SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _______________
Commission File Number: 1-10203
NORTHBAY FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-1592399
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1360 Redwood Way, Petaluma, California 94975
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (707) 792-7400
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of its Form 10-K or any amendments to this
Form 10-K. YES X
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The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing sales price of the registrant's common stock as
quoted under the symbol "NBF" on the American Stock Exchange ("AMEX") on
September 19, 1995 was $32,737,581 ($14.375 per share times 2,277,397 shares).
For purposes of this calculation, all directors and senior officers of the
registrant have been treated as affiliates.
As of September 19, 1995, there were issued and outstanding 2,750,522 shares
of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June
30, 1995. (Part II)
2. Portions of Proxy Statement for the 1995 Annual Meeting of
Stockholders. (Part III)
PART I
Item 1. Business
-----------------
General
The Corporation. Northbay Financial Corporation (the "Corporation") was
incorporated under the laws of the State of Delaware on October 5, 1988 for
the purpose of becoming a savings and loan holding company. On April 10,
1989, the Corporation acquired all of the outstanding stock of Northbay
Savings and Loan Association ("Northbay Savings" or the "Bank") issued in
connection with Northbay Savings' conversion from a California chartered
mutual to a California chartered stock institution.
Prior to the acquisition of all of the outstanding stock of Northbay
Savings, the Corporation had no assets or liabilities and engaged in no
business activities. Subsequent to the acquisition of Northbay Savings, the
Corporation has engaged in no significant activity other than holding the
stock of Northbay Savings and operating through Northbay Savings a savings and
loan business. Accordingly, the information set forth in this report,
including financial statements and related data, relates primarily to Northbay
Savings and its subsidiary.
The Corporation's executive offices are located at 1360 Redwood Way,
Petaluma, California. Its telephone number is (707) 792-7400.
The Bank. Northbay Savings was organized as a federally chartered mutual
savings and loan association in 1965 and converted to a California chartered
mutual savings and loan association in 1972. In January, 1990, Northbay
Savings amended its charter to adopt the name "Northbay Savings Bank." In
June 1990, Northbay Savings converted to a federally chartered stock savings
bank with the name "Northbay Savings Bank, F.S.B." At June 30, 1995, Northbay
Savings had total assets of $391.1 million, deposits of $283.9 million, and
stockholders' equity of $34.6 million. Based on total assets at that date,
the Bank was the second largest savings and loan institution headquartered in
Sonoma County, California insured by the Savings Association Insurance Fund
("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is primarily engaged in the business of attracting deposits from
the general public and using those deposits, together with other funds, to
originate mortgage loans for the purchase or construction of residential real
estate, multi-family real estate and commercial real estate. At June 30,
1995, substantially all of the Bank's real estate loans were secured by
properties located in California. To a lesser extent, the Bank also
originates consumer loans and commercial business loans. The Bank has been a
participant in the secondary mortgage market as both a purchaser and seller of
loans. In the past, the Bank also engaged to a limited extent in real estate
development activities. In March 1994, the Bank established full-service
brokerage capabilities and alternative investment services within each of the
Bank's branch offices pursuant to an agreement with PRIMEVEST Financial
Services Inc., an independent registered broker-dealer.
Northbay Savings conducts operations through its main office in Petaluma,
California, seven full service branch offices and one loan production office,
all within Sonoma County. Petaluma is located approximately 40 miles north of
San Francisco. The Bank considers its
1
primary market area for savings and lending activities to be Sonoma County,
but such activities have expanded to Marin and surrounding counties.
Northbay Savings is subject to examination and comprehensive regulation
by the Office of Thrift Supervision ("OTS"), a bureau within the Department of
Treasury. Northbay Savings is a member of and owns capital stock in the
Federal Home Loan Bank ("FHLB") of San Francisco, which is one of the twelve
regional banks in the FHLB system. Northbay Savings is further subject to
regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") governing reserves to be maintained against deposits
and certain other matters. See "Regulation."
Lending Activities
General. The principal lending activity of the Bank is the origination
of conventional mortgage loans (i.e., loans that are neither insured nor
partially guaranteed by government agencies) for the purpose of constructing,
financing or refinancing one-to-four family residential properties,
multifamily (over four family) properties and commercial properties. As of
June 30, 1995, $242.4 million or 68% of the Bank's loan portfolio (before the
deduction of undisbursed funds, unearned fees, and loan loss allowance)
consisted of loans secured by one-to-four family residential properties. The
Bank also originates second mortgage loans, consumer loans (including
automobile loans, equity lines of credit, loans secured by savings accounts
and personal loans), commercial business loans and land loans.
In recent years the Bank has implemented a number of measures to make the
yield on its loan portfolio more interest rate sensitive. These measures
include an emphasis on the origination of adjustable-rate residential mortgage
loans, construction and commercial real estate loans, consumer loans and
commercial business loans. These measures were adopted to shorten the average
life of the Bank's portfolio and to make it less susceptible to interest rate
volatility. Due to the fact that approximately 81% of the Bank's loan
portfolio is indexed to the 11th District Cost of Funds Index ("COFI"), an
index which by its nature lags movements in interest rates generally, the Bank
has recently undertaken a strategy of attempting to diversify indexes to which
its assets will reprice. As a result, the Bank has on its books at June 30,
1995, approximately $17.6 million of adjustable rate assets, that reprice to
"current" indices, such as prime and the one year Constant Maturity Treasury
("CMT"). Further, the Bank has in recent years attempted to build a portfolio
of more rate sensitive COFI based products such as those that adjust monthly
rather than semi-annually. As a result of this strategy, the Bank held in
portfolio approximately $18 million of such loans and investments. At June
30, 1995, approximately $326 million (or 91%) of the Bank's total loans
receivable, before net items, consisted of loans that were other than 15-30
year, fixed-rate loans.
2
Loan Portfolio Analysis. The following table sets forth the composition
of the Bank's loan portfolio by type of loan and type of security as of the
dates indicated.
