FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 0-10652
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NORTH VALLEY BANCORP
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2751350
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
880 E. Cypress Avenue, Redding, CA. 96002
--------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 221-8400
------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
No par value common stock
-----------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock, was $ 47,613,000
as of March 1, 1998.
The number of shares outstanding of common stock as of March 1, 1998, was
1,839,092.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for the 1998 Annual Meeting
of Shareholders are incorporated by reference in Part III, Items 10, 11, 12 and
13 of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
Page
Part I
Item 1 - Description of Business........................................... 2
Item 2 - Description of Property...........................................32
Item 3 - Legal Proceedings ................................................33
Item 4 - Submission of Matters to a Vote of
Security Holders .................................................33
Part II
Item 5 - Market for Common Equity and Related Stockholder Matters ........34
Item 6 - Selected Financial Data...........................................35
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operation ........................................36
Item 7A - Quantitative and Qualitative Disclosures About Market Risk........44
Item 8 - Financial Statements and Supplementary Data.......................45
Item 9 - Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure .........................................45
Part III
Item 10 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................46
Item 11 - Executive Compensation ...........................................46
Item 12 - Security Ownership of Certain Beneficial Owners
and Management....................................................46
Item 13 - Certain Relationships and Related Transactions ..................46
Part IV
Item 14 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K...........................................46
Financial Statements.........................................................48
Signatures ..................................................................77
- I -
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Certain statements in this Annual Report on Form 10-K (excluding
statements of fact or historical financial information) involve forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Shasta
County; volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets. See also "Certain
Additional Business Risks" on pages 30 through 31 herein and other risk factors
discussed elsewhere in this Report.
General
North Valley Bancorp (the "Company") is a bank holding company
registered with and subject to regulation and supervision by the Board of
Governors of the Federal Reserve System (the "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"), which is inactive, 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, 1997, the Company had approximately 140 employees
(which includes 120 full-time equivalent employees); the Company had total
consolidated assets of $270,757,000; before consolidation the Bank had total
assets of $268,329,000 and total deposits of $239,137,000; assets of the Trading
Company were $2,000; assets of Bank Processing, Inc., were $403,000; 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 or
international banking services and does not plan to do so in the near future.
2
<PAGE>
The Bank operates ten 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 had previously leased from a former Board
member. In 1997, the Bank finished construction on its new site located in
Shasta Lake, CA. The branch was relocated from its leased facility to its new
building on October 14, 1997. The Bank opened its first super market branch
located in Cottonwood, CA, on January 20, 1998.
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, is inactive. North
Valley Consulting Services was established as a consulting service for
depository institutions. In 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 one other bank 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, 1997 Bank Processing, Inc., had cash of
approximately $58,000.
On August 18, 1995, the Bank entered into an Agreement with Linsco
Private Ledger ("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 invest- ments 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
3
<PAGE>
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 30%
tax rate for 1997, 32% for 1996 and 35% for 1995) have been made in calculating
yields on tax-exempt securities.
4
<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>
1997 1996
-------------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE INCOME(1)/ RATES AVERAGE INCOME(1)/ RATES
BALANCE EXPENSE EARNED/ BALANCE EXPENSE EARNED/
(Dollars in thousands) PAID PAID
ASSETS ====================================== ===================================
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 20,016 $ 1,079 5.39% $ 18,690 $ 990 5.30%
Available for sale securities:
U.S. Treasury securities 6,447 385 5.97% 327 18 5.50%
U.S. Agencies 5,442 329 6.05% 5,162 323 6.26%
Obligations of states and
political subdivisions 2,867 208 7.26% 4,918 384 7.80%
Other investments 866 33 3.81% 579 27 4.66%
------- -------- ----- ---------- ------ -----
Total available for sale
securities 15,622 955 6.11% 10,986 752 6.84%
Held to maturity securities:
U.S. Agencies 3,342 215 6.43% 4,078 281 6.89%
Obligations of states and
political subdivisions 36,541 3,181 8.71% 34,923 3,094 8.86%
------- -------- ----- ---------- ------ -----
Total held to maturity
securities 39,883 3,396 8.51% 39,001 3,375 8.65%
FHLB 765 47 6.14% 709 40 5.64%
Cash held in trust 597 33 5.53% 0 0 0.00%
Trading account securities 0 0 0.00% 1,094 58 5.30%
Total loans (2)(3) 167,496 15,238 9.10% 157,644 14,517 9.21%
------- -------- ----- ---------- ------ -----
Total interest earning assets/
interest income 244,379 20,748 8.49% 228,124 19,732 8.65%
===== =====
Nonearning assets 23,958 20,740
Less: Allowance for loan losses (1,462) (1,502)
--------- ----------
TOTAL ASSETS $ 266,875 $ 247,362
========= ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities
Deposits
Transaction $ 43,138 $ 1,003 2.33% $ 40,022 $ 931 2.33%
Savings & Money Market 46,547 1,418 3.05% 44,392 1,325 2.98%
Time 116,440 6,223 5.34% 109,946 5,821 5.29%
--------- -------- ----- ---------- ------ -----
Total interest bearing
deposits/interest expense 206,125 8,644 4.19% 194,360 8,077 4.16%
-------- ===== ------ =====
Non interest-bearing deposits 31,179 27,376
Other noninterest-bearing
liabilities 3,409 2,928
--------- ----------
TOTAL LIABILITIES 240,713 224,664
Shareholders' equity 26,162 22,698
--------- ----------
Total Liabilities and
and Stockholders' Equity $ 266,875 $ 247,362
--------- ----------
Net Interest Income and Margin(4) $12,104 4.95% $11,655 5.11%
========= ===== ======= =====
1995
--------------------------------
AVERAGE
AVERAGE INCOME(1) RATES
BALANCE EXPENSE EARNED/
PAID
(Dollars in thousands)
================================
Federal funds sold 17,742 $ 1,040 5.86%
Available for sale securities:
U.S. Treasury securities 9,070 374 4.12%
U.S. Agencies 3,200 202 6.31%
Obligations of states and
political subdivisions 55 5 9.09%
Other investments 413 14 3.39%
--------- -------- -----
Total available for sale
securities 12,738 595 4.67%
Held to maturity securities:
U.S. Agencies 5,594 353 6.31%
Obligations of states and
political subdivisions 36,470 3,330 9.13%
--------- -------- -----
Total held to maturity
securities 42,064 3,683 8.76%
FHLB 645 31 4.81%
Cash held in trust 0 0 0.00%
Trading account securities 211 13 6.16%
Total loans (2)(3) 137,613 13,230 9.61%
--------- -------- -----
Total interest earning assets/
interest income 211,013 18,592 8.81%
=====
Nonearning assets 18,834
Less: Allowance for loan losses (1,259)
----------
TOTAL ASSETS 228,588
==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities
Deposits
Transaction $ 36,520 $ 867 2.37%
Savings & Money Market 44,123 1,248 2.83%
Time 100,345 5,444 5.43%
--------- -------- -----
Total interest bearing
deposits/interest expense 180,988 7,559 4.18%
-------- =====
Non interest-bearing deposits 24,826
Other noninterest-bearing
liabilities 2,800
---------
TOTAL LIABILITIES 208,614
Shareholders' equity 19,974
---------
Total Liabilities and
and Stockholders' Equity $ 228,588
---------
Net Interest Income and Margin(4) $11,033 5.23%
======== =====
<FN>
(1) Tax-equivalent basis
(2) Loans on nonaccrual status have been included in the computation of average
balances.
(3) Includes loan fees of $259,000, $225,000, and $190,000 for 1997, 1996 and
1995, respectively.
(4) Net interest margin is determined by dividing net interest income by total
average interest earning assets.
</FN>
</TABLE>
5
<PAGE>
RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
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>
1997 versus 1996 1996 versus 1995 1995 versus 1994
------------------------------ ------------------------------ ----------------------------
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 $ 71 $ 18 $ 89 $ 50 $ (100) $ (50) $ 93 $ 295 $ 388
Interest on available for sale
securities:
U.S. Treasury securities 365 2 367 (482) 126 (356) (543) (6) (549)
U.S. Agencies 17 (11) 6 123 (2) 121 9 43 52
Obligations of states and
political subdivisions (149) (26) (175) 380 (1) 379 5 0 5
Other investments 11 (5) 6 8 5 13 4 1 5
------- ------ ----- ------- ------ ------ ------- ------ -------
Total available for sale
securities 244 (40) 204 29 128 157 (525) 38 (487)
Interest on held to maturity
securities:
U.S. Agencies (47) (19) (66) (104) 32 (72) 157 (11) 146
Obligations of states and
political subdivisions 140 (53) 87 (137) (99) (236) 417 16 433
------- ------ ----- ------- ------ ------ ------- ------ -------
Total held to maturity
securities 93 (72) 21 (241) (67) (308) 574 5 579
Dividends on FHLB 3 4 7 4 5 9 24 7 31
Interest on trust 33 0 33
Interest on trading account
securities 0 (58) (58) 47 (2) 45 11 1 12
Interest on total loans 896 (175) 721 1,845 (558) 1,287 2,215 668 2,883
------- ------ ----- ------- ------ ------ ------- ------ -------
Total interest income 1,340 (323) 1,017 1,734 (594) 1,140 2,392 1,014 3,406
------- ------ ----- ------- ------ ------ ------- ------ -------
INTEREST EXPENSE
Interest bearing liabilities
Deposits
Transaction 72 (0) 72 81 (17) 64 252 (193) 59
Saving s & Money Market 66 27 93 8 69 77 (113) (7) (120)
Time 347 55 402 508 (131) 377 1,004 1,156 2,160
------- ------ ----- ------- ------ ------ ------- ------ -------
Total interest expense 485 82 567 597 (79) 518 1,143 956 2,099
------- ------ ----- ------- ------ ------ ------- ------ -------
Change in net interest income $ 855 $ (405) $ 450 $ 1,137 $ (515) $ 622 $ 1,249 $ 58 $ 1,307
======= ====== ===== ======= ====== ====== ======= ====== =======
<FN>
(1) The change in interest due to both rate and volume has been allocated to volume.
</FN>
</TABLE>
6
<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. Changes in market value are
included in other operating income. The trading securities balance for
December 31, 1997, 1996, and 1995 was zero.
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.
<TABLE>
At December 31, the amortized cost of securities and their
approximate fair value were as follows (in thousands):
Available for Sale Securities:
<CAPTION>
Carrying
Gross Gross Amount
Amortized Unrealized Unrealized (Approximate
Cost Gains Losses Fair Value)
December 31, 1997:
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and corporations $22,037 $ 20 $22,057
Obligations of states and political
subdivisions 2,268 58 2,326
Other securities 1,311 919 2,230
------- ------- ------- -------
Total $25,616 $ 997 $ $26,613
======= ======= ======= =======
December 31, 1996:
U.S. Treasury and other U.S.
government agencies and corporations $ 3,998 $ 44 $ 3,954
Obligations of states and
political subdivisions 4,140 $ 113 4,253
Other securities 655 361 1,016
------- ------- ------- -------
Total $ 8,793 $ 474 $ 44 $ 9,223
======= ======= ======= =======
7
<PAGE>
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
Obligations of states and
political subdivisions 5,013 94 20 5,087
Other securities 499 133 632
------- ------- ------- -------
Total $12,512 $ 233 $ 61 $12,684
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity Securities: Carrying Gross Gross Approximate
Amount Unrealized Unrealized Fair
(Amortized Cost) Gain Losses Value
December 31, 1997:
<S> <C> <C> <C> <C>
U. S. Agencies $ 3,000 $ (11) $ 2,989
Obligations of states and
political subdivisions 36,219 $ 2,023 38,242
------- ------- ------- -------
Total $39,219 $ 2,023 $ (11) $41,231
======= ======= ======= =======
December 31, 1996:
U. S. Agencies $ 4,000 $ 59 $ 3,941
Obligations of states and
political subdivisions 35,997 $ 1,940 7 37,930
------- ------- ------- -------
Total $39,997 $ 1,940 $ 66 $41,871
======= ======= ======= =======
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
======= ======= ======= =======
</TABLE>
Gross realized gains on sales of U.S. government and agency securities
categorized as available for sale securities were $250,000 in 1997, and $31,000
in 1996 and 1995. There were no gross realized losses on sale of available for
sale securities in 1997, 1996 or 1995.
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 related factors.
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
8
<PAGE>
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.
Scheduled maturities of held to maturity and available for sale
securities (other than equity securities with an amortized cost of approximately
$1,310,000 and a carrying value of approximately $2,230,000) at December 31,
1997, are shown below (in thousands). Expected maturities may differ from
contractual maturities because borrowers may have the right to prepay with or
without penalty.
The following table sets forth the maturities of investment
securities at December 31, 1997, based on their amortized cost, 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
December 31 1997 1997 1997 1997
- ----------- -------- --------- --------- -------
(Dollars in thousands)
U.S. Treasury obligations
<S> <C> <C> <C> <C>
Due within one year -- -- 6.05% $ 1,994
Due after one year but within five years -- -- 5.92% 9,046
Due after five years but within ten years -- -- -- --
Due after ten years -- -- -- --
--------- ------- --------- -------
Total -- -- 5.94% 11,040
U.S. government agency securities
Due within one year -- -- 5.67% 6,000
Due after one year but within five years 6.24% $ 3,000 6.36% 3,998
Due after five years but within ten years -- -- 7.04% 1,000
Due after ten years -- -- -- --
--------- ------- --------- -------
Total 6.24% 3,000 6.05% 10,998
State and municipal bonds
Due within one year 8.69% 1,794 5.56% 425
Due after one year but within five years 8.99% 12,783 6.88% 624
Due after five years but within ten years 8.63% 10,971 7.74% 499
Due after ten years 8.45% 10,671 8.27% 720
--------- ------- --------- -------
Total 8.71% 36,219 7.26 2,268
Grand Total 8.52% $39,219 6.11% $24,306
========= ======= ========= =======
<FN>
- ----------------------
(1) Tax-equivalent basis at fiscal year end.
9
</FN>
</TABLE>
<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>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 64,666 $ 63,944 $ 53,044 $ 46,347 $ 38,897
Real estate - construction 1,688 1,135 2,838 2,333 1,754
Real estate - mortgage 45,590 46,673 41,967 30,366 16,467
Installment 44,510 43,863 39,034 36,185 31,836
Other 13,390 13,283 12,888 11,899 11,875
-------- -------- -------- -------- --------
Total loans receivable 169,844 168,898 149,771 127,130 100,829
Less:
Allowance for loan losses 1,702 1,254 1,325 1,144 1,066
Deferred loan fees 636 661 638 523 306
-------- -------- -------- -------- --------
Net loans receivable $167,507 $166,983 $147,808 $125,463 $ 99,457
======== ======== ======== ======== ========
</TABLE>
At December 31, 1997 and 1996, the Bank serviced real estate loans
and loans guaranteed by the Small Business Administration which it had sold to
the secondary market, such loans totaling approximately $88,640,000 and
$90,744,000, respectively, as of such date.
The Bank was contingently liable under letters of credit issued on
behalf of its customers in the amount of $1,189,000 and $521,000 at December 31,
1997 and 1996, respectively. At December 31, 1997 commercial and consumer lines
of credit, and real estate loans of approximately $17,739,000 and $919,000,
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 certain loan categories.
