEDGER. FI further agrees that at LINSCO/PRIVATE
LEDGER's request Branch Office books and records may be inspected at any
time by any duly authorized representative of any registered "Clearing
Agency" as defined in Section 3(a)(23)(A) of the Securities Exchange Act
of 1934.
5. FI OBLIGATIONS AND SERVICES.
The obligations and services to be provided by FI under this Agreement
shall consist of the following:
a. Branch Offices shall be established and located at a physically
separate area of each FI location. FI shall provide at FI's expense
the office facilities, furnishings, telephones and other office
support facilities and services necessary for the efficient operation
of each Branch Office. FI shall use its best efforts to maintain
total separation of its business from the business of the Branch
Offices, including separation of records and physical area and sign
locations.
b. Any marketing, advertising or promotion of the Program which FI
wishes to do independently of LINSCO/PRIVATE LEDGER marketing,
advertising and promotion, shall first be reviewed and approved in
writing by LINSCO/PRIVATE LEDGER, and all costs incurred by FI for
such independent marketing, advertising and promotion shall be paid
by FI.
c. Except as otherwise expressly set forth in this Agreement, FI shall
be solely responsible for the payment of all expenses of operation of
the
5
72
<PAGE>
Program at Branch Offices, including: (i) all telephone expenses of
each Branch Office; (ii) salary and benefits for at least one
half-time clerical support person for the Program at each Branch
office; (iii) all travel and lodging costs associated with training
of FI employees in the Program and meetings of FI employees held in
connection with the Branch Office operations; and (iv) all
stationary, postage, business cards and collateral material and
supplies required for the Program.
d. FI agrees to provide to LINSCO/PRIVATE LEDGER customer account
information essential to the successful functioning of the Program
and this Agreement to the extent permissible under applicable Federal
and State regulations now or hereafter in effect. Such customer
account information shall include customer name, address, telephone
number and any documents relating to Program brokerage accounts,
excluding any customer financial information pertaining to said
customer banking or non-brokerage activities. If not inconsistent
with applicable Federal and State regulations such information shall
be provided to the on-site Registered Representative who is an
employee of FI and such information shall be used only by said
Registered Representative in conjunction with the marketing of
services for and on behalf of the Program.
e. Subject to applicable Federal and State law, FI agrees to notify
LINSCO/PRIVATE LEDGER of material adversary events in the accounts of
FI customers who are also Branch Officer customers.
f. FI agrees that with respect to securities issued or offered by FI and
with respect to securities issued or offered by any corporation or
other business having a lending relationship with FI, that
LINSCO/PRIVATE LEDGER has established a "no recommendation policy"
with respect to such securities and that any transactions related to
such securities shall be on a non-solicited basis only.
g. FI agrees that all information, materials, records and any other
documents or data associated with the Program are confidential and
proprietary in nature and shall not be used by FI or disclosed to any
person or entity by FI or its employees except
6
73
<PAGE>
as necessary in operation of the Program at the Branch Offices.
h. FI agrees that all Program Employees shall abide by all applicable
federal securities laws, rules of the SEC and NASD, State Law, as
well as LINSCO/PRIVATE LEDGER policies. FI shall not interfere with
the Program Employee's compliance with said rules, regulations and
policies. FI does not hereby accept any responsibility for
enforcement or any other measure to insure compliance with the said
regulations and/or policies.
6. CONFIDENTIALITY.
LINSCO/PRIVATE LEDGER agrees that all customer account information
obtained by LINSCO/PRIVATE LEDGER from FI is confidential and proprietary
in nature and that said information shall not be divulged by
LINSCO/PRIVATE LEDGER to any third parties or used in any manner other
than in connection with Branch Office operations. LINSCO/PRIVATE LEDGER
shall not be responsible, however, for any conduct of FI employees,
whether or not they are Registered Representatives which breach the
preceding sentence, unless LINSCO/PRIVATE LEDGER contributes to said
breach.
7. FI EMPLOYEES.
a. FI shall select, subject to LINSCO/PRIVATE LEDGER approval, an
employee of FI at each Branch Office to be the Registered
Representative of LINSCO/PRIVATE LEDGER for that Branch Office. Each
such Registered Representative shall at all times be an employee of
FI and not of LINSCO/PRIVATE LEDGER. LINSCO/PRIVATE LEDGER shall
appoint such Registered Representative on an independent contractor
basis in accordance with its terms for such appointment from time to
time.
b. FI shall be solely responsible for the payment of all fees, bonuses,
salaries, benefits and other compensation due any of its employees,
including all Registered Representatives, and FI acknowledges and
agrees that LINSCO/PRIVATE LEDGER shall have no responsibility or
liability therefor.
c. LINSCO/PRIVATE LEDGER may terminate any Registered Representative at
any time upon ten (10) days written notice to FI or immediately upon
written
7
74
<PAGE>
notice to FI in the event of the Registered Representative's breach
of his Representative Agreement with LINSCO/PRIVATE LEDGER. In the
event of termination, LINSCO/PRIVATE LEDGER shall have no liability
or responsibility to such Registered Representative under any
employment agreement or compensation arrangement between FI and such
Registered Representative. The Registered Representative may remain
as an employee of FI if FI so desires, however, the employee will
cease to have any involvement in the Program. FI may terminate any
Registered Representative as its employee upon ten (10) days advance
notice to LINSCO/PRIVATE LEDGER.
8. INDEMNIFICATION.
Indemnification between the parties under this Agreement shall be as
follows:
a. FI agrees to indemnify and hold LINSCO/PRIVATE LEDGER harmless from
any and all liability, damages, claims, costs or action (including
attorneys, accountants, paralegal fees and expenses) to which
LINSCO/PRIVATE LEDGER may become subject involving any failure or
alleged failure by FI or its employees to perform any of FI's
obligations to LINSCO/PRIVATE LEDGER under this Agreement or any act
or omission of FI or its employees in connection therewith.
b. LINSCO/PRIVATE LEDGER agrees to indemnify and hold FI harmless from
any and all liability, daniages, claims, costs or action (including
attorneys, accountants, paralegal fees and expenses) to which FI may
become subject arising out of any failure or alleged failure by
LINSCO/PRIVATE LEDGER, Registered Representatives or employees to
perform any of LINSCO/PRIVATE LEDGER'S obligations to FI under this
Agreement or any act or omission of LINSCO/PRIVATE LEDGER or its
employees in connection therewith.
c. The parties agree that upon receipt of any claim or notice of any
action prompt written notice of such claim or action shall be
communicated to both parties to this Agreement. Upon assumption by
either party of the defense of a claim or action by counsel
reasonably acceptable to the indemnified party within the scope of
its indemnity, such party shall not thereafter be responsible for
legal, accounting or paralegal
8
75
<PAGE>
expenses of the indemnified party. Any indemnified party may at its
own expense retain counsel and the indemnifying party and its counsel
shall reasonably keep informed any such additional counsel selected
by an indemnified party.
9. DIVISION OF COMMISSIONS.
LINSCO/PRIVATE LEDGER shall distribute commissions to FI on a
semi-monthly basis with respect to all transactions made in connection
with the Program for each on-site office or branch operation of FI as
specified herein. Payments hereunder shall be made only with respect to
transactions affected during the term of this Agreement.
a. All fees and commissions generated by transactions in Branch Office
customer accounts shall be payable to and received by LINSCO/PRIVATE
LEDGER pursuant to the terms of the selling agreement or clearing
agreement involved in such transaction. LINSCO/PRIVATE LEDGER shall
exercise reasonable and diligent efforts to collect all fees and
commissions due in connection with transactions effected in Branch
Office customer accounts.
b. Any losses or costs as a result of customer reneges or Registered
Representative errors will be deducted from net commissions as
defined below.
c. LINSCO/PRIVATE LEDGER will distribute net commissions to FI. Net
commissions are defined as follows:
1) 90% of commissions from the sale of mutual funds and variable
annuities.