At June 30,
----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------- -------------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Type of Loan:/(1)/
Conventional real estate
loans --
Interim construction
loans.................. $ 26,225 7.63% $ 48,554 14.95% $ 47,845 17.23% $ 48,685 19.57% $ 37,040 16.59%
Loans on existing
property............... 304,574 88.57 267,380 82.35 224,847 80.97 196,423 78.94 177,791 79.62
Land loans.............. 7,078 2.06 10,121 3.12 13,025 4.69 10,194 4.10 8,533 3.82
Consumer loans --
Automobile.............. 1,245 .36 740 .23 728 .26 987 .40 1,437 .64
Savings account loans... 1,403 .41 1,498 .46 1,727 .62 1,753 .70 1,935 .87
Equity lines of credit
and other.............. 15,943 4.64 12,546 3.86 11,277 4.06 9,045 3.64 8,625 3.86
Commercial business loans. 1,642 .48 1,324 .41 2,133 .77 2,086 .84 2,351 1.05
Less:
Loans in process........ 10,995 3.20 14,027 4.32 20,623 7.43 17,425 7.00 11,664 5.22
Unearned fees........... 1,030 .30 1,358 .42 1,444 .52 1,816 .73 2,009 .90
Allowance for losses.... 2,233 .65 2,067 .64 1,809 .65 1,150 .46 727 .33
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total............. $343,852 100.00% $324,711 100.00% $277,706 100.00% $248,782 100.00% $223,312 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
(Continued on the following page)
3
At June 30,
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1995 1994 1993 1992 1991
------------------ -------------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Type of Security:/(1)/
Residential real estate
Single family............ $255,783 74.39% $226,103 69.63% $184,298 66.37% $181,605 72.99% $163,842 73.38%
2-to-4 family............ 9,413 2.74 8,366 2.58 5,888 2.12 4,912 1.97 5,792 2.59
Other dwelling units..... 22,434 6.52 33,463 10.31 35,435 12.76 13,172 5.29 5,557 2.49
Land loans................. 7,078 2.06 10,121 3.12 13,025 4.69 10,194 4.10 8,533 3.82
Commercial or industrial
real estate............... 43,169 12.55 48,002 14.78 47,071 16.95 45,419 18.26 39,640 17.75
Automobile................. 1,245 .36 740 .23 728 .26 987 .40 1,437 .64
Savings accounts........... 1,403 .41 1,498 .46 1,727 .62 1,753 .70 1,935 .87
Commercial business loans.. 1,642 .48 1,324 .41 2,133 .77 2,086 .84 2,351 1.05
Equity lines of credit
and other............... 15,943 4.64 12,546 3.86 11,277 4.06 9,045 3.64 8,625 3.86
Less:
Loans in process......... 10,995 3.20 14,027 4.32 20,623 7.43 17,425 7.00 11,664 5.22
Unearned fees............ 1,030 .30 1,358 .42 1,444 .52 1,816 .73 2,009 .90
Allowance for losses..... 2,233 .65 2,067 .64 1,809 .65 1,150 .46 727 .33
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total............... $343,852 100.00% $324,711 100.00% $277,706 100.00% $248,782 100.00% $223,312 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
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/(1)/ Excludes mortgage-backed securities, which amounted to (in thousands)
$10,114, $7,943, $6,863, $10,071 and $4,122 at June 30, 1995, 1994, 1993,
1992 and 1991, respectively, most of which were secured by single family
4
Residential Real Estate Loans. The Bank's primary lending activity
consists of the origination of one-to-four family, owner-occupied residential
mortgage loans secured by property located in the Bank's primary market area.
The majority of the Bank's residential mortgage loans consists of loans
secured by single family residences. At June 30, 1995, the Bank had $255.8
million, or 71.4%, of its total loan portfolio (before deduction of loans in
process, unearned fees and allowance for loan losses) in loans secured by
single family residences. The Bank's real estate loan portfolio also includes
loans on two-to-four family dwellings, and loans made for the development of
unimproved real estate to be used for residential housing. At June 30, 1995,
approximately 82.30% of the Bank's total loan portfolio consisted of loans
secured by residential real estate.
The Bank's mortgage loan originations are generally for terms of 15 to 30
years, amortized on a monthly basis, with principal and interest due each
month. Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans at their option.
The Bank has offered adjustable rate loans since 1983. Historically, the
Bank has offered residential mortgage loans with interest rates that adjust
every six months based upon the FHLB's Eleventh District COFI. The interest
rates on these mortgages are adjustable on each six month anniversary date of
the loan generally with a cap of 1% per adjustment and 4.75% to 6.25% over the
life of the loan. During the fiscal year ended June 30, 1994, the Bank
attempted to diversify its adjustable rate portfolio to products tied to
indices other than the Eleventh District COFI. During fiscal year 1994, the
Bank completed the purchase of approximately $10 million of adjustable rate
residential mortgage loans, all indexed to the one-year constant maturity
treasury index. Total adjustable rate residential mortgage loans amounted to
$217.4 million or approximately 61% of the Bank's total loan portfolio at June
30, 1995.
The Bank also originates fully amortizing fixed rate loans on one- to
four-family units with maturities ranging from 10 to 30 years. In addition,
the Bank offers a fixed rate loan with a 30-year amortization schedule and a
balloon payment of remaining principle of five and seven years. The Bank
generally charges a higher interest rate on such loans if the property is not
owner occupied. Fixed rate mortgage loans are underwritten according to
Federal Home Loan Mortgage Corporation ("FHLMC") guidelines, so that the loans
qualify for sale in the secondary market.
The Bank has been an active seller of fixed rate loans in the secondary
market. At the time of origination, it is the Bank's policy to classify the
loan as held for sale or held to maturity. The decision to classify loans as
held for sale or held to maturity is based upon the Bank's asset/liability
management goals as well as an analysis of the economic benefit of such sales
versus cash flows generated from holding such loans in portfolio. Those loans
that have been designated as held for sale are carried at the lower of cost or
estimated market value in the aggregate. Net unrealized losses are recognized
in a valuation allowance by charges to income. During the quarter ended June
30, 1994, the Bank elected to alter its classification of approximately $6
million of loans from held for sale to held for investment. The Bank took
this action for the following reasons: (1) having written down the value of
these assets to the lower of cost or market at March 31, 1994, during a period
of rapidly rising rates, the Bank believed there was a greater economic value
in holding these loans to maturity rather than selling the assets at a
substantial discount into the market; and (2) upon review of the Bank's
concentration of assets and a favorable exposure to a long-term rising
interest rate environment, the addition
5
of these predominantly fixed rate loans provides an acceptable diversification
to the volume of adjustable rate products within the Bank's portfolio. There
were no sales of such long-term fixed rate loans during fiscal 1995 as the
Bank continued the policy of holding all originations of such loans in
portfolio. Management believes that while these loans may carry higher
interest rate risk than other more interest rate sensitive assets, the Bank's
held to maturity portfolio can absorb additional long-term, fixed-rate loans.
In the past the Bank has also exchanged fixed-rate, long-term mortgage loans
for mortgage backed securities guaranteed by FHLMC and Federal National
Mortgage Association ("FNMA"), which were either sold in the secondary market
or retained by the Bank. At June 30, 1995, approximately $32.1 million or 9%
of the Bank's total loan portfolio, consisted of long-term, fixed-rate
residential mortgage loans.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on residential mortgage loans to 90% of the lesser of the appraised
value or purchase price, with the condition that private mortgage insurance is
required on loans with loan to value ratios in excess of 80%. The majority of
the Bank's residential loan portfolio has loan-to-value ratios of 80% or less.
The Bank requires title insurance and hazard insurance on all properties
securing real estate loans made by the Bank.