Excluded categories are residential mortgages of 1-4 family residences,
installment loans and lease financing outstanding as of December 31, 1997. Also
provided with respect to such loans are the amounts due after one year,
classified according to the sensitivity to changes in interest rates:
10
<PAGE>
<TABLE>
<CAPTION>
Maturing
-------------------------------------------------------------
Within After One After
One Year Through Five Years Five Years Total
-------- ------------------ ---------- -----
(Millions of dollars)
Commercial, financial and
<S> <C> <C> <C> <C>
agricultural $ 5,375 $17,382 $41,909 $64,666
Real Estate - construction 1,688 1,688
------- ------- ------- -------
$ 7,063 $17,382 $41,909 $66,354
======= ======= ======= =======
Loans maturing after one year with:
Fixed interest rates 9,557 22,555
Variable interest rates 7,825 19,354
------- -------
$17,382 $41,909
======= =======
</TABLE>
Impaired, Nonaccrual, Past Due, Restructured Loans, and Other Real Estate Owned
At December 31, 1997, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 was approximately
$4,353,000. No significant impaired balances required a valuation allowance at
December 31, 1997. For the year ended December 31, 1997, the average recorded
investment in loans for which impairment has been recognized was approximately
$3,454,000. During the portion of the year that the loans were impaired the
Company recognized interest income of approximately $153,000 for cash payments
received.
At December 31, 1996, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 was approximately
$2,612,000. Of that balance approximately $320,000 has a related valuation
allowance of $33,000. The remaining $2,292,000 did not require, in management's
view, a valuation allowance. For the year ended December 31, 1996, the average
recorded investment in loans for which impairment has been recognized was
approximately $2,244,000. During the portion of the year that the loans were
impaired the Company recognized interest income of approximately $203,000 for
cash payments received.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is discontinued
either when reasonable doubt exists as to the full and timely collection of
interest or principal, or when a loan becomes contractually past due by 90 days
or more with respect to interest or principal (except that when management
believes a loan is well secured and in the process of collection, interest
accruals are continued on loans deemed by management to be fully collectible).
When a loan is placed on nonaccrual status, all interest previously accrued but
not collected is reversed against current period interest income. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable. Interest accruals are resumed on
such loans when, in the judgment of management, the loans are estimated to be
fully collectible as to both principal and interest.
Nonperforming loans at December 31 are summarized as follows (in
thousands):
11
<PAGE>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Nonaccrual loans $ 536 $1,190 $ 282 $ 421 $ 334
Loans 90 days past due but still
accruing interest 244 14 15 22 84
Restructured loans -- -- -- -- --
Other real estate owned 212 69 87 -- --
------ ------ ------ ------ ------
Total $ 992 $1,273 $ 384 $ 443 $ 418
====== ====== ====== ====== ======
If interest on nonaccrual loans had been accrued, such income would
have approximated $32,000 in 1997, $82,000 in 1996, and $37,000 in 1995.
Interest income of $28,000 in 1997, $27,000 in 1996, and $8,000 in 1995 was
recorded in connection with payments received on certain nonaccrual loans.
Based on its review of impaired, past due and nonaccrual loans and
other information known to management at the date of this Report, in addition to
the nonperforming loans included in the above table, management has identified
18 loans in the aggregate principal amount of $341,000 about which it has
serious doubts regarding the borrowers' ability to comply with present loan
repayment terms, such that said loans might subsequently be classified as
nonperforming.
At December 31, 1997, there were no commitments to lend additional
funds to borrowers whose loans were classified as nonaccrual.
Summary of Loan Loss Experience:
<TABLE>
The following table summarizes the Company's loan loss experience
for the years ended December 31:
<CAPTION>
December 31 (dollars in thousands) 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average amount of gross loans outstanding $167,496 $157,644 $137,613 $114,577 $ 92,399
Balance of allowance for loan losses
at beginning of period 1,254 1,325 1,144 1,066 1,105
Loans charged off:
Commercial, financial and agricultural 8 538 139 39 61
Real Estate - construction 0 2 0 0 0
Real Estate - mortgage 128 139 27 0 0
Installment 193 118 106 125 107
Other 33 16 9 21 21
-------- -------- -------- -------- --------
Total loans charged off 362 813 281 185 189
Recoveries of loans previously charged off:
Commercial, financial and agricultural 15 7 52 10 21
Real Estate - construction 0 0 0 0 2
Real Estate - mortgage 4 0 9 0 0
Installment 20 14 23 12 16
Other 1 1 3 1 1
-------- -------- -------- -------- --------
Total recoveries of loans
previously charged off 40 22 87 23 40
-------- -------- -------- -------- --------
Net loans charged off 322 791 194 162 149
Provisions for loan losses 770 720 375 240 110
Balance of allowance for loan losses
at end of period $ 1,702 $ 1,254 $ 1,325 $ 1,144 $ 1,066
======== ======== ======== ======== ========
12
<PAGE>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Ratio of net charge-offs to
average loans outstanding .19% .50% .14% .14% .16%
Allowance for loan losses to
total loans 1.00% .74% .88% .90% 1.06%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank maintains an allowance for possible loan losses (the
"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, 1997, was
adequate against foreseeable losses in its loan portfolio at that time. The risk
of nonpayment of loans is inherent in 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 perceived risk is taken into account in
establishing the structure of, and interest rates 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
and the percent of loans in each category to total loans at the dates indicated
(dollars in thousands).
<CAPTION>
December 31 1997 1996 1995 1994 1993
-------------- ------------- ------------- -------------- ----------------
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
------ ----- ------- ----- ------ ----- ------ ---- ------ -----
Loan Categories:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 993 58% $ 765 61% $ 875 66% $ 583 51% $ 593 39%
Real Estate - construction -0- -- -0- -- -0- -- -0- -- -0- --
Real Estate - mortgage 89 5% 117 9% 106 8% 114 10% 41 18%
Installment 400 24% 372 30% 344 26% 447 39% 432 43%
Other -0- -- -0- -- -0- -- -0- -- -0- --
Unallocated 220 13% -0- -- -0- -- -0- -- -0- --
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $1,702 100% $1,254 100% $1,325 100% $1,144 100% $1,066 100%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
The Allowance totaled $1,702,000, or 1.00% of total loans
outstanding at December 31, 1997. Based on management's evaluation of the
current loan portfolio and economic trends during 1997, the Bank made a
provision to its Allowance of $770,000 which was due primarily to the increase
in loan volume and loans charged off during 1997. 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, 1997 are summarized as follows (dollars in
thousands):
13
<PAGE>
$100,000 or More -Time
Certificates of Deposit
-----------------------
Remaining maturities:
Three months or less $ 5,819
Over three through six months 5,724
Over six through twelve months 5,648
Over twelve months 723
-------
TOTAL $17,914
=======
As of December 31, 1997, the Company did not have any brokered
deposits. In general, it is the Company's policy not to accept brokered
deposits.
Return on Equity and Assets:
The following table sets forth certain financial ratios for the
Company:
December
------------------------------
1997 1996 1995
---- ---- -----
Return on average equity (net income
divided by average equity) 19.67% 18.09% 20.44%
Return on average assets (net income
divided by average total assets) 1.93% 1.66% 1.79%
Equity to assets ratio (average equity
divided by average total assets) 9.80% 9.18% 8.74%
Dividend payout ratio (dividends
divided by net income) 24.96% 31.31% 23.27%
Short Term Borrowings
At December 31, 1997, 1996 and 1995, 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 Company 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
14
<PAGE>
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 Company
cannot be predicted. Additionally, state and federal tax policies can impact
banking organizations. Effective January 1, 1997, applicable California bank and
corporation tax rates were reduced by 5% in order to keep California competitive
with other western states.
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 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.
Implementation of the various provisions of FDICIA is subject to
the adoption of regulations by the various regulatory agencies, the manner in
which the regulatory agencies implement those regulations and certain phase-in
periods.
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 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 Commissioner of Financial Institutions (the "Commissioner").
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 exercises 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.
15
<PAGE>
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.
Pursuant to the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a bank
holding company became able to acquire banks in states other than its home state
beginning September 29, 1995 without regard to the permissibility of such
acquisitions under state law, but subject to any state requirement that the bank
has been organized and operating for a minimum period of time, not to exceed
five years, and the requirement that the bank holding company, prior to or
following the proposed acquisition, controls no more than 10% of the total
amount of deposits of insured depository institutions in the United States and
no more than 30% of such deposits in that state (or such lesser or greater
amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to
merge across states lines, therefore creating interstate branches, beginning
June 1, 1997. Under such legislation, each state has the opportunity to "opt
out" of this provision, thereby prohibiting interstate branching in such states,
or to "opt in" at an earlier time, thereby allowing interstate branching within
that state prior to June 1, 1997. Furthermore, pursuant to such act, a bank is
now able to open new branches in a state in which it does not already have
banking operations, if the laws of such state permit such de novo branching.
California "opted in" to the Interstate Banking and Branching Act
provisions regarding interstate branching by enacting the Caldera, Weggeland,
and Killea California Interstate Banking and Branching Act of 1995 ("IBBA").
Under the IBBA, (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
Commissioner will be authorized to approve an interstate acquisition or merger
which would result in a deposit concentration exceeding 30% if the Commissioner
finds that the transaction is consistent with public convenience and advantage.
However, the IBBA prohibits a state bank chartered in a state other than
California from entering California by purchasing a California branch office of
a California bank or industrial loan company without purchasing the entire
entity or by establishing a de novo California branch office. 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.
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies.
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
16
<PAGE>
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. See the section
entitled "Restrictions on Dividends and Other Distributions" for additional
restrictions.
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). 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 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.
The FRB has adopted comprehensive amendments to Regulation Y which
became effective April 21, 1997, and are intended to improve the competitiveness
of bank holding companies by, among other things: (i) expanding the list of
permissible nonbanking activities in which well-run bank holding companies may
engage without prior FRB approval, (ii) streamlining the procedures for well-run
bank holding companies to obtain approval to engage in other nonbanking
activities and (iii) eliminating most of the anti-tying restrictions imposed
upon bank holding companies and their nonbank subsidiaries. Amended Regulation Y
also provides for a streamlined and expedited review process for bank
acquisition proposals submitted by well-run bank holding companies and
eliminates certain duplicative reporting requirements when there has been a
further change in bank control or in bank directors or officers after an earlier
approved change.
In order for a bank holding company to qualify as "well-run," both
it and the insured depository institutions that it controls must meet the
"well-capitalized" and "well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank holding company must, on
a consolidated basis: (i) maintain a total risk-based capital ratio of 10% or
greater; (ii) maintain a Tier 1 risk-based capital ratio of 6% or greater; and
(iii) not be subject to any order by the FRB to meet a specified capital level.
Its lead insured depository institution must be well-capitalized as that term is
defined in the capital adequacy regulations of the applicable bank regulator,
80% of the total risk-weighted assets held by its insured depository
institutions must be held by institutions that are well-capitalized, and none of
its insured depository institutions may be undercapitalized.
To qualify as "well-managed": (i) each of the bank holding company,
its lead depository institution and its depository institutions holding 80% of
the total risk-weighted assets of all its depository institutions at their most
recent examination or review must have received a composite rating, rating for
management and rating for compliance which were at least satisfactory; (ii) none
of the bank holding company's depository institutions may have received one of
the two lowest composite ratings; and (iii) neither the bank holding company nor
any of its depository institutions during the previous 12 months may have been
subject to a formal enforcement order or action.
17
<PAGE>
The permissible nonbanking activities in which bank holding
companies may engage include: (i) extending credit and servicing loans; (ii)
real estate and personal property appraising; (iii) arranging commercial real
estate equity financing; (iv) check-guaranty services; (v) collection agency
services; (vi) credit bureau services; (vii) asset management, servicing and
collection; (viii) acquiring debt in default; (ix) real estate settlement
services; (x) leasing personal or real property; (xi) operating nonbank
depository institutions; (xii) trust company functions; (xiii) financial and
investment advisory activities; (xiv) riskless principal transactions; (xv)
private placement services; (xvi) foreign exchange trading for a bank holding
company's own account; (xvii) dealing and related activities in gold, silver,
platinum and palladium; (xviii) employee benefits consulting; (xix) career
counselling services; (xx) printing and selling checks; (xxi) insurance agency
and underwriting services; (xxii) community development activities; (xxiii) data
processing; and (xxiv) money order, savings bond and traveler's checks services.
A bank holding company's provision of these services is subject to numerous
qualifications, limitations and restrictions.
18
<PAGE>
Bank Regulation and Supervision
The Bank is subject to regulation, supervision and regular
examination by the California Department of Financial Institutions ("DFI") 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 DFI was created pursuant to AB 3351, effective July 1, 1997, and combines
the State Banking Department, the Department of Savings and Loan, and regulatory
oversight over industrial loan companies and credit unions with the DFI. For the
most part, the DFI is merely assuming the responsibilities and authorities held
by the previous regulators.
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 Commissioner 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.
During 1996 the California Interstate Banking and Branching Cleanup Act was
enacted, which revised the DFI's assessment methodology for state-chartered
banks in order to provide a better basis of comparison to the method used by the
Office of the Comptroller of the Currency ("OCC"). Under the revised
methodology, the average assessment for state banks will be approximately 39% of
the OCC's annual charges for national bank supervision.
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 Commissioner. 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 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 have been 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.
During 1996, the OCC adopted a regulation to revise and streamline
its procedures with respect to corporate activities of national banks, effective
December 31, 1996. These revised standards 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 allows
19
<PAGE>
a national bank to conduct an activity approved for a bank holding company
through a bank operating subsidiary such as acting as an investment or financial
advisor, leasing personal property and providing financial advice to customers.
In general, these revised standards will be available to well-capitalized or
adequately capitalized national banks.
Capital Standards
The 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 certain loans.
In determining the capital level the Bank is required to maintain,
the federal banking agencies do 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 the regulations or practices of the
federal banking agencies 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,
other types of qualifying preferred stock and minority interests in certain
subsidiaries, less most other intangible assets and other adjustments. Net
unrealized losses on available-for-sale equity 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, term preferred stock and other types of
preferred stock not qualifying as Tier 1 capital, 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 adjusted average risk-adjusted assets and off balance
sheet items of 4%.
On September 16, 1997, the FDIC adopted a final rule lowering the
risk-based capital requirements for certain small business loans and leases sold
with recourse. The final rule on small business
20
<PAGE>
loans and leases sold with recourse essentially makes permanent an interim
interagency rule in effect since 1995 that reduced the minimum capital levels
that institutions must maintain for those transactions. Under the final rule, a
qualifying institution that sells small business loans and leases with recourse
must hold capital only against the amount of recourse retained. In general, a
qualifying institution is one that is well-capitalized under the FDIC's prompt
corrective action rules. The amount of recourse that can receive the
preferential capital treatment cannot exceed 15% of the institution's total
risk-based capital.
In addition to the risked-based guidelines, federal banking
regulators require banking organizations to maintain a minimum amount of Tier 1
capital to adjusted average total assets, referred to as the leverage capital
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 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, 1997 (amounts in thousands except percentage
amounts).
<CAPTION>
Company: To Be Well
Actual Capitalized Under Minimum For
--------------------- Prompt Corrective Capital Adequacy
Capital Ratio Action Provisions Purposes
-------- ------ ----------- -----------
<S> <C> <C> <C>
Tier 1 capital
(to average assets) $ 27,185 9.94% N/A 4.0%
Tier I capital
(to risk weighted assets) $ 27,185 14.80 N/A 4.0
Total capital
(to risk weighted assets) $ 28,887 15.73 N/A 8.0
Bank:
Tier 1 capital
(to average assets) $ 25,063 9.24% 5.0% 4.0%
Tier I capital
(to risk weighted assets) $ 25,063 13.76 6.0 4.0
Total capital
(to risk weighted assets) $ 26,765 14.69 10.0 8.0
</TABLE>
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Banking agencies have adopted final regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies also have recently adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in evaluation
of 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.
Under the prompt corrective action provisions of FDICIA, an insured
depository institution generally will be classified in the following categories
based on the capital measures indicated below:
"Well capitalized" "Adequately capitalized"
- ------------------ ------------------------
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"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%.
