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, 1998
---------------------
[ ] 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
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(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
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(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 $ 45,320,000
as of March 1, 1999.
The number of shares outstanding of common stock as of March 1, 1999, was
3,699,556.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for the 1999 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 ...................................... 27
Item 3 - Legal Proceedings ............................................ 29
Item 4 - Submission of Matters to a Vote of Security Holders .......... 29
Part II
- -------
Item 5 - Market for Common Equity and Related Stockholder Matters .... 30
Item 6 - Selected Financial Data ...................................... 31
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operation ..................................... 32
Item 7A - Quantitative and Qualitative Disclosures About Market Risk ... 42
Item 8 - Financial Statements and Supplementary Data .................. 46
Item 9 - Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure ..................................... 46
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 ...................................... 47
Financial Statements ................................................... 48
Signatures ............................................................. 75
- 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 25 through 26 herein, Year 2000 Compliance
on pages 26 through 27, 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., a California
corporation. 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, 1998, the Company had approximately 165 employees
(which includes 142 full-time equivalent employees); the Company had total
consolidated assets of $296,362,000; before consolidation the Bank had total
assets of $295,861,000 and total deposits of $262,344,000; assets of the Trading
Company were $2,000; assets of Bank Processing, Inc., were $357,000; 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
2
<PAGE>
plan to do so in the near future.
The Bank operates twelve 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 Shasta Lake 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 two super-market branches in 1998 located in
Cottonwood, CA, on January 20, 1998, and Redding, CA, on September 8, 1998. On
May 11, 1998, the Bank opened a Business Banking Center in Redding, CA, to
provide banking services to business and professional clients.
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, 1998 Bank Processing, Inc., had cash of
approximately $140,000.
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.
3
<PAGE>
Selected Statistical Data
The following tables present certain consolidated statistical
information concerning the business of the Company. This information should be
read in conjunction with the Consolidated Financial Statements and the notes
thereto and Management's Discussion and Analysis or Plan of Operation and other
information contained elsewhere herein. Averages are based on daily averages.
Tax-equivalent adjustments (using a 31% tax rate for 1998, 30% for 1997, and 32%
for 1996) have been made in calculating yields on tax-exempt securities.
4
<PAGE>
AVERAGE BALANCES AND TAX-EQUIVALENT NET INTEREST MARGIN
<TABLE>
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>
1998 1997
AVERAGE AVERAGE
AVERAGE INCOME(1)/ RATES AVERAGE INCOME(1)/ RATES
(Dollars in thousands) BALANCE EXPENSE EARNED/ BALANCE EXPENSE EARNED/
PAID PAID
ASSETS ================================== ===============================
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 19,318 $ 1,019 5.27% $20,016 $ 1,079 5.39%
Available for sale securities:
U.S. Treasury securities 9,647 575 5.96% 6,447 385 5.97%
U.S. Agencies 11,061 631 5.70% 5,442 329 6.05%
Obligations of states and
political subdivisions 1,036 90 8.69% 2,867 208 7.26%
Other investments 1,215 29 2.39% 866 33 3.81%
--------- --------- ---- ------- --------- ----
Total available for sale
securities 22,959 1,325 5.77% 15,622 955 6.11%
Held to maturity securities:
U.S. Agencies 930 54 5.81% 3,342 215 6.43%
Obligations of states and
political subdivisions 35,265 3,052 8.65% 36,541 3,181 8.71%
--------- --------- ---- ------- --------- ----
Total held to maturity
securities 36,195 3,106 8.58% 39,883 3,396 8.51%
FHLB 819 56 6.84% 765 47 6.14%
Cash held in trust 1,348 72 5.34% 597 33 5.53%
Trading account securities 0 0 0.00% 0 0 0.00%
Total loans (2)(3) 175,556 15,860 9.03% 167,496 15,238 9.10%
--------- --------- ---- ------- --------- ----
Total interest earning assets/
interest income 256,195 21,438 8.37% 244,379 20,748 8.49%
==== ====
Nonearning assets 25,333 23,958
Less: Allowance for loan losses (1,859) (1,462)
TOTAL ASSETS $ 279,669 $266,875
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Deposits
Transaction $ 46,891 $ 1,044 2.23% $ 43,138 $ 1,003 2.33%
Savings & Money Market 48,984 1,453 2.97% 46,547 1,418 3.05%
Time 117,609 6,086 5.17% 116,440 6,223 5.34%
--------- --------- ---- ------- --------- ----
Total interest bearing
deposits/interest expense 213,484 8,583 4.02% 206,125 8,644 4.19%
--------- ==== --------- ====
Non interest-bearing deposits 33,048 31,179
Other noninterest-bearing
liabilities 3,380 3,409
--------- --------
TOTAL LIABILITIES 249,912 240,713
Shareholders' equity 29,757 26,162
--------- --------
Total Liabilities and
and Stockholders' Equity $ 279,669 $266,875
========= ========
Net Interest Income and Margin(4) $ 12,855 5.02% $ 12,104 4.95%
========= ==== ========= ====
</TABLE>
1996
AVERAGE
AVERAGE INCOME(1)/ RATES
(Dollars in thousands) BALANCE EXPENSE EARNED/
PAID
ASSETS ================================
Federal funds sold $18,690 $ 990 5.30%
Available for sale securities:
U.S. Treasury securities 327 18 5.50%
U.S. Agencies 5,162 323 6.26%
Obligations of states and
political subdivisions 4,918 384 7.80%
Other investments 579 27 4.66%
-------- --------- ----
Total available for sale
securities 10,986 752 6.84%
Held to maturity securities:
U.S. Agencies 4,078 281 6.89%
Obligations of states and
political subdivisions 34,923 3,094 8.86%
-------- --------- ----
Total held to maturity
securities 39,001 3,375 8.65%
FHLB 709 40 5.64%
Cash held in trust 0 0 0.00%
Trading account securities 1,094 58 5.30%
Total loans (2)(3) 157,644 14,517 9.21%
-------- --------- ----
Total interest earning assets/
interest income 228,124 19,732 8.65%
====
Nonearning assets 20,740
Less: Allowance for loan losses (1,502)
TOTAL ASSETS $247,362
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Deposits
Transaction $ 40,022 $ 931 2.33%
Savings & Money Market 44,392 1,325 2.98%
Time 109,946 5,821 5.29%
-------- --------- ----
Total interest bearing
deposits/interest expense 194,360 8,077 4.16%
====
Non interest-bearing deposits 27,376
Other noninterest-bearing
liabilities 2,928
-------
TOTAL LIABILITIES 224,664
Shareholders' equity 22,698
-------
Total Liabilities and
and Stockholders' Equity $247,362
========
Net Interest Income and Margin(4) $ 11,655 5.11%
========= ====
(1) Tax-equivalent basis
(2) Loans on nonaccrual status have been included in the computation of average
balances.
(3) Includes loan fees of $302,000, $259,000, and $225,000, for 1998, 1997 and
1996, respectively.
(4) Net interest margin is determined by dividing net interest income by total
average interest earning assets.
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>
1998 versus 1997 1997 versus 1996
------------------------------ ------------------------------
Total Total
Average Average Increase Average Average Increase
(Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest on Federal funds sold $ (37) $ (23) $ (60) $ 71 $ 18 $ 89
Interest on available for sale
securities:
U.S. Treasury securities 191 (1) 190 365 2 367
U.S. Agencies 321 (19) 302 17 (11) 6
Obligations of states and
political subdivisions (158) 40 (118) (149) (26) (175)
Other investments 8 (12) (4) 11 (5) 6
------- ------- ------- ------- ------- -------
Total available for sale
securities 362 8 370 244 (40) 204
Interest on held to maturity
securities:
U.S. Agencies (140) (21) (161) (47) (19) (66)
Obligations of states and
political subdivisions (110) (19) (129) 140 (53) 87
------- ------- ------- ------- ------- -------
Total held to maturity
securities (250) (40) (290) 93 (72) 21
Dividends on FHLB 4 5 9 3 4 7
Interest on trust 40 (1) 39 33 0 33
Interest on trading account securities 0 0 0 0 (58) (58)
Interest on total loans 728 (106) 622 896 (175) 721
------- ------- ------- ------- ------- -------
Total interest income 847 (157) 690 1,340 (323) 1,017
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Interest bearing liabilities
Deposits
Transaction 84 (43) 41 72 (0) 72
Savings & Money Market 72 (37) 35 66 27 93
Time 60 (197) (137) 347 55 402
------- ------- ------- ------- ------- -------
Total interest expense 216 (277) (61) 485 82 567
------- ------- ------- ------- ------- -------
Change in net interest income $ 631 $ 120 $ 751 $ 855 $ (405) $ 450
======= ======= ======= ======= ======= =======
</TABLE>
1996 versus 1995
--------------------------------
Total
Average Average Increase
(Dollars in thousands) Volume Rate (Decrease)
INTEREST INCOME
Interest on Federal funds sold $ 50 $ (100) $ (50)
Interest on available for sale
securities:
U.S. Treasury securities (482) 126 (356)
U.S. Agencies 123 (2) 121
Obligations of states and
political subdivisions 380 (1) 379
Other investments 8 5 13
------- ------- -------
Total available for sale
securities 29 128 157
Interest on held to maturity
securities:
U.S. Agencies (104) 32 (72)
Obligations of states and
political subdivisions (137) (99) (236)
------- ------- -------
Total held to maturity
securities (241) (67) (308)
Dividends on FHLB 4 5 9
Interest on trust
Interest on trading account securities 47 (2) 45
Interest on total loans 1,845 (558) 1,287
------- ------- -------
Total interest income 1,734 (594) 1,140
------- ------- -------
INTEREST EXPENSE
Interest bearing liabilities
Deposits
Transaction 81 (17) 64
Savings & Money Market 8 69 77
Time 508 (131) 377
------- ------- -------
Total interest expense 597 (79) 518
------- ------- -------
Change in net interest income $ 1,137 $ (515) $ 622
======= ======= =======
(1) The change in interest due to both rate and volume has been allocated to
volume.
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 fair value
are included in other operating income. The Company did not have
any securities classified as trading at December 31, 1998, 1997,
and 1996.
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):
<CAPTION>
Available for Sale Securities:
Gross Gross Carrying
Amortized Unrealized Unrealized Amount
Cost Gains Losses (Fair Value)
<S> <C> <C> <C> <C>
December 31, 1998:
Securities of U.S. government
agencies and corporation $21,976 $ 62 $ (13) $22,025
Obligations of states and
political subdivisions 625 5 -- 630
Other securities 215 5 (33) 187
------- ------- ------- -------
Total $22,816 $ 72 $ (46) $22,842
======= ======= ======= =======
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
------- ------- ------- -------
Total $25,616 $ 997 $ -- $26,613
======= ======= ======= =======
7
<PAGE>
December 31, 1996:
Securities of 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
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity Securities: Carrying Gross Gross
Amount Unrealized Unrealized Fair
(Amortized Cost) Gain Losses Value
<S> <C> <C> <C> <C>
December 31, 1998:
Obligations of states and
political subdivisions $33,914 $ 2,025 $ -- $35,939
======= ======= ======= =======
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 securities categorized as available for sale
securities were $979,000, $250,000, and $31,000 in 1998, 1997 and 1996. There
were no gross realized losses on sale of available for sale securities in 1998,
1997, or 1996.
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.
Scheduled maturities of held to maturity and available for sale
securities (other than equity securities with an amortized cost of approximately
$215,000 and a carrying value of approximately $187,000) at December 31, 1998,
are shown below (in thousands). Expected maturities may differ from contractual
maturities because borrowers may have the right to prepay with or without
penalty.