Construction Loans and Land Development Loans. The Bank originates loans
to finance the construction of one-to-four family dwellings, housing
developments, multi-family apartments and condominiums and commercial real
estate. It also originates loans for the acquisition and development of
unimproved property to be used for residential and commercial purposes. In
fiscal 1993 and 1994, the Bank increased its emphasis on the origination of
construction and land development loans in the $1 million to $3 million range,
including loans for the construction of multi-family residential properties
and housing for lower income families in cooperation with non-profit
organizations. As a result of its continued commitment to provide financing
for the construction of low income housing, the Bank originated $3.7 million
of such loans during the fiscal year ended June 30, 1995. Gross construction
and land development loans amounted to $33.3 million, or 9.3% of the Bank's
total loan portfolio at June 30, 1995. The decrease in such loans was
principally due to reduced demand for new constructions in the Bank's market
area. Of the total construction and land development portfolio, $21 million
or 63% were for residential one-to-four family construction, $3.5 million or
10.5% were for multifamily construction, $1.7 million or 5% were for non-
residential or commercial construction, and $7.1 million or 21.5% were for
land development. The average loan balance is estimated to be less than
$500,000. However, the Bank currently has 18 loans in amounts in excess of $1
million, totalling $28.7 million, most of which are construction and land
development loans. The Bank's construction loans to individuals typically
range in size from $100,000 to $400,000.
As a federally chartered savings association, the Bank is subject to
regulatory loan-to-one-borrower limits. Management believes that these limits
have not had a material adverse effect on the Bank and, in fact, have
benefitted the Bank by creating opportunities to participate in other banks'
loans when those banks reach their own limits. At June 30, 1995, the Bank's
lending limit was $5 million. As of such date, there were no loans in excess
of this limit. For additional information regarding the Bank's regulatory
loan-to-one-borrower limits, see "Regulation--Federal Regulation of Savings
Associations."
Construction loans generally have terms of up to 12 months. Loan
proceeds are disbursed in increments as construction progresses and as
inspections warrant. In addition to
6
builders' projects, the Bank finances the construction of individual, owner-
occupied houses on the basis of underwriting and construction loan management
guidelines. Construction loans are structured either to be converted to
permanent loans at the end of the construction phase or to be paid off upon
receiving financing from another financial institution. Construction loans on
residential properties are generally made in amounts up to 80% of appraised
value, and loans on commercial property are made in amounts up to 75% of
appraised value.
Construction loans afford the Bank the opportunity to increase the
interest rate sensitivity of its loan portfolio and to receive yields higher
than those obtainable on loans secured by existing one-to-four family
residential properties. These higher yields correspond to the higher risks
associated with construction lending. The Bank's risk of loss on a
construction loan is largely dependent upon the accuracy of the initial
estimate of the property's value at completion of construction and the bid
price (including interest) of construction. If the estimate of construction
costs proves to be inaccurate, the Bank may be required to advance funds
beyond the amount originally committed to permit completion of the project.
If the estimate of value proves to be inaccurate, the Bank may be confronted,
at or prior to the maturity of the loan, with a project with a value which is
insufficient to assure full repayment.
The Bank's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, the Bank considers
the reputation of the borrower and the contractor, the amount of the
borrower's equity in the project, independent valuations and reviews of cost
estimates, pre-construction sale and leasing information, and cash flow
projections of the borrower. The Bank generally makes construction loans
within its primary market area. In fiscal 1995, the Bank's losses on
construction loans were not material. As a result of the existing real estate
market in the Bank's primary market area, the Bank incurred losses on land
development loans of approximately $108,000 of which was concentrated in four
properties within its primary market area. There can be no assurance that the
Bank will not experience additional losses on construction loans and land
development loans in the future.
Loans Secured by Commercial and Multi-family Properties. Loans secured
by commercial real estate and multifamily properties of five or more units
constituted approximately $60.4 million or 16.9% of the Bank's total loans at
June 30, 1995. Federal law permits the Bank to make non-residential real
estate loans up to 400% of capital; non-residential real estate loans in
excess of such amount must be approved by the Director of the OTS.
The Bank originates both construction loans and permanent loans on
commercial properties. Permanent commercial real estate loans are generally
made in amounts up to 75% of the lesser of appraised value or purchase price
of the property. Commercial real estate loans range in amount up to $1.2
million, although the average loan balance is estimated to be $250,000. The
Bank's permanent commercial real estate loans are secured by improved property
such as office buildings, medical facilities, retail centers, warehouses and
other types of buildings, most of which are located in the Bank's primary
market area. Commercial real estate and multi-family property loans
generally are variable rate in nature, with interest rate adjustments at
periods of six months at a rate indexed to the FHLB's Eleventh District Cost
of Funds. Commercial real estate and multifamily residential loans are
generally balloon loans which mature in 10 years with principal amortization
over a maximum 30-year period.
Loans secured by commercial and multifamily residential properties are
generally larger and involve greater risks than residential mortgage loans.
Because payments on loans secured
7
by commercial and multifamily residential properties are often dependent on
successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks in a variety of
ways, including limiting the size of its commercial and multifamily real
estate loans and generally restricting such loans to its primary market area.
Consumer Loans. Federal regulations permit thrift institutions to make
secured and unsecured consumer loans up to 30% of the institution's assets.
In addition, a thrift institution has lending authority above the 30% category
for certain consumer loans, such as equity lines of credit, property
improvement loans, mobile home loans and loans secured by savings accounts.
The Bank began offering consumer loans in 1983. As of June 30, 1995, total
consumer loans constituted approximately $18.6 million or 5.2% of the Bank's
total loan portfolio, consisting principally of home equity lines of credit of
$15 million. The consumer loans granted by the Bank have included automobile
loans, equity lines of credit, personal loans (secured and unsecured), boat
loans, and loans (including credit card accounts) secured by savings accounts.
The Bank believes that the shorter terms and the normally higher interest
rates available on various types of consumer loans have been helpful in
maintaining a profitable spread between the Bank's average loan yield and its
cost of funds. Consumer loans do, however, pose additional risks of
collectibility when compared to traditional types of loans granted by thrift
institutions such as residential mortgage loans. The Bank has sought to
reduce the risk of this type of lending by granting primarily secured consumer
loans. In many instances the Bank is required to rely on the borrower's
ability to repay since the collateral may be of reduced value at the time of
collection. Thus, the initial determination of the borrower's ability to
repay is of primary importance in the underwriting of consumer loans.
Commercial Business Loans. The Bank offered various types of commercial
business loans until June 1992, when the Bank ceased offering such loans to
new customers and began limiting the origination of such loans to rollovers
and refinancings of existing loans. As a result, at June 30, 1995, such loans
represented only $1.6 million, or .5% of the Bank's total loan portfolio.
These remaining loans primarily consist of term loans, lines of credit and
equipment financing. These loans were primarily underwritten in the Bank's
primary market area on the basis of the borrowers' ability to service such
debt from income, although the Bank as a general practice takes as collateral
any available real estate, equipment or other chattel. These loans generally
have remaining terms of one year or less at interest rates which adjust
monthly based upon the FHLB's Eleventh District COFI.
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his employment and other
income and which are secured by real property whose value tends to be easily
ascertainable, commercial loans typically are made on the basis of the
borrower's ability to make payment from the cash flow of his business and are
generally secured by business assets, such as accounts receivable, equipment
and inventory. As a result, the availability of funds for the repayment of
commercial loans may be substantially dependent on the success of the business
itself. Further, the collateral securing the loans may depreciate over time,
occasionally cannot be appraised with as much precision as residential real
estate, and may fluctuate in value based on the success of the business.