2) 90% of commissions from the sale of public offerings which are
the subject of a registration statement filed with the SEC under
the Securities Act of 1933.
3) 90% of commissions from the sale of public offerings qualified
for sale in only one state pursuant to rule 147 promulgated by
the SEC under section 3(a)(1l) of the 1933 Act.
4) 76.5% of commissions from sales of general securities (stocks,
bonds, options, government agency obligations and similar
9
76
<PAGE>
securities) in routine broker transactions, after deducting all
clearing costs and variable charges in connection with such
transactions in accordance with Exhibit A.
5) 100% of the amount listed as "net payout" on the LPL approved
Insurance Product List for the sale of insurance products. The
Insurance Product List may be obtained from the Insurance
Services Department and is updated as products are added and
deleted.
6) 90% of commissions from sales of Unit Investment trusts.
7) 85% of commissions from the sale of closed end bond funds, prime
rate trusts (primary offer) and Peak Advisory Products.
8) 90% of fees from the sale of SAM Advisory Products.
d. LINSCO/PRIVATE LEDGER's determination of the type of securities sold
shall be conclusive.
e. Payments to FI represent reimbursement for compensation of Program
Employees and payment for the use of the facilities of FI required
for operation of the Program.
f. FI shall pay all fees per Exhibit B attached.
10. TERMINATION OF AGREEMENT.
a. In the event any of the following shall occur this Agreement may be
terminated by any party upon notice to all other parties:
(i) LINSCO/PRIVATE LEDGER or FI liquidates or dissolves its
operations.
(ii) LINSCO/PRIVATE LEDGER or FI files a voluntary petition in
bankruptcy, makes an assignment for the benefit of creditors,
or has an involuntary petition in bankruptcy filed against it.
(iii) A receiver or trustee is appointed for the purpose of managing
a significant portion of the property and/or affairs of
LINSCO/PRIVATE LEDGER or FI.
10
77
<PAGE>
b. In the event either party shall breach or be in default of any of the
terms of this Agreement and such breach or default shall not be cured
or resolved within ninety (90) days from the date written notice of
such breach or default is given to such party, then this Agreement
may be terminated at the end of such ninety (90) day period by the
party giving notice of such breach. In the event such breach or
default involves a violation of federal securities laws, SEC or NASD
rules or State Law, LINSCO/PRIVATE LEDGER policies or decisions made
by LINSCO/PRIVATE LEDGER in exercise of its supervisory
responsibilities, LINSCO/PRIVATE LEDGER may elect to immediately
cease all Branch Office operations upon notice to FI until such time
as such violation is cured, and LINSCO/PRIVATE LEDGER may immediately
suspend or terminate any Registered Representative involved in such
violation from further participation in Branch Office operations. In
the event such violation is not cured to LINSCO/PRIVATE LEDGER's
satisfaction within ninety (90) days of such notice this Agreement
may be terminated as described above. LINSCO/PRIVATE LEDGER's right
to terminate may be applied to particular Branch Offices in the
discretion of LINSCO/PRIVATE LEDGER.
c. In the event the SEC, NASD, any state securities agency, and/or other
regulatory agency with responsibility for generally supervising the
operations of FI or LINSCO/PRIVATE LEDGER disapproves of the Program
or its implementation as described in this Agreement in any material
respect, and continuing with the Program would subject either party
in its reasonable judgment to material risk of liability or adverse
consequence, such party shall immediately suspend its operations
until such time as the Program has been modified to conform with the
requirements of such disapproving regulatory agency. If such
modification is not implemented within ninety (90) days, then either
party may terminate this Agreement upon notice to the other party.
Such disapproval shall include any material change in the SEC's
position taken in its no action letters to LINSCO/PRIVATE LEDGER,
copies of which have been received by all parties.
d. All indemnities shall survive termination of this Agreement. Upon
termination all payments to be
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<PAGE>
made under this Agreement shall be accounted for as of the date of
termination and no further business shall be transacted subsequent to
the date of termination. Settlement for any business transacted up to
and including the date of termination shall be made on the
immediately following semi-monthly payment date subject to the
commissions being received by LINSCO/PRIVATE LEDGER.
e. In addition to the foregoing provisions for either party without
cause, upon giving forty five (45) days advance written notice to the
other party. If FI elects to terminate this Agreement under this
section during the initial term set forth in Section 1, FI shall
reimburse LINSCO/PRIVATE LEDGER for costs incurred to set up the
program according to the following schedule:
(i) $3,000 if terminated during the first year of the term of this
Agreement.
11. LINSCO/PRIVATE LEDGER MATERIALS AND PRODUCTS.
All materials, manuals, products, literature and any other documentation
provided by LINSCO/PRIVATE LEDGER to FI shall be and remain the property
of LINSCO/PRIVATE LEDGER.
12. RESTRICTIVE COVENANTS.
FI agrees to not directly or indirectly offer any other brokerage service
or services during the term of this Agreement without the express written
consent of LINSCO/ PRIVATE LEDGER.
13. NOTICES.
Any notices required to be given under the terms of this Agreement shall
be delivered personally with an acknowledgment of receipt or delivered by
certified mail, postage prepaid or telex or telegram to the address as
set forth below:
North Valley Bank
Administration
880 E. Cypress Avenue
Redding, CA 96002
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<PAGE>
LINSCO/ PRIVATE LEDGER
155 Federal Street, 14th Floor
Boston, MA 02110
Either party may from time to time change its above-designated address
by giving written notice to the other party of such change.
14. BINDING AGREEMENT.
This Agreement constitutes the entire understanding of FI with
LINSCO/PRIVATE LEDGER as to the matters described herein and may be
amended only in writing signed by the parties. This Agreement shall be
binding upon and inure to the benefit of the parties, their successors,
administrators and assigns.
15. ASSIGNMENT.
This Agreement shall not be assigned by either party without the prior
written consent of the other party.
16. INVALIDITY OF TERM.
If any of the terms of this Agreement are determined to be invalid by any
court or agency of competent jurisdiction, such invalidity shall have no
effect on any of the other terms of this Agreement and such other terms
shall remain valid, binding and in full force and effect.
17. MISCELLANEOUS.
a. This Agreement shall be construed according to the laws of the State
of California.
b. Any disputes under this Agreement, including interpretation of its
terms and conditions, and any rights and obligations of the parties
hereunder shall be arbitrated in accordance with the Rules of the
National Association of Securities Dealers with such arbitration to
occur in San Diego, California.
c. All obligations of the parties herein with respect to matters through
the date of termination of this Agreement shall survive the
termination of this Agreement.
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<PAGE>
d. The schedules attached are subject to change on thirty (30) days
written notice.
IN WITNESS WHEREOF, the parties have signed this Agreement on the dates as
shown below.