8
<PAGE>
The following table sets forth the maturities of investment
securities at December 31, 1998, 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 1998 1998 1998 1998
- ----------- -------- -------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury obligations
Due within one year -- -- 5.92% $ 9,021
Due after one year but within five years -- -- -- --
Due after five years but within ten years -- -- -- --
Due after ten years -- -- -- --
---- ------- ---- -------
Total -- -- 5.92% 9,021
U.S. government agency securities
Due within one year -- -- 5.16% 12,955
Due after one year but within five years -- -- -- --
Due after five years but within ten years -- -- -- --
Due after ten years -- -- -- --
---- ------- ---- -------
Total -- -- 5.16% 12,955
State and municipal bonds
Due within one year 9.28% 2,092 6.92% 625
Due after one year but within five years 8.87% 12,487 -- --
Due after five years but within ten years 8.53% 9,805 -- --
Due after ten years 8.47% 9,530 -- --
---- ------- ---- -------
Total 8.68% 33,914 6.92% 625
Grand Total 8.68% $33,914 5.51% $22,601
==== ======= ==== =======
<FN>
- -------
(1) Tax-equivalent basis at fiscal year end.
</FN>
</TABLE>
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.
9
<PAGE>
<TABLE>
Major classifications of loans at December 31 are summarized as follows (in thousands):
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 72,102 $ 64,666 $ 63,944 $ 53,044 $ 46,347
Real estate - construction 4,177 1,688 1,135 2,838 2,333
Real estate - mortgage 52,909 45,590 46,673 41,967 30,366
Installment 56,686 44,510 43,863 39,034 36,185
Other 13,911 13,390 13,283 12,888 11,899
-------- -------- -------- -------- --------
Total loans receivable 199,785 169,844 168,898 149,771 127,130
Less:
Allowance for loan losses 1,902 1,702 1,254 1,325 1,144
Deferred loan fees 449 635 661 638 523
-------- -------- -------- -------- --------
Net loans receivable $197,434 $167,507 $166,983 $147,808 $125,463
======== ======== ======== ======== ========
</TABLE>
At December 31, 1998 and 1997, the Bank serviced real estate loans
and loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $78,568,000 and $88,640,000, respectively.
The Bank was contingently liable under letters of credit issued on
behalf of its customers in the amount of $485,000 and $1,189,000 at December 31,
1998 and 1997, respectively. At December 31, 1998 commercial and consumer lines
of credit, and real estate loans of approximately $23,975,000 and $2,191,000
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
<TABLE>
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, 1998. Also
provided with respect to such loans are the amounts due after one year,
classified according to the sensitivity to changes in interest rates:
<CAPTION>
Maturing
-------------------------------------------------
Within After One After
One Year Through Five Years Five Years Total
-------- ------------------ ---------- -----
(Millions of dollars)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 7,835 $17,638 $46,629 $72,102
Real Estate - construction 4,177 -- -- 4,177
------- ------- ------- -------
$12,012 $17,638 $46,629 $76,279
======= ======= ======= =======
Loans maturing after one year with:
Fixed interest rates 11,208 18,501
Variable interest rates 6,430 28,128
------- -------
$17,638 $46,629
======= =======
</TABLE>
10
<PAGE>
Impaired, Nonaccrual, Past Due, Restructured Loans, and Other Real Estate Owned
At December 31, 1998 and 1997, the recorded investment in loans for
which impairment has been recognized was approximately $2,871,000 and
$4,353,000. Of the 1998 balance approximately $2,269,000 has a related valuation
allowance of $226,900. The remaining $602,000 did not require a valuation
allowance. No significant impaired balances required a valuation allowance at
December 31, 1997. For the years ended December 31, 1998, 1997 and 1996, the
average recorded investment in loans for which impairment has been recognized
was approximately $3,201,000, $3,455,000 and $2,244,000, respectively. During
the portion of the year that the loans were impaired the Company recognized
interest income of approximately $232,000, $153,000 and $203,000 for cash
payments received in 1998, 1997 and 1996.
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.
<TABLE>
Nonperforming loans at December 31 are summarized as follows (in thousands):
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $2,307 $ 536 $1,190 $ 282 $ 421
Loans 90 days past due but still accruing interest 364 244 14 15 22
Restructured loans -- -- -- -- --
Other real estate owned 575 212 69 87 --
------ ------ ------ ------ ------
Total $3,246 $ 992 $1,273 $ 384 $ 443
====== ====== ====== ====== ======
</TABLE>
If interest on nonaccrual loans had been accrued, such income would
have approximated $132,000 in 1998, $32,000 in 1997, and $82,000 in 1996.
Interest income of $33,000 in 1998, $28,000 in 1997, and $27,000 in 1996 was
recorded when it was received on the 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 3
loans in the aggregate principal amount of $347,000 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, 1998, there were no commitments to lend additional
funds to borrowers whose loans were classified as nonaccrual.
11
<PAGE>
<TABLE>
Summary of Loan Loss Experience:
The following table summarizes the Company's loan loss experience for the years ended December 31:
<CAPTION>
December 31 (dollars in thousands) 1998 1997 1996 1995 1994
- ---------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average amount of gross loans outstanding $175,556 $167,496 $157,644 $137,613 $114,577
Balance of allowance for loan losses
at beginning of period 1,702 1,254 1,325 1,144 1,066
Loans charged off:
Commercial, financial and agricultural 952 8 538 139 39
Real Estate - construction -- -- 2 -- --
Real Estate - mortgage 35 128 139 27 --
Installment 340 193 118 106 125
Other 33 33 16 9 21
-------- -------- -------- -------- --------
Total loans charged off 1,360 362 813 281 185
Recoveries of loans previously charged off:
Commercial, financial and agricultural 10 15 7 52 10
Real Estate - construction -- -- -- -- --
Real Estate - mortgage 12 4 -- 9 --
Installment 104 20 14 23 12
Other 4 1 1 3 1
-------- -------- -------- -------- --------
Total recoveries of loans previously charged off 130 40 22 87 23
-------- -------- -------- -------- --------
Net loans charged off 1,230 322 791 194 162
Provisions for loan losses 1,430 770 720 375 240
-------- -------- -------- -------- --------
Balance of allowance for loan losses
at end of period $ 1,902 $ 1,702 $ 1,254 $ 1,325 $ 1,144
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of net charge-offs to
average loans outstanding .70% .19% .50% .14% .14%
Allowance for loan losses to total loans .95% 1.00% .74% .88% .90%
</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, 1998, 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 identify 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
12
<PAGE>
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 allowance in each category to the total allowance at the
dates indicated (dollars in thousands).
<CAPTION>
December 31 1998 1997 1996 1995 1994
---------------- ----------------- ---------------- --------------- ----------------
Allowance % Allowance % Allowance % Allowance % Allowance %
for of for of for of for of for of
Losses Allowance Losses Allowance Losses Allowance Losses Allowance Losses Allowance
------ ----- ------ ----- ------ ----- ------ ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Categories:
Commercial, financial and agricultural $ 769 40% $ 993 58% $ 765 61% $ 875 66% $ 583 51%
Real Estate - construction 10 1% -0- -- -0- -- -0- -- -0- --
Real Estate - mortgage 481 25% 89 5% 117 9% 106 8% 114 10%
Installment 355 19% 400 24% 372 30% 344 26% 447 39%
Other 69 4% -0- -- -0- -- -0- -- -0- --
Unallocated 218 11% 220 13% -0- -- -0- -- -0- --
------ --- ------ --- ------ --- ------ --- ------ ---
Total $1,902 100% $1,702 100% $1,254 100% $1,325 100% $1,144 100%
====== === ====== === ====== === ====== === ====== ===
</TABLE>
The Allowance totaled $1,902,000, or .95% of total loans
outstanding at December 31, 1998. Based on management's evaluation of the
current loan portfolio and economic trends during 1998, the Bank made a
provision to its Allowance of $1,430,000 which was due primarily to the increase
in loan volume and loans charged off during 1998. 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, 1998 are summarized as follows (dollars in
thousands):
$100,000 or More -Time
Certificates of Deposit
- ----------------------------------------------------------------------
Remaining maturities:
Three months or less $ 6,952
Over three through six months 6,505
Over six through twelve months 4,421
Over twelve months 591
-------
TOTAL $18,469
=======
As of December 31, 1998, the Company did not have any brokered
deposits. In general, it is the Company's policy not to accept brokered
deposits.
13
<PAGE>
Return on Equity and Assets:
The following table sets forth certain financial ratios for the Company:
December
--------------------------
1998 1997 1996
---- ---- ----
Return on average equity (net income
divided by average equity) 13.73% 19.67% 18.09%
Return on average assets (net income
divided by average total assets) 1.46% 1.93% 1.66%
Equity to assets ratio (average equity
divided by average total assets) 10.64% 9.80% 9.18%
Dividend payout ratio (dividends
paid or declared divided by net income) 33.86% 24.96% 31.31%
Short Term Borrowings
At December 31, 1998, 1997, and 1996, 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 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
14
<PAGE>
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.
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 also 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.
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).
15
<PAGE>
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 had 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, 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. For instance, there are proposals
currently pending in Congress to reform the Glass-Steagall Act, to allow
affiliations between banks and other firms, including insurance companies and
securities firms.
The FRB generally prohibits a bank holding company from declaring
or paying a cash dividend which would impose undue pressure on the capital of
subsidiary banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's financial position. The
FRB's policy is that a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality and overall financial
condition. 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.
16
<PAGE>
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.
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.
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 has assumed 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
17
<PAGE>
collect an assessment upon its common shares. If such assessment becomes
delinquent, such common shares are to be sold by the bank.
California law permits a state chartered bank to invest in the
stock and securities of other corporations, subject to a state chartered bank
receiving either general authorization or, depending on the amount of the
proposed investment, specific authorization from the Commissioner. FDICIA,
however, imposed limitations on the activities and equity investments of state
chartered, federally insured banks, such as the Bank. FDIC rules on investments
prohibit a state Bank from acquiring an equity investment not permissible for a
national bank and FDICIA generally prohibits a state bank from engaging in any
activity that is not permissible for a national bank.
The OCC has 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 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 have special rules which reduce the amount of
capital they 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,
established 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. Tier 2
capital may consist of a
18
<PAGE>
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. Effective October 1, 1998, up to 45% of the pretax net unrealized
gains on certain available-for-sale equity securities may be included in Tier 2
capital. 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%.
In addition to the risk-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. The Board of Governors and other federal banking agencies have recently
adopted a revised minimum leverage ratio for bank holding companies and banks.
The old rule established a 3% minimum leverage standard for well-run banking
organizations (bank holding companies and banks) with diversified risk profiles.
Banking organizations which did not exhibit such characteristics or had greater
risk due to significant growth, among other factors, were required to maintain a
minimum leverage ratio 1% to 2% higher. The old rule did not take into account
the implementation of the market risk capital measure set forth in the federal
regulatory agency capital adequacy guidelines. The revised leverage ratio
establishes a minimum tier 1 ratio of 3% (Tier 1 capital to total assets) for
the highest rated bank holding companies and banks. All other banking
organizations must maintain a minimum Tier 1 leverage ratio of 4% with higher
leverage capital ratios required for bank holding companies that have
significant financial and/or operational weaknesses, a high risk profile, or are
undergoing or anticipating rapid growth.
<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, 1998 (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> <C>
Tier I capital
(to average assets) $ 29,588 10.18% N/A 4.0%
Tier I capital
(to risk weighted assets) $ 29,588 14.14 N/A 4.0
Total capital
(to risk weighted assets) $ 31,490 15.05 N/A 8.0
Bank:
Tier I capital
(to average assets) $ 27,478 9.49% 5.0% 4.0%
Tier I capital
(to risk weighted assets) $ 27,478 13.17 6.0 4.0
Total capital
(to risk weighted assets) $ 29,380 14.08 10.0 8.0
</TABLE>
19
<PAGE>
Banking agencies have adopted 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 adopted 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.