8
Loan Maturity Schedule
The following table sets forth certain information at June 30, 1995,
regarding the dollar amount of loans maturing in the Bank's portfolio based on
their contractual terms to maturity. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less.
Due during Due after Due after Due after Due after
the year 1 through 3 through 5 through 10 through Due after 20
Ending 3 years after 5 years after 10 years after 20 years after years after
June 30, June 30, June 30, June 30, June 30, June 30,
1996 1996 1996 1996 1996 1996 Total
---------- ------------- ------------- -------------- -------------- ------------ --------
(In thousands)
Real estate mortgage............... $13,461 $29,973 $31,816 $40,327 $90,269 $96,254 $302,100
Real estate construction and land.. 21,511 --- --- --- --- --- 21,511
Consumer........................... 3,216 2,643 1,935 6,288 4,703 --- 18,785
Commercial business................ 1,456 --- --- --- --- --- 1,456
------- ------- ------- ------- ------- ------- --------
Total.......................... $39,644 $32,616 $33,751 $46,615 $94,972 $96,254 $343,852
======= ======= ======= ======= ======= ======= ========
The following table sets forth, as of June 30, 1995, the dollar amount of
all loans maturing or repricing more than one year after June 30, 1995 which
have predetermined interest rates and have floating or adjustable interest
rates.
Floating or
Predetermined Adjustable Rates Total
------------- ---------------- --------
(In thousands)
Real estate mortgage............... $40,745 $247,892 $288,637
Real estate construction and land.. --- --- ---
Consumer........................... 1,235 14,334 15,569
Commercial business................ --- --- ---
------- -------- --------
Total.......................... $41,980 $262,226 $304,206
======= ======== ========
Loan Solicitation and Processing. Loan originations are derived from a
number of sources including "walk-in" customers at the Bank's offices,
referrals from real estate professionals, building contractors and mortgage
brokers. Loan applications, whether originated through the Bank's branch
system or an outside broker, are underwritten and closed based on the same
standards.
In September 1992, a loan center was established in the city of Santa
Rosa to conduct residential mortgage lending with exclusive loan agents. In
February 1993, a wholesale loan division was implemented to accept loans from
the mortgage brokerage community. Such division was effectively closed in
fiscal 1995 due to reduced demand as a result of the higher pricing of
wholesale loans relative to the Bank's other loans and management's decision
to emphasize the origination of loans by its own lending agents.
Upon receipt of a loan application, a credit report is ordered to verify
specific information relating to the loan applicant's employment, income, and
credit standing. In the case of a real estate loan, an appraisal of the real
estate intended to secure the proposed loan is undertaken by the Bank's in-
house appraiser or an approved outside licensed appraiser. In the case of
commercial and multi-family properties, appraisals will be performed by an
independent
9
fee appraiser approved by the Bank. The loan application file is then
reviewed, depending upon the dollar amount of the loan, by either a loan
officer, the Vice President for Loan Administration, the President, or the
Board of Directors.
The Bank's consumer lending officers are authorized to approve unsecured
consumer loans up to $10,000 and secured loans up to $20,000. The Bank's
Assistant Vice President and Consumer/Commercial Loan Manager, as well as the
President, have the authority to approve non-mortgage loans up to $100,000.
Mortgage lending officers are authorized to approve residential mortgage loans
up to $650,000. The Bank's Vice President for Loan Administration has
authority to approve loans up to $750,000, and the President has the authority
to approve loans up to $1.0 million. The Bank's loan committee has authority
to approve loans over $1.0 million up to $4.0 million, and the Board of
Directors of the Bank approves all loans over $4.0 million. In order to
increase origination of loans secured by single-family residences, the Bank
instituted an exclusive loan-agent program for the procurement of such loans
on July 1, 1992. The underwriting of loans presented by the loan agents
continue to be undertaken by salaried employee underwriters.
Loan Originations, Purchases and Sales. The Bank has engaged, from time
to time, in the sale of loans and loan participations in the secondary
mortgage market. Such sales have consisted generally of long-term, fixed-rate
loans, which have been sold in an effort to minimize the effects of volatile
interest rates or as a source of funds for other investment or lending
activities. The Bank has also occasionally sold adjustable-rate loans in the
secondary market. The timing of such sales generally is based upon the Bank's
asset/liability management strategies, the Bank's need for funds and market
opportunities that permit loan sales on terms favorable to the Bank. The Bank
sometimes exchanges long-term, fixed-rate loans for mortgage-backed securities
guaranteed by the FHLMC, and then sells the securities in the secondary
market. From time to time, the Bank has also sold loans or loan
participations in private sales to savings institutions or other institutional
investors. The Bank's practice in recent years has been to sell loans or loan
participations without recourse. The Bank generally retains the servicing on
the loans sold, for which it receives a servicing fee. At June 30, 1995, the
Bank's total loans serviced for others amounted to $55.5 million.
For the purpose of transferring the interest rate risk associated with
holding to maturity 30-year, fixed-rate mortgage loans, the Bank followed a
policy of selling in the secondary market all current originations of such
loans through the period ended March 31, 1994. During the quarter ended
June 30, 1994, the Bank elected to reclassify all loans held for sale,
totaling approximately $6 million and consisting primarily of long-term,
fixed-rate loans, to held for investment. During that quarter, the Bank also
revised its asset/liability management policy to provide, in general, that
fixed-rate loan originations would be held to maturity. The Bank continued
this policy during fiscal 1995 and did not sell any long-term fixed rate loans
during the period. The participations sold in fiscal 1995 consisted of
construction loans for which the Bank sought to reduce its exposure due to
credit risk or lending limits. During recent periods, loan sales provided a
significant source of funds for the Bank's lending and other activities and
management believes that the absence of loans available for sale has
contributed to and may continue to result in reduced loan originations.
In addition to originating loans, the Bank has purchased real estate
loans in the secondary market. The Bank purchased approximately $422,000 of
construction loan participations from local institutions during the fiscal
year ended June 30, 1995. The Bank's purchases in the
10
secondary market are dependent upon the demand for mortgage credit in the
local market area and the inflow of funds from traditional sources. Purchases
of loans enable the Bank to utilize available funds more quickly.
The following table shows the loan origination, purchase and sales
activity of the Bank for the periods indicated.