FI NORTH VALLEY BANK
By: /s/ JAMES F. COWEE Date: August 18, 1995
-------------------------------- ---------------
Name: James F. Cowee
Title: Executive Vice President
FI's Tax ID#: 94-2184061
LINSCO/PRIVATE LEDGER
a California Corporation
By: /s/ Stephanie Brown Date: 8/23/95
-------------------------------- ----------------
Name: STEPHANIE L. BROWN
Title: MANAG1NG DIRECTOR
GENERAL COUNSEL
FISC 03/09/95
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<PAGE>
PERSHING CLEARING AND BROKERAGE CHARGES--EXHIBIT A
This Schedule sets forth the clearing charges and brokerage charges for
transactions executed through a Linsco/Private Ledger clearing broker.
This Schedule is subject to change upon thirty (30) days notice.
Order Variable Charge
----- ----------------
Listed:
Stocks $23.50 +$0.0l5/share(Market orders 1-4,999 shares)
+$0.025/share(Limit orders 1-4,999 shares) or
+$0.015/share(Market or Limit 5000 shares & over)
Bonds $25.00
Options $18.00 +$1.60 (options trading at less than $1.00)
+$1.75 (options trading at $1.00 or more)
OTC Agency:
Stocks $23.00
Bonds $25.00
OTC Principal:
Stocks $35.00
GNMA, $35.00
Muni,
Corporate,
Treasury
Unit Trusts $35.00
Option Exercise: $23.50 Equity
$300.00 Currency
Syndicate: $35.00
Mutual Funds: $25.00
Exchange Fee $10.00
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FEES - EXHIBIT B
BRANCH REGISTERED
START-UP FEES MANAGER REPRESENTATIVE
- ------------- ------- --------------
Registration Fees $150 $100
NASD Registration $ 90 $ 90
State Registration $ 25-$245 $ 25-$245
NASD Branch Fee $ 60
Compliance Inspection Fee $100 $100
Establish Branch Office in State $ 0-$l00
(Where applicable)
Errors & Omissions Premium $840***
MONTHLY FEES
- ------------
90% Contract Fee $ 50-$125* $ 50-$125*
Bonding Fee $ 10 $ 10
MISCELLANEOUS FEES
- ------------------
NASD Examinations $ 60-$150 $ 60-$150
NFA Registration for Commodities
As Associated Branch/Person $ 80 $ 80
NASD Termination Fee $ 25 $ 25
State Fees $ 25-$100 $ 25-$l00
SIPC Assessment .1875% of Gross Commission
NASD Assessment .23% of Gross Commission
ANNUAL RENEWAL FEES
- -------------------
NASD Renewal $ 50 $ 50
NASD Branch Renewal $ 60
State Renewals $ 25-$230 $ 25-$230
State Branch Renewals
(Where applicable) $ 0-$100
Compliance Inspection Fee $100** $100**
ADMINISTRATIVE ASSOCIATE FEES
START-UP FEES
- -------------
Registration Fee $100
Administrative Associate Contract Fee $100
NASD Registration Fee $ 90
State Registration $ 25-$245
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FEE - EXHIBIT B (CONTINUED~
MONTHLY FEES
Bonding $ 10
ANNUAL RENEWAL FEES
NASD Renewal $ 50
State Renewals $ 25-$230
Contract Renewal Fee $100
*For offices of 4 or fewer, the monthly fee is $125 per representative; for
offices of 5 to 11 persons, the monthly fee is a maximum of $600 per office; for
offices of 12 or more, the monthly fee is $50 per representative.
**In offices of 10 or fewer, the annual fee is $100 per representative. In
offices of more than 10, the maximum fee is $1,000.
***Errors & Omissions Insurance Premium is $840 per policy period commencing on
each August 1. No part of the premium is refundable.
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LIST OF SUBSIDIARIES
NORTH VALLEY TRADING COMPANY, a California corporation which was established in
1984 to assist customers of North Valley Bank as an export trading company.
BANK PROCESSING INC., a California corporation which was established in 1988 to
provide data processing services to other depository institutions.
NORTH VALLEY BANK, a California corporation which conducts a commercial and
retail banking operation in California.
NORTH VALLEY BASIC SECURITIES, the sole subsidiary of North Valley Bank.
EXHIBIT 21
85
<PAGE>
Deloitte &
Touche LLP
- ------------ ---------------------------------------------
Suite 2000 Telephone: (916) 498-7100
400 Capitol Mall Facsmile: (916) 444-7963
Sacramento, California 95814-4424
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
North Valley Bancorp
Redding, California
We have audited the accompanying consolidated balance sheets of North Valley
Bancorp and subsidiaries (Company) as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995 and 1994,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes, as of January 1, 1993 and
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities
as of December 31, 1993.
/s/ Deloitte & Touche LLP
January 26, 1996
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
86
<PAGE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994 (In thousands except share amounts)
- -------------------------------------------------------------------------------
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Cash and due from banks $ 11,868 $ 13,497
Federal funds sold 16,600 9,500
--------- ---------
Total cash and cash equivalents 28,468 22,997
Securities:
Available for sale, at market 12,684 13,955
Held to maturity, at amortized cost (market value of $37,057
and $41,023 at December 31, 1995 and 1994, respectively) 35,217 41,374
Loans receivable, net of allowance for loan losses and
deferred loan fees 147,808 125,463
Premises and equipment, net of accumulated depreciation
and amortization 3,805 3,532
Other real estate owned 87
FHLB stock 662 609
Accrued interest receivable 1,715 1,497
Other assets 4,626 4,529
--------- ---------
TOTAL ASSETS $ 235,072 $ 213,956
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 25,006 $ 25,158
Interest-bearing:
Savings 41,882 47,747
Time certificates 107,575 86,190
NOW accounts 36,612 34,446
--------- ---------
Total deposits 211,075 193,541
Accrued interest and other liabilities 3,024 2,489
--------- ---------
Total liabilities 214,099 196,030
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: authorized, 20,000,000 shares;
none outstanding
Common stock, no par value: authorized 20,000,000 shares;
outstanding, 1,841,048 and 1,829,933 at December 31, 1995
and 1994, respectively 9,766 9,694
Retained earnings 11,086 8,493
Unrealized gain (loss) on securities available for sale (net of tax effect) 121 (261)
--------- ---------
Total stockholders' equity 20,973 17,926
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 235,072 $ 213,956
========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-2-
87
<PAGE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(In thousands except share and per share amounts)
- -------------------------------------------------------------------------------
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME:
Loans including fees $ 13,230 $ 10,347 $ 9,171
Securities:
Taxable 1,012 1,290 1,422
Exempt from federal taxes 2,187 1,889 1,600
Interest on federal funds sold 1,040 652 728
-------- -------- --------
Total interest income 17,469 14,178 12,921
INTEREST EXPENSE - DEPOSITS 7,559 5,460 5,255
-------- -------- --------
NET INTEREST INCOME 9,910 8,718 7,666
PROVISION FOR LOAN LOSSES 375 240 110
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,535 8,478 7,556
-------- -------- --------
OTHER OPERATING INCOME:
Service charges on deposit accounts 1,342 1,245 1,184
Other fees and charges 546 523 535
Gain on sale of loans 160 164 325
Gain on sale of available-for-sale securities 31 11
Gain on sale of trading securities 11
Gain on sale of investment securities 157
Other 540 534 475
-------- -------- --------
Total other operating income 2,630 2,477 2,676
-------- -------- --------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 3,679 3,523 3,423
Occupancy expense 422 406 393
Furniture and equipment expense 451 424 385
Other 1,860 2,051 1,969
-------- -------- --------
Total other operating expenses 6,412 6,404 6,170
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR INCOME TAXES 5,753 4,551 4,062
PROVISION FOR INCOME TAXES 1,670 1,339 1,178
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR INCOME TAXES 4,083 3,212 2,884
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES 127
-------- ------- ------
NET INCOME $ 4,083 $ 3,212 $ 3,011
======== ======== ========
INCOME PER COMMON AND EQUIVALENT SHARE:
Before change in accounting for income taxes $2.20 $1.74 $1.57
Change in accounting for income taxes 0.07
-------- ------- ------
Net income $2.20 $1.74 $1.64
===== ===== =====
WEIGHTED AVERAGE SHARES USED TO