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.
<TABLE>
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:
<CAPTION>
"Well capitalized" "Adequately capitalized"
------------------ -------------------------
<S> <C>
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%.
</TABLE>
<TABLE>
<CAPTION>
"Undercapitalized" "Significantly undercapitalized"
------------------ ---------------------------------
<S> <C>
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
- -----------------------------
Tangible equity to total assets less
than 2%.
</TABLE>
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
20
<PAGE>
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.
The Bank has been classified as a well-capitalized bank since adoption
of the prompt corrective action regulations.
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.
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, and in 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
21
<PAGE>
one or more standards. The Bank has not been and does not expect to be required
to submit a safety and soundness compliance plan because of a failure to meet
any of the safety and soundness 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 Commissioner 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
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
22
<PAGE>
assessment period beginning January 1, 1996. The FDIC has continued such BIF
assessment rate through 1998.
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. The guidelines provide for streamlined
examinations of smaller institutions. The bank has a current rating of
"satisfactory" CRA Compliance.
Competition
The Bank's primary market area consists of Shasta and Trinity Counties.
The banking business in California generally, and specifically in the Bank's
primary market area, is highly competitive with respect to both loans and
deposits. The business is dominated by a relatively small number of major banks
which have many offices operating over wide geographic areas. Many of the major
commercial banks offer certain services (such as international, trust and
securities brokerage services) which are not offered directly by the Bank. By
virtue of their greater total capitalization, such banks have substantially
higher lending limits than the Bank and substantial advertising and promotional
budgets.
However, smaller independent financial institutions also represent a
competitive force. To illustrate the Bank's relative market share, total
deposits in banks in Shasta County, California, at June 30, 1998 approximated
$1,313,177,000. The Bank's deposits at June 30, 1998 represented approximately
15.54% 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,
23
<PAGE>
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."
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
24
<PAGE>
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
3,690,220 were outstanding at December 31, 1998. Pursuant to its stock option
plans, at December 31, 1998, the Company had outstanding options to purchase
101,492 shares of Company Common Stock. As of December 31, 1998, 1,003,000
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, 1998, real estate served as the principal source of
collateral with respect to approximately 57% of the Company's loan portfolio. A
worsening of current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and the value of the available-for-sale investment portfolio, as well as the
Company's financial condition and results of operations in general and the
market value for Company Common Stock. Acts of nature, including earthquakes and
floods, which may cause uninsured damage and other loss of value to real estate
that secures these loans, may also negatively impact the Company's financial
condition.
The Company is subject to certain operations risks, including, but not
limited to, data processing system failures and errors and customer or employee
fraud. The Company maintains a system of internal controls to mitigate against
such occurrences and maintains insurance coverage for such risks, but should
such an event occur that is not prevented or detected by the Company's internal
controls, uninsured or in excess of applicable insurance limits, it could have a
significant adverse impact on the Company's business, financial condition or
results of operations.
25
<PAGE>
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 has a written plan to mitigate the risks associated with the
impact of the Year 2000. The plan directs the Company's Year 2000 activities
under the framework of the Federal Financial Institutions Examination Council
(FFIEC) Five-Step Program. The FFIEC's Five-Step Program includes the following
phases: Awareness, Assessment, Renovation, Validation and Implementation. The
Awareness Phase, 100% complete, defines the Year 2000 problem and gains
executive level support for the necessary resources to prepare the Company for
Year 2000 compliance. The Assessment Phase, 100% complete, assesses the size and
complexity of the problem and details the magnitude of the effort necessary to
address the Year 2000 issues. Although the Awareness and Assessment Phases are
complete, the Company will continue to evaluate any new issues as they arise.
The Renovation Phase, 80% complete, includes the incremental changes to hardware
and software components. The Validation Phase includes the testing of hardware
and software components and is scheduled to be substantially complete by March
31, 1999. The Implementation Phase, 50% complete, certifies that systems are
Year 2000 compliant and will be accepted by the end users. The Implementation
Phase is scheduled to be substantially complete by June 30, 1999. The Company
has completed the development of test and validation methodologies for its
Information Technology (IT) systems. Testing of applications has begun and is
scheduled to be substantially complete during the first quarter of 1999. In some
cases, the Company will rely on the service providers and software vendors to
facilitate proxy testing with a selected group of users. The Company will review
the test plans and validate the results of the proxy testing to ensure the Year
2000 compliance of those systems. The Company's business also utilizes non-IT
products and services, some of which have embedded technology which might not be
Year 2000 ready. Some non-IT products and services involve infrastructure issues
such as power, communication and water, as well as elevators, ventilation and
air conditioning equipment. The Company classifies power and communications as
non-IT products and services and considers them to be of significant importance,
giving them high priority. Based on responses from vendors and software
providers, the Company does not anticipate incurring any material expenses due
to unpreparedness. The Company has identified material third party relationships
to minimize the potential loss from unpreparedness of these parties. The Company
continues to work closely with Jack Henry & Associates, its data services and
items processing provider, regarding Year 2000 compliance. The testing and
validation of this system was substantially complete by December 31, 1998.
The Company is making efforts to ensure that its customer base is aware
of the Year 2000 problem. Year 2000 correspondence has been sent to both deposit
and loan customers. The
26
<PAGE>
Bank has amended its credit authorization documentation to include consideration
regarding the Year 2000 problem. Significant customers relationships have been
identified, and such customers are being contacted by the Bank's employees to
determine whether they are aware of Year 2000 risks and whether they are taking
preparatory actions.
The total cost to the Company of these Year 2000 Compliance activities
was approximately $28,100 for 1998 and the Company has budgeted approximately
$100,000 for 1999. 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 the estimates of costs
for 1999 will be accurate since actual results could differ from those plans.
The costs incurred in 1998 did not have a material effect on the Company's net
income for 1998 and the Company does not expect the costs incurred for the same
period in 1999 to have a material effect on net income. It is anticipated that
any disruption of services would be partial and brief, and that there will not
be a material impact on revenues or earnings.
The Company and the Bank are developing contingency plans to address
the possibility that efforts to mitigate Year 2000 risk are not successful
either in whole or in part. These plans will include remedial efforts up to and
including complete manual processing of information for critical IT systems in
the event there is a failure after December 31, 1999. The Company's contingency
plan should be completed by April 30, 1999, after which time the appropriate
implementation training would take place.
The disclosure set forth above contains forward-looking statements.
Specifically, such statements are contained in sentences including the words
"expect" or "anticipate". Such forward-looking statements are subject to
inherent risks and uncertainties that may cause actual results to differ
materially from those contemplated by such forward-looking statements. The
factors that may cause actual results to differ materially from those
contemplated by the forward-looking statements include the failure by third
parties to adequately remediate Year 2000 issues or the inability of the Company
to complete writing and/or testing software changes on time schedules currently
expected. Nevertheless, the Company expects that its Year 2000 compliance
efforts will be successful without any adverse effects on its business.
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.
27
<PAGE>
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
and leases 540 square feet located in Holiday Market in Cottonwood, CA, and on
September 8, 1998, opened its second grocery store branch in the Holiday Market
on Placer Street in Redding, CA, leasing 488 square feet. On May 11, 1998, the
Bank opened its Business Banking Center located at 443 Redcliff Drive, Suite
110, Redding CA, and leases 3,767 square feet.
During the year ended December 31, 1998, the Company spent $90,000
for rental of the Westwood Village branch, Palo Cedro branch, the two grocery
store branches, the business banking center and the warehouse for the Bank. Net
occupancy expenses for all facilities for the year ended December 31, 1998, were
$557,000. 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.
28
<PAGE>
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.
29
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
North Valley Bancorp's common stock trades on the NASDAQ National
Market under the symbol "NOVB". The shares were first listed in the NASDAQ Stock
Market in April 1998.
<TABLE>
The following table summarizes trades occurring in the quarters ended
March 31, 1997 to March 31, 1998 of which the Company had knowledge, setting
forth the high and low bid prices, reflects inter-dealer prices, without retail
mark-up, mark down or commission and may not represent actual transactions for
the periods indicated. The following table also summarizes the Common Stock high
and low trading prices and volume of shares traded in the quarters ended June
30, 1998, September 30, 1998, and December 31, 1998 as reported by NASDAQ.
<CAPTION>
Price of
Quarter Ended: Common Stock Approximate Cash
-------------- ------------ Trading Dividends
Low High Volume Declared
--- ---- ------ --------
<S> <C> <C> <C>
March 31, 1997 10.57 12.00 100,012 --
June 30, 1997 11.88 14.25 112,782 .175
September 30, 1997 15.00 16.00 163,734 --
December 31, 1997 15.57 16.19 133,246 .175
March 31, 1998 15.00 16.625 364,600 --
June 30, 1998 15.375 15.375 263,518 .175
September 30, 1998 14.25 14.75 191,898 --
December 31, 1998 12.25 12.25 433,866 .20
</TABLE>
-----------------------------------
The information for March 1997 through March 1998 was provided by
Hoefer & Arnett, Inc., Sutro & Co. and the Company, based upon trades of which
management was aware, and does not include purchases of stock pursuant to the
exercise of employee stock options or other private transactions.
The Company had approximately 1,090 shareholders of record as of March 1,
1999.
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.
30
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
North Valley Bancorp & Subsidiaries
FINANCIAL HIGHLIGHTS & SUMMARY OF SELECTED FINANCIAL DATA
(Dollars In Thousands Except Per Share Data)
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net interest income $11,885 $11,089 $10,564 $9,910 $8,718
Net income $4,085 $5,145 $4,107 $4,083 $3,212
Performance ratios:
Return on average assets 1.46% 1.93% 1.66% 1.79% 1.54%
Return on average equity 13.73% 19.67% 18.09% 20.44% 19.03%
Capital Ratios:
Risk based capital:
Tier 1 (4% Minimum Ratio) 14.14% 14.80% 12.58% 12.76% 13.09%
Total (8% Minimum Ratio) 15.05% 15.73% 13.29% 13.57% 13.91%
Leverage Ratio 10.18% 9.94% 8.98% 8.87% 8.49%
BALANCE SHEET DATA AT DECEMBER 31
Assets $296,362 $270,757 $256,877 $235,072 $213,956
Investment securities and
federal funds sold $75,056 $78,932 $67,320 $64,501 $64,829
Net loans $197,434 $167,507 $166,983 $147,808 $125,463
Deposits $259,881 $238,522 $229,228 $211,075 $193,541
Stockholders' equity $30,180 $28,066 $23,900 $20,973 $17,926
COMMON SHARE DATA
Net income(1)
Basic $1.11 $1.41 $1.11 $1.11 $0.88
Diluted $1.10 $1.39 $1.10 $1.10 $0.87
Dividends:
Cash $0.38 $0.35 $0.35 $0.32 $0.35
Year end book value $8.18 $7.63 $6.55 $5.70 $4.90
Shares Outstanding 3,690,220 3,678,184 3,647,376 3,682,096 3,659,866
SUMMARY OF OPERATIONS
Total interest income $20,468 $19,733 $18,641 $17,469 $14,178
Total interest expense 8,583 8,644 8,077 7,559 5,460
Net interest income 11,885 11,089 10,564 9,910 8,718
Provision for possible loan losses 1,430 770 720 375 240
Net interest income after
provision for loan losses 10,455 10,319 9,844 9,535 8,478
Total non interest income 4,095 4,138 2,581 2,630 2,477
Total non interest expense 8,886 8,312 6,786 6,412 6,404
Income before provision for income taxes 5,664 6,145 5,639 5,753 4,551
Provision for income taxes 1,579 1,000 1,532 1,670 1,339
Net Income 4,085 5,145 4,107 4,083 3,212
31
<PAGE>
<FN>
(1) Net income per share amounts have been adjusted to give effect to a two for one stock split on October 15,
1998 and a three-for-two stock split effected in the form of a 50% stock dividend on November 1, 1995.