Year Ended June 30,
---------------------------
1995 1994 1993
------- -------- --------
(In thousands)
Loans originated:
Conventional real estate loans:
Construction loans............. $34,926 $ 47,280 $ 47,034
Loans on existing property.... 27,685 38,679 20,238
Loans refinanced.............. 28,406 66,936 85,468
Consumer....................... 5,799 7,362 12,060
Commercial business loans...... 777 1,129 1,572
Other loans.................... 1,388 1,453 2,851
------- -------- --------
Total loans originated........ $98,981 $162,839 $169,223
======= ======== ========
Loans purchased:
Total real estate loans....... $ 422 $ 14,027 $ 5,692
------- -------- --------
Total loans purchased........ $ 422 $ 14,027 $ 5,692
======= ======== ========
Loans sold:
Whole loans.................... $ --- $ 23,238 $ 30,776
Participation loans............ 649 1,608 3,730
------- -------- --------
Total loans sold............. $ 649 $ 24,846 $ 34,506
======= ======== ========
Loan Commitments. The Bank issues standby loan origination commitments
to real estate developers and qualified borrowers primarily for the
construction and purchase of residential real estate and commercial real
estate. Such commitments are made on specified terms and conditions and are
usually for terms of up to 15 days. Historically, fewer than 10% of the
Bank's commitments expire without being funded. At June 30, 1995 the Bank had
outstanding loan origination commitments of approximately $29.9 million. See
Note 15 of Notes to Consolidated Financial Statements.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the mortgage
loan which are charged to the borrower for creation of the loan. Loan
origination fees and certain related direct loan origination costs are offset,
and the resulting net amount is deferred and amortized over the life of the
related loan as an adjustment to the yield of such loan.
The Bank's loan origination fees range from 0% to 2.25% of residential
loans, 2% on commercial real estate loans and up to 3% on construction loans.
The total amount of net deferred loan fees at June 30, 1995 was $1.03 million.
11
Delinquencies. The Bank's collection procedures provide that when a loan
is 15 days past due, the borrower is contacted by mail and payment requested.
If the delinquency continues, subsequent efforts are made to contact the
delinquent borrower. Additional attempts are made to contact the borrower and
if the loan continues in a delinquent status for 75 days or more, the Bank
generally initiates foreclosure proceedings. At June 30, 1995, the Bank owned
eight properties acquired as the result of foreclosure. The properties, seven
of which are single family residences and one of which is land, are located in
Sonoma County and are carried at a fair market value, less estimated selling
costs, of $1.56 million.
Non-Performing Assets and Asset Classification. Loans are reviewed on a
regular basis and are placed on a non-accrual status when either principal or
interest is 90 days or more past due or when, in the opinion of management,
the collection of additional interest is doubtful. Consumer loans generally
are charged off when the loan becomes over 120 days delinquent. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is
charged against interest income.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of the unpaid principal balance of the
related loan or its fair market value. Any write-down of the property at the
time of acquisition is charged to the allowance for loan losses. The
recognition of subsequent declines in the market value of the property are
charged to the provision for loss on real estate owned.
12
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods shown,
the Bank had no restructured loans within the meaning of Statement of
Financial Accounting Standards No. 15.
At June 30,
------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- ------
(Dollars in thousands)
Loans accounted for on
a non-accrual basis:
Real estate:
Residential..................... $ 835 $2,362 $1,749 $ 393 $ 489
Commercial...................... 67 --- --- 376 ---
Commercial Business.............. 282 482 543 424 302
Consumer......................... 161 16 124 31 27
------ ------ ------ ------ -----
Total.......................... $1,345 $2,860 $2,416 $1,224 $ 818
====== ====== ====== ====== =====
Accruing loans which are
contractually past due 90 days or
more:
Real estate:
Residential..................... $ --- $ --- $ --- $ --- $ ---
Commercial...................... --- --- --- --- ---
Commercial Business.............. --- --- --- --- ---
Consumer......................... --- --- --- --- ---
------ ------ ------ ------ -----
Total........................... $ --- $ --- $ --- $ --- $ ---
====== ====== ====== ====== =====
Total of nonaccrual
and 90 days past
due loans....................... $1,345 $2,860 $2,416 $1,224 $ 818
====== ====== ====== ====== =====
Percentage of total loans.......... .38% .84% .80% .45% .34%
====== ====== ====== ====== =====
Other Non-Performing
Assets/(1)/...................... $1,555 $1,637 $ 355 $ --- $ ---
====== ====== ====== ====== =====
- --------------------
/(1)/ Other non-performing assets represented the net book value of property
acquired by the Bank through foreclosure or repossession. Upon
acquisition, this property is recorded at the lower of its fair market
value or the recorded investment in the related loan.
The majority of these non-performing loans are concentrated in single
family residential housing units. Sixteen of such single residential
properties account for $2.3 million of the total non-performing assets.
During the year ended June 30, 1995, gross interest income of $53,000
would have been recorded on loans set forth above as accounted for on a
non-accrual basis if the loans had been current throughout the year.
Interest income of $53,000 on these loans was recorded during the year.
13
Under federal regulations, each institution is required to classify its
own assets on a regular basis. In addition, in connection with examinations
of institutions, OTS examiners have authority to identify problem assets and,
if appropriate, classify them Under the regulation, assets are subject to
evaluation under a classification system with three categories: (i)
Substandard, (ii) Doubtful and (iii) Loss. An asset could fall within more
than one category and a portion of the asset could remain unclassified.
An asset is classified Substandard if it is determined to involve a
distinct possibility that the institution could sustain some loss if
deficiencies associated with the loan, such as inadequate documentation, were
not corrected. An asset is classified as Doubtful if full collection is
highly questionable or improbable. An asset is classified as Loss if it is
considered uncollectible, even if a partial recovery could be expected in the
future. The regulations create a Special Mention category, described as
assets which do not currently expose an institution to a sufficient degree of
risk to warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
Substandard or Doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified
Loss, the institution must either establish specified allowances for loan
losses in the amount of 100 percent of the portion of the asset classified
Loss, or charge off such amount.
Allowance for Loan Losses. The Bank establishes specific reserves in
accordance with the asset classification regulations discussed above. The
Bank also provides an allowance for unspecified potential losses, based on
historical experience and other factors. As of June 30, 1995 the Bank's total
unspecified reserves were $2.2 million in addition to $42,000 in specific loss
reserves.
14
The following table sets forth an analysis of the Bank's allowance for
possible loan losses for the periods indicated.
At June 30,
------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- ------
(Dollars in thousands)
Balance at beginning of period...... $2,067 $1,809 $1,150 $ 727 $ 695
Loans charged-off:
Real estate - construction and
land............................. 54 254 12 30 ---
Real estate - mortgage............ 21 38 49 --- 26
Commercial business............... 176 140 --- 41 139
Consumer.......................... 15 43 11 41 17
------ ------ ------ ------ -----
Total charge-offs................... 266 475 72 112 182
------ ------ ------ ------ -----
Recoveries.......................... 19 8 8 6 ---
------ ------ ------ ------ -----
Net loans charged-off............... 247 467 64 106 182
------ ------ ------ ------ -----
Provision for possible loan losses.. 412 725 722 529 214
------ ------ ------ ------ -----
Balance at end of period............ $2,232 $2,067 $1,809 $1,150 $ 727
====== ====== ====== ====== =====
Ratio of net charge-offs
to average loans outstanding
during the period................. .07% .16% .02% .04% .08%
====== ====== ====== ====== =====
15
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that
the allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
further losses and does not restrict the use of the allowance to absorb losses
in any category. Also set forth are allowances for losses on real estate
owned.