COMPUTE INCOME PER COMMON SHARE 1,859,453 1,849,520 1,838,309
========= ========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-3-
88
<PAGE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(In thousands except share and per share amounts)
- -------------------------------------------------------------------------------
<CAPTION>
NET
UNREALIZED
GAIN (LOSS) ON
AVAILABLE-
COMMON STOCK FOR-SALE
--------------------- RETAINED SECURITIES
SHARES AMOUNT EARNINGS (NET OF TAXES) TOTAL
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1993 1,427,892 $ 5,556 $ 7,846 $ 13,402
Net income 3,011 3,011
Stock options exercised 9,045 53 53
Stock dividend paid on common stock (15%) 213,394 2,134 (2,134)
Cash paid in lieu of fractional shares (8) (8)
Stock dividend paid on common stock (10%) 164,486 1,864 (1,864)
Cash paid in lieu of fractional shares (6) (6)
Cash dividend paid on common
stock ($.35 per share) (385) (385)
Cash dividend declared on common
stock ($.35 per share) (423) (423)
Effect of adopting SFAS No. 115,
December 31, 1993 $ 115 115
Reduction in equity - retirement plans (54) (54)
--------- -------- -------- ----- ---------
Balances at December 31, 1993 1,814,817 9,607 5,983 115 15,705
Net income 3,212 3,212
Stock options exercised 15,116 87 87
Cash dividend paid on common
stock ($.35 per share) (425) (425)
Cash dividend declared on common
stock ($.35 per share) (427) (427)
Net change in unrealized gain/loss
on available-for-sale securities (376) (376)
Addition to equity - retirement plans 150 150
--------- -------- -------- ----- ---------
Balances at December 31, 1994 1,829,933 9,694 8,493 (261) 17,926
Net income 4,083 4,083
Stock options exercised 11,115 72 72
Cash dividend paid on common
stock ($.37 per share) (453) (453)
Cash in lieu of fractional shares (7) (7)
Cash dividend declared on common
stock ($.27 per share) (497) (497)
Net change in unrealized gain/loss on
available-for-sale securities 382 382
Reduction in equity - retirement plans (533) (533)
--------- -------- -------- ----- ---------
Balances at December 31, 1995 1,841,048 $ 9,766 $ 11,086 $ 121 $ 20,973
========= ======== ======== ===== =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-4-
89
<PAGE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (In thousands)
- -------------------------------------------------------------------------------
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,083 $ 3,212 $ 3,011
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 373 362 331
Amortization of premium on securities 14 10 122
Provision for loan losses 375 240 110
Gain on sale of available-for-sale securities (31) (11)
Gain on sale of trading securities (11)
Gain on sale of securities (157)
Gain on sales of loans (160) (164) (325)
Provision for deferred taxes (377) (80) (116)
Proceeds from sales of trading securities 4,006
Purchase of trading securities (3,995)
Effect of changes in:
Accrued interest receivable (218) (203) (69)
Other assets 26 (500) (625)
Accrued interest and other liabilities 23 618 228
--------- -------- ---------
Net cash provided by operating activities 4,108 3,484 2,510
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FHLB stock (53) (609)
Purchases of available-for-sale securities (4,273) (5,176)
Proceeds from sales of available-for-sale securities 118 32
Proceeds from maturities of available-for-sale securities 11,000 22,000
Purchases of held-to-maturity securities (7,482) (13,402)
Proceeds from maturities or calls of held-to-maturity securities 8,627 1,245
Proceeds from sales of securities 14,429
Proceeds from maturities of securities 12,582
Purchases of securities (37,473)
Proceeds from sales of loans 3,124 6,726 49,023
Net increase in loans (25,771) (32,808) (55,142)
Purchases of premises and equipment (646) (207) (348)
--------- -------- ---------
Net cash used in investing activities (15,356) (22,199) (16,929)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits, NOW accounts, and savings accounts (3,851) 1,473 12,357
Net increase in time certificates 21,385 8,749 9,100
Cash dividends paid (880) (848) (718)
Cash received for stock options exercised 72 87 53
Cash paid in lieu of fractional shares (7) (14)
--------- -------- ---------
Net cash provided by financing activities 16,719 9,461 20,778
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,471 (9,254) 6,359
CASH AND CASH EQUIVALENTS:
Beginning of year 22,997 32,251 25,892
--------- -------- ---------
End of year $ 28,468 $ 22,997 $ 32,251
========= ======== =========
ADDITIONAL INFORMATION:
Transfer of securities from held to maturity to available for sale $5,012
======
Transfer of foreclosed loans from loans receivable to other
real estate owned $87
===
Cash Payments:
Income tax payments $2,110 $1,140 $1,285
====== ====== ======
Interest payments $7,468 $5,414 $5,291
====== ====== ======
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
-5-
90
<PAGE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The Company operates nine branches in Shasta and
Trinity Counties in Northern California. The Company's primary source of
revenue is through providing loans to customers, who are predominately
small and middle market businesses and middle income individuals.
General - The accounting and reporting policies of North Valley Bancorp
and subsidiaries (the Company) conform to generally accepted accounting
principles and to prevailing practices within the banking industry. The
Company follows the accrual method of accounting.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The more significant accounting and reporting policies are discussed
below.
Consolidation - The consolidated financial statements include North
Valley Bancorp and its wholly owned subsidiaries, Bank Processing, Inc.,
North Valley Trading Company, and North Valley Bank (the Bank) and its
wholly owned subsidiary North Valley Basic Securities. All material
intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents - For the purposes of the statements of cash
flows, cash and cash equivalents have been defined as cash, demand
deposits with correspondent banks, cash items and settlements in
transit, and federal funds sold. Generally, federal funds are sold for
one-day periods. Cash equivalents have remaining terms to maturity of
three months or less from the date of acquisition.
Investments - The Company accounts for investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. The Company's
policy with regard to investments is as follows:
TRADING SECURITIES are carried at fair value. Gains and losses on
sales and changes in market value are included in other operating
income.
AVAILABLE-FOR-SALE SECURITIES are carried at fair value and represent
securities not classified as trading securities nor as
held-to-maturity securities. Unrealized gains and losses resulting
from changes in fair value are recorded, net of tax, as a separate
component of stockholders' equity. Gains or losses on disposition are
recorded in other operating income based on the net proceeds received
and the carrying amount of the securities sold, using the specific
identification method.
HELD-TO-MATURITY SECURITIES are carried at cost adjusted for
amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income. The Company's policy of
carrying such investment securities at amortized cost is based upon
its ability and management's intent to hold such securities to
maturity.
-6-
91
<PAGE>
Loans Receivable - Loans are reported at the principal amount
outstanding, net of deferred loan fees and the allowance for loan
losses. Interest on loans is calculated by using the simple interest
method on the daily balance of the principal amount outstanding.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full and
timely collection of interest or principal, or when a loan becomes
contractually past due by 90 days or more with respect to interest or
principal. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is reversed against current period
interest income. Income on such loans is then recognized only to the
extent that cash is received and where the future collection of
principal is probable. Interest accruals are resumed on such loans when,
in the judgment of management, the loans are estimated to be fully
collectible as to both principal and interest.