</FN>
</TABLE>
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 nine 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 pressures in the banking industry increase
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; changes in the securities markets; and Year 2000 compliance
problems.
Earnings Summary
For the year ended December 31, 1998, the Company achieved earnings of
$4,085,000 as compared to $5,145,000 in 1997. On a diluted per share basis, net
income was $1.10 for 1998 and $1.39 for 1997 (as adjusted to give effect to the
two-for-one stock split). Significant nonrecurring income and expense items in
1998 and 1997 impacted the operating results of the Company. During the twelve
month period ended December 31, 1998 the Company had $979,000 in securities
gains and increased the provision for loan losses in 1998 by $660,000. For the
period ending December 31, 1997, the Company had $250,000 in securities gains, a
lower effective tax rate and collected $889,000 in net proceeds from a life
insurance policy. The Company's return on average total assets and average
shareholders' equity were 1.46% and 13.73% in 1998, compared with 1.93% and
19.67% in 1997.
32
<PAGE>
Net Interest Income
The Company's primary source of operating earnings is net interest
income, which is the difference between interest income on earning assets and
interest expense on interest-bearing liabilities.
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 $12,855,000 in 1998, as compared to $12,104,000 in 1997. The
increase in net interest income for 1998 resulted primarily from the increase in
the average balances of investment securities and loans.
Average loans increased to $175,556,000 in 1998, or 4.81% over 1997,
with an increase in average available for sale securities of 46.97% and a
decrease in average held to maturity securities of 9.25%. Total interest income
(FTE) increased to $21,438,000 in 1998 compared to $20,748,000 in 1997,
representing a 3.32% increase.
Average interest-bearing deposits in 1998 totaled $213,484,000, as
compared to $206,125,000 in 1997, or a 3.57% increase. Total interest expense
increased to $8,583,000 as compared to $8,644,000 in 1997.
Net interest margin (determined by dividing net interest income by
total average interest-earning assets) was 5.02% for 1998, as compared to 4.95%
at year end 1997. The slight increase in 1998 in the net interest margin is
attributed to the increases in loans, investments and deposits, and by an
increase in the net spread (the difference between rates earned on interest
earning assets and rates paid on deposits), affected primarily by a declining
interest rate environment and the change in the mix between loans and investment
securities in 1998. Average earning assets yielded 8.37% in 1998 compared to
8.49% in 1997. The decrease in the yields on earning assets was offset by the
decrease in the rates paid on interest-bearing deposits. Rates paid declined to
4.02% in 1998 as compared to 4.19% in 1997. The interest spread was 4.35% in
1998 compared to 4.30% in 1997.
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
on sale of securities, and insurance proceeds decreased 1.04% to $4,095,000 in
1998 as compared to $4,138,000 in 1997. For the year ended December 31, 1998,
there was a $729,000 increase in gains on sale of available for sale securities,
and a $386,000 increase in service charges on deposit accounts, as compared to
insurance proceeds of $1,139,000 received in 1997.
33
<PAGE>
A summary of non-interest income for the past three years is presented below:
Non-Interest Income
(in thousands) 1998 1997 1996
------- ------- -------
Service charges on deposit accounts $ 1,786 $ 1,400 $ 1,342
Other fees and charges 624 570 520
Gain on sale of loans 130 160 160
Gain on sale of available for sale securities 979 250 31
Life insurance proceeds 0 1,139 0
Gain (loss) on sale of trading securities 0 0 (7)
Other 576 619 535
------- ------- -------
Total non-interest income $ 4,095 $ 4,138 $ 2,581
======= ======= =======
Non-Interest Expense
Non-interest expense totaled $8,886,000 for 1998 compared to
$8,312,000 in 1997. Salaries and employee benefits increased in 1998 to
$4,679,000 compared to $4,522,000 in 1997. The increase in salary expense was
attributed to the additional personnel for the new branches, along with
increases in staff compensation. Salaries were affected in both years from
payout of contractual obligations to senior executives no longer with the
Company and in 1997 by a non-recurring benefit payment of $250,000. The increase
in occupancy and furniture and equipment expense was attributed to the opening
of two new in-store branches, the Business Banking Center, and the relocation of
the Shasta Lake branch to a new facility. The increase in professional services
for the period ending December 31, 1998 was attributed to the loan portfolio and
technology reviews performed for the Company, and legal costs to establish the
Incentive Stock Option plan for employees. In 1997, the Company 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 non-interest income and net interest income exclusive of provision
for loan losses) was 55.6% in 1998 compared to 54.6% in 1997. The efficiency
ratio is a measurement as to how efficiently the Company allocates its
resources.
34
<PAGE>
A summary of non-interest expense for the past three years is presented below:
Non-Interest Expense
(in thousands) 1998 1997 1996
------ ------ ------
Salaries & employee benefits $4,679 $4,522 $3,934
Occupancy expense 557 503 456
Furniture & equipment expense 666 553 497
Professional services 373 235 136
Data processing expenses 415 360 260
Printing & supplies 292 232 222
Postage 196 182 175
Donations 50 217 35
FDIC & State banking assessments 50 70 23
Messenger 178 139 136
ATM and Online expense 284 247 134
Other 1,146 1,052 778
------ ------ ------
Total non-interest expense $8,886 $8,312 $6,786
====== ====== ======
Income Taxes
In 1998 and 1997, the Company recorded a tax provision of $1,579,000
and $1,000,000, respectively. The effective income tax rate for state and
federal income taxes increased to 27.9% in 1998, from 16.3% in 1997. The
increase in the effective income tax rate in 1998 from 1997 is mainly 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 considers a loan 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. 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.
35
<PAGE>
The amount of non accrual loans increased during 1998 to $2,307,000 as
compared to $536,000 in 1997. During the third quarter of 1998, the Company
placed $1,891,000 in secured loans to a single borrower on nonaccrual status and
charged off the unsecured portion of such borrower's note (see Allowance for
Loan Losses).
A summary of non-performing assets for the past three years is
presented below:
Non-Performing Assets (in thousands) 1998 1997 1996
------ ------ ------
Nonaccrual loans $2,307 $ 536 $1,190
Accruing loans past due 90 days
or more 364 244 14
Restructured loans -- -- --
Other real estate owned 575 212 69
------ ------ ------
Total $3,246 $ 992 $1,273
====== ====== ======
Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb inherent
losses in the loan portfolio. Management attributes general reserves to
different types of loans using percentages which are based upon perceived risk
associated with the portfolio and underlying collateral. 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. At December 31, 1998, 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.
As of December 31, 1998, the allowance for possible loan losses was
$1,902,000 as compared to the December 31, 1997 amount of $1,702,000. 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 $1,230,000, $322,000, and
$791,000 in 1998, 1997, and 1996, respectively. Additions to the allowance for
loan losses are charged against income. Provisions for loan losses of
$1,430,000, $770,000, and $720,000 were charged to income in 1998, 1997, and
1996, respectively.
The evaluation process is designed to determine the adequacy of the
allowance for loan losses. This process attempts to assess the risk of losses
inherent in the loan portfolio by segregating the allowance for loan losses into
three components: "Specific," "loss migration," and "general." The specific
component is established by allocating a portion of the allowance for loan
losses to individual classified credits on the basis of specific circumstances
and assessments. The loss migration component is calculated as a function of the
historical loss migration experience of the internal loan credit risk rating
categories. The general component is an unallocated portion that supplements the
first two components and includes:
36
<PAGE>
management's judgement of the current economic conditions, borrower's financial
condition, loan impairment, evaluation of the performing loan portfolio,
continual evaluation of problem loans identified as having a higher degree of
risk, off balance sheet risks, net charge off trends, and other factors.
<TABLE>
The following table shows the allocation of the Company's Allowance
and the percent of allowance in each category to the total allowance at the
dates indicated (dollars in thousands).
<CAPTION>
December 31 1998 1997 1996 1995
----------------- ----------------- ----------------- ---------------
Allowance % Allowance % Allowance % Allowance %
for of for of for of for of
Losses Allowance Losses Allowance Losses Allowance Losses Allowance
------ ----- ------ ----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Categories:
Commercial, financial and agricultural $ 769 40% $ 993 58% $ 765 61% $ 875 66%
Real Estate - construction 10 1% -0- -- -0- -- -0- --
Real Estate - mortgage 481 25% 89 5% 117 9% 106 8%
Installment 355 19% 400 24% 372 30% 344 26%
Other 69 4% -0- -- -0- -- -0- --
Unallocated 218 11% 220 13% -0- -- -0- --
------ --- ------ --- ------ --- ------ ---
$1,902 100% $1,702 100% $1,254 100% $1,325 100%
====== === ====== === ====== === ====== ===
</TABLE>
December 31 1994
-----------------
Allowance %
for of
Losses Allowance
Loan Categories:
Commercial, financial and agricultural $ 583 51%
Real Estate - construction -0- --
Real Estate - mortgage 114 10%
Installment 447 39%
Other -0- --
Unallocated -0- --
------ ---
$1,144 100%
====== ===
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 to 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 aggregate amount of $6,000,000 as of
December 31, 1998, were available to provide liquidity. In addition, the Bank is
a member of the Federal Home Loan Bank ("FHLB") System provides an additional
line of credit of $3,743,000 secured by first deeds of trust on eligible 1-4
unit residential loans. The Company had not utilized the line of credit from the
FHLB as of December 31, 1998.
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 $82,108,000 and
$87,774,000 (or 27.71% and 32.42% of total assets) at December 31, 1998 and
1997, respectively. Total liquid assets for 1998 and 1997 include investment
securities of $33,914,000 and $39,219,000, 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 the Company with a relatively stable
37
<PAGE>
and low cost source of funds. Core deposits totaled $241,412,000 and
$220,608,000 at December 31, 1998 and 1997, respectively.
In assessing liquidity, historical information such as seasonal loan
demand, local economic cycles and the economy in general are considered along
with current ratios, management goals and unique characteristics of the Company.
Management believes the Company is in compliance with its policies relating to
liquidity.
The Company has no definitive commitments for capital expenditures in
1999 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, 1998, up to $9.4 million could have been paid to
the parent Company by the Bank without regulatory approval. Condensed financial
statements of North Valley Bancorp 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. That 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.
38
<PAGE>
<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, 1998 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 $ 330 $ 1,762 $ 12,487 $ 19,335 $ 33,914
Available for sale
securities 9,952 12,703 0 0 22,655
Fed Funds Sold 18,300 0 0 0 18,300
Loans 42,544 13,021 72,502 71,718 199,785
--------- --------- --------- --------- ---------
Total earning assets $ 71,126 $ 27,486 $ 84,989 $ 91,053 $ 274,654
========= ========= ========= ========= =========
INTEREST BEARING LIABILITIES:
Interest bearing demand
deposits $ 0 $ 8,298 $ 0 $ 0 $ 8,298
Savings deposits 0 95,617 0 0 95,617
Time deposits 44,876 67,470 6,248 0 118,594
--------- --------- --------- --------- ---------
Total interest bearing
liabilities $ 44,876 $ 171,385 $ 6,248 $ 0 $ 222,509
========= ========= ========= ========= =========
INTEREST SENSITIVITY
GAP $ 26,250 $(143,899) $ 78,741 $ 91,053
CUMULATIVE INTEREST
RATE SENSITIVITY GAP $ 26,250 $(117,649) $ (39,908) $ 52,145
</TABLE>
At December 31, 1998, the foregoing table indicates the Company as
liability sensitive in the preceding 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 same time period. The yearend 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.