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"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.
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<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. In 1994 FDICIA was amended 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.
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 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 also administers the Savings Association Insurance Fund ("SAIF"), which
insures deposits in thrift institutions. 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
24
<PAGE>
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. The revised assessment schedule would retain
the risk based characteristics of the current system. On November 26, 1996 the
FDIC decided to continue in effect the current BIF assessment rate schedule.
The FDIC may make limited adjustments to the above rate schedule not to
exceed an increase or decrease of 5 basis points without public notice and
comment rulemaking. 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 designated reserve ratio 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.
In 1996 Congress enacted the Deposit Insurance Funds Act ("Funds Act")
in order to raise the level of SAIF reserves, and to reduce the possibility that
bonds issued by the Financing Corporation ("FICO") would go into default. The
FICO was a special purpose government corporation that issued $8.2 billion in
bonds to recapitalize the Federal Savings and Loan Insurance Corporation.
Interest on the FICO bonds was paid from the proceeds of assessment made on the
deposits of SAIF members. Because of the almost $800 million needed to pay for
the annual interest on the FICO bonds, the payments of SAIF members were not
increasing the SAIF reserve to a sufficient level to allow the FDIC to reduce
assessment rates (as had been done for BIF deposits), and SAIF members were
employing certain strategies to either exit the system or transfer deposits to
BIF coverage.
Pursuant to the Funds Act, the FDIC imposed a special one-time
assessment on all institutions that held SAIF assessable deposits as of March
31, 1995 of an estimated 65.7 cents per $100 of SAIF assessable deposits.
Certain discounts and exemptions from the assessment were available. For
example, BIF-member banks that had acquired SAIF-insured deposits from thrifts
were generally entitled to a 20% discount on the special assessment if the bank
satisfied certain statutory thresholds (the bank's acquired SAIF deposits, as
adjusted, must be less than half of its total domestic deposits). Furthermore,
beginning January 1, 1997, all FDIC-insured institutions were to be assessed to
cover the interest payments due on FICO bonds. For calendar years 1997 through
1999, BIF members will pay one-fifth the rate SAIF members will pay, and
beginning in 2000 both types of institutions will pay the same rate. BIF members
were required to pay a FICO assessment of approximately 1.3 basis points for the
first semiannual FICO assessment in 1997.
25
<PAGE>
The Funds Act also authorized the FDIC to rebate assessments paid by
BIF members if the BIF has reserves exceeding its designated reserve ratio of
1.25 percent of total estimated insured deposits. The FDIC has expressed its
view that the long-term needs of the BIF are a factor in setting the effective
average BIF assessment rate, and that the FDIC is uncertain whether the current
favorable conditions represent a long-term trend.
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 1996, 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 to be fully phased in as of July 1, 1997. The
guidelines provide for streamlined examinations of smaller institutions.
Recently Enacted Legislation
The Taxpayer Relief Act of 1997 provides for Education Individual
Retirement Accounts ("Education IRA"), a new type of tax-free savings vehicle to
pay qualified higher education expenses. A maximum of $500 per year may be
contributed to Education IRAs for any beneficiary under the age of 18 years,
provided the contributor has adjusted gross income for the year not exceeding
$95,000 ($150,000 for joint returns). No income tax deduction is provided for a
contribution to an Education IRA. Until a distribution is made from an Education
IRA, earnings on contributions to the account are not subject to tax. In
addition, distributions from an Education IRA are excludable from gross income
to the extent that the distribution does not exceed qualified higher education
expenses incurred by the beneficiary during the year the distribution is made.
The trustee or custodian of an Education IRA must be a bank or another person
approved by the Internal Revenue Service ("IRS"), including any entity already
approved by the IRS to be a nonbank trustee or custodian of an IRA.
During 1996, new federal legislation amended the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and the
underground storage tank provisions of the Resource Conversation and Recovery
Act ("RCRA") to provide lenders and fiduciaries with greater protections from
environmental liability. The definition of "owner or
26
<PAGE>
operator" under CERCLA has been amended to exclude a lender who : (i) holds
indicia of ownership in a property primarily to protect its security interest,
but does not participate in the property's management or (i) forecloses on a
property, or, after foreclosure, sells, re-leases (in the case of a lease
finance transaction), or liquidates the property, maintains business activities,
winds up operations, undertakes a response under CERCLA, or takes measures to
preserve, protect or prepare property prior to sale or disposition, so long as
the lender did not participate in the property's management prior to sale. In
order to preserve these protections, a lender who forecloses on property must
seek to sell, re-lease, or otherwise divest itself of the property at the
earliest practicable, commercially reasonable time, and on reasonable terms.
"Participation in management" is defined as actual participation in the
management or operational affairs of the facility, not merely having the
capacity to influence or the unexercised right to control operations. Similar
changes have been made in RCRA.
The California legislature adopted a similar bill to provide that,
subject to numerous exceptions, a lender acting in the capacity of a lender
shall not be liable under any state or local statute, regulation or ordinance,
other than the California Hazardous Waste Control Law, to undertake a cleanup,
pay damages, penalties or fines, or forfeit property as a result of the release
of hazardous materials at or from the property. Under this bill a lender which
had not participated in the management of the property prior to foreclosure may
take actions similar to those set forth in the CERCLA and RCRA amendments
without losing its immunity from liability. To preserve that immunity, after
foreclosure, the lender must take commercially reasonable steps to divest itself
of the property in a reasonably expeditious manner.
In June 1997, the U.S. Environmental Protection Agency ("EPA") issued
its official policy with regard to the liability of lenders under CERCLA as a
result of the enactment of the Asset Conservation, Lender Liability and Deposit
Insurance Protection Act of 1996 (the "Asset Conservation Act"). By way of
background, in 1992 the EPA issued its CERCLA Lender Liability Rule which was
intended to be a regulation for the enforcement of CERCLA as to lenders. In 1994
the Lender Liability Rule was stricken by the U.S. Court of Appeals for the
District of Columbia in Kelley v. EPA. The EPA retained the Lender Liability
Rule, characterizing it as its internal enforcement policy. The Asset
Conservation Act adopted language similar to the EPA's Lender Liability Rule. In
its June 1997 announcement, the EPA indicated that it will treat those
provisions of the Lender Liability Rule that are similar to the Asset
Conservation Act "as guidance in interpreting" the lender liability exemption
under the Act.
In 1997, California adopted the Environmental Responsibility Acceptance
Act (Cal. Civil Code ss.ss. 850-855). The main purposes of the Act are to
facilitate (i) the notification of government agencies and potentially
responsible parties (e.g., for cleanup) of the existence of contamination and
(ii) the cleanup or other remediation of contamination by the potentially
responsible parties. The Act requires owners of sites who have actual awareness
of a release of a hazardous material that exceeds a specified notification
threshold to take all reasonable steps to identify the potentially responsible
parties and to send a notice of potential liability to the parties and the
appropriate oversight agency. Potentially responsible parties that receive such
notice must respond with either a "commitment statement" to conduct certain
response actions (as defined in the Act) or a "negative response." Potentially
responsible parties who become aware of a release must provide the owner with a
report of the release and either a "commitment statement" or a "negative
response." Persons failing to provide the requisite notice lose certain
27
<PAGE>
rights to damages. Neither the failure to issue a "commitment statement" nor its
issuance is to be construed as an admission of liability for the release.
Commitment statements that are accepted run with the land, thereby binding
future owners. The notification requirements of the Act do not take effect until
July 31, 1998. However, the Act's notification requirements apply to past
releases, if they occurred after January 1, 1995. Notices for such past releases
must be given by December 31, 1998.
Pending Legislation and Regulations
There are 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.
On September 16, 1997, the FDIC proposed two new rules governing
minimum capital levels that FDIC-supervised banks must maintain against the
risks to which they are exposed. The proposed rules were developed in
consultation with the Office of the Comptroller of the Currency ("OCC"), the
FRB, and the Office of Thrift Supervision ("OTS").
The first proposed rule would make risk-based capital standards
consistent for two types of credit enhancements (i.e., recourse arrangements and
direct credit substitutes) and would require different amounts of capital for
different risk positions in asset securitization transactions. Similar proposals
are being considered by the other Federal banking agencies as well. Under the
proposed rule, banks holding the riskiest part of a securitization would have
higher capital requirements than those holding less risky sections.
The second proposed rule would permit limited amounts of unrealized
gains on equity securities to be recognized for risk-based capital purposes. The
proposal on equity securities would permit institutions to include in Tier 2
capital 45% of the net unrealized pre-tax gains on available-for-sale equity
securities. The proposal would increase the amount of regulatory capital for
some institutions.
Certain other pending legislative proposals include bills to let banks
pay interest on business checking accounts, to cap consumer liability for stolen
debit cards, and to give judges the authority to force high-income borrowers to
repay their debts rather than cancel them through bankruptcy.
While the effect of such proposed legislation and regulatory reform on
the business of financial institutions cannot be accurately predicted at this
time, it seems likely that a significant amount of consolidating in the banking
industry will continue to occur throughout the remainder of the decade.
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
28
<PAGE>
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, 1997 approximated
$1,291,360,000. The Bank's deposits at June 30, 1997 represented approximately
15.51% 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, mutual fund companies,
credit card companies, and even retail establishments have offered new
investment vehicles 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 Interstate Banking and Branching Act in 1994 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 primarily to
protect his security interests in the vessel or facility."
29
<PAGE>
In the event that the Bank were 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
his/her expense, have an Environmental Inspection performed by an insured,
bonded environmental engineering firm acceptable to the Bank.
Certain Additional Business Risks
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
Shares of Company Common Stock eligible for future sale could have a
dilutive effect on the market for Company Common Stock and could adversely
affect the market price. The Articles of Incorporation of the Company authorize
the issuance of 20,000,000 shares of common stock, of which approximately
1,839,092 were outstanding December 31, 1997. Pursuant to its stock option
plans, at December 31, 1997, the Company had outstanding options to purchase
250,912 shares of Company Common Stock. As of December 31, 1997, 225,948 shares
of Company Common Stock remained available for grants under the Company's stock
option plans. Sales of substantial amounts of Company Common Stock in the public
market could adversely affect the market price of Common Stock.
A large portion of the loan portfolio of the Company is dependent on
real estate. At December 31, 1997, real estate served as the principal source of
collateral with respect to approximately 57.9% of the Company's loan portfolio.
A worsening of current economic conditions or rising interest rates could have
an adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and the value of the available-for-sale investment portfolio, as well as the
Company's financial condition and results of operations in general and the
market value for Company Common Stock. Acts of nature, including earthquakes and
floods, which may cause
30
<PAGE>
uninsured damage and other loss of value to real estate that secures these
loans, may also negatively impact the Company's financial condition.
The Company is subject to certain operations risks, including, but not
limited to, data processing system failures and errors and customer or employee
fraud. The Company maintains a system of internal controls to mitigate against
such occurrences and maintains insurance coverage for such risks, but should
such an event occur that is not prevented or detected by the Company's internal
controls, uninsured or in excess of applicable insurance limits, it could have a
significant adverse impact on the Company's business, financial condition or
results of operations.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company believes it has identified all significant applications that
will require modification to ensure Year 2000 Compliance. Internal and external
resources are being used to make the required modifications and test Year 2000
Compliance. The Company currently plans on completing the testing process of all
significant applications by December 31, 1998.
In addition, the Company has communicated with significant borrowers and
others with whom it does significant business to determine their Year 2000
Compliance readiness and the extent to which the Company is vulnerable to any
third party Year 2000 issues. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans.
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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 and land, 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. During
the year ended December 31, 1995, the Bank purchased, in the ordinary course of
business, the Hayfork facility for $134,000 which the Bank previously leased
from a former board member. The 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, 1997, the Bank purchased land in the city of Shasta Lake for $176,000 and
completed construction on a 4,250 square foot building for approximately
$805,000 to relocate the Shasta Dam facility. It opened for business on October
14, 1997. On January 20, 1998, the Bank opened its first grocery store branch in
Cottonwood, CA, and leases 540 square feet located in Holiday Market.
During the year ended December 31, 1997, the Company spent $77,000
for rental of the Shasta Dam, Westwood Village, Palo Cedro offices, and the
warehouse of the Bank. Net occupancy expenses for all facilities for the year
ended December 31, 1997, were $503,000. 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 7, Management's
Discussion and Analysis of Financial Condition and Results 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.
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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-K.
33
<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 national market.
It is anticipated, however, that early in the second quarter of 1998, the
Company will become listed on the Nasdaq national market under the symbol NOVB.
<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.
<CAPTION>
Bid Price of
Quarter Ended: Common Stock Approximate Cash
------------- ------------ Trading Dividends
Low High Volume Declared
--- ---- ------ --------
<S> <C> <C> <C> <C>
March 31, 1996 19.25 24.00 51,966 ---
June 30, 1996 22.25 25.00 65,173 .35
September 30, 1996 20.75 22.75 66,518 ---
December 31, 1996 21.00 23.00 66,407 .35
March 31, 1997 21.13 24.00 50,006 ---
June 30, 1997 23.75 28.50 56,391 .35
September 30, 1997 30.00 32.00 81,867 ---
December 31, 1997 31.13 32.38 66,623 .35
<FN>
-----------------------------------
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.
</FN>
</TABLE>
The Company had approximately 890 shareholders of record as of March 1, 1998.
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.
34
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
North Valley Bancorp & Subsidiaries
<TABLE>
FINANCIAL HIGHLIGHTS & SUMMARY OF SELECTED FINANCIAL DATA
(Dollars In Thousands Except Per Share Data)
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net interest income $ 11,089 $ 10,564 $ 9,910 $ 8,718 $ 7,666
Net income $ 5,145 $ 4,107 $ 4,083 $ 3,212 $ 3,011
Performance ratios:
Return on average assets 1.93% 1.66% 1.79% 1.54% 1.59%
Return on average equity 19.67% 18.09% 20.44% 19.03% 20.28%
Capital Ratios:
Risk based capital:
Tier 1 (4% Minimum Ratio) 14.80% 12.58% 12.76% 13.09% 13.14%
Total (8% Minimum Ratio) 15.73% 13.29% 13.57% 13.91% 14.04%
Leverage Ratio 9.94% 8.98% 8.87% 8.49% 7.75%
BALANCE SHEET DATA AT DECEMBER 31
Assets $ 270,757 $ 256,877 $ 235,072 $ 213,956 $ 201,068
Investment securities and
federal funds sold $ 78,932 $ 67,320 $ 64,501 $ 64,829 $ 86,014
Net loans $ 167,507 $ 166,983 $ 147,808 $ 125,463 $ 99,457
Deposits $ 238,522 $ 229,228 $ 211,075 $ 193,541 $ 183,319
Stockholders' equity $ 28,066 $ 23,900 $ 20,973 $ 17,926 $ 15,705
COMMON SHARE DATA
Net income(1)
Basic $ 2.81 $ 2.23 $ 2.22 $ 1.76 $ 1.66
Diluted $ 2.78 $ 2.20 $ 2.20 $ 1.74 $ 1.64
Dividends:
Cash $ 0.70 $ 0.70 $ 0.64 $ 0.70 $ 0.70
Stock -- -- 3 for 2 Stock Split -- 25%
Year end book value $ 15.27 $ 13.11 $ 11.39 $ 9.79 $ 8.65
(acutual shares outstanding)
Actual Shares Outstanding 1,839,092 1,823,688 1,841,048 1,829,933 1,814,817
SUMMARY OF OPERATIONS
Total interest income $ 19,733 $ 18,641 $ 17,469 $ 14,178 $ 12,921
Total interest expense 8,644 8,077 7,559 5,460 5,255
---------- ---------- ---------- ---------- ----------
Net interest income 11,089 10,564 9,910 8,718 7,666
Provision for possible loan losses 770 720 375 240 110
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 10,319 9,844 9,535 8,478 7,556
Total non interest income 4,138 2,581 2,630 2,477 2,676
Total non interest expense 8,312 6,786 6,412 6,404 6,170
---------- ---------- ---------- ---------- ----------
Income before provision for income
taxes and cumulative effect of
change in accounting principle 6,145 5,639 5,753 4,551 4,062
Provision for income taxes 1,000 1,532 1,670 1,339 1,178
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting principle 5,145 4,107 4,083 3,212 2,884
Cumulative effect of change in
accounting principle -- -- -- -- 127
---------- ---------- ---------- ---------- ----------
Net income $ 5,145 $ 4,107 $ 4,083 $ 3,212 $ 3,011
========== ========== ========== ========== ==========
<FN>
(1) Net income per share amounts have been adjusted to give effect to a three-for-two stock split effected
in the form of a 50% stock dividend on November 1, 1995 and a 25% stock dividend declared in 1993.
