PART
I
ITEM
1. BUSINESS
Certain
matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described
in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking
statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and subject to the safe-harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements may contain words related to future projections including, but not limited to, words
such as “believe,” “expect,” “anticipate,” “intend,” “may,” “will,”
“should,” “could,” “would,” and variations of those words and similar words that are subject
to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. Factors that
could cause or contribute to such differences include, but are not limited to, the following: (1) the duration of financial and
economic volatility and actions taken by the United States Congress and governmental agencies, including the United States Department
of the Treasury, to deal with challenges to the U.S. financial system; (2) variances in the actual versus projected growth in
assets and return on assets; (3) loan losses; (4) expenses; (5) changes in the interest rate environment including interest rates
charged on loans, earned on securities investments and paid on deposits and other borrowed funds; (6) competition effects; (7)
fee and other noninterest income earned; (8) general economic conditions nationally, regionally, and in the operating market areas
of the Company and its subsidiaries including State and local budget issues being addressed in California; (9) changes in the
regulatory environment including government intervention in the U.S. financial system; (10) changes in business conditions and
inflation; (11) changes in securities markets, public debt markets, and other capital markets; (12) data processing and other
operational systems failures or fraud; (13) a further decline in real estate values in the Company’s operating market areas;
(14) the effects of uncontrollable events such as terrorism, the threat of terrorism or the impact of the current military conflicts
in Afghanistan and Iraq and the conduct of the war on terrorism by the United States and its allies, worsening financial and economic
conditions, natural disasters, and disruption of power supplies and communications; and (15) changes in accounting standards,
tax laws or regulations and interpretations of such standards, laws or regulations, as well as other factors. The factors set
forth under Item 1A, “Risk Factors”, in this report and other cautionary statements and information set forth in this
report should be carefully considered and understood as being applicable to all related forward-looking statements contained in
this report when evaluating the business prospects of the Company and its subsidiaries.
Forward-looking
statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. Actual results
and shareholder values in the future may differ significantly from those expressed in forward-looking statements. You are cautioned
not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of the report, and in
the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation
to update or release any revisions to any forward-looking statements, or to report any new information, future event or other
circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However,
your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities
and Exchange Commission on Forms 10-K, 10-Q and 8-K.
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 (“FRB” or the “Board of Governors”). The Company
was incorporated in 1980 in the State of California. The Company owns 100% of its principal subsidiaries, North Valley Bank (“NVB”
or the “Bank”), North Valley Trading Company (“Trading Company”), which is inactive, North Valley Capital
Trust II, North Valley Capital Trust III, and North Valley Capital Statutory Trust IV.
The
Company acquired Six Rivers National Bank (based in Eureka, California) in 2000, and Yolo Community Bank (based in Woodland, California)
in 2004. Over time, the former branches and operations of Six Rivers National Bank and Yolo Community Bank were combined with
the branches and operations of North Valley Bank and the information contained in this report reflects their combined results
of operations.
At December
31, 2013 the Company had $917,764,000 in total assets, $509,244,000 in total loans and $787,849,000 in total deposits. The Company
does not hold deposits of any one customer or group of customers where the loss of such deposits would have a material adverse
effect on the Company. The Company’s business is not seasonal.
NVB was organized
in September 1972, under the laws of the State of California, and commenced operations in February 1973. NVB is principally supervised
and regulated by the Commissioner of the California Department of Business Oversight (the “Commissioner”) and conducts
a commercial and retail banking business, which includes accepting demand, savings, and money market rate deposit accounts and
time deposits, and making commercial, real estate and consumer loans. It also issues cashier’s checks and money orders,
and provides safe deposit boxes and other customary banking services. As a state-chartered insured member bank, NVB is also subject
to regulation by the Board of Governors of the Federal Reserve System (the “Board of Governors”) and its deposits
are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount which is $250,000 per separately
insured depositor. FDIC-insured deposits are our primary source of funds. As part of our asset-liability management, we analyze
the maturities and interest rates of our retail deposits in order to promote stability in our supply of funds, to the extent feasible
under changing market conditions. For more deposit information, see
Item 7
“Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Balance Sheet Analysis – Deposits.”
NVB has signed
agreements with Essex National Securities, Inc., a registered broker-dealer, (“ENSI”) whereby ENSI provides broker/dealer
services and standardized investment advice to NVB customers. NVB shares in the fees and commissions paid to ENSI on a pre-determined
schedule. Majority ownership of ENSI is held by Samson Investment Partners, Inc., a private investment firm headquartered in New
York City, New York.
Recent Development
– Proposed Merger with TriCo Bancshares
As announced
by the Company on January 21, 2014 and reported in the Company’s Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 22, 2014 (the “Current Report”), the Company has entered into an Agreement and Plan
of Merger and Reorganization dated January 21, 2014 (the “Merger Agreement”), pursuant to which the Company would
merge with and into TriCo Bancshares, a California corporation (“TriCo”), with TriCo being the surviving corporation.
Immediately thereafter, the Company’s subsidiary bank, North Valley Bank, would be merged with and into TriCo’s subsidiary
bank, Tri Counties Bank. Under the terms of the Merger Agreement, the Company shareholders would receive a fixed exchange ratio
of 0.9433 shares of TriCo common stock for each share of Company common stock, providing the Company shareholders with aggregate
ownership on a pro forma basis of approximately 28.6% of the common stock of the combined company. Holders of the Company’s
outstanding in-the-money stock options would receive cash, net of applicable taxes withheld, for the value of their unexercised
stock options. The merger is expected to qualify as a tax-free exchange for shareholders who receive shares of TriCo common stock.
The transactions contemplated by the Merger Agreement are expected to close in the second or third quarter of 2014, pending approvals
of the Company shareholders and the TriCo shareholders, the receipt of all necessary regulatory approvals, and the satisfaction
of other closing conditions which are customary for such transactions. For additional information, reference should be made to
the text of the Agreement and Plan of Merger and Reorganization, filed as an exhibit to the Current Report, and to other information
regarding TriCo and the Company, their respective businesses and the status of their proposed merger, as reported from time to
time in other filings with the Securities and Exchange Commission.
Markets We Serve
The Bank’s
head office is located at 300 Park Marina Circle, Redding, California 96001. As of December 31, 2013, the Bank had branch offices
in Shasta County (ten branches), Trinity County (two branches), Humboldt County (five branches), Del Norte County (one branch),
Yolo County (one branch), Sonoma County (one branch), Placer County (one branch) and Mendocino County (one branch). The Company
views its service area as having four distinct markets:
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The
Redding market – NVB was founded in Redding, California, which is located in Shasta
County, and has grown organically there since 1973. Shasta County is a mature, slow growth
market that has a population of roughly 178,000. The median household income is $44,000
and the median age is 41.8 years. The unemployment rate in Shasta County as of December
2013 was 9.8%. The primary employment types are the Services Industry and Government.
The major employers are the State of California – local government offices, Mercy
Hospital, Shasta Regional Medical Facility and Shasta College.
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The
Coastal market – the Company acquired its presence in the coastal market (which
includes Humboldt, Del Norte, Trinity, and Mendocino Counties) through the acquisition
of Six Rivers National Bank in 2000. The Coastal market is a mature, slow growth market.
Most of the NVB branches are small retail facilities located in rural towns, with the
exception of Eureka, which is located in Humboldt County and has a population of approximately
27,000. Humboldt County has a population of approximately 135,000, median household income
of $41,000, and the median age is 37.0 years. The unemployment rate in Humboldt County
as of December 2013 was 7.7%. Employment has traditionally been fishing and timber resource
based. The major employers are various seafood-related companies and the State of California
– local government offices.
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The
I-80 Corridor market – the Company has a business banking office located in each
of Roseville, California and Woodland, California along Interstate 80. This market is
a growth market and the Company acquired its presence in this market through the acquisition
of Yolo Community Bank in 2004. Roseville, which is located in Placer County, has a population
of 126,000 and the county population is approximately 362,000. The county’s median
household income is $73,000 and the median age 40 years. The unemployment rate in Placer
County as of December 2013 was 7.4%. The local economy provides many employment types
and some major employers are Kaiser Permanente, Hewlett-Packard, Sutter Health and the
Union Pacific Railroad. Woodland, which is located in Yolo County, has a population of
approximately 55,000 and the county population is approximately 204,000. The county’s
median household income is $57,000 and the median age 30.0 years. The unemployment rate
in Yolo County as of December 2013 was 8.1%. The primary employment types are agriculture,
manufacturing, technology companies, services, merchants, and tourism. The major employers
are the University of California at Davis, the State of California and the US Postal
Service.
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The
Santa Rosa market – the Company established its presence in the Santa Rosa market
through de novo branching when it opened a business banking office in 2005. Santa Rosa,
which is located in Sonoma County, is a growth market. Santa Rosa has a population of
171,000 and the county population is approximately 491,000. The county’s median
household income is $64,000 and the median age 38.8 years. The unemployment rate in Sonoma
County as of December 2013 was 6.1%. The primary employment types are education and health
services, retail trade, tourism and the wine industry. The major employers are Kaiser
Permanente, St. Joseph Health System, Agilent Technologies, and Medtronic Cardio Vascular.
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Subordinated
Debentures
The Company
owns the common stock of three business trusts that have issued an aggregate of $21.0 million in trust preferred securities fully
and unconditionally guaranteed by the Company. The entire proceeds of each respective issuance of trust preferred securities were
invested by the separate business trusts into junior subordinated debentures issued by the Company, with identical maturity, repricing
and payment terms as the respective issuance of trust preferred securities. The aggregate amount of junior subordinated debentures
issued by the Company is $21.7 million, with the maturity dates for the respective debentures ranging from 2033 through 2036.
Subject to regulatory approval, the Company may redeem the respective junior subordinated debentures earlier than the maturity
date, with certain of the debentures being redeemable beginning in April 2008, July 2009 and March 2011.
On November
9, 2009, the Company elected to defer the payment of interest on these securities. The Company is allowed to defer the payment
of interest for up to 20 consecutive quarterly periods without triggering an event of default. The obligation to pay interest
is cumulative and continues to accrue. On May 29, 2012, the Company received approval from the Federal Reserve Bank of San Francisco
and on May 9, 2012, the Company received approval from the California Department of Financial Institutions to pay all deferred
interest on its junior subordinated notes underlying its trust preferred securities in the amount of $5,854,000 and to fully redeem
its North Valley Capital Trust I notes in the amount of $10,310,000, bearing an interest rate of 10.25%. On July 23, 2012, the
Company paid all deferred interest on its junior subordinated notes and on July 25, 2012, it redeemed, in full, the notes associated
with North Valley Capital Trust I. Since then, the Company has continued to pay interest on the remaining notes when and
as due. For more information about the trust preferred securities and the debentures and certain regulatory restrictions on the
payment of interest, see
Notes 10
and
16
to the Consolidated Financial Statements.
Supervision
and Regulation
The common stock
of the Company is subject to the registration requirements of the Securities Act of 1933, as amended, and the qualification requirements
of the California Corporate Securities Law of 1968, as amended. The Company is also subject to the periodic reporting requirements
of Section 13 of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, the filing of annual,
quarterly and current reports with the Securities and Exchange Commission.
NVB is licensed
by the California Department of Business Oversight, and subject to the rules and regulations of the Commissioner. NVB’s
deposits are insured by the FDIC, and NVB is a member of the Federal Reserve System. Consequently, NVB is subject to the supervision
of, and is regularly examined by, the Commissioner and the Board of Governors. Such supervision and regulation includes comprehensive
reviews of all major aspects of the Bank’s business and condition, including its capital ratios, allowance for loan losses
and other factors. However, no inference should be drawn that such authorities have approved any such factors. NVB is required
to file reports with the Commissioner and the Board of Governors and provide such additional information as the Commissioner and
the Board of Governors may require.
NVB was
originally chartered by the California Department of Financial Institutions. On July 3, 2012, the California Legislature approved
and adopted a reorganization plan proposed by Governor Jerry Brown to restructure the California government with the goal of achieving
a more efficient, streamlined and cost-effective state government. As part of the reorganization plan, the Department of Financial
Institutions (“DFI”) and the Department of Corporations (“DOC”) were merged into a newly created California
Department of Business Oversight (“DBO”) with a single commissioner in charge of the DBO. Effective July 1, 2013,
the former DFI and DOC became the Division of Financial Institutions and the Division of Corporations, respectively, under the
DBO. It is uncertain what effect this reorganization may have upon the regulation of NVB in the future.
The Company
is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company
Act”), and is registered as such with, and subject to the supervision of, the Board of Governors. The Company is required
to obtain the approval of the Board of Governors before it may acquire all or substantially all of the assets of any bank, or
ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, the Company would
own or control more than 5% of the voting shares of such bank. The Bank Holding Company Act prohibits the Company from acquiring
any voting shares of, or interest in, all or substantially all of the assets of, a bank located outside the State of California
unless such an acquisition is specifically authorized by the laws of the state in which such bank is located. Any such interstate
acquisition is also subject to the provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
The Company,
and its subsidiary, NVB, are deemed to be “affiliates” within the meaning of that term as defined in the Federal Reserve
Act. This means, for example, that there are limitations (a) on loans between affiliates, and (b) on investments by NVB in affiliates’
stock as collateral for loans to any borrower. The Company and its subsidiaries are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of securities.
Capital Adequacy
.
The Board of Governors and the FDIC have adopted risk-based capital guidelines for evaluating the capital adequacy of bank holding
companies and banks. The guidelines are designed to make capital requirements sensitive to differences in risk profiles among
banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of bank capital uniform
internationally. Under the guidelines, the Company and its banking subsidiaries are required to maintain capital equal to at least
8% of its assets and commitments to extend credit, weighted by risk, of which at least 4% must consist primarily of common equity
(including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock, or a limited amount
of loan loss reserves. The Company and NVB are subject to regulations issued by the Board of Governors and the FDIC, which require
maintenance of a certain level of capital. These regulations impose two capital standards: a risk-based capital standard and a
leverage capital standard.
Assets, commitments
to extend credit and off-balance sheet items are categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For example, most home mortgage loans are placed in a 50%
risk category and therefore require maintenance of capital equal to 4% of such loans, while commercial loans are placed in a 100%
risk category and therefore require maintenance of capital equal to 8% of such loans.
Under the Board
of Governors’ risk-based capital guidelines, assets reported on an institution’s balance sheet and certain off-balance
sheet items are assigned to risk categories, each of which has an assigned risk weight. Capital ratios are calculated by dividing
the institution’s qualifying capital by its period-end risk-weighted assets. The guidelines establish two categories of
qualifying capital: Tier 1 capital (defined to include common stockholders’ equity and noncumulative perpetual preferred
stock) and Tier 2 capital which includes, among other items, limited life (and in case of banks, cumulative) preferred stock,
mandatory convertible securities, subordinated debt and a limited amount of reserve for loan losses. Tier 2 capital may also include
up to 45% of the pretax net unrealized gains on certain available-for-sale equity securities having readily determinable fair
values (i.e. the excess, if any, of fair market value over the book value or historical cost of the investment security). The
federal regulatory agencies reserve the right to exclude all or a portion of the unrealized gains upon a determination that the
equity securities are not prudently valued. Unrealized gains and losses on other types of assets, such as bank premises and available-for-sale
debt securities, are not included in Tier 2 capital, but may be taken into account in the evaluation of overall capital adequacy
and net unrealized losses on available-for-sale equity securities will continue to be deducted from Tier 1 capital as a cushion
against risk. Each institution is required to maintain a risk-based capital ratio (including Tier 1 and Tier 2 capital) of 8%,
of which at least half must be Tier 1 capital.
Under the Board
of Governors’ leverage capital standard, an institution is required to maintain a minimum ratio of Tier 1 capital to the
sum of its quarterly average total assets and quarterly average reserve for loan losses, less intangibles not included in Tier
1 capital. Period-end assets may be used in place of quarterly average total assets on a case-by-case basis. The Board of Governors
and the FDIC have adopted a minimum leverage ratio for bank holding companies as a supplement to the risk-weighted capital guidelines.
The leverage ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to total assets) for the highest rated bank holding
companies or those that have implemented the risk-based capital market risk measure. All other bank holding companies must maintain
a minimum Tier 1 leverage ratio of 4% with higher leverage capital ratios required for bank holding companies that have significant
financial and/or operational weakness, a high risk profile, or are undergoing or anticipating rapid growth.
At December
31, 2013, the Company and the Bank were in compliance with the risk-based capital and leverage ratios described above. See
Item 8
, “Financial Statements and Supplementary Data”, and Note 16 to the Consolidated Financial Statements incorporated
by reference therein, for a listing of the Company’s and the Bank’s risk-based capital ratios at December 31, 2013
and 2012.
FDICIA.
The Board of Governors, the Comptroller of the Currency (“OCC”) and the FDIC have adopted regulations implementing
a system of prompt corrective action for insured financial institutions pursuant to Section 38 of the Federal Deposit Insurance
Act and Section 131 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). These regulations
establish five capital categories with the following characteristics: (1) “Well capitalized” - consisting of institutions
with a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater, and the institution is not subject to any written agreement, order, capital directive, or prompt corrective
action directive to meet and maintain a specific capital level for any capital measure; (2) “Adequately capitalized”
- consisting of institutions with a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not meet the definition of a “well capitalized”
institution; (3) “Undercapitalized” - consisting of institutions with a total risk-based capital ratio less than 8%,
a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 4%; (4) “Significantly undercapitalized”
- consisting of institutions with a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less
than 3%, or a leverage ratio of less than 3%; and (5) “Critically undercapitalized” - consisting of an institution
with a ratio of tangible equity to total assets that is equal to or less than 2%. NVB is considered “well capitalized”
under the framework for prompt corrective action.
The regulations
established procedures for classification of financial institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of directives by the appropriate regulatory agency,
among other matters. The regulations impose restrictions upon all institutions to refrain from certain actions which would cause
an institution to be classified within any one of the three “undercapitalized” categories, such as declaration of
dividends or other capital distributions or payment of management fees, if following the distribution or payment the institution
would be classified within one of the “undercapitalized” categories. In addition, institutions which are classified
in one of the three “undercapitalized” categories are subject to certain mandatory and discretionary supervisory actions.
Mandatory supervisory actions include (1) increased monitoring and review by the appropriate federal banking agency; (2) implementation
of a capital restoration plan; (3) total asset growth restrictions; and (4) limitation upon acquisitions, branch expansion, and
new business activities without prior approval of the appropriate federal banking agency. Discretionary supervisory actions may
include (1) requirements to augment capital; (2) restrictions upon affiliate transactions; (3) restrictions upon deposit gathering
activities and interest rates paid; (4) replacement of senior executive officers and directors; (5) restrictions upon activities
of the institution and its affiliates; (6) requiring divestiture or sale of the institution; and (7) any other supervisory action
that the appropriate federal banking agency determines is necessary to further the purposes of the regulations. Further, the federal
banking agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital
restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution
will comply with such capital restoration plan. The aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository institution’s total assets at the time it became undercapitalized,
and (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital
standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution
fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” FDICIA also restricts
the solicitation and acceptance of and interest rates payable on brokered deposits by insured depository institutions that are
not “well capitalized.” An “undercapitalized” institution is not allowed to solicit deposits by offering
rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the particular institution’s
normal market areas or in the market areas in which such deposits would otherwise be accepted.
Any financial
institution which is classified as “critically undercapitalized” must be placed in conservatorship or receivership
within 90 days of such determination unless it is also determined that some other course of action would better serve the purposes
of the regulations. Critically undercapitalized institutions are also prohibited from making (but not accruing) any payment of
principal or interest on subordinated debt without the prior approval of the FDIC and the FDIC must prohibit a critically undercapitalized
institution from taking certain other actions without its prior approval, including (1) entering into any material transaction
other than in the usual course of business, including investment expansion, acquisition, sale of assets or other similar actions;
(2) extending credit for any highly leveraged transaction; (3) amending articles or bylaws unless required to do so to comply
with any law, regulation or order; (4) making any material change in accounting methods; (5) engaging in certain affiliate transactions;
(6) paying excessive compensation or bonuses; and (7) paying interest on new or renewed liabilities at rates which would increase
the weighted average costs of funds beyond prevailing rates in the institution’s normal market areas.
Under FDICIA,
the federal financial institution agencies have adopted regulations which require institutions to establish and maintain comprehensive
written real estate lending policies which address certain lending considerations, including loan-to-value limits, loan administrative
policies, portfolio diversification standards, and documentation, approval and reporting requirements. FDICIA further generally
prohibits an insured state bank from engaging as a principal in any activity that is impermissible for a national bank, absent
an FDIC determination that the activity would not pose a significant risk to the Deposit Insurance Fund, and that the bank is,
and will continue to be, within applicable capital standards. Similar restrictions apply to subsidiaries of insured state banks.
The Company does not currently intend to engage in any activities which would be restricted or prohibited under FDICIA.
Effective January
1, 2015, the risk-based capital regulations and prompt corrective regulations, described above under “Capital Adequacy”
and “FDICIA,” respectively, have been amended to the extent described below under “Basel III Capital.”
Basel III
Capital
. In July 2013, the federal bank regulatory agencies issued interim final rules that revise and replace the current
risk-based capital requirements. These rules implement the “Basel III” regulatory capital reforms released by the
Basel Committee on Banking Supervision and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Basel III reforms reflected in the final rules include an increase in the risk-based capital requirements and certain changes
to capital components and the calculation of risk-weighted assets.
Effective January
1, 2015, banking organizations like the Company and NVB must comply with new minimum capital ratio requirements to be phased in
between January 1, 2015 and January 1, 2019, which would consist of the following: (i) a new common equity Tier 1 capital to total
risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%); (iii)
a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted
average total assets (“leverage”) ratio of 4%.
In addition,
a “capital conservation buffer,” is established which when fully phased-in will require maintenance of a minimum of
2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements
described above. The 2.5% buffer would increase the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%,
(ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new buffer requirement would be phased in between
January 2016 and January 2019. An institution would be subject to limitations or prohibition from paying dividends, engaging in
share repurchases, discretionary payments under Tier 1 instruments, and paying discretionary bonuses if its capital ratio level
fell below the buffer amount.
The federal
bank regulatory agencies have also proposed changes to the prompt corrective action framework (described above under “
FDICIA
”)
which is designed to place restrictions on insured depository institutions if their capital ratios begin to show signs of weakness.
These changes will take effect January 1, 2015 and will require insured depository institutions to meet the following increased
capital ratio requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio
of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules);
and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).
Assuming the
Basel III interim final rules were in effect at December 31, 2013, and based upon the Company’s capital position at December
31, 2013, management believes that the Company and NVB would be in compliance with the minimum capital requirements, including
the fully phased-in capital conservation buffer requirement, of the interim final rules.
Rating System
.
The Federal Financial Institution Examination Counsel (“FFIEC”) on December 13, 1996, approved an updated Uniform
Financial Institutions Rating System (“UFIRS”). In addition to the five components traditionally included in the so-called
“CAMEL” rating system which has been used by bank examiners for a number of years to classify and evaluate the soundness
of financial institutions (including capital adequacy, asset quality, management, earnings and liquidity), UFIRS includes for
all bank regulatory examinations conducted on or after January 1, 1997, a new rating for a sixth category identified as sensitivity
to market risk. Ratings in this category are intended to reflect the degree to which changes in interest rates, foreign exchange
rates, commodity prices or equity prices may adversely affect an institution’s earnings and capital. The revised rating
system is identified as the “CAMELS” system.
CRA Compliance
.
Community Reinvestment Act (“CRA”) regulations evaluate banks’ lending to low and moderate income individuals
and businesses across a four-point scale from “outstanding” to “substantial noncompliance,” and are a
factor in regulatory review of applications to merge, establish new branches or form bank holding companies. In addition, any
bank rated in “substantial noncompliance” with the CRA regulations may be subject to enforcement proceedings.
Regulatory
Compliance.
NVB is subject to periodic regulatory examinations in the ordinary course of business which are conducted by the
Federal Reserve Bank of San Francisco and the California Department of Business Oversight (“DBO”). A supervisory agreement
signed in 2010 by and among North Valley Bancorp, NVB and the Federal Reserve Bank of San Francisco to address certain examination
issues was terminated effective as of April 16, 2012. Resolutions adopted by the NVB Board of Directors at the request of the
DBO (formerly the California DFI) for similar reasons were also terminated in 2012. During the quarter ended September 30, 2013,
in accordance with the terms of an agreement reached with the Federal Reserve Bank of San Francisco, NVB disbursed a total of
$1,260,000 to certain affected parties, as agreed, to resolve criticisms raised in connection with a compliance examination conducted
in 2010, and NVB remains in compliance with that agreement.
Dividends
.
The Company’s ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law.
Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends from NVB. The
ability of NVB to pay cash dividends is subject to restrictions set forth in the California Financial Code as well as restrictions
established by the FDIC and the FRB. See
Items 1A
, “Risk Factors” and
5
, “Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” below for further information regarding
the payment of cash dividends by the Company and NVB.
The Board of
Directors of the Company decides whether to declare and pay dividends after consideration of the Company’s earnings, financial
condition, future capital needs, regulatory requirements and other factors as the Board of Directors may deem relevant. The Company
suspended indefinitely the payment of quarterly cash dividends on its common stock beginning in 2009. This Board decision was
made to strengthen and preserve the Company’s capital base in these challenging economic times. The payment of cash dividends
remains suspended at present and the payment of dividends in the future will be determined by the Board of Directors after consideration
of the Company’s earnings, financial condition, future capital funds, regulatory requirements and other factors as the Board
of Directors may deem relevant.
The Company
relies upon distributions from NVB in the form of cash dividends in order to pay dividends to its shareholders. The Board of Governors
of the Federal Reserve System generally prohibits a bank holding company from declaring or paying a cash dividend which would
impose undue pressure on the capital of a subsidiary bank or would be funded only through borrowing or other arrangements that
might adversely affect a bank holding company’s financial position. The Federal Reserve Board policy is that a bank holding
company should not pay 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.
The Patriot
Act
On October 26,
2001, President Bush signed the USA Patriot Act (the “Patriot Act”), which includes provisions pertaining to domestic
security, surveillance procedures, border protection, and terrorism laws to be administered by the Secretary of the Treasury.
Title III of the Patriot Act entitled, “International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001”
includes amendments to the Bank Secrecy Act which expand the responsibilities of financial institutions in regard to anti-money
laundering activities with particular emphasis upon international money laundering and terrorism financing activities through
designated correspondent and private banking accounts.
Effective December
25, 2001, Section 313(a) of the Patriot Act prohibits any insured financial institution such as North Valley Bank, from providing
correspondent accounts to foreign banks which do not have a physical presence in any country (designated as “shell banks”),
subject to certain exceptions for regulated affiliates of foreign banks. Section 313(a) also requires financial institutions to
take reasonable steps to ensure that foreign bank correspondent accounts are not being used to indirectly provide banking services
to foreign shell banks, and Section 319(b) requires financial institutions to maintain records of the owners and agent for service
of process of any such foreign banks with whom correspondent accounts have been established.
Effective July
23, 2002, Section 312 of the Patriot Act created a requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that establishes, maintains, administers, or manages a private
banking account or a correspondent account in the United States for a non-United States person, including a foreign individual
visiting the United States, or a representative of a non-United States person shall establish appropriate, specific, and, where
necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and record instances
of money laundering through those accounts.
The Patriot
Act contains various provisions in addition to Sections 313(a) and 312 that affect the operations of financial institutions by
encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals,
entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.
The Company and North Valley Bank are not currently aware of any account relationships between North Valley Bank and any foreign
bank or other person or entity as described above under Sections 313(a) or 312 of the Patriot Act. Certain surveillance provisions
of the Patriot Act were scheduled to expire on December 31, 2005, and actions to restrict the use of the Patriot Act surveillance
provisions were filed by the ACLU and other organizations. On March 9, 2006, after temporary extensions of the Patriot Act, President
Bush signed the “USA Patriot Improvement and Reauthorization Act of 2005” and the “USA Patriot Act Additional
Reauthorizing Amendments Act of 2006,” which reauthorized all expiring provisions of the Patriot Act and extended
certain provisions related to surveillance and production of business records until December 31, 2009. The extended deadline
for those provisions was subsequently further extended at various times during 2010 and 2011 and on May 26, 2011, President Obama
signed a further four-year extension of the surveillance provisions.
The effects
which the Patriot Act and any additional legislation enacted by Congress may have upon financial institutions is uncertain; however,
such legislation could increase compliance costs and thereby potentially may have an adverse effect upon the Company’s results
of operations.
The Sarbanes-Oxley
Act of 2002
On July 30,
2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Act”), legislation designed to
address certain issues of corporate governance and accountability. The key provisions of the Act and the rules promulgated by
the SEC pursuant to the Act include the following:
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Expanded
oversight of the accounting profession by creating a new independent public company oversight
board to be monitored by the SEC.
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Revised
rules on auditor independence to restrict the nature of non-audit services provided to
audit clients and to require such services to be pre-approved by the audit committee.
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Improved
corporate responsibility through mandatory listing standards relating to audit committees,
certifications of periodic reports by the CEO and CFO and making issuer interference
with an audit a crime.
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Enhanced
financial disclosures, including periodic reviews for largest issuers and real time disclosure
of material company information.
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Enhanced
criminal penalties for a broad array of white collar crimes and increases in the statute
of limitations for securities fraud lawsuits.
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Disclosure
of whether a company has adopted a code of ethics that applies to the company’s
principal executive officer, principal financial officer, principal accounting officer
or controller, or persons performing similar functions, and disclosure of any amendments
or waivers to such code of ethics.
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Disclosure
of whether a company’s audit committee of its board of directors has a member of
the audit committee who qualifies as an “audit committee financial expert.”
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A
prohibition on insider trading during pension plan black-out periods.
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Disclosure
of off-balance sheet transactions.
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A
prohibition on personal loans to directors and officers.
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Conditions
on the use of non-GAAP (generally accepted accounting principles) financial measures.
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Standards
of professional conduct for attorneys, requiring attorneys having an attorney-client
relationship with a company, among other matters, to report “up the ladder”
to the audit committee, to another board committee or to the entire board of directors
regarding certain material violations.
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Expedited
filing requirements for Form 4 reports of changes in beneficial ownership of securities,
reducing the filing deadline to within 2 business days of the date on which an obligation
to report is triggered.
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Accelerated
filing requirements for reports on Forms 10-K and 10-Q by public companies which qualify
as “accelerated filers,” with a phased-in reduction of the filing deadline
for Form 10-K and Form 10-Q.
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Disclosure
concerning website access to reports on Forms 10-K, 10-Q and 8-K, and any amendments
to those reports, by “accelerated filers” as soon as reasonably practicable
after such reports and material are filed with or furnished to the SEC.
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Rules
requiring national securities exchanges and national securities associations to prohibit
the listing of any security whose issuer does not meet audit committee standards established
pursuant to the Act.
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The Company’s
securities are listed on the NASDAQ Global Select Market. Consequently, in addition to the rules promulgated by the SEC pursuant
to the Act, the Company must also comply with the listing standards applicable to all NASDAQ listed companies. The NASDAQ listing
standards applicable to the Company include standards related to (i) director independence, (ii) executive session meetings of
the board, (iii) requirements for audit, nominating and compensation committee charters, membership qualifications and procedures,
(iv) shareholder approval of equity compensation arrangements, and (v) code of conduct requirements.
The Company
has incurred and it is anticipated that it will continue to incur increased costs to comply with the Act and the rules and regulations
promulgated pursuant to the Act by the Securities and Exchange Commission, NASDAQ and other regulatory agencies having jurisdiction
over the Company or the issuance and listing of its securities. The Company does not currently anticipate that compliance with
the Act and such rules and regulations will have a material adverse effect upon its financial position or results of its operations
or its cash flows. Management is required to report on the effectiveness of internal control over financial reporting, and an
external attestation report of the Company’s independent registered public accounting firm regarding internal control over
financial reporting is required for the years ended December 31, 2013 and 2012 but was not required for the year ended December
31, 2011. See
Item 9A
, “Controls and Procedures,” below.
The California
Corporate Disclosure Act
Effective January
1, 2003, the California Corporate Disclosure Act (the “CCD Act”) required publicly traded corporations incorporated
or qualified to do business in California to disclose information about their past history, auditors, directors and officers.
Effective September 28, 2004, the CCD Act, as currently in effect and codified at California Corporations Code Section 1502.1,
requires the Company to file with the California Secretary of State and disclose within 150 days after the end of its fiscal year
certain information including the following:
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The
name of the company’s independent registered accounting firm and a description
of services, if any, performed for a company during the previous two fiscal years and
the period from the end of the most recent fiscal year to the date of filing;
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The
annual compensation paid to each director and the five most highly compensated non-director
executive officers (including the CEO and CFO) during the most recent fiscal year, including
all plan and non-plan compensation for all services rendered to a company as specified
in Item 402 of Regulation S-K such as grants, awards or issuance of stock, stock options
and similar equity-based compensation;
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A
description of any loans made to a director at a “preferential” loan rate
during the company’s two most recent fiscal years, including the amount and terms
of the loans;
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Whether
any bankruptcy was filed by a company or any of its directors or executive officers within
the previous 10 years;
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Whether
any director or executive officer of a company has been convicted of fraud during the
previous 10 years; and
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A
description of any material pending legal proceedings other than ordinary routine litigation
as specified in Item 103 of Regulation S-K and a description of such litigation where
the company was found legally liable by a final judgment or order.
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Compliance with
the CCD Act did not have a material adverse effect upon its financial position or results of its operations or its cash flows.
Competition
At June 30,
2013, commercial and savings banks in competition with the Company had 396 banking offices in the counties of Del Norte, Humboldt,
Mendocino, Placer, Shasta, Sonoma, Trinity and Yolo where the Company operates. In those 396 banking offices (which include the
Company’s 22), there were $28.9 billion in total deposits of which the Company had an overall share of 2.7%. Additionally,
the Company competes with thrifts and, to a lesser extent, credit unions, finance companies and other financial service providers
for deposit and loan customers.
Larger banks
may have a competitive advantage over the Company because of higher lending limits and major advertising and marketing campaigns.
They also perform services, such as trust services and international banking which the Company is not authorized nor prepared
to offer currently. The Company has arranged with correspondent banks and with others to provide some of these services for their
customers. As of December 31, 2013, NVB’s lending limit to any one borrower is $29,278,000 on a fully secured basis and
$17,567,000 on an unsecured basis. These limits are adequate in most instances to compete for lending relationships within the
markets we currently serve.
In order to
compete with the major financial institutions in its primary service areas, the Company, through NVB, utilizes to the fullest
extent possible, the flexibility which is accorded by its independent status. This includes an emphasis on specialized services,
local promotional activity, and personal contacts by the officers, directors and employees of the Company. NVB also seeks to provide
special services and programs for individuals in its primary service area who are employed in the agricultural, professional and
business fields, such as loans for equipment, furniture, tools of the trade or expansion of practices or businesses.
Banking is a
business that depends heavily on net interest income. Net interest income is defined as the difference between the interest rate
paid to obtain deposits and other borrowings and the interest rate received on loans extended to customers and on securities held
in the Bank’s investment portfolio. Commercial banks compete with savings and loan associations, credit unions, other financial
institutions and other entities for funds. For instance, yields on corporate and government debt securities and other commercial
paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for loans with savings
and loan associations, credit unions, consumer finance companies, mortgage companies and other lending institutions.
Monetary
and Fiscal Policies
The net interest
income of the Company, and to a large extent, its earnings, are affected not only by general economic conditions, both domestic
and foreign, but also by the monetary and fiscal policies of the United States as set by statutes and as implemented by federal
agencies, particularly the Board of Governors of the Federal Reserve System. The Board of Governors can and does implement national
monetary policy, such as seeking to curb inflation and combat recession by its open market operations in United States government
securities, adjustments in the amount of interest free reserves that banks and other financial institutions are required to maintain,
and adjustments to the discount rates applicable to borrowing by banks from the Federal Reserve System. These activities influence
the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature
and timing of any future changes in monetary policies and their impact on the Company are not predictable.
Deposit Insurance
The FDIC is
an independent federal agency that insures deposits of federally insured banks (such as North Valley Bank) and savings institutions
up to prescribed limits through the Deposit Insurance Fund (“DIF”). The Emergency Economic Stabilization Act of 2008
(“EESA”) temporarily raised the limit on federal deposit insurance coverage provided by the FDIC from $100,000 to
$250,000 per depositor. The Dodd-Frank Act (described in more detail below) made the $250,000 amount permanent.
In addition,
on November 9, 2010, the FDIC issued a final rule (implementing the Dodd-Frank Act) which provided unlimited deposit insurance
coverage for non-interest bearing transaction accounts until December 31, 2012. This Transaction Account Guarantee (“TAG”)
program was not extended and expired December 31, 2012.
The amount of
FDIC assessments paid by each DIF member institution is based on its risk profile as measured by regulatory capital ratios and
other supervisory factors. Under the assessment rate system established in 2006, the FDIC increased the assessment rates (effective
January 1, 2007) for most institutions from $0.05 to $0.07 per $100 of insured deposits and established a Designated Reserve Ratio
(“DRR”) for the DIF during 2007 at 1.25% of insured deposits. Since 2008, due to higher levels of bank failures and
the need to maintain a strong DIF, the FDIC has increased the assessment rates of insured institutions and may continue to do
so in the future. On November 17, 2009, the FDIC amended its regulations and required all insured financial institutions to prepay
their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012 unless they
were notified they were exempt from the prepayment. The FDIC exempted North Valley Bank from the requirement to prepay.
As required
by the Dodd-Frank Act, the FDIC revised the assessment rates, effective April 1, 2011, and the deposit insurance assessment base
used to calculate premiums paid to DIF, substituting the average consolidated total assets less average tangible equity of an
institution in place of deposits. Also pursuant to the Dodd-Frank Act, the FDIC increased the DRR to 2.0 percent, effective January
1, 2011. For the year ended December 31, 2013, the assessment rate for North Valley Bank averaged $0.09 per $100 in assessable
deposits, compared to $0.11 per $100 in assessable deposits for the year ended December 31, 2012. If economic conditions continue
to impact financial institutions and there are additional bank and other financial institution failures, or if the FDIC otherwise
determines, North Valley Bank may be required to pay higher FDIC premiums than the recently increased levels, which could have
a material and adverse effect on the earnings of the Company.