39
<PAGE>
Even though the Company had a negative gap in the twelve month period
ended December 31, 1998, the asset liability simulation model showed the Bank
was slightly asset sensitive in 1998. Due to a declining interest rate
environment in 1998, the Bank's slightly asset sensitive posture had a positive
impact on net interest margins. Even though the Bank is slightly asset sensitive
the decline in yields on earning assets were offset by the reduction in yields
on interest-bearing deposits.
Financial Condition
Total assets at December 31, 1998, were $296,362,000, representing an
increase of 9.5% over December 31, 1997 assets of $270,757,000. Increased
deposits were used to fund a 4.84% increase in average earning assets in 1998.
Investment securities and federal funds sold totaled $75,056,000 at
December 31, 1998, compared to $78,932,000 at December 31, 1997. The Company is
a member of Federal Home Loan Bank of San Francisco and holds $841,000 in FHLB
stock. Additional information regarding investment securities held by the
Company at year end 1998 is set forth in Note 3 of "Notes to Consolidated
Financial Statements".
During 1998, net loans increased to $197,434,000 from $167,507,000 for
the same period in 1997. Loans are the Company's major component of earning
assets. The Bank's average loan to deposit ratio was 71.21% and 70.58% in 1998
and 1997, respectively. Additional information regarding loans is shown in Note
4 of the Notes to Consolidated Financial Statements.
Funding for increased investments and loan activity came from
increases in deposits. Total deposits increased $21,359,000 in 1998 to
$259,881,000, as compared to $238,522,000 in 1997. 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 $30,180,000 as of December 31, 1998,
as compared to $28,066,000 as of December 31, 1997. This increase was primarily
attributable to retention of earnings, offset by $1,383,000 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, 1998 was 15.05% and its Tier 1 Risk Based Capital
(RBC) ratio was 14.14%, exceeding the minimum guidelines of 8% and 4%. The same
ratios at December 31, 1997 were 15.73% and 14.80%, respectively.
The Company's leverage ratios were 10.18% and 9.94% at December 31,
1998 and 1997, respectively, exceeding the minimum guideline 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
14.08%, a
40
<PAGE>
Tier 1 RBC ratio of 13.17% and a leverage ratio of 9.49% at December 31, 1998,
compared with 14.69%, 13.76% and 9.24%, respectively at December 31, 1997.
The most recent notifications from the Federal Deposit Insurance
Corporation for the Bank as of December 31, 1998 and 1997, categorized the Bank
as "well capitalized" under the regulatory framework for prompt corrective
action. There are no conditions or events since such 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, 1998) 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 has a written plan to mitigate the risks associated with the
impact of the Year 2000. The plan directs the Company's Year 2000 activities
under the framework of the Federal Financial Institutions Examination Council
(FFIEC) Five-Step Program. The FFIEC's Five-Step Program includes the following
phases: Awareness, Assessment, Renovation, Validation and Implementation. The
Awareness Phase, 100% complete, defines the Year 2000 problem and gains
executive level support for the necessary resources to prepare the Company for
Year 2000 compliance. The Assessment Phase, 100% complete, assesses the size and
complexity of the problem and details the magnitude of the effort necessary to
address the Year 2000 issues. Although the Awareness and Assessment Phases are
complete, the Company will continue to evaluate any new issues as they arise.
The Renovation Phase, 80% complete, includes the incremental changes to hardware
and software components. The Validation Phase includes the testing of hardware
and software components and is scheduled to be substantially complete by March
31, 1999. The Implementation Phase, 50% complete, certifies that systems are
Year 2000 compliant and will be accepted by the end users. The Implementation
Phase is scheduled to be substantially complete by June 30, 1999. The Company
has completed the development of test and validation methodologies for its
Information Technology (IT) systems. Testing of applications has begun and is
scheduled to be substantially complete during the first quarter of 1999. In some
cases, the Company will rely on the service providers and software vendors to
facilitate proxy testing with a selected group of users. The Company will review
the test plans and validate the results of the proxy testing to ensure the Year
2000 compliance of those systems. The Company's business also utilizes non-IT
products and services, some of which have embedded technology, which might not
be Year 2000 ready. Some non-IT products and services involve infrastructure
issues such as power, communication and water, as well as elevators, ventilation
and air conditioning equipment. The Company classifies power and communications
as non-IT products and services and considers them to be of significant
importance, giving them high priority. Based on responses from vendors and
software providers, the Company does not anticipate incurring any material
expenses due to unpreparedness. The Company has identified material third party
41
<PAGE>
relationships to minimize the potential loss from unpreparedness of these
parties. The Company continues to work closely with Jack Henry & Associates, its
data services and items processing provider, regarding Year 2000 compliance. The
testing and validation of this system was substantially complete by December 31,
1998.
The Company is making efforts to ensure that its customer base is aware
of the Year 2000 problem. Year 2000 correspondence has been sent to both deposit
and loan customers. The Bank has amended its credit authorization documentation
to include consideration regarding the Year 2000 problem. Significant customers
relationships have been identified, and such customers are being contacted by
the Bank's employees to determine whether they are aware of Year 2000 risks and
whether they are taking preparatory actions.
The total cost to the Company of these Year 2000 Compliance activities
was approximately $28,100 for 1998 and the Company has budgeted approximately
$110,000 for 1999. 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 the estimates of costs
for 1999 will be accurate since actual results could differ from those plans.
The costs incurred in 1998 did not have a material effect on the Company's net
income for 1998 and the Company does not expect the costs incurred for the same
period in 1999 to have a material effect on net income. It is anticipated that
any disruption of services would be partial and brief, and that there will not
be a material impact on revenues or earnings.
The Company and the Bank are developing contingency plans to address
the possibility that efforts to mitigate Year 2000 risk are not successful
either in whole or in part. These plans will include remedial efforts up to and
including complete manual processing of information for critical IT systems in
the event there is a failure after December 31, 1999. The Company's contingency
plan should be completed by April 30, 1999, after which time the appropriate
implementation training would take place.
The disclosure set forth above contains forward-looking statements.
Specifically, such statements are contained in sentences including the words
"expect" or "anticipate". Such forward-looking statements are subject to
inherent risks and uncertainties that may cause actual results to differ
materially from those contemplated by such forward-looking statements. The
factors that may cause actual results to differ materially from those
contemplated by the forward-looking statements include the failure by third
parties to adequately remediate Year 2000 issues or the inability of the Company
to complete writing and/or testing software changes on time schedules currently
expected. Nevertheless, the Company expects that its Year 2000 compliance
efforts will be successful without any adverse effects on its business.
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
42
<PAGE>
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:
43
<PAGE>
<TABLE>
TABLE OF MARKET RISK SENSITIVE INSTRUMENTS
The following table presents (dollars in thousands) the scheduled Maturity of
market risk sensitive instruments at December 31, 1998:
<CAPTION>
Less Than 1 1 - 2 2 - 3 3 - 5 5+
Year Years Years Years Years Total
Maturing in
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Debt Securities $24,747 $2,756 $4,639 $5,092 $19,335 $56,569
Loans 15,030 7,844 11,180 48,970 116,761 199,785
------- ------- ------- ------- --------- --------
Total $39,777 $10,600 $15,819 $54,062 $136,096 $256,354
======= ======= ======= ======= ========= ========
LIABILITIES
Savings,Demand, MMDA $103,915 $103,915
Time Deposits 112,444 5,281 780 59 30 118,594
------- ------- ------- ------- --------- --------
Total $216,359 $5,281 $780 $59 $30 $222,509
======= ======= ======= ======= ========= ========
</TABLE>
Average Estimated
Interest Fair
Total Rate Value
ASSETS
Debt Securities $56,569 5.79% $58,594
Loans 199,785 8.44% 202,990
LIABILITIES
Savings, Demand, MMDA 103,915 2.31% 103,915
Time Deposits $118,594 4.96% $118,951
<TABLE>
44
<PAGE>
TABLE OF MARKET RISK SENSITIVE INSTRUMENTS
The following table presents (dollars in thousands) the scheduled Maturity of
market risk sensitive instruments at December 31, 1997:
<CAPTION>
Less Than 1 1 - 2 2 - 3 3 - 5 5+
Maturing in Year Years Years Years Years Total
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Debt 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,Demand, 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
======= ======= ======= ======= ========= ========
</TABLE>
Average Estimated
Interest Fair
Total Rate Value
ASSETS
Debt Securities $63,525 6.00% $65,614
Loans 169,844 9.23% 171,486
LIABILITIES
Savings,Demand, MMDA 88,110 2.70% 88,110
Time Deposits $118,159 5.29% $118,448
45
<PAGE>
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.
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 1999 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 1999 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 1999 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 1999 Annual
Meeting of Shareholders to be filed with the Commission, entitled "Certain
Relationships and Related Transactions".
46
<PAGE>
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 72.
(B) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last
quarter of 1998.