At June 30,
-------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------- -------------------- ------------------- ------------------- ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans/(1)/ Amount Loans/(1)/ Amount Loans/(1)/ Amount Loans/(1)/ Amount Loans/(1)/
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------
(Dollars in thousands)
Loans:
Real estate - mortgage:
Residential............. $ 974 73.47% $ 551 67.88% $ 547 64.92% $ 173 60.88% $165 58.29%
Commercial.............. 301 12.05 185 13.60 129 15.73 87 17.20 52 16.05
Construction and land..... 662 9.30 921 13.61 619 13.65 592 16.40 411 19.66
Commercial business....... 192 4.59 337 4.51 414 4.93 245 4.69 53 5.02
Consumer.................. 104 .59 73 0.40 100 0.77 53 0.83 46 0.98
------ ------ ------ ------ ------ ------ ------ ------ ---- ------
Total allowance for
loan losses........... 2,233 100.00% 2,067 100.00% 1,809 100.00% 1,150 100.00% 727 100.00%
------ ====== ------ ====== ------ ====== ------ ====== ---- ======
Real estate owned:
Allocated.............. --- --- --- --- ---
Unallocated............ --- --- --- --- ---
------ ------ ------ ------ ----
Total................ --- --- --- --- ---
------ ------ ------ ------ ----
Total allowances..... $2,233 $2,067 $1,809 $1,150 $727
====== ====== ====== ====== ====
- -----------------
/(1)/ Gross loans less undisbursed loans in process.
16
Financial institutions throughout the United States have incurred losses
in recent years due to increases in loan loss provisions and charge-offs
resulting largely from higher levels of loan delinquencies and foreclosures.
Depressed real estate market conditions have adversely affected the economies
of various regions and have had an adverse impact on the financial condition
and businesses of many of the financial institutions doing business in these
areas. Uncertainty exists as to the future improvement or deterioration of the
real estate markets in these regions, or of its ultimate impact on these
financial institutions. As a result of the instability in real estate market
conditions and the impact on financial institutions, there has been a greater
level of scrutiny by regulatory authorities of the loan portfolios of
financial institutions, undertaken as part of the examination of the
institutions by the FDIC, the OTS or other federal or state regulators. While
the Bank believes it has established its existing allowances for loan losses
in accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to increase its allowance for loan losses, thereby negatively
affecting the Bank's financial condition and earnings.
Investment Activities
Northbay Savings is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and is also permitted to make certain other investments. See
"Regulation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity" in the 1995 Annual Report to
Stockholders. It has generally been Northbay Savings' policy to maintain a
liquidity portfolio in excess of regulatory requirements. Liquidity levels
may be increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its expectation
of the level of yield that will be available in the future, as well as
management's projections as to the short term demand for funds to be used in
the Bank's loan origination and other activities. The Bank does not actively
trade investments. At June 30, 1995, Northbay Savings had an investment
portfolio of approximately $21.1 million consisting primarily of Federal
Agency securities, various mutual funds investing in Federal Agency securities
and mortgage related products, insured certificates of deposit and interest
earning accounts. For more information on the Bank's investment activities
see Note 2 of Notes to Consolidated Financial Statements.
17
The following table sets forth the carrying value of the Bank's
investment portfolio (including interest bearing deposits, overnight federal
funds and FHLB stock) at the dates indicated.
At June 30,
-------------------------
1995 1994 1993
------- ------- -------
(In thousands)
Investment securities:
U.S. Government and agency securities... $14,331 $10,111 $ 3,606
Income funds............................ 1,082 2,092 2,643
FHLMC participating preferred stock..... --- 137 40
------- ------- -------
Total investment securities........... 15,413 12,340 6,289
Overnight federal funds................... 425 --- 1,500
Interest bearing deposits/(1)/............ 1,957 2,436 3,602
FHLB of San Francisco stock............... 3,291 2,315 2,016
------- ------- -------
Total investments...................... $21,086 $17,091 $13,407
======= ======= =======
- -------------------------
/(1)/Interest bearing deposits consists of certificates of deposit in other
institutions, as well as interest earning accounts in the amounts of
$513,190, $690,999 and $543,000 at June 30, 1995, 1994 and 1993,
respectively.
At June 30, 1995, the market value of the Bank's investment securities
portfolio was $21 million, compared to a carrying value of $21.1 million. The
Corporation adopted Statement of Financial Accounting Standards No. 115 ("SFAS
No. 115"), Accounting for Certain Investments in Debt and Equity Securities,
on June 30, 1994. SFAS No. 115 addresses the accounting and reporting for
certain investments in debt and marketable equity securities.
Under SFAS No. 115, institutions are required to classify investments in
debt securities and equity securities as "held to maturity," "trading" or
"available-for-sale." SFAS No. 115 modified the accounting treatment for debt
and equity securities by replacing the "held for sale" categorization (with
lower-of-cost or market accounting treatment) with an "available-for-sale"
categorization (with fair value accounting treatment). Further, it imposes
strict criteria over securities accounted for as "held to maturity." Upon the
adoption of SFAS No. 115 on June 30, 1994, debt securities that may not be
held until maturity and marketable equity securities are considered available-
for-sale and, as such, are classified as securities carried at fair value net
of applicable taxes, with unrealized gains and losses, reported in a separate
component of stockholders' equity. Declines in the value of debt securities
and marketable equity securities that are considered other than temporary are
recorded in non-interest income as loss on investment securities. See Notes
1(b) and 2 of Notes to Consolidated Financial Statements.
At June 30, 1995, the Bank also owned mortgage-backed securities which
had a book value of approximately $10.1 million (market value: $10.1 million).
18
Investment Portfolio
The following table sets forth the scheduled maturities, amortized costs,
market values and average yields for the Bank's investment portfolio and
mortgage-backed securities at June 30, 1995.
At June 30, 1995
----------------------------------------------------------------------------------------------------------
One Year Over One to Five Over Five to Ten More than
or Less Years Years Ten Years Total
------------------- ------------------ ----------------- ------------------ ----------------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Market Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
-------- --------- -------- --------- ------ --------- -------- --------- -------- ------- ---------
(Dollars in thousands)
Investment securities:
U.S. Government and
agency securities $ --- ---% $11,999 5.89% $2,010 7.17% $ 300 7.75% $14,309 $14,217 6.11%
Income funds 1,082 6.23 --- --- --- --- --- --- 1,082 1,082 6.23
------ ------- ------ ------ ------- -------
Total investment
securities 1,082 11,999 2,010 300 15,391 15,299
Mortgage-backed
securities/(1)/ 158 8.46 1,942 6.25 1,568 7.00 6,356 7.15 10,023 10,088 6.97
Overnight Federal funds 425 5.94 --- --- --- --- --- 425 425 5.94
Interest-bearing deposits 1,174 5.37 783 6.99 --- --- --- --- 1,957 1,957 6.02
FHLB of San Francisco stock 3,291 4.74 --- --- --- --- --- --- 3,291 3,291 4.74
------ ------- ------ ------ ------- -------
Total investments $6,130 5.30% $14,723 5.99% $3,578 7.10% $6,656 7.18% $31,087 $31,060 6.24%
====== ======= ====== ====== ======= =======
____________________
(1) This table includes mortgage-backed securities classified in the statement
of financial condition as mortgage-backed securities available for sale
totalling $8.4 million.