Deferred Loan Fees - Loan fees and certain related direct costs to
originate loans are deferred and amortized to income by a method that
approximates a level yield over the contractual life of the underlying
loans.
Allowance for Loan Losses - The Company adopted SFAS No. 114, Accounting
by Creditors for Impairment of a Loan and SFAS No. 118, Accounting by
Creditors for Impairment of Loan - Income Recognition and Disclosures,
effective January 1, 1995. Under the new standards, a loan is considered
impaired if, based on current information and events, it is probable
that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the
loan agreement. The measurement of impaired loans is generally based on
the present value of expected future cash flows discounted at the
historical effective interest rate, except that all collateral-dependent
loans are measured for impairment based on the fair value of the
collateral. The adoption of SFAS No. 114 and SFAS No. 118 did not have a
material effect.
The allowance for loan losses is established through a provision for
loan losses charged to operations. Loans are charged against the
allowance for loan losses when management believes that the
collectibility of the principal is unlikely or, with respect to consumer
installment loans, according to an established delinquency schedule. The
allowance is an amount that management believes will be adequate to
absorb losses inherent in existing loans and commitments to extend
credit, based on evaluations of the collectibility and prior loss
experience of loans and commitments to extend credit. The evaluations
take into consideration such factors as changes in the nature and volume
of the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, commitments, and current and anticipated
economic conditions that may affect the borrowers' ability to repay the
obligation. Actual results could differ from those estimates.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation, which is computed principally on the
straight-line method over the estimated useful lives of the respective
assets. Leasehold improvements are amortized on the straight-line method
over the shorter of the estimated useful lives of the improvements or
the terms of the respective leases.
Other Real Estate Owned - Real estate acquired by foreclosure is carried
at the lower of the recorded investment in the property or its fair
value less estimated costs to sell (fair value). Immediately upon
foreclosure, the value of the underlying loan is written down to the
fair value of the real estate acquired by a charge to allowance for loan
losses, if necessary. Any subsequent write-downs are recorded as a
valuation allowance and charged against operating expenses. Operating
expenses of such properties, net of related income are included in other
expenses and gains and losses on their disposition are included in other
income and other expenses.
-7-
92
<PAGE>
Income Taxes - The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. The cumulative effect of
adopting SFAS No. 109 on the Company's financial statements as of
January 1, 1993 was to increase income from continuing operations by
$127,000 ($0.07 per share).
SFAS No. 109 applies an asset and liability method in accounting for
deferred income taxes. Deferred tax assets and liabilities are
calculated by applying applicable tax laws to the differences between
the financial statement basis and the tax basis of assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Net Income Per Common and Equivalent Share - Net income per common and
equivalent share is calculated by dividing net income by the weighted
average number of common and common equivalent (stock options) shares
outstanding during the period as adjusted for a three for two stock
split in 1995.
Common Stock Split - On September 18, 1995, the Company's Board of
Directors authorized a three for two stock split effected in the form of
a 50% stock dividend distributed on November 1, 1995 to stockholders of
record as of October 2, 1995. This resulted in the issuance of 612,945
additional shares of common stock. All share and per share amounts have
been restated to reflect this stock split.
Mortgage Servicing Rights - In May 1995, the Financial Accounting
Standards Board (FASB) issued SFAS No. 122, Accounting for Mortgage
Servicing Rights, which must be adopted by the Company effective January
1, 1996. SFAS No. 122 requires that the Company recognize as a separate
asset rights to service mortgage loans for others, whether those
servicing rights are originated or purchased. Previously, only purchased
servicing rights were capitalizable as an asset. SFAS No. 122 also
requires that capitalized servicing rights be assessed for impairment
based on fair value, rather than an estimate of undiscounted future cash
flows. The Company has determined the effect of adoption of this
standard will not be material.
Accounting for Stock-Based Compensation - In October 1995, the FASB
issued SFAS No. 123, Accounting for Stock-Based Compensation. The new
standard defines a fair value method of accounting for stock options and
other equity instruments, such as stock purchase plans. Under this
method, compensation cost is measured based on the fair value of the
stock award when granted and is recognized as an expense over the
service period, which is usually the vesting period. This standard will
be effective for the Company beginning in 1996, and requires measurement
of awards made beginning in 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but
requires disclosure in a note to the financial statements of the pro
forma net income and earnings per share as if the company had applied
the new method of accounting. The Company intends to follow these
disclosure requirements for its employees stock plans. As a result,
adoption of the new standard will not impact reported earnings or
earnings per share, and will have no effect on the Company's cash flows.
Reclassifications - Certain amounts in 1994 and 1993 have been
reclassified to conform with the 1995 financial statement presentation.
-8-
93
<PAGE>
2. RESTRICTED CASH BALANCES
The Bank is subject to regulation by the Federal Reserve Board. The
regulations required the Bank to maintain average cash reserve balances
on hand or at the Federal Reserve Bank of $1,872,000 and $1,803,000 at
December 31, 1995 and 1994. As compensation for check-clearing services,
additional compensating balances of $1,000,000 are required to be
maintained with the Federal Reserve Bank.
<TABLE>
3. SECURITIES
At December 31, the amortized cost of securities and their approximate
fair value were as follows (in thousands):
<CAPTION>
CARRYING
GROSS GROSS AMOUNT
AMORTIZED UNREALIZED UNREALIZED (APPROXIMATE
COST GAINS LOSSES FAIR VALUE)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
DECEMBER 31, 1995:
U.S. Treasury securities $ 2,000 $ 2 $ 1,998
Securities of U.S. government
agencies and corporations 5,000 $ 6 39 4,967
Other securities 5,512 227 20 5,719
--------- ----- ----- --------
$ 12,512 $ 233 $ 61 $ 12,684
========= ===== ===== ========
DECEMBER 31, 1994:
U.S. Treasury securities $ 12,015 $ 276 $ 11,739
Securities of U.S. government
agencies and corporations 2,000 153 1,847
Other securities 312 $ 57 369
-------- ---- ------ --------
$ 14,327 $ 57 $ 429 $ 13,955
======== ==== ====== ========
CARRYING GROSS GROSS APPROXIMATE
AMOUNT UNREALIZED UNREALIZED FAIR
(AMORTIZED COST) GAIN LOSS VALUE
HELD-TO-MATURITY SECURITIES:
DECEMBER 31, 1995:
U.S. Agencies $ 1,598 $ 2 $ 1,600
Obligations of states and
political subdivisions 33,619 1,846 $ 8 35,457
-------- ------- ---- --------
Total $ 35,217 $ 1,848 $ 8 $ 37,057
======== ======= ==== ========
DECEMBER 31, 1994:
U.S. Agencies $ 7,000 $ 38 $ 6,962
Obligations of states and
political subdivisions 34,374 $ 506 819 34,061
--------- ------ ------ --------
Total $ 41,374 $ 506 $ 857 $ 41,023
========= ====== ====== ========
</TABLE>
-9-
94
<PAGE>
Gross realized gains on sales of available-for-sale securities were as
follows:
1995 1994
Gross realized gains:
U.S. government and agency securities $ 31 $ 11
==== ====
There were no gross realized losses on sale of available-for-sales
securities in 1995 or 1994.