(C) Exhibits
See Index to Exhibits at page 72 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, 1998 and 1997 and for
each of the Three Years in the Period Ended December 31, 1998 and
Independent Auditors' Report
48
<PAGE>
Deloitte & Touche Deloitte & Touche LLP Telephone: (916) 498-7100
Suite 2000 Facsimile: (916) 444-7963
400 Capitol Mall
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 as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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 statements present fairly, in all
material respects, the financial position of the North Valley Bancorp and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
January 27, 1999
Deloitte Touche
Tohmatsu
49
<PAGE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997 (In thousands except share amounts)
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 7,052 $ 8,842
Federal funds sold 18,300 13,100
--------- ---------
Total cash and cash equivalents 25,352 21,942
Cash held in trust 873 1,670
Securities:
Available for sale, at fair value 22,842 26,613
Held to maturity, at amortized cost 33,914 39,219
Loans receivable, net of allowance for loan losses and deferred loan fees 197,434 167,507
Premises and equipment, net of accumulated depreciation and amortization 5,028 4,647
Other real estate owned 575 212
FHLB stock 841 790
Accrued interest receivable 1,770 1,923
Other assets 7,733 6,234
--------- ---------
TOTAL ASSETS $ 296,362 $ 270,757
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 37,372 $ 32,253
Interest-bearing:
Savings 95,617 46,431
Time certificates 118,594 118,159
Demand accounts 8,298 41,679
--------- ---------
Total deposits 259,881 238,522
Accrued interest and other liabilities 6,301 4,169
--------- ---------
Total liabilities 266,182 242,691
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: authorized 5,000,000; none outstanding
Common stock, no par value: authorized 20,000,000 shares;
outstanding, 3,690,220 and 3,678,184 at December 31, 1998 and 1997 10,237 10,161
Retained earnings 19,890 17,188
Accumulated other comprehensive income, net of tax 53 717
--------- ---------
Total stockholders' equity 30,180 28,066
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 296,362 $ 270,757
========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
50
<PAGE>
NORTH VALLEY BANCORP AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands except share and per share amounts)
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Loans including fees $ 15,860 $ 15,238 $ 14,517
Securities:
Taxable 1,416 1,042 747
Exempt from federal taxes 2,173 2,374 2,387
Interest on federal funds sold 1,019 1,079 990
-------- -------- --------
Total interest income 20,468 19,733 18,641
INTEREST EXPENSE - DEPOSITS 8,583 8,644 8,077
-------- -------- --------
NET INTEREST INCOME 11,885 11,089 10,564
PROVISION FOR LOAN LOSSES 1,430 770 720
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,455 10,319 9,844
-------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 1,786 1,400 1,342
Other fees and charges 624 570 520
Gain on sale of loans 130 160 160
Gain on sale of available for sale securities 979 250 31
Life insurance proceeds 1,139
Loss on sale of trading securities (7)
Other 576 619 535
-------- -------- --------
Total noninterest income 4,095 4,138 2,581
-------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee benefits 4,679 4,522 3,934
Occupancy expense 557 503 456
Furniture and equipment expense 666 553 497
Other 2,984 2,734 1,899
-------- -------- --------
Total noninterest expenses 8,886 8,312 6,786
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,664 6,145 5,639
PROVISION FOR INCOME TAXES 1,579 1,000 1,532
-------- -------- --------
NET INCOME $ 4,085 $ 5,145 $ 4,107
======== ======== ========
EARNINGS PER SHARE:
Basic $1.11 $1.41 $1.11
===== ===== =====
Diluted $1.10 $1.39 $1.10
===== ===== =====
<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, 1998, 1997 AND 1996 (In thousands except share and per
share amounts)
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Accumulated
Common Stock Other
----------------- Comprehensive Retained Comprehensive
Shares Amount Income Earnings Income Total
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 3,682,096 $ 9,766 $ 11,086 $121 $20,973
Comprehensive income
Net income $ 4,107 4,107 4,107
Other comprehensive income,
net of tax of $129
Unrealized gain (loss) on available for
sale securities, net of reclassification
adjustment of $22 180 180 180
Minimum pension liability adjustments 376 376 376
-------
Total comprehensive income 4,663
=======
Stock options exercised 10,880 50 50
Tax benefit derived from the exercise
of stock options 80 (80)
Cash dividend paid on common
stock ($.175 per share) (646) (646)
Cash dividend declared on common
stock ($.175 per share) (640) (640)
Repurchase of stock (45,600) (500) (500)
---------- ------- ------- ----- -------
Balance at December 31, 1996 3,647,376 9,896 13,327 677 23,900
Comprehensive income
Net income 5,145 5,145 5,145
Other comprehensive income,
net of tax of $297
Unrealized gain (loss) on available for
sale securities, net of reclassification
adjustment of $180 399 399 399
Minimum pension liability adjustments (359) (359) (359)
-------
Total comprehensive income 5,185
=======
Stock options exercised 30,808 133 133
Tax benefit derived from the exercise
of stock options 132 132
Cash dividend paid on common
stock ($.175 per share) (640) (640)
Cash dividend declared on common
stock ($.175 per share) (644) (644)
---------- ------- ------- ----- -------
Balance at December 31, 1997 3,678,184 10,161 17,188 717 28,066
Comprehensive income
Net income 4,085 4,085 4,085
Other comprehensive income,
net of tax of $8
Unrealized gain (loss) on available for
sale securities, net of reclassification
adjustment of $705 (682) (682) (682)
Minimum pension liability adjustment 18 18 18
-------
Total comprehensive income $ 3,421
=======
Stock issued and options exercised 12,036 42 42
Tax benefit derived from the exercise
of stock options 34 34
Cash dividend paid on common
stock ($.175 per share) (645) (645)
Cash dividend declared on common
stock ($.20 per share) (738) (738)
---------- ------- ------- ----- -------
Balance at December 31, 1998 3,690,220 $10,237 $19,890 $ 53 $30,180
========== ======= ======= ===== =======
<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, 1998, 1997 AND 1996 (In thousands)
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,085 $ 5,145 $ 4,107
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 526 430 406
Amortization of premium on securities (70) 4 10
Provision for loan losses 1,430 770 720
Loss on sale/write down of other real estate owned 31 185 48
Gain on sale of available for sale securities (979) (250) (31)
Loss on sale of trading securities 7
Gain on sales of loans (130) (160) (160)
Provision (benefit) for deferred taxes 590 (675) (327)
Proceeds from sales of trading securities 1,970
Purchase of trading securities (1,980)
Effect of changes in:
Cash held in trust 797 (1,670)
Accrued interest receivable 153 (158) (50)
Other assets (2,687) (129) (740)
Accrued interest and other liabilities 1,660 1,066 755
--------- -------- ---------
Net cash provided by operating activities 5,406 4,558 4,735
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FHLB stock (51) (56) (72)
Proceeds from sale of other real estate owned 279 1,565 271
Purchases of available for sale securities (22,538) (23,353) (2,611)
Proceeds from sales of available for sale securities 4,418 6,534 61
Proceeds from maturities of available for sale securities 21,999 260 6,304
Purchases of held to maturity securities (2,082) (8,970)
Proceeds from maturities or calls of held to maturity securities 5,275 2,842 4,178
Proceeds from sales of loans 9,925 9,619 8,027
Net increase in loans (41,152) (12,646) (28,063)
Purchases of premises and equipment (907) (1,309) (381)
--------- -------- ---------
Net cash used in investing activities (22,752) (18,626) (21,256)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits, NOW accounts, and savings accounts 20,924 5,176 11,687
Net increase in time certificates 435 4,118 6,466
Cash dividends paid (645) (1,924) (1,143)
Repurchase of company stock (500)
Cash received for stock options exercised 42 133 50
--------- -------- ---------
Net cash provided by financing activities 20,756 7,503 16,560
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,410 (6,565) 39
CASH AND CASH EQUIVALENTS:
Beginning of year 21,942 28,507 28,468
--------- -------- ---------
End of year $ 25,352 $ 21,942 $ 28,507
========= ======== =========
ADDITIONAL INFORMATION:
Transfer of foreclosed loans from loans receivable to other
real estate owned $ 673 $ 1,893 $301
========= ======== ====
Cash Payments:
Income tax payments $ 775 $ 1,849 $1,971
========= ======== ======
Interest payments $ 8,600 $ 8,620 $8,059
========= ======== ======
<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, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - North Valley Bancorp and subsidiaries (Company)
operates 12 branches, which include two supermarket branches, in Shasta
and Trinity Counties in Northern California. The Company operates as
one business segment providing banking services to the Company's
clients in Northern California. The Company's principal business
consists of attracting deposits from the general public and using the
funds to originate commercial, real estate and installment loans to
customers, who are predominately small and middle market businesses and
middle income individuals. The Company's primary source of revenues is
interest income from its loan and investment securities portfolios. The
Company is not dependent on any single customer for more than ten
percent of the Company's revenues.
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 1998. 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'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. The Company did not
have any securities classified as trading at December 31, 1998 and
1997.
54
<PAGE>
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.
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 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. Management attributes general reserves to
different types of loans using percentages which are based upon
perceived risk associated with the portfolio and underlying collateral,
historical loss experience, and vulnerability to changing economic
conditions which may affect the collectibility of the loans. Specific
reserves are allocated for impaired loans, for loans which have
experienced a decline in internal loan grading, and when management
believes additional loss exposure exists. Although the allowance for
loan losses is allocated to various portfolio segments, it is general
in nature and is available for the loan portfolio in its entirety. The
allowance is an amount that management believes will be adequate to
absorb losses inherent in existing loans and commitments to extend
credit. Actual amounts could differ from those estimates.
The Company considers a loan 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.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation, which is computed principally on the
straight-line method over the estimated useful lives of the respective
assets. Leasehold improvements are amortized on the straight-line
method over the shorter of the estimated useful lives of the
improvements or the terms of the respective leases.
Other Real Estate Owned - Real estate acquired 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
55
<PAGE>
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 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.
Preferred Stock - During 1998, the Board of Directors amended the
Articles of Incorporation to authorize 5,000,000 shares of no par value
preferred stock. There were no shares of preferred stock outstanding at
December 31, 1998.
Common Stock Split - On September 21, 1998, the Company's Board of
Directors authorized a two-for-one stock split distributed on October
30, 1998 to stockholders of record as of October 15, 1998. This
resulted in the issuance of 1,844,610 additional shares of common
stock. All share and per share amounts have been restated to reflect
this stock split.
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 Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation.
Comprehensive Income - The Company has retroactively adopted SFAS No.
130, Reporting Comprehensive Income, which requires that an enterprise
report and display, by major components and as a single total, the
change in its net assets during the period from nonowner sources. The
adoption of this Statement resulted in a change in the financial
statement presentation but did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.
Disclosures About Segments of an Enterprise - On January 1, 1998, the
Company adopted SFAS 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. This statement will not impact the Company's
consolidated financial position, results of operations or cash flows.
Management evaluates the Company's performance as a whole and does not
allocate resources based on the performance of different lending or
transaction activities. Therefore, the financial disclosures of this
standard related to operating performance of reportable segments do not
apply.
56
<PAGE>
Disclosures About Pensions and Other Post Retirement Benefits - On
January 1, 1998, the Company adopted SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, which
revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of
those plans.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting For Derivative
Instruments and Hedging Activities. The statement establishes
accounting and reporting standards for derivative instruments and
hedging activities. The statement is effective for all fiscal quarter
of fiscal years beginning after June 15, 1999. The Company is in the
process of determining the impact of SFAS No. 133 on the Company's
financial position and results of operations.
Reclassification - Certain amounts in 1997 and 1996 have been
reclassified to conform with the 1998 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 $1,009,000 and $3,345,000 at
December 31, 1998 and 1997. 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>
Gross Gross Carrying
Amortized Unrealized Unrealized Amount
Available for sale securities: Cost Gains Losses (Fair Value)
<S> <C> <C> <C> <C>
December 31, 1998:
Securities of U.S. government $ 21,976 $ 62 $ (13) $ 22,025
agencies and corporations
Obligation of states and political 625 5 630
subdivisions
Other securities 215 5 (33) 187
-------- ----- ------- --------
$ 22,816 $ 72 $ (46) $ 22,842
======== ===== ====== ========
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
======== ===== ====== ========
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Carrying
Amount Gross Gross
(Amortized Unrealized Unrealized
Held to maturity securities: Cost) Gains Losses Fair Value
<S> <C> <C> <C> <C>
December 31, 1998:
Obligations of states and
political subdivisions $ 33,914 $2,025 $ 35,939
======== ====== ====== ========
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
======== ====== ====== ========
</TABLE>
Gross realized gains on sales of securities categorized as available
for sale securities were $979,000, $250,000 and $31,000 in 1998, 1997
and 1996. There were no gross realized losses on sale of available for
sales securities in 1998, 1997 or 1996.
Scheduled maturities of held to maturity and available for sale
securities (other than equity securities with an amortized cost of
approximately $215,000 and a carrying value of approximately $187,000)
at December 31, 1998, are shown below (in thousands). Expected
maturities may differ from contractual maturities because borrowers may
have the right to prepay with or without penalty.
<TABLE>
<CAPTION>
Held to maturity securities Available for sale securities
--------------------------- -----------------------------
Amortized
Cost Fair Value
(Carrying Amortized (Carrying
Amount) Fair Value Cost Amount)
<S> <C> <C> <C> <C>
Due in 1 year or less $ 2,092 $ 2,129 $ 22,601 $ 22,655
Due after 1 year through 5 years 12,487 13,034
Due after 5 years through 10 years 9,805 10,509
Due after 10 years 9,530 10,267
--------- -------- -------- ---------
$ 33,914 $ 35,939 $ 22,601 $ 22,655
========= ======== ======== =========
</TABLE>
At December 31, 1998 and 1997, securities having carrying amounts of
approximately $16,448,000 and $18,790,000 were pledged to secure public
deposits and short-term borrowings and for other purposes required by
law or contract.
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.
58
<PAGE>
Major classifications of loans at December 31 were as follows (in
thousands):
1998 1997
Commercial $ 72,102 $ 64,666
Real estate - construction 4,177 1,688
Real estate - mortgage 52,909 45,590
Installment 56,686 44,510
Other 13,911 13,390
-------- --------
Total loans receivable 199,785 169,844
Less:
Allowance for loan losses 1,902 1,702
Deferred loan fees 449 635
-------- --------
Net loans receivable $197,434 $167,507
======== ========
At December 31, 1998 and 1997, the Bank serviced real estate loans and
loans guaranteed by the Small Business Administration which it had sold
to the secondary market of approximately $78,568,000 and $88,640,000.