</FN>
</TABLE>
35
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS 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.
Certain statements in this Annual Report on Form 10-K (excluding
statements of fact or historical financial information) involve forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Shasta
County; volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets.
Earnings Summary
For the year ended December 31, 1997, the Company achieved earnings of
$5,145,000 as compared to $4,107,000 in 1996. On a per share basis, net income
on a diluted basis was $2.78 for 1997 and $2.20 for 1996. Net income increased
primarily due to the increase in net interest income, a lower effective tax
rate, and the proceeds from a life insurance policy on the Company's President &
CEO. The Company's return on average total assets and average shareholders'
equity were 1.93% and 19.67% in 1997, compared with 1.66% and 18.09% in 1996.
Net Interest Income
Net interest income is the principal source of the Company's operating
earnings. It represents the difference between interest earned on loans and
other investments and interest paid on deposits. The amount of interest income
and expense is affected by changes in volume and mix of earning assets and
interest-bearing deposits, along with changes in interest rates.
Net interest income has been adjusted to a fully taxable equivalent
(FTE) basis for tax-exempt investments included in earning assets. Net interest
income (FTE) was $12,104,000 in 1997, as
36
<PAGE>
compared to $11,655,000 in 1996. The increase in net interest income for 1997
resulted primarily from the increase in investment securities and loans.
Average loans increased to $167,496,000 in 1997, or 6.25% over 1996,
with an increase in average available for sale securities of 42.20% and average
held to maturity securities of 2.26%. Total interest income (FTE) increased to
$20,748,000 in 1997 compared to $19,732,000 in 1996, representing a 5.15%
increase.
Average interest-bearing deposits in 1997 totaled $206,125,000, as
compared to $194,360,000 in 1996, or a 6.05% increase. Total interest expense
increased to $8,644,000 as compared to $8,077,000 in 1996.
Net interest margin (determined by dividing net interest income by
total average interest-earning assets) was 4.95% for 1997, as compared to 5.11%
at year end 1996. The slight decrease in 1997 in the net interest margin was
attributed to the increases in loans, investments and deposits, offset by a
decrease in the net spread (the difference between rates earned on interest
earning assets and rates paid on deposits), affected primarily by a stable to
declining interest rate environment and the change in the mix between loans and
investment securities in 1997. Average earning assets yielded 8.49% in 1997
compared to 8.65% in 1996. The cost of funding these earning assets increased
slightly during 1997 as the yield on earning assets declined slightly. Rates
paid remained relatively stable at 4.19% as compared to 4.16% in 1996. The
interest spread was 4.30% in 1997 compared to 4.49% in 1996.
Non-Interest Income
Other non-interest income, which includes income derived from service
charges on deposit accounts, loan servicing fees, other fees and charges, gain
(loss) on sale of securities, and insurance proceeds, increased to $4,138,000 in
1997 as compared to $2,581,000 in 1996, a $1,557,000 increase.
A summary of non-interest income for the past three years is presented
below:
Non-Interest Income
(in thousands) 1997 1996 1995
---- ---- ----
Service charges on deposit accounts $1,400 $1,342 $1,342
Other fees and charges 570 520 546
Gain on sale of loans 160 160 160
Gain on sale of available for sale securities 250 31 31
Life insurance proceeds 1,139 0 0
Gain (loss) on sale of trading securities 0 ( 7) 11
Other 619 535 540
------ ------ ------
Total Non-interest income $4,138 $2,581 $2,630
====== ====== ======
37
<PAGE>
Non-Interest Expense
Non-interest expense totaled $8,312,000 for 1997 compared to
$6,786,000 in 1996. Salaries and employee benefits increased in 1997 to
$4,522,000 compared to $3,934,000 in 1996, primarily due to normal salary
increases, employer taxes, net pension cost for the supplemental retirement
plans for directors and key executives, and a non-recurring benefit payment of
$250,000.
Occupancy and equipment expenses increased as a result of the
relocation of the Shasta Dam branch to our new building and the new super market
branch in Cottonwood.
The Company experienced a reduction in FDIC insurance expense
resulting from reduced premiums in 1996. Effective January 1, 1997, all
FDIC-insured institutions were assessed to cover interest payments due on
Financing Corporation ("FICO") bonds. The Bank's FICO assessment for 1997 was
approximately 1.3 basis points semi-annually on assessable deposits. The Company
also contributed $170,000 from other non-interest expense to the North Valley
Bank Scholarship Fund to fund future scholarships in the community.
The Company's efficiency ratio (derived by dividing total non-interest
expenses by net interest income exclusive of provision for loan losses and
non-interest income) was 54.6% in 1997 compared to 51.6% in 1996. 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:
Non-Interest Expense
(in thousands) 1997 1996 1995
---- ---- ----
Salaries & employee benefits $4,522 $3,934 $3,679
Occupancy expense 503 456 422
Furniture & equipment expense 553 497 451
Professional services 235 136 151
Data processing expenses 360 260 249
Printing & supplies 232 222 216
Postage 182 175 160
Donations 217 35 41
FDIC & State banking assessments 70 23 249
Messenger 139 136 128
ATM and Online expense 247 134 134
Other 1,052 778 532
------ ------ ------
Total Non-interest expense $8,312 $6,786 $6,412
====== ====== ======
Income Taxes
In 1997 and 1996, the Company recorded a tax provision of $1,000,000
and $1,532,000, respectively. The effective income tax rate for state and
federal income tax decreased to 16.3% in 1997, compared to 27.2% in 1996. The
decrease in the effective income tax rate in 1997 from 1996 is mainly
38
<PAGE>
due to the non taxability of the proceeds from a life insurance policy. Income
taxes are based on income reported in the consolidated financial statements
using the effective tax rate.
Impaired, Nonaccrual, Past Due, Restructured Loans and Other Real Estate Owned
The Company accounts for impaired loans in accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS 118.
Under SFAS 114 loans are considered impaired when 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. For
further discussion of SFAS 114, refer to Note 5 of the Financial Statements.
Nonaccrual loans consist of loans on which the accrual of interest has
been discontinued and other loans where management believes that borrowers'
financial condition is such that the collection of principal or interest is
doubtful, or when a loan becomes contractually past due by 90 days or more with
respect to interest or principal (except that when management believes a loan is
well secured and in the process of collection, interest accruals are continued
on loans considered by management to be fully collectible). Loans are charged
off when management determines that the loan is considered uncollectible. Other
real estate owned consists of real property acquired through foreclosure on the
related collateral underlying defaulted loans.
The amount of non accrual loans decreased during 1997 to $536,000 as
compared to $1,190,000 in 1996.
A summary of non-performing assets for the past three years is
presented below:
Non-Performing Assets (in thousands) 1997 1996 1995
---- ---- ----
Nonaccrual loans $ 536 $1,190 $ 282
Accruing loans past due 90 days
or more 244 14 15
Restructured loans -- -- --
Other real estate owned 212 69 87
------ ------ ------
Total $ 992 $1,273 $ 384
====== ====== ======
Allowance for Loan Losses
Management's assessment of the adequacy of the allowance for loan loss
and the level of the related provision for possible loan losses is based on its
evaluation of current economic conditions, borrower's financial condition, loan
impairment, continuing evaluation of the performing loan portfolio, continual
evaluation of problem loans identified as having a higher degree of risk, off
balance sheet risks, assessments by regulators and other third parties, and any
other factors identified by management which may have an effect on the quality
of the portfolio. At December 31, 1997, based on known information, management
believed that the allowance for loan losses was 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 as of such date.
39
<PAGE>
As of December 31, 1997, the allowance for possible loan losses was
$1,702,000 as compared to the December 31, 1996 amount of $1,254,000. When a
loan is considered 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 $322,000, $791,000, and
$194,000 in 1997, 1996, and 1995, respectively. Additions to the allowance for
loan losses are charged against income. A provision for loan losses of $770,000,
$720,000 and $375,000 was charged to income in 1997, 1996, and 1995,
respectively.
The allowance for possible loan losses is a general reserve available
against the total loan portfolio and off balance sheet credit exposure. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
possible loan losses. Such agencies may require the company to provide additions
to the allowance based on their judgment of information available to them at the
time of their examination.
There is uncertainty concerning future economic trends. Accordingly,
it is not possible to predict the effect future economic trends may have on the
level of the provision for possible loan losses in future periods.
Liquidity and Interest Rate Sensitivity
The fundamental objective of the Company's management is to increase
shareholders' value while maintaining adequate liquidity, to manage interest
rate risk, and increase the economic value of its assets and liabilities.
Liquidity is the 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 satisfy demands from depositors, borrowers and other
commitments on a timely basis. Collection of principal and interest on loans,
the liquidations and maturities of investment securities, deposits with other
banks, 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 $6,000,000 as of December 31,
1997, 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 $5,238,000 secured by first deeds of trust on eligible 1-4 unit
residential loans. The Company had not borrowed from the FHLB as of December 31,
1997.
The Company manages both assets and liabilities by monitoring asset
and liability mixes, volumes, maturities, yields and rates in order to preserve
liquidity and earnings stability. Total liquid assets (cash and due from banks,
federal funds sold, and investment securities) totaled $87,774,000 and
$77,727,000 (or 32.42% and 30.26% of total assets) at December 31, 1997 and
1996, respectively. Total liquid assets for 1997 and 1996 include investment
securities of $39,219,000 and $39,997,000, respectively, classified as held to
maturity based on the Company's intent to hold such securities to maturity.
Core deposits, defined as demand deposits, NOW, regular savings, money
market deposit accounts and time deposits of less than $100,000, continue to
provide a relatively stable and low cost source of funds. Core deposits totaled
$220,608,000 and $209,320,000 at year end 1997 and 1996, respectively.
40
<PAGE>
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.
Management believes the Company is in compliance with its policies relating to
liquidity.
There are no definitive commitments for capital expenditures in 1998
or beyond.
Parent company liquidity is maintained by cash flows stemming from
dividends and the exercise of stock options issued to the Bank's employees and
directors. The amount of dividends from the Bank is subject to certain
regulatory restrictions as discussed in Note 16 of the Notes to the Consolidated
Financial Statements and elsewhere within this Report. Subject to said
restrictions, at December 31, 1997, up to $9.8 million could have been paid to
the parent Company by the Bank without regulatory approval. The parent company
financial statements are presented in Note 18 of the Notes to Consolidated
Financial Statements.
Asset and liability management focuses on interest rate risk due to
asset and liability cash flows and market interest rate movement. The primary
objective of managing interest rate risk 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. An asset and liability
management simulation model is used to quantify the exposure and impact of
changing interest rates on earnings. 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 the Fed Funds rate
changes by 1%) and lags (time it takes for rates to change after the 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, 1997 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 $ 105 $ 1,689 $ 15,783 $ 21,642 $ 39,219
Available for sale
securities 0 8,416 13,701 2,266 24,383
Fed Funds Sold 13,100 0 0 0 13,100
Loans 45,654 7,933 53,866 62,391 169,844
-------- -------- -------- -------- --------
Total earning assets $ 58,859 $ 18,038 $ 83,350 $ 86,299 $246,546
======== ======== ======== ======== ========
INTEREST BEARING LIABILITIES:
Interest bearing demand
deposits $ 0 $ 41,679 $ 0 $ 0 $ 41,679
Savings deposits 0 46,431 0 0 46,431
Time deposits 40,817 71,447 5,895 0 118,159
-------- -------- -------- -------- --------
Total interest bearing
liabilities $ 40,817 $159,557 $ 5,895 $ 0 $206,269
======== ======== ======== ======== ========
41
<PAGE>
INTEREST SENSITIVITY
GAP $ 18,042 $(141,519) $ 77,455 $ 86,299
CUMULATIVE INTEREST
RATE SENSITIVITY GAP $ 18,042 $(123,477) $(46,022) $ 40,277
</TABLE>
At December 31, 1997, the gap table indicates the Company as liability
sensitive in the twelve month period. The interest rate sensitivity gap is
defined as the difference between amount of interest-earning assets anticipated
to mature or reprice within a specific time period and the amount of
interest-bearing liabilities anticipated to mature or reprice within that time
period. The year end Gap report is based on the contractual interest repricing
date. The gap method does not consider the impact of different multipliers (how
interest rates change when the Fed Funds rate changes by 1%) and lags (time it
takes for rates to change after the 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 and future impact of new
business strategies. 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 Company had a negative gap in the twelve month period
as of December 31, 1997, the asset liability simulation model showed the Bank
was slightly asset sensitive in 1997. This means that when interest rates
decline, yields on earning assets would be expected to decline faster than rates
paid for deposits, causing the net interest margin to decrease. Due to a
slightly declining interest rate environment in 1997, the Bank's asset sensitive
posture had a slightly negative impact on net interest margins as predicted by
the asset liability simulation model. In a rising rate environment the opposite
impact would be expected; i.e., the net interest margin should improve.
Financial Condition
Total assets at December 31, 1997, were $270,757,000, representing an
increase of 5.4% over December 31, 1996 assets of $256,877,000. Increased
deposits were used to fund a 7.13% increase in average earning assets in 1997.
Investment securities and federal funds sold totaled $78,932,000 at
December 31, 1997, compared to $67,320,000 at December 31, 1996. The Company is
a member of Federal Home Loan Bank of San Francisco and holds $790,000 in FHLB
stock. Additional information regarding investment securities held by the
Company at year end 1997 is set forth in Note 3 of "Notes to Consolidated
Financial Statements".
During 1997, net loans increased to $167,507,000 from $166,983,000 for
the same period in 1996. Loans are the Company's major component of earning
assets. The Bank's average loan to deposit ratio was 70.58% and 71.10% in 1997
and 1996, respectively. Additional information regarding loans is shown in Note
4 of the "Notes to Consolidated Financial Statements".
42
<PAGE>
Funding for increased investments and loan activity came from
increases in deposits. Total deposits increased $9,294,000 in 1997 to
$238,522,000, as compared to $229,228,000 in 1996. 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. The Company has provided the
majority of its capital requirements through the retention of earnings.
Shareholders' equity increased to $28,066,000 as of December 31, 1997,
as compared to $23,900,000 for year end 1996. This increase was primarily
attributable to retention of earnings, offset by $1,284,000 in dividends to
shareholders.
The Company's and the Bank's regulatory capital ratios continue to be
strong and remain above regulatory minimums. The Company's total risk based
capital ratio at December 31, 1997 was 15.73% and its Tier 1 Risk Based Capital
(RBC) ratio was 14.80%, exceeding the minimum guidelines of 8% and 4%. The
ratios at December 31, 1996 were 13.29% and 12.58%, respectively.