In November 1995, the FASB issued additional implementation guidance
regarding the previously issued SFAS No. 115. In accordance with this
guidance and prior to December 31, 1995, companies were allowed a
one-time reassessment of their classification of securities and were
required to account for any resulting transfers at fair value. Transfers
from the held-to-maturity category that result from this one-time
reassessment will not call into question the intent to hold other
securities to maturity in the future. Accordingly, the Company
transferred approximately $5,012,000 of securities from held to maturity
to available for sale to allow the Company greater flexibility in
managing its interest rate risk and liquidity. Available-for-sale
securities were adjusted to fair value and stockholders' equity was
increased by $52,276, net of income taxes of $22,191, respectively.
<TABLE>
Scheduled maturities of held-to-maturity and available-for-sale
securities (other than equity securities with a carrying value of
approximately $632,000) at December 31, 1995, are shown below (in
thousands). Expected maturities may differ from contractual maturities
because borrowers may have the right to prepay with or without penalty.
<CAPTION>
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES
--------------------------- -----------------------------
AMORTIZED APPROXIMATE
COST FAIR VALUE
(CARRYING APPROXIMATE AMORTIZED (CARRYING
AMOUNT) FAIR VALUE COST AMOUNT)
<S> <C> <C> <C> <C>
Due in 1 year or less $ 1,603 $ 1,611 $ 4,145 $ 4,133
Due after 1 year
through 5 years 8,673 9,017 2,426 2,409
Due after 5 years
through 10 years 14,869 15,905 3,032 3,039
Due after 10 years 10,072 10,524 2,410 2,471
--------- --------- ---------- ---------
$ 35,217 $ 37,057 $ 12,013 $ 12,052
========= ========= ========== =========
</TABLE>
At December 31, 1995 and 1994, securities having carrying amounts of
approximately $17,385,000 and $20,221,000 were pledged to secure public
deposits and short-term borrowings and for other purposes required by
law or contract.
-10-
95
<PAGE>
4. LOANS RECEIVABLE
The Company originates loans for business, consumer and real estate
activities. Such loans are concentrated in Shasta and Trinity Counties
and neighboring communities. Substantially all loans are collateralized.
Generally real estate loans are secured by real property. Commercial and
other loans are secured by bank deposits or business or personal assets.
The Company's policy for requiring collateral is through analysis of the
borrower, the borrower's industry and the economic environment in which
the loan would be granted. The loans are expected to be repaid from cash
flows or proceeds from the sale of selected assets of the borrower.
Major classifications of loans at December 31 were as follows (in
thousands):
1995 1994
Commercial $ 53,044 $ 46,347
Real estate - construction 2,838 2,333
Real estate - mortgage 41,967 30,366
Installment 39,034 36,185
Other 12,888 11,899
---------- ----------
Total loans receivable 149,771 127,130
Less:
Allowance for loan losses 1,325 1,144
Deferred loan fees 638 523
---------- ----------
Net loans receivable $ 147,808 $ 125,463
========== ==========
At December 31, 1995 and 1994, the Bank serviced real estate loans and
loans guaranteed by the Small Business Administration which it had sold
to the secondary market of approximately $93,563,000 and $100,090,000.
Changes in the allowance for loan losses for the years ended December
31, were as follows (in thousands):
1995 1994 1993
Balance, beginning of year $ 1,144 $ 1,066 $ 1,105
Provision charged to operations 375 240 110
Loans charged off (281) (185) (189)
Recoveries 87 23 40
------- -------- --------
Balance, end of year $ 1,325 $ 1,144 $ 1,066
======= ======== ========
-11-
96
<PAGE>
5. IMPAIRED AND NONPERFORMING LOANS
At December 31, 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 was
approximately $1,715,000. Of that balance approximately $1,078,000 has a
related valuation allowance of $254,000. The remaining $637,000 did not
require a valuation allowance. For the year ended December 31, 1995, the
average recorded investment in loans for which impairment has been
recognized was approximately $1,473,000. During the portion of the year
that the loans were impaired the Company recognized approximately
$205,000 of interest income.
Nonperforming loans at December 31 were as follows (in thousands):
1995 1994
Nonaccrual loans $282 $421
Loans 90 days past due but
still accruing interest 15 22
----- -----
Total nonaccrual and 90 days
past due loans $297 $443
==== ====
If interest on nonaccrual loans had been accrued, such income would have
approximated $37,000, in 1995, $33,000 in 1994 and $39,000 in 1993.
Interest income of $8,000 in 1995, $19,000 in 1994, and $23,000 in 1993
was recorded when it was received on the nonaccrual loans.
At December 31, 1995, there were no commitments to lend additional funds
to borrowers whose loans were classified as nonaccrual.
6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are
summarized as follows (in thousands):
1995 1994
Land $ 904 $ 885
Buildings and improvements 3,315 2,933
Furniture, fixtures and equipment 3,532 3,242
Leasehold improvements 178 224
-------- --------
7,929 7,284
Accumulated depreciation and amortization (4,124) (3,752)
-------- --------
$ 3,805 $ 3,532
======== ========
Building and equipment rental expense amounted to approximately $54,400,
$52,000, and $46,000, for the years ended December 31, 1995, 1994 and
1993.
During the year ended December 31, 1995, the Bank purchased, in the
ordinary course of business, a branch facility for $134,000 which the
Bank previously leased from a former board member.
-12-
97
<PAGE>
7. OTHER ASSETS
Major classifications of other assets at December 31 were as follows (in
thousands):
1995 1994
Cash surrender value of life
insurance policies $ 2,945 $ 2,535
Prepaid expenses 548 556
Deferred taxes 1,123 910
Other 10 528
-------- --------
Total $ 4,626 $ 4,529
======== ========
8. DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $17,344,000 and $13,782,000 at December 31, 1995
and 1994. Interest expense incurred on such time certificates of deposit
was $734,000, $452,000, and $431,000, for the years ended December 31,
1995, 1994 and 1993.
9. LINES OF CREDIT
At December 31, 1995, the Bank had the following lines of credit with
correspondent banks to purchase federal funds (in thousands):
TYPE AMOUNT EXPIRATION
Unsecured $3,000 July 31, 1996
$3,000 September 30, 1996
$3,000 None
Secured $5,020 Quarterly
(First deeds of trust on
eligible 1-4 unit residential
loans)
-13-
98
<PAGE>
10. INCOME TAXES
The provision for income taxes for the years ended December 31, was as
follows (in thousands):
1995 1994 1993
Currently payable:
Federal $ 1,343 $ 831 $ 806
State 702 588 488
-------- -------- --------
Total 2,045 1,419 1,294
-------- -------- --------
Deferred (credit):
Federal (341) (21) (84)
State (34) (59) (32)
-------- -------- --------
Total (375) (80) (116)
-------- -------- --------
Total $ 1,670 $ 1,339 $ 1,178
======== ======== ========
The effective federal tax rate for the years ended December 31, differs
from the statutory tax rate as follows:
1995 1994 1993
Federal income tax at statutory rates 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit 7.2 7.9 7.3
Tax exempt income (12.1) (13.3) (12.5)
Other (1.1) (.2)
----- ---- ----
Total 29.0% 29.4% 29.8%
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's net deferred tax asset
at December 31, are as follows (in thousands):
1995 1994 1993
Deferred tax assets:
Reserve for loan losses $ 371 $ 247 $ 260
California franchise tax 133 51 100
Deferred loan fee income 289 178 138
Deferred compensation 361 208 176
Accrued pension obligation 415 370 396
Mark to market adjustment 33
Unrealized loss on securities
available-for-sale 111
-------- ------- -------
Total deferred tax assets 1,602 1,165 1,070
-------- ------- -------
Deferred tax liabilities:
Tax depreciation in excess of
book depreciation (134) (95) (137)
Mark to market adjustment (87)
Unrealized gain on securities
available-for-sale (51)
Other (294) (73) (214)
-------- ------- -------
Total deferred tax liabilities (479) (255) (351)
-------- ------- -------
Net deferred tax asset $ 1,123 $ 910 $ 719
======== ======= =======
-14-
99
<PAGE>
11. RETIREMENT PLANS
Substantially all employees with at least one year of service
participate in a Company-sponsored employee stock ownership plan (ESOP).