Changes in the allowance for loan losses for the years ended December
31, were as follows (in thousands):
1998 1997 1996
Balance, beginning of year $ 1,702 $ 1,254 $ 1,325
Provision charged to operations 1,430 770 720
Loans charged off (1,360) (362) (813)
Recoveries 130 40 22
------- ------- -------
Balance, end of year $ 1,902 $ 1,702 $ 1,254
======= ======= =======
5. IMPAIRED AND NONPERFORMING LOANS
At December 31, 1998 and 1997, the recorded investment in loans for
which impairment has been recognized was approximately $2,871,000 and
$4,353,000. Of the 1998 balance approximately $2,269,000 has a related
valuation allowance of $226,900. The remaining $602,000 did not require
a valuation allowance. No significant impaired balances required a
valuation allowance at December 31, 1997. For the years ended December
31, 1998, 1997 and 1996, the average recorded investment in loans for
which impairment has been recognized was approximately $3,201,000,
$3,455,000 and $2,244,000. During the portion of the year that the
loans were impaired the Company recognized interest income of
approximately $232,000, $153,000 and $203,000 for cash payments
received in 1998, 1997 and 1996.
Nonperforming loans at December 31 were as follows (in thousands):
1998 1997
Nonaccrual loans $2,307 $ 536
Loans 90 days past due but still accruing interest 364 244
------ ------
Total nonaccrual and 90 days past due loans $2,671 $ 780
====== ======
If interest on nonaccrual loans had been accrued, such income would
have approximated $132,000, in 1998, $32,000 in 1997 and $82,000 in
1996. Interest income of $33,000 in 1998, $28,000 in 1997, and $27,000
in 1996 was
59
<PAGE>
recorded when it was received on the nonaccrual loans.
At December 31, 1998, there were no commitments to lend additional
funds to borrowers whose loans were classified as nonaccrual.
6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are
summarized as follows (in thousands):
1998 1997
Land $ 1,080 $ 1,080
Buildings and improvements 4,323 4,084
Furniture, fixtures and equipment 4,902 4,234
Leasehold improvements 174 174
-------- --------
10,479 9,572
Accumulated depreciation and amortization (5,451) (4,925)
-------- --------
$ 5,028 $ 4,647
======== ========
Building and equipment rental expense was approximately $90,000 for the
year ended December 31, 1998 and $77,000 for the years ended December
31, 1997 and 1996.
7. OTHER ASSETS
Major classifications of other assets at December 31 were as follows
(in thousands):
1998 1997
Cash surrender value of life insurance policies $3,850 $3,009
Prepaid expenses 723 745
Income tax receivable 664 528
Deferred taxes 1,786 1,881
Other 710 71
------ ------
Total $7,733 $6,234
====== ======
8. DEPOSITS
The aggregate amount of time certificates of deposit in denominations
of $100,000 or more was $18,469,000 and $17,914,000 at December 31,
1998 and 1997. Interest expense incurred on such time certificates of
deposit was $713,000, $925,000, and $882,000, for the years ended
December 31, 1998, 1997 and 1996.
60
<PAGE>
At December 31, 1998, the scheduled maturities of all time deposits was
as follows (in thousands):
Year Amount
1999 $ 112,444
2000 5,281
2001 780
2002 11
2003 and thereafter 78
----------
Total $ 118,594
==========
9. LINES OF CREDIT
At December 31, 1998, 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, 1999
Secured $3,743 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):
1998 1997 1996
Currently payable:
Federal $ 459 $ 1,185 $ 1,212
State 530 490 647
------- ------- -------
Total 989 1,675 1,859
------- ------- -------
Deferred taxes (benefit):
Federal 565 (539) (297)
State 25 (136) (30)
------- ------- -------
Total 590 (675) (327)
------- ------- -------
Total $ 1,579 $ 1,000 $ 1,532
======= ======= =======
61
<PAGE>
The effective federal tax rate for the years ended December 31, differs
from the statutory tax rate as follows:
1998 1997 1996
Federal income tax at statutory rates 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 6.5 3.8 7.4
Tax exempt income (13.7) (13.6) (14.2)
Officer's life insurance proceeds (6.3)
Other .1 (2.6) (1.0)
------ ------ ------
Total 27.9% 16.3% 27.2%
====== ====== ======
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):
1998 1997
Deferred tax assets:
Allowance for loan losses $ 522 $ 530
Deferred loan fee income 201 285
Deferred compensation 635 530
Accrued pension obligation 673 651
Accrued severance 62 119
Mark to market adjustment 333
Alternative minimum tax credit 108
------- -------
Total deferred tax assets 2,093 2,556
------- -------
Deferred tax liabilities:
Tax depreciation in excess of book depreciation (133) (119)
California franchise tax (7) (26)
Unrealized gain on securities available for sale (8) (297)
Mark to market adjustment (23)
Other (342) (233)
------- -------
Total deferred tax liabilities (513) (675)
------- -------
Net deferred tax asset $ 1,580 $ 1,881
======= =======
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.
62
<PAGE>
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 1998,
1997 and 1996, respectively. At December 31, 1998, the ESOP owned
approximately 191,000 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, 1998, 1997, and 1996 of $26,000, $20,000, 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 $1,415,000 and $1,183,000 as of
December 31, 1998 and 1997, respectively, is included in accrued
interest and other liabilities.
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
($3,850,000 and $3,009,000 at December 31, 1998 and 1997, respectively)
to pay the retirement obligations. The accrued pension obligation of
$2,325,000, $1,927,000, and $1,544,000, as of December 31, 1998, 1997,
and 1996, respectively, is included in accrued interest and other
liabilities.
<TABLE>
The following table sets forth the plans' status at December 31 (in
thousands):
<CAPTION>
1998 1997
<S> <C> <C>
Change in projected benefit obligation
Projected benefit obligation at beginning of year $ (2,525) $ (2,190)
Service cost (38)
Interest cost (153) (140)
Benefits paid 114 114
Actuarial gain (loss) (3) 161
Plan amendments (470)
--------- ---------
Projected benefit obligation at end of year (2,605) (2,525)
--------- ---------
Change in plan assets
Fair value of plan assets at beginning of year - -
Fair value of plan assets at end of year - -
Funding
Funded (Unfunded) status (2,605) (2,525)
Unrecognized transitional amount 175 200
Unrecognized prior service cost 439 470
Unrecognized net actuarial (gain) loss 193 195
--------- ---------
Net amount recognized (accrued pension cost) $ (1,798) $ (1,660)
========= =========
Weighted-average assumptions as of December 31
Discount rate 6.41% 6.11%
Rate of compensation increase (supplemental
executive retirement plan only) 6.00% 6.00%
Expected return on plan assets N/A N/A
</TABLE>
63
<PAGE>
<TABLE>
The elements of pension costs for the unqualified defined benefit
pension plans at December 31 are as follows (in thousands):
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Components of net periodic benefits cost
Service cost $ 38 $ 110
Interest cost 153 $ 140 88
Amortization of net obligation at transition 25 31 28
Amortization of prior service cost 31
Recognized net actuarial loss 5 17 17
----- ------ -----
Net periodic benefit cost $ 252 $ 188 $ 243
===== ====== =====
The net periodic pension cost was determined
using the following assumptions
Discount rate 6.11% 6.48% 6.26%
Rate of compensation increase (supplemental executive
retirement plan only) 6.00% 6.00% 6.00%
Expected return on plan assets N/A N/A N/A
</TABLE>
12. STOCK BASED COMPENSATION
During 1998 each director was awarded 600 shares of common stock,
resulting in an additional 4,200 shares being issued.
<TABLE>
Under the Company's stock option plans as of December 31, 1998,
1,003,000 shares of the Company's common stock remained available for
grants to directors and employees of the Bank. Under the Director Plan,
options may not be granted at a price less than 85% of fair market
value at the date of the grant. Under the Employee Plan, options may
not be granted at a price less than the fair market value at the date
of the grant. Under both plans, options may be exercised over a ten
year term and vest ratably over four years from the date of the grant.
A summary of stock options follows:
<CAPTION>
Weighted
Average
Options Exercise Price
<S> <C> <C>
Outstanding, January 1, 1996 72,488 $ 4.14
30,618 exercisable at weighted average price of $3.62
Granted 14,000 8.29
Exercised (10,712) 4.75
-----------
Outstanding December 31, 1996 75,776 4.78
39,618 exercisable at weighted average price of $3.56
Granted 14,000 9.32
Exercised (30,808) 4.32
Expired or canceled (9,040) 7.33
-----------
Outstanding December 31, 1997 49,928 5.69
27,288 exercisable at weighted average price of $4.36
Granted 61,000 15.10
Exercised (7,836) 5.31
Expired or canceled (1,600) 12.75
----------- -----
Outstanding December 31, 1998 101,492 $ 11.34
41,372 exercisable at weighted average price of $7.94 =========== =====
</TABLE>
64
<PAGE>
<TABLE>
Information about stock options outstanding at December 31, 1998 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> <C>
2.18 - 3.35 10,892 3 2.71 10,892 2.71
5.10 - 6.09 15,800 6 5.68 12,880 5.59
8.29 - 9.14 16,400 8 8.75 6,400 8.66
12.75 13,400 9 12.75 2,200 12.75
15.94 45,000 9 15.94 9,000 15.94
</TABLE>
<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>
1998 1997 1996
<S> <C> <C> <C>
Net income:
As reported $4,085 $5,145 $4,107
Pro forma $4,011 $5,122 $4,094
Basic earnings per common share:
As reported $1.11 $1.41 $1.11
Pro forma $1.09 $1.40 $1.11
Diluted earnings per common and equivalent share:
As reported $1.10 $1.39 $1.10
Pro forma $1.08 $1.38 $1.10
</TABLE>
The fair value of the options granted during 1998, 1997 and 1996 is
estimated as $311,000, $45,000, and $36,000 on the date of grant using
a binomial option-pricing model with the following assumptions: $0.375
annual dividend, volatility of 21.89%, 15.19%, and 15.19%, risk-free
interest rate of 5.40%, 6.36%, 5.37%, assumed forfeiture rate of zero,
and an expected life of six years. The weighted average per share fair
value of the 1998, 1997 and 1996 awards was $5.10, $3.22, and $2.57,
respectively. The impact of outstanding nonvested stock options granted
prior to 1995 has been excluded from the pro forma calculations;
accordingly the 1996, 1997 and 1998 pro forma adjustments are not
indicative of future pro forma adjustments when the calculation will
apply to all applicable stock options.
65
<PAGE>
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.
<TABLE>
There was no difference in the numerator used in the calculation of
basic earnings per share and diluted earnings per share. The
denominator used in the calculation of basic earnings per share and
diluted earnings per share for each of the years ended December 31 is
reconciled as follows:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Calculation of Basic Earnings Per Share
Numerator - net income $ 4,085 $ 5,145 $ 4,107
Denominator - weighted average common shares outstanding 3,684 3,658 3,686
------- ------- -------
Basic Earnings Per Share $1.11 $1.41 $1.11
===== ===== =====
Calculation of Diluted Earnings Per Share
Numerator - net income $ 4,085 $ 5,145 $ 4,107
Denominator:
Weighted average common shares outstanding 3,684 3,658 3,686
Dilutive effect of outstanding options 36 44 46
------- ------- -------
Weighted average common shares outstanding - diluted 3,720 3,702 3,732
------- ------- -------
Diluted Earnings Per Share $1.10 $1.39 $1.10
===== ===== =====
</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 $485,000 and $1,189,000 at
December 31, 1998 and 1997. At December 31, 1998 commercial and
consumer lines of credit, and real estate loans of approximately
$23,975,000 and $2,191,000 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, 1998 and 1997, 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.