Interstate
Banking
Since
1996, California law implementing certain provisions of prior federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located in California without acquisition of the whole
business unit of the California bank; and (3) prohibited interstate branching through de novo establishment of California
branch offices. Initial entry into California by an out-of-state institution must be accomplished by acquisition of or merger
with an existing whole bank, which has been in existence for at least five years. The Dodd-Frank Act authorizes national and state
banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch.
Glass-Steagall
Act
The Gramm-Leach
Bliley Act, also known as the Financial Services Modernization Act of 1999 (the “FSMA”) eliminated most of the remaining
depression-era “firewalls” between banks, securities firms and insurance companies which was established by the Banking
Act of 1933, also known as the Glass-Steagall Act (“Glass-Steagall). Glass-Steagall sought to insulate banks as depository
institutions from the perceived risks of securities dealing and underwriting, and related activities. The FSMA repealed Section
20 of Glass-Steagall, which prohibited banks from affiliating with securities firms. Bank holding companies that can qualify as
“financial holding companies” can now acquire securities firms or create them as subsidiaries, and securities firms
can now acquire banks or start banking activities through a financial holding company. The FSMA includes provisions which permit
national banks to conduct financial activities through a subsidiary that are permissible for a national bank to engage in directly,
as well as certain activities authorized by statute, or that are financial in nature or incidental to financial activities to
the same extent as permitted to a “financial holding company” or its affiliates. This liberalization of United States
banking and financial services regulation applies both to domestic institutions and foreign institutions conducting business in
the United States. Consequently, the common ownership of banks, securities firms and insurance firms is now possible, as is the
conduct of commercial banking, merchant banking, investment management, securities underwriting and insurance within a single
financial institution using a “financial holding company” structure authorized by the FSMA.
Prior to the
FSMA, significant restrictions existed on the affiliation of banks with securities firms and on the direct conduct by banks of
securities dealing and underwriting and related securities activities. Banks were also (with minor exceptions) prohibited from
engaging in insurance activities or affiliating with insurers. The FSMA removed these restrictions and substantially eliminated
the prohibitions under the Bank Holding Company Act on affiliations between banks and insurance companies. Bank holding companies,
which qualify as financial holding companies through an application process, can now insure, guarantee, or indemnify against loss,
harm, damage, illness, disability, or death; issue annuities; and act as a principal, agent, or broker regarding such insurance
services.
In order for
a commercial bank to affiliate with a securities firm or an insurance company pursuant to the FSMA, its bank holding company must
qualify as a financial holding company. A bank holding company will qualify if (i) its banking subsidiaries are “well capitalized”
and “well managed” and (ii) it files with the Board of Governors a certification to such effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank Holding Company Act now permits financial holding
companies to engage in activities, and acquire companies engaged in activities, that are financial in nature or incidental to
such financial activities. Financial holding companies are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose a substantial risk to the safety or soundness
of depository institutions or the financial system in general. These standards expand upon the list of activities “closely
related to banking” which to date have defined the permissible activities of bank holding companies under the Bank Holding
Company Act. The Company has not determined whether (or when) to seek qualification as a financial holding company.
Volker Rule
.
On December 10, 2013, the federal banking agencies jointly issued a final rule implementing the so-called “Volker Rule”
(set forth in Section 619 of the Dodd-Frank Act). The Volker Rule prohibits depository institutions, companies that control such
institutions, bank holding companies, and the affiliates and subsidiaries of such banking entities, from engaging as principal
for the trading account of the banking entity in any purchase or sale of one or more covered financial instruments (so-called
“proprietary trading”) and imposes limitations upon retaining ownership interests in, sponsoring, investing in and
transacting with certain investment funds, including hedge funds and private equity funds. Certain activities involving underwriting,
risk mitigation hedging, and transactions on behalf of customers as a fiduciary or riskless principal are not prohibited proprietary
trading, including purchases and sales of financial instruments which are either obligations of or issued or guaranteed by (i)
the United States or agencies thereof; (ii) a State or political subdivision including municipal securities; or (iii) the FDIC.
Notwithstanding these permissible activities, no such activities are permitted if they would (i) involve or result in a material
conflict of interest between the banking entity and its clients, customers, or counterparties; (ii) result, directly or indirectly,
in a material exposure by the banking entity to a high-risk asset or a high-risk trading strategy; or (iii) pose a threat to the
safety and soundness of the banking entity or to the financial stability of the United States. The effective date of the final
rule is delayed to July 21, 2015 in order to provide a transitional period for banking entities to conform their activities and
policies to the final rule. Neither the Company nor NVB engages in activities prohibited by the Volker Rule and management does
not expect the Volker Rule to have a material impact upon the Company or NVB.
One further
effect of FSMA was to require that federal financial institution and securities regulatory agencies prescribe regulations to implement
the policy that financial institutions must respect the privacy of their customers and protect the security and confidentiality
of customers’ non-public personal information. These regulations will require, in general, that financial institutions (1)
may not disclose non-public personal information of customers to non-affiliated third parties without notice to their customers,
who must have opportunity to direct that such information not be disclosed; (2) may not disclose customer account numbers except
to consumer reporting agencies; and (3) must give prior disclosure of their privacy policies before establishing new customer
relationships.
Discharge
of Materials into the Environment
Compliance with
federal, state and local regulations regarding the discharge of materials into the environment may have a substantial effect on
the capital expenditure, earnings and competitive position of the Company in the event of lender liability or environmental lawsuits.
Under federal law, liability for environmental damage and the cost of cleanup may be imposed upon any person or entity that is
an “owner” or “operator” of contaminated property. State law provisions, which were modeled after federal
law, are substantially similar. Congress established an exemption under Federal law for lenders from “owner” and/or
“operator” liability, which provides that “owner” and/or “operator” do not include “a
person, who, without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect
his security interests in the vessel or facility.”
In the event
that the Company was held liable as an owner or operator of a toxic property, it could be responsible for the entire cost of environmental
damage and cleanup. Such an outcome could have a serious effect on the Company’s consolidated financial condition depending
upon the amount of liability assessed and the amount of cleanup required.
The Company
takes reasonable steps to avoid loaning against property that may be contaminated. In order to identify possible hazards, the
Company requires that all fee appraisals contain a reference to a visual assessment of hazardous waste by the appraiser. Further,
on loans proposed to be secured by industrial, commercial or agricultural real estate, an Environmental Questionnaire must be
completed by the borrower and any areas of concern addressed. Additionally, the borrower is required to review and sign a Hazardous
Substance Certificate and Indemnity at the time the note is signed.
If the investigation
reveals and if certain warning signs are discovered, but it cannot be easily ascertained, that an actual environmental hazard
exists, the Company may require that the owner/buyer of the property, at his/her expense, have an Environmental Inspection performed
by an insured, bonded environmental engineering firm acceptable to the Company.
Recent Regulatory
Developments
In response
to global credit and liquidity issues involving a number of financial institutions, the United States government, particularly
the United States Department of the Treasury (the “U.S. Treasury”) and the Federal financial institution regulatory
agencies, have taken a variety of extraordinary measures designed to restore confidence in the financial markets and to strengthen
financial institutions, including capital injections, guarantees of bank liabilities and the acquisition of illiquid assets from
banks.
TARP and
the CPP
. On October 3, 2008, the EESA was signed into law. Pursuant to the EESA, the U.S. Treasury was granted the authority
to take a range of actions for the purpose of stabilizing and providing liquidity to the U.S. financial markets and has implemented
several programs, including the purchase by the U.S. Treasury of certain troubled assets from financial institutions under the
Troubled Asset Relief Program” (the “TARP”) and the direct purchase by the U.S. Treasury of equity securities
of financial institutions under the Capital Purchase Program (the “CPP”). The final investment under the CPP was made
in December 2009. The Company did not participate in the CPP.
Financial
Stability Plan
. On February 10, 2009, the U.S. Treasury announced a Financial Stability Plan (the “FSP”) as a
comprehensive approach to strengthening the financial system and addressing the credit crisis. The Plan included a Capital Assistance
Program (the “CAP”) that was intended to serve as a bridge to raising private capital and to ensure sufficient capital
to preserve or increase lending in a worse-than-expected economic deterioration. Eligibility to participate in the CAP was consistent
with the criteria for QFI’s under the CPP. Eligible institutions with consolidated assets below $100 billion would be able
to obtain capital under the CAP after a supervisory review. The CAP ended in November 2009 and the Company did not participate.
American
Recovery and Reinvestment Act
. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “ARRA”)
was signed into law. Section 7001 of the ARRA amended Section 111 of the EESA in its entirety. While the U.S. Treasury
must promulgate regulations to implement the restrictions and standards set forth in Section 7001, the ARRA, among other
things, significantly expands the executive compensation restrictions previously imposed by the EESA. Such restrictions apply
to any entity that has received or will receive financial assistance under the TARP, and shall generally continue to apply for
as long as any obligation arising from financial assistance provided under the TARP, including preferred stock issued under the
CPP, remains outstanding. These ARRA restrictions do not apply to any TARP recipient during such time when the federal government
(i) only holds any warrants to purchase common stock of such recipient or (ii) holds no preferred stock or warrants
to purchase common stock of such recipient. The Company is not subject to these restrictions because it did not participate in
TARP.
The Small
Business Jobs Act of 2010
On September
27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the “SBJ Act”), which, among other
matters, authorizes the U.S. Treasury to buy up to $30 billion in preferred stock or subordinated debt issued by community banks
(or their bank holding companies provided 90% of the funds received are downstreamed to the bank subsidiary) with assets less
that $10 billion pursuant to the Small Business Lending Fund (the “SBLF”) created under the SBJ Act. Funds received
as capital investments will qualify as Tier 1 capital. The SBLF investments are intended to increase the availability of credit
for small businesses and thereby induce the creation of jobs in support of economic recovery.
The participating
banks (or bank holding companies) will pay an annual dividend on the preferred stock or subordinated debt purchased by the U.S.
Treasury in an amount which ranges between 5% and 1% during the initial measurement period of approximately two years determined
by reducing the dividend rate 1% for every 2.5% increase in the bank’s small business lending up to a lending increase of
10%. The dividend rate will be adjusted quarterly during the initial period. If a participant’s lending activity does not
increase in the initial period, the dividend rate will increase thereafter to 7%. After 4.5 years, the dividend rate increases
to 9% until the SBLF funds are repaid.
On December
23, 2010, the federal banking agencies jointly issued guidance on underwriting standards for small business loans originated under
the SBLF which require adherence to safe and sound credit standards and risk management processes. It is uncertain whether the
SBLF will have the intended effect of creating jobs in sufficient numbers to positively impact the economic recovery. The Company
did not participate in the SBLF.
The Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010
On July 21,
2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank
Act”). The Dodd-Frank Act is intended to restructure the regulation of the financial services sector by, among other things,
(i) establishing a framework to identify systemic risks in the financial system implemented by a newly created Financial Stability
Oversight Council and other federal banking agencies; (ii) expanding the resolution authority of the federal banking agencies
over troubled financial institutions; (iii) authorizing changes to capital and liquidity requirements; (iv) changing deposit insurance
assessments; and (v) enhancing regulatory supervision to improve the safety and soundness of the financial services sector. The
Dodd-Frank Act is expected to have a significant impact upon our business as its provisions are implemented over time. Below is
a summary of certain provisions of the Dodd-Frank Act which, directly or indirectly, may affect us.
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Changes
to Capital Requirements.
The federal banking agencies are required to establish minimum leverage and risk-based capital
requirements for banks and bank holding companies which will not be lower and could be higher than current regulatory capital
and leverage standards for insured depository institutions. Under these requirements, trust preferred securities will be excluded
from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15
billion in assets. The Dodd-Frank Act requires capital requirements to be countercyclical so that the required amount of capital
increases in times of economic expansion and decreases in times of economic contraction consistent with safety and soundness.
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Enhanced
Regulatory Supervision.
The Dodd-Frank Act increased regulatory oversight, supervision and examination of banks, bank
holding companies and their respective subsidiaries by the appropriate regulatory agency.
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Consumer Protection.
The Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”) within the Federal Reserve System.
The CFPB is responsible for establishing and implementing rules and regulations under various federal consumer protection
laws governing certain consumer products and services. The CFPB has primary enforcement authority over large financial institutions
with assets of $10 billion or more, while smaller institutions will be subject to the CFPB’s rules and regulations through
the enforcement authority of the federal banking agencies. States are permitted to adopt consumer protection laws and regulations
that are more stringent than those laws and regulations adopted by the CFPB and state attorneys general are permitted to enforce
consumer protection laws and regulations adopted by the CFPB.
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Deposit Insurance.
The Dodd-Frank Act permanently increased the deposit insurance limit for insured deposits to $250,000 per depositor and
extended unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012. Other deposit
insurance changes under the Dodd-Frank Act include (i) amendment of the assessment base used to calculate an insured depository
institution’s deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”) by elimination of deposits
and substitution of average consolidated total assets less average tangible equity during the assessment period as the revised
assessment base; (ii) increasing the minimum designated reserve ratio of the DIF from 1.15 percent to 1.35 percent of the
estimated amount of total insured deposits; (iii) eliminating the requirement that the FDIC pay dividends to depository institutions
when the reserve ratio exceeds certain thresholds; and (iv) repeal of the prohibition upon the payment of interest on demand
deposits to be effective one year after the date of enactment of the Dodd-Frank Act. In December 2010, pursuant to the Dodd-Frank
Act, the FDIC increased the reserve ratio of the DIF to 2.0 percent effective January 1, 2011.
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Transactions with
Affiliates.
The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates under Section 23A and
23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increased
the amount of time for which collateral requirements regarding covered transactions must be maintained.
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Transactions with
Insiders.
Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and
the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements,
reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset
sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain
circumstances, approved by the institution’s board of directors.
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Enhanced
Lending Limitations.
The Dodd-Frank Act strengthened the existing limits on a depository institution’s credit exposure
to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing
transactions.
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Debit
Card Interchange Fees.
The Dodd-Frank Act requires that the amount of any interchange fee charged by a debit
card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. The
Federal Reserve Board is required to establish standards for reasonable and proportional fees which may take into account
the costs of preventing fraud. The restrictions on interchange fees, however, do not apply to banks that, together
with their affiliates, have assets of less than $10 billion.
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Interstate
Branching.
The Dodd-Frank Act authorizes national and state banks to establish branches in other states to
the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish
branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly,
banks will be able to enter new markets more freely.
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Charter
Conversions.
Effective one year after enactment of the Dodd-Frank Act, depository institutions that are subject
to a cease and desist order or certain other enforcement actions issued with respect to a significant supervisory matter are
prohibited from changing their federal or state charters, except in accordance with certain notice, application and other
procedures involving the applicable regulatory agencies.
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Compensation
Practices
. The Dodd-Frank Act provides that the appropriate federal banking regulators must establish standards prohibiting
as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution”
that provides an insider or other employee with “excessive compensation” or could lead to a material financial
loss to such firm. In June 2010, prior to the enactment of the Dodd-Frank Act, the federal bank regulatory agencies jointly
issued the
Interagency Guidance on Sound Incentive Compensation Policies
(“Guidance”), which requires that
financial institutions establish metrics for measuring the risk to the financial institution of such loss from incentive compensation
arrangements and implement policies to prohibit inappropriate risk taking that may lead to material financial loss to the
institution. Together, the Dodd-Frank Act and the Guidance may impact our compensation policies and arrangements.
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Corporate
Governance.
The Dodd-Frank Act will enhance corporate governance requirements to include (i) requiring publicly traded
companies to give shareholders a non-binding vote on executive compensation at their first annual meeting taking place six
months after the date of enactment and at least every three years thereafter and on so-called “golden parachute”
payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders; (ii) authorizing
the SEC to promulgate rules that would allow shareholders to nominate their own candidates for election as directors using
a company’s proxy materials; (iii) directing the federal banking regulators to promulgate rules prohibiting excessive
compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion,
regardless of whether or not the company is publicly traded; and (iv) authorizing the SEC to prohibit broker discretionary
voting on the election of directors and on executive compensation matters.
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Many of the
requirements under the Dodd-Frank Act will be implemented over an extended period of time. Therefore, the nature and extent of
regulations that will be issued by various regulatory agencies and the impact such regulations will have on the operations of
financial institutions such as the Company is unclear. Such regulations resulting from the Dodd-Frank Act may impact the profitability
of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity
and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant
management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory
requirements.
Future Legislation
and Regulation
Certain legislative
and regulatory proposals that could affect the Company and banking business in general are periodically introduced before the
United States Congress, the California State Legislature and federal and state government agencies. It is not known to what extent,
if any, legislative proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive
relationships of financial institutions. It is likely, however, that such legislation could subject the Company and NVB to increased
regulation, disclosure and reporting requirements and increase competition and the Company’s cost of doing business.
In addition
to legislative changes, the various federal and state financial institution regulatory agencies frequently propose rules and regulations
to implement and enforce already existing legislation. It cannot be predicted whether or in what form any such rules or regulations
will be enacted or the effect that such and regulations may have on the Company and NVB.
Employees
At December
31, 2013, the Company had approximately 319 employees, (which includes 297 full-time equivalent employees). None of the Company’s
employees are represented by a labor union, and management considers its relations with employees to be good.
Website Access
Information
on the Company and its subsidiary NVB may be obtained from the Company’s website www.novb.com. Copies of the Company’s
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto are available
free of charge on the website as soon as they are published by the SEC through a link to the Edgar reporting system maintained
by the SEC. Simply select the “NOVB Investors” menu item, then click on “Shareholder Relations” and then
select the “SEC Filings” link. Also made available through the “SEC Filings” link are the Section 16 reports
of ownership and changes in ownership of the Company’s common stock which are filed with the Securities and Exchange Commission
by the directors and executive officers of the Company and by any persons who own more than ten percent of the outstanding shares
of such stock. Information on the Company website is not incorporated by reference into this report.
ITEM 1A.
RISK FACTORS
In addition
to the risks associated with the business of banking generally, as described above under Item 1 “Description of Business”,
the Company’s business, financial condition, operating results, future prospects and stock price can be adversely impacted
by certain risk factors, as 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.
Termination
of our Merger Agreement with TriCo could negatively affect the Company and NVB
. On January 21, 2014, the Company and TriCo
Bancshares (“TriCo”) entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”)
providing for the merger of the Company with and into TriCo (the “Merger”). If the Merger Agreement is terminated
or the Merger is not consummated for any reason, we may suffer adverse consequences, such as: (1) the market price of our common
stock may decline to the extent that the market price prior to termination reflects a market assumption that the Merger will be
completed; (2) recognizing substantial expenses incurred in connection with the negotiation and completion of the transactions
contemplated by the Merger Agreement without realizing the expected benefits of the Merger; (3) our ability to attract, retain
and motivate key personnel, depositors and borrowers as such personnel, depositors and borrowers may experience uncertainty about
their future roles following the consummation of the Merger; (4) competitors may target our existing customers by highlighting
potential uncertainties and integration difficulties that may result from the Merger; (5) the Merger Agreement restricts us from
taking certain actions without TriCo’s consent while the Merger is pending which may, among other matters, prevent us from
pursuing certain transactions or making other changes to our business prior to consummation of the Merger or termination of the
Merger Agreement; and (6) we have a small number of key personnel and the pursuit of the Merger and the preparation for the integration
may place a burden on management and internal resources.
The consideration
to be paid in the Merger is fixed and will not be adjusted for changes in the business, assets, liabilities, prospects, outlook,
financial condition or results of operations of the Company or TriCo, or in the event of any change in our stock price or TriCo’s
stock price.
The Merger Agreement provides that the merger consideration (i.e., the number of shares of TriCo common stock
that will be issued to the holders of the Company’s common stock) is fixed and will not be adjusted for changes in the business,
assets, liabilities, prospects, outlook, financial condition or results of operations of the Company or TriCo, or changes in the
market price of, analyst estimates of, or projections relating to, the Company’s common stock or TriCo’s common stock.
Extensive
Regulation of Banking
. The operations of the Company and its subsidiary, North Valley Bank, are subject to extensive regulation
by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on part or all of such operations. The Company and North Valley Bank believe they are in
substantial compliance in all material respects with laws, rules and regulations applicable to the conduct of their banking business.
Because the banking business is highly regulated, the laws, rules and regulations applicable to the Company are subject to regular
modification and change. These laws, rules and regulations, or any other laws, rules or regulations adopted in the future, could
make compliance more difficult or expensive, restrict the Company’s ability to originate, broker or sell loans, further
limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by the Company, or otherwise
adversely affect the Company’s results of operations, financial condition, or future prospects. The Dodd-Frank Act, signed
into law on July 21, 2010, continues to have a broad impact on the financial services sector, including significant regulatory
and compliance changes. Many of the Dodd-Frank Act requirements are being implemented over time and, given the uncertainty associated
with the manner in which they will be implemented by the various regulatory agencies, the full extent of the impact such requirements
will have on the Company’s operations is not clear. Changes resulting from the Dodd-Frank Act may impact the profitability
of business activities, require changes to certain business practices, impose more stringent capital, liquidity and leverage requirements
or otherwise adversely affect our business, results of operations or financial condition.
Competition
.
An economy characterized by a decline in real estate values, high unemployment and general uncertainty has increased competition
for good quality loans among depository institutions operating in the Company’s market areas. Ultimately, the Company and
North Valley Bank may not be able to compete successfully against current and future competitors. Many competitors offer the banking
services that are offered by North Valley Bank. These competitors include national and super-regional banks, finance companies,
investment banking and brokerage firms, credit unions, government-assisted farm credit programs, other community banks and technology-oriented
financial institutions offering online services. In particular, North Valley Bank’s competitors include several major financial
companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations
and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization
and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve
the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits,
and range and quality of products and services provided, including new technology-driven products and services. Technological
innovation continues to contribute to greater competition in domestic and international financial services markets as technological
advances, such as Internet-based banking services that cross traditional geographic bounds, enable more companies to provide financial
services. If North Valley Bank is unable to attract and retain banking customers, it may be unable to continue its level of loans
and deposits, which may adversely affect its and the Company’s results of operations, financial condition and future prospects.
Dependence
on Key Employees.
The Company and North Valley Bank are dependent on the successful recruitment and retention of highly qualified
personnel. Our ability to implement our business strategies is closely tied to the strengths of our chief executive officer and
other key officers. Our key officers have extensive experience in the banking industry which is not easily replaced. Business
banking, one of the Company’s principal lines of business, is dependent on relationship banking, in which Company personnel
develop professional relationships with small business owners and officers of larger business customers who are responsible for
the financial management of the companies they represent. If these employees were to leave the Company and become employed by
a competing bank, the Company could potentially lose business customers. In addition, the Company relies on its customer service
staff to effectively serve the needs of its consumer customers. The Company very actively recruits for all open positions and
management believes that its employee relations are good.
Growth Strategy
.
The Company has pursued and continues to pursue a growth strategy which depends primarily on generating an increasing level of
loans and deposits at acceptable risk levels. The Company may not be able to sustain this growth strategy without establishing
new branches or new products. Therefore, the Company may expand in its current markets by opening or acquiring branch offices
or may expand into new markets or make strategic acquisitions of other financial institutions or branch offices. This expansion
may require significant investments in equipment, technology, personnel and site locations. Our success in implementing our growth
strategy may not be possible without corresponding increases in our noninterest expenses. In addition, growth through acquisitions
represents a component of our business strategy. The need to integrate the operations and personnel of acquired banks and branches
may not always be successfully accomplished. Any inability to improve operating performance through integration and/or merger
of operations, functions or banks could increase expenses and impact the Company’s performance.
Governmental
Fiscal and Monetary Policies
. The business of banking is affected significantly by the fiscal and monetary policies of the
federal government and its agencies. Such policies are beyond the control of the Company. The Company is particularly affected
by the policies established by the Board of Governors in relation to the supply of money and credit in the United States. The
instruments of monetary policy available to the Board of Governors can be used in varying degrees and combinations to directly
affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits, and this
can and does have a material effect on the Company’s business, results of operations and financial condition.
Geographic
Concentration
. All of the business of the Company is located in the State of California and the banking offices of the Company
are located in the Northern California Counties of Shasta, Trinity, Humboldt, Del Norte, Yolo, Sonoma, Placer and Mendocino. As
a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those
counties. Our success depends upon the business activity, population, employment and income levels, deposits and real estate activity
in these markets. Adverse economic conditions and unemployment trends in those markets are affecting the ability of our customers
to repay their loans which has reduced our growth rate and impacted our financial condition and results of operations. Economic
conditions in the State of California are subject to various uncertainties at this time, including the budgetary and fiscal difficulties
facing the California State Government. Conditions in the California economy may deteriorate and such deterioration would adversely
affect the Company.
Commercial
Loans.
As of December 31, 2013, approximately 9.3% of our loan portfolio consisted of commercial business loans. The credit
risk for commercial loans is a result of several factors, including the concentration of principal in a limited number of loans
and borrowers, the mobility of collateral, the effect of general economic conditions and the increased difficulty of evaluating
and monitoring these types of loans. In addition, unlike residential mortgage loans, which generally are made on the basis of
the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property
whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower’s
ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic
environment. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired.
Real Estate
Values.
A large portion of the loan portfolio of the Company is dependent on real estate. At December 31, 2013, real estate
served as the principal source of collateral with respect to approximately 81.9% of the Company’s loan portfolio. A continuing
substantial decline in the economy in general, or a continuing decline in real estate values in the Company’s primary operating
market areas in particular, 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 mortgage-backed securities included in the
available-for-sale investment portfolio, as well as the Company’s financial condition and results of operations in general
and the market value for Company common stock. Acts of nature, including fires, earthquakes and floods, which may cause uninsured
damage and other loss of value to real estate that secures these loans, may also negatively impact the Company’s financial
condition. In considering whether to make a loan secured by real property, we generally require an appraisal of the property.
However, an appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal does
not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize the amount equal
to the indebtedness secured by the property in the event of foreclosure.
Construction
and Development Loans
. At December 31, 2013, real estate construction loans totaled $27.4 million, or 5.4% of our total loan
portfolio. Residential construction loans, including land acquisition and development, totaled $20.3 million or 74.0% of the Company’s
real estate construction portfolio, and 4.0% of the total loan portfolio. Construction, land acquisition and development lending
involve additional risks because funds are advanced on the security of the project, which is of uncertain value prior to its completion.
Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and
the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required
to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial
funds with repayment dependent, in part, on the completion of the project and the ability of the borrower to sell the property,
rather than the ability of the borrower or the guarantor to repay the principal and interest. If our appraisal of the value of
the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of
construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not
be able to recover all of the unpaid balance of, and accrued interest on, the loan, as well as related foreclosure and holding
costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for
an unspecified period of time.
Other Real
Estate Owned (“OREO”)
. Real estate acquired through, or in lieu of, loan foreclosures is expected to be sold and
is recorded at its fair value less estimated costs to sell. The amount, if any, by which the recorded amount of the loan exceeds
the fair value (less estimated costs to sell) are charged to the allowance for loan losses, if necessary. The Company’s
earnings could be materially and adversely affected by various expenses associated with OREO, including personnel costs, insurance
and taxes, completion and repair costs, valuation adjustments, and other expenses associated with property ownership. Also, any
further decrease in market prices of real estate in our market areas may lead to additional OREO write downs, with a corresponding
expense in our income statement. The Company’s OREO totaled $3,454,000, $22,423,000 and $20,106,000 at December 31, 2013,
2012 and 2011, respectively.
Allowance
for Loan Losses.
Like all financial institutions, the Company maintains an allowance for loan losses to provide for loan defaults
and non-performance, but the allowance for loan losses may not be adequate to cover actual loan losses. In addition, future provisions
for loan losses could materially and adversely affect the Company and therefore the Company’s operating results. The Company’s
allowance for loan losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount
of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that
may be beyond the Company’s control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral
part of their examination process, review the Company’s loans and allowance for loan losses. We believe that the Company’s
allowance for loan losses is adequate to cover current losses, but a continuing decline in real estate values combined with higher
rates of unemployment or under-employment in our operating markets could result in an increase in classified loans and the allowance
for loan losses. These occurrences could materially and adversely affect the Company’s earnings.
Nonperforming
Loans
. In recent years, we have experienced some improvement in the performance of loans, particularly construction, development
and land loans, and unsecured commercial and consumer loans after several years of deterioration. The Company’s nonperforming
loans (defined as nonaccrual loans and loans 90 days or more past due and still accruing interest) were approximately $5,093,000,
$5,835,000 and $18,411,000 at December 31, 2013, 2012 and 2011, respectively. Nonperforming loans as a percentage of the Company’s
total loans were 1.00%, 1.19%, and 4.04% at December 31, 2013, 2012 and, 2011, respectively. Nonperforming loans adversely affect
the Company’s net income in various ways. We do not record interest income on nonaccrual loans; the costs of reappraising
adversely classified assets, legal and other costs associated with loan collections, and other operating costs related to foreclosed
assets have increased our noninterest expense; and upon taking collateral through foreclosure or similar proceedings, we are required
to mark the related loan to the then fair value of the collateral, less estimated selling costs, which may result in a loss. Until
economic and market conditions improve, we expect that our level of nonperforming loans will continue to impact our earnings,
and could have a substantial adverse impact if conditions deteriorate further.
The Effects
of Legislation in Response to Current Credit Conditions.
Legislation passed at the federal level and/or by the State of California
in response to current conditions affecting credit markets could cause the Company to experience higher loan losses if such legislation
reduces the amount that borrowers are otherwise contractually required to pay under existing loan contracts with North Valley
Bank. Such legislation could also result in the imposition of limitations upon North Valley Bank’s ability to foreclose
on property or other collateral or make foreclosure less economically feasible. Such events could result in increased loan losses
and require a material increase in the allowance for loan losses and thereby adversely affect the Company’s results of operations,
financial condition, future prospects, profitability and stock price.
Dilution
of Common Stock.
Shares of the Company’s common stock may be issued in public or private capital raising transactions,
future acquisitions, joint ventures, strategic alliances, or for other corporate purchases approved by the Board of Directors.
On April 22, 2010, the Company raised $40 million (in gross proceeds) in a private placement of 40,000 shares of its Mandatorily
Convertible Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”) to a limited number of institutional
and other accredited investors, including certain directors and executive officers of the Company. The shares of Series A Preferred
Stock were convertible into shares of the Company’s common stock and, on July 21, 2010, with the prior approval of the Company
shareholders, all 40,000 shares of Series A Preferred Stock were converted into a 26,666,646 shares of Company common stock (resulting
in a total of 34,162,463 shares of common stock outstanding on such date). Shares of the Company’s common stock remaining
eligible for future sale could have a further dilutive effect on the market for the common stock and could adversely affect the
market price. The Amended and Restated Articles of Incorporation of the Company currently authorize the issuance of 60,000,000
shares of common stock, of which 6,836,463 were outstanding at December 31, 2013 (after a one-for-five reverse stock split effective
on December 28, 2010). Pursuant to Company stock option plans, at December 31, 2013, employees and directors of the Company had
outstanding options to purchase 354,710 shares of common stock. As of December 31, 2013, there were 241,635 shares of common stock
available for grants under the Company’s stock option plans.
Operations
Risks.
The Company is subject to a variety of operations risks, including, but not limited to, reputational risk, legal risk
and compliance risk, data processing system failures and errors, operational errors resulting from faulty or disabled computer
or telecommunications systems and the risk of fraud or theft by employees or outsiders, any of which may adversely affect our
business and results of operations. The Company maintains a system of internal controls to mitigate against such occurrences and
maintains insurance coverage for such risks, but should such an event occur that is not prevented or detected by the Company’s
internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on the Company’s
business, financial condition or results of operations. The Bank is subject to periodic regulatory examinations in the ordinary
course of business which are conducted by the Federal Reserve Bank of San Francisco and the California DBO.
Business
Confidence and International Uncertainty.
The terrorist actions on September 11, 2001, and thereafter, plus military actions
taken by the United States in Afghanistan, Iraq and elsewhere, have had significant adverse effects upon the United States economy.
Whether terrorist activities in the future and the actions taken by the United States and its allies in combating terrorism on
a worldwide basis will adversely impact the Company, and the extent of such impact, is uncertain. However, such events have had
and may continue to have an adverse effect on the United States economy and by extension, the California economy including business
activity in the Company’s market areas. Further economic deterioration and a loss of business confidence, whether at the
national, state or local level, could adversely affect the Company’s future results of operations by, among other matters,
reducing the demand for loans and other products and services offered by the Company, increasing nonperforming loans and the amounts
required to be reserved for loan losses, reducing the value of collateral held as security for the Company’s loans, and
causing a decline in the Company’s stock price.
The Effects
of Changes to FDIC Insurance Coverage Limits and Assessments.
FDIC insurance assessments are uncertain and increased premiums
may adversely affect the Company’s earnings. The FDIC charges insured financial institutions premiums to maintain the DIF.
Current economic conditions have increased expectations for additional bank closures and, in such event, the FDIC would take control
of the failed banks and guarantee payment of deposits up to applicable insured limits from the DIF. Insurance premium assessments
to insured financial institutions may increase as necessary to maintain adequate funding of the DIF. The EESA of 2008 included
a provision for an increase in the amount of deposits insured by the FDIC to $250,000, which was scheduled to remain in effect
through December 31, 2013. With enactment of the Dodd-Frank Act on July 21, 2010, the $250,000 per depositor insurance limit was
made permanent. The TAG program which provided unlimited deposit insurance for non-interest bearing transaction accounts was not
extended and it expired on December 31, 2012. It is not clear how depositors will regard the increase in insurance coverage to
$250,000 in the future. Despite the increase, some depositors may reduce the amount of deposits held at North Valley Bank if concerns
regarding bank failures persist, which could affect the level and composition of North Valley Bank’s deposit portfolio and
thereby directly impact its funding costs and net interest margin. North Valley Bank’s funding costs may also be adversely
affected in the event that activities of the Federal Reserve Board and the U.S. Department of the Treasury to provide liquidity
for the banking system and improvement in capital markets are curtailed or are unsuccessful. Such events could reduce liquidity
in the markets, thereby increasing funding costs to North Valley Bank or reducing the availability of funds to finance its existing
operations and thereby adversely affect the Company’s results of operations, financial condition, future prospects, profitability
and stock price.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2. DESCRIPTION
OF PROPERTIES
The Company’s
head office is located at 300 Park Marina Circle, Redding, California 96001. As of December 31, 2013, the Bank had branch offices
in Shasta County (ten branches), Trinity County (two branches), Humboldt County (five branches), Del Norte County (one branch),
Yolo County (one branch), Sonoma County (one branch), Placer County (one branch) and Mendocino County (one branch).
The Bank owns
eleven branch office locations. The Bank leases eleven branch office locations, one loan production office, one administrative
building, one non branch location and one storage warehouse facility. Expiration dates of the Bank’s leases range from October
2013 to September 2023. Certain properties currently leased have renewal options which could extend the use of the facility for
additional specified terms, and provisions for rental increases, principally for changes in the cost of living index, property
taxes and maintenance. In the opinion of management, all properties are adequately covered by insurance and existing facilities
are considered adequate for present and anticipated future use.
The following
table summarizes the Company’s premises, both owned and leased:
Office
Description
|
Office
Address
|
Office
Type
|
|
|
|
Redding
|
1327 South Street,
Redding
|
Branch (Owned)
|
Westwood
|
6392-J Westside
Road, Redding
|
Branch (Leased)
|
Shasta Lake
|
4715 Shasta Dam
Blvd., Shasta Lake
|
Branch (Owned)
|
Weaverville
|
595 Main Street,
Weaverville
|
Branch (Owned)
|
Hayfork
|
7061 State Highway
3, Hayfork
|
Branch (Owned)
|
Buenaventura
|
3315 Placer Street,
Redding
|
Supermarket Branch
(Leased)
|
Anderson
|
2686 Gateway Drive,
Anderson
|
Branch (Owned)
|
Enterprise
|
880 E. Cypress
Avenue, Redding
|
Branch (Owned)
|
Cottonwood
|
20635 Gas Point
Road, Cottonwood
|
Supermarket Branch
(Leased)
|
Palo Cedro
|
9334-A Deschutes
Road, Palo Cedro
|
Branch (Leased)
|
Churn Creek
|
2245 Churn Creek
Road, Redding
|
Branch (Owned)
|
Redding Warehouse
|
|
Storage Facility
(Leased)
|
Park Marina Circle
|
300 Park Marina
Circle, Redding
|
Administrative/Branch
(Leased)
|
Cypress Center
|
804 East Cypress,
Redding
|
Administrative
(Leased)
|
Real Estate
|
836 East Cypress,
Redding
|
(Owned)
|
Eureka Mall
|
838 W. Harris,
Eureka
|
Branch (Leased)
|
McKinleyville
|
1640 Central Avenue,
McKinleyville
|
Branch (Leased)
|
Crescent City
|
1492 Northcrest
Drive, Crescent City
|
Branch (Owned)
|
Eureka Downtown
|
402 F Street,
Eureka
|
Branch (Owned)
|
Ferndale
|
394 Main Street,
Ferndale
|
Branch (Owned)
|
Garberville
|
793 Redwood Drive,
Garberville
|
Branch (Leased)
|
Willits
|
255 S. Main Street,
Willits
|
Branch (Owned)
|
Woodland
|
630 Main Street,
Woodland
|
Administrative/Branch
(Leased)
|
Roseville
|
2999 Douglas Blvd.,
Suite 160, Roseville
|
Branch (Leased)
|
Santa Rosa
|
100 B Street,
Suite 110, Santa Rosa
|
Branch (Leased)
|
Ukiah
|
275 West Gobbi Street, Suite B, Ukiah
|
Loan Production Office (Leased)
|
As of December
31, 2013, the Bank’s investment in premises and equipment, net of depreciation, totaled $7,833,000. See
Note 6
to the Consolidated
Financial Statements.
From time to
time, the Company, through NVB, acquires real property through foreclosure of defaulted loans. The policy of the Company is not
to use or permanently retain any such properties but to resell them when practicable.
ITEM 3. LEGAL
PROCEEDINGS
There are no
material legal proceedings pending against the Company or against any of its property. The Company, because of the nature of its
business, is generally subject to various legal actions, threatened or filed, which involve ordinary, routine litigation incidental
to its business. Although the amount of the ultimate exposure, if any, cannot be determined at this time, the Company, based on
the advice of counsel, does not expect that the final outcome of threatened or filed suits will have a materially adverse effect
on its consolidated financial position.