The Company made contributions to the ESOP of $60,000 in 1995, 1994 and
1993, respectively. At December 31, 1995, the ESOP owned approximately
111,343 shares of the Company's stock.
The Company maintains a 401(k) plan covering employees who have
completed 1,000 hours of service during a 12-month period and are aged
21 or older. Voluntary employee contributions are partially matched by
the Company. The Company made contributions to the Plan for the years
ended December 31, 1995, 1994, and 1993 of $21,000, $20,000, and
$21,000, respectively.
The Company has a supplemental retirement plan for directors and a
supplemental executive retirement plan covering key executives. These
plans are nonqualified defined benefit plans and are unsecured and
unfunded. The Company has purchased insurance on the lives of the
participants and intends to use the cash values of these policies
($2,945,000 and $2,535,000 at December 31, 1995 and 1994, respectively)
to pay the retirement obligations. The accrued pension obligation of
$1,509,000, $912,000, and $904,000, as of December 31, 1995, 1994 and
1993, respectively, is included in accrued interest and other
liabilities.
<TABLE>
The following table sets forth the plans' status at December 31 (in
thousands):
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $1,432 $912 $904
======= ===== ========
Accumulated benefit obligation $1,432 $912 $904
======= ===== ========
Projected benefit obligation for service
rendered to date $2,157 $931 $1,000
======= ===== ========
Plan assets at fair value - - -
======= ===== ========
Projected benefit obligation in excess of
plan assets $(2,157) $(931) $(1,000)
Unrecognized net losses 502 28 255
Unrecognized net pension transition
asset, amortized over 17 years 277 117 145
Adjustment necessary to recognize minimum
liability (131) (126) (304)
------- ----- --------
Accrued pension obligation $(1,509) $(912) $ (904)
======= ===== ========
</TABLE>
The net periodic pension cost was determined using a discount rate
assumption of 6.26%, 7.87%, and 6.25% for 1995, 1994 and 1993,
respectively. The rate of increase in compensation used was 6% for 1995,
1994 and 1993.
-15-
100
<PAGE>
The elements of pension costs for the unqualified defined benefit
pension plans at December 31 are as follows (in thousands):
1995 1994 1993
Cost of benefits earned during the year $ 84 $101 $ 93
Interest on projected benefit obligation 79 68 57
Net amortization and other deferrals 28 41 40
---- ---- ----
Net pension cost $191 $210 $190
==== ==== ====
<TABLE>
12. STOCK OPTIONS
Under the Company's stock option plan, options are granted to directors
of the Bank at no less than 85% of fair market value. Outstanding
options to purchase common stock expire in January 2000 Options vest at
the rate of 20% per year for each year of future service for options
granted in each year. A summary of stock options follows:
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Stock under option, beginning of year 42,772 46,217 39,330
Stock options granted 12,000 15,000 15,000
Stock options expired or canceled (7,413) (3,329) (3,597)
Stock options exercised (11,115) (15,116) (9,045)
Stock dividend 4,529
------ ------ ------
Stock under option, end of year 36,244 42,772 46,217
====== ====== ======
Price per share:
Stock options outstanding $4.37-$12.19 $4.37-10.20 $4.37-6.70
Stock options exercised $4.37-$12.19 $4.37-10.20 $4.37-6.70
Number of options exercisable 15,309 15,327 14,984
</TABLE>
The price per share and number of options have been adjusted to give
effect to the three for two stock split effected in 1995 in the form of
a 50% stock dividend.
13. COMMITMENTS AND CONTINGENCIES
The Company is involved in a number of legal actions arising from normal
business activities. Management, upon the advice of legal counsel,
believes that the ultimate resolution of these actions will not have a
material effect on the financial statements.
The Bank was contingently liable under letters of credit issued on
behalf of its customers in the amount of $439,000 and $331,000 at
December 31, 1995 and 1994. At December 31, 1995 commercial and consumer
lines of credit, and real estate loans of approximately $18,918,000 and
$1,524,000, respectively, were undisbursed. These instruments involve,
to varying degrees, elements of credit and market risk in excess of the
amounts recognized in the balance sheet. The contractual or notional
amounts of these transactions express the extent of the Bank's
involvement in these instruments and do not necessarily represent the
actual amount subject to credit loss.
-16-
101
<PAGE>
14. RELATED PARTY TRANSACTIONS
At December 31, 1995 and 1994, certain officers and directors and their
associates were indebted to the Bank for loans made in the ordinary
course of business.
A summary of activity for the years ended December 31, 1995 and 1994 is
as follows (in thousands; renewals are not reflected as either new loans
or repayments):
1995 1994
Beginning balance $ 3,365 $ 3,634
Borrowings 1,173 1,085
Repayments (692) (1,354)
-------- -------
Ending balance $ 3,846 $ 3,365
======== =======
15. REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and, possibly,
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Capital adequacy guidelines and the regulatory framework for
prompt corrective action require that the Company meet specific capital
adequacy guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's capital
classification is also subject to qualitative judgments by the
regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum ratios of total and
Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined) and a minimum leverage ratio of Tier 1 capital to average
assets (as defined). Management believes, as of December 31, 1995, that
the Company meets all capital adequacy requirements to which it is
subject.
The following table shows the Company's capital ratios at December 31 as
well as the minimum capital ratios required to be deemed "well
capitalized" under the regulatory framework:
MINIMUM
WELL
CAPITALIZED
1995 1994 RATIOS
CAPITAL RATIOS:
Total risk-based
capital ratio 13.57% 13.91% 10.00%
Tier 1 capital to
risk-weighted assets 12.76% 13.09% 6.00%
Leverage ratio 8.87% 8.49% 5.00%
Under federal and California state banking laws, dividends paid by the
Company's subsidiary bank in any calendar year may not exceed certain
limitations without the prior written approval of the appropriate bank
regulatory agency. At December 31, 1995, the amount available for such
dividends without prior written approval was approximately $7,696,000.
Similar restrictions apply to the amounts and terms of loans, advances
and other transfers of funds from the subsidiary bank to the Company.
-17-
102
<PAGE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments
requires that the Company disclose the fair value of financial
instruments for which it is practicable to estimate. Although management
uses its best judgment in assessing fair value, there are inherent
weaknesses in any estimating technique that may be reflected in the fair
values disclosed. The fair value estimates are made at a discrete point
in time based on relevant market data, information about the financial
instruments, and other factors. Estimates of fair value of instruments
without quoted market prices are subjective in nature and involve
various assumptions and estimates that are matters of judgment. Changes
in the assumptions used could significantly affect these estimates. Fair
value has not been adjusted to reflect changes in market conditions
subsequent to December 31, 1995, therefore, estimates presented herein
are not necessarily indicative of amounts which could be realized in a
current transaction.
The following estimates and assumptions were used as of December 31,
1995 and 1994 to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value.