The Company's leverage ratios were 9.94% and 8.98% at December 31,
1997 and 1996, exceeding the minimum guidelines of 4%.
Under current regulations adopted by federal regulatory agencies, a
"well-capitalized" institution must have a Tier 1 RBC ratio of at least 6%, a
total capital ratio of at least 10% and leverage ratio of at least 5% and not be
subject to a capital directive order. The Bank had a total capital ratio of
14.69%, a Tier 1 RBC ratio of 13.76% and a leverage ratio of 9.24% at December
31, 1997, compared with 12.72%, 12.04% and 8.56% at December 31, 1996,
respectively.
The most recent notifications from the Federal Deposit Insurance
Corporation for the Bank as of December 31, 1997 and 1996, categorized the Bank
as well capitalized under the regulatory framework for prompt correction action.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
Impact of Inflation
Impact of inflation on a financial institution differs significantly
from that exerted on an industrial concern, primarily because a financial
institution's assets and liabilities consist largely of monetary items. The
relatively low proportion of the Bank's fixed assets (approximately 1.7% at
December 31, 1997) reduces both the potential of inflated earnings resulting
from understated depreciation and the potential understatement of absolute asset
values.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company believes it has identified all significant applications
that will require modification to ensure Year 2000 Compliance. Internal and
external resources are being used to make the required
43
<PAGE>
modifications and test Year 2000 Compliance. The Company currently plans on
completing the testing process of all significant applications by December 31,
1998.
In addition, the Company has communicated with others with whom it
does significant business to determine their Year 2000 Compliance readiness and
the extent to which the Company is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities
has not been and is not anticipated to be material to its financial position or
results of operations in any given year. Costs associated with the modifications
necessary are being expensed by the Company during the period in which they are
incurred. These costs and the date on which the Company plans to complete the
Year 2000 modification and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative financial instruments include futures, forwards, interest
rate swaps, option contracts, and other financial instruments with similar
characteristics. The Company currently does not enter into futures, forwards,
swaps or options. However, the Company is party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and letters of credit. These instruments involve to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates and generally require collateral from the borrower. Letters of
credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party up to a stipulated amount and with
specified terms and conditions.
Commitments to extend credit and letters of credit are not recorded as
an asset or liability by the Company until the instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis
by management. Interest rate risk is the potential of economic losses due to
future interest rate changes. These economic losses can be reflected as a loss
of future net interest income and/or a loss of current fair market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while at the same time maximize
income. Management realizes certain risks are inherent and that the goal is to
identify and minimize the risks. An asset and liability management simulation
model is used by the Company to quantify the exposure and impact of changing
interest rates on earnings. The Company has no market risk sensitive instruments
held for trading purposes. In the opinion of management, it appears the
Company's market risk is reasonable at this time. The condensed GAP report
summarizing the Company's interest rate sensitivity is as follows:
44
<PAGE>
TABLE OF MARKET RISK SENSITIVE INSTRUMENTS
<TABLE>
The following table presents (dollars in thousands) the scheduled maturity of
market risk sensitive instruments at December 31, 1997:
<CAPTION>
Maturing in Less Than 1 1 - 2 2 - 3 3 - 5 5+
Year Years Years Years Years Total
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities 10,213 14,432 5,064 9,955 23,861 63,525
Loans 8,541 11,190 10,129 37,915 102,069 169,844
------- ------- ------- ------- ------- -------
Total 18,754 25,622 15,193 47,870 125,930 233,369
======= ======= ======= ======= ======= =======
LIABILITIES
Savings, NOW, and
MMDA 88,110 88,110
Time Deposits 111,594 5,381 1,147 10 27 118,159
------- ------- ------- ------- ------- -------
Total 199,704 5,381 1,147 10 27 206,269
======= ======= ======= ======= ======= =======
Average Estimated
Interest Fair
Total Rate Value
ASSETS
Securities 63,525 6.00% 65,614
Loans 169,844 9.23% 171,486
LIABILITIES
Savings, NOW, and
MMDA 88,110 2.70% 88,110
Time Deposits 118,159 5.29% 118,448
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required by this item are set forth following
Item 14 of this Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
45
<PAGE>
PART III
ITEM 10. 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 1998 Annual Meeting of Shareholders of the
Company to be filed with the Securities and Exchange Commission (the
"Commission") entitled "Election of Directors" (not including the share
information included in the beneficial ownership tables nor the footnotes
thereto nor the subsections entitled "Committees of the Board of Directors",
"Compensation Committee Interlocks and Insider Participation" and "Meetings of
the Board of Directors.") and the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
from the section of the Company's Definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders of the Company to be filed with the Commission entitled
"Executive Compensation" and the subsection entitled "Election of Directors -
Compensation Committee Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference
from sections of the Company's Definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders of the Company to be filed with the Commission, entitled
"Election of Directors - Security Ownership of Certain Beneficial Owners and
Management", as to share information in the tables of beneficial ownership and
footnotes thereto.
ITEM 13. 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 1998 Annual
Meeting of Shareholders to be filed with the Commission, entitled "Certain
Relationships and Related Transactions".
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of the report:
1. Financial Statements:
2. Exhibits:
See Index to Exhibits at page 73.
46
<PAGE>
(B) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last
quarter of 1997.
(C) Exhibits
See Index to Exhibits at page 73 of this Annual Report on Form 10-K, which is
incorporated herein by reference.
(D) Financial Statement Schedules
Not applicable.
47
<PAGE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
Consolidated Financial Statements as of December 31, 1997 and 1996 and for each
of the Three Years in the Period Ended December 31, 1997 and Independent
Auditors' Report
48
<PAGE>
Deloitte &
Touche LLP
- ------------ -----------------------------------------------------------
Suite 2000 Telephone: (916) 498-7100
400 Capitol Mall Facsimile: (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, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. 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 consolidated financial statments present fairly, in all
material respects, the financial position of the Company at December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
January 27, 1998
- -------------------
Deloitte & Touche
Tohmatsu
International
- -------------------
49
<PAGE>
<TABLE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996 (In thousands except share amounts)
- -------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 8,842 $ 10,407
Federal funds sold 13,100 18,100
-------- --------
Total cash and cash equivalents 21,942 28,507
Cash held in trust 1,670
Securities:
Available for sale, at fair value 26,613 9,223
Held to maturity, at amortized cost (fair value of $41,231
and $41,871 at December 31, 1997 and 1996, respectively) 39,219 39,997
Loans receivable, net of allowance for loan losses and
deferred loan fees 167,507 166,983
Premises and equipment, net of accumulated depreciation
and amortization 4,647 3,768
Other real estate owned 212 69
FHLB stock 790 734
Accrued interest receivable 1,923 1,765
Other assets 6,234 5,831
-------- --------
TOTAL ASSETS $270,757 $256,877
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 32,253 $ 28,314
Interest-bearing:
Savings 46,431 46,640
Time certificates 118,159 114,041
NOW accounts 41,679 40,233
-------- --------
Total deposits 238,522 229,228
Accrued interest and other liabilities 4,169 3,749
-------- --------
Total liabilities 242,691 232,977
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, no par value: authorized 20,000,000 shares;
outstanding, 1,839,092 and 1,823,688 at December 31, 1997
and 1996 10,161 9,896
Retained earnings 17,205 13,703
Unrealized gain on securities available for sale (net of tax effect) 700 301
-------- --------
Total stockholders' equity 28,066 23,900
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $270,757 $256,877
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
50
<PAGE>
<TABLE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands except share and per share amounts)
- --------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
INTEREST INCOME:
<S> <C> <C> <C>
Loans including fees $ 15,238 $ 14,517 $ 13,230
Securities:
Taxable 1,042 747 1,012
Exempt from federal taxes 2,374 2,387 2,187
Interest on federal funds sold 1,079 990 1,040
-------- -------- --------
Total interest income 19,733 18,641 17,469
INTEREST EXPENSE - DEPOSITS 8,644 8,077 7,559
-------- -------- --------
NET INTEREST INCOME 11,089 10,564 9,910
PROVISION FOR LOAN LOSSES 770 720 375
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,319 9,844 9,535
-------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 1,400 1,342 1,342
Other fees and charges 570 520 546
Gain on sale of loans 160 160 160
Gain on sale of available for sale securities 250 31 31
Life insurance proceeds 1,139
Gain (loss) on sale of trading securities (7) 11
Other 619 535 540
-------- -------- --------
Total noninterest income 4,138 2,581 2,630
-------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee benefits 4,522 3,934 3,679
Occupancy expense 503 456 422
Furniture and equipment expense 553 497 451
Other 2,734 1,899 1,860
-------- -------- --------
Total noninterest expenses 8,312 6,786 6,412
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,145 5,639 5,753
PROVISION FOR INCOME TAXES 1,000 1,532 1,670
-------- -------- --------
NET INCOME $ 5,145 $ 4,107 $ 4,083
======== ======== ========
EARNINGS PER SHARE:
Basic $ 2.81 $ 2.23 $ 2.22
======== ======== ========
Diluted $ 2.78 $ 2.20 $ 2.20
======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
51
<PAGE>
<TABLE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997,
1996 AND 1995 (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> <C>
Balances at January 1, 1995 1,829,933 $ 9,694 $ 8,493 $ (261) $ 17,926
Net income 4,083 4,083
Stock options exercised 11,115 72 72
Cash dividends on common
stock ($.64 per share) (950) (950)
Cash in lieu of fractional shares (7) (7)
Net change in unrealized gain (loss) on
available for sale securities 382 382
Reduction in equity - retirement plans (533) (533)
---------- ---------- ---------- ---------- ----------
Balances at December 31, 1995 1,841,048 9,766 11,086 121 20,973
Net income 4,107 4,107
Stock options exercised 5,440 50 50
Tax benefit derived from the exercise
of stock options 80 (80)
Cash dividends on common
stock ($.70 per share) (1,286) (1,286)
Net change in unrealized gain (loss) on
available for sale securities 180 180
Addition to equity - retirement plans 376 376
Repurchase of stock (22,800) (500) (500)
---------- ---------- ---------- ---------- ----------
Balances at December 31, 1996 1,823,688 9,896 13,703 301 23,900
Net income 5,145 5,145
Stock options exercised 15,404 133 133
Tax benefit derived from the exercise
of stock options 132 132
Cash dividends on common
stock ($.70 per share) (1,284) (1,284)
Net change in unrealized gain (loss)
on available for sale securities 399 399
Reduction in equity - retirement plans (359) (359)
---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 1,839,092 $ 10,161 $ 17,205 $ 700 $ 28,066
========== ========== ========== ========== ==========
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
52
<PAGE>
<TABLE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (In thousands)
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,145 $ 4,107 $ 4,083
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 430 406 373
Amortization of premium on securities 4 10 14
Provision for loan losses 770 720 375
Loss on sale/write down of other real estate owned 185 48
Gain on sale of available for sale securities (250) (31) (31)
Loss (gain) on sale of trading securities 7 (11)
Gain on sales of loans (160) (160) (160)
Provision for deferred taxes (675) (327) (377)
Proceeds from sales of trading securities 1,970 4,006
Purchase of trading securities (1,980) (3,995)
Effect of changes in:
Cash held in trust (1,670)
Accrued interest receivable (158) (50) (218)
Other assets (129) (740) 26
Accrued interest and other liabilities 1,066 755 23
-------- -------- --------
Net cash provided by operating activities 4,558 4,735 4,108
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FHLB stock (56) (72) (53)
Proceeds from sale of other real estate owned 1,565 271
Purchases of available for sale securities (23,353) (2,611) (4,273)
Proceeds from sales of available for sale securities 6,534 61 118
Proceeds from maturities of available for sale securities 260 6,304 11,000
Purchases of held to maturity securities (2,082) (8,970) (7,482)
Proceeds from maturities or calls of held to maturity securities 2,842 4,178 8,627
Proceeds from sales of loans 9,619 8,027 3,124
Net increase in loans (12,646) (28,063) (25,771)
Purchases of premises and equipment (1,309) (381) (646)
-------- -------- --------
Net cash used in investing activities (18,626) (21,256) (15,356)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits, NOW accounts, and savings accounts 5,176 11,687 (3,851)
Net increase in time certificates 4,118 6,466 21,385
Cash dividends paid (1,924) (1,143) (880)
Repurchase of company stock (500)
Cash received for stock options exercised 133 50 72
Cash paid in lieu of fractional shares (7)
-------- -------- --------
Net cash provided by financing activities 7,503 16,560 16,719
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (6,565) 39 5,471
CASH AND CASH EQUIVALENTS:
Beginning of year 28,507 28,468 22,997
-------- -------- --------
End of year $ 21,942 $ 28,507 $ 28,468
======== ======== ========
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 $ 1,893 $ 301 $ 87
======== ======== ========
Cash Payments:
Income tax payments $ 1,849 $ 1,971 $ 2,110
======== ======== ========
Interest payments $ 8,620 $ 8,059 $ 7,468
======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
53
<PAGE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - North Valley Bancorp and subsidiaries (Company)
operate nine branches in Shasta and Trinity Counties in Northern
California. The Company's primary source of revenue is from providing
loans to customers, who are predominately small and middle market
businesses and middle income individuals.
General - The accounting and reporting policies of 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. North
Valley Trading Company and North Valley Basic Securities did not have
any activity in 1997. 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. Changes in fair
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.
54
<PAGE>
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.
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 accounts for impaired loans in
accordance with 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. Under these 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 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.
55
<PAGE>
Other Real Estate Owned - Real estate acquired through, or in lieu of,
loan foreclosures is expected to be sold and is recorded at the date of
foreclosure at the lower of the recorded investment in the property or
its fair value less estimated costs to sell (fair value) establishing a
new cost basis through a charge to allowance for loan losses, if
necessary. After foreclosure, valuations are periodically performed by
management with any subsequent write-downs recorded as a valuation
allowance and charged against operating expenses. Operating expenses of
such properties, net of related income are included in other expenses
and gains and losses on their disposition are included in other income
and other expenses.
Income Taxes - The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. 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.
Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with
Accounting Principles Board (APB) No. 25, Accounting for Stock Issued
to Employees. The Company presents the required pro forma disclosures
of the effect of stock-based compensation on net income and earnings
per share using the fair value method in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation.
Net Income Per Share - Effective December 15, 1997, the Company adopted
SFAS No. 128, Earnings Per Share. This statement replaces previous
earnings per share reporting requirements and requires presentation of
both basic and diluted earnings per share. All earnings per share
information has been restated to give effect to the adoption of SFAS
No. 128. Basic earnings per share is computed by dividing net income by
the weighted average common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
options or other contracts to issue common stock were exercised and
converted into common stock.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities Effective January 1, 1997, the Company
adopted SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement
provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. This standard
is based on consistent application of a financial-components approach
that focuses on control. Adoption of SFAS No. 125 did not have a
material effect on the Company's financial position or results of
operations.
New Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board adopted Statements of Financial Accounting Standards
No. 130, Reporting Comprehensive Income, which requires that an
enterprise report, by major components and as a single total, the
change in its net assets during the period from nonowner sources, and
No. 131, Disclosures about Segments of an Enterprise and Related
Information, which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas, and major customers. Adoption of
these statements will not impact the Company's consolidated financial
position, results of operations or cash flows. Both statements are
effective for fiscal years beginning after December 15, 1997, with
earlier application permitted.
56
<PAGE>
Reclassification - Certain amounts in 1996 and 1995 have been
reclassified to conform with the 1997 financial statement presentation.
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 $3,345,000 and $2,462,000 at
December 31, 1997 and 1996. As compensation for check-clearing
services, additional compensating balances of $1,000,000 are required
to be maintained with the Federal Reserve Bank.