On January 24, 2014, a putative shareholder
class action lawsuit titled
John Solak v. North Valley Bancorp, et al.
was filed in the Superior Court of the State
of California, County of Shasta. TriCo Bancshares and all of the individuals serving as Directors of the Company are also named
as defendants. The complaint alleges breach of fiduciary duty and aiding and abetting breach of fiduciary duty in connection with
the Agreement and Plan of Merger and Reorganization signed between the Company and TriCo Bancshares on January 21, 2014. The Company
and the Directors have not yet responded to the complaint. The Company and its legal counsel believe the complaint’s claims
are without merit. The resolution of this matter is not expected to have a material impact on the Company’s business, financial
condition or results of operations, though no assurance can be given in this regard.
ITEM 4. MINE
SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The North Valley
Bancorp common stock is quoted and trades on the NASDAQ Global Select Market under the symbol “NOVB.” The shares were
first listed with the NASDAQ Stock Market in April 1998. The table below summarizes the Common Stock high and low trading prices
during the two-year period ended December 31, 2013 as reported on the NASDAQ Global Select Market. The Company did not declare
any cash dividends on its common stock for the years ended 2013 and 2012.
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
19.00
|
|
|
$
|
14.00
|
|
|
$
|
12.44
|
|
|
$
|
9.39
|
|
Second Quarter
|
|
$
|
18.00
|
|
|
$
|
16.22
|
|
|
$
|
15.00
|
|
|
$
|
12.24
|
|
Third Quarter
|
|
$
|
20.00
|
|
|
$
|
16.49
|
|
|
$
|
14.41
|
|
|
$
|
13.00
|
|
Fourth Quarter
|
|
$
|
20.24
|
|
|
$
|
18.56
|
|
|
$
|
14.41
|
|
|
$
|
13.65
|
|
Holders
The Company
had approximately 447 shareholders of record as of December 31, 2013.
Dividends
As a California
corporation, the Company’s ability to pay cash dividends is subject to restrictions set forth in the California General
Corporation Law (the “Corporation Law”). The Corporation Law provides that neither a corporation nor any of its subsidiaries
shall make a distribution to the corporation’s shareholders unless the board of directors has determined in good faith either
of the following: (1) the amount of retained earnings of the corporation immediately prior to the distribution equals or exceeds
the sum of (A) the amount of the proposed distribution plus (B) the preferential dividends arrears amount; or (2) immediately
after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities plus
the preferential rights amount. The good faith determination of the board of directors may be based upon (1) financial statements
prepared on the basis of reasonable accounting practices and principles, (2) a fair valuation, or (3) any other method reasonable
under the circumstances; provided, that a distribution may not be made if the corporation or subsidiary making the distribution
is, or is likely to be, unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they
mature. The term “preferential dividends arrears amount” means the amount, if any, of cumulative dividends in arrears
on all shares having a preference with respect to payment of dividends over the class or series to which the applicable distribution
is being made, provided that if the articles of incorporation provide that a distribution can be made without regard to preferential
dividends arrears amount, then the preferential dividends arrears amount shall be zero. The term “preferential rights amount”
means the amount that would be needed if the corporation were to be dissolved at the time of the distribution to satisfy the preferential
rights, including accrued but unpaid dividends, of other shareholders upon dissolution that are superior to the rights of the
shareholders receiving the distribution, provided that if the articles of incorporation provide that a distribution can be made
without regard to any preferential rights, then the preferential rights amount shall be zero.
Funds for payment
of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from NVB.
As a California banking corporation, the ability of NVB to pay cash dividends and/or management fees is subject to restrictions
set forth in the California Financial Code (the “Financial Code”). The Financial Code provides that a bank may not
make a cash distribution to its shareholders in excess of the lesser of (a) the bank’s retained earnings; or (b) the bank’s
net income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary
of the bank to the shareholders of the bank during such period. However, a bank may, with the approval of the Commissioner, make
a distribution to its shareholders in an amount not exceeding the greater of (a) its retained earnings; (b) its net income for
its last fiscal year; or (c) its net income for its current fiscal year. In the event that the Commissioner determines that the
stockholders’ equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound,
the Commissioner may order the bank to refrain from making a proposed distribution.
The Board of
Governors 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 policy of the Board of Governors 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. Such policy also applies to the payment of cash dividends by state member banks such as NVB.
The FDIC may
also restrict the payment of dividends by a subsidiary bank if such payment would be deemed unsafe or unsound or if after the
payment of such dividends, the bank would be included in one of the “undercapitalized” categories for capital adequacy
purposes pursuant to the FDIC Improvement Act of 1991.
The Board of
Directors of the Company decides whether to declare and pay dividends after consideration of the Company’s earnings, financial
condition, future capital needs, regulatory requirements and other factors as the Board of Directors may deem relevant. On January
29, 2009, primarily as a result of the Company’s operating performance for 2008, the Board of Directors determined that
it was in the best interest of the Company to suspend indefinitely the payment of quarterly cash dividends on its common stock,
beginning in 2009. As a result, no cash dividends were declared or paid during 2013, 2012 and 2011.
See
Note 16
to the Consolidated Financial Statements for additional information regarding the payment of dividends, including information
regarding certain limitations on the payment of dividends or distributions by the Company or NVB.
Performance
Graph
The following
graph compares our cumulative total shareholder return since December 31, 2008 with the NASDAQ Composite Index, the
SNL $500 million - $1 billion Bank Index, and SNL Western Bank Index. The graph assumes that the value of the investment in our
common stock and each index (including reinvestment of dividends) was $100.00 on December 31, 2008.
|
|
Period Ending
|
|
Index
|
|
12/31/08
|
|
|
12/31/09
|
|
|
12/31/10
|
|
|
12/31/11
|
|
|
12/31/12
|
|
|
12/31/13
|
|
North Valley Bancorp
|
|
|
100.00
|
|
|
|
55.88
|
|
|
|
47.86
|
|
|
|
51.39
|
|
|
|
76.15
|
|
|
|
101.12
|
|
NASDAQ Composite
|
|
|
100.00
|
|
|
|
145.36
|
|
|
|
171.74
|
|
|
|
170.38
|
|
|
|
200.63
|
|
|
|
281.22
|
|
SNL Bank $500M-$1B
|
|
|
100.00
|
|
|
|
95.24
|
|
|
|
103.96
|
|
|
|
91.46
|
|
|
|
117.25
|
|
|
|
152.05
|
|
SNL Western Bank
|
|
|
100.00
|
|
|
|
91.83
|
|
|
|
104.05
|
|
|
|
94.00
|
|
|
|
118.63
|
|
|
|
166.91
|
|
ITEM 6. SELECTED
FINANCIAL DATA
The following
table presents our selected historical consolidated financial data, and is derived in part from our audited consolidated financial
statements. The selected historical consolidated financial data should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto, which are included in this Annual Report on Form 10-K as well as Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Selected Consoldidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands, except per share data)
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
32,213
|
|
|
$
|
33,731
|
|
|
$
|
37,145
|
|
|
$
|
38,922
|
|
|
$
|
43,955
|
|
Total interest expense
|
|
|
1,618
|
|
|
|
3,525
|
|
|
|
5,786
|
|
|
|
8,985
|
|
|
|
12,721
|
|
Net interest income
|
|
|
30,595
|
|
|
|
30,206
|
|
|
|
31,359
|
|
|
|
29,937
|
|
|
|
31,234
|
|
Provision for loan losses
|
|
|
—
|
|
|
|
2,100
|
|
|
|
2,650
|
|
|
|
7,970
|
|
|
|
26,500
|
|
Net interest income after provision for loan losses
|
|
|
30,595
|
|
|
|
28,106
|
|
|
|
28,709
|
|
|
|
21,967
|
|
|
|
4,734
|
|
Total noninterest income
|
|
|
14,137
|
|
|
|
16,419
|
|
|
|
14,365
|
|
|
|
12,944
|
|
|
|
14,010
|
|
Total noninterest expense
|
|
|
39,513
|
|
|
|
39,979
|
|
|
|
39,715
|
|
|
|
42,144
|
|
|
|
53,990
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
5,219
|
|
|
|
4,546
|
|
|
|
3,359
|
|
|
|
(7,233
|
)
|
|
|
(35,246
|
)
|
Provision (benefit) for income taxes
|
|
|
1,594
|
|
|
|
(1,744
|
)
|
|
|
312
|
|
|
|
(985
|
)
|
|
|
(9,394
|
)
|
Net income (loss)
|
|
|
3,625
|
|
|
|
6,290
|
|
|
|
3,047
|
|
|
|
(6,248
|
)
|
|
|
(25,852
|
)
|
Preferred stock discount
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(18,667
|
)
|
|
|
—
|
|
Net income (loss) available to common stockholders
|
|
$
|
3,625
|
|
|
$
|
6,290
|
|
|
$
|
3,047
|
|
|
$
|
(24,915
|
)
|
|
$
|
(25,852
|
)
|
Income (loss) per share (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.53
|
|
|
$
|
0.92
|
|
|
$
|
0.45
|
|
|
$
|
(6.42
|
)
|
|
$
|
(17.24
|
)
|
Diluted
|
|
$
|
0.53
|
|
|
$
|
0.92
|
|
|
$
|
0.45
|
|
|
$
|
(6.42
|
)
|
|
$
|
(17.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
917,764
|
|
|
$
|
902,343
|
|
|
$
|
904,966
|
|
|
$
|
884,941
|
|
|
$
|
884,362
|
|
Investment securities, interest-bearing deposits in
other financial institutions and federal funds sold
|
|
$
|
319,842
|
|
|
$
|
303,905
|
|
|
$
|
354,380
|
|
|
$
|
275,114
|
|
|
$
|
195,019
|
|
Net loans
|
|
$
|
499,943
|
|
|
$
|
481,753
|
|
|
$
|
443,559
|
|
|
$
|
498,473
|
|
|
$
|
583,878
|
|
Deposits
|
|
$
|
787,849
|
|
|
$
|
768,580
|
|
|
$
|
766,239
|
|
|
$
|
753,790
|
|
|
$
|
787,809
|
|
Stockholder’s equity
|
|
$
|
93,429
|
|
|
$
|
96,161
|
|
|
$
|
89,465
|
|
|
$
|
83,978
|
|
|
$
|
52,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding
|
|
|
6,836,463
|
|
|
|
6,835,192
|
|
|
|
6,833,752
|
|
|
|
6,832,492
|
|
|
|
1,499,163
|
|
Book value per share (2)
|
|
$
|
13.67
|
|
|
$
|
14.07
|
|
|
$
|
13.09
|
|
|
$
|
12.29
|
|
|
$
|
34.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return (loss) on average assets
|
|
|
0.40
|
%
|
|
|
0.69
|
%
|
|
|
0.34
|
%
|
|
|
(0.69
|
%)
|
|
|
(2.85
|
%)
|
Return (loss) on average equity
|
|
|
3.78
|
%
|
|
|
6.70
|
%
|
|
|
3.54
|
%
|
|
|
(8.03
|
%)
|
|
|
(34.92
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk based capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (8% minimum ratio)
|
|
|
19.04
|
%
|
|
|
18.28
|
%
|
|
|
19.53
|
%
|
|
|
17.63
|
%
|
|
|
12.19
|
%
|
Tier I (4% minimum ratio)
|
|
|
17.79
|
%
|
|
|
17.01
|
%
|
|
|
17.99
|
%
|
|
|
15.94
|
%
|
|
|
9.09
|
%
|
Leverage ratio
|
|
|
12.16
|
%
|
|
|
11.77
|
%
|
|
|
11.82
|
%
|
|
|
11.48
|
%
|
|
|
7.16
|
%
|
(1) Earnings per share amounts have been adjusted to give effect to a one for five reverse stock split on December 28, 2010.
(2) Represents stockholders’ equity divided by the number of shares of common stock outstanding at the end of the period indicated.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters
discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking
statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and subject to the safe-harbor provision of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements may contain words related to future projections including, but not limited to, words such
as “believe,” “expect,” “anticipate,” “intend,” “may,” “will,”
“should,” “could,” “would,” and variations of those words and similar words that are subject
to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. Factors that
could cause or contribute to such differences include, but are not limited to, the following: (1) the duration of financial and
economic volatility and actions taken by the United States Congress and governmental agencies, including the United States Department
of the Treasury, to deal with challenges to the U.S. financial system; (2) variances in the actual versus projected growth in
assets and return on assets; (3) loan losses; (4) expenses; (5) changes in the interest rate environment including interest rates
charged on loans, earned on securities investments and paid on deposits and other borrowed funds; (6) competition effects; (7)
fee and other noninterest income earned; (8) general economic conditions nationally, regionally, and in the operating market areas
of the Company and its subsidiaries, including State and local budget issues being addressed in California; (9) changes in the
regulatory environment including government intervention in the U.S. financial system; (10) changes in business conditions and
inflation; (11) changes in securities markets, public debt markets, and other capital markets; (12) data processing and other
operational systems failures or fraud; (13) a further decline in real estate values in the Company’s operating market areas;
(14) the effects of uncontrollable events such as terrorism, the threat of terrorism or the impact of the current military conflicts
in Afghanistan and Iraq and the conduct of the war on terrorism by the United States and its allies, worsening financial and economic
conditions, natural disasters, and disruption of power supplies and communications; and (15) changes in accounting standards,
tax laws or regulations and interpretations of such standards, laws or regulations, as well as other factors. The factors set
forth under Item 1A, “Risk Factors,” in this report and other cautionary statements and information set forth in this
report should be carefully considered and understood as being applicable to all related forward-looking statements contained in
this report when evaluating the business prospects of the Company and its subsidiaries.
Forward-looking
statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. Actual results
and shareholder values in the future may differ significantly from those expressed in forward-looking statements. You are cautioned
not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of the report, and in
the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation
to update or release any revisions to any forward-looking statements, or to report any new information, future event or other
circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However,
your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities
and Exchange Commission on Forms 10-K, 10-Q and 8-K.
Critical
Accounting Policies
General
.
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP). The financial information contained within our financial statements is, to a significant extent, financial
information that is based on measures of the financial effects of transactions and events that have already occurred. A variety
of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an
asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present
in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. Other estimates that
we use are related to the expected useful lives of our depreciable assets. In addition, GAAP itself may change from one previously
acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would
impact the accounting for such transactions could change.
A summary of
the Company’s most significant accounting policies and accounting estimates is contained in Note 1 to the Consolidated Financial
Statements. An accounting estimate recognized in the financial statements is a critical accounting estimate if the accounting
estimate requires management to make assumptions about matters that are highly uncertain at the time the accounting estimate is
made and different estimates that management could reasonably have used in the current period, or changes in the accounting estimate
that are reasonably likely to occur from period to period, would have a material impact on the presentation of the Company’s
financial condition, changes in financial condition, or results of operations. Management considers the Company’s allowance
for loan losses, initial and subsequent valuation of other real estate owned, expenses related to the Company’s share-based
payments programs, valuation of deferred tax assets and liabilities and investment impairment to be critical accounting policies.
Loans
and Allowance for Loan Losses
.
The allowance for loan losses is an estimate of loan losses inherent in the Company’s
loan portfolio as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged
to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after loan losses and loan
growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged
off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves
related to impaired loans and general reserves for inherent losses related to loans that are evaluated collectively for impairment.
A loan is considered
impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts
due, including principal and interest, according to the contractual terms of the original agreement. Loans determined to be impaired
are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value
of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it
may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral
dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral.
A restructuring
of a debt constitutes a troubled debt restructuring (“TDR”) if the Company for economic or legal reasons related to
the debtor’s financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured
loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual
terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.
The determination
of the general reserve for loans that are collectively evaluated for impairment is based on estimates made by management, to include,
but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors
to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated
collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent
in the portfolio taken as a whole.
The Company
calculates the allowance for each portfolio segment (loan type). These portfolio segments include commercial, real estate commercial,
real estate construction (including land and development loans), real estate mortgage, installment and other loans (principally
home equity loans). The allowance for loan losses attributable to each portfolio segment, which includes both individually impaired
loans and loans that are collectively evaluated for impairment, is combined to determine the Company’s overall allowance,
which is included on the consolidated balance sheet.
The Company
assigns a risk rating to all loans except pools of homogeneous loans and periodically performs detailed reviews of all such loans
over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings
are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these
internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries
in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to
assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories, defined as follows:
Pass
– A pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.
Special
Mention
– A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected,
these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit
position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk
to warrant adverse classification.
Substandard
– A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the
value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize
the liquidation of the debt. Well defined weaknesses include a project’s lack of marketability, inadequate cash flow or
collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations.
They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful
– Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic
that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly
questionable and improbable.
Loss
– Loans classified as loss are considered uncollectible and charged off immediately.
The general
reserve component of the allowance for loan losses also consists of reserve factors that are based on management’s assessment
of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative
factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment
described below.
Commercial.
Commercial loans generally possess more inherent risk of loss than real estate portfolio segments because these loans are
generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic
trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these
loans.
Real
Estate Commercial.
Real estate commercial loans generally possess a higher inherent risk of loss than other real estate portfolio
segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate
projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these
loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service
debt obligations.
Real
Estate Construction.
Real estate construction loans generally possess a higher inherent risk of loss than other real estate
portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in
the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition,
trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic
viability of construction projects.
Real
Estate Mortgage.
The degree of risk in real estate mortgage lending depends primarily on the loan amount in relation to collateral
value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower
inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key
economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’
capacity to repay their obligations may be deteriorating.
Individual loans
and receivables in homogeneous loan portfolio segments are not evaluated for specific impairment. Rather, the sole component of
the allowance for these loan types is determined by collectively measuring impairment reserve factors based on management’s
assessment of the following for each homogeneous loan portfolio segment: (1) inherent credit risk, (2) delinquencies, (3) historical
losses and (4) other qualitative factors. The homogenous loan portfolio segments are described in further detail below.
Installment
– An installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over
a specific period. Most installment loans are made directly for consumer purchases. Economic trends determined by unemployment
rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate
that the borrowers’ capacity to repay their obligations may be deteriorating.
Other
(principally home equity loans)
– The degree of risk in home equity loans depends primarily on the loan amount in relation
to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally
possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates
and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that
the borrowers’ capacity to repay their obligations may be deteriorating.
Although management
believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors
reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions
and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance
is adjusted. In addition, the Company’s primary regulators, the Federal Reserve Bank of San Francisco and the California
Department of Financial Institutions, as an integral part of their examination process, review the adequacy of the allowance.
These regulatory agencies may require additions to the allowance based on their judgment about information available at the time
of their examinations.
Other
Real Estate Owned (“OREO”).
OREO represents properties acquired through foreclosure or physical possession.
Write-downs to fair value at the time of transfer to OREO is charged to allowance for loan losses. These properties are subsequently
accounted for at the lower of cost or fair value less costs to sell. Subsequent to foreclosure, management periodically evaluates
the value of OREO held for sale and records a valuation allowance for any subsequent declines in fair value less selling costs.
Subsequent declines in value are charged to operations. Fair value is based on our assessment of information available to us and
depends upon a number of factors, including our historical experience, economic conditions, and issues specific to individual
properties. Management’s evaluation of these factors involves subjective estimates and judgments that may change.
Share
Based Compensation
. At December 31, 2013, the Company had two stock-based compensation plans: the 1998 Employee Stock
Incentive Plan and the 2008 Stock Incentive Plan, which are described more fully in Notes 1 and 13 to the Consolidated Financial
Statements included herein in Item 8, “Financial Statements and Supplementary Data”. Compensation cost is recognized
on all share-based payments over the requisite service periods of the awards based on the grant-date fair value of the options
determined using the Black-Scholes-Merton based option valuation model. Critical assumptions that are assessed in computing the
fair value of share-based payments include stock price volatility, expected dividend rates, the risk free interest rate and the
expected lives of such options. Compensation cost recorded is net of estimated forfeitures expected to occur prior to vesting.
For further information on the computation of the fair value of share-based payments, see
Notes 1
and
13
to the Consolidated Financial
Statements.
Impairment
of Investment Securities
. An investment security is impaired when its carrying value is greater than its fair value. Investment
securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions
warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes
criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment
in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons
underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary”
is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value
is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying
value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell
the security or it is more likely than not that the Company will not be required to sell the security before recovery, only the
portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized
as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company
will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge
to earnings.
Accounting
for Income Taxes
.
The Company files its income taxes on a consolidated basis with its subsidiary. The allocation of income
tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.
The Company
applies the asset and liability method to account for 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 changes in tax laws and rates is recognized in income in the period that includes the enactment date.
On the consolidated balance sheet, net deferred tax assets are included in other assets. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
The Company
accounts for uncertainty in income taxes by recording only tax positions that met the more likely than not recognition threshold,
that the tax position would be sustained in a tax examination.
When tax returns
are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while
others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on
all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including
the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that
is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the
benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable
to the taxing authorities upon examination. As of December 31, 2013, the liability for unrecognized tax benefits is $519,000.
As
of December 31, 2013, the net deferred tax asset was $15,309,000. This is compared to a net deferred tax asset of $12,346,000
as of December 31, 2012.
Business
Organization
North Valley
Bancorp (the “Company”) is a California corporation and a bank holding company for NVB, a state-chartered, Federal
Reserve Member bank. NVB operates out of its main office located at 300 Park Marina Circle, Redding, California 96001, with twenty-two
branches, including two supermarket branches. 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 its revenues.
Overview
Proposed
Merger with TriCo Bancshares
As announced
by the Company on January 21, 2014 and reported in the Company’s Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 22, 2014 (the “Current Report”), the Company has entered into an Agreement and Plan
of Merger and Reorganization dated January 21, 2014 (the “Merger Agreement”), pursuant to which the Company would
merge with and into TriCo Bancshares, a California corporation (“TriCo”), with TriCo being the surviving corporation.
Immediately thereafter, the Company’s subsidiary bank, North Valley Bank, would be merged with and into TriCo’s subsidiary
bank, Tri Counties Bank. Under the terms of the Merger Agreement, the Company shareholders would receive a fixed exchange ratio
of 0.9433 shares of TriCo common stock for each share of Company common stock, providing the Company shareholders with aggregate
ownership on a pro forma basis of approximately 28.6% of the common stock of the combined company. Holders of the Company’s
outstanding in-the-money stock options would receive cash, net of applicable taxes withheld, for the value of their unexercised
stock options. The merger is expected to qualify as a tax-free exchange for shareholders who receive shares of TriCo common stock.
The transactions contemplated by the Merger Agreement are expected to close in the second or third quarter of 2014, pending approvals
of the Company shareholders and the TriCo shareholders, the receipt of all necessary regulatory approvals, and the satisfaction
of other closing conditions which are customary for such transactions. For additional information, reference should be made to
the text of the Agreement and Plan of Merger and Reorganization, filed as an exhibit to the Current Report, and to other information
regarding TriCo and the Company, their respective businesses and the status of their proposed merger, as reported from time to
time in other filings with the Securities and Exchange Commission.
Financial
Results
For the year
ended December 31, 2013, the Company recorded net income of $3,625,000, compared to net income of $6,290,000, for the year ended
December 31, 2012. For 2013, the Company realized a return on average stockholders’ equity of 3.78% and a return on average
assets of 0.40%, as compared to a return on average stockholders’ equity of 6.70% and a return on average assets of 0.69%
for 2012.
During 2013,
total assets increased $15,421,000, or 1.71%, to $917,764,000 at year end. The loan portfolio increased $17,033,000, or 3.46%,
and totaled $509,244,000 at December 31, 2013 compared to $492,211,000 at December 31, 2012. See “Loan Portfolio”
on page 39 for further information. Available-for-sale investment securities decreased $6,336,000 to $279,479,000 at December
31, 2013 from $285,815,000 at December 31, 2012 due to proceeds from maturities and principal pay downs. The loan to deposit ratio
at December 31, 2013 was 64.6% as compared to 64.0% at December 31, 2012. Total deposits increased $19,269,000, or 2.51%, to $787,849,000
at December 31, 2013 compared to $768,580,000 at December 31, 2012. The overall increase in deposits was due to the increase in
non-maturity deposits of $41,908,000. This was offset by a decrease in time certificates of $22,639,000.
Nonperforming
loans (defined as nonaccrual loans and loans 90 days or more past due and still accruing interest) decreased $742,000, or 12.7%,
to $5,093,000 at December 31, 2013 from $5,835,000 at December 31, 2012. Nonperforming loans as a percentage of total loans were
1.00% at December 31, 2013, compared to 1.19% at December 31, 2012.
Nonperforming
assets (defined as nonperforming loans and OREO) totaled $8,547,000 at December 31, 2013, a decrease of $19,711,000 from the December
31, 2012 balance of $28,258,000. Nonperforming assets as a percentage of total assets were 0.93% at December 31, 2013 compared
to 3.13% at December 31, 2012.
Gross charge-offs
for the year ended December 31, 2013 were $1,840,000 and recoveries for the same year totaled $683,000 resulting in net charge-offs
of $1,157,000, compared to gross charge-offs for the year ended December 31, 2012 of $4,702,000 and recoveries of $404,000 resulting
in net charge-offs of $4,298,000.
Results of
Operations
Net Interest
Income and Net Interest Margin (fully taxable equivalent basis):
Net interest income is the difference between interest
earned on loans and investments and interest paid on deposits and borrowings, and is the primary revenue source for the Company.
Net interest margin is net interest income expressed as a percentage of average earning assets. These items have been adjusted
to give effect to $190,000, $272,000 and $324,000 of taxable-equivalent interest income on tax-free investments for the years
ending December 31, 2013, 2012 and 2011.
Net interest
income for 2013 was $30,785,000, a $307,000, or 1.01%, increase from net interest income of $30,478,000 in 2012. Interest income
decreased $1,600,000, or 4.71%, to $32,403,000 in 2013 due primarily to a decrease in average yield on loans. The Company also
had $224,000 in foregone interest income for the loans placed on nonaccrual status during the year ended December 31, 2013 compared
to $575,000 and $1,039,000 for the years ended December 31, 2012 and 2011, respectively. The average loans outstanding in 2013
increased $30,848,000, or 6.64%, to $495,495,000. This higher loan volume increased interest income by $1,731,000 in 2013. The
average yield earned on the loan portfolio decreased 42 basis points to 5.19% for 2013. This decrease in yield decreased interest
income by $2,054,000 in 2013. The net decrease to interest income from the loan portfolio was $323,000. The 2013 average balance
of the investment portfolio decreased $11,908,000, or 3.85%, compared to 2012, which accounted for the $456,000 decrease in interest
income in 2013. The 2013 average yield of the investment portfolio decreased 32 basis points which accounted for an $809,000 decrease
in interest income.
Interest expense
in 2013 decreased $1,907,000, or 54.10%, to $1,618,000. The decrease was primarily related to the average rates paid on time deposits
which decreased 38 basis points to 0.43% and reduced interest expense by $596,000 along with a decrease in average time deposits
of $35,425,000 which reduced interest expense by $287,000 during 2013, and secondarily driven by a decrease in interest expense
on other borrowed funds. The average rate paid on other borrowed funds decreased 219 basis points to 2.31% for 2013 compared to
4.50% for 2012, resulting in a decrease to interest expense of $506,000. The average rate paid on savings and money market accounts
decreased 8 basis points to 0.13% for 2013 compared to 0.21% for 2012, resulting in a decrease to interest expense of $186,000
in 2013. This decrease was offset partially by higher average balances in savings and money market accounts of $19,190,000 in
2013, resulting in a $40,000 increase in interest expense compared to 2012.
Net interest
margin for 2013 decreased 3 basis points to 3.77% from 3.80% in 2012. The net interest margin for the fourth quarter of 2013 was
3.71%, which was a 22 basis point decrease from 3.93% in the fourth quarter of 2012 and an 11 basis point decrease from 3.82%
in the third quarter of 2013. The decrease in the net interest margin in the fourth quarter of 2013 compared to the third quarter
of 2013 is primarily due to a decrease average rate earned on loans.
Net interest
income for 2012 was $30,478,000, a $1,205,000, or 3.80%, decrease from net interest income of $31,683,000 in 2011. Interest income
decreased $3,466,000, or 9.25%, to $34,003,000 in 2012 due primarily to a decrease in average yield on loans. The Company also
had $575,000 in foregone interest income for the loans placed on nonaccrual status during the year ended December 31, 2012 compared
to $1,039,000 for the year ended December 31, 2011. The average loans outstanding in 2012
decreased $18,198,000, or 3.77%, to $464,647,000. This lower loan volume decreased interest income by $1,088,000 in 2012. The
average yield earned on the loan portfolio decreased 37 basis points to 5.61% for 2012. This decrease in yield decreased interest
income by $1,713,000 in 2012. The net decrease to interest income from the loan portfolio was $2,801,000. The 2012 average balance
of the investment portfolio increased $14,441,000, or 4.90%, compared to 2011, which accounted for the $298,000 increase in interest
income in 2012. The 2012 average yield of the investment portfolio decreased 35 basis points which accounted for a $956,000 decrease
in interest income.
Interest expense
in 2012 decreased $2,261,000, or 39.08%, to $3,525,000. The decrease was primarily related to the average rates paid on time deposits
which decreased 40 basis points to 0.81% and reduced interest expense by $783,000 along with a decrease in average time deposits
of $22,932,000 which reduced interest expense by $277,000 during 2012. The average rate paid on savings and money market accounts
decreased 23 basis points to 0.21% for 2012 compared to 0.44% for 2011, resulting in a decrease to interest expense of $525,000
in 2012. This decrease was offset partially by higher average balances in savings and money market accounts of $5,569,000 in 2012,
resulting in a $25,000 increase in interest expense compared to 2011. The average rate paid on other borrowed funds decreased
141 basis points to 4.50% for 2012 compared to 5.91% for 2011, resulting in a decrease to interest expense of $426,000.
Net interest
margin for 2012 decreased 12 basis points to 3.80% from 3.92% in 2011. The net interest margin for the fourth quarter of 2012
was 3.93%, which was a 25 basis point increase from 3.68% in the fourth quarter of 2011 and a 15 basis point increase from 3.78%
in the third quarter of 2012. The increase in the net interest margin in the fourth quarter of 2012 compared to the third quarter
of 2012 is primarily due to a decrease in average balance and average rate paid on the other borrowed funds.
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.
Average Daily Balance Sheets
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|
|
|
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|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
|
|
|
Yield/
|
|
|
Interest
|
|
|
Average
|
|
|
Yield/
|
|
|
Interest
|
|
|
Average
|
|
|
Yield/
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Amount
|
|
|
Balance
|
|
|
Rate
|
|
|
Amount
|
|
|
Balance
|
|
|
Rate
|
|
|
Amount
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
23,091
|
|
|
|
0.23
|
%
|
|
$
|
54
|
|
|
$
|
27,861
|
|
|
|
0.24
|
%
|
|
$
|
66
|
|
|
$
|
31,103
|
|
|
|
0.23
|
%
|
|
$
|
73
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
|
289,510
|
|
|
|
2.09
|
%
|
|
|
6,051
|
|
|
|
297,451
|
|
|
|
2.38
|
%
|
|
|
7,075
|
|
|
|
280,708
|
|
|
|
2.70
|
%
|
|
|
7,580
|
|
Nontaxable securities(1)
|
|
|
7,936
|
|
|
|
7.04
|
%
|
|
|
559
|
|
|
|
11,903
|
|
|
|
6.72
|
%
|
|
|
800
|
|
|
|
14,205
|
|
|
|
6.71
|
%
|
|
|
953
|
|
Total investments
|
|
|
297,446
|
|
|
|
2.22
|
%
|
|
|
6,610
|
|
|
|
309,354
|
|
|
|
2.55
|
%
|
|
|
7,875
|
|
|
|
294,913
|
|
|
|
2.89
|
%
|
|
|
8,533
|
|
Total loans (2)(3)
|
|
|
495,495
|
|
|
|
5.19
|
%
|
|
|
25,739
|
|
|
|
464,647
|
|
|
|
5.61
|
%
|
|
|
26,062
|
|
|
|
482,845
|
|
|
|
5.98
|
%
|
|
|
28,863
|
|
Total earning assets/interest income
|
|
|
816,032
|
|
|
|
3.97
|
%
|
|
|
32,403
|
|
|
|
801,862
|
|
|
|
4.24
|
%
|
|
|
34,003
|
|
|
|
808,861
|
|
|
|
4.63
|
%
|
|
|
37,469
|
|
Nonearning assets
|
|
|
102,653
|
|
|
|
|
|
|
|
|
|
|
|
120,321
|
|
|
|
|
|
|
|
|
|
|
|
106,836
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(9,774
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,888
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,426
|
)
|
|
|
|
|
|
|
|
|
Net nonearning assets
|
|
|
92,879
|
|
|
|
|
|
|
|
|
|
|
|
108,433
|
|
|
|
|
|
|
|
|
|
|
|
92,410
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
908,911
|
|
|
|
|
|
|
|
|
|
|
$
|
910,295
|
|
|
|
|
|
|
|
|
|
|
$
|
901,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts
|
|
$
|
195,048
|
|
|
|
0.04
|
%
|
|
$
|
73
|
|
|
$
|
180,038
|
|
|
|
0.07
|
%
|
|
$
|
125
|
|
|
$
|
164,616
|
|
|
|
0.18
|
%
|
|
$
|
293
|
|
Savings and money market
|
|
|
245,260
|
|
|
|
0.13
|
%
|
|
|
325
|
|
|
|
226,070
|
|
|
|
0.21
|
%
|
|
|
471
|
|
|
|
220,501
|
|
|
|
0.44
|
%
|
|
|
971
|
|
Time deposits
|
|
|
158,051
|
|
|
|
0.43
|
%
|
|
|
686
|
|
|
|
193,476
|
|
|
|
0.81
|
%
|
|
|
1,569
|
|
|
|
216,408
|
|
|
|
1.21
|
%
|
|
|
2,629
|
|
Other borrowed funds
|
|
|
23,085
|
|
|
|
2.31
|
%
|
|
|
534
|
|
|
|
30,205
|
|
|
|
4.50
|
%
|
|
|
1,360
|
|
|
|
32,012
|
|
|
|
5.91
|
%
|
|
|
1,893
|
|
Total interest bearing liabilities/interest
expense
|
|
|
621,444
|
|
|
|
0.26
|
%
|
|
|
1,618
|
|
|
|
629,789
|
|
|
|
0.56
|
%
|
|
|
3,525
|
|
|
|
633,537
|
|
|
|
0.91
|
%
|
|
|
5,786
|
|
Noninterest bearing deposits
|
|
|
174,281
|
|
|
|
|
|
|
|
|
|
|
|
164,437
|
|
|
|
|
|
|
|
|
|
|
|
159,242
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
17,338
|
|
|
|
|
|
|
|
|
|
|
|
22,163
|
|
|
|
|
|
|
|
|
|
|
|
22,386
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
813,063
|
|
|
|
|
|
|
|
|
|
|
|
816,389
|
|
|
|
|
|
|
|
|
|
|
|
815,165
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
95,848
|
|
|
|
|
|
|
|
|
|
|
|
93,906
|
|
|
|
|
|
|
|
|
|
|
|
86,106
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders’ equity
|
|
$
|
908,911
|
|
|
|
|
|
|
|
|
|
|
$
|
910,295
|
|
|
|
|
|
|
|
|
|
|
$
|
901,271
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
|
|
|
$
|
30,785
|
|
|
|
|
|
|
|
|
|
|
$
|
30,478
|
|
|
|
|
|
|
|
|
|
|
$
|
31,683
|
|
Net interest spread
|
|
|
|
|
|
|
3.71
|
%
|
|
|
|
|
|
|
|
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
|
|
|
3.72
|
%
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
3.77
|
%
|
|
|
|
|
|
|
|
|
|
|
3.80
|
%
|
|
|
|
|
|
|
|
|
|
|
3.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Tax-equivalent basis; nontaxable securities are exempt from federal taxation.
(2) Loans on nonaccrual status have been included in the computations of average balances.
(3) Includes loan fees of $190, $361 and $234 for years ended December 31, 2013, 2012 and 2011.
(4) Net interest margin is determined by dividing net interest income by total average earning assets.
The following
table summarizes changes in net interest income resulting from changes in average asset and liability balances (volume) and changes
in average interest rates. The change in interest due to both rate and volume has been allocated to the change in rate (in thousands).
Changes in Volume/Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Compared to 2012
|
|
|
2012 Compared to 2011
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
|
Average
|
|
|
Average
|
|
|
Increase
|
|
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on federal funds sold
|
|
$
|
(11
|
)
|
|
$
|
(1
|
)
|
|
$
|
(12
|
)
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
Interest on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
|
(189
|
)
|
|
|
(835
|
)
|
|
|
(1,024
|
)
|
|
|
452
|
|
|
|
(957
|
)
|
|
|
(505
|
)
|
Nontaxable securities
|
|
|
(267
|
)
|
|
|
26
|
|
|
|
(241
|
)
|
|
|
(154
|
)
|
|
|
1
|
|
|
|
(153
|
)
|
Total investments
|
|
|
(456
|
)
|
|
|
(809
|
)
|
|
|
(1,265
|
)
|
|
|
298
|
|
|
|
(956
|
)
|
|
|
(658
|
)
|
Interest on loans
|
|
|
1,731
|
|
|
|
(2,054
|
)
|
|
|
(323
|
)
|
|
|
(1,088
|
)
|
|
|
(1,713
|
)
|
|
|
(2,801
|
)
|
Total interest income
|
|
|
1,264
|
|
|
|
(2,864
|
)
|
|
|
(1,600
|
)
|
|
|
(797
|
)
|
|
|
(2,669
|
)
|
|
|
(3,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts
|
|
|
11
|
|
|
|
(63
|
)
|
|
|
(52
|
)
|
|
|
28
|
|
|
|
(196
|
)
|
|
|
(168
|
)
|
Savings and money market
|
|
|
40
|
|
|
|
(186
|
)
|
|
|
(146
|
)
|
|
|
25
|
|
|
|
(525
|
)
|
|
|
(500
|
)
|
Time deposits
|
|
|
(287
|
)
|
|
|
(596
|
)
|
|
|
(883
|
)
|
|
|
(277
|
)
|
|
|
(783
|
)
|
|
|
(1,060
|
)
|
Other borrowed funds
|
|
|
(320
|
)
|
|
|
(506
|
)
|
|
|
(826
|
)
|
|
|
(107
|
)
|
|
|
(426
|
)
|
|
|
(533
|
)
|
Total interest expense
|
|
|
(556
|
)
|
|
|
(1,351
|
)
|
|
|
(1,907
|
)
|
|
|
(331
|
)
|
|
|
(1,930
|
)
|
|
|
(2,261
|
)
|
Total change in net interest income
|
|
$
|
1,820
|
|
|
$
|
(1,513
|
)
|
|
$
|
307
|
|
|
$
|
(466
|
)
|
|
$
|
(739
|
)
|
|
$
|
(1,205
|
)
|
Provision
for Loan losses
. The provision for loan losses reflects changes in the credit quality of the entire loan portfolio. The
provision for loan losses corresponds to management’s assessment as to the inherent risk in the portfolio for probable incurred
losses. The provision adjusts the balance in the allowance for loan losses so that the allowance is adequate to provide for the
potential losses based upon historical experience, current economic conditions, the mix in the portfolio and other factors necessary
in estimating these inherent losses. For further information, see discussion under “Loan Portfolio” on page 39 and
“Allowance for Loan losses” on page 44.