66
<PAGE>
<TABLE>
A summary of activity for the years ended December 31, 1998 and 1997 is
as follows (in thousands; renewals are not reflected as either new
loans or repayments):
<CAPTION>
1998 1997
<S> <C> <C>
Beginning balance $ 2,885 $ 3,329
Borrowings 679 388
Repayments (1,707) (569)
Directors or officers no longer associated with the Company (107) (263)
-------- -------
Ending balance $ 1,750 $ 2,885
======== =======
</TABLE>
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 corrective 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, 1998, 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, 1998 and 1997, 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.
The Company's and the Bank's actual capital amounts (in thousands) and
ratios are also presented, respectively, in the following tables.
67
<PAGE>
<TABLE>
<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, 1998:
Total capital
(to risk weighted assets) $31,490 15.05% $16,739 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $29,588 14.14% $8,369 4.00% N/A N/A
Tier I capital
(to average assets) $29,588 10.18% $11,626 4.00% N/A N/A
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
Bank:
As of December 31, 1998:
Total capital
(to risk weighted assets) $29,380 14.08% $16,697 8.00% $20,871 10.00%
Tier I capital
(to risk weighted assets) $27,478 13.17% $8,349 4.00% $12,523 6.00%
Tier I capital
(to average assets) $27,478 9.49% $11,583 4.00% $14,478 5.00%
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%
</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, 1998, the amount available for such
dividends without prior written approval was approximately $9,384,000.
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, 1998, therefore, estimates
presented herein are not necessarily indicative of amounts which could
be realized in a current transaction.
68
<PAGE>
The following estimates and assumptions were used as of December 31,
1998 and 1997 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. Available for sale securities are carried at
fair value.
(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>
1998 1997
------------------------ --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $25,352 $25,352 $21,942 $21,942
Securities:
Available for sale $22,842 $22,842 $26,613 $26,613
Held to maturity $33,914 $35,939 $39,219 $41,231
Loans receivable $197,434 $200,639 $167,507 $169,149
Cash surrender value of life insurance $3,850 $3,850 $3,009 $3,009
FINANCIAL LIABILITIES:
Deposits $259,881 $260,238 $238,522 $238,811
</TABLE>
69
<PAGE>
18. CONDENSED FINANCIAL INFORMATION OF NORTH VALLEY BANCORP
The condensed financial statements of North Valley Bancorp are
presented below (in thousands except share amounts):
NORTH VALLEY BANCORP
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
--------------------------
1998 1997
Assets:
Cash and cash equivalents $ 2,332 $ 554
Available for sale securities at fair value 187 2,230
Investments in subsidiaries 28,326 25,556
Other assets 208
---------- ----------
Total $ 31,053 $ 28,340
========== ==========
Liabilities and stockholders' equity:
Dividend payable $ 738
Other liabilities 135 $ 274
Stockholders' equity 30,180 28,066
---------- ----------
Total $ 31,053 $ 28,340
========== ==========
<TABLE>
NORTH VALLEY BANCORP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INCOME:
Dividends from subsidiaries $ 645 $ 2,024 $ 1,888
Other income 963 489 64
-------- -------- --------
Total income 1,608 2,513 1,952
EXPENSE:
Legal and accounting 112 74 14
Other 101 251 13
Taxes 210
-------- -------- --------
Total expense 423 325 27
-------- -------- --------
Income before equity in undistributed
income of subsidiaries 1,185 2,188 1,925
Equity in undistributed income of
subsidiaries 2,900 2,957 2,182
-------- -------- --------
Net income 4,085 5,145 4,107
Other comprehensive income, net of tax (664) 40 556
-------- -------- --------
Total comprehensive income $ 3,421 $ 5,185 $ 4,663
======== ======== ========
</TABLE>
70
<PAGE>
<TABLE>
NORTH VALLEY BANCORP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,085 $ 5,145 $ 4,107
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries (2,900) (2,957) (2,182)
Gain on sale of available for sale securities (913) (187) (26)
Effect of changes in:
Other Assets (38)
Other Liabilities 139
Dividends receivable 650 (150)
--------- -------- --------
Net cash provided by operating activities 373 2,651 1,749
--------- -------- --------
Cash flows from investing activities:
Purchase of available for sale securities (582) (871) (188)
Proceeds from sale of available for sale securities 2,590 297 57
--------- -------- --------
Net cash provided by (used in) investing activities 2,008 (574) (131)
--------- -------- --------
Cash flows from financing activities:
Cash dividends paid (645) (1,924) (1,143)
Repurchase of company stock (500)
Stock options exercised 42 133 50
--------- -------- --------
Net cash used in financing activities (603) (1,791) (1,593)
--------- -------- --------
Increase (decrease) in cash and cash equivalents 1,778 286 25
Cash and cash equivalents at beginning of year 554 268 243
--------- -------- --------
Cash and cash equivalents at end of year $ 2,332 $ 554 $ 268
========= ======== ========
* * * * * *
</TABLE>
71
<PAGE>
<TABLE>
INDEX OF EXHIBITS
<CAPTION>
Sequential
Exhibit No. Exhibit Name Page No.
- ----------- ------------ --------
<S> <C> <C>
3(a) Articles of incorporation, as amended and restated.
Incorporated by reference from Exhibit 3(i) to the
Company's Quarterly Report on Form 10-Q for the
quarter end June 30, 1998, filed with the Commission
(hereinafter, "June 30, 1998 10-Q"). *
3(b) By-laws of the Registrant, as amended and restated.
Incorporated by reference from Exhibit 3(ii)
to the Company's June 30, 1998 10Q. *
10(a) North Valley Bancorp 1989 Employee Stock Option
Plan, as amended. Incorporated by reference from
Exhibit 4.5 to Post-Effective Amendment No. One to
the Company's Registration Statement on Form S-8
(No. 33-32787) filed with the Commission on
December 26, 1989 (hereinafter, the "1989 S-8
Amendment"). *
10(b) North Valley Bancorp 1989 Employee Nonstatutory
Stock Option Agreement. Incorporated by ref-
erence from Exhibit 4.3 to the 1989 S-8 Amendment. *
10(c) North Valley Bancorp 1989 Director Stock Option
Plan, as amended. Incorporated by reference from
Exhibit 4.5 to Post-Effective Amendment No. One to
the Company's Registration Statement on Form S-8
(No. 33-32787) filed with the Commission on
December 26, 1989 (hereinafter, the "1989 S-8
Amendment"). *
10(d) North Valley Bancorp 1989 Director Nonstatutory
Stock Option Agreement. Incorporated by refer-
ence from Exhibit 4.4 to the 1989 S-8 Amendment. *
10(e) 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. *
72
<PAGE>
Sequential
Exhibit No. Exhibit Name Page No.
- ----------- ------------ --------
10(f) Amendment No. 3 to the Employee Stock Ownership Plan.
Incorporated by reference from Exhibit 10(ee) to the
Company's 1994 10-KSB. *
10(g) 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(h) Management Incentive Plan. Incorporated by
reference from Exhibit 10(c) to the Company's 1984 10-K. *
10(i) 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(j) Executive Deferred Compensation Plan. Incorporated by
reference from Exhibit 10(j) to the Company's 1988 10-K. *
10(k) Supplemental Retirement Plan for Directors. Incorporated by
reference from Exhibit 10(k) to the Company's 1988 10-K. *
10(l) Legal Services Agreement with Wells, Wingate,
Small & Graham. Incorporated by reference from
Exhibit 10(q) to the Company's 1987 10-K. *
10(m) Employment Agreement of Martin R. Sorensen dated *
February 2, 1998. Incorporated by reference from Exhibit
10(x) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, filed with the
Commission (hereinafter "1997 10-K").
10(n) Sales Agreement with Federated Securities Corp. Incorpor-
ated by reference from Exhibit 10(gg) to the Company's
1995 10-KSB. *
10(o) Linsco/Private Ledger, Inc. Full Service Brokerage
Agreement. Incorporated by reference from Exhibit 10(hh)
to the Company's 1995 10-KSB. *
73
<PAGE>
Sequential
Exhibit No. Exhibit Name Page No.
- ----------- ------------ --------
10(p) 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(q) Directors' Deferred Compensation Plan, effective 4-1-95.
Incorporated by reference from Exhibit 10(ee) to the Company's
1996 10-KSB. *
10(r) Umbrella Trust(TM) for Directors, effective 4-1-95.
Incorporated by reference from Exhibit 10(ff) to the
Company's 1996 10-KSB. *
10(s) Umbrella Trust(TM) for Executives, effective 4-1-95.
Incorporated by reference from Exhibit 10(gg) to the
Company's 1996 10-KSB. *
10(t) Indemnification Agreement. Incorporated by reference from
Exhibit 10 to the Company's June 30, 1998 10Q. *
10(u) North Valley Bancorp 1998 Employee Stock Incentive Plan.
Incorporated by reference from Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (No. 333-61771) filed with
the Commission on August 18, 1998. *
10(v) Amendment No. Two to the North Valley Bancorp 1989 Director
Stock Option Plan. 76
21 List of Subsidiaries. 77
23 Consent of Deloitte & Touche, L.L.P. 78
27 Financial Data Schedule. 79
<FN>
- --------------
* Previously filed.
</FN>
</TABLE>
74
<PAGE>
<TABLE>
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.
<CAPTION>
<S> <C>
NORTH VALLEY BANCORP
By: /s/ Michael J. Cushman
------------------------------------
Michael J. Cushman
President and Chief Executive Officer
/s/ Sharon L. Benson /s/ Jack R. Richter
--------------------------------------- --------------------------------------------
Sharon L. Benson Jack R. Richter
Senior Vice President & Chief Financial Officer Senior Vice President & Chief Credit Officer
DATE: March 15, 1999
</TABLE>
<TABLE>
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.
<CAPTION>
NAME AND SIGNATURE: TITLE DATE
------------------- ----- ----
<S> <C> <C>
/s/ Michael J. Cushman Director March 15, 1999
-----------------------------------
Michael J. Cushman
/s/ Rudy V. Balma Director March 15, 1999
-----------------------------------
Rudy V. Balma
/s/ William W. Cox Director March 15, 1999
-----------------------------------
William W. Cox
/s/ Dan W. Ghidinelli Director March 15, 1999
-----------------------------------
Dan W. Ghidinelli
/s/ Thomas J. Ludden Director March 15, 1999
-----------------------------------
Thomas J. Ludden
/s/ Kelly V. Pierce Director March 15, 1999
-----------------------------------
Kelly V. Pierce
/s/ Douglas M. Treadway Director March 15, 1999
-----------------------------------
Douglas M. Treadway
/s/ J. M. Wells, Jr. Director March 15, 1999
-----------------------------------
J. M. Wells, Jr.
</TABLE>
75
EX-10(v)
AMENDMENT NO. TWO TO THE NORTH VALLEY BANCORP
1989 Director Stock Option Plan
Pursuant to Section 9 of the North Valley Bancorp 1989 Director
Stock Option Plan (the "Plan"), the Board of Directors of North Valley Bancorp
(the "Corporation") amends the Plan, subject to the approval of the
Corporation's shareholders, as follows:
Effective as of January 1, 1998, Section 4 of the Plan shall be
amended by the addition of the following at the end thereof:
Effective as of January 1, 1998, the number of Shares available for
grant under the Plan shall equal the number of Shares to be issued upon
the exercise of options granted under the Plan.
76
Ex - 21
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.
77
EX-23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-32787 and 33-361771of North Valley Bancorp on Form S-8 of our report dated
January 27, 1999, appearing in this Annual Report on Form 10-K of North Valley
Bancorp for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------
Sacramento, California
March 29, 1999
78
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0
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