3. SECURITIES
<TABLE>
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
Available for sale securities: Cost Gains Losses Fair Value)
<S> <C> <C> <C>
December 31, 1997:
Securities of U.S. government
agencies and corporations $ 22,037 $ 20 $ 22,057
Obligations of states and
political subdivisions 2,268 58 2,326
Other securities 1,311 919 2,230
-------- ----- ------ --------
$ 25,616 $ 997 $ 26,613
======== ===== ====== ========
December 31, 1996:
Securities of U.S. government
agencies and corporations $ 3,998 $ 44 $ 3,954
Obligation of states and political
subdivisions 4,140 $ 113 4,253
Other securities 655 361 1,016
-------- ----- ------ --------
$ 8,793 $ 474 $ 44 $ 9,223
======== ===== ====== ========
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Carrying Gross Gross Approximate
Amount Unrealized Unrealized Fair
Held to maturity securities: (Amortized Cost) Gains Losses Value
<S> <C> <C> <C>
December 31, 1997:
U.S. Agencies $ 3,000 $ (11) $ 2,989
Obligations of states and
political subdivisions 36,219 $ 2,023 38,242
-------- ------- ----- --------
Total $ 39,219 $ 2,023 $ (11) $ 41,231
======== ======= ===== ========
December 31, 1996:
U.S. Agencies $ 4,000 $ 59 $ 3,941
Obligations of states and
political subdivisions 35,997 $ 1,940 7 37,930
-------- ------- ----- --------
Total $ 39,997 $ 1,940 $ 66 $ 41,871
======== ======= ===== ========
</TABLE>
Gross realized gains on sales of U.S. government and agency securities
categorized as available for sale securities were $250,000 and $31,000
in 1997 and 1996, respectively. There were no gross realized losses on
sale of available for sales securities in 1997 or 1996.
<TABLE>
Scheduled maturities of held to maturity and available for sale
securities (other than equity securities with an amortized cost of
approximately $1,310,000 and a carrying value of approximately
$2,230,000) at December 31, 1997, 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 $ 1,794 $ 1,817 $ 8,419 $ 8,416
Due after 1 year through 5 years 15,783 16,399 13,668 13,701
Due after 5 years through 10 years 10,971 11,650 1,499 1,516
Due after 10 years 10,671 11,365 720 750
--------- -------- -------- ---------
$ 39,219 $ 41,231 $ 24,306 $ 24,383
========= ======== ======== =========
</TABLE>
At December 31, 1997 and 1996, securities having carrying amounts of
approximately $18,790,000 and $16,379,000 were pledged to secure public
deposits and short-term borrowings and for other purposes required by
law or contract.
58
<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 reflects the Company's analysis of the borrower, the
borrower's industry and the economic environment in which the loan
would be granted. The loans 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):
1997 1996
Commercial $ 64,666 $ 63,944
Real estate - construction 1,688 1,135
Real estate - mortgage 45,590 46,673
Installment 44,510 43,863
Other 13,390 13,283
---------- ----------
Total loans receivable 169,844 168,898
Less:
Allowance for loan losses 1,702 1,254
Deferred loan fees 636 661
---------- ----------
Net loans receivable $ 167,507 $ 166,983
========== ==========
At December 31, 1997 and 1996, the Bank serviced real estate loans and
loans guaranteed by the Small Business Administration which it had sold
to the secondary market of approximately $88,640,000 and $90,744,000,
respectively.
Changes in the allowance for loan losses for the years ended December
31, were as follows (in thousands):
1997 1996 1995
Balance, beginning of year $ 1,254 $ 1,325 $ 1,144
Provision charged to operations 770 720 375
Loans charged off (362) (813) (281)
Recoveries 40 22 87
------- -------- --------
Balance, end of year $ 1,702 $ 1,254 $ 1,325
======= ======== ========
59
<PAGE>
5. IMPAIRED AND NONPERFORMING LOANS
At December 31, 1997, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 was
approximately $4,353,000. No significant impaired balances required a
valuation allowance at December 31, 1997. For the year ended December
31, 1997, the average recorded investment in loans for which impairment
has been recognized was approximately $3,454,000. During the portion of
the year that the loans were impaired the Company recognized interest
income of approximately $153,000 for cash payments received.
At December 31, 1996, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 was
approximately $2,612,000. Of that balance approximately $320,000 has a
related valuation allowance of $33,000. The remaining $2,292,000 did
not require a valuation allowance. For the year ended December 31,
1996, the average recorded investment in loans for which impairment has
been recognized was approximately $2,244,000. During the portion of the
year that the loans were impaired the Company recognized interest
income of approximately $203,000 for cash payments received.
Nonperforming loans at December 31 were as follows (in thousands):
1997 1996
Nonaccrual loans $ 536 $1,190
Loans 90 days past due but still accruing interest 244 14
----- ------
Total nonaccrual and 90 days past due loans $ 780 $1,204
===== ======
If interest on nonaccrual loans had been accrued, such income would
have approximated $32,000, in 1997, $82,000 in 1996 and $37,000 in
1995. Interest income of $28,000 in 1997, $27,000 in 1996, and $8,000
in 1995 was recorded when it was received on the nonaccrual loans.
At December 31, 1997, there were no commitments to lend additional
funds to borrowers whose loans were classified as nonaccrual.
60
<PAGE>
6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are
summarized as follows (in thousands):
1997 1996
Land $ 1,080 $ 904
Buildings and improvements 4,084 3,420
Furniture, fixtures and equipment 4,234 3,797
Leasehold improvements 174 178
-------- --------
9,572 8,299
Accumulated depreciation and amortization (4,925) (4,531)
-------- --------
$ 4,647 $ 3,768
======== ========
Building and equipment rental expense was approximately $77,000 for the
years ended December 31, 1997 and 1996, and $54,000 for the year ended
December 31, 1995.
7. OTHER ASSETS
Major classifications of other assets at December 31 were as follows
(in thousands):
1997 1996
Cash surrender value of life insurance policies $ 3,009 $ 3,414
Prepaid expenses 745 479
Income tax receivable 528
Deferred taxes 1,881 1,386
Other 71 552
-------- --------
Total $ 6,234 $ 5,831
======== ========
8. DEPOSITS
The aggregate amount of time certificates of deposit in denominations
of $100,000 or more was $17,914,000 and $19,908,000 at December 31,
1997 and 1996. Interest expense incurred on such time certificates of
deposit was $925,000, $882,000, and $734,000, for the years ended
December 31, 1997, 1996 and 1995.
61
<PAGE>
9. LINES OF CREDIT
At December 31, 1997, the Bank had the following lines of credit with
correspondent banks to purchase federal funds (in thousands):
Type Amount Expiration
Unsecured $6,000 July 31, 1998
Secured $5,238 Quarterly
(First deeds of trust on eligible
1-4 unit residential loans)
10. INCOME TAXES
The provision for income taxes for the years ended December 31, was as
follows (in thousands):
1997 1996 1995
Currently payable:
Federal $ 1,185 $ 1,212 $ 1,343
State 490 647 702
------- -------- --------
Total 1,675 1,859 2,045
------- -------- --------
Deferred (benefit):
Federal (539) (297) (341)
State (136) (30) (34)
------- -------- --------
Total (675) (327) (375)
------- -------- --------
Total $ 1000 $ 1,532 $ 1,670
======= ======== ========
The effective federal tax rate for the years ended December 31, differs
from the statutory tax rate as follows:
1997 1996 1995
Federal income tax at statutory rates 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 3.8 7.4 7.2
Tax exempt income (13.6) (14.2) (12.1)
Officer's life insurance proceeds (6.3)
Other (2.6) (1.1) (1.1)
---- ----- -----
Total 16.3% 27.2% 29.0%
==== ==== ====
62
<PAGE>
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):
1997 1996
Deferred tax assets:
Reserve for loan losses $ 530 $ 310
California franchise tax 118
Deferred loan fee income 285 297
Deferred compensation 530 447
Accrued pension obligation 651 621
Mark to market adjustment 333 124
Accrued severance 119
Alternative minimum tax credit 108
------- -------
Total deferred tax assets 2,556 1,917
------- -------
Deferred tax liabilities:
Tax depreciation in excess of book depreciation (119) (118)
California franchise tax (26)
Unrealized gain on securities available for sale (297) (116)
Other (233) (297)
------- -------
Total deferred tax liabilities (675) (531)
------- -------
Net deferred tax asset $ 1,881 $ 1,386
======= =======
The Company believes that it is more likely than not that it will
realize the above deferred tax assets in the future periods; therefore,
no valuation allowance has been provided against its deferred tax
assets.
11. RETIREMENT AND DEFERRED COMPENSATION PLANS
Substantially all employees with at least one year of service
participate in a Company-sponsored employee stock ownership plan
(ESOP). The Company made contributions to the ESOP of $60,000 in 1997,
1996 and 1995, respectively. At December 31, 1997, the ESOP owned
approximately 103,000 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, 1997, 1996, and 1995 of $20,000, $21,000, and
$21,000, respectively.
The Company has a nonqualified executive deferred compensation plan for
key executives and directors. Under this plan, participants voluntarily
elect to defer a portion of their salary, bonus or fees and the Company
is required to credit these deferrals with interest. The Company's
deferred compensation obligation of $1,183,000 and $978,000 as of
December 31, 1997 and 1996, respectively, is included in accrued
interest and other liabilities.
63
<PAGE>
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
($3,009,000 and $3,414,000 at December 31, 1997 and 1996, respectively)
to pay the retirement obligations. The accrued pension obligation of
$1,927,000, $1,544,000, and $1,509,000 as of December 31, 1997, 1996,
and 1995, respectively, is included in accrued interest and other
liabilities.
The following table sets forth the plans' status at December 31 (in
thousands):
1997 1996
Actuarial present value of benefit obligations:
Vested benefit obligation $1,859 $1,508
======= =======
Accumulated benefit obligation 1,927 $1,544
======= =======
Projected benefit obligation for service
rendered to date $ 2,525 $2,190
Plan assets at fair value - -
------- ------
Projected benefit obligation in excess of
plan assets (2,525) (2,190)
Unrecognized net losses 195 373
Unrecognized prior service costs 470
Unrecognized net pension transition
asset, amortized over 17 years 200 231
Adjustment necessary to recognize minimum liability (267) 42
------- ------
Accrued pension obligation $(1,927) $(1,544)
======= =======
The net periodic pension cost was determined using a discount rate
assumption of 6.48%, 6.26%, and 7.87% for 1997, 1996 and 1995,
respectively. The rate of increase in compensation for the supplemental
executive retirement plan was 6% for 1997, 1996 and 1995.
The elements of pension costs for the unqualified defined benefit
pension plans at December 31 are as follows (in thousands):
1997 1996 1995
Cost of benefits earned during the year $110 $ 84
Interest on projected benefit obligation $140 88 79
Net amortization and other deferrals 48 45 28
---- ---- ----
Net pension cost $188 $243 $191
==== ==== ====
64
<PAGE>
12. STOCK BASED COMPENSATION
<TABLE>
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>
Directors' Plan
-----------------------------
Weighted
Average
Options Exercise Price
<S> <C> <C>
Outstanding, January 1, 1995 42,772 6.84
Granted 12,000 12.19
Exercised (11,115) 6.79
Expired or canceled (7,413) 8.70
-------
Outstanding, December 31, 1995
15,309 exercisable at weighted average price of $7.24 36,244 8.27
Granted 7,000 16.58
Exercised (5,356) 9.49
-------
Outstanding December 31, 1996
19,809 exercisable at weighted average price of $7.11 37,888 9.55
Granted 7,000 18.64
Exercised (15,404) 8.64
Expired or canceled (4,520) 14.66
-------
Outstanding December 31, 1997
13,644 exercisable at weighted average price of $8.72 24,964 11.37
====== =====
</TABLE>
<TABLE>
Information about stock options outstanding at December 31, 1997 is
summarized as follows:
<CAPTION>
Weighted Weighted
Average Average
Average Exercise Exercise
Range of Remaining Price of Price of
Exercises Options Contractual Options Options Options
Prices Outstanding Life (Years) Outstanding Exercisable Exercisable
<S> <C> <C> <C> <C> <C>
$4.37 - $6.70 7,344 2 $ 5.34 7,344 $ 5.33
$10.20-$12.19 9,020 2 11.32 4,700 11.13
$16.58 - $18.28 8,600 2 17.49 1,600 17.40
------ ------ ------ ------
24,964 $11.70 13,644 $ 8.72
====== ====== ====== ======
</TABLE>
65
<PAGE>
<TABLE>
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plan. Under the intrinsic value method
no compensation cost has been recognized for its stock option grants.
SFAS No. 123, Accounting for Stock-Based Compensation requires
disclosure of pro forma net income and earnings per share had the
Company adopted the fair value method as of the beginning of 1995. Had
compensation cost for the grants been determined based upon the fair
value method, the Company's net income and earnings per share would
have been adjusted to the pro forma amounts indicated below.
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income:
As reported $5,145 $4,107 $4,083
Pro forma 5,122 4,094 4,075
Basic earnings per common share:
As reported $2.81 $2.23 $2.22
Pro forma 2.80 2.22 2.22
Diluted earnings per common and equivalent share:
As reported $2.78 $2.20 $2.20
Pro forma 2.76 2.19 2.19
</TABLE>
The fair value of the options granted during 1997, 1996 and 1995 is
estimated as $45,000, $36,000, and $55,000 on the date of grant using a
binomial option-pricing model with the following assumptions: $0.70
annual dividend, volatility of 15.19%, 15.19% and 14.43%, risk-free
interest rate of 6.36%, 5.37% and 7.62%, assumed forfeiture rate of
zero, and an expected life of six years. The weighted average per share
fair value of the 1997, 1996 and 1995 awards was $6.43, $5.14 and
$4.58, respectively. The impact of outstanding nonvested stock options
granted prior to 1995 has been excluded from the pro forma
calculations; accordingly the 1995, 1996 and 1997 pro forma adjustments
are not indicative of future pro forma adjustments when the calculation
will apply to all applicable stock options.
13. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
options or other contracts to issue common stock were exercised and
converted into common stock.
66
<PAGE>
<TABLE>
The denominator used in the calculation of basic earnings per share and
diluted earnings per share for each of the years ended December 31 is
reconciled as follows:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Calculation of Basic Earnings Per Share
Numerator - net income $ 5,145 $ 4,107 $ 4,083
Denominator - weighted average common shares outstanding 1,829 1,843 1,838
------- ------- -------
Basic Earnings Per Share $2.81 $2.23 $2.22
======= ======= =======
Calculation of Diluted Earnings Per Share
Numerator - net income $ 5,145 $ 4,107 $ 4,083
Denominator:
Weighted average common shares outstanding 1,829 1,843 1,838
Dilutive effect of outstanding options 22 23 21
------- ------- -------
1,851 1,866 1,859
------- ------- -------
Diluted Earnings Per Share $ 2.78 $ 2.20 $ 2.20
======= ======= =======
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in a number of legal actions arising from
normal business activities. Management, based upon the advice of legal
counsel, believes that the ultimate resolution of all pending 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 $1,189,000 and $521,000 at
December 31, 1997 and 1996. At December 31, 1997 commercial and
consumer lines of credit, and real estate loans of approximately
$17,739,000 and $919,000 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.
15. RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, certain officers and directors and their
associates were indebted to the Bank for loans made on substantially
the same terms, including interest rates and collateral, as comparable
transactions with unaffiliated parties.
A summary of activity for the years ended December 31, 1997 and 1996 is
as follows (in thousands; renewals are not reflected as either new
loans or repayments):
1997 1996
Beginning balance $ 3,329 $ 3,846
Borrowings 388 80
Repayments (832) (597)
-------- -------
Ending balance $ 2,885 $ 3,329
======== =======
67
<PAGE>
16. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and,
possibly, additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines,
the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Company's and the Bank's assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital
amounts and the Bank's prompt correction action classification are also
subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined)
and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1997, that the Company and the
Bank meet all capital adequacy requirements to which they are subject.