(a) Cash and Cash Equivalents - The carrying amount represents a
reasonable estimate of fair value.
(b) Securities - Held-to-maturity securities are based on quoted market
prices, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
securities. Trading securities are carried at market.
Available-for-sale securities are carried at market.
(c) Loans Receivable - Commercial loans, residential mortgages, and
construction loans, are segmented by fixed and adjustable rate
interest terms, by maturity, and by performing and nonperforming
categories.
The fair value of performing loans is estimated by discounting
contractual cash flows using the current interest rates at which
similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. Assumptions
regarding credit risk, cash flow, and discount rates are
judgmentally determined using available market information.
The fair value of nonperforming loans and loans delinquent more
than 30 days is estimated by discounting estimated future cash
flows using current interest rates with an additional risk
adjustment reflecting the individual characteristics of the loans.
(d) Deposit Liabilities - Noninterest bearing and interest bearing
demand deposits and savings accounts are payable on demand and are
assumed to be at fair value. Time deposits are based on the
discounted value of contractual cash flows. The discount rate is
based on rates currently offered for deposits of similar size and
remaining maturities.
(e) Commitments to Fund Loans/Standby Letters of Credit - Commitments
are estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties.
The differences between the carrying value of commitments to fund
loans or stand by letters of credit and their fair value is not
significant and therefore not included in the following table.
-18-
103
<PAGE>
<TABLE>
The estimated fair values of the Company's financial instruments as of
December 31, are as follows (in thousands):
<CAPTION>
1995 1994
------------------------ --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $28,468 $28,468 $22,997 $22,997
Securities:
Available for sale $12,684 $12,684 $13,955 $13,955
Held to maturity $35,217 $37,057 $41,374 $41,023
Loans receivable $147,808 $148,258 $125,463 $121,623
FINANCIAL LIABILITIES:
Deposits $211,075 $211,559 $193,541 $193,385
</TABLE>
<TABLE>
17. CONDENSED FINANCIAL INFORMATION OF NORTH VALLEY BANCORP
The condensed financial statements of North Valley Bancorp are presented
below (in thousands except share amounts):
NORTH VALLEY BANCORP
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
------------------------------------------------------------------------
<CAPTION>
1995 1994
<S> <C> <C>
Assets:
Cash and cash equivalents $ 243 $ 325
Available-for-sale securities (at market) 632 368
Investments in subsidiaries 20,136 17,250
Dividend receivable 500 427
---------- ----------
Total $ 21,511 $ 18,370
========== ==========
Liabilities and stockholders' equity:
Dividend payable $ 497 $ 427
Other liabilities 41 17
Stockholders' equity:
Preferred stock, no par value: authorized, 20,000,000 shares;
none outstanding
Common stock, no par value: authorized, 20,000,000 shares;
outstanding, 1,841,048 and 1,829,933 as of
December 31, 1995 and 1994, respectively 9,766 9,694
Retained earnings 11,086 8,493
Unrealized gain (loss) on securities available for sale
(net of tax effect) 121 (261)
---------- ----------
Total $ 21,511 $ 18,370
========== ==========
</TABLE>
-19-
104
<PAGE>
<TABLE>
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
------------------------------------------------------------------------
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
INCOME:
Dividends from subsidiary $ 954 $ 1,127 $ 867
Other income 29 17 18
-------- -------- --------
Total income 983 1,144 885
EXPENSE:
Legal and accounting 17 9
Other 10 7
-------- -------- --------
Total expense 17 19 7
-------- -------- --------
Income before equity in undistributed income
of subsidiary 966 1,125 878
Equity in undistributed income of subsidiary 3,117 2,087 2,133
-------- -------- --------
Net income $ 4,083 $ 3,212 $ 3,011
======== ======== ========
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
------------------------------------------------------------------------
1995 1994 1993
Cash flows from operating activities:
Net income $ 4,083 $ 3,212 $ 3,011
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed income of subsidiaries (3,117) (2,087) (2,133)
Gain on sale of investments (29) (7) (14)
Effect of changes in:
Dividends receivable (73)
--------- -------- --------
Net cash provided in operating activities 864 1,118 864
--------- -------- --------
Cash flows from investing activities:
Purchase of available-for-sale securities (315) (162) (175)
Proceeds from sale of available-for-sale securities 114 32 44
--------- -------- --------
Net cash used by investing activities (201) (130) (131)
--------- -------- --------
Cash flows from financing activities:
Cash dividends paid (880) (848) (718)
Increase in dividends payable 70
Cash in lieu of fractional shares (7) (14)
Stock options exercised 72 87 53
--------- -------- --------
Net cash used in financing activities (745) (761) (679)
--------- -------- --------
(Decrease) increase in cash and cash equivalents (82) 227 54
Cash and cash equivalents at beginning of year 325 98 44
--------- -------- --------
Cash and cash equivalents at end of year $ 243 $ 325 $ 98
========= ======== ========
</TABLE>
* * * * * *
-20-
105
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTH VALLEY BANCORP
- --------------------------------------
Registrant
BY: /s/ Donald V. Carter
- --------------------------------------
Donald V. Carter
President and Chief Executive Officer
/s/ James F. Cowee, Jr. /s/ Fred A. Drake
- -------------------------------------- -----------------------------------
James F. Cowee, Jr. Fred A. Drake
Chief Financial Officer Sr. Vice President and Cashier
(Principal Accounting Officer)
DATE: MARCH 18, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME AND SIGNATURE: TITLE DATE
- ------------------ ----- ----
/s/ Donald V. Carter Director March 18, 1996
- --------------------------------------
Donald V. Carter
/s/ Rudy V. Balma Director March 18, 1996
- --------------------------------------
Rudy V. Balma
/s/ Dan W. Ghidinelli Director March 18, 1996
- --------------------------------------
Dan W. Ghidinelli
/s/ Thomas J. Ludden Director March 18, 1996
- --------------------------------------
Thomas J. Ludden
/s/ Bill G. Minton Director March 18, 1996
- --------------------------------------
Bill G. Minton
/s/ Kelly V. Pierce Director March 18, 1996
- --------------------------------------
Kelly V. Pierce
/s/ J. M. Wells, Jr. Director March 18, 1996
- --------------------------------------
J. M. Wells, Jr.
106
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000353191
<NAME> NORTH VALLEY BANCORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 11,868
<INT-BEARING-DEPOSITS> 186,069
<FED-FUNDS-SOLD> 16,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,684
<INVESTMENTS-CARRYING> 35,217
<INVESTMENTS-MARKET> 37,057
<LOANS> 149,133
<ALLOWANCE> 1,325
<TOTAL-ASSETS> 235,072
<DEPOSITS> 211,075
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,024
<LONG-TERM> 0
<COMMON> 9,766
0
0
<OTHER-SE> 11,207
<TOTAL-LIABILITIES-AND-EQUITY> 235,072
<INTEREST-LOAN> 3,543
<INTEREST-INVEST> 1,019
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,562
<INTEREST-DEPOSIT> 1,992
<INTEREST-EXPENSE> 1,992
<INTEREST-INCOME-NET> 2,570
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 1,595
<INCOME-PRETAX> 1,509
<INCOME-PRE-EXTRAORDINARY> 1,509
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,061
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
<YIELD-ACTUAL> 4.77
<LOANS-NON> 282
<LOANS-PAST> 15
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,144
<CHARGE-OFFS> 281
<RECOVERIES> 87
<ALLOWANCE-CLOSE> 1,325
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