19
Subsidiary Activities
As a federally chartered savings association, Northbay Savings is
permitted to invest an amount equal to 2% of its assets in subsidiaries with
an additional investment of 1% of assets where such investment serves
primarily community, inner-city, and community development purposes. Under
such limitations, as of June 30, 1995, Northbay Savings was authorized to
invest up to approximately $11.7 million in the stock of or loans to
subsidiaries. In addition, institutions such as the Bank which meet
regulatory capital requirements may invest up to 50% of their regulatory
capital in conforming first mortgage loans to subsidiaries.
In 1985, Northbay Savings organized Northbay Service Corporation for the
purpose of acting as a trustee on deeds of trust and also to enter into
agreements for the sale of insurance products. Thereafter, in December 1987,
the Bank, pursuant to a directive of the FHLB of San Francisco, purchased all
of the outstanding stock of Sonoma Service Company ("Sonoma Service") from six
of the Bank's directors for a nominal purchase price. Sonoma Service
conducted the same activities as Northbay Service Corporation. Upon the
acquisition of Sonoma Service, Northbay Service Corporation became inactive
and was dissolved after the end of fiscal 1992. At June 30, 1995, the Bank's
investment in its wholly-owned subsidiary aggregated $175,000. To date, the
activities of the Bank's subsidiary have not been material to the Bank.
Federal regulations require SAIF-insured savings institutions to give the
FDIC and the Director of OTS 30 days prior notice before establishing or
acquiring a new subsidiary, or commencing any new activity through an existing
subsidiary. Both the FDIC and the Director of OTS have authority to order
termination of subsidiary activities determined to pose a risk to the safety
or soundness of the institution.
Deposit Activities and Other Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, Northbay Savings
derives funds from loan principal repayments, the sale of loans or
participation interests therein, and borrowings. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short term basis to compensate
for reductions in the availability of funds from other sources. They may also
be used on a longer term basis for general business purposes. Special purpose
borrowings also may be obtained often at discounted rates for certain
purposes, such as for financing the construction of low-income housing. The
Bank has a substantial borrowing capacity with the FHLB of San Francisco, and
the Bank's borrowings from the FHLB of San Francisco totalled $60 million at
June 30, 1995. These borrowings have provided the Bank flexibility in
matching a stable source of funds with financial assets of similar maturities
(see "Borrowings" below).
Deposits. Deposits are attracted from within the Bank's primary market
area through the offering of a broad selection of deposit instruments
including NOW accounts, money market accounts, regular savings accounts,
checking accounts, certificates of deposit and retirement savings plans.
Deposit account terms vary, according to the minimum balance required, the
time periods the funds must remain on deposit and the interest rate, among
other factors. The Bank attempts to control its cost of funds by emphasizing
passbook, money market and NOW and
20
checking accounts. At June 30, 1995, such accounts totalled $99.6 million or
35.1% of the Bank's total savings accounts.
The Bank regularly evaluates the internal cost of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements
for lending and liquidity and executes rate changes when deemed appropriate.
The Bank's primary strategy for attracting and retaining deposits is to
emphasize customer service and personal attention. The Bank generally has not
been aggressive in pricing its deposit products relative to the competition.
The Bank does not have any brokered deposits and has no present intention to
accept or solicit such deposits.
21
The following table sets forth the various types of deposit accounts
offered by the Bank and the balance in these accounts at June 30, 1995.
Weighted
Average
Interest Minimum Minimum Percentage of
Rate Term Category Amount Balance Total Savings
- -------- ------- -------- -------- ------------ --------------
0.87% None NOW/Commercial Checking $ 200 $ 25,538,800 9.00%
2.91 None Passbook Accounts 200 35,589,258 12.54
3.06 None Money Market Accounts 2,500 25,685,892 9.05
2.45 None Super NOW Accounts 2,500 12,635,449 4.45
2.25 None Market Rate Checking 2,500 179,680 0.06
Certificates of Deposit
-----------------------
3.55% 7 Days Fixed Term, Fixed Rate 1,000 3,307,707 1.17
4.99 32 Days Fixed Term, Fixed Rate 1,000 4,171,173 1.47
5.04 60 Days Fixed Term, Fixed Rate 1,000 1,604,243 0.57
5.32 91 Days Fixed Term, Fixed Rate 1,000 5,524,600 1.95
5.43 120 Days Fixed Term, Fixed Rate 1,000 731,688 0.26
5.63 150 Days Fixed Term, Fixed Rate 1,000 888,465 0.31
5.77 180 Days Fixed Term, Fixed Rate 1,000 34,645,385 12.20
5.84 210 Days Fixed Term, Fixed Rate 1,000 1,471,163 0.52
5.78 240 Days Fixed Term, Fixed Rate 1,000 1,082,275 0.38
5.65 270 Days Fixed Term, Fixed Rate 1,000 2,543,990 0.90
6.06 300 Days Fixed Term, Fixed Rate 1,000 200,783 0.07
6.01 330 Days Fixed Term, Fixed Rate 1,000 3,714,195 1.31
5.79 366 Days Fixed Term, Fixed Rate 1,000 31,854,334 11.22
5.66 18 Months Fixed Term, Fixed Rate 1,000 4,668,821 1.64
5.07 24 Months Fixed Term, Fixed Rate 1,000 6,364,068 2.24
5.60 30 Months Fixed Term, Fixed Rate 1,000 23,165,049 8.16
3.96 18 Months 18 Month Small Savers 1,000 665,669 0.23
5.70 12 Months 12 Month IRA 1,000 5,169,413 1.82
5.70 6 Months Fixed Term, Fixed Rate 1,000 5,669,747 2.00
5.57 1 Year Fixed Term, Fixed Rate 1,000 12,446,549 4.38
4.48 18 Months Fixed Term, Fixed Rate 1,000 6,021,608 2.12
5.60 15 Months Fixed Term, Fixed Rate 1,000 7,557,356 2.66
5.88 9 Months Fixed Term, Fixed Rate 1,000 980,902 0.35
6.21 12 Months Fixed Term, Fixed Rate 1,000 5,055,147 1.78
5.64 180 Days Fixed Term, Fixed Rate 2,500 79,856 0.03
5.03 18 Months 18 Month IRA 5 10,160,110 3.58
2.79 1 Month Flex Retirement Account 5 1,057,741 0.37
2.52 1 Month Flex Retirement Account 5 1,481 0.00
6.34 1 Month Fixed Term, Fixed Rate 100,000 3,476,478 1.22
----- ------------ ------
4.40% $283,909,075 100.00%
============ ======
22
Time Deposit Rates. The following table sets forth the time deposits in
the Bank classified by rates as of the dates indicated.
At June 30,
Interest ----------------------------
Rate 1995 1994 1993
- ---------------- -------- -------- --------
(In thousands)
2.01 - 4.00% $ 17,977 $ 92,414 $ 54,431
4.01 - 6.00% 106,205 59,960 64,555
6.01 - 8.00% 60,098 271 2,465
8.01 - 10.00% --- --- 24
-------- -------- --------
$184,280 $152,645 $121,475
======== ======== ========
Time Deposit Maturity Schedule. The following table sets forth the amount
and maturities of the Bank's time deposits at June 30, 1995.
Amount Due
---------------------------------------------
Interest Less than 1 to 2 2 to 3 After
Rate 1 Year Years Years 3 Years Total
- --------------- --------- ------- ------ ------- --------
(In thousands)
2.01 - 4.00% $ 16,912 $ 6 $ --- $1,059 $ 17,977
4.01 - 6.00% 98,508 7,071 626 --- 106,205
6.01 - 8.00% 44,667 9,292 6,139 --- 60,098
-------- ------- ------ ------- --------
$160,087 $16,369 $6,765 $1,059 $184,280
======== ======= ====== ======= ========
23
Time Deposits of $100,000 or Greater. The following table indicates the
amount of the Bank's certificates of deposit of $100,000 or more by time
remaining until maturity as of June 30, 1995.
Certificates
of
Maturity Period Deposit
--------------- --------------
(In thousands)
Three months or less............. $11,183
Over three through six months.... 9,539
Over six through twelve months... 4,948
Over twelve months............... 2,988
-------
Total........................ $28,658
=======
Deposit Flow. The following table sets forth the change in dollar amount
of deposits in the various types of deposit programs offered by the Bank
between the dates indicated.
Balance at % of Increase Balance at % of Increase Balance at % of
June 30, 1995 Deposits (Decrease) June 30, 1994 Deposits (Decrease) June 30, 1993 Deposits
------------- --------- ---------- ------------- --------- ---------- ------------- ---------
(Dollars in thousands)
NOW checking accounts..... $ 25,539 9.00% $ (1,132) $ 26,671 9.63% $ (605) $ 27,276 10.69%
Jumbo certificates........ 3,476 1.22 3,476 -- -- -- -- --
Super NOW checking........ 12,636 4.45 (387) 13,023 4.70 (1,475) 14,498 5.68
accounts
Passbook.................. 35,589 12.54 (9,832) 45,421 16.40 (6,501) 51,922 20.36
Money market deposit...... 25,686 9.05 (13,264) 38,950 14.07 (954) 39,904 15.64
accounts
IRA accounts.............. 25,542 9.00 1,054 24,488 8.84 (61) 24,549 9.62
Certificates of deposit... 155,441 54.75 27,094 128,347 46.36 31,421 96,926 38.01
-------- ------ -------- -------- ------ ------- -------- ------
$283,909 100.00% $ 7,009 $276,900 100.00% $21,825 $255,075 100.00%
======== ====== ======== ======== ====== ======= ======== ======
24
Average Deposit Balances and Rates
The following table sets forth certain information concerning the average
month end balances and interest rates for the Bank's deposit accounts by type
of deposit for the periods indicated.
Year Ended June 30,
-------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
Non interest bearing accounts.. $ 2,472 ---% $ 2,514 ---% $ 2,840 ---%
Interest-bearing transaction
accounts..................... 70,283 1.90 78,817 2.11 77,124 2.93
Savings accounts............... 40,061 2.53 48,734 2.53 55,254 3.09
Time deposits.................. 164,195 4.88 133,216 3.97 115,625 4.41
-------- -------- --------
$277,011 3.74 $263,281 3.11 $250,843 3.61
======== ======== ========
Deposit Activity. The following table sets forth the deposit activities
of the Bank for the periods indicated.
Year Ended June 30,
------------------------------
1995 1994 1993
--------- -------- ---------
(In thousands)
Deposits..................................... $661,696 $684,968 $638,076
Withdrawals.................................. 664,007 670,514 646,655
-------- -------- --------
Net increase (decrease)
before interest credited.................. (2,311) 14,454 (8,579)
Interest credited............................ 9,320 7,371 8,316
-------- -------- --------
Net increase (decrease) in savings deposits.. $ 7,009 $ 21,825 $ (263)
======== ======== ========
Borrowings. Savings deposits are the primary source of funds of Northbay
Savings' lending and investment activities and for its general business
purposes. If the need arises, the Bank may rely upon advances from the FHLB
of San Francisco to supplement its supply of lendable funds. Advances from
the FHLB typically are secured by the Bank's stock in the FHLB and a portion
of the Bank's first mortgage loans. At June 30, 1995, the Bank had $60.0
million of advances from the FHLB of San Francisco, including $3.6 million of
fixed-rate Community Investment Program ("CIP") advances, which are lower rate
bearing advances allocated for specific low income housing projects. The
increase in FHLB of San Francisco advances was attributable to the Bank's
policy of funding loans through FHLB advances when necessary rather than
pursuing growth in the loan portfolio with higher rate paying retail
25
deposits. This strategy has contributed to the Bank's ability to maintain a
low cost of funds. The following table sets forth the year of maturity and
weighted average interest rate for all FHLB advances outstanding at June 30,
1995.
Year of Weighted Average Principal
Maturity Interest Rate Balance
-------- ---------------- ---------
(In thousands)
1995.................... 6.54% $37,300
1996.................... 6.73 17,385
1998.................... 6.10 1,000
1999.................... 6.30 1,000
2000.................... 9.20 357
2001.................... 8.61 670
2002.................... 7.99 93
2003.................... 6.33 88
2004.................... 7.60 1,387
2009.................... 7.77 650
2014.................... 7.90 106
-------
$60,036
=======
Weighted average
interest rate at
the dates indicated
above.................. 6.66%
The FHLB functions as a central reserve bank providing credit for savings
and loan associations and certain other member financial institutions. As a
member, Northbay Savings is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made
pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of an
association's net worth or on the FHLB's assessment of the association's
creditworthiness. Under its current credit policies, the FHLB limits advances
to 30% of a member's assets and, consequently, the Bank has an unused credit
line at the FHLB of San Francisco of approximately $57 million at June 30,
1995.
In addition to the FHLB advances noted above, at June 30, 1995, the Bank
had the following borrowings outstanding: $742,000 in short term banking
controlled disbursement accounts, $7.8 million in reverse repurchase
agreements and $603,000 in retail repurchase agreements which are secured by
mortgage-backed securities, and the Corporation had $188,000
26
of a ten-year employee stock ownership plan loan. Under the reverse
repurchase agreements, the Bank has sold U.S. Government and mortgage-backed
securities, and is obligated to repurchase the securities at some time in the
future (which period not exceed 270 days under agreements as of June 30,
1995).
For further information concerning the Bank's borrowings, see Notes 8 and
9 of the Notes to Consolidated Financial Statements.
The following table sets forth certain information regarding short-term
borrowings by the Bank at the dates and during the periods indicated:
June 30,
----------------------------
1995 1994 1993
-------- -------- --------
Weighted average rate paid on:
Short