The most recent notifications from the Federal Deposit Insurance
Corporation for the Bank as of December 31, 1997 and 1996, categorized
the Bank as well capitalized under the regulatory framework for prompt
correction action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage
ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the
Bank's category.
<TABLE>
The Company's and the Bank's actual capital amounts (in thousands) and
ratios are also presented, respectively, in the following tables.
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
Actual --------------------- --------------------
----------------- Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Company:
As of December 31, 1997:
Total capital
(to risk weighted assets) $28,887 15.73% $14,694 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $27,185 14.80% $7,347 4.00% N/A N/A
Tier I capital
(to average assets) $27,185 9.94% $10,945 4.00% N/A N/A
As of December 31, 1996:
Total capital
(to risk weighted assets) $24,438 13.29% 14,707 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $23,184 12.58% $7,353 4.00% N/A N/A
Tier I capital
(to average assets) $23,184 8.98% $10,275 4.00% N/A N/A
68
<PAGE>
Bank:
As of December 31, 1997:
Total capital
(to risk weighted assets) $26,765 14.69% $14,573 8.00% $18,216 10.00%
Tier I capital
(to risk weighted assets) $25,063 13.76% $7,287 4.00% $10,298 6.00%
Tier I capital
(to average assets) $25,063 9.24% $10,852 4.00% $13,565 5.00%
As of December 31, 1996:
Total capital
(to risk weighted assets) $23,234 12.72% $14,610 8.00% $18,263 10.00%
Tier I capital
(to risk weighted assets) 21,980 12.04% $7,305 4.00% $10,958 6.00%
Tier I capital
(to average assets) 21,980 8.56% $9,847 4.00% $12,309 5.00%
</TABLE>
Under federal and California state banking laws, dividends paid by the
Bank to the Company in any calendar year may not exceed certain
limitations without the prior written approval of the appropriate bank
regulatory agency. At December 31, 1997, the amount available for such
dividends without prior written approval was approximately $9,815,000.
Similar restrictions apply to the amounts and terms of loans, advances
and other transfers of funds from the Bank to the Company.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments
requires certain disclosures regarding the estimated 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, 1997, 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,
1997 and 1996 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.
69
<PAGE>
(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) Cash Surrender Value of Life Insurance - The carrying amount
represents a reasonable estimate of fair value.
(e) 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.
(f) Commitments to Fund Loans/Standby Letters of Credit - The fair
values of commitments are estimated using the fees currently
charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present
creditworthiness of the counterparties. The differences between
the carrying value of commitments to fund loans or stand by
letters of credit and their fair value is not significant and
therefore not included in the following table.
<TABLE>
The estimated fair values of the Company's financial instruments as of
December 31, are as follows (in thousands):
<CAPTION>
1997 1996
------------------------ ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $21,942 $21,942 $28,507 $28,507
Securities:
Available for sale $26,613 $26,613 $9,223 $9,223
Held to maturity $39,219 $41,231 $39,997 $41,871
Loans receivable $167,507 $169,149 $166,983 $166,918
Cash surrender value of life insurance $3,009 $3,009 $3,414 $3,414
FINANCIAL LIABILITIES:
Deposits $238,522 $238,811 $229,228 $229,585
</TABLE>
70
<PAGE>
18. CONDENSED FINANCIAL INFORMATION OF NORTH VALLEY BANCORP
<TABLE>
The condensed financial statements of North Valley Bancorp are
presented below (in thousands except share amounts):
NORTH VALLEY BANCORP
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<CAPTION>
1997 1996
<S> <C> <C>
Assets:
Cash and cash equivalents $ 554 $ 268
Available for sale securities (at fair value) 2,230 1,016
Investments in subsidiaries 25,556 22,714
Dividend receivable 650
---------- ----------
Total $ 28,340 $ 24,648
========== ==========
Liabilities and stockholders' equity:
Dividend payable $ 640
Other liabilities $ 274 108
Stockholders' equity:
Common stock, no par value: authorized, 20,000,000 shares;
outstanding, 1,839,092 and 1,823,688 as of
December 31, 1997 and 1996, respectively 10,161 9,896
Retained earnings 17,205 13,703
Unrealized gain on securities available for sale
(net of tax effect) 700 301
---------- ----------
Total $ 28,340 $ 24,648
========== ==========
</TABLE>
71
<PAGE>
<TABLE>
NORTH VALLEY BANCORP
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INCOME:
Dividends from subsidiaries $ 2,024 $ 1,888 $ 954
Other income 489 64 29
-------- -------- --------
Total income 2,513 1,952 983
EXPENSE:
Legal and accounting 74 14 17
Other 251 13
-------- -------- --------
Total expense 325 27 17
-------- -------- --------
Income before equity in undistributed income
of subsidiaries 2,188 1,925 966
Equity in undistributed income of subsidiaries 2,957 2,182 3,117
-------- -------- --------
Net income $ 5,145 $ 4,107 $ 4,083
======== ======== ========
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Cash flows from operating activities:
Net income $ 5,145 $ 4,107 $ 4,083
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries (2,957) (2,182) (3,117)
Gain on sale of available for sale securities (187) (26) (29)
Effect of changes in:
Dividends receivable 650 (150) (73)
--------- -------- --------
Net cash provided by operating activities 2,651 1,749 864
--------- -------- --------
Cash flows from investing activities:
Purchase of available for sale securities (871) (188) (315)
Proceeds from sale of available for sale securities 297 57 114
--------- -------- --------
Net cash used by investing activities (574) (131) (201)
--------- -------- --------
Cash flows from financing activities:
Cash dividends paid (1,924) (1,143) (810)
Repurchase of company stock (500)
Cash in lieu of fractional shares (7)
Stock options exercised 133 50 72
--------- -------- --------
Net cash used in financing activities (1,791) (1,593) (745)
--------- -------- --------
Increase (decrease) in cash and cash equivalents 286 25 (82)
Cash and cash equivalents at beginning of year 268 243 325
--------- -------- --------
Cash and cash equivalents at end of year $ 554 $ 268 $ 243
========= ======== ========
</TABLE>
* * * * * *
72
<PAGE>
INDEX OF EXHIBITS
Sequential
Exhibit 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 January 21, 1997. Incorporated by
reference from Exhibit 10(b) to the Company's
Annual Report on 10-KSB for the fiscal year ended
December 31, 1996 filed with the
Commission (hereinafter, "1996 10-KSB) *
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 & March 28, 1996.
Incorporated by reference from Exhibit 10(d) to the
Company's 1996 10-KSB. *
10(e) Employment Agreement of James F. Cowee dated
November 10, 1997. 78
10(f) 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"). *
73
<PAGE>
Sequential
Exhibit No. Exhibit Name Page No.
- ----------- ------------ --------
10(g) North Valley Bancorp 1989 Employee Nonstatutory
Stock Option Agreement. Incorporated by reference
from Exhibit 4.3 to the 1989 S-8 Amendment. *
10(h) North Valley Bancorp 1989 Director Stock Option
Plan, as amended. Incorporated by reference from
Exhibit 4.6 to the 1989 S-8 Amendment. *
10(i) North Valley Bancorp 1989 Director Nonstatutory
Stock Option Agreement. Incorporated by reference
from Exhibit 4.4 to the 1989 S-8 Amendment. *
10(j) 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(k) Amendment No. 3 to the Employee Stock Ownership
Plan. Incorporated by reference from Exhibit 10(ee)
to the Company's 1994 10-KSB. *
10(l) Amendment No. 4 to the Employee Stock Ownership
Plan, dated August 19, 1996. Incorporated by
reference from Exhibit 10(kk) to the Company's 1996
10-KSB. *
10(m) Management Incentive Plan. Incorporated by
reference from Exhibit 10(c) to the Company's 1984
10-K. *
10(n) Supplemental Executive Retirement Plan.
Incorporated 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"). *
10(o) Executive Deferred Compensation Plan. Incorporated
by reference from Exhibit 10(j) to the Company's
1988 10-K. *
10(p) Supplemental Retirement Plan for Directors.
Incorporated by reference from Exhibit 10(k) to
the Company's 1988 10-K. *
10(q) Legal Services Agreement with Wells, Wingate, Small
& Graham. Incorporated by reference from Exhibit
10(q) to the Company's 1987 10-K. *
74
<PAGE>
Sequential
Exhibit No. Exhibit Name Page No.
- ----------- ------------ --------
10(r) PrimeVest Financial Services, Inc. Nondiscretionary
Full Service Brokerage Agreement. Incorporated by
reference from Exhibit 10(w) to the Company's 1993
10-K. *
10(s) Employment Agreement of Fred A. Drake. Incorporated
by reference from Exhibit 10(aa) to the Company's
1993 10-K. *
10(t) Addendum to Employment Agreement of Fred A. Drake
dated March 28, 1996 & January 2, 1997.
Incorporated by reference from Exhibit 10(x) to the
Company's 1996 10-KSB. *
10(u) Addendum to Employment Agreement of Fred A. Drake
dated July 1, 1997, and January 5, 1998. 86
10(v) Employment Agreement of Robert Jones. Incorporated
by reference from Exhibit 10(cc) to the Company's
1993 10-K. *
10(w) Addendum to Employment Agreement of Robert Jones
dated March 28, 1996 & January 2, 1997.
Incorporated by reference from Exhibit 10(z) to the
Company's 1996 10-KSB. *
10(x) Employment Agreement of Martin R. Sorensen dated 88
February 2, 1998.
10(y) Sales Agreement with Federated Securities Corp.
Incorpor- ated by reference from Exhibit 10(gg) to
the Company's 1995 10-KSB. *
10(z) Linsco/Private Ledger, Inc. Full Service Brokerage
Agreement. Incorporated by reference from Exhibit
10(hh) to the Company's 1995 10-KSB. *
10(aa) Executive Deferred Compensation Plan, effective
1-1-89, restated 4-1-95. Incorporated by reference
from Exhibit 10(dd) to the Company's 1996 10-KSB. *
10(bb) Directors' Deferred Compensation Plan, effective
4-1-95. Incorporated by reference from Exhibit
10(ee) to the Company's 1996 10-KSB. *
75
<PAGE>
Sequential
Exhibit No. Exhibit Name Page No.
- ----------- ------------ --------
10(cc) Umbrella TrustTM for Directors, effective 4-1-95.
Incorporated by reference from Exhibit 10(ff) to
the Company's 1996 10-KSB. *
10(dd) Umbrella TrustTM for Executives, effective 4-1-95.
Incorporated by reference from Exhibit 10(gg) to
the Company's 1996 10-KSB. *
21 List of Subsidiaries. 96
23 Consent of Deloitte & Touche, L.L.P. 97
27 Financial Data Schedule. 98
- -------------------
* Previously filed.
76
<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
By: /s/ Martin R. Sorensen
----------------------
Martin R. Sorensen
President and Chief Executive Officer
/s/ Sharon L. Benson /s/ Fred A. Drake
---------------------- ----------------------
Sharon L. Benson Fred A. Drake
Senior Vice President & Chief Executive Vice President
Financial Officer
DATE: March 20, 1998
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/ Martin R. Sorensen Director March 20, 1998
- ------------------------------
Martin R. Sorensen
/s/ Rudy V. Balma Director March 20, 1998
- ------------------------------
Rudy V. Balma
/s/ William W. Cox Director March 20, 1998
- ------------------------------
William W. Cox
/s/ Dan W. Ghidinelli Director March 20, 1998
- ------------------------------
Dan W. Ghidinelli
/s/ Thomas J. Ludden Director March 20, 1998
- ------------------------------
Thomas J. Ludden
/s/ Kelly V. Pierce Director March 20, 1998
- ------------------------------
Kelly V. Pierce
/s/ Douglas M. Treadway Director March 20, 1998
- ------------------------------
Douglas M. Treadway
/s/ J. M. Wells, Jr. Director March 20, 1998
- ------------------------------
J. M. Wells, Jr.
77
EMPLOYMENT AGREEMENT
This Agreement made this 10th day of November 1997, by and between NORTH
VALLEY BANCORP, a California bank holding company, and NORTH VALLEY BANK, a
California banking corporation, (collectively, the "Employer"), and James F.
Cowee ("Employee").
IT IS AGREED:
1.Employment. The Employer hereby employs the Employee and the Employee
hereby accepts the employment upon the terms and conditions set forth herein.
2. Duties. Employee shall perform the customary and necessary duties of
the President and Chief Executive Officer of a bank holding company and as
President and Chief Executive Officer of its subsidiaries NORTH VALLEY BANK,
NORTH VALLEY TRADING COMPANY, NORTH VALLEY BASIC SECURITIES, NORTH VALLEY BANK
SCHOLARSHIP FUND AND BANK PROCESSING, INC.
3. Term.The contract is retroactively effective to June 1,1997 and is
terminable as otherwise provided herein.
4. Salary. Performance of the duties under this agreement entitles
Employee to a $155,823.00 annual salary. In January of each year of the
EXHIBIT 10(e)
1
<PAGE>
agreement, the Board of Directors of Employer will conduct a review of the
performance of Employee and will determine in their sole discretion an increase
in the annual salary of Employee.
5. Extent of Services. Employee acknowledges that the duties under this
Agreement require his full time attention and best efforts and agrees not to
accept any gainful employment elsewhere during its term.
6. Vacation. The Employee shall be entitled to six (6) weeks' vacation
annually pursuant to the provisions of the vacation policies established by the
Employer but which shall not exceed two (2) weeks at any one time.
7. Other Benifits. Employee shall be entitled to the use of an Employer
owned automobile and membership at Riverview Golf and Country Club.
8. Expenses. The Employee is authorized to incur reasonable expenses in
conducting his duties hereunder, including expenses for entertainment, travel,
shareholder relations and similar items. The Employer shall pay directly or
shall reimburse Employee for all such expenses upon presentation by the
Employee, from time to time, of an itemized account of such expenditures.
9. Insurance.
(a) Employer hereby agrees, at its sole cost and expense, to provide
Employee with, at all times during the term of this Agreement, health
and term life insurance of a type and in an amount generally made
available by employer to its executive employees.
2
<PAGE>
(b) At the expiration of the time period set forth in Section 11(a)
below, unless this agreement shall terminate for reasons set forth in
Section 10(c) below, Employee and/or his surviving spouse, until each
shall reach the age of 65, shall have the right to purchase from
Employer or its successor, the above described insurance provided by
Employer for Employee and Employee's spouse under this agreement by
reimbursing Employer its true cost of same.
10. Termination with Cause. This Agreement shall terminate immediately
upon the occurrence of:
(a) Death of Employee.
(b) Permanent and incapacitating disability for a period of not less
than one hundred and eighty (180) days which reasonably renders Employee
unable to fulfill the duties of the Agreement.
(c) The receipt of notice of termination in the event Employee
willfully or habitually breached the terms of this Agreement or
committed illegal or improper acts which would reasonably require his
dismissal or for other grounds specified in section 2924 of the
California Labor Code.
11. Termination without Cause. This Agreement may also be terminated
without cause and upon ten (10) days written notice, but not prior to January
1,1998.
3
<PAGE>
(a) Employee will then continue in the employment of Employer, or
its successor, as a consultant with the same annual salary and benefits
for the remainder of the calendar year following the ten (10) day notice
period.
(b) At the end of the period so determined, Employee shall
additionally and immediately receive a severance payment of not less
than his total annual base salary at the time of termination reduced by
any payment made pursuant to Section 11(a).