The Company
did not record a provision for loan losses for the year ended December 31, 2013. The Company’s provision for loan losses
was $2,100,000 and $2,650,000 for the years ended December 31, 2012 and 2011, respectively. The decrease in the provision for
loan losses is due primarily to a decrease in the level of charge-offs experienced of $2,862,000 to $1,840,000 at December 31
2013, down from $4,702,000 at December 31, 2012 and the decrease in the level of nonperforming loans to $5,093,000 at December
31, 2013, down from $5,835,000 at December 31, 2012. Loan charge-offs, net of recoveries were $1,157,000 in 2013, $4,298,000 in
2012 and $4,987,000 in 2011. The ratio of net charge-offs to average loans outstanding were 0.23% in 2013, 0.93% in 2012 and 1.03%
in 2011. The ratio of the allowance for loan losses to total loans was 1.83% in 2013, 2.12% in 2012 and 2.77% in 2011. The process
for determining allowance adequacy and the resultant provision for loan losses includes a comprehensive analysis of the loan portfolio.
Factors in the analysis include size and mix of the loan portfolio, nonperforming loan levels, charge-off/recovery activity and
other qualitative factors including economic environment and activity. The decision to not record a provision for the year ended
December 31, 2013 reflects management’s assessment of the overall adequacy of the allowance for loan losses including the
consideration of the level of nonperforming loans, other trends in the quality and performance of our loan portfolio, and other
general economic factors. Management believes that the current level of allowance for loan losses as of December 31, 2013 of $9,301,000,
or 1.83% of total loans, is adequate at this time. The allowance for loan losses was $10,458,000, or 2.12% of total loans, at
December 31, 2012. This assessment includes the consideration of the changes in nonperforming loans and the overall effect of
the economy, particularly in real estate values in Northern California.
Noninterest
Income
.
The following table is a summary of the Company’s noninterest income for the years ended December 31
(in thousands):
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Service charges on deposit accounts
|
|
$
|
3,690
|
|
|
$
|
4,333
|
|
|
$
|
4,635
|
|
Other fees and charges
|
|
|
4,422
|
|
|
|
4,715
|
|
|
|
4,663
|
|
Earnings on cash surrender value of life insurance policies
|
|
|
1,472
|
|
|
|
1,363
|
|
|
|
1,359
|
|
Gain on sale of loans
|
|
|
3,038
|
|
|
|
3,154
|
|
|
|
1,172
|
|
Gain on sale of securities
|
|
|
548
|
|
|
|
1,877
|
|
|
|
1,677
|
|
Other
|
|
|
967
|
|
|
|
977
|
|
|
|
859
|
|
Total
|
|
$
|
14,137
|
|
|
$
|
16,419
|
|
|
$
|
14,365
|
|
Noninterest
income for the year ended December 31, 2013 decreased by $2,282,000, or 13.9%, to $14,137,000 from $16,419,000 for the year ended
December 31, 2012. The decrease was primarily attributed to a reduction in gain on sale of securities of $1,329,000. Service charges
on deposit accounts decreased by $643,000 to $3,690,000 for the year ended December 31, 2013 compared to $4,333,000 for the same
period in 2012, reflecting a continuation of the decrease from December 31, 2012 to December 31, 2011, due to a decline in customer
utilization of the program.
Noninterest
income for the year ended December 31, 2012 increased by $2,054,000, or 14.3%, to $16,419,000 from $14,365,000 for the year ended
December 31, 2011. The increase was primarily attributed to gain on sale of loans of $3,154,000. Of the $3,154,000 gain on sale
of loans for the year ended December 31, 2012, the sale of mortgage loans was $2,682,000 and the sale of SBA loans was $472,000
compared to the sale of mortgage loans of $492,000 and the sale of SBA loans of $680,000 for the same period in 2011. Service
charges on deposit accounts decreased by $302,000 to $4,333,000 for the year ended December 31, 2012 compared to $4,635,000 for
the same period in 2011. All other sources
of fees and charges increased by $52,000 to $4,715,000 for the year ended December 31, 2012 compared to $4,663,000 for the same
period in 2011. The Company had a $1,877,000 gain on sale of securities for the year ended December 31, 2012, an increase of $200,000
compared to $1,677,000 for the same period in 2011.
Noninterest
Expense
.
The following table is a summary of the Company’s noninterest expense for the years ended December 31
(in thousands):
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Salaries and benefits
|
|
$
|
20,454
|
|
|
$
|
20,277
|
|
|
$
|
18,657
|
|
Other real estate owned expense
|
|
|
3,539
|
|
|
|
3,556
|
|
|
|
4,804
|
|
Data processing
|
|
|
2,605
|
|
|
|
2,517
|
|
|
|
2,507
|
|
Occupancy
|
|
|
2,495
|
|
|
|
2,547
|
|
|
|
2,786
|
|
Professional services
|
|
|
1,034
|
|
|
|
1,105
|
|
|
|
1,090
|
|
Loan expense
|
|
|
978
|
|
|
|
922
|
|
|
|
337
|
|
Furniture and equipment
|
|
|
860
|
|
|
|
938
|
|
|
|
1,062
|
|
Director expense
|
|
|
822
|
|
|
|
614
|
|
|
|
420
|
|
FDIC and state assessments
|
|
|
820
|
|
|
|
922
|
|
|
|
1,355
|
|
ATM and online banking
|
|
|
573
|
|
|
|
768
|
|
|
|
1,182
|
|
Marketing
|
|
|
571
|
|
|
|
608
|
|
|
|
607
|
|
Printing and supplies
|
|
|
488
|
|
|
|
479
|
|
|
|
542
|
|
Operations expense
|
|
|
474
|
|
|
|
507
|
|
|
|
652
|
|
Postage
|
|
|
450
|
|
|
|
477
|
|
|
|
537
|
|
Messenger
|
|
|
418
|
|
|
|
447
|
|
|
|
608
|
|
Telecommunications
|
|
|
294
|
|
|
|
412
|
|
|
|
305
|
|
Other
|
|
|
2,638
|
|
|
|
2,883
|
|
|
|
2,264
|
|
Total
|
|
$
|
39,513
|
|
|
$
|
39,979
|
|
|
$
|
39,715
|
|
Noninterest
expense decreased $466,000, or 1.17%, to $39,513,000 for the year ended December 31, 2013 from $39,979,000 for the same period
in 2012. Salaries and employee benefits increased $177,000, for the year ended December 31, 2013 compared to the same period in
2012 primarily due to the hiring of production personnel and the development of production incentive plans. Occupancy and furniture
and equipment expense decreased $130,000 for the year ended December 31, 2013 compared to the same period of 2012 due to a decrease
in depreciation and rent expense as a result of facilities consolidation initiatives completed in 2012 and 2011. OREO expense
decreased $17,000 to $3,539,000, for the year ended December 31, 2013 compared to $3,556,000 for the same period in 2012. For
the year ended December 31, 2013, OREO expense consisted of operating expenses and losses from disposals or write-downs of $329,000
and $3,210,000, respectively, compared to $523,000 and $3,033,000, respectively, in 2012. FDIC and state assessments decreased
$102,000 to $820,000 for the year ended December 31, 2013, compared to $922,000 for the same period in 2012, as a result of the
termination of regulatory agreements with the Federal Reserve Bank of San Francisco and the DBO ( formerly the California DFI)
as well as a change in FDIC insurance assessment methodology, which changed the assessment base from total deposits to average
total assets less tangible capital. All other expenses decreased $394,000 to $11,345,000 for the year ended December 31, 2013
compared to $11,739,000 for the same period in 2012.
Noninterest
expense increased $264,000, or 0.66%, to $39,979,000 for the year ended December 31, 2012 from $39,715,000 for the same period
in 2011. Salaries and employee benefits increased $1,620,000, for the year ended December 31, 2012 compared to the same period
in 2011 primarily due to the hiring of production personnel and the development of production incentive plans. Occupancy and furniture
and equipment expense decreased $363,000 for the year ended December 31, 2012 compared to the same period of 2011 due to a decrease
in depreciation and rent expense as a result of facilities consolidation initiatives completed in 2012 and 2011. OREO expense
decreased $1,248,000 to $3,556,000, for the year ended December 31, 2012 compared to $4,804,000 for the same period in 2011. For
the year ended December 31, 2012, OREO expense consisted of operating expenses and losses from disposals or write-downs of $523,000
and $3,033,000, respectively, compared to $708,000 and $4,096,000, respectively, in 2011. FDIC and state assessments decreased
$433,000 to $922,000 for the year ended December 31, 2012, compared to $1,355,000 for the same period in 2011, as a result of
the termination of regulatory agreements with the Federal Reserve Bank of San Francisco and the California Department of Financial
Institutions as well as a change in FDIC insurance assessment methodology, which changed the assessment base from total deposits
to average total assets less tangible capital. All other expenses increased $688,000 to $11,739,000 for the year ended December
31, 2012 compared to $11,051,000 for the same period in 2011.
Income Taxes
. The Company
recorded a provision for income taxes for the year ended December 31, 2013 of $1,594,000, compared to a benefit for income taxes
of $1,744,000, and a provision for income taxes of $312,000 for the year ended December 31, 2012 and December 31, 2011. The effective
tax provision rate for state and federal income taxes was 30.6% for the year ended December 31, 2013, compared to an effective
tax benefit rate of 38.4% for the year ended December 31, 2012, and an effective tax provision rate of 9.3% for the year ended
December 31, 2011. The difference in the effective tax rate compared to the statutory tax rate is primarily the result of the
Company’s investment in municipal securities and Company-owned life insurance policies whose income is exempt from Federal
taxes. In addition, the Company receives certain tax benefits from the State of California Franchise Tax Board for operating and
providing loans, as well as jobs, in designated “Enterprise Zones”.
The Company
evaluates deferred income tax assets for recoverability based on all available evidence. This process involves significant management
judgment about assumptions that are subject to change from period to period based on changes in tax laws, our ability to successfully
implement tax planning strategies, or variances between our future projected operating performance and our actual results. The
Company is required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at
the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not
be realized. In determining the more-likely-than-not criterion, we evaluate all positive and negative available evidence as of
the end of each reporting period. The realization of deferred tax assets ultimately depends on the existence of sufficient taxable
income in the carry back and carry forward periods under the tax law. Due to the Company’s cumulative tax losses in 2009
and 2010, it was determined to establish a partial valuation allowance in 2010 of $4,500,000 to reflect the portion of the deferred
tax assets that the Company determined to be more likely than not that it will not be realized. During the quarter ended December
31, 2011, the Company reversed the Federal portion of its valuation allowance in the amount of $223,000, and in the quarter ended
September 30, 2012, the Company eliminated the remaining valuation allowance of $4,277,000.
As of December
31, 2013, the Company had recorded net deferred income tax assets (which are included in other assets in the accompanying condensed
consolidated balance sheet, of approximately $15,309,000. For a discussion of the Company’s deferred income tax assets,
see “Critical Accounting Policies — Accounting for Income Tax” above and Note 11 of the Consolidated Financial
Statements.
Balance Sheet
Analysis
North Valley
Bancorp’s total assets increased $15,421,000, or 1.7%, to $917,764,000 at December 31, 2013 compared to $902,343,000 at
December 31, 2012 with an increase in the loan portfolio offset by decreases in the investment securities.
Investment
Securities
. The investment securities portfolio decreased $6,340,000 from year end 2012 to a total of $279,481,000 at
December 31, 2013.
The policy of
the Company requires that management determine the appropriate classification of securities at the time of purchase. If management
has the intent and the Company has the ability at the time of purchase to hold debt securities until maturity, they are classified
as investments held-to-maturity, and carried at amortized cost. Debt securities to be held for indefinite periods of time and
not intended to be held-to-maturity and equity securities are classified as available-for-sale and carried at fair 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.
The amortized
cost of securities and their approximate fair value are summarized in the following table for the years ended
December 31
(in thousands):
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government sponsored agencies
|
|
$
|
19,669
|
|
|
$
|
18,198
|
|
|
$
|
21,003
|
|
|
$
|
21,118
|
|
|
$
|
15,042
|
|
|
$
|
15,234
|
|
Obligations of states and political subdivisions
|
|
|
5,216
|
|
|
|
5,317
|
|
|
|
10,698
|
|
|
|
11,197
|
|
|
|
13,811
|
|
|
|
14,455
|
|
Government sponsored agency mortgage-backed securities
|
|
|
251,923
|
|
|
|
248,277
|
|
|
|
239,543
|
|
|
|
245,631
|
|
|
|
270,337
|
|
|
|
275,204
|
|
Corporate securities
|
|
|
6,000
|
|
|
|
4,755
|
|
|
|
6,000
|
|
|
|
4,756
|
|
|
|
6,000
|
|
|
|
4,232
|
|
Equity securities
|
|
|
3,000
|
|
|
|
2,932
|
|
|
|
3,000
|
|
|
|
3,113
|
|
|
|
3,000
|
|
|
|
3,080
|
|
Total available-for-sale
|
|
$
|
285,808
|
|
|
$
|
279,479
|
|
|
$
|
280,244
|
|
|
$
|
285,815
|
|
|
$
|
308,190
|
|
|
$
|
312,205
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agency mortgage-backed securities
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
6
|
|
Total investment securities
|
|
$
|
285,810
|
|
|
$
|
279,481
|
|
|
$
|
280,250
|
|
|
$
|
285,821
|
|
|
$
|
308,196
|
|
|
$
|
312,211
|
|
The following
table shows estimated fair value of our investment securities, exclusive of equity securities with a fair value of $2,932,000,
by year of maturity as of December 31, 2013. Expected maturities, specifically of government sponsored agency mortgage-backed
securities, may differ significantly from contractual maturities because borrowers may have the right to prepay with or without
penalty. Tax-equivalent adjustments have been made in calculating yields on tax exempt securities.
Contractual
Maturity Distribution and Yields of Investment Securities are summarized in the following table (in thousands):
|
|
Within
|
|
|
After One But Within
|
|
|
After Five But Within
|
|
|
After Ten
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Years
|
|
|
Total
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government sponsored agencies
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
18,198
|
|
|
|
1.72
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
18,198
|
|
|
|
1.72
|
%
|
Obligations of states and political subdivisions
|
|
|
3,214
|
|
|
|
7.28
|
%
|
|
|
420
|
|
|
|
7.96
|
%
|
|
|
978
|
|
|
|
7.02
|
%
|
|
|
705
|
|
|
|
7.17
|
%
|
|
|
5,317
|
|
|
|
7.27
|
%
|
Government sponsored agency mortgage-backed securities
|
|
|
887
|
|
|
|
3.63
|
%
|
|
|
103,637
|
|
|
|
2.40
|
%
|
|
|
143,494
|
|
|
|
2.06
|
%
|
|
|
259
|
|
|
|
2.18
|
%
|
|
|
248,277
|
|
|
|
2.20
|
%
|
Corporate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,755
|
|
|
|
2.29
|
%
|
|
|
4,755
|
|
|
|
2.29
|
%
|
Total
available-for-sale
|
|
$
|
4,101
|
|
|
|
6.49
|
%
|
|
$
|
104,057
|
|
|
|
2.42
|
%
|
|
$
|
162,670
|
|
|
|
2.05
|
%
|
|
$
|
5,719
|
|
|
|
2.89
|
%
|
|
$
|
276,547
|
|
|
|
2.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agency mortgage-back securities
|
|
$
|
2
|
|
|
|
2.41
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
2
|
|
|
|
2.41
|
%
|
An investment
security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated
on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether
such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of
the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient
to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the
loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline
is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is
a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline
in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than
not that the Company will not be required to sell the security before recovery, only the portion of the impairment loss representing
credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income.
If management intends to sell the security or it is more likely than not that the Company will be required to sell the security
before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.
Loan Portfolio
.
The loan portfolio increased $17,033,000, or 3.5%, in 2013 and totaled $509,244,000 at December 31, 2013. The loan to deposit
ratio was 64.6%, 64.0% and 59.5% at December 31, 2013, 2012 and 2011.
Major classifications
of loans for the years ended December 31 are summarized as follows (in thousands):
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Commercial
|
|
$
|
47,526
|
|
|
$
|
46,078
|
|
|
$
|
46,160
|
|
|
$
|
54,639
|
|
|
$
|
66,513
|
|
Real estate - commercial
|
|
|
326,631
|
|
|
|
295,630
|
|
|
|
276,644
|
|
|
|
291,514
|
|
|
|
313,917
|
|
Real estate - construction
|
|
|
27,472
|
|
|
|
23,003
|
|
|
|
27,463
|
|
|
|
55,181
|
|
|
|
92,111
|
|
Real estate - mortgage
|
|
|
63,120
|
|
|
|
74,353
|
|
|
|
47,362
|
|
|
|
49,726
|
|
|
|
59,816
|
|
Installment
|
|
|
5,376
|
|
|
|
6,689
|
|
|
|
10,925
|
|
|
|
14,690
|
|
|
|
22,289
|
|
Other
|
|
|
39,311
|
|
|
|
45,941
|
|
|
|
47,965
|
|
|
|
48,292
|
|
|
|
48,478
|
|
Total loans receivable
|
|
|
509,436
|
|
|
|
491,694
|
|
|
|
456,519
|
|
|
|
514,042
|
|
|
|
603,124
|
|
Deferred loan (fees) costs, net
|
|
|
(192
|
)
|
|
|
517
|
|
|
|
(304
|
)
|
|
|
(576
|
)
|
|
|
(707
|
)
|
Allowance for loan losses
|
|
|
(9,301
|
)
|
|
|
(10,458
|
)
|
|
|
(12,656
|
)
|
|
|
(14,993
|
)
|
|
|
(18,539
|
)
|
Net loans
|
|
$
|
499,943
|
|
|
$
|
481,753
|
|
|
$
|
443,559
|
|
|
$
|
498,473
|
|
|
$
|
583,878
|
|
Commercial loans
increased $1,448,000 or 3.1% in 2013 due to an increase in loan originations. The Company increased its Real Estate – Construction
loans during the year by $4,469,000, or 19.4%, from $23,003,000 at December 31, 2012 to $27,472,000 at December 31, 2013. Real
Estate – Commercial loans increased $31,001,000, or 10.5%, during 2013 from $295,630,000 at December 31, 2012 to $326,631,000
at December 31, 2013. Real Estate – Mortgage loans decreased $11,233,000, or 15.1%. Installment loans decreased $1,313,000,
or 19.6%, due to the Company’s decision in January 2008 to discontinue its purchases of indirect auto contracts. Other loans
at December 31, 2013 decreased $6,630,000, or 14.4%, from 2012.
At December
31, 2013 and 2012, the Company serviced Real Estate-Mortgage loans and loans guaranteed by the Small Business Administration which
it had sold to the secondary market of approximately $188,484,000 and $159,010,000, respectively.
The Company
was contingently liable under letters of credit issued on behalf of its customers for $4,557,000 and $4,713,000 at December 31,
2013 and 2012, respectively. At December 31, 2013, commercial and consumer lines of credit, and real estate loans of approximately
$38,683,000 and $35,264,000, respectively, were undisbursed. At December 31, 2012, commercial and consumer lines of credit, and
real estate loans of approximately $47,350,000 and $31,925,000, respectively, were undisbursed. These instruments involve, to
varying degrees, elements of credit and market risk more than the amounts recognized in the balance sheet. The contractual or
notional amounts of these transactions express the extent of the Company’s involvement in these instruments and do not necessarily
represent the actual amount subject to credit loss.
The Company
originates loans for business, consumer and real estate activities for equipment purchases. Such loans are concentrated in the
primary markets in which the Company operates. Substantially all loans are collateralized. Generally, real estate loans are secured
by real property. Commercial and other loans are secured by bank deposits or business or personal assets and leases are generally
secured by equipment. The Company’s policy for requiring collateral is through analysis of the borrower, the borrower’s
industry and the economic environment in which the loan would be granted. The loans are expected to be repaid from cash flows
or proceeds from the sale of selected assets of the borrower.
Maturity
Distribution and Interest Rate Sensitivity of Loans and Commitments
.
The following table shows the maturity of certain
loan categories and commitments. Also provided with respect to such loans and commitments are the amounts due after one year,
classified according to the sensitivity to changes in interest rates (in thousands):
|
|
|
|
|
After One
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Through
|
|
|
After
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
19,593
|
|
|
$
|
11,340
|
|
|
$
|
16,593
|
|
|
$
|
47,526
|
|
Real estate - commercial
|
|
|
39,867
|
|
|
|
54,730
|
|
|
|
232,034
|
|
|
|
326,631
|
|
Real estate - construction
|
|
|
4,525
|
|
|
|
20,384
|
|
|
|
2,563
|
|
|
|
27,472
|
|
Real estate - mortgage
|
|
|
7,046
|
|
|
|
7,301
|
|
|
|
48,773
|
|
|
|
63,120
|
|
Installment
|
|
|
2,662
|
|
|
|
1,479
|
|
|
|
1,235
|
|
|
|
5,376
|
|
Other
|
|
|
21,973
|
|
|
|
951
|
|
|
|
16,387
|
|
|
|
39,311
|
|
|
|
$
|
95,666
|
|
|
$
|
96,185
|
|
|
$
|
317,585
|
|
|
$
|
509,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans maturing after one year with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rates
|
|
|
|
|
|
$
|
76,318
|
|
|
$
|
291,823
|
|
|
$
|
368,141
|
|
Variable interest rates
|
|
|
|
|
|
$
|
19,867
|
|
|
$
|
25,762
|
|
|
$
|
45,629
|
|
Impaired,
Nonaccrual, Past Due, Troubled Debt Restructuring and Other Nonperforming Assets
. 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 original loan agreement. The measurement of impaired
loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.
The following
table shows information related to impaired loans at and for the period ended (in thousands):
|
|
As of December 31, 2013
|
|
|
As of December 31, 2012
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
With no allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
458
|
|
|
$
|
481
|
|
|
$
|
—
|
|
|
$
|
585
|
|
|
$
|
586
|
|
|
$
|
—
|
|
Real estate - commercial
|
|
|
4,193
|
|
|
|
4,284
|
|
|
|
—
|
|
|
|
2,778
|
|
|
|
2,974
|
|
|
|
—
|
|
Real estate - construction
|
|
|
435
|
|
|
|
449
|
|
|
|
—
|
|
|
|
1,210
|
|
|
|
1,273
|
|
|
|
—
|
|
Real estate - mortgage
|
|
|
919
|
|
|
|
948
|
|
|
|
—
|
|
|
|
684
|
|
|
|
736
|
|
|
|
—
|
|
Installment
|
|
|
96
|
|
|
|
115
|
|
|
|
—
|
|
|
|
122
|
|
|
|
138
|
|
|
|
—
|
|
Other
|
|
|
374
|
|
|
|
397
|
|
|
|
—
|
|
|
|
111
|
|
|
|
120
|
|
|
|
—
|
|
Subtotal
|
|
|
6,475
|
|
|
|
6,674
|
|
|
|
—
|
|
|
|
5,490
|
|
|
|
5,827
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
240
|
|
|
|
240
|
|
|
|
150
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Real estate - commercial
|
|
|
113
|
|
|
|
113
|
|
|
|
28
|
|
|
|
184
|
|
|
|
217
|
|
|
|
171
|
|
Real estate - construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
161
|
|
|
|
161
|
|
|
|
18
|
|
Real estate - mortgage
|
|
|
416
|
|
|
|
416
|
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
769
|
|
|
|
769
|
|
|
|
228
|
|
|
|
345
|
|
|
|
378
|
|
|
|
189
|
|
Total Impaired Loans
|
|
$
|
7,244
|
|
|
$
|
7,443
|
|
|
$
|
228
|
|
|
$
|
5,835
|
|
|
$
|
6,205
|
|
|
$
|
189
|
|
The following
table presents the average balance related to impaired loans for the period indicated (in thousands):
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Average Book
|
|
|
Interest Income
|
|
|
Average Book
|
|
|
Interest Income
|
|
|
Average Book
|
|
|
Interest Income
|
|
|
|
Balance
|
|
|
Recognized
|
|
|
Balance
|
|
|
Recognized
|
|
|
Balance
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
960
|
|
|
$
|
—
|
|
|
$
|
941
|
|
|
$
|
—
|
|
|
$
|
2,056
|
|
|
$
|
—
|
|
Real estate - commercial
|
|
|
4,784
|
|
|
|
77
|
|
|
|
3,069
|
|
|
|
—
|
|
|
|
6,354
|
|
|
|
—
|
|
Real estate - construction
|
|
|
458
|
|
|
|
20
|
|
|
|
1,673
|
|
|
|
—
|
|
|
|
9,453
|
|
|
|
—
|
|
Real estate - mortgage
|
|
|
1,415
|
|
|
|
52
|
|
|
|
681
|
|
|
|
—
|
|
|
|
991
|
|
|
|
—
|
|
Installment
|
|
|
127
|
|
|
|
2
|
|
|
|
139
|
|
|
|
—
|
|
|
|
110
|
|
|
|
—
|
|
Other
|
|
|
388
|
|
|
|
—
|
|
|
|
122
|
|
|
|
—
|
|
|
|
91
|
|
|
|
—
|
|
Total
|
|
$
|
8,132
|
|
|
$
|
151
|
|
|
$
|
6,625
|
|
|
$
|
—
|
|
|
$
|
19,055
|
|
|
$
|
—
|
|
Loans on which
the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued
either when reasonable doubt exists as to the full and timely collection of interest or principal, or when a loan becomes contractually
past due by 90 days or more with respect to interest or principal (except that when management believes a loan is well secured
and in the process of collection, interest accruals are continued on loans deemed by management to be fully collectible). When
a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest
income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal
is probable. Interest accruals are resumed on such loans when, in the judgment of management, the loans are estimated to be fully
collectible as to both principal and interest.
Nonperforming
assets for the years ended December 31 are summarized as follows (in thousands):
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Nonaccrual loans
|
|
$
|
5,093
|
|
|
$
|
5,835
|
|
|
$
|
18,359
|
|
|
$
|
20,065
|
|
|
$
|
46,598
|
|
Loans past due 90 days or more
and still accruing interest
|
|
|
—
|
|
|
|
—
|
|
|
|
52
|
|
|
|
—
|
|
|
|
—
|
|
Total nonperforming loans
|
|
|
5,093
|
|
|
|
5,835
|
|
|
|
18,411
|
|
|
|
20,065
|
|
|
|
46,598
|
|
Other real estate owned
|
|
|
3,454
|
|
|
|
22,423
|
|
|
|
20,106
|
|
|
|
25,784
|
|
|
|
12,377
|
|
Total nonperforming assets
|
|
$
|
8,547
|
|
|
$
|
28,258
|
|
|
$
|
38,517
|
|
|
$
|
45,849
|
|
|
$
|
58,975
|
|
At December
31, 2013 and 2012, the recorded investment in nonperforming loans (defined as nonaccrual loans and loans 90 days or more past
due and still accruing interest) was approximately $5,093,000 and $5,835,000, respectively. The Company had $150,000 of specific
allowance for loan losses on nonperforming loans of $240,000 at December 31, 2013 as compared to $189,000 of specific allowance
for loan losses on nonperforming loans of $345,000 at December 31, 2012. Nonperforming loans as a percentage of total loans were
1.00% and 1.19% at December 31, 2013 and 2012, respectively. Nonperforming assets (nonperforming loans and OREO) totaled $8,547,000
at December 31, 2013, a decrease of $19,711,000 from the total at December 31, 2012. Nonperforming assets as a percentage of total
assets were 0.93% and 3.13% at December 31, 2013 and 2012, respectively.
If interest
on nonaccrual loans had been accrued, such income would have approximated $224,000, $575,000 and $1,039,000 for the years ended
December 31, 2013, 2012 and 2011, respectively.
There were no
commitments to lend additional funds to borrowers whose loans were classified as nonaccrual at December 31, 2013.
At December
31, 2013, net carrying value of other real estate owned decreased $18,969,000 to $3,454,000 from $22,423,000 at December 31, 2012.
During the year 2013, the Company transferred seven properties into OREO totaling $1,445,000, sold twenty three properties totaling
$17,204,000, had write-downs of OREO of $3,057,000, and recorded loss on sale of OREO of $153,000. At December 31, 2013, OREO
was comprised of seven properties which consisted of the following: three residential land parcels totaling $2,487,000, one residential
construction loan totaling $161,000 one commercial land parcel for $41,000, one non-farm non-residential property totaling $571,000
and one residential property totaling $194,000.
The composition
of nonperforming loans as of December 31, 2013, September 30, 2013, June 30, 2013, March 31, 2013 and December 31, 2012 was as
follows (in thousands):
|
|
December
|
|
|
September
|
|
|
June
|
|
|
March
|
|
|
December
|
|
|
|
2013
|
|
|
2013
|
|
|
2013
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
total
|
|
|
Amount
|
|
|
total
|
|
|
Amount
|
|
|
total
|
|
|
Amount
|
|
|
total
|
|
|
Amount
|
|
|
total
|
|
Commercial
|
|
$
|
698
|
|
|
|
13.7
|
%
|
|
$
|
582
|
|
|
|
11.2
|
%
|
|
$
|
648
|
|
|
|
11.0
|
%
|
|
$
|
563
|
|
|
|
8.7
|
%
|
|
$
|
585
|
|
|
|
10.0
|
%
|
Real estate - commercial
|
|
|
3,425
|
|
|
|
67.2
|
%
|
|
|
3,391
|
|
|
|
65.0
|
%
|
|
|
3,669
|
|
|
|
62.5
|
%
|
|
|
4,355
|
|
|
|
67.5
|
%
|
|
|
2,962
|
|
|
|
50.8
|
%
|
Real estate - construction
|
|
|
110
|
|
|
|
2.2
|
%
|
|
|
438
|
|
|
|
8.4
|
%
|
|
|
450
|
|
|
|
7.7
|
%
|
|
|
770
|
|
|
|
11.9
|
%
|
|
|
1,371
|
|
|
|
23.5
|
%
|
Real estate - mortgage
|
|
|
417
|
|
|
|
8.2
|
%
|
|
|
412
|
|
|
|
7.9
|
%
|
|
|
622
|
|
|
|
10.6
|
%
|
|
|
513
|
|
|
|
8.0
|
%
|
|
|
684
|
|
|
|
11.7
|
%
|
Installment
|
|
|
69
|
|
|
|
1.4
|
%
|
|
|
82
|
|
|
|
1.6
|
%
|
|
|
89
|
|
|
|
1.5
|
%
|
|
|
93
|
|
|
|
1.4
|
%
|
|
|
122
|
|
|
|
2.1
|
%
|
Other
|
|
|
374
|
|
|
|
7.3
|
%
|
|
|
311
|
|
|
|
6.0
|
%
|
|
|
393
|
|
|
|
6.7
|
%
|
|
|
155
|
|
|
|
2.4
|
%
|
|
|
111
|
|
|
|
1.9
|
%
|
Total nonaccrual loans
|
|
$
|
5,093
|
|
|
|
100.0
|
%
|
|
$
|
5,216
|
|
|
|
100.0
|
%
|
|
$
|
5,871
|
|
|
|
100.0
|
%
|
|
$
|
6,449
|
|
|
|
100.0
|
%
|
|
$
|
5,835
|
|
|
|
100.0
|
%
|
At December
31, 2013, there were seven real-estate-commercial loans totaling $3,425,000, or 67.2%, of the nonperforming loans. The largest
real estate-commercial loan is for a commercial real estate building located in Sacramento County for $1,231,000. Charge-offs
of $720,000 have been taken on this loan and no specific reserve has been established for this loan at December 31, 2013. The
remaining six real estate-commercial loans total $2,194,000 (approximate average loan balance of $366,000). Charge-offs of $239,000
have been taken on these loans and no specific reserves have been established for these loans at December 31, 2013.
The following
table shows an aging analysis of the loan portfolio by the amount of time past due (in thousands):
|
|
As of December 31, 2013
|
|
|
|
Accruing Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 Days
|
|
|
89 Days
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Nonaccrual
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
46,587
|
|
|
$
|
241
|
|
|
$
|
—
|
|
|
$
|
698
|
|
|
$
|
47,526
|
|
Real estate - commercial
|
|
|
322,773
|
|
|
|
433
|
|
|
|
—
|
|
|
|
3,425
|
|
|
|
326,631
|
|
Real estate - construction
|
|
|
27,362
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110
|
|
|
|
27,472
|
|
Real estate - mortgage
|
|
|
62,178
|
|
|
|
525
|
|
|
|
—
|
|
|
|
417
|
|
|
|
63,120
|
|
Installment
|
|
|
5,273
|
|
|
|
34
|
|
|
|
—
|
|
|
|
69
|
|
|
|
5,376
|
|
Other
|
|
|
38,594
|
|
|
|
343
|
|
|
|
—
|
|
|
|
374
|
|
|
|
39,311
|
|
Total
|
|
$
|
502,767
|
|
|
$
|
1,576
|
|
|
$
|
—
|
|
|
$
|
5,093
|
|
|
$
|
509,436
|
|
|
|
As of December 31, 2012
|
|
|
|
Accruing Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 Days
|
|
|
89 Days
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Nonaccrual
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
45,473
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
585
|
|
|
$
|
46,078
|
|
Real estate - commercial
|
|
|
292,505
|
|
|
|
163
|
|
|
|
—
|
|
|
|
2,962
|
|
|
|
295,630
|
|
Real estate - construction
|
|
|
21,436
|
|
|
|
196
|
|
|
|
—
|
|
|
|
1,371
|
|
|
|
23,003
|
|
Real estate - mortgage
|
|
|
72,907
|
|
|
|
762
|
|
|
|
—
|
|
|
|
684
|
|
|
|
74,353
|
|
Installment
|
|
|
6,529
|
|
|
|
38
|
|
|
|
—
|
|
|
|
122
|
|
|
|
6,689
|
|
Other
|
|
|
45,581
|
|
|
|
249
|
|
|
|
—
|
|
|
|
111
|
|
|
|
45,941
|
|
Total
|
|
$
|
484,431
|
|
|
$
|
1,428
|
|
|
$
|
—
|
|
|
$
|
5,835
|
|
|
$
|
491,694
|
|
A troubled debt
restructuring (“TDRs”) is a formal modification of the terms of a loan when the lender, for economic or legal reasons
related to the borrower’s financial difficulties, grants a concession to the borrower. The modification of the terms of
such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of
the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent
reduction of the recorded investment in the loan.
At December
31, 2013, accruing TDRs were $2,151,000 and nonaccrual TDRs were $905,000 compared to accruing TDRs of $2,414,000 and nonaccrual
TDRs of $1,072,000 at December 31, 2012. At December 31, 2013, there were $78,000 in specific reserves allocated to customers
whose loan terms were modified in troubled debt restructurings. At December 31, 2012, there were no specific reserves allocated
to customers whose loan terms were modified in troubled debt restructurings. There were no commitments to lend additional amounts
at December 31, 2013 and 2012 to customers with outstanding loans classified as troubled debt restructurings. There were no TDRs
that subsequently defaulted during the twelve months following the modification of terms for either 2013 or 2012.
The following
table presents loans that were modified and recorded as TDRs for the twelve months ended December 31, 2013 and 2012.
|
|
As
of December 31, 2013
|
|
|
As
of December 31, 2012
|
|
|
|
Accruing
TDRs
|
|
|
Accruing
TDRs
|
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
Real estate
- commercial
|
|
1
|
|
|
$
|
435
|
|
|
$
|
435
|
|
|
|
5
|
|
|
$
|
1,350
|
|
|
$
|
1,350
|
|
Real estate - construction
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
343
|
|
|
$
|
343
|
|
Real estate - mortgage
|
|
|
1
|
|
|
$
|
209
|
|
|
$
|
209
|
|
|
|
2
|
|
|
$
|
721
|
|
|
$
|
721
|
|
|
|
Nonaccrual TDRs
|
|
|
Nonaccrual TDRs
|
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
Commercial
|
|
1
|
|
|
$
|
36
|
|
|
$
|
36
|
|
|
|
1
|
|
|
$
|
529
|
|
|
$
|
529
|
|
Real estate - construction
|
|
1
|
|
|
$
|
110
|
|
|
$
|
110
|
|
|
|
2
|
|
|
$
|
398
|
|
|
$
|
398
|
|
Real estate - mortgage
|
|
1
|
|
|
$
|
113
|
|
|
$
|
113
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Installment
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
4
|
|
|
$
|
120
|
|
|
$
|
120
|
|
Other
|
|
|
3
|
|
|
$
|
210
|
|
|
$
|
210
|
|
|
|
1
|
|
|
$
|
25
|
|
|
$
|
25
|
|
A summary of
TDRs by type of concession and by type of loan as of December 31, 2013 and 2012 is shown below:
|
|
December 31, 2013
|
|
Accruing TDRs
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
of
|
|
|
Rate
|
|
|
Maturity
|
|
|
Maturity
|
|
|
|
|
|
|
Contracts
|
|
|
Reduction
|
|
|
Extension
|
|
|
Extension
|
|
|
Total
|
|
Real estate - commercial
|
|
5
|
|
|
$
|
—
|
|
|
$
|
195
|
|
|
$
|
686
|
|
|
$
|
881
|
|
Real estate-construction
|
|
1
|
|
|
$
|
—
|
|
|
$
|
325
|
|
|
$
|
—
|
|
|
$
|
325
|
|
Real estate - mortgage
|
|
3
|
|
|
$
|
—
|
|
|
$
|
293
|
|
|
$
|
625
|
|
|
$
|
918
|
|
Installment
|
|
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
27
|
|
|
|
December 31, 2013
|
|
Nonaccrual TDRs
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
of
|
|
|
Rate
|
|
|
Maturity
|
|
|
Maturity
|
|
|
|
|
|
|
Contracts
|
|
|
Reduction
|
|
|
Extension
|
|
|
Extension
|
|
|
Total
|
|
Commercial
|
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
391
|
|
|
$
|
391
|
|
Real estate-construction
|
|
1
|
|
|
$
|
—
|
|
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
110
|
|
Real estate - mortgage
|
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
113
|
|
|
$
|
113
|
|
Installment
|
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
59
|
|
|
$
|
59
|
|
Other
|
|
|
4
|
|
|
$
|
104
|
|
|
$
|
60
|
|
|
$
|
68
|
|
|
$
|
232
|
|
|
|
December 31, 2012
|
|
Accruing TDRs
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
of
|
|
|
Rate
|
|
|
Maturity
|
|
|
Maturity
|
|
|
|
|
|
|
Contracts
|
|
|
Reduction
|
|
|
Extension
|
|
|
Extension
|
|
|
Total
|
|
Real estate - commercial
|
|
5
|
|
|
$
|
202
|
|
|
$
|
—
|
|
|
$
|
1,148
|
|
|
$
|
1,350
|
|
Real estate-construction
|
|
1
|
|
|
$
|
—
|
|
|
$
|
343
|
|
|
$
|
—
|
|
|
$
|
343
|
|
Real estate - mortgage
|
|
|
2
|
|
|
$
|
—
|
|
|
$
|
298
|
|
|
$
|
423
|
|
|
$
|
721
|
|
|
|
December 31, 2012
|
|
Nonaccrual TDRs
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
of
|
|
|
Rate
|
|
|
Maturity
|
|
|
Maturity
|
|
|
|
|
|
|
Contracts
|
|
|
Reduction
|
|
|
Extension
|
|
|
Extension
|
|
|
Total
|
|
Commercial
|
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
529
|
|
|
$
|
529
|
|
Real estate-construction
|
|
2
|
|
|
$
|
327
|
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
398
|
|
Installment
|
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
120
|
|
|
$
|
120
|
|
Other
|
|
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
25
|
|
The following
table presents the activity in the allowance for loan losses by portfolio segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Commercial
|
|
|
Real Estate
Commercial
|
|
|
Real Estate
Construction
|
|
|
Real Estate
Mortgage
|
|
|
Installment
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
843
|
|
|
$
|
6,295
|
|
|
$
|
690
|
|
|
$
|
982
|
|
|
$
|
98
|
|
|
$
|
721
|
|
|
$
|
829
|
|
|
$
|
10,458
|
|
Charge-offs
|
|
|
(208
|
)
|
|
|
(438
|
)
|
|
|
(401
|
)
|
|
|
(420
|
)
|
|
|
(84
|
)
|
|
|
(289
|
)
|
|
|
|
|
|
|
(1,840
|
)
|
Recoveries
|
|
|
593
|
|
|
|
46
|
|
|
|
6
|
|
|
|
11
|
|
|
|
27
|
|
|
|
—
|
|
|
|
|
|
|
|
683
|
|
Provision for loan losses
|
|
|
(352
|
)
|
|
|
(707
|
)
|
|
|
315
|
|
|
|
269
|
|
|
|
90
|
|
|
|
400
|
|
|
|
(15
|
)
|
|
|
—
|
|
Total ending allowance balance
|
|
$
|
876
|
|
|
$
|
5,196
|
|
|
$
|
610
|
|
|
$
|
842
|
|
|
$
|
131
|
|
|
$
|
832
|
|
|
$
|
814
|
|
|
$
|
9,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,333
|
|
|
$
|
7,528
|
|
|
$
|
1,039
|
|
|
$
|
935
|
|
|
$
|
185
|
|
|
$
|
736
|
|
|
$
|
900
|
|
|
$
|
12,656
|
|
Charge-offs
|
|
|
(480
|
)
|
|
|
(2,681
|
)
|
|
|
(822
|
)
|
|
|
(353
|
)
|
|
|
(221
|
)
|
|
|
(145
|
)
|
|
|
|
|
|
|
(4,702
|
)
|
Recoveries
|
|
|
110
|
|
|
|
63
|
|
|
|
80
|
|
|
|
39
|
|
|
|
103
|
|
|
|
9
|
|
|
|
|
|
|
|
404
|
|
Provision for loan losses
|
|
|
(120
|
)
|
|
|
1,385
|
|
|
|
393
|
|
|
|
361
|
|
|
|
31
|
|
|
|
121
|
|
|
|
(71
|
)
|
|
|
2,100
|
|
Total ending allowance balance
|
|
$
|
843
|
|
|
$
|
6,295
|
|
|
$
|
690
|
|
|
$
|
982
|
|
|
$
|
98
|
|
|
$
|
721
|
|
|
$
|
829
|
|
|
$
|
10,458
|
|
December 31, 2011
|
|
Commercial
|
|
|
Real Estate
Commercial
|
|
|
Real Estate
Construction
|
|
|
Real Estate
Mortgage
|
|
|
Installment
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,517
|
|
|
$
|
8,439
|
|
|
$
|
1,936
|
|
|
$
|
956
|
|
|
$
|
339
|
|
|
$
|
666
|
|
|
$
|
1,140
|
|
|
$
|
14,993
|
|
Charge-offs
|
|
|
(928
|
)
|
|
|
(2,917
|
)
|
|
|
(405
|
)
|
|
|
(440
|
)
|
|
|
(345
|
)
|
|
|
(490
|
)
|
|
|
|
|
|
|
(5,525
|
)
|
Recoveries
|
|
|
212
|
|
|
|
108
|
|
|
|
10
|
|
|
|
2
|
|
|
|
206
|
|
|
|
—
|
|
|
|
|
|
|
|
538
|
|
Provision for loan losses
|
|
|
532
|
|
|
|
1,898
|
|
|
|
(502
|
)
|
|
|
417
|
|
|
|
(15
|
)
|
|
|
560
|
|
|
|
(240
|
)
|
|
|
2,650
|
|
Total ending allowance balance
|
|
$
|
1,333
|
|
|
$
|
7,528
|
|
|
$
|
1,039
|
|
|
$
|
935
|
|
|
$
|
185
|
|
|
$
|
736
|
|
|
$
|
900
|
|
|
$
|
12,656
|
|
The following
table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based
on impairment method (in thousands):
December 31, 2013
|
|
Commercial
|
|
|
Real Estate
Commercial
|
|
|
Real Estate
Construction
|
|
|
Real Estate
Mortgage
|
|
|
Installment
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
150
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
228
|
|
Collectively evaluated for impairment
|
|
|
726
|
|
|
|
5,168
|
|
|
|
610
|
|
|
|
792
|
|
|
|
131
|
|
|
|
832
|
|
|
|
814
|
|
|
|
9,073
|
|
Total ending allowance balance
|
|
$
|
876
|
|
|
$
|
5,196
|
|
|
$
|
610
|
|
|
$
|
842
|
|
|
$
|
131
|
|
|
$
|
832
|
|
|
$
|
814
|
|
|
$
|
9,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
698
|
|
|
$
|
4,306
|
|
|
$
|
435
|
|
|
$
|
1,335
|
|
|
$
|
96
|
|
|
$
|
374
|
|
|
|
|
|
|
$
|
7,244
|
|
Loans collectively evaluated for impairment
|
|
|
46,828
|
|
|
|
322,325
|
|
|
|
27,037
|
|
|
|
61,785
|
|
|
|
5,280
|
|
|
|
38,937
|
|
|
|
|
|
|
|
502,192
|
|
Total ending loans balance
|
|
$
|
47,526
|
|
|
$
|
326,631
|
|
|
$
|
27,472
|
|
|
$
|
63,120
|
|
|
$
|
5,376
|
|
|
$
|
39,311
|
|
|
|
|
|
|
$
|
509,436
|
|
December 31, 2012
|
|
Commercial
|
|
|
Real Estate
Commercial
|
|
|
Real Estate
Construction
|
|
|
Real Estate
Mortgage
|
|
|
Installment
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
171
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
189
|
|
Collectively evaluated for impairment
|
|
|
843
|
|
|
|
6,124
|
|
|
|
672
|
|
|
|
982
|
|
|
|
98
|
|
|
|
721
|
|
|
|
829
|
|
|
|
10,269
|
|
Total ending allowance balance
|
|
$
|
843
|
|
|
$
|
6,295
|
|
|
$
|
690
|
|
|
$
|
982
|
|
|
$
|
98
|
|
|
$
|
721
|
|
|
$
|
829
|
|
|
$
|
10,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
585
|
|
|
$
|
2,962
|
|
|
$
|
1,371
|
|
|
$
|
684
|
|
|
$
|
122
|
|
|
$
|
111
|
|
|
|
|
|
|
$
|
5,835
|
|
Loans collectively evaluated for impairment
|
|
|
45,493
|
|
|
|
292,668
|
|
|
|
21,632
|
|
|
|
73,669
|
|
|
|
6,567
|
|
|
|
45,830
|
|
|
|
|
|
|
|
485,859
|
|
Total ending loans balance
|
|
$
|
46,078
|
|
|
$
|
295,630
|
|
|
$
|
23,003
|
|
|
$
|
74,353
|
|
|
$
|
6,689
|
|
|
$
|
45,941
|
|
|
|
|
|
|
$
|
491,694
|
|
December
31, 2011
|
|
|
Commercial
|
|
|
|
Real Estate
Commercial
|
|
|
|
Real Estate
Construction
|
|
|
|
Real Estate
Mortgage
|
|
|
|
Installment
|
|
|
|
Other
|
|
|
|
Unallocated
|
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
450
|
|
|
$
|
606
|
|
|
$
|
504
|
|
|
$
|
37
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,610
|
|
Collectively evaluated for impairment
|
|
|
883
|
|
|
|
6,922
|
|
|
|
535
|
|
|
|
898
|
|
|
|
172
|
|
|
|
736
|
|
|
|
900
|
|
|
|
11,046
|
|
Total ending loans balance
|
|
$
|
1,333
|
|
|
$
|
7,528
|
|
|
$
|
1,039
|
|
|
$
|
935
|
|
|
$
|
185
|
|
|
$
|
736
|
|
|
$
|
900
|
|
|
$
|
12,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
1,788
|
|
|
$
|
5,998
|
|
|
$
|
9,440
|
|
|
$
|
938
|
|
|
$
|
107
|
|
|
$
|
88
|
|
|
|
|
|
|
$
|
18,359
|
|
Loans collectively evaluated for impairment
|
|
|
44,372
|
|
|
|
270,646
|
|
|
|
18,023
|
|
|
|
46,424
|
|
|
|
10,818
|
|
|
|
47,877
|
|
|
|
|
|
|
|
438,160
|
|
Total ending loans balance
|
|
$
|
46,160
|
|
|
$
|
276,644
|
|
|
$
|
27,463
|
|
|
$
|
47,362
|
|
|
$
|
10,925
|
|
|
$
|
47,965
|
|
|
|
|
|
|
$
|
456,519
|
|
The following
table shows the loan portfolio allocated by management’s internal risk ratings (in thousands):
|
|
As
of December 31, 2013
|
|
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Total
|
|
Commercial
|
|
$
|
45,446
|
|
|
$
|
1,107
|
|
|
$
|
973
|
|
|
$
|
47,526
|
|
Real estate - commercial
|
|
|
309,828
|
|
|
|
6,213
|
|
|
|
10,590
|
|
|
|
326,631
|
|
Real estate - construction
|
|
|
27,101
|
|
|
|
261
|
|
|
|
110
|
|
|
|
27,472
|
|
Real estate - mortgage
|
|
|
61,200
|
|
|
|
—
|
|
|
|
1,920
|
|
|
|
63,120
|
|
Installment
|
|
|
5,278
|
|
|
|
—
|
|
|
|
98
|
|
|
|
5,376
|
|
Other
|
|
|
38,611
|
|
|
|
—
|
|
|
|
700
|
|
|
|
39,311
|
|
Total
|
|
$
|
487,464
|
|
|
$
|
7,581
|
|
|
$
|
14,391
|
|
|
$
|
509,436
|
|
|
|
As
of December 31, 2012
|
|
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Total
|
|
Commercial
|
|
$
|
44,486
|
|
|
$
|
129
|
|
|
$
|
1,463
|
|
|
$
|
46,078
|
|
Real estate - commercial
|
|
|
278,834
|
|
|
|
—
|
|
|
|
16,796
|
|
|
|
295,630
|
|
Real estate - construction
|
|
|
21,386
|
|
|
|
—
|
|
|
|
1,617
|
|
|
|
23,003
|
|
Real estate - mortgage
|
|
|
71,973
|
|
|
|
—
|
|
|
|
2,380
|
|
|
|
74,353
|
|
Installment
|
|
|
6,562
|
|
|
|
—
|
|
|
|
127
|
|
|
|
6,689
|
|
Other
|
|
|
45,658
|
|
|
|
—
|
|
|
|
283
|
|
|
|
45,941
|
|
Total
|
|
$
|
468,899
|
|
|
$
|
129
|
|
|
$
|
22,666
|
|
|
$
|
491,694
|
|
The allowance
for loan losses is established through a provision for loan losses based on management’s evaluation of the probable incurred
losses in the loan portfolio. In determining levels of risk, management considers a variety of factors, including, but not limited
to, asset classifications, economic trends, industry experience and trends, geographic concentrations, estimated collateral values,
historical loan loss experience, and the Company’s underwriting policies. During the second quarter of 2013, there was a
change in the Bank’s method of calculating the historical loss factors applied to loans identified as “homogenous
segments” of the loan portfolio as follows: Losses from the past twelve quarters are applied to loan pools based on a “Migration
Analysis” method. The method calculates Net Charge Offs (charge offs less corresponding recoveries) and measures them against
average balances in loan pools based on the risk grade in effect on charged-off loans four quarters prior to the actual charge
off date. The logic behind this four quarter “look back” is to account for management’s estimate of the typical
time lapse between the recognition of the problem loan and the recognition of some or all of the loan as uncollectable. In addition,
the loss ratios are calculated using “factored” logic which systematically reduces the Net Charge Off value so that
charge offs occurring in older periods do not have as much weight as more recent charge offs. Management of the Company believes
that, given the recent trends in historical losses and the correlation of those losses with a loans identified risk grade, that
incorporation of a migration analysis in the current and future analyses was a prudent refinement of the allowance methodology.
In addition, management believes that the decreases in the overall level of the allowance for loan losses over the past several
quarters is directionally consistent with the improving credit quality trends of the loan portfolio. The allowance for loan losses
is maintained at an amount management considers adequate to cover the probable incurred losses in loans receivable. While management
uses the best information available to make these estimates, future adjustments to allowances may be necessary due to economic,
operating, regulatory, and other conditions that may be beyond the Company’s control. The Company also engages a third party
credit review consultant to analyze the Company’s loan loss adequacy periodically. In addition, the regulatory agencies,
as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies
may require the Company to recognize additions to the allowance based on judgments different from those of management.
The allowance
for loan losses is comprised of several components including the specific, formula and unallocated allowance relating to loans
in the loan portfolio. Our methodology for determining the allowance for loan losses consists of several key elements, which include:
|
●
|
Specific
Allowances
. A specific allowance is established when management has identified unique
or particular risks that were related to a specific loan that demonstrated risk characteristics
consistent with impairment. Specific allowances are established when management can estimate
the amount of an impairment of a loan.
|
|
●
|
Formula
Allowance
. The formula allowance is calculated by applying loss factors through the
assignment of loss factors to homogenous pools of loans. Changes in risk grades of both
performing and nonperforming loans affect the amount of the formula allowance. Loss factors
are based on our historical loss experience and such other data as management believes
to be pertinent. Management, also, considers a variety of subjective factors, including
regional economic and business conditions that impact important segments of our portfolio,
loan growth rates, the depth and skill of lending staff, the interest rate environment,
and the results of bank regulatory examinations and findings of our internal credit examiners
to establish the formula allowance.
|
|
●
|
Unallocated
Allowance
. The unallocated loan loss allowance represents an amount for imprecision
or uncertainty that is inherent in estimates used to determine the allowance.
|
The Company
also maintains a separate allowance for off-balance-sheet commitments. A reserve for unfunded commitments is maintained at a level
that, in the opinion of management, is adequate to absorb probable losses associated with commitments to lend funds under existing
agreements, for example, the Bank’s commitment to fund advances under lines of credit. The reserve amount for unfunded commitments
is determined based on our methodologies described above with respect to the formula allowance. The allowance for off-balance-sheet
commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet and was $146,000 and
$143,000, as of December 31, 2013 and 2012, respectively.
Management anticipates
modest growth in commercial lending and commercial real estate and to a lesser extent consumer and real estate mortgage lending,
while it anticipates a further decline in construction lending. As a result, future provisions may be required and the ratio of
the allowance for loan losses to loans outstanding may increase to reflect portfolio risk, increasing concentrations, loan type
and changes in economic conditions. In addition, the regulatory agencies, as an integral part of their examination process, periodically
review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on
their judgment about information available to them at the time of their examinations.
Deposits
.
Deposits represent the Company’s primary source of funds. They are primarily core deposits in that they are demand,
savings and money market, and time deposits generated from local businesses and individuals. These sources are considered to be
relatively stable as they are mostly derived from long-term banking relationships. During 2013, total deposits increased $19,269,000,
or 2.51%, to $787,849,000 compared to $768,580,000 at December 31, 2012. Noninterest-bearing demand deposits increased $7,116,000,
or 4.00%, interest-bearing demand deposits increased $17,193,000, or 9.28% and savings and money market deposits increased $17,599,000,
or 7.55% during 2013. This increase was offset by a decrease in deposits from time certificates of $22,639,000, or 13.13% during
2013 as the Bank reduced the rates paid on time certificates. The shift in deposit mix has resulted in noninterest-bearing demand
deposits representing 23.5% of total deposits at December 31, 2013 compared to 23.1% of total deposits at December 31, 2012.
During 2012,
total deposits increased $2,341,000, or 0.31%, to $768,580,000 compared to $766,239,000 at December 31, 2011. Noninterest-bearing
demand deposits increased $10,349,000, or 6.18%, interest-bearing demand deposits increased $15,191,000, or 8.93% and savings
and money market deposits increased $16,735,000, or 7.74% during 2012. This increase was offset by a decrease in deposits from
time certificates of $39,934,000, or 18.81% during 2012 as the Bank reduced the rates paid on time certificates. The shift in
deposit mix has resulted in noninterest-bearing demand deposits representing 23.1% of total deposits at December 31, 2012 compared
to 21.9% of total deposits at December 31, 2011.
The
following table summarizes the Company’s deposits by type for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Noninterest-bearing demand
|
|
$
|
184,971
|
|
|
$
|
177,855
|
|
|
$
|
167,506
|
|
Interest-bearing demand
|
|
|
202,508
|
|
|
|
185,315
|
|
|
|
170,124
|
|
Savings and money market
|
|
|
250,633
|
|
|
|
233,034
|
|
|
|
216,299
|
|
Time
certificates
|
|
|
149,737
|
|
|
|
172,376
|
|
|
|
212,310
|
|
Total
deposits
|
|
$
|
787,849
|
|
|
$
|
768,580
|
|
|
$
|
766,239
|
|
Capital
Resources
. The Company maintains capital to support future growth and maintain financial strength while trying to effectively
manage the capital on hand. From the depositor standpoint, a greater amount of capital on hand relative to total assets is generally
viewed as positive. At the same time, from the standpoint of the shareholder, a greater amount of capital on hand may not be viewed
as positive because it limits the Company’s ability to earn a high rate of return on stockholders’ equity (ROE). Stockholders’
equity decreased $2,732,000 to $93,429,000 as of December 31, 2013, as compared to $96,161,000 at December 31, 2012. The decrease
was due to a change in accumulated other comprehensive loss of $6,686,000, which was partially offset by net income of $3,625,000,
and stock based compensation expense of $329,000. Under current regulations, management believes that the Company meets all capital
adequacy requirements. The Company suspended indefinitely the payment of quarterly cash dividends on its common stock beginning
in 2009.
The following
table displays the Company’s and Bank’s capital ratios at December 31, 2013 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum for Capital Adequacy
|
|
|
Well-capitalized
|
|
|
|
Capital
|
|
|
Ratio
|
|
|
Purposes
|
|
|
Ratios
|
|
Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
$
|
119,178
|
|
|
|
19.04
|
%
|
|
|
8.00
|
%
|
|
|
N/A
|
|
Tier 1 capital (to risk weighted assets)
|
|
$
|
111,333
|
|
|
|
17.79
|
%
|
|
|
4.00
|
%
|
|
|
N/A
|
|
Tier 1 capital (to average assets)
|
|
$
|
111,333
|
|
|
|
12.16
|
%
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
$
|
116,783
|
|
|
|
18.68
|
%
|
|
|
8.00
|
%
|
|
|
10.00
|
%
|
Tier 1 capital (to risk weighted assets)
|
|
$
|
108,947
|
|
|
|
17.42
|
%
|
|
|
4.00
|
%
|
|
|
6.00
|
%
|
Tier 1 capital (to average assets)
|
|
$
|
108,947
|
|
|
|
11.90
|
%
|
|
|
4.00
|
%
|
|
|
5.00
|
%
|
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 monetarily based items. The
relatively low proportion of the Company’s fixed assets (approximately 0.9% at December 31, 2013) reduces both the potential
of inflated earnings resulting from understated depreciation and the potential understatement of absolute asset values.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Overview
.
The Company constantly monitors earning asset and deposit levels, developments and trends in interest rates, liquidity, capital
adequacy and marketplace opportunities with the view towards maximizing shareholder value and earnings while maintaining a high
quality balance sheet without exposing the Company to undue market risk. Management responds to all of these to protect and possibly
enhance net interest income while managing risks within acceptable levels as set forth in the Company’s policies. In addition,
alternative business plans and contemplated transactions are also analyzed for their impact. This process, known as asset/liability
management is carried out by changing the maturities and relative proportions of the various types of loans, investments, deposits
and other borrowings.
Market
Risk
.
Market risk results from the fact that the market values of assets or liabilities on which the interest rate is
fixed will increase or decrease with changes in market interest rates. If the Company invests in a fixed-rate, long term security
and then interest rates rise, the security is worth less than a comparable security just issued because the older security pays
less interest than the newly issued security. If the security had to be sold before maturity, then the Company would incur a loss
on the sale. Conversely, if interest rates fall after a fixed-rate security is purchased, its value increases, because it is paying
at a higher rate than newly issued securities. The fixed rate liabilities of the Company, like certificates of deposit and fixed-rate
borrowings, also change in value with changes in interest rates. As rates drop, they become more valuable to the depositor and
hence more costly to the Company. As rates rise, they become more valuable to the Company. Therefore, while the value changes
when rates move in either direction, the adverse impacts of market risk to the Company’s fixed-rate assets are due to rising
rates and for the Company’s fixed-rate liabilities, they are due to falling rates. In general, the change in market value
due to changes in interest rates is greater in financial instruments that have longer remaining maturities. Therefore, the exposure
to market risk of assets is lessened by managing the amount of fixed-rate assets and by keeping maturities relatively short. These
steps, however, must be balanced against the need for adequate interest income because variable-rate and shorter-term assets generally
yield less interest than longer-term or fixed-rate assets.
Mismatch
Risk
. The second interest-related risk, mismatched risk, arises from the fact that when interest rates change, the changes
do not occur equally in the rates of interest earned and paid because of differences in the contractual terms of the assets and
liabilities held. A difference in the contractual terms, a mismatch, can cause adverse impacts on net interest income.
The Company
has a certain portion of its loan portfolio tied to the national prime rate. If these rates are lowered because of general market
conditions, e.g., the prime rate decreases in response to a rate decrease by the Federal Reserve Open Market Committee (“FOMC”),
these loans will be repriced. If the Company were at the same time to have a large proportion of its deposits in long-term fixed-rate
certificates, interest earned on loans would decline while interest paid on the certificates would remain at higher levels for
a period of time until they mature. Therefore, net interest income would decrease immediately. A decrease in net interest income
could also occur with rising interest rates if the Company had a large portfolio of fixed-rate loans and securities that was funded
by deposit accounts on which the rate is steadily rising.
This exposure
to mismatch risk is managed by attempting to match the maturities and repricing opportunities of assets and liabilities. This
may be done by varying the terms and conditions of the products that are offered to depositors and borrowers. For example, if
many depositors want shorter-term certificates while most borrowers are requesting longer-term fixed rate loans, the Company will
adjust the interest rates on the certificates and loans to try to match up demand for similar maturities. The Company can then
partially fill in mismatches by purchasing securities or borrowing funds from the Federal Home Loan Bank (“FHLB”)
with the appropriate maturity or repricing characteristics.
Basis
Risk
.
The third interest-related risk, basis risk, arises from the fact that interest rates rarely change in a parallel
or equal manner. The interest rates associated with the various assets and liabilities differ in how often they change, the extent
to which they change, and whether they change sooner or later than other interest rates. For example, while the repricing of a
specific asset and a specific liability may occur at roughly the same time, the interest rate on the liability may rise one percent
in response to rising market rates while the asset increases only one-half percent. While the Company would appear to be evenly
matched with respect to mismatch risk, it would suffer a decrease in net interest income. This exposure to basis risk is the type
of interest risk least able to be managed, but is also the least dramatic. Avoiding concentrations in only a few types of assets
or liabilities is the best means of increasing the chance that the average interest received and paid will move in tandem. The
wider diversification means that many different rates, each with their own volatility characteristics, will come into play.
Net Interest
Income and Net Economic Value Simulations
. The tool used to manage and analyze the interest rate sensitivity of a financial
institution is known as a simulation model and is performed with specialized software built for this specific purpose for financial
institutions. This model allows management to analyze the three specific types of risks; market risk, mismatch risk, and basis
risk.
To quantify
the extent of all of these risks both in its current position and in transactions it might make in the future, the Company uses
computer modeling to simulate the impact of different interest rate scenarios on net interest income and on net economic value.
Net economic value or the market value of portfolio equity is defined as the difference between the market value of financial
assets and liabilities. These hypothetical scenarios include both sudden and gradual interest rate changes, and interest rate
changes in both directions. This modeling is the primary means the Company uses for interest rate risk management decisions.
The hypothetical
impact of sudden interest rate shocks applied to the Company’s asset and liability balances are modeled quarterly. The results
of this modeling indicate how much of the Company’s net interest income and net economic value are “at risk”
(deviation from the base level) from various sudden rate changes. Although interest rates normally would not change in this sudden
manner, this exercise is valuable in identifying risk exposures. The results for the Company’s December 31, 2013 analysis
indicates the following results for changes in net economic value and changes in net interest income over a one-year period given
the interest rate shocks listed in the table below. Management believes that short and medium term interest rates will continue
to remain at historical lows throughout the year.
|
|
Shocked
|
|
|
Shocked
|
|
|
|
by -1%
|
|
|
by +2%
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
-0.7
|
%
|
|
|
-0.9
|
%
|
Net economic value
|
|
|
-2.8
|
%
|
|
|
-8.0
|
%
|
For the modeling,
the Company has made certain assumptions about the duration of its non-maturing deposits that are based on an analysis performed
on the Company’s database to determine average length of deposit accounts. This assumption is important to determining net
economic value at risk. The Company has compared its assumptions with those used by other financial institutions.
Liquidity
.
The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors
and borrowers. Collection of principal and interest on loans, the pay-downs and maturities of investment securities, deposits
with other banks, customer deposits and short term borrowing, when needed, are primary sources of funds that contribute to liquidity.
Unused lines of credit from correspondent banks to provide secured federal funds for $10,000,000 as of December 31, 2013 were
available to provide liquidity. In addition, NVB is a member of the FHLB providing an additional available line of credit of $260,689,000
secured by first deeds of trust on eligible 1-4 unit residential loans and qualifying investment securities. The Company also
had a line of credit with the Federal Reserve Bank of San Francisco of $2,131,000 secured by qualifying investment securities.
As of December 31, 2013, borrowings of $21,651,000 were outstanding in the form of Subordinated Debentures.
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 available-for-sale
investment securities) totaled $336,962,000 and $324,334,000, or 36.7% and 35.9% of total assets at December 31, 2013 and December
31, 2012, respectively.
Core deposits,
defined as demand deposits, interest bearing demand deposits, regular savings, money market deposit accounts and time deposits
of less than $100,000, continue to provide a relatively stable and low cost source of funds. Core deposits totaled $716,631,000
and $686,544,000 at December 31, 2013 and December 31, 2012, 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.
Certificates
of Deposit
. Maturities of time certificates of deposit outstanding of less than $100,000 and $100,000 or more at December
31, 2013 are summarized as follows (in thousands):
|
|
$ 100,000
|
|
|
Under
|
|
|
|
and over
|
|
|
$ 100,000
|
|
Three Months or Less
|
|
$
|
15,117
|
|
|
$
|
24,139
|
|
Over Three Months Through Twelve Months
|
|
|
44,423
|
|
|
|
42,129
|
|
Over One Year Through Three Years
|
|
|
10,790
|
|
|
|
10,729
|
|
Over Three Years
|
|
|
888
|
|
|
|
1,522
|
|
Total
|
|
$
|
71,218
|
|
|
$
|
78,519
|
|
As of December
31, 2013, the Company had $400,000 in brokered deposits consisting solely of customers’ time certificates of deposits that
utilized the CDARs program. As a policy, the Company limits the use of brokered deposits to 10% of total assets.
Other
Borrowed Funds
. The Company did not have outstanding balances for Federal Home Loan Bank advances or Federal funds purchased
at December 31, 2013, 2012 and 2011.
Certain
Contractual Obligations
.
The following table summarizes certain contractual obligations of the Company as of December
31, 2013 (in thousands):
|
|
Total
|
|
|
Less than one year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
Loan Commitments
|
|
$
|
73,947
|
|
|
$
|
35,549
|
|
|
$
|
5,714
|
|
|
$
|
252
|
|
|
$
|
32,432
|
|
Subordinated Debentures, floating rate of 3.49% payable on 2033
|
|
|
6,186
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,186
|
|
Subordinated Debentures, floating rate of 3.04% payable on 2034
|
|
|
5,155
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,155
|
|
Subordinated Debentures, floating rate of 1.57% payable on 2036
|
|
|
10,310
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,310
|
|
Operating lease obligations
|
|
|
3,744
|
|
|
|
1,047
|
|
|
|
1,262
|
|
|
|
525
|
|
|
|
910
|
|
Certificates of deposits
|
|
|
149,737
|
|
|
|
125,808
|
|
|
|
21,519
|
|
|
|
2,410
|
|
|
|
—
|
|
Deferred compensation(1)
|
|
|
1,770
|
|
|
|
158
|
|
|
|
197
|
|
|
|
77
|
|
|
|
1,338
|
|
Supplemental retirement plans(1)
|
|
|
9,973
|
|
|
|
300
|
|
|
|
2,748
|
|
|
|
839
|
|
|
|
6,086
|
|
Total
|
|
$
|
260,822
|
|
|
$
|
162,862
|
|
|
$
|
31,440
|
|
|
$
|
4,103
|
|
|
$
|
62,417
|
|
(1) These amounts
represent known certain payments to participants under the Company’s deferred compensation and supplemental retirement plans.
See
Note 12
to the Consolidated Financial Statements at Item 15 of this report for additional information related to the Company’s
deferred compensation and supplemental retirement plan liabilities.
In addition,
liabilities related to income taxes are not included in the table because the amount and timing of any cash payments cannot be
reasonably estimated. Further discussion of income taxes and liabilities recorded is included in Note 11 to the Consolidated Financial
Statements.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The Financial
Statements required by this item are set forth following Item 15 of this Form 10-K, and are incorporated herein by reference.
The following
table discloses the Company’s condensed selected unaudited quarterly financial data for each of the quarters in the two-year
period ended December 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
(In thousands except per share data)
|
|
December
2013
|
|
|
September
2013
|
|
|
June
2013
|
|
|
March
2013
|
|
|
December
2012
|
|
|
September
2012
|
|
|
June
2012
|
|
|
March
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
8,199
|
|
|
$
|
8,165
|
|
|
$
|
7,981
|
|
|
$
|
7,868
|
|
|
$
|
8,276
|
|
|
$
|
8,426
|
|
|
$
|
8,420
|
|
|
$
|
8,609
|
|
Interest expense
|
|
|
392
|
|
|
|
391
|
|
|
|
403
|
|
|
|
432
|
|
|
|
504
|
|
|
|
713
|
|
|
|
1,091
|
|
|
|
1,217
|
|
Net interest income
|
|
|
7,807
|
|
|
|
7,774
|
|
|
|
7,578
|
|
|
|
7,436
|
|
|
|
7,772
|
|
|
|
7,713
|
|
|
|
7,329
|
|
|
|
7,392
|
|
Provision for loan losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
700
|
|
|
|
1,000
|
|
|
|
400
|
|
Noninterest income
|
|
|
2,948
|
|
|
|
3,209
|
|
|
|
3,651
|
|
|
|
4,329
|
|
|
|
4,269
|
|
|
|
4,204
|
|
|
|
4,687
|
|
|
|
3,259
|
|
Noninterest expense
|
|
|
9,653
|
|
|
|
10,036
|
|
|
|
9,936
|
|
|
|
9,888
|
|
|
|
11,336
|
|
|
|
9,759
|
|
|
|
9,228
|
|
|
|
9,656
|
|
Income before provision (benefit) for income taxes
|
|
|
1,102
|
|
|
|
947
|
|
|
|
1,293
|
|
|
|
1,877
|
|
|
|
705
|
|
|
|
1,458
|
|
|
|
1,788
|
|
|
|
595
|
|
Provision (benefit) for income taxes
|
|
|
212
|
|
|
|
367
|
|
|
|
399
|
|
|
|
616
|
|
|
|
160
|
|
|
|
(2,546
|
)
|
|
|
527
|
|
|
|
115
|
|
Net income
|
|
$
|
890
|
|
|
$
|
580
|
|
|
$
|
894
|
|
|
$
|
1,261
|
|
|
$
|
545
|
|
|
$
|
4,004
|
|
|
$
|
1,261
|
|
|
$
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
|
$
|
0.08
|
|
|
$
|
0.13
|
|
|
$
|
0.18
|
|
|
$
|
0.08
|
|
|
$
|
0.59
|
|
|
$
|
0.18
|
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
0.13
|
|
|
$
|
0.08
|
|
|
$
|
0.13
|
|
|
$
|
0.18
|
|
|
$
|
0.08
|
|
|
$
|
0.59
|
|
|
$
|
0.18
|
|
|
$
|
0.07
|
|
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As
previously reported in the Company’s Current Report on Form 8-K, as filed with the Commission on November 4, 2011, Perry-Smith
LLP was replaced by Crowe Horwath LLP as the Company’s independent registered public accounting firm for the year ended
December 31, 2012. This change in accountants was the result of a transaction consummated on November 1, 2011 whereby Crowe
Horwath LLP acquired certain assets of Perry-Smith LLP and certain Perry-Smith LLP personnel became associated with Crowe Horwath
LLP. Except as described above there has been no change in the independent accountants engaged to audit the financial statements
of the Company during the two fiscal years ended December 31, 2013. There have been no disagreements with such independent
registered public accountants during the two fiscal years ended December 31, 2013 on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
ITEM 9A.
CONTROLS AND PROCEDURES
The Company
maintains controls and procedures designed to ensure that all information required to be disclosed by the Company is recorded,
processed and reported in reports filed by the Company under the Exchange Act. Such information is reported to the Company’s
management, including its Chief Executive Officer and its Chief Financial Officer, to allow timely and accurate disclosure in
accordance with the definition of “disclosure controls and procedures” in Rule 13a-15(e) of the Exchange Act. In accordance
with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of December 31, 2013, under the supervision and with
the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2013.
Management’s
report on internal control over financial reporting is set forth in “Item 8. Financial Statements and Supplementary Data,”
and is incorporated herein by reference. Crowe Horwath LLP, the independent registered public accounting firm that audited the
financial statements included in this Annual Report, was engaged to assess the effectiveness of the Company’s internal control
over financial reporting. The report of Crowe Horwath LLP, which is set forth in “Item 8. Financial Statements and Supplementary
Data,” is incorporated herein by reference.
ITEM 9B.
OTHER INFORMATION
None.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED December 31, 2013, 2012 and 2011
1. NATURE
OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations
. The accounting and reporting practices of North Valley Bancorp (the “Company”) and its wholly
owned subsidiary, North Valley Bank (“NVB”), conform to accounting principles generally accepted in the United States
of America and prevailing practices within the banking industry. The operations of the Company are comprised predominately of
NVB. NVB is a commercial banking institution with twenty-two banking offices in Shasta, Trinity, Humboldt, Del Norte, Yolo, Sonoma,
Placer and Mendocino Counties located in California. Between 2003 to 2005, the Company formed North Valley Capital Trust II, North
Valley Capital Trust III, and North Valley Capital Statutory Trust IV (collectively, the Trusts) which Trust II, and III are Delaware
statutory business trusts and Trust IV is a Connecticut statutory business trust formed for the exclusive purpose of issuing and
selling Trust Preferred Securities.
NVB’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. The deposits of NVB are insured
by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable legal limits.
Use
of Estimates in the Preparation of Financial Statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 allowance for loan losses, loan servicing rights, deferred tax assets, and
fair values of financial instruments are particularly subject to change.
Consolidation
and Basis of Presentation.
The consolidated financial statements include the Company and its wholly owned subsidiary NVB.
NVB has one wholly owned inactive subsidiary, North Valley Trading Company. All material intercompany accounts and transactions
have been eliminated in consolidation.
For
financial reporting purposes, the Company’s investments in the Trusts of $651,000 are accounted for under the equity method
and, accordingly, are not consolidated and are included in other assets on the consolidated balance sheet. The subordinated debentures
issued and guaranteed by the Company and held by the Trusts are reflected as debt on the Company’s consolidated balance
sheet
.
Disclosures
About Segments of an Enterprise.
The Company uses the “management approach” for reporting business segment
information. The management approach is based on the segments within a company used by the chief operating decision-maker for
making operating decisions and assessing performance. Reportable segments are based on such factors as products and services,
geography, legal structure or any other manner by which a company’s management distinguishes major operating units. Utilizing
this approach, management has determined that the Company has only one reportable segment.
Reclassifications.
Certain amounts in 2012 and 2011 have been reclassified to conform with the 2013 consolidated financial statement presentation.
These reclassifications had no effect on prior year net income or stockholders’ equity.
Cash
and Cash Equivalents.
For the purposes of the consolidated statement of cash flows, cash and cash equivalents have been
defined as cash, demand deposits with correspondent banks, cash items, settlements in transit, and federal funds sold and repurchase
agreements. Generally, federal funds are sold for one-day periods and repurchase agreements are sold for eight to fourteen-day
periods. Cash equivalents have remaining terms to maturity of three months or less from the date of acquisition.
Net
cash flows are reported for customer loan and deposit transactions and time deposits in other financial institutions.
Reserve
Requirements.
The Company is subject to regulation by the Federal Reserve Board. The regulations require the Company to
maintain certain cash reserve balances on hand or at the Federal Reserve Bank (“FRB”). At December 31, 2013 and 2012,
the Company had no reserve requirement.
Investment
Securities
. The Company accounts for its investment securities as follows:
Trading
securities
are carried at fair value. Changes in fair value are included in noninterest income. The Company did not have
any securities classified as trading at or during the years ended December 31, 2013, 2012 and 2011.
Available-for-sale
securities
are carried at estimated 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 net amount within
accumulated other comprehensive (loss) income, which is a separate component of stockholders’ equity.
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.
Management
determines the appropriate classification of its investments at the time of purchase and may only change the classification in
certain limited circumstances. All transfers between categories are accounted for at fair value. During the years ended December
31, 2013, 2012 and 2011, there were no transfers of securities between categories.
Gains
or losses on disposition are recorded in noninterest income based on the net proceeds received and the carrying amount of the
securities sold, using the specific identification method. Interest earned on investment securities is reported in interest income,
net of applicable adjustments for accretion of discounts and amortization of premiums which are accounted for using the
level-yield
method without anticipating prepayments
.
An
investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired
are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation
to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude
and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period
of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine
whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that
the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or
that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.
Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is
more likely than not that the Company will not be required to sell the security before recovery, only the portion of the impairment
loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive
income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the
security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.
Loans.
Loans are reported at the principal amount outstanding, net of unearned income, including net deferred loan fees, and
the allowance for loan losses.
Interest
on loans is calculated using the simple interest method on the daily balance of the principal amount outstanding.
A loan is considered
impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts
due, including principal and interest, according to the contractual terms of the original agreement. Loans determined to be impaired
are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value
of expected future cash flows discounted at the original interest rate, except that as a practical expedient, it may measure impairment
based on an observable market price, or the fair value of the collateral if collateral dependent. A loan is collateral dependent
if the repayment is expected to be provided solely by the underlying collateral.
The determination
of the general reserve for loans that are collectively evaluated for impairment is based on estimates made by management, to include,
but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors
to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated
collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent
in the portfolio taken as a whole.
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.
A restructuring
of a debt constitutes a troubled debt restructuring (“TDR”) if the Company for economic or legal reasons related to
the borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured
loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual
terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.
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. The unamortized balance of deferred fees and
costs is reported as a component of net loans.
Loan
Sales and Servicing.
The Company originates and sells residential mortgage loans to Freddie Mac and others. The Company
retains the servicing on certain loans that are sold. Deferred origination fees and expenses are recognized at the time of sale
in the determination of the gain or loss.
When loans are sold with servicing retained, servicing
rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is
based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation
model that calculates the present value of estimated future net servicing income.
The gain
(loss) is recognized at the time of sale or when all recourse provisions, if any, have lapsed based on the difference between
the sale proceeds and the allocated carrying value of the related loans sold. The fair value of the contractual servicing is reflected
as a servicing asset, which is amortized over the period of estimated net servicing income using a method approximating the interest
method. The servicing asset is included in other assets on the consolidated balance sheet, and is evaluated for impairment on
a periodic basis. Servicing income net of amortization is included in non-interest income on the consolidated statements of income.
At December
31, 2013 and 2012, the Company serviced real estate loans which it had sold to the secondary market of approximately $175,904,000
and $145,314,000, respectively. At December 31, 2013 and 2012, the Company serviced loans guaranteed by the Small Business Administration
which it had sold to the secondary market of approximately $12,580,000 and $13,696,000, respectively.
Allowance
for Loan Losses.
The allowance for loan losses is an estimate of probable incurred
loan losses in the Company’s loan portfolio as of the balance-sheet date. The allowance is established through a provision
for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance
after loan losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received
on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components,
specific reserves related to impaired loans and general reserves for inherent losses related to loans that are evaluated collectively
for impairment.
The Company
calculates the allowance for each portfolio segment. These portfolio segments include commercial, real estate commercial, real
estate construction (including land and development loans), real estate mortgage, installment, and other loans (principally home
equity loans). The allowance for loan losses attributable to each portfolio segment, which includes both individually impaired
and loans that are collectively evaluated for impairment, is combined to determine the Company’s overall allowance, which
is included on the consolidated balance sheet.
The general
reserve component of the allowance for loan losses also consists of reserve factors that are based on management’s assessment
of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses over the past twelve quarters
and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated
with each portfolio segment described below.
Commercial.
Commercial loans generally possess a more inherent risk of loss than real estate portfolio segments because these loans are
generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic
trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these
loans.
Real
Estate Commercial.
Real estate commercial loans generally possess a higher inherent risk of loss than other real estate portfolio
segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate
projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these
loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service
debt obligations.
Real
Estate Construction.
Real estate construction loans generally possess a higher inherent risk of loss than other real estate
portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in
the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition,
trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic
viability of construction projects.
Real
Estate Mortgage
. The degree of risk in real estate mortgage lending depends primarily on the loan amount in relation to collateral
value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower
inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key
economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’
capacity to repay their obligations may be deteriorating.
Individual loans
and receivables in homogeneous loan portfolio segments are not evaluated for specific impairment. Rather, the sole component of
the allowance for these loan types is determined by collectively measuring impairment reserve factors based on management’s
assessment of the following for each homogeneous loan portfolio segment: (1) inherent credit risk, (2) delinquencies, (3) historical
losses and (4) other qualitative factors. The homogenous loan portfolio segments are described in further detail below.
Installment
– An installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over
a specific period. Most installment loans are made directly for consumer purchases. Economic trends determined by unemployment
rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate
that the borrowers’ capacity to repay their obligations may be deteriorating.
Other
(principally home equity loans)
– The degree of risk in home equity depends primarily on the loan amount in relation
to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally
possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates
and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that
the borrowers’ capacity to repay their obligations may be deteriorating.
The Company
assigns a risk rating to all loans except pools of homogeneous loans and periodically, but not less than annually, performs detailed
reviews of all such individual loans over $250,000 to identify credit risks and to assess the overall collectability of the portfolio.
Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated
for impairment, and accordingly, they are not separately identified for impairment disclosures. The risk ratings of these smaller
homogeneous loans are typically determined by the extent of their monthly required payments being past due, if any. These risk
ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators.
During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in
the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators
are used to assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories, defined
as follows:
Pass.
A pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.
Special
Mention.
A special mention loan has potential weaknesses that deserve management’s close attention. If left
uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s
credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient
risk to warrant adverse classification.
Substandard
.
A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of
the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. Well defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral
support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized
by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful
.
Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that
the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable
and improbable.
Loss
.
Loans classified as loss are considered uncollectible and charged off immediately.
Although management
believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors
and management review the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic
conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews,
the allowance is adjusted. In addition, the Company’s primary regulators, the FRB and the California Department of Financial
Institutions, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies
may require additions to the allowance based on their judgment about information available at the time of their examinations.
Allowance
for Loan Losses on Off-Balance-Sheet Credit Exposures
. The Company also maintains a separate allowance for off-balance-sheet
commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet
commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet.
Other
Real Estate Owned (“OREO”).
Real estate acquired through, or in lieu of, loan foreclosures is expected to
be sold and is recorded at its fair value less estimated costs to sell. The amount, if any, by which the recorded amount of the
loan exceeds the fair value less estimated costs to sell are charged to the allowance for loan losses, if necessary. These properties
are subsequently accounted for at the lower of cost or fair value less costs to sell. 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 noninterest expenses and gains and losses on their
disposition are included in other income or noninterest expenses.
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. The useful lives of premises are estimated
to be twenty to thirty years. The useful lives of furniture, fixtures and equipment are estimated to be two to ten years. 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. The Company evaluates premises and equipment for financial impairment as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully recoverable.
FHLB
and FRB Stock and Other Securities.
The Company purchases restricted stock in the Federal Home Loan Bank of San Francisco
(FHLB), the FRB and others as required to participate in various programs offered by these institutions. These investments are
carried at cost and may be redeemed at par with certain restrictions. Both cash and stock dividends are reported as income. Restricted
stock is periodically evaluated for impairment based on ultimate recovery of par.
Bank
Owned Life Insurance.
The Company has purchased life insurance policies on certain key executives. Bank owned life insurance
is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender
value adjusted for other charges or other amounts due that are probable at settlement.
Core
Deposit Intangibles.
These assets represent the estimated fair value of the deposit relationship acquired in acquisitions
and is being amortized by the straight-line method. The core deposit intangible was recorded at $1,421,000 in August, 2004 with
accumulated amortization of $1,312,000 at December 31, 2013. It was being amortized at $146,000 per year over an estimated life
of ten years with a remaining amortization period of nine months. Amortization expense on these intangibles was $146,000 for the
years ended December 31, 2013, 2012 and 2011, respectively. Amortization expense during 2014 is expected to be $109,000. Management
evaluates the recoverability and remaining useful life annually to determine whether events or circumstances warrant a revision
to the intangible asset or the remaining period of amortization. There were no revisions resulting from management’s assessment
in 2013, 2012 or 2011.
Defined
Benefit Pension and Other Post Retirement Plans
.
Since December 31, 2006, the Company has recognized the funded status
of its defined benefit plan in the accompanying consolidated balance sheet with gains or losses and prior service costs or credits
that arise during the period that are not recognized as net period benefit expenses recorded in other comprehensive income (loss).
The Company has recognized the underfunded status of its supplemental retirement plan as a liability in the consolidated balance
sheet and recognizes subsequent changes in that unfunded status through other comprehensive income (loss). For the years ended
December 31, 2013, 2012 and 2011, the amount recognized through other comprehensive income (loss) was $335,000, ($722,000) and
($441,000), respectively.
Income
Taxes.
Income tax expense is the total of the current year income tax due or refundable and the change in
deferred tax assets and liabilities.
The Company files its income taxes on a
consolidated basis with its subsidiaries. The allocation of income tax expense (benefit) represents each entity’s
proportionate share of the consolidated provision for income taxes. The Company applies the asset and liability method to
account for income taxes. Deferred tax assets and liabilities are calculated by applying enacted tax laws and tax rates
applicable at the time of the calculation to the differences between the financial statement basis and the tax basis of
assets and liabilities. The effect on deferred taxes of changes in tax laws and rates is recognized in income in the period
that includes the enactment date. On the consolidated balance sheet, net deferred tax assets are included in other assets. A
valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
The
Company uses a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions
taken or expected to be taken on a tax return. A tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The
amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax
positions not meeting the “more likely than not” test, no tax benefit is recorded.
When
tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on
all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including
the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that
is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the
benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable
to the taxing authorities upon examination.
Interest
expense associated with unrecognized tax benefits is classified as interest expense in the consolidated statement of income.
Penalties associated with unrecognized tax benefits are classified as other expense in the consolidated statement of income.
Earnings
per Share.
Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common
stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect
of stock options in computing diluted EPS. Earnings per share is retroactively adjusted for stock dividends and stock splits for
all periods presented.
Stock-Based
Compensation.
At December 31, 2013, the Company had two shareholder approved stock-based compensation plans: the 1998
Employee Stock Incentive Plan and the 2008 Stock Incentive Plan. The plans do not provide for the settlement of awards in cash
and new shares are issued upon exercise of options. The North Valley Bancorp 1998 Employee Stock Incentive Plan provides for awards
in the form of options (which may constitute incentive stock options (“ISOs”) or non-statutory stock options (“NSOs”)
to key employees) and also provides for the award of shares of Common Stock to outside directors. As provided in the 1998 Employee
Stock Incentive Plan, the authorization to award incentive stock options terminated on February 19, 2008. As of December 31, 2013,
a total of 241,635 shares of Common Stock were available for future grants under the 2008 Stock Incentive Plan.
The
North Valley Bancorp 2008 Stock Incentive Plan was adopted by the Company’s Board of Directors on February 27, 2008, effective
that date, and was approved by the Company’s shareholders at the annual meeting, May 22, 2008. The terms of the 2008 Stock
Incentive Plan are substantially the same as the North Valley Bancorp 1998 Employee Stock Incentive Plan. The 2008 Stock Incentive
Plan provides for share based awards to key employees in the form of stock options, which may consist of NSOs and ISOs. The 2008
Stock Incentive Plan also provides for the grant to outside directors, and to consultants and advisers to the Company, in the
form of stock awards or stock options, all of which must be NSOs. A total of 601,925 shares were authorized under all plans at
December 31, 2013. Pursuant to the 1998 Employee Stock Incentive Plan there were outstanding options to purchase 51,930 shares
of Common Stock at December 31, 2013. At December 31, 2013, the shares of Common Stock authorized to be granted as options under
the terms of the 2008 Stock Incentive Plan totaled 549,995, consisting of 302,780 shares to be issued upon the exercise of options
granted and still outstanding as of that date, 5,580 shares issued as stock awards and 241,635 shares reserved for future stock
option grants and director stock awards. Effective January 1, 2009, and on each January 1 thereafter for the remaining term of
the 2008 Stock Incentive Plan, the aggregate number of shares of Common Stock which are reserved for issuance pursuant to options
granted under the terms of the 2008 Stock Incentive Plan shall be increased by a number of shares of Common Stock equal to 2%
of the total number of the shares of Common Stock of the Company outstanding at the end of the most recently concluded calendar
year. Any shares of Common Stock that have been reserved but not issued as options during any calendar year shall remain available
for grant during any subsequent calendar year. Each outside director of the Company shall also be eligible to receive a stock
award of 180 shares of Common Stock as part of his or her annual retainer paid by the Company for his or her services as a director.
Each stock award shall be fully vested when granted to the outside director. In September 2013 and July 2012, each director was
awarded 180 shares for their retainer grant. The number of shares of Common Stock available as stock awards to outside directors
shall equal the number of shares of Common Stock to be awarded to such outside directors. Outstanding options under the plans
are exercisable until their expiration.
Cash
flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for those options (excess
tax benefits) is to be classified as a cash flow from financing activities in the statement of cash flows.
Determining
Fair Value.
The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton based option
valuation model that uses the assumptions discussed below. This fair value is then amortized on a straight-line basis over the
requisite service periods of the awards, which is generally the vesting period.
Expected
Term – The Company’s expected term represents the period that the Company’s stock-based awards are expected
to be outstanding and was determined based on the Company’s historical option activity.
Expected
Volatility - The Company uses the trading history of the common stock of the Company in determining an estimated volatility factor
when using the Black-Scholes-Merton option-pricing formula to determine the fair value of options granted.
Expected
Dividend – The Company estimates the expected dividend based on its historical experience of dividends declared per year,
giving consideration to any anticipated changes and the estimated stock price over the expected term based on historical experience
when using the Black-Scholes-Merton option-pricing formula.
Risk-Free
Interest Rate - The Company bases the risk-free interest rate used in the Black-Scholes-Merton option-pricing formula on the implied
yield currently available on U.S. Treasury zero-coupon issues with the same or substantially equivalent remaining term as the
expected term of the options.
Estimated
Forfeitures - When estimating forfeitures, the Company considers voluntary and involuntary termination behavior as well as analysis
of actual option forfeitures.
There
were 114,234, 77,908 and 66,000 options granted in 2013, 2012 and 2011, respectively. The fair value of each option is estimated
on the date of grant with the following assumptions:
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Weighted average dividend
yield
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
Weighted average expected
volatility
|
|
59.78%
|
|
58.50%
|
|
53.60%
|
Weighted average risk-free
interest rate
|
|
1.38%
|
|
1.40%
|
|
2.27%
|
Weighted average expected
option life
|
|
6.32
years
|
|
6.49
years
|
|
7.67
years
|
Weighted average grant
date fair value
|
|
$9.53
|
|
$6.28
|
|
$6.07
|
Comprehensive
(Loss) Income
. Comprehensive (loss) income includes net income and other comprehensive income or loss, which represents
the change in its net assets during the period from nonowner sources. The components of other comprehensive income or loss for
the Company include the unrealized gain or loss on available-for-sale securities and changes in the funded status of the pension
liability and are presented net of tax. Comprehensive (loss) income is reported on the consolidated statement of changes in stockholders’
equity.
Adoption
of New Financial Accounting Standards
In February
2013, the FASB amended existing guidance related to reporting amounts reclassified out of other comprehensive (loss) income out
of accumulated other comprehensive (loss) income. These amendments do not change the current requirements for reporting
net income or other comprehensive (loss) income in financial statements. These amendments require an entity to provide information
about the amounts reclassified out of accumulated other comprehensive (loss) income by component. In addition, an entity is required
to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified
out of accumulated other comprehensive (loss) income by the respective line items of net income but only if the amount reclassified
is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that
are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference
to other disclosures required under U.S. GAAP that provide additional details about those amounts. These amendments are effective
prospectively for interim and annual reporting periods beginning after December 15, 2012 and are disclosed in Note 18.
2. INVESTMENT
SECURITIES
The amortized
cost of investment securities and their estimated fair value were as follows (in thousands):
|
|
As of December 31, 2013
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government sponsored agencies
|
|
$
|
19,669
|
|
|
$
|
—
|
|
|
$
|
(1,471
|
)
|
|
$
|
18,198
|
|
Obligations of state and political subdivisions
|
|
|
5,216
|
|
|
|
151
|
|
|
|
(50
|
)
|
|
|
5,317
|
|
Government sponsored agency mortgage-backed securities
|
|
|
251,923
|
|
|
|
2,528
|
|
|
|
(6,174
|
)
|
|
|
248,277
|
|
Corporate debt securities
|
|
|
6,000
|
|
|
|
—
|
|
|
|
(1,245
|
)
|
|
|
4,755
|
|
Equity securities
|
|
|
3,000
|
|
|
|
—
|
|
|
|
(68
|
)
|
|
|
2,932
|
|
Total available-for-sale
|
|
$
|
285,808
|
|
|
$
|
2,679
|
|
|
$
|
(9,008
|
)
|
|
$
|
279,479
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agency mortgage-backed securities
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
|
As of December 31, 2012
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government sponsored agencies
|
|
$
|
21,003
|
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
21,118
|
|
Obligations of state and political subdivisions
|
|
|
10,698
|
|
|
|
499
|
|
|
|
—
|
|
|
|
11,197
|
|
Government sponsored agency mortgage-backed securities
|
|
|
239,543
|
|
|
|
6,152
|
|
|
|
(64
|
)
|
|
|
245,631
|
|
Corporate debt securities
|
|
|
6,000
|
|
|
|
—
|
|
|
|
(1,244
|
)
|
|
|
4,756
|
|
Equity securities
|
|
|
3,000
|
|
|
|
113
|
|
|
|
—
|
|
|
|
3,113
|
|
Total available-for-sale
|
|
$
|
280,244
|
|
|
$
|
6,879
|
|
|
$
|
(1,308
|
)
|
|
$
|
285,815
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agency mortgage-backed securities
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
Net unrealized
(losses) gains on available-for-sale securities totaling ($6,329,000) and $5,571,000 were recorded, net of ($2,595,000) and $2,284,000
in tax (benefits) provision, as accumulated other comprehensive (loss) gain within stockholders’ equity at December 31,
2013 and 2012, respectively. All government sponsored agency mortgage-backed securities are residential mortgages for the years
ended December 31, 2013 and 2012.
For the years
ended December 31, 2013, 2012 and 2011 there were $548,000, $1,886,000 and $1,687,000, respectively, in gross realized gains on
sales or calls of available for sale securities. For the year ended December 31, 2013 there were no gross realized losses on sales
or calls of securities categorized as available for sale securities. For the years ended December 31, 2012 and 2011 there were
$9,000 and $10,000, respectively, in gross realized losses on sales or calls of securities categorized as available for sale securities.
For the years ended December 31, 2013, 2012 and 2011 there were $20,215,000, $133,047,000 and $101,940,000, respectively, in gross
proceeds from sales or calls of available for sale securities. There were no sales or transfers of held to maturity securities
for the years ended December 31, 2013, 2012 and 2011. For the year ended December 31, 2013 there were gross proceeds of $4,000
in maturities or calls of held to maturity securities. For the years ended December 31, 2012 and 2011 there were no gross proceeds
from maturities and calls of held to maturity securities.
The following
tables show gross unrealized losses and the estimated fair value of available-for-sale investment securities, aggregated by investment
category, for investment securities that are in an unrealized loss position (in thousands). Unrealized losses for held-to-maturity
investment securities during the same period were not significant.
|
|
As of December 31, 2013
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
Description of Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government sponsored agencies
|
|
$
|
18,198
|
|
|
$
|
(1,471
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,198
|
|
|
$
|
(1,471
|
)
|
Obligations of state and political subdivisions
|
|
|
1,145
|
|
|
|
(50
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,145
|
|
|
|
(50
|
)
|
Government sponsored agency mortgage-backed securities
|
|
|
156,421
|
|
|
|
(5,163
|
)
|
|
|
17,296
|
|
|
|
(1,011
|
)
|
|
|
173,717
|
|
|
|
(6,174
|
)
|
Corporate debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
4,755
|
|
|
|
(1,245
|
)
|
|
|
4,755
|
|
|
|
(1,245
|
)
|
Equity securities
|
|
|
2,932
|
|
|
|
(68
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,932
|
|
|
|
(68
|
)
|
Total impaired securities
|
|
$
|
178,696
|
|
|
$
|
(6,752
|
)
|
|
$
|
22,051
|
|
|
$
|
(2,256
|
)
|
|
$
|
200,747
|
|
|
$
|
(9,008
|
)
|
|
|
As of December 31, 2012
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
Description of Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agency mortgage-backed securities
|
|
$
|
34,878
|
|
|
$
|
(64
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,878
|
|
|
$
|
(64
|
)
|
Corporate debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
4,756
|
|
|
|
(1,244
|
)
|
|
|
4,756
|
|
|
|
(1,244
|
)
|
Total impaired securities
|
|
$
|
34,878
|
|
|
$
|
(64
|
)
|
|
$
|
4,756
|
|
|
$
|
(1,244
|
)
|
|
$
|
39,634
|
|
|
$
|
(1,308
|
)
|
Obligations
of U.S. Government Sponsored Agencies
.
Management believes that the unrealized losses on the Company’s investment
in obligations of U.S. government sponsored agencies is caused by interest rate changes, and is not attributable to changes in
credit quality. The Company’s investments in obligations of U.S. government sponsored agencies include two securities which
were in a loss position for less than twelve months, none of which are individually significant. Management does not have the
intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities
before the recovery of its amortized cost basis, which may be upon maturity. The Company does not consider these securities to
be other-than-temporarily impaired at December 31, 2013.
Obligations
of States and Political Subdivisions.
Management believes that the unrealized losses on the Company’s investment
in obligations of states and political subdivisions is caused by interest rate changes and other market conditions, and is not
attributable to changes in credit quality. The Company’s investments in obligations of states and political subdivisions
include two securities which were in a loss position for less than twelve months, none of which are individually significant.
Management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required
to sell these securities before the recovery of its amortized cost basis, which may be upon maturity. The Company does not consider
these securities to be other-than-temporarily impaired at December 31, 2013.
Government
Sponsored Agency Mortgage Backed Securities
.
Management believes that the unrealized losses on the Company’s investment
in government sponsored agency mortgage-backed securities is caused by interest rate changes and other market conditions and is
not attributable to changes in credit quality. These investments include fourteen securities which were in a loss position for
less than twelve months and two securities in a loss position for twelve months or longer, none of which are individually significant.
Additionally, the contractual cash flows of these investments are guaranteed by an agency of the U.S. government and thus it is
expected that the securities would not be settled at any price less than the amortized cost of the Company’s investment.
Management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required
to sell these securities before the recovery of its amortized cost basis, which may be upon maturity. The Company does not consider
these investments to be other-than-temporarily impaired at December 31, 2013 or 2012.
Corporate
Debt Securities
. As of December 31, 2013, there were two corporate debt securities in a loss position for twelve months
or more. There is a current active market for these securities and management believes that the unrealized losses on the Company’s
investment in these corporate debt securities is due to the yield of the securities and is not attributable to changes in credit
quality. The two corporate debt securities are each a $3,000,000 single-issuer trust preferred security issued by two separate
large publicly-traded financial institutions. The securities are tied to the front-end of the yield curve, three-month LIBOR (a
short-term interest rate) and have a spread over that. Management does not have the intent to sell these securities nor does it
believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost
basis, which may be upon maturity. The Company does not consider these investments to be other-than-temporarily impaired at December
31, 2013 or 2012.
Maturities.
The Company invests in government sponsored agency mortgage-backed securities (“MBSs”) and collateralized
mortgage obligations (“CMOs”) issued by the FNMA, the Federal Home Loan Mortgage Corporation and Government National
Mortgage Association. Actual maturities of the MBSs and CMOs and other securities may differ from contractual maturities because
borrowers have the right to prepay mortgages without penalty or call obligations with or without call penalties. The Company uses
the “Wall Street” consensus average life at the time the security is purchased to schedule maturities of these MBSs
and CMOs and adjusts scheduled maturities periodically based upon changes in the Wall Street estimates.
Contractual
maturities of held-to-maturity and available-for-sale securities (other than equity securities with an amortized cost and fair
value of approximately $3,000,000 and $2,932,000) at December 31, 2013, are shown below (in thousands).
|
|
Held-to-Maturity
|
|
|
Available-for-Sale
|
|
|
|
Amortized Cost
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
(Carrying
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair Value
|
|
|
|
Amount)
|
|
|
Value
|
|
|
Costs
|
|
|
(Carrying Amount)
|
|
Within one year
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
4,003
|
|
|
$
|
4,101
|
|
One to five years
|
|
|
—
|
|
|
|
—
|
|
|
|
102,441
|
|
|
|
104,057
|
|
Five to ten years
|
|
|
—
|
|
|
|
—
|
|
|
|
169,362
|
|
|
|
162,670
|
|
Beyond ten years
|
|
|
—
|
|
|
|
—
|
|
|
|
7,002
|
|
|
|
5,719
|
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
282,808
|
|
|
$
|
276,547
|
|
At December
31, 2013 and 2012, securities having fair value amounts of approximately $272,092,000 and $276,308,000, respectively, were pledged
to secure public deposits, short-term borrowings, treasury tax and loan balances and for other purposes required by law or contract.
3. LOANS
The Company
originates loans for business, consumer and real estate activities for equipment purchases. Such loans are concentrated in Yolo,
Placer, Sonoma, Shasta, Humboldt, Mendocino, Trinity and Del Norte 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, real estate or business or personal assets. Leases are generally secured by equipment. The Company’s policy for
requiring collateral reflects the Company’s analysis of the borrower, the borrower’s industry and the economic environment
in which the loan would be granted. The loans are expected to be repaid from cash flows or proceeds from the sale of selected
assets of the borrower.
Major classifications
of loans at December 31 were as follows (in thousands):
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Commercial
|
|
$
|
47,526
|
|
|
$
|
46,078
|
|
Real estate - commercial
|
|
|
326,631
|
|
|
|
295,630
|
|
Real estate - construction
|
|
|
27,472
|
|
|
|
23,003
|
|
Real estate - mortgage
|
|
|
63,120
|
|
|
|
74,353
|
|
Installment
|
|
|
5,376
|
|
|
|
6,689
|
|
Other
|
|
|
39,311
|
|
|
|
45,941
|
|
Gross loans
|
|
|
509,436
|
|
|
|
491,694
|
|
Deferred loan (fees) costs, net
|
|
|
(192
|
)
|
|
|
517
|
|
Allowance for loan losses
|
|
|
(9,301
|
)
|
|
|
(10,458
|
)
|
Loans, net
|
|
$
|
499,943
|
|
|
$
|
481,753
|
|
Salaries and
employee benefits totaling $1,048,000, $1,263,000 and $800,000 have been deferred as loan origination costs for the years ended
December 31, 2013, 2012 and 2011, respectively.
Certain real
estate loans receivable are pledged as collateral for available borrowings with the FHLB. Pledged loans totaled $91,447,000 and
$116,929,000 December 31, 2013 and 2012, respectively (see
Note 9
).
The following
table presents impaired loans and the related allowance for loan losses as of the dates indicated (in thousands):
|
|
As of December 31, 2013
|
|
|
As of December 31, 2012
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
With no allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
458
|
|
|
$
|
481
|
|
|
$
|
—
|
|
|
$
|
585
|
|
|
$
|
586
|
|
|
$
|
—
|
|
Real estate - commercial
|
|
|
4,193
|
|
|
|
4,284
|
|
|
|
—
|
|
|
|
2,778
|
|
|
|
2,974
|
|
|
|
—
|
|
Real estate - construction
|
|
|
435
|
|
|
|
449
|
|
|
|
—
|
|
|
|
1,210
|
|
|
|
1,273
|
|
|
|
—
|
|
Real estate - mortgage
|
|
|
919
|
|
|
|
948
|
|
|
|
—
|
|
|
|
684
|
|
|
|
736
|
|
|
|
—
|
|
Installment
|
|
|
96
|
|
|
|
115
|
|
|
|
—
|
|
|
|
122
|
|
|
|
138
|
|
|
|
—
|
|
Other
|
|
|
374
|
|
|
|
397
|
|
|
|
—
|
|
|
|
111
|
|
|
|
120
|
|
|
|
—
|
|
Subtotal
|
|
|
6,475
|
|
|
|
6,674
|
|
|
|
—
|
|
|
|
5,490
|
|
|
|
5,827
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
240
|
|
|
|
240
|
|
|
|
150
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Real estate - commercial
|
|
|
113
|
|
|
|
113
|
|
|
|
28
|
|
|
|
184
|
|
|
|
217
|
|
|
|
171
|
|
Real estate - construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
161
|
|
|
|
161
|
|
|
|
18
|
|
Real estate - mortgage
|
|
|
416
|
|
|
|
416
|
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
769
|
|
|
|
769
|
|
|
|
228
|
|
|
|
345
|
|
|
|
378
|
|
|
|
189
|
|
Total Impaired Loans
|
|
$
|
7,244
|
|
|
$
|
7,443
|
|
|
$
|
228
|
|
|
$
|
5,835
|
|
|
$
|
6,205
|
|
|
$
|
189
|
|
The following
table presents the average balance related to impaired loans for the period indicated (in thousands):
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Average Book
|
|
|
Interest Income
|
|
|
Average Book
|
|
|
Interest Income
|
|
|
Average Book
|
|
|
Interest Income
|
|
|
|
Balance
|
|
|
Recognized
|
|
|
Balance
|
|
|
Recognized
|
|
|
Balance
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
960
|
|
|
$
|
—
|
|
|
$
|
941
|
|
|
$
|
—
|
|
|
$
|
2,056
|
|
|
$
|
—
|
|
Real estate - commercial
|
|
|
4,784
|
|
|
|
77
|
|
|
|
3,069
|
|
|
|
—
|
|
|
|
6,354
|
|
|
|
—
|
|
Real estate - construction
|
|
|
458
|
|
|
|
20
|
|
|
|
1,673
|
|
|
|
—
|
|
|
|
9,453
|
|
|
|
—
|
|
Real estate - mortgage
|
|
|
1,415
|
|
|
|
52
|
|
|
|
681
|
|
|
|
—
|
|
|
|
991
|
|
|
|
—
|
|
Installment
|
|
|
127
|
|
|
|
2
|
|
|
|
139
|
|
|
|
—
|
|
|
|
110
|
|
|
|
—
|
|
Other
|
|
|
388
|
|
|
|
—
|
|
|
|
122
|
|
|
|
—
|
|
|
|
91
|
|
|
|
—
|
|
Total
|
|
$
|
8,132
|
|
|
$
|
151
|
|
|
$
|
6,625
|
|
|
$
|
—
|
|
|
$
|
19,055
|
|
|
$
|
—
|
|
Nonperforming
loans include all such loans that are either on nonaccrual status or are 90 days past due as to principal or interest but still
accrue interest because such loans are well-secured and in the process of collection. Nonperforming loans at December 31 are summarized
as follows (in thousands):
|
|
|
|
|
|
|
|
Loans Past Due Over
|
|
|
|
Nonaccrual
|
|
|
90 Days Still Accruing
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Commercial
|
|
$
|
698
|
|
|
$
|
585
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate - commercial
|
|
|
3,425
|
|
|
|
2,962
|
|
|
|
—
|
|
|
|
—
|
|
Real estate - construction
|
|
|
110
|
|
|
|
1,371
|
|
|
|
—
|
|
|
|
—
|
|
Real estate - mortgage
|
|
|
417
|
|
|
|
684
|
|
|
|
—
|
|
|
|
—
|
|
Installment
|
|
|
69
|
|
|
|
122
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
374
|
|
|
|
111
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
5,093
|
|
|
$
|
5,835
|
|
|
$
|
—
|
|
|
$
|
—
|
|
If interest
on nonaccrual loans had been accrued, such income would have approximated $224,000, $575,000 and $1,039,000 for the years ended
December 31, 2013, 2012 and 2011.
At December
31, 2013 there were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual.
The following
table shows an aging analysis of the loan portfolio by the amount of time past due (in thousands):
|
|
As of December 31, 2013
|
|
|
|
Accruing Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 Days
|
|
|
89 Days
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Nonaccrual
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
46,587
|
|
|
$
|
241
|
|
|
$
|
—
|
|
|
$
|
698
|
|
|
$
|
47,526
|
|
Real estate - commercial
|
|
|
322,773
|
|
|
|
433
|
|
|
|
—
|
|
|
|
3,425
|
|
|
|
326,631
|
|
Real estate - construction
|
|
|
27,362
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110
|
|
|
|
27,472
|
|
Real estate - mortgage
|
|
|
62,178
|
|
|
|
525
|
|
|
|
—
|
|
|
|
417
|
|
|
|
63,120
|
|
Installment
|
|
|
5,273
|
|
|
|
34
|
|
|
|
—
|
|
|
|
69
|
|
|
|
5,376
|
|
Other
|
|
|
38,594
|
|
|
|
343
|
|
|
|
—
|
|
|
|
374
|
|
|
|
39,311
|
|
Total
|
|
$
|
502,767
|
|
|
$
|
1,576
|
|
|
$
|
—
|
|
|
$
|
5,093
|
|
|
$
|
509,436
|
|
|
|
As of December 31, 2012
|
|
|
|
Accruing Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 Days
|
|
|
89 Days
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Nonaccrual
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
45,473
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
585
|
|
|
$
|
46,078
|
|
Real estate - commercial
|
|
|
292,505
|
|
|
|
163
|
|
|
|
—
|
|
|
|
2,962
|
|
|
|
295,630
|
|
Real estate - construction
|
|
|
21,436
|
|
|
|
196
|
|
|
|
—
|
|
|
|
1,371
|
|
|
|
23,003
|
|
Real estate - mortgage
|
|
|
72,907
|
|
|
|
762
|
|
|
|
—
|
|
|
|
684
|
|
|
|
74,353
|
|
Installment
|
|
|
6,529
|
|
|
|
38
|
|
|
|
—
|
|
|
|
122
|
|
|
|
6,689
|
|
Other
|
|
|
45,581
|
|
|
|
249
|
|
|
|
—
|
|
|
|
111
|
|
|
|
45,941
|
|
Total
|
|
$
|
484,431
|
|
|
$
|
1,428
|
|
|
$
|
—
|
|
|
$
|
5,835
|
|
|
$
|
491,694
|
|
A troubled debt
restructuring (“TDRs”) is a formal modification of the terms of a loan when the lender, for economic or legal reasons
related to the borrower’s financial difficulties, grants a concession to the borrower. The modification of the terms of
such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of
the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent
reduction of the recorded investment in the loan.
At December
31, 2013, accruing TDRs were $2,151,000 and nonaccrual TDRs were $905,000 compared to accruing TDRs of $2,414,000 and nonaccrual
TDRs of $1,072,000 at December 31, 2012. At December 31, 2013, there were $78,000 in specific reserves allocated to customers
whose loan terms were modified in troubled debt restructurings. At December 31, 2012, there were no specific reserves allocated
to customers whose loan terms were modified in troubled debt restructurings. There were no commitments to lend additional amounts
at December 31, 2013 and 2012 to customers with outstanding loans classified as troubled debt restructurings. There were no TDRs
that subsequently defaulted during the twelve months following the modification of terms for either 2013 or 2012.
The following
table presents loans that were modified and recorded as TDRs during the twelve months ended December 31, 2013 and 2012.
|
|
As
of December 31, 2013
|
|
|
As
of December 31, 2012
|
|
|
|
Accruing
TDRs
|
|
|
Accruing
TDRs
|
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
Real
estate - commercial
|
|
1
|
|
|
$
|
435
|
|
|
$
|
435
|
|
|
|
5
|
|
|
$
|
1,350
|
|
|
$
|
1,350
|
|
Real
estate - construction
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
343
|
|
|
$
|
343
|
|
Real
estate - mortgage
|
|
|
1
|
|
|
$
|
209
|
|
|
$
|
209
|
|
|
|
2
|
|
|
$
|
721
|
|
|
$
|
721
|
|
|
|
Nonaccrual
TDRs
|
|
|
Nonaccrual
TDRs
|
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
Commercial
|
|
1
|
|
|
$
|
36
|
|
|
$
|
36
|
|
|
|
1
|
|
|
$
|
529
|
|
|
$
|
529
|
|
Real
estate - construction
|
|
1
|
|
|
$
|
110
|
|
|
$
|
110
|
|
|
|
2
|
|
|
$
|
398
|
|
|
$
|
398
|
|
Real
estate - mortgage
|
|
1
|
|
|
$
|
113
|
|
|
$
|
113
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Installment
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
4
|
|
|
$
|
120
|
|
|
$
|
120
|
|
Other
|
|
|
3
|
|
|
$
|
210
|
|
|
$
|
210
|
|
|
|
1
|
|
|
$
|
25
|
|
|
$
|
25
|
|
A summary of
TDRs by type of concession and by type of loan as of December 31, 2013 and 2012, is shown below:
|
|
December 31, 2013
|
|
Accruing TDRs
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
of
|
|
|
Rate
|
|
|
Maturity
|
|
|
Maturity
|
|
|
|
|
|
|
Contracts
|
|
|
Reduction
|
|
|
Extension
|
|
|
Extension
|
|
|
Total
|
|
Real estate - commercial
|
|
5
|
|
|
$
|
—
|
|
|
$
|
195
|
|
|
$
|
686
|
|
|
$
|
881
|
|
Real estate-construction
|
|
1
|
|
|
$
|
—
|
|
|
$
|
325
|
|
|
$
|
—
|
|
|
$
|
325
|
|
Real estate - mortgage
|
|
3
|
|
|
$
|
—
|
|
|
$
|
293
|
|
|
$
|
625
|
|
|
$
|
918
|
|
Installment
|
|
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
27
|
|
Nonaccrual TDRs
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
of
|
|
|
Rate
|
|
|
Maturity
|
|
|
Maturity
|
|
|
|
|
|
|
Contracts
|
|
|
Reduction
|
|
|
Extension
|
|
|
Extension
|
|
|
Total
|
|
Commercial
|
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
391
|
|
|
$
|
391
|
|
Real estate-construction
|
|
1
|
|
|
$
|
—
|
|
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
110
|
|
Real estate - mortgage
|
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
113
|
|
|
$
|
113
|
|
Installment
|
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
59
|
|
|
$
|
59
|
|
Other
|
|
|
4
|
|
|
$
|
104
|
|
|
$
|
60
|
|
|
$
|
68
|
|
|
$
|
232
|
|
|
|
December 31, 2012
|
|
Accruing TDRs
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
of
|
|
|
Rate
|
|
|
Maturity
|
|
|
Maturity
|
|
|
|
|
|
|
Contracts
|
|
|
Reduction
|
|
|
Extension
|
|
|
Extension
|
|
|
Total
|
|
Real estate - commercial
|
|
5
|
|
|
$
|
202
|
|
|
$
|
—
|
|
|
$
|
1,148
|
|
|
$
|
1,350
|
|
Real estate-construction
|
|
1
|
|
|
$
|
—
|
|
|
$
|
343
|
|
|
$
|
—
|
|
|
$
|
343
|
|
Real estate - mortgage
|
|
|
2
|
|
|
$
|
—
|
|
|
$
|
298
|
|
|
$
|
423
|
|
|
$
|
721
|
|
Nonaccrual TDRs
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
of
|
|
|
Rate
|
|
|
Maturity
|
|
|
Maturity
|
|
|
|
|
|
|
Contracts
|
|
|
Reduction
|
|
|
Extension
|
|
|
Extension
|
|
|
Total
|
|
Commercial
|
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
529
|
|
|
$
|
529
|
|
Real estate-construction
|
|
2
|
|
|
$
|
327
|
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
398
|
|
Installment
|
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
120
|
|
|
$
|
120
|
|
Other
|
|
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
25
|
|
The following
table presents the activity in the allowance for loan losses by portfolio segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Commercial
|
|
|
Real Estate
Commercial
|
|
|
Real Estate
Construction
|
|
|
Real Estate
Mortgage
|
|
|
Installment
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
843
|
|
|
$
|
6,295
|
|
|
$
|
690
|
|
|
$
|
982
|
|
|
$
|
98
|
|
|
$
|
721
|
|
|
$
|
829
|
|
|
$
|
10,458
|
|
Charge-offs
|
|
|
(208
|
)
|
|
|
(438
|
)
|
|
|
(401
|
)
|
|
|
(420
|
)
|
|
|
(84
|
)
|
|
|
(289
|
)
|
|
|
|
|
|
|
(1,840
|
)
|
Recoveries
|
|
|
593
|
|
|
|
46
|
|
|
|
6
|
|
|
|
11
|
|
|
|
27
|
|
|
|
—
|
|
|
|
|
|
|
|
683
|
|
Provision for loan losses
|
|
|
(352
|
)
|
|
|
(707
|
)
|
|
|
315
|
|
|
|
269
|
|
|
|
90
|
|
|
|
400
|
|
|
|
(15
|
)
|
|
|
—
|
|
Total ending allowance balance
|
|
$
|
876
|
|
|
$
|
5,196
|
|
|
$
|
610
|
|
|
$
|
842
|
|
|
$
|
131
|
|
|
$
|
832
|
|
|
$
|
814
|
|
|
$
|
9,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Commercial
|
|
|
Real Estate
Commercial
|
|
|
Real Estate
Construction
|
|
|
Real Estate
Mortgage
|
|
|
Installment
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,333
|
|
|
$
|
7,528
|
|
|
$
|
1,039
|
|
|
$
|
935
|
|
|
$
|
185
|
|
|
$
|
736
|
|
|
$
|
900
|
|
|
$
|
12,656
|
|
Charge-offs
|
|
|
(480
|
)
|
|
|
(2,681
|
)
|
|
|
(822
|
)
|
|
|
(353
|
)
|
|
|
(221
|
)
|
|
|
(145
|
)
|
|
|
|
|
|
|
(4,702
|
)
|
Recoveries
|
|
|
110
|
|
|
|
63
|
|
|
|
80
|
|
|
|
39
|
|
|
|
103
|
|
|
|
9
|
|
|
|
|
|
|
|
404
|
|
Provision for loan losses
|
|
|
(120
|
)
|
|
|
1,385
|
|
|
|
393
|
|
|
|
361
|
|
|
|
31
|
|
|
|
121
|
|
|
|
(71
|
)
|
|
|
2,100
|
|
Total ending allowance balance
|
|
$
|
843
|
|
|
$
|
6,295
|
|
|
$
|
690
|
|
|
$
|
982
|
|
|
$
|
98
|
|
|
$
|
721
|
|
|
$
|
829
|
|
|
$
|
10,458
|
|
December 31, 2011
|
|
Commercial
|
|
|
Real Estate
Commercial
|
|
|
Real Estate
Construction
|
|
|
Real Estate
Mortgage
|
|
|
Installment
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,517
|
|
|
$
|
8,439
|
|
|
$
|
1,936
|
|
|
$
|
956
|
|
|
$
|
339
|
|
|
$
|
666
|
|
|
$
|
1,140
|
|
|
$
|
14,993
|
|
Charge-offs
|
|
|
(928
|
)
|
|
|
(2,917
|
)
|
|
|
(405
|
)
|
|
|
(440
|
)
|
|
|
(345
|
)
|
|
|
(490
|
)
|
|
|
|
|
|
|
(5,525
|
)
|
Recoveries
|
|
|
212
|
|
|
|
108
|
|
|
|
10
|
|
|
|
2
|
|
|
|
206
|
|
|
|
—
|
|
|
|
|
|
|
|
538
|
|
Provision for loan losses
|
|
|
532
|
|
|
|
1,898
|
|
|
|
(502
|
)
|
|
|
417
|
|
|
|
(15
|
)
|
|
|
560
|
|
|
|
(240
|
)
|
|
|
2,650
|
|
Total ending allowance balance
|
|
$
|
1,333
|
|
|
$
|
7,528
|
|
|
$
|
1,039
|
|
|
$
|
935
|
|
|
$
|
185
|
|
|
$
|
736
|
|
|
$
|
900
|
|
|
$
|
12,656
|
|
The following
table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based
on impairment method (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Commercial
|
|
|
Real Estate
Commercial
|
|
|
Real Estate
Construction
|
|
|
Real Estate
Mortgage
|
|
|
Installment
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
150
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
228
|
|
Collectively evaluated for impairment
|
|
|
726
|
|
|
|
5,168
|
|
|
|
610
|
|
|
|
792
|
|
|
|
131
|
|
|
|
832
|
|
|
|
814
|
|
|
|
9,073
|
|
Total ending allowance balance
|
|
$
|
876
|
|
|
$
|
5,196
|
|
|
$
|
610
|
|
|
$
|
842
|
|
|
$
|
131
|
|
|
$
|
832
|
|
|
$
|
814
|
|
|
$
|
9,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
698
|
|
|
$
|
4,306
|
|
|
$
|
435
|
|
|
$
|
1,335
|
|
|
$
|
96
|
|
|
$
|
374
|
|
|
|
|
|
|
$
|
7,244
|
|
Loans collectively evaluated for impairment
|
|
|
46,828
|
|
|
|
322,325
|
|
|
|
27,037
|
|
|
|
61,785
|
|
|
|
5,280
|
|
|
|
38,937
|
|
|
|
|
|
|
|
502,192
|
|
Total ending loans balance
|
|
$
|
47,526
|
|
|
$
|
326,631
|
|
|
$
|
27,472
|
|
|
$
|
63,120
|
|
|
$
|
5,376
|
|
|
$
|
39,311
|
|
|
|
|
|
|
$
|
509,436
|
|
December 31, 2012
|
|
Commercial
|
|
|
Real Estate
Commercial
|
|
|
Real Estate
Construction
|
|
|
Real Estate
Mortgage
|
|
|
Installment
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
171
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
189
|
|
Collectively evaluated for impairment
|
|
|
843
|
|
|
|
6,124
|
|
|
|
672
|
|
|
|
982
|
|
|
|
98
|
|
|
|
721
|
|
|
|
829
|
|
|
|
10,269
|
|
Total ending allowance balance
|
|
$
|
843
|
|
|
$
|
6,295
|
|
|
$
|
690
|
|
|
$
|
982
|
|
|
$
|
98
|
|
|
$
|
721
|
|
|
$
|
829
|
|
|
$
|
10,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
585
|
|
|
$
|
2,962
|
|
|
$
|
1,371
|
|
|
$
|
684
|
|
|
$
|
122
|
|
|
$
|
111
|
|
|
|
|
|
|
$
|
5,835
|
|
Loans collectively evaluated for impairment
|
|
|
45,493
|
|
|
|
292,668
|
|
|
|
21,632
|
|
|
|
73,669
|
|
|
|
6,567
|
|
|
|
45,830
|
|
|
|
|
|
|
|
485,859
|
|
Total ending loans balance
|
|
$
|
46,078
|
|
|
$
|
295,630
|
|
|
$
|
23,003
|
|
|
$
|
74,353
|
|
|
$
|
6,689
|
|
|
$
|
45,941
|
|
|
|
|
|
|
$
|
491,694
|
|
December 31, 2011
|
|
Commercial
|
|
|
Real Estate
Commercial
|
|
|
Real Estate
Construction
|
|
|
Real Estate
Mortgage
|
|
|
Installment
|
|
|
Other
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
450
|
|
|
$
|
606
|
|
|
$
|
504
|
|
|
$
|
37
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,610
|
|
Collectively evaluated for impairment
|
|
|
883
|
|
|
|
6,922
|
|
|
|
535
|
|
|
|
898
|
|
|
|
172
|
|
|
|
736
|
|
|
|
900
|
|
|
|
11,046
|
|
Total ending loans balance
|
|
$
|
1,333
|
|
|
$
|
7,528
|
|
|
$
|
1,039
|
|
|
$
|
935
|
|
|
$
|
185
|
|
|
$
|
736
|
|
|
$
|
900
|
|
|
$
|
12,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
1,788
|
|
|
$
|
5,998
|
|
|
$
|
9,440
|
|
|
$
|
938
|
|
|
$
|
107
|
|
|
$
|
88
|
|
|
|
|
|
|
$
|
18,359
|
|
Loans collectively evaluated for impairment
|
|
|
44,372
|
|
|
|
270,646
|
|
|
|
18,023
|
|
|
|
46,424
|
|
|
|
10,818
|
|
|
|
47,877
|
|
|
|
|
|
|
|
438,160
|
|
Total ending loans balance
|
|
$
|
46,160
|
|
|
$
|
276,644
|
|
|
$
|
27,463
|
|
|
$
|
47,362
|
|
|
$
|
10,925
|
|
|
$
|
47,965
|
|
|
|
|
|
|
$
|
456,519
|
|
The following
table shows the loan portfolio allocated by management’s internal risk ratings (in thousands):
|
|
As of December 31, 2013
|
|
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Total
|
|
Commercial
|
|
$
|
45,446
|
|
|
$
|
1,107
|
|
|
$
|
973
|
|
|
$
|
47,526
|
|
Real estate - commercial
|
|
|
309,828
|
|
|
|
6,213
|
|
|
|
10,590
|
|
|
|
326,631
|
|
Real estate - construction
|
|
|
27,101
|
|
|
|
261
|
|
|
|
110
|
|
|
|
27,472
|
|
Real estate - mortgage
|
|
|
61,200
|
|
|
|
—
|
|
|
|
1,920
|
|
|
|
63,120
|
|
Installment
|
|
|
5,278
|
|
|
|
—
|
|
|
|
98
|
|
|
|
5,376
|
|
Other
|
|
|
38,611
|
|
|
|
—
|
|
|
|
700
|
|
|
|
39,311
|
|
Total
|
|
$
|
487,464
|
|
|
$
|
7,581
|
|
|
$
|
14,391
|
|
|
$
|
509,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Total
|
|
Commercial
|
|
$
|
44,486
|
|
|
$
|
129
|
|
|
$
|
1,463
|
|
|
$
|
46,078
|
|
Real estate - commercial
|
|
|
278,834
|
|
|
|
—
|
|
|
|
16,796
|
|
|
|
295,630
|
|
Real estate - construction
|
|
|
21,386
|
|
|
|
—
|
|
|
|
1,617
|
|
|
|
23,003
|
|
Real estate - mortgage
|
|
|
71,973
|
|
|
|
—
|
|
|
|
2,380
|
|
|
|
74,353
|
|
Installment
|
|
|
6,562
|
|
|
|
—
|
|
|
|
127
|
|
|
|
6,689
|
|
Other
|
|
|
45,658
|
|
|
|
—
|
|
|
|
283
|
|
|
|
45,941
|
|
Total
|
|
$
|
468,899
|
|
|
$
|
129
|
|
|
$
|
22,666
|
|
|
$
|
491,694
|
|
The allowance
for loan losses is established through a provision for loan losses based on management’s evaluation of the probable incurred
losses in the loan portfolio. In determining levels of risk, management considers a variety of factors, including, but not limited
to, asset classifications, economic trends, industry experience and trends, geographic concentrations, estimated collateral values,
historical loan loss experience, and the Company’s underwriting policies. During the second quarter of 2013, there was a
change in the Bank’s method of calculating the historical loss factors applied to loans identified as “homogenous
segments” of the loan portfolio as follows: Losses from the past twelve quarters are applied to loan pools based on a “Migration
Analysis” method. The method calculates Net Charge Offs (charge offs less corresponding recoveries) and measures them against
average balances in loan pools based on the risk grade in effect on charged-off loans four quarters prior to the actual charge
off date. The logic behind this four quarter “look back” is to account for management’s estimate of the typical
time lapse between the recognition of the problem loan and the recognition of some or all of the loan as uncollectable. In addition,
the loss ratios are calculated using “factored” logic which systematically reduces the Net Charge Off value so that
charge offs occurring in older periods do not have as much weight as more recent charge offs. Management of the Company believes
that, given the recent trends in historical losses and the correlation of those losses with a loans identified risk grade, that
incorporation of a migration analysis in the current and future analyses was a prudent refinement of the allowance methodology.
In addition, management believes that the decreases in the overall level of the allowance for loan losses over the past several
quarters is directionally consistent with the improving credit quality trends of the loan portfolio. The allowance for loan losses
is maintained at an amount management considers adequate to cover the probable incurred losses in loans receivable. While management
uses the best information available to make these estimates, future adjustments to allowances may be necessary due to economic,
operating, regulatory, and other conditions that may be beyond the Company’s control. The Company also engages a third party
credit review consultant to analyze the Company’s loan loss adequacy periodically. In addition, the regulatory agencies,
as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies
may require the Company to recognize additions to the allowance based on judgments different from those of management.
The allowance
for loan losses is comprised of several components including the specific, formula and unallocated allowance relating to loans
in the loan portfolio. Our methodology for determining the allowance for loan losses consists of several key elements, which include:
|
●
|
Specific
Allowances
. A specific allowance is established when management has identified unique
or particular risks that were related to a specific loan that demonstrated risk characteristics
consistent with impairment. Specific allowances are established when management can estimate
the amount of an impairment of a loan.
|
|
●
|
Formula
Allowance
. The formula allowance is calculated by applying loss factors through the
assignment of loss factors to homogenous pools of loans. Changes in risk grades of both
performing and nonperforming loans affect the amount of the formula allowance. Loss factors
are based on our historical loss experience and such other data as management believes
to be pertinent. Management, also, considers a variety of subjective factors, including
regional economic and business conditions that impact important segments of our portfolio,
loan growth rates, the depth and skill of lending staff, the interest rate environment,
and the results of bank regulatory examinations and findings of our internal credit examiners
to establish the formula allowance.
|
|
●
|
Unallocated
Allowance
. The unallocated loan loss allowance represents an amount for imprecision
or uncertainty that is inherent in estimates used to determine the allowance.
|
The Company
also maintains a separate allowance for off-balance-sheet commitments. A reserve for unfunded commitments is maintained at a level
that, in the opinion of management, is adequate to absorb probable losses associated with commitments to lend funds under existing
agreements, for example, the Bank’s commitment to fund advances under lines of credit. The reserve amount for unfunded commitments
is determined based on our methodologies described above with respect to the formula allowance. The allowance for off-balance-sheet
commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet and was $146,000 and
$143,000, as of December 31, 2013 and 2012, respectively.
4. OTHER
REAL ESTATE OWNED
The table shows
the changes in other real estate owned (OREO) during the years ended December 31 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Balance, beginning of year
|
|
$
|
22,423
|
|
|
$
|
20,106
|
|
|
$
|
25,784
|
|
Loans transferred to other real estate owned
|
|
|
818
|
|
|
|
12,239
|
|
|
|
10,454
|
|
Premises transferred to other real estate owned
|
|
|
627
|
|
|
|
—
|
|
|
|
—
|
|
Sales of other real estate owned
|
|
|
(17,204
|
)
|
|
|
(6,889
|
)
|
|
|
(12,036
|
)
|
Loss on sale or write-down of other real estate owned
|
|
|
(3,210
|
)
|
|
|
(3,033
|
)
|
|
|
(4,096
|
)
|
Balance, end of year
|
|
$
|
3,454
|
|
|
$
|
22,423
|
|
|
$
|
20,106
|
|
The following
table presents the components of OREO expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Operating expenses
|
|
$
|
329
|
|
|
$
|
523
|
|
|
$
|
708
|
|
Provision for unrealized losses
|
|
|
3,057
|
|
|
|
2,638
|
|
|
|
4,002
|
|
Net loss on sales
|
|
|
153
|
|
|
|
395
|
|
|
|
94
|
|
Total other real estate owned expense
|
|
$
|
3,539
|
|
|
$
|
3,556
|
|
|
$
|
4,804
|
|
5. FAIR
VALUE MEASUREMENTS
The Company
groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine fair value. These levels are:
●
Quoted prices in active markets for identical assets (Level 1)
: Inputs that are quoted unadjusted prices in active markets
for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market
in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on
an ongoing basis.
●
Significant
other observable inputs (Level 2)
: Inputs that reflect the assumptions market participants would use in pricing the
asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted
prices for similar assets or liabilities, quoted prices for securities in inactive markets and inputs derived principally
from, or corroborated by, observable market data by correlation or other means.
●
Significant
unobservable inputs (Level 3)
: Inputs that reflect the reporting entity’s own assumptions about the assumptions
market participants would use in pricing the asset or liability developed based on the best information available in the
circumstances.
Management monitors
the availability of observable market data to assess the appropriate classification of financial instruments within the fair value
hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments
from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates
the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative
to total assets, total liabilities or total earnings.
The following
tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring
basis (in thousands):
Recurring
Basis
|
|
Fair Value Measurements at December 31, 2013 Using:
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government sponsored agencies
|
|
$
|
18,198
|
|
|
$
|
—
|
|
|
$
|
18,198
|
|
|
$
|
—
|
|
Obligations of state and political subdivisions
|
|
|
5,317
|
|
|
|
—
|
|
|
|
5,317
|
|
|
|
—
|
|
Government sponsored agency mortgage-backed securities
|
|
|
248,277
|
|
|
|
—
|
|
|
|
248,277
|
|
|
|
—
|
|
Corporate debt securities
|
|
|
4,755
|
|
|
|
—
|
|
|
|
4,755
|
|
|
|
—
|
|
Equity securities
|
|
|
2,932
|
|
|
|
—
|
|
|
|
2,932
|
|
|
|
—
|
|
|
|
$
|
279,479
|
|
|
$
|
—
|
|
|
$
|
279,479
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2012 Using:
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government sponsored agencies
|
|
$
|
21,118
|
|
|
$
|
—
|
|
|
$
|
21,118
|
|
|
$
|
—
|
|
Obligations of state and political subdivisions
|
|
|
11,197
|
|
|
|
—
|
|
|
|
11,197
|
|
|
|
—
|
|
Government sponsored agency mortgage-backed securities
|
|
|
245,631
|
|
|
|
—
|
|
|
|
245,631
|
|
|
|
—
|
|
Corporate debt securities
|
|
|
4,756
|
|
|
|
—
|
|
|
|
4,756
|
|
|
|
—
|
|
Equity securities
|
|
|
3,113
|
|
|
|
—
|
|
|
|
3,113
|
|
|
|
—
|
|
|
|
$
|
285,815
|
|
|
$
|
—
|
|
|
$
|
285,815
|
|
|
$
|
—
|
|
Fair values
for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the year
ended December 31, 2013, there were no transfers between Levels 1 and 2.
There were no
liabilities measured at fair value on a recurring basis at December 31, 2013 or 2012.
Nonrecurring
Basis
|
|
Total at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
157
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
157
|
|
|
$
|
63
|
|
Real estate - commercial
|
|
|
593
|
|
|
|
—
|
|
|
|
—
|
|
|
|
593
|
|
|
|
239
|
|
Real estate - construction
|
|
|
110
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110
|
|
|
|
71
|
|
Real estate - mortgage
|
|
|
291
|
|
|
|
—
|
|
|
|
—
|
|
|
|
291
|
|
|
|
42
|
|
Other
|
|
|
164
|
|
|
|
—
|
|
|
|
—
|
|
|
|
164
|
|
|
|
71
|
|
Other real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - commercial
|
|
|
570
|
|
|
|
—
|
|
|
|
—
|
|
|
|
570
|
|
|
|
57
|
|
Real estate - construction
|
|
|
2,147
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,147
|
|
|
|
1,125
|
|
Total assets measured at fair value on a nonrecurring basis
|
|
$
|
4,032
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,032
|
|
|
$
|
1,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
2012
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
585
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
585
|
|
|
$
|
126
|
|
Real estate - commercial
|
|
|
2,222
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,222
|
|
|
|
1,313
|
|
Real estate - construction
|
|
|
143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
143
|
|
|
|
19
|
|
Real estate - mortgage
|
|
|
464
|
|
|
|
—
|
|
|
|
—
|
|
|
|
464
|
|
|
|
29
|
|
Installment
|
|
|
75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
|
|
27
|
|
Other
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
|
|
24
|
|
Other real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction
|
|
|
7,360
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,360
|
|
|
|
2,194
|
|
Real estate - mortgage
|
|
|
184
|
|
|
|
—
|
|
|
|
—
|
|
|
|
184
|
|
|
|
140
|
|
Total assets measured at fair value on a nonrecurring basis
|
|
$
|
11,058
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,058
|
|
|
$
|
3,872
|
|
Impaired
Loans
- The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based
on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including
comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers
to adjust for differences between the comparable sales and income data available, and additional discounts by management for known
market factors and time since the last appraisal. Such adjustments are usually significant and typically result in a Level 3 classification
of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted
accordingly.
Other
Real Estate Owned
– Nonrecurring adjustments to certain commercial and residential real estate properties classified
as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate
appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and
the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences
between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level
3 classification of the inputs for determining fair value.
The following
table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value
on a nonrecurring basis (in thousands):
|
|
|
|
|
|
|
|
|
Range
|
|
|
|
|
|
|
|
|
|
(Weighted
|
December
31, 2013
|
|
Fair
Value
|
|
|
Valuation
Techniques
|
|
Unobservable
Inputs
|
|
Average)
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
157
|
|
|
Sales comparison
approach
|
|
Adjustment
for differences between the comparable sales
|
|
6% to 11% (9%)
|
Real
estate - commercial
|
|
$
|
593
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
6% to 11% (9%)
|
Real
estate - construction
|
|
$
|
110
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
2% to 3% (3%)
|
Real
estate - mortgage
|
|
$
|
291
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
6% to 11% (9%)
|
Other
|
|
$
|
164
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
6% to 11% (9%)
|
Other real estate owned:
|
|
|
|
|
|
|
|
|
|
|
Real
estate - commercial
|
|
$
|
570
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
6% to 11% (9%)
|
Real
estate - construction
|
|
$
|
2,147
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
0% to 6% (6%)
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
|
|
|
|
|
|
|
(Weighted
|
Monday,
December 31, 2012
|
|
Fair
Value
|
|
|
Valuation
Techniques
|
|
Unobservable
Inputs
|
|
Average)
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
585
|
|
|
Sales comparison
approach
|
|
Adjustment
for differences between the comparable sales
|
|
6% to 11% (9%)
|
Real
estate - commercial
|
|
$
|
2,222
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
6% to 11% (9%)
|
Real
estate - construction
|
|
$
|
143
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
2% to 3% (3%)
|
Real
estate - mortgage
|
|
$
|
464
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
6% to 11% (9%)
|
Other
|
|
$
|
25
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
6% to 11% (9%)
|
Other real estate owned:
|
|
|
|
|
|
|
|
|
|
|
Real
estate - construction
|
|
$
|
7,360
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
0% to 6% (6%)
|
Real
estate - mortgage
|
|
$
|
184
|
|
|
Sales comparison approach
|
|
Adjustment for differences
between the comparable sales
|
|
6% to 11% (9%)
|
Disclosures
about Fair Value of Financial Instruments
The fair values
presented represent the Company’s best estimate of fair value using the methodologies discussed below. The fair values of
financial instruments which have a relatively short period of time between their origination and their expected realization were
valued using historical cost. The values assigned do not necessarily represent amounts which ultimately may be realized. In addition,
these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities.
The
following assumptions were used as of December 31, 2013 and 2012 to estimate the fair value of each class of financial instruments
for which it is practicable to estimate that value.
|
a)
|
Cash
and Due From Banks - The carrying amounts of cash and short-term instruments approximate
fair values and are classified as Level 1.
|
|
b)
|
Federal
Funds Sold - The carrying amounts of cash and short-term instruments approximate fair
values and are classified as Level 1.
|
|
c)
|
Time
Deposits at Other Financial Institutions - The carrying amounts of cash and short-term
instruments approximate fair values and are classified as Level 2.
|
|
d)
|
FHLB,
FRB Stock and Other Securities - It was not practicable to determine the fair value of
FHLB or FRB stock due to the restrictions placed on its transferability.
|
|
e)
|
Investment
Securities – The fair value of investment 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.
|
|
f)
|
Loans
- Commercial loans, residential mortgages, construction loans and direct financing leases
are segmented by fixed and adjustable rate interest terms, by maturity, and by performing
and nonperforming categories.
|
The
fair values of performing loans are estimated as follows: For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans
are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair
value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
The
fair value of nonperforming loans is estimated by discounting estimated future cash flows using current interest rates with an
additional risk adjustment reflecting the individual characteristics of the loans, or using the fair value of underlying collateral
for collateral dependent loans as a practical expedient.
|
g)
|
Deposits
– The fair values disclosed for noninterest-bearing and interest-bearing demand
deposits and savings and money market accounts are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amount) resulting in a
Level 1 classification. Fair values for certificates of deposit are estimated using a
discounted cash flows calculation that applies interest rates currently being offered
on certificates to a schedule of aggregated expected monthly maturities on time deposits
resulting in a Level 2 classification.
|
|
h)
|
Subordinated
Debentures - The fair values of the Company’s subordinated debentures are estimated
using discounted cash flow analyses based on the current borrowing rates for similar
types of borrowing arrangements resulting in a Level 3 classification.
|
|
i)
|
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 standby letters
of credit and their fair value are not significant and therefore not included in the
following table.
|
|
j)
|
Accrued
Interest Receivable/Payable – The carrying amounts of accrued interest approximate
fair value and therefore follow the same classification as the related asset or liability.
|
The carrying
amounts and estimated fair values of the Company’s financial instruments are as follows (in thousands):
|
|
|
|
|
Fair
Value Measurements at
|
|
|
|
|
|
|
|
|
|
December
31, 2013 Using
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
FINANCIAL
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
19,348
|
|
|
$
|
19,348
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,348
|
|
Federal
funds sold
|
|
|
38,135
|
|
|
|
38,135
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,135
|
|
Time
deposits at other financial institutions
|
|
|
2,226
|
|
|
|
—
|
|
|
|
2,226
|
|
|
|
—
|
|
|
|
2,226
|
|
FHLB,
FRB and other securities
|
|
|
8,402
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
N/A
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
279,479
|
|
|
|
—
|
|
|
|
279,479
|
|
|
|
—
|
|
|
|
279,479
|
|
Held-to-maturity
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
Loans
|
|
|
499,943
|
|
|
|
—
|
|
|
|
|
|
|
|
510,611
|
|
|
|
510,611
|
|
Accrued
interest receivable
|
|
|
2,124
|
|
|
|
—
|
|
|
|
692
|
|
|
|
1,432
|
|
|
|
2,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonmaturity
deposits
|
|
$
|
638,112
|
|
|
$
|
638,112
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
638,112
|
|
Time
deposits
|
|
|
149,737
|
|
|
|
—
|
|
|
|
149,899
|
|
|
|
—
|
|
|
|
149,899
|
|
Subordinated
debentures
|
|
|
21,651
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,702
|
|
|
|
7,702
|
|
Accrued
interest payable
|
|
|
108
|
|
|
|
2
|
|
|
|
29
|
|
|
|
77
|
|
|
|
108
|
|
|
|
|
|
|
Fair
Value Measurements at
|
|
|
|
|
|
|
|
|
|
December
31, 2012 Using
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
FINANCIAL
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
22,654
|
|
|
$
|
22,654
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,654
|
|
Federal
funds sold
|
|
|
15,865
|
|
|
|
15,865
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,865
|
|
Time
deposits at other financial institutions
|
|
|
2,219
|
|
|
|
—
|
|
|
|
2,219
|
|
|
|
—
|
|
|
|
2,219
|
|
FHLB,
FRB and other securities
|
|
|
8,313
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
N/A
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
285,815
|
|
|
|
—
|
|
|
|
285,815
|
|
|
|
—
|
|
|
|
285,815
|
|
Held-to-maturity
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
Loans
|
|
|
481,753
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500,689
|
|
|
|
500,689
|
|
Accrued
interest receivable
|
|
|
2,217
|
|
|
|
—
|
|
|
|
767
|
|
|
|
1,450
|
|
|
|
2,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonmaturity
deposits
|
|
$
|
596,204
|
|
|
$
|
596,204
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
596,204
|
|
Time
deposits
|
|
|
172,376
|
|
|
|
—
|
|
|
|
172,805
|
|
|
|
—
|
|
|
|
172,805
|
|
Subordinated
debentures
|
|
|
21,651
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,018
|
|
|
|
9,018
|
|
Accrued
interest payable
|
|
|
136
|
|
|
|
2
|
|
|
|
54
|
|
|
|
80
|
|
|
|
136
|
|
6. PREMISES
AND EQUIPMENT
Major classifications
of premises and equipment at December 31 are summarized as follows (in thousands):
|
|
2013
|
|
|
2012
|
|
Land
|
|
$
|
2,207
|
|
|
$
|
2,620
|
|
Building and building improvements
|
|
|
8,696
|
|
|
|
9,341
|
|
Furniture, fixtures and equipment
|
|
|
12,716
|
|
|
|
12,599
|
|
Leasehold improvements
|
|
|
2,805
|
|
|
|
2,791
|
|
Construction in process
|
|
|
26
|
|
|
|
5
|
|
Total premises and equipment
|
|
|
26,450
|
|
|
|
27,356
|
|
Less: Accumulated depreciation
|
|
|
(18,617
|
)
|
|
|
(18,175
|
)
|
Premises and equipment, net
|
|
$
|
7,833
|
|
|
$
|
9,181
|
|
Depreciation
and amortization included in occupancy and equipment expense totaled $1,019,000, $1,080,000 and $1,197,000 for the years ended
December 31, 2013, 2012 and 2011, respectively.
The Company
has operating leases for certain premises and equipment. These leases expire on various dates through 2023 and have various renewal
options ranging from 1 to 25 years. Rent expense for such leases for the years ended December 31, 2013, 2012 and 2011 was $1,107,000,
$1,109,000 and $1,252,000, respectively.
The following
schedule represents the Company’s noncancelable future minimum scheduled lease payments at December 31, 2013 (in thousands):
2014
|
|
$
|
1,047
|
|
2015
|
|
|
793
|
|
2016
|
|
|
469
|
|
2017
|
|
|
299
|
|
2018
|
|
|
226
|
|
Thereafter
|
|
|
910
|
|
Total
|
|
$
|
3,744
|
|
7. OTHER
ASSETS
Major classifications
of other assets at December 31 were as follows (in thousands):
|
|
2013
|
|
|
2012
|
|
Deferred taxes, net
|
|
$
|
15,309
|
|
|
$
|
12,346
|
|
Federal and state tax receivable
|
|
|
1,314
|
|
|
|
444
|
|
Prepaid expenses
|
|
|
767
|
|
|
|
879
|
|
Mortgage and SBA servicing asset
|
|
|
1,362
|
|
|
|
1,139
|
|
Other
|
|
|
748
|
|
|
|
789
|
|
Total other assets
|
|
$
|
19,500
|
|
|
$
|
15,597
|
|
Originated mortgage
and SBA servicing assets totaling $706,000, $628,000 and $421,000 were recognized during the years ended December 31, 2013, 2012
and 2011, respectively. Amortization of mortgage and SBA servicing assets totaled $483,000, $343,000 and $275,000 for the years
ended December 31, 2013, 2012 and 2011, respectively. There were no impairment charges to mortgage servicing assets during the
years ended December 31, 2013, 2012 and 2011. At December 31, 2013 and 2012, the Company serviced real estate loans and loans
guaranteed by the Small Business Administration which it had sold to the secondary market of approximately $188,484,000 and $159,010,000,
respectively. Fair value of loan servicing assets at year-end 2013 was determined using discount rates ranging from 9.25% to 12.75%,
prepayment speeds ranging from 144psa to 320psa, depending on the stratification of the specific right, and a weighted average
default rate of 1.25%. Fair value of loan servicing assets at year-end 2012 was determined using discount rates ranging from 9.25%
to 12.75%, prepayment speeds ranging from 318psa to 512psa, depending on the stratification of the specific right; and a weighted
average default rate of 1.25%.
8. DEPOSITS
The following
table summarizes the Company’s deposits by type for the years ended December 31 (in thousands):
|
|
2013
|
|
|
2012
|
|
Noninterest-bearing demand
|
|
$
|
184,971
|
|
|
$
|
177,855
|
|
Interest-bearing demand
|
|
|
202,508
|
|
|
|
185,315
|
|
Savings and money market
|
|
|
250,633
|
|
|
|
233,034
|
|
Time certificates
|
|
|
149,737
|
|
|
|
172,376
|
|
Total deposits
|
|
$
|
787,849
|
|
|
$
|
768,580
|
|
The aggregate
amount of time certificates of deposit in denominations of $100,000 or more was $71,218,000 and $82,036,000 at December 31, 2013
and 2012, respectively. Interest expense incurred on such time certificates of deposit was $399,000, $805,000 and $1,245,000 for
the years ended December 31, 2013, 2012 and 2011. At December 31, 2013, the scheduled maturities of all time deposits were as
follows (in thousands):
Years
|
|
Amount
|
|
2014
|
|
$
|
125,808
|
|
2015
|
|
|
15,498
|
|
2016
|
|
|
6,021
|
|
2017
|
|
|
2,410
|
|
|
|
$
|
149,737
|
|
9. LINES
OF CREDIT
At December
31, 2013, the Company had the following lines of credit with correspondent banks to purchase federal funds (in thousands):
Description
|
|
Amount
|
|
|
Expiration
|
Secured:
|
|
|
|
|
|
|
Secured fed funds
|
|
$
|
10,000
|
|
|
6/30/2014
|
First deeds of trust on eligible 1-4 unit residential loans
|
|
$
|
70,932
|
|
|
Monthly
|
Securities backed credit program
|
|
$
|
189,757
|
|
|
Monthly
|
Discount -securities
|
|
$
|
2,131
|
|
|
Monthly
|
The Company
did not have outstanding balances for FHLB advances or Federal Funds purchased at December 31, 2013 and 2012.
10. SUBORDINATED
DEBENTURES
The Company
owns the common stock of three business trusts that have issued an aggregate of $21.0 million in trust preferred securities fully
and unconditionally guaranteed by the Company. The entire proceeds of each respective issuance of trust preferred securities were
invested by the separate business trusts into junior subordinated debentures issued by the Company, with identical maturity, repricing
and payment terms as the respective issuance of trust preferred securities. The aggregate amount of junior subordinated debentures
issued by the Company is $22.0 million, with the maturity dates for the respective debentures ranging from 2033 through 2036.
Subject to regulatory approval, the Company may redeem the respective junior subordinated debentures earlier than the maturity
date, with certain of the debentures being redeemable beginning in April 2008, July 2009 and March 2011.
On November
9, 2009, the Company elected to defer the payment of interest on these securities. The Company is allowed to defer the payment
of interest for up to 20 consecutive quarterly periods without triggering an event of default. The obligation to pay interest
is cumulative and continued to accrue. On May 29, 2012, the Company received approval from the Federal Reserve Bank of San Francisco
and on May 9, 2012, the Company received approval from the California Department of Financial Institutions to pay all deferred
interest on its junior subordinated notes underlying its trust preferred securities in the amount of $5,854,000 and to fully redeem
its North Valley Capital Trust I notes in the amount of $10,310,000, bearing an interest rate of 10.25%. On July 23, 2012, the
Company paid all deferred interest on its junior subordinated notes and on July 25, 2012, it redeemed, in full, the notes associated
with North Valley Capital Trust I.
The obligation
to pay interest on the Debentures is cumulative and will continue to accrue, currently at a variable rate of 3.49% on the 2033
Debentures, variable rate of 3.04% on the 2034 Debentures and a variable rate of 1.57% on the 2036 Debentures. Interest
is generally set at variable rates based on the three-month LIBOR, reset and payable quarterly, plus 3.25% for the 2033
Debentures,
plus 2.80% for the 2034 Debentures, and plus 1.33% for the 2036 Debentures. At December 31, 2013 and 2012, the Company had recorded
accrued and unpaid interest payments of $77,000 and $79,000, respectively.
The trust preferred
securities issued by the trusts are currently included in Tier 1 capital in the amount of $21,000,000 for purposes of determining
Leverage, Tier 1 and Total Risk-Based capital ratios for the year ending December 31, 2013 and 2012.
The following
table summarizes the terms of each subordinated debenture issuance (dollars in thousands):
|
|
|
|
|
|
Fixed or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
|
Variable
|
|
Current
|
|
|
Rate
|
|
Redemption
|
|
Amount at December 31,
|
|
Series
|
|
Issued
|
|
Maturity
|
|
Rate
|
|
Rate
|
|
|
Index
|
|
Date
|
|
2013
|
|
|
2012
|
|
North Valley Capital Trust II
|
|
4/10/03
|
|
4/24/33
|
|
Variable
|
|
|
3.49
|
%
|
|
LIBOR + 3.25%
|
|
4/24/08
|
|
|
6,186
|
|
|
|
6,186
|
|
North Valley Capital Trust III
|
|
5/5/04
|
|
4/24/34
|
|
Variable
|
|
|
3.04
|
%
|
|
LIBOR + 2.80%
|
|
7/23/09
|
|
|
5,155
|
|
|
|
5,155
|
|
North Valley Capital Statutory Trust IV
|
|
12/29/05
|
|
3/15/36
|
|
Variable
|
|
|
1.57
|
%
|
|
LIBOR + 1.33%
|
|
3/15/11
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,651
|
|
|
$
|
21,651
|
|
Deferred costs
related to the Subordinated Debentures, which are included in other assets in the accompanying consolidated balance sheet, totaled
$0 and $6,000 at December 31, 2013 and 2012, respectively. Amortization of the deferred costs was $6,000, $20,000 and $42,000
for the years ended December 31, 2013, 2012 and 2011, respectively.
11. INCOME
TAXES
The provision
(benefit) for income taxes for the years ended December 31, was as follows (in thousands):
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current tax (benefit) provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(75
|
)
|
|
$
|
(99
|
)
|
|
$
|
63
|
|
State
|
|
|
(15
|
)
|
|
|
117
|
|
|
|
46
|
|
Total
|
|
|
(90
|
)
|
|
|
18
|
|
|
|
109
|
|
Deferred tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,472
|
|
|
|
2,715
|
|
|
|
695
|
|
State
|
|
|
212
|
|
|
|
(200
|
)
|
|
|
(269
|
)
|
Impact of valuation allowance
|
|
|
—
|
|
|
|
(4,277
|
)
|
|
|
(223
|
)
|
Total
|
|
|
1,684
|
|
|
|
(1,762
|
)
|
|
|
203
|
|
Total provision (benefit) for income taxes
|
|
$
|
1,594
|
|
|
$
|
(1,744
|
)
|
|
$
|
312
|
|
Current and
deferred tax provision (benefit) for the years ended December 31, 2013, 2012 and 2011 was $1,594,000, ($1,744,000), and $312,000,
respectively. During 2010, the Company recorded a partial valuation allowance of $4,500,000 against the Company’s deferred
tax asset. During the quarter ended December 31, 2011, the Company reversed the Federal portion of its valuation allowance in
the amount of $223,000, and during the quarter ended September 30, 2012 the Company reversed the remaining State valuation allowance
of $4,277,000.
At December
31, 2013, the Bank had Federal and State net operating loss carryforwards (NOLs) for tax purposes of approximately $4,627,000
and $26,586,000, respectively. The Company’s Federal NOLs will expire in 2031 and its California NOLs will expire in 2032
if not fully utilized.
The effective
federal tax rate for the years ended December 31, differs from the statutory tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Federal statutory income tax rate
|
|
|
35.0%
|
|
|
|
35.0%
|
|
|
|
35.0%
|
|
State income taxes net of Federal income tax benefit
|
|
|
2.5%
|
|
|
|
(1.2%
|
)
|
|
|
(4.3%
|
)
|
Tax exempt income
|
|
|
(2.5%
|
)
|
|
|
(4.0%
|
)
|
|
|
(6.5%
|
)
|
Impact of valuation allowance
|
|
|
—
|
|
|
|
(61.1%
|
)
|
|
|
(6.6%
|
)
|
Increase in reserve for uncertain tax positions
|
|
|
—
|
|
|
|
—
|
|
|
|
1.2%
|
|
Other
|
|
|
(4.4%
|
)
|
|
|
(7.1%
|
)
|
|
|
(9.5%
|
)
|
Effective tax (benefit) rate
|
|
|
30.6%
|
|
|
|
(38.4%
|
)
|
|
|
9.3%
|
|
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):
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
4,490
|
|
|
$
|
5,252
|
|
Accrued pension obligation
|
|
|
3,573
|
|
|
|
3,070
|
|
Underfunded pension obligation
|
|
|
893
|
|
|
|
1,125
|
|
Deferred compensation
|
|
|
811
|
|
|
|
755
|
|
Unrealized loss on available-for-sale securities
|
|
|
2,595
|
|
|
|
—
|
|
Discount on acquired loans
|
|
|
—
|
|
|
|
14
|
|
Stock based compensation
|
|
|
166
|
|
|
|
181
|
|
Tax credits
|
|
|
2,634
|
|
|
|
2,092
|
|
Net operating loss
|
|
|
4,501
|
|
|
|
4,109
|
|
Capital loss
|
|
|
26
|
|
|
|
489
|
|
Other real estate owned
|
|
|
684
|
|
|
|
2,597
|
|
Other
|
|
|
526
|
|
|
|
864
|
|
Total deferred tax assets
|
|
$
|
20,899
|
|
|
$
|
20,548
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Tax depreciation in excess of book depreciation
|
|
|
1,069
|
|
|
|
1,149
|
|
FHLB stock dividend
|
|
|
410
|
|
|
|
410
|
|
Deferred loan fees and costs
|
|
|
894
|
|
|
|
986
|
|
Originated mortgage servicing rights
|
|
|
463
|
|
|
|
412
|
|
Core deposit intangibles
|
|
|
50
|
|
|
|
117
|
|
Unrealized gain on available-for-sale securities
|
|
|
—
|
|
|
|
2,284
|
|
Market to market adjustment
|
|
|
—
|
|
|
|
28
|
|
California franchise tax
|
|
|
2,538
|
|
|
|
2,612
|
|
Other
|
|
|
166
|
|
|
|
204
|
|
Total deferred tax liabilities
|
|
$
|
5,590
|
|
|
$
|
8,202
|
|
Net deferred tax asset
|
|
$
|
15,309
|
|
|
$
|
12,346
|
|
The Company
and its subsidiaries file income tax returns in the United States and California jurisdictions. There are currently no pending
federal tax examinations by tax authorities. With few exceptions, the Company is no longer subject to examination by federal taxing
authorities for the years ended on or before December 31, 2009 and by state and local taxing authorities for years ended on or
before December 31, 2008. The Company’s primary market areas are designated as “Enterprise Zones” and the Company
receives tax credits for hiring individuals in these markets and receives an interest deduction for loans made in designated enterprise
zones. The tax credits and interest deductions are significant to the Company in reducing its effective tax rate. These positions
could be challenged by the California Franchise Tax Board, and an unfavorable adjustment could occur. The California Franchise
Tax Board is currently conducting examinations of the State of California returns for 2003, 2004, 2007 and 2008.
The Company
determined its unrecognized tax benefit to be $519,000 for the years ended December 31, 2013 and 2012. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
2013
|
|
|
2012
|
|
Beginning balance
|
|
$
|
519
|
|
|
$
|
519
|
|
Additions based on tax positions related to the current year
|
|
|
—
|
|
|
|
—
|
|
Additions for tax positions of prior years
|
|
|
—
|
|
|
|
—
|
|
Reductions for tax positions of prior years
|
|
|
—
|
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
|
|
—
|
|
Ending balance
|
|
$
|
519
|
|
|
$
|
519
|
|
Of this total,
the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods
is not considered significant for disclosure purposes. The Company does not expect the total amount of unrecognized tax benefits
to significantly increase or decrease in the next twelve months.
During the year
ended December 31, 2013, the Company was not assessed any interest and penalties. The Company had approximately $86,000 and $42,000
for the payment of interest and penalties accrued at December 31, 2013 and 2012, respectively.
12. PENSION
AND OTHER BENEFIT PLANS
Substantially
all employees with at least one year of service participate in a Company-sponsored employee stock ownership plan (ESOP). The Company
made discretionary contributions to the ESOP of $80,000, for the years ended December 31, 2013 and 2012, respectively and $40,000
for the year ended December 31, 2011. At December 31, 2013 and 2012, the ESOP owned approximately 48,794 and 47,445, respectively,
shares of the Company’s common 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 age 21 or
older. Voluntary employee contributions are partially matched by the Company. The Company made contributions to the plan of $208,000,
$172,000 and $69,000 for the years ended December 31, 2013, 2012 and 2011, 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 $1,770,000 and $1,697,000 as of December 31, 2013 and 2012, respectively,
is included in accrued interest payable and other liabilities. The interest cost for this plan was $135,000, $132,000 and $141,000
for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company
has a supplemental retirement plan for key executives, certain retired key executives and directors. These plans are nonqualified
defined benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and
holds policies with cash surrender values of $37,209,000 and $36,045,000 at December 31, 2013 and 2012, respectively. The related
accrued pension obligation of $9,973,000 and $9,443,000 as of December 31, 2013 and 2012, respectively, is included in accrued
interest payable and other liabilities.
The following tables set forth the status
of the nonqualified supplemental retirement defined benefit pension plans at or for the year ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Change in projected benefit obligation (PBO)
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at the beginning of the year
|
|
|
|
|
|
$
|
9,443
|
|
|
$
|
7,397
|
|
Service cost
|
|
|
|
|
|
|
683
|
|
|
|
602
|
|
Interest cost
|
|
|
|
|
|
|
372
|
|
|
|
334
|
|
Benefit payments
|
|
|
|
|
|
|
(250
|
)
|
|
|
(250
|
)
|
Actuarial loss
|
|
|
|
|
|
|
(275
|
)
|
|
|
1,360
|
|
Plan amendments
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Projected benefit obligation at end of year
|
|
|
|
|
|
$
|
9,973
|
|
|
$
|
9,443
|
|
Accumulated benefit obligation at end of year
|
|
|
|
|
|
$
|
7,639
|
|
|
$
|
7,031
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
|
|
|
$
|
250
|
|
|
$
|
250
|
|
Benefit payments
|
|
|
|
|
|
|
(250
|
)
|
|
|
(250
|
)
|
Fair value of plan assets at end of year
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
$
|
(9,973
|
)
|
|
$
|
(9,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in statements of financial position
|
|
|
|
|
|
|
|
|
|
|
|
Current liability
|
|
|
|
|
|
|
(300
|
)
|
|
|
(278
|
)
|
Noncurrent liability
|
|
|
|
|
|
|
(9,673
|
)
|
|
|
(9,165
|
)
|
Net amount recognized
|
|
|
|
|
|
$
|
(9,973
|
)
|
|
$
|
(9,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
|
|
|
|
305
|
|
|
|
403
|
|
Net loss
|
|
|
|
|
|
|
1,872
|
|
|
|
2,342
|
|
Net amount recognized
|
|
|
|
|
|
$
|
2,177
|
|
|
$
|
2,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
|
|
|
|
(7,796
|
)
|
|
|
(6,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine benefit obligations as of the end of fiscal year
|
|
|
|
|
Measurement Date
|
|
|
12/31/2013
|
|
|
|
12/31/2012
|
|
|
|
12/31/2011
|
|
Discount rate
|
|
|
4.75
|
%
|
|
|
4.00
|
%
|
|
|
4.60
|
%
|
Expected return on assets
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
Components of net periodic benefits cost
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Service cost
|
|
$
|
683
|
|
|
$
|
602
|
|
|
$
|
549
|
|
Interest cost
|
|
|
372
|
|
|
|
334
|
|
|
|
333
|
|
Amortization of prior service cost
|
|
|
98
|
|
|
|
98
|
|
|
|
98
|
|
Amortization of actuarial loss
|
|
|
195
|
|
|
|
40
|
|
|
|
10
|
|
Net periodic benefit cost
|
|
$
|
1,348
|
|
|
$
|
1,074
|
|
|
$
|
990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (income) loss
|
|
$
|
(568
|
)
|
|
$
|
1,222
|
|
|
$
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in accumulated other comprehensive income expected to be recognized during the next fiscal year
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
98
|
|
|
$
|
98
|
|
|
$
|
98
|
|
Actuarial loss
|
|
$
|
142
|
|
|
$
|
195
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used in computing net periodic benefit cost
|
|
|
|
|
|
|
|
|
Measurement Date
|
|
|
12/31/2013
|
|
|
|
12/31/2012
|
|
|
|
12/31/2011
|
|
Discount rate
|
|
|
4.75
|
%
|
|
|
4.00
|
%
|
|
|
4.60
|
%
|
Expected return on assets
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
Estimated costs expected to be accrued in
2014 are $1,382,000. The following table presents the benefits expected to be paid under the plan in the periods indicated (in
thousands):
|
|
|
|
Year
|
|
Pension Benefits
|
|
2014
|
|
|
300
|
|
2015
|
|
|
346
|
|
2016
|
|
|
2,402
|
|
2017
|
|
|
378
|
|
2018
|
|
|
461
|
|
2019 - 2021
|
|
|
6,997
|
|
13. STOCK-BASED COMPENSATION
During 2013 and 2012 each director of the Company
was awarded 180 shares of common stock for their share retainer grant. Total common stock grants were 1,440 during 2013 and 2012,
respectively, and 1,260 during 2011. Compensation cost related to these awards was recognized based on the fair value of the shares
at the date of the award which equaled $18.84, $13.10 and $10.40 per share, or a total expense of $27,000, $19,000 and $13,000,
for the years ended December 31, 2013, 2012 and 2011, respectively.
Under the Company’s stock option plans
as of December 31, 2013, there were 241,635 shares of the Company’s common stock available for future grants to directors
and employees of the Company. Under the Director Plan, options may not be granted at a price less than 85% of fair value at the
date of the grant. Under the Employee Plan, options may not be granted at a price less than the fair value at the date of the grant.
Under both plans, options may be exercised over a ten year term. The vesting period is generally five years; however the vesting
period can be modified at the discretion of the Company’s Board of Directors. A summary of outstanding stock options follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
($000)
|
|
Outstanding January 1, 2011
|
|
|
152,095
|
|
|
|
51.02
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
66,000
|
|
|
|
10.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired or canceled
|
|
|
(34,025
|
)
|
|
|
39.66
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2011
|
|
|
184,070
|
|
|
|
38.55
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
77,908
|
|
|
|
11.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired or canceled
|
|
|
(13,156
|
)
|
|
|
49.10
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2012
|
|
|
248,822
|
|
|
$
|
29.40
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
114,234
|
|
|
|
16.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired or canceled
|
|
|
(8,346
|
)
|
|
|
63.32
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2013
|
|
|
354,710
|
|
|
$
|
24.55
|
|
|
|
7
|
|
|
$
|
1,403
|
|
Fully vested and exercisable
at December 31, 2013
|
|
|
138,607
|
|
|
$
|
40.97
|
|
|
|
5
|
|
|
$
|
345
|
|
Options expected to vest
|
|
|
216,103
|
|
|
$
|
14.01
|
|
|
|
9
|
|
|
$
|
1,059
|
|
Information about stock options outstanding
at December 31, 2013 is summarized as follows:
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Remaining
|
|
|
Price of
|
|
|
|
|
|
Price of
|
|
Range of
|
|
Options
|
|
|
Contractual
|
|
|
Options
|
|
|
Options
|
|
|
Options
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
0-12.38
|
|
|
|
140,408
|
|
|
|
7.90
|
|
|
$
|
10.77
|
|
|
|
41,079
|
|
|
$
|
10.65
|
|
$
|
|
|
12.38-24.75
|
|
|
|
162,372
|
|
|
|
7.90
|
|
|
$
|
18.64
|
|
|
|
45,598
|
|
|
$
|
23.54
|
|
$
|
|
|
61.88-74.25
|
|
|
|
22,229
|
|
|
|
4.07
|
|
|
$
|
65.05
|
|
|
|
22,229
|
|
|
$
|
65.05
|
|
$
|
|
|
74.25-86.63
|
|
|
|
10,012
|
|
|
|
1.15
|
|
|
$
|
81.00
|
|
|
|
10,012
|
|
|
$
|
81.00
|
|
$
|
|
|
86.63-99.00
|
|
|
|
5,514
|
|
|
|
2.02
|
|
|
$
|
89.60
|
|
|
|
5,514
|
|
|
$
|
89.60
|
|
$
|
|
|
99.00-111.38
|
|
|
|
14,175
|
|
|
|
2.39
|
|
|
$
|
99.98
|
|
|
|
14,175
|
|
|
$
|
99.98
|
|
The aggregate intrinsic value is calculated
as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock
for options that were in-the-money at December 31, 2013. There were no options exercised during the years ended December 31, 2013,
2012 and 2011. The total fair value of the options that vested during the years ended December 31, 2013, 2012 and 2011 totaled
$405,000, $191,000 and $144,000, respectively.
The compensation cost that has been charged
against income for stock based compensation was $432,000, $210,000 and $157,000 for the years ended December 31, 2013, 2012 and
2011, respectively.
At December 31, 2013, the total unrecognized
compensation cost related to stock-based awards granted to employees under the Company’s stock option plans was $1,404,000.
This cost will be amortized on a straight-line basis over a weighted average period of approximately 3.7 years and will be adjusted
for subsequent changes in estimated forfeitures.
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal actions arising
from normal business activities. Management, based upon the advice of legal counsel, believes that the ultimate resolution of all
pending legal actions will not have a material effect on the Company’s financial position or results of its operations or
its cash flows.
The Company was contingently liable under letters
of credit issued on behalf of its customers in the amount of $4,557,000 and $4,713,000 at December 31, 2013 and 2012, respectively.
At December 31, 2013, commercial and consumer lines of credit and real estate loans of approximately $38,683,000 and $35,264,000,
respectively, were undisbursed. At December 31, 2012, commercial and consumer lines of credit and real estate loans of approximately
$47,350,000 and $31,925,000, respectively, were undisbursed. Approximately 87% of these undisbursed loan commitments are associated
with variable rate loans.
Loan commitments are typically contingent upon
the borrower meeting certain financial and other covenants and such commitments typically have fixed expiration dates and require
payment of a fee. As many of these commitments are expected to expire without being drawn upon, the total commitments do not necessarily
represent future cash requirements. The Company evaluates each potential borrower and the necessary collateral on an individual
basis. Collateral varies, but may include real property, bank deposits, debt securities, equity securities or business or personal
assets.
Standby letters of credit are conditional commitments
written by the Company to guarantee the performance of a customer to a third party. These guarantees are issued primarily relating
to inventory purchases by the Company’s commercial customers and such guarantees are typically short term. Credit risk is
similar to that involved in extending loan commitments to customers and the Company, accordingly, uses evaluation and collateral
requirements similar to those for loan commitments. Virtually all of such commitments are collateralized. The fair value of the
liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant
at December 31, 2013 and 2012. The Company recognizes these fees as revenues over the term of the commitment or when the commitment
is used.
Loan commitments and standby letters of credit
involve, to varying degrees, elements of credit and market risk in excess of the amounts recognized in the balance sheet and do
not necessarily represent the actual amount subject to credit loss. At December 31, 2013 and 2012, the reserve for unfunded commitments
totaled $146,000 and $143,000, respectively.
In management’s opinion, a concentration
exists in real estate-related loans which represent approximately 82% and 80% of the Company’s loan portfolio for years ended
December 31, 2013 and 2012. Although management believes such concentrations to have no more than the normal risk of collectibility,
a continued substantial decline in the economy in general, or a continued decline in real estate values in the Company’s
primary market areas in particular, could have an adverse impact on collectibility of these loans. However, personal and business
income represents the primary source of repayment for a majority of these loans.
On January 24, 2014, a putative shareholder
class action lawsuit titled John Solak v. North Valley Bancorp, et al. was filed in the Superior Court of the State of California,
County of Shasta. TriCo Bancshares and all of the individuals serving as Directors of the Company are also named as defendants.
The complaint alleges breach of fiduciary duty and aiding and abetting breach of fiduciary duty in connection with the Agreement
and Plan of Merger and Reorganization signed between the Company and TriCo Bancshares on January 21, 2014. The Company and the
Directors have not yet responded to the complaint. The Company and its legal counsel believe the complaint's claims are without
merit. The resolution of this matter is not expected to have a material impact on the Company's business, financial condition
or results of operations, though no assurance can be given in this regard.
15. RELATED PARTY TRANSACTIONS
At December 31, 2013 and 2012 the Company provided
loans or had commitments to lend to, certain officers, directors and their associates and principal shareholders.
A summary of activity
for the years ended December 31 were as follows (in thousands; renewals are not reflected as either new loans or repayments):
|
|
2013
|
|
|
2012
|
|
Beginning balance
|
|
$
|
4,689
|
|
|
$
|
4,681
|
|
Borrowings
|
|
|
126
|
|
|
|
525
|
|
Repayments
|
|
|
(423
|
)
|
|
|
(517
|
)
|
|
|
$
|
4,392
|
|
|
$
|
4,689
|
|
|
|
|
|
|
|
|
|
|
Undisbursed commitments
|
|
$
|
116
|
|
|
$
|
199
|
|
16. REGULATORY MATTERS
The Company and NVB 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 NVB must meet
specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. These quantitative measures are established by regulation and require that
minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and
of Tier 1 capital (as defined) to average assets (as defined) are maintained. Capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings and other factors.
NVB is also subject to additional capital guidelines
under the regulatory framework for prompt corrective action. To be categorized as well capitalized, NVB must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. The most recent notifications from the
FDIC for NVB as of December 31, 2013 categorized NVB as well-capitalized under these guidelines. There are no conditions or events
since that notification that management believes have changed NVB’s category.
Management believes, as of December 31, 2013
and 2012, that the Company and NVB met all capital adequacy requirements to which they are subject. There are no conditions or
events since that management believes have changed the categories.
The Company’s and NVB’s actual
capital amounts (in thousands) and ratios are also presented in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be Well Capitalized
|
|
|
|
|
|
|
|
|
|
For
Capital
|
|
|
Under Prompt Corrective
|
|
|
|
|
|
|
|
|
Adequacy
Purposes
|
|
|
Action Provisions
|
|
|
|
Actual
|
|
|
Minimum
|
|
|
Minimum
|
|
|
Minimum
|
|
|
Minimum
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
(to risk weighted assets)
|
|
$
|
119,178
|
|
|
|
19.04
|
%
|
|
$
|
50,075
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 capital (to risk
weighted assets)
|
|
$
|
111,333
|
|
|
|
17.79
|
%
|
|
$
|
25,033
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 capital (to average
assets)
|
|
$
|
111,333
|
|
|
|
12.16
|
%
|
|
$
|
36,623
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk
weighted assets)
|
|
$
|
113,028
|
|
|
|
18.28
|
%
|
|
$
|
49,465
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 capital (to risk
weighted assets)
|
|
$
|
105,211
|
|
|
|
17.01
|
%
|
|
$
|
24,741
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 capital (to average
assets)
|
|
$
|
105,211
|
|
|
|
11.77
|
%
|
|
$
|
35,756
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Valley Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk
weighted assets)
|
|
$
|
116,783
|
|
|
|
18.68
|
%
|
|
$
|
50,014
|
|
|
|
8.00
|
%
|
|
$
|
62,518
|
|
|
|
10.00
|
%
|
Tier 1 capital (to risk
weighted assets)
|
|
$
|
108,947
|
|
|
|
17.42
|
%
|
|
$
|
25,017
|
|
|
|
4.00
|
%
|
|
$
|
37,525
|
|
|
|
6.00
|
%
|
Tier 1 capital (to average
assets)
|
|
$
|
108,947
|
|
|
|
11.90
|
%
|
|
$
|
36,621
|
|
|
|
4.00
|
%
|
|
$
|
45,776
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk
weighted assets)
|
|
$
|
112,938
|
|
|
|
18.26
|
%
|
|
$
|
49,480
|
|
|
|
8.00
|
%
|
|
$
|
61,850
|
|
|
|
10.00
|
%
|
Tier 1 capital (to risk
weighted assets)
|
|
$
|
105,122
|
|
|
|
17.00
|
%
|
|
$
|
24,735
|
|
|
|
4.00
|
%
|
|
$
|
37,102
|
|
|
|
6.00
|
%
|
Tier 1 capital (to average
assets)
|
|
$
|
105,122
|
|
|
|
11.76
|
%
|
|
$
|
35,756
|
|
|
|
4.00
|
%
|
|
$
|
44,695
|
|
|
|
5.00
|
%
|
The supervisory agreement signed on January
6, 2010 by and among North Valley Bancorp, North Valley Bank and the Federal Reserve Bank of San Francisco was terminated, effective
as of April 16, 2012, and resolutions adopted by the Board of Directors of NVB at the request of the California Department of Financial
Institutions were previously terminated, effective March 1, 2012.
As a California corporation, the Company’s
ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law (the “Corporation
Law”). The Corporation Law provides that neither a corporation nor any of its subsidiaries shall make a distribution to the
corporation’s shareholders unless the board of directors has determined in good faith either of the following: (1) the amount
of retained earnings of the corporation immediately prior to the distribution equals or exceeds the sum of (A) the amount of the
proposed distribution plus (B) the preferential dividends arrears amount; or (2) immediately after the distribution, the value
of the corporation’s assets would equal or exceed the sum of its total liabilities plus the preferential rights amount. The
good faith determination of the board of directors may be based upon (1) financial statements prepared on the basis of reasonable
accounting practices and principles, (2) a fair valuation, or (3) any other method reasonable under the circumstances; provided,
that a distribution may not be made if the corporation or subsidiary making the distribution is, or is likely to be, unable to
meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature. The term “preferential
dividends arrears amount” means the amount, if any, of cumulative dividends in arrears on all shares having a preference
with respect to payment of dividends over the class or series to which the applicable distribution is being made, provided that
if the articles of incorporation provide that a distribution can be made without regard to preferential dividends arrears amount,
then the preferential dividends arrears amount shall be zero. The term “preferential rights amount” means the amount
that would be needed if the corporation were to be dissolved at the time of the distribution to satisfy the preferential rights,
including accrued but unpaid dividends, of other shareholders upon dissolution that are superior to the rights of the shareholders
receiving the distribution, provided that if the articles of incorporation provide that a distribution can be made without regard
to any preferential rights, then the preferential rights amount shall be zero.
The Company’s ability to pay dividends
is also limited by certain covenants contained in the indentures relating to trust preferred securities that have been issued by
three business trusts and corresponding junior subordinated debentures. The Company owns the common stock of the three business
trusts. The indentures provide that if an Event of Default (as defined in the indentures) has occurred and is continuing, or if
the Company is in default with respect to any obligations under our guarantee agreement which covers payments of the obligations
on the trust preferred securities, or if the Company gives notice of any intention to defer payments of interest on the debentures
underlying the trust preferred securities, then the Company may not, among other restrictions, declare or pay any dividends.
Dividends from the Bank to the Company are
restricted under California law to the lesser of the Bank’s retained earnings or the Bank’s net income for the latest
three fiscal years, less dividends previously declared during that period, or, with the approval of the DFI, to the greater of
the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current
fiscal year.
17. EARNINGS PER SHARE
Basic earnings per share is computed by dividing
net income available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings
per share reflect the potential dilution that could occur if options or other contracts to issue common stock were exercised and
converted into common stock.
There was no difference in the numerator used
in the calculation of basic earnings per share and diluted earnings per share, and there was no difference in the denominator
used in the calculation of basic earnings per share and diluted earnings per share in 2013, 2012 and 2011 (in thousands except
earnings per share data):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,625
|
|
|
$
|
6,290
|
|
|
$
|
3,047
|
|
Weighted average common shares outstanding
|
|
|
6,836
|
|
|
|
6,834
|
|
|
|
6,833
|
|
Basic earnings per common share
|
|
$
|
0.53
|
|
|
$
|
0.92
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,625
|
|
|
$
|
6,290
|
|
|
$
|
3,047
|
|
Weighted average common shares outstanding
|
|
|
6,836
|
|
|
|
6,834
|
|
|
|
6,833
|
|
Dilutive effect of outstanding stock options
|
|
|
21
|
|
|
|
1
|
|
|
|
—
|
|
Average shares and dilutive potential common shares
|
|
|
6,857
|
|
|
|
6,835
|
|
|
|
6,833
|
|
Diluted earnings per common share
|
|
$
|
0.53
|
|
|
$
|
0.92
|
|
|
$
|
0.45
|
|
Stock options
for 214,302, 247,822, and 183,070 shares of common stock were not considered in computing diluted earnings per common share for
2013, 2012 and 2011, respectively, because they were antidilutive.
18. ACCUMULATED OTHER COMPREHENSIVE
(LOSS) INCOME
Changes in each component of accumulated other
comprehensive (loss) income for the periods ended December 31, 2013 and 2012 were as follows (in thousands):
|
|
|
|
|
Adjustments
|
|
|
Accumulated
|
|
|
|
Net
Unrealized
|
|
|
Related
to
|
|
|
Other
|
|
|
|
Gains
(Losses)
|
|
|
Defined
Benefit
|
|
|
Comprehensive
|
|
December
31, 2013
|
|
on
Securities
|
|
|
Pension
Plan
|
|
|
(Loss)
Income
|
|
Beginning
balance
|
|
$
|
3,287
|
|
|
$
|
(1,621
|
)
|
|
$
|
1,666
|
|
Net
unrealized loss on securities available for sale, net of tax, $(4,655)
|
|
|
(6,698
|
)
|
|
|
|
|
|
|
(6,698
|
)
|
Reclassification
adjustment for gains on securities, net of tax, $(225)
|
|
|
(323
|
)
|
|
|
|
|
|
|
(323
|
)
|
Net
gains arising during the period, net of tax, $113
|
|
|
—
|
|
|
|
162
|
|
|
|
162
|
|
Reclassification
adjustment for amortization of prior service cost and net loss included in salaries and employee benefits, net of tax, $120
|
|
|
—
|
|
|
|
173
|
|
|
|
173
|
|
Ending
Balance
|
|
$
|
(3,734
|
)
|
|
$
|
(1,286
|
)
|
|
$
|
(5,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
2,369
|
|
|
$
|
(899
|
)
|
|
$
|
1,470
|
|
Net
unrealized gains on securities available for sale, net of tax, $1,408
|
|
|
2,025
|
|
|
|
|
|
|
|
2,025
|
|
Reclassification
adjustment for gains on securities, net of tax, $(770)
|
|
|
(1,107
|
)
|
|
|
|
|
|
|
(1,107
|
)
|
Net
gains arising during the period, net of tax, $(557)
|
|
|
|
|
|
|
(803
|
)
|
|
|
(803
|
)
|
Reclassification
adjustment for amortization of prior service cost and net loss included in salaries and employee benefits, net of tax, $57
|
|
|
|
|
|
|
81
|
|
|
|
81
|
|
Ending
Balance
|
|
$
|
3,287
|
|
|
$
|
(1,621
|
)
|
|
$
|
1,666
|
|
Changes in each component of accumulated other comprehensive income
were as follows (in thousands):
December 31, 2013
|
|
|
|
|
|
Details About Accumulated Other
Comprehensive (Loss) Income Components
|
|
Amount Reclassified From
Accumulated Other
Comprehensive (Loss) Income
|
|
|
Affected Line Item in the Statement
Where Net Income is Presented
|
Gain on investment securities
|
|
$
|
548
|
|
|
Gain on sales or calls of securities, net
|
Amortization of prior service cost and net gain included in net periodic pension cost
|
|
|
(293
|
)
|
|
Salaries and employee benefits
|
|
|
|
255
|
|
|
Total before tax
|
|
|
|
(104
|
)
|
|
Provision for income tax
|
|
|
$
|
151
|
|
|
Net of tax
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
Details About Accumulated Other
Comprehensive (Loss) Income Components
|
|
Amount Reclassified From
Accumulated Other
Comprehensive (Loss) Income
|
|
|
Affected Line Item in the Statement
Where Net Income is Presented
|
Gain on investment securities
|
|
$
|
1,877
|
|
|
Gain on sales or calls of securities, net
|
Amortization of prior service cost and net gain included in net periodic pension cost
|
|
|
(137
|
)
|
|
Salaries and employee benefits
|
|
|
|
1,740
|
|
|
Total before tax
|
|
|
|
(713
|
)
|
|
Provision for income tax
|
|
|
$
|
1,027
|
|
|
Net of tax
|
19. PARENT COMPANY ONLY - CONDENSED FINANCIAL
INFORMATION
The condensed financial statements of the
Company are presented below (in thousands):
|
|
|
|
|
|
|
CONDENSED BALANCE SHEET
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,759
|
|
|
$
|
1,023
|
|
Investment in banking subsidiary
|
|
|
107,812
|
|
|
|
113,383
|
|
Investment in other subsidiary
|
|
|
2
|
|
|
|
2
|
|
Investment in unconsolidated subsidiary grantor trusts
|
|
|
651
|
|
|
|
651
|
|
Other assets
|
|
|
4,277
|
|
|
|
3,082
|
|
Total assets
|
|
$
|
115,501
|
|
|
$
|
118,141
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
Subordinated debentures
|
|
$
|
21,651
|
|
|
$
|
21,651
|
|
Other liabilities
|
|
|
421
|
|
|
|
329
|
|
Stockholders’ equity
|
|
|
93,429
|
|
|
|
96,161
|
|
Total liabilities and stockholders’ equity
|
|
$
|
115,501
|
|
|
$
|
118,141
|
|
CONDENSED STATEMENT OF INCOME
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries
|
|
$
|
4,500
|
|
|
$
|
16,500
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on subordinated debentures
|
|
|
532
|
|
|
|
1,352
|
|
|
|
1,892
|
|
Legal and accounting
|
|
|
522
|
|
|
|
485
|
|
|
|
470
|
|
Other
|
|
|
2,047
|
|
|
|
1,624
|
|
|
|
1,466
|
|
Tax benefit
|
|
|
(1,303
|
)
|
|
|
(1,455
|
)
|
|
|
(1,609
|
)
|
Total expense
|
|
|
1,798
|
|
|
|
2,006
|
|
|
|
2,219
|
|
Income (loss) before equity in undistributed income (loss) of subsidiaries
|
|
|
2,702
|
|
|
|
14,494
|
|
|
|
(2,219
|
)
|
Equity in undistributed income (loss) of subsidiaries
|
|
|
923
|
|
|
|
(8,204
|
)
|
|
|
5,266
|
|
Net income
|
|
$
|
3,625
|
|
|
$
|
6,290
|
|
|
$
|
3,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
STATEMENT OF CASH FLOWS
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,625
|
|
|
$
|
6,290
|
|
|
$
|
3,047
|
|
Adjustments to reconcile net income to net cash from operating activites:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed (loss) income of subsidiaries
|
|
|
(923
|
)
|
|
|
8,204
|
|
|
|
(5,266
|
)
|
Stock-based compensation expense
|
|
|
137
|
|
|
|
118
|
|
|
|
62
|
|
Effect of changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
(1,195
|
)
|
|
|
(73
|
)
|
|
|
19
|
|
Other liabilities
|
|
|
92
|
|
|
|
(4,772
|
)
|
|
|
302
|
|
Net cash provided by (used in) operating activities
|
|
|
1,736
|
|
|
|
9,767
|
|
|
|
(1,836
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
—
|
|
|
|
310
|
|
|
|
—
|
|
Net cash provided by investing activities
|
|
|
—
|
|
|
|
310
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of subordinated debentures
|
|
|
—
|
|
|
|
(10,310
|
)
|
|
|
—
|
|
Net cash used in financing activities
|
|
|
—
|
|
|
|
(10,310
|
)
|
|
|
—
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
1,736
|
|
|
|
(233
|
)
|
|
|
(1,836
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
1,023
|
|
|
|
1,256
|
|
|
|
3,092
|
|
Cash and cash equivalents, end of year
|
|
$
|
2,759
|
|
|
$
|
1,023
|
|
|
$
|
1,256
|
|
20. SUBSEQUENT EVENT
As announced
by the Company on January 21, 2014 and reported in the Company's Current Report on Form 8-K, filed with the Securities and Exchange
Commission on January 22, 2014 (the "Current Report"), the Company has entered into an Agreement and Plan of Merger and Reorganization
dated January 21, 2014 (the "Merger Agreement"), pursuant to which the Company would merge with and into TriCo Bancshares, a California
corporation ("TriCo"), with TriCo being the surviving corporation. Immediately thereafter, the Company's subsidiary bank, North
Valley Bank, would be merged with and into TriCo's subsidiary bank, Tri Counties Bank. Under the terms of the Merger Agreement,
the Company shareholders would receive a fixed exchange ratio of 0.9433 shares of TriCo common stock for each share of Company
common stock, providing the Company shareholders with aggregate ownership on a pro forma basis of approximately 28.6% of the common
stock of the combined company. Holders of the Company's outstanding in-the-money stock options would receive cash, net of applicable
taxes withheld, for the value of their unexercised stock options. The merger is expected to qualify as a tax-free exchange for
shareholders who receive shares of TriCo common stock. The transactions contemplated by the Merger Agreement are expected to close
in the second or third quarter of 2014, pending approvals of the Company shareholders and the TriCo shareholders, the receipt
of all necessary regulatory approvals, and the satisfaction of other closing conditions which are customary for such transactions.