Example: Employer gives Employee notice of termination effective
January 1,1998. Employee will continue to be employed through December
31, 1998. Employment would terminate on January 1,1999 and Employee
would be entitled to severance compensation equal to ten (10) days of
his annual base salary.
(c) In the event that a "Change of Control" as defined herein should
occur during a period beginning June 1,1997 and ending twelve (12)
months after the date of written notice of termination, then the amount
of severance payment due Employee under Section 11(b) shall be two times
his total annual base salary at the time of termination reduced by any
payments made pursuant to Section 11(a).
(d) For all purposes under this agreement, the term "Change in
Control" shall mean the occurrence of either of the following events:
4
<PAGE>
(i) A change in the composition of the Company's Board of Directors
occurs at any time within 12 months after the date of written notice of
termination of Employee, as a result of which fewer than one-half of the
incumbent directors are directors who had been directors of the Company
on the date of written notice of termination of Employee; or
(ii) Any person(s) or entity(s) by the acquisition or aggregation of
securities, within 12 months after the date of written notice of
termination of Employee, becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding securities or by
the acquisition, by any means, of all or substantially all of the assets
of the Company.
(e) Employee may voluntarily terminate this Agreement at any time
upon thirty (30) days written notice to Employer. The term of employment
will end at the end of such time and no further salary shall be paid.
Employee would continue to have the rights granted under Section 9(b).
12. Confidentiality. Employee agrees that he will not during the term of
this Agreement or at any time thereafter, either directly or indirectly,
disclose or make known to any other person, firm or corporation any confidential
information, trade secret, processes or names or addresses of any of the
customers of Employer, or any other information pertaining to said customers
that he may acquire in the performance of his duties hereunder, nor will
5
<PAGE>
Employee make use of any such information, secrets, processes or names or
addresses or other information for his own commercial purposes or for the
benefit of any person, firm, corporation or other entity (other than Employer)
under any circumstances, during or after the term of his employment. Employee
acknowledges and agrees that he has been privy to valuable confidential
information, trade secrets, processes and customer information belonging to
Employer. Upon termination of his employment by Employer, Employee agrees
forthwith to deliver to Employer any and all literature, documents,
correspondence, and other materials and records furnished to him during the
course of such employment.
13. Remedies for Breach. In the event of a breach by either party of any
of the terms and conditions of this Agreement to be performed by either, each
shall have the right to institute and prosecute proceedings, in law or in
equity, in any court of competent jurisdiction to obtain any injunction during
the term of this Agreement or after its termination to enforce the provisions of
Sections 9(b), 11 and 12 hereof and to pursue any other remedy which either
party may be entitled.
14. Notice. Any written notice required under this Agreement shall be
sufficiently served by any provable method at the principle place of business of
Employer or his residence in the case of Employee.
15. Waiver of Breach. The waiver by either party of the breach of any
provisions of this Agreement by either party shall not operate or be construed
as a waiver of any subsequent breach by either party.
6
<PAGE>
16. Assignment. The rights and obligations of the Employer under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Employer; however, the rights and benefits of the Employee
under this Agreement are personal to him, and no right or benefit accruing to
the Employee under this Agreement shall be subject to voluntary or involuntary
alienation, assignment, or transfer. Nothing in this Section shall limit the
rights of the spouse of Employee under Section 9(b).
17. Entire Agreement. This Agreement represents the entire agreement of
the parties and any modifications hereto shall be in writing signed by the
parties.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
EMPLOYER EMPLOYEE
NORTH VALLEY BANCORP
By /s/ Rudy V. Balma /s/ James F. Cowee
----------------------------- ----------------------------
Rudy V. Balma James F. Cowee
Chairman of the Board
NORTH VALLEY BANK
By /s/ Rudy V. Balma
-----------------------------
Rudy V. Balma
Chairman of the Board
8
ADDENDUM
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 2 is amended to read as follows:
DUTIES. Employee shall perform the duties established by the Bank for the
position of Executive Vice President and Chief Operating Officer, and such
kindred duties as may, from time to time, be reasonably requested of him by the
President and/or Board of Directors.
2. 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 $101,280.00.
3. Paragraph 7 is amended to read as follows:
VACATION. The Employee shall be entitled to six (6) weeks' vacation annually
pursuant to the vacation policies established by the Employer.
4. Paragraph 8A is added as follows:
INSURANCE. Employer hereby agrees, at its sole cost and expense, to provide
Employee with, at all times during the term of this Agreement, health and term
life insurance of a type and in an amount generally made available by Employer
to its executive employees.
IN ALL OTHER RESPECTS, the terms and conditions of said Agreement shall
continue in full force and effect.
DATED: July 1,1997
EMPLOYER EMPLOYEE
NORTH VALLEY BANK
By /s/ James F. Cowee /s/ Fred A. Drake
------------------------------- -------------------------
James F. Cowee, President Fred A. Drake
EXHIBIT 10(u)
<PAGE>
ADDENDUM
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 $104,340 per year.
IN ALL OTHER RESPECTS, the terms and conditions of said Agreement shall
continue in full force and effect.
DATED: January 5, 1998.
EMPLOYER: EMPLOYEE:
NORTH VALLEY BANK
By /s/ James F. Cowee, President /s/ Fred A. Drake
-------------------------------- --------------------------
James F. Cowee, President Fred A. Drake
EMPLOYMENT AGREEMENT
This Agreement made this 2nd day of February, 1998, by and between NORTH
VALLEY BANCORP, a California bank holding company, and NORTH VALLEY BANK, a
California banking corporation ("collectively, the "Employer""), and MARTIN R.
SORENSEN ("Employee").
IT IS AGREED:
1. Employment. The Employer hereby employs the Employee and the Employee
hereby accepts the employment upon the terms and conditions set forth herein.
2. Duties. Employee shall perform the customary duties of the President
and Chief Executive Officer of a bank holding company and as President and Chief
Executive Officer of its subsidiaries, NORTH VALLEY BANK, NORTH VALLEY TRADING
COMPANY, and NORTH VALLEY BANK PROCESSING, INC.. In addition he shall perform
such kindred duties as may, from time to time, be reasonably requested of him by
the Board of Directors of the Employer.
3. Term. Subject to the provisions for termination as herein provided,
the term of this contract shall begin on February 1, 1998 and shall continue
indefinitely thereafter.
4. Salary. As compensation for the services rendered by him under this
Agreement, the Employee shall be entitled to an annual salary of $175,000.00,
which shall be paid by North Valley Bank. The Board of Directors shall, in
January each year, conduct a review of the performance of Employee during the
previous year. The Board
EXHIBIT 10(x)
1
<PAGE>
of Directors in its sole discretion shall determine whether Employee shall be
granted an increase in annual salary based upon said performance.
5. Extent of Services. The Employee shall devote substantially all of
his time, attention and energies to the business of the Employer. This shall not
be construed as preventing the Employee from engaging in appropriate civic,
charitable, or religious activities or investing his assets in such form and
manner as will not interfere or conflict with the full performance of the
services to be performed by Employee for Employer pursuant to this Agreement.
6. Vacation. The Employee shall be entitled to four (4) weeks vacation
annually pursuant to the provisions of the vacation policies established by the
Bank.
7. Other Benefits. Employee shall be entitled to the use of a bank
automobile and membership at Riverview Golf and Country Club.
8. Expenses. The Employee is authorized to incur reasonable expenses in
conducting his duties hereunder, including expenses for entertainment, travel,
and similar items. The Employer shall pay directly to or shall reimburse the
Employee for all such expenses upon the presentation by the Employee, from time
to time, of an itemized account of such expenditures.
9. Insurance. Employer hereby agrees, at its sole cost and expense, to
provide Employee with, at all times during the term of this Agreement, health
and accident insurance and term life insurance of a type and in an amount
generally made available by Employer to its executive employees.
10. Termination. This Agreement may be terminated without breach of this
Agreement at any time, subject to the provisions of Paragraph 11 hereof, in
accordance with any of the following provisions:
2
<PAGE>
(a) Employer shall have the right to terminate this Agreement
immediately for cause in the event Employee has willfully breached or
habitually neglected the duties which he was required to perform under
this Agreement or Employee commits acts of dishonesty, theft,
misappropriation or conversion of funds, disclosure of confidential
information or records of Employer by Employee or for other grounds of
cause specified in Section 2924 of the California Labor Code, by giving
Employee written notice thereof. The term of employment shall terminate
immediately upon receipt of notice by Employee.
(b) This Agreement shall terminate immediately upon the death of
Employee.
(c) In the event that Employee shall become permanently
incapacitated or disabled for a period of at least one hundred eighty
(180) days, so that it reasonably appears to Employer that he will be
unable to perform his duties hereunder, Employer shall have the right to
terminate this Agreement by giving Employee thirty (30) days' written
notice of such termination.
Not withstanding anything contained in this Paragraph to the contrary, no
termination of this Agreement for any reasons whatsoever shall in any manner
release, or be construed as releasing, any party hereto from any liability,
obligation or damage to the other party hereto arising out of, directly or
indirectly, any breach or default by said party of any term hereunder or the
failure of said party to comply with or perform any duty or obligation
hereunder.
11. Termination Without Cause. Employer may at any time during the term
of this contract give Employee thirty (30) days written notice terminating this
employment agreement.
3
<PAGE>
(a) In the event Employer gives notice of termination without cause
under this Paragraph 11, or in the event Employee separates from
employment with Employer following thirty (30) days written notice by
the Employee to the Employer within one year following a "Change in
Control" as defined herein in response to a "Constructive Termination,"
Employer shall pay to Employee as severance compensation an amount equal
to one and one-half times Employee's current annual base salary (not
including bonuses). "Constructive Termination" means a material
reduction in base salary, a material change in responsibilities, or a
requirement to relocate, except for office relocations that would not
increase the Employee's one-way commute distance by more than
thirty-five (35) miles.
i. "Change in Control" as used herein shall be a change in
control of North Valley Bancorp of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or in response to any similar item on any similar
schedule or form) promulgated under the Securities Exchange Act of
1934, as amended.
(b) Employee may voluntarily terminate his employment with Employer
at any time with thirty (30) days written notice to Employer. The term
of employment shall end on the last day on which Employee performs
services for the Company and which no further salary shall be payable by
Employer to Employee.
12. Employment as Consultant and Restrictive Covenant. Upon the
termination of this Agreement by Employer in accordance with subparagraph (a) of
Paragraph 10 hereof or upon the voluntary termination of employment by Employee,
in accordance with subparagraph (b) of Paragraph 11, Employer shall have the
right, at its option, within thirty (30) days of such termination, to hire
Employee as a consultant for any period of
4
<PAGE>
whole months up to one (1) year from date of termination of employment, in
accordance with the following provisions:
(a) In the event of a termination of this Agreement by Employer in
accordance with subparagraph (a) of Paragraph 10 hereof, Employee shall
receive $833.33 monthly which shall be payable on the first day of each
month thereof until said consulting services are terminated; and
(b) In the event of a voluntary termination of this Agreement by
Employee in accordance with subparagraph (b) of Paragraph 11, Employee
shall receive a monthly payment at the same monthly salary rate to be
paid at the time of termination pursuant to this Agreement, which salary
shall be payable on the first day of each month thereof until said
consulting services are terminated.
Employee agrees that in the event Employer desires to employ him as a consultant
in accordance with the provisions hereof, he will accept such employment
continuously for the number of whole months up to one year from date of
termination of this Agreement. Employer may, however, give Employee written
notice of termination not less than ten (10) days in advance of any month and
terminating Employee's employment as a consultant at the end of that month.
Employee will not during the term of said employment as consultant, without the
prior written consent of Employer, directly or indirectly, engage for his own
account in any business, or own, manage, operate, control, be employed as an
employee or consultant, buy, participate in, or be connected in any manner with
the ownership, management operation or control of any firm, corporation,
association, or other business entity which is in competition with the business
of Employer. This covenant on the part of Employee shall be construed as an
agreement independent of any other provisions of this Agreement and shall
survive the termination of this Agreement, and the existence of any claims or
cause of action by Employee against Employer, whether predicated on this
Agreement or otherwise, shall not constitute
5
<PAGE>
a defense in the enforcement by Employer of this covenant. In the event that
Employee is employed as a consultant and Employer shall default for ten (10)
days after notice of default to the Employer in the payment of any monthly
installment of compensation due to Employee, Employee may, at his option,
terminate his employment as a consultant hereunder by delivering written notice
to Employer of such termination. In the event that Employee elects to terminate
his employment as a consultant in accordance with the foregoing, the foregoing
restrictive covenant shall cease to be effective and binding upon Employee.
13. Confidential Information. Employee agrees that he will not during
the term of this Agreement or at any time thereafter, either directly or
indirectly, disclose or make known to any other person, firm or corporation any
confidential information, trade secret, processes or names or addresses of any
of the customers or shareholders of Employer, or any other information
pertaining to said customers or shareholders that he may acquire in the
performance of his duties hereunder, nor will Employee make use of any such
information, secrets, processes or names or addresses or other information for
his own purposes or for the benefit of any person, firm, corporation or other
entity (other than Employer) under any circumstances, during or after the term
of his employment. Employee acknowledges and agrees that he has been privy to
valuable confidential information, trade secrets, processes and customer and
shareholder information belonging to Employer. Upon the termination of his
employment by Employer, Employee agrees forthwith to deliver to Employer any and
all literature, documents, correspondence, and other materials and records
furnished to him during the course of such employment.
14. Remedies for Breach. Employer and Employee both recognize that the
services to be rendered under this Agreement by Employee are special, unique and
of an extraordinary character, and that in the event of the breach by Employee
of any of the terms and conditions of this Agreement to be performed by him, the
Employer shall have
6
<PAGE>
the right to institute and prosecute proceedings, in law or in equity, in any
court of competent jurisdiction to obtain any injunction during the term of this
Agreement or after its termination, whether by expiration of its term or
otherwise, to enforce the provisions of Sections 12 and 13 hereof and to pursue
any other remedy, in law or in equity to which Employer may be entitled.
15. Notice. Any notice required or permitted to be given under this
contract shall be sufficient if in writing and if delivered by hand or sent by
registered mail certified mail or FedEx (or similar overnight carrier) to his
residence in the case or the Employee, or to its principal office in the case of
the Employer.
16. Waiver of Breach. The waiver by the Employer of the breach of any
provisions of this Agreement by the Employee shall not operate or be construed
as a waiver of any subsequent breach by the Employee.
17. Assignment. The rights and obligations of the Employer under this
Agreement shall insure to the benefit and shall be binding upon the successors
and assigns of the Employer; however, the rights and benefits of the Employee
under this Agreement are personal to him, and no right or benefit accruing to
the Employee under this Agreement shall be subject to voluntary or involuntary
alienation, assignment or transfer.
18. Attorneys Fees. In any action or proceeding arising out of this
Agreement, the prevailing party shall be entitled to reasonable attorney's fees
and costs.
19. Entire Agreement. This Agreement and the provisions of the letter
offering employment dated January 7, 1998 represent the entire agreement of the
parties and any modifications hereto shall be in writing signed by the parties.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
EMPLOYER: EMPLOYEE:
NORTH VALLEY BANCORP
By /s/ Rudy V. Balma /s/ Martin R. Sorensen
----------------------------- ----------------------------
Rudy V. Balma Martin R. Sorensen
Chairman of the Board
NORTH VALLEY BANK
By /s/ Rudy V. Balma
-----------------------------
Rudy V. Balma
Chairman of the Board
8
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.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-32787 on Form S-8, of North Valley Bancorp of our report dated January 27,
1998, appearing in this Annual Report on Form 10-K of North Valley Bancorp for
the year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Sacramento, California
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000353191
<NAME> NORTH VALLEY BANCORP
<MULTIPLIER> 1,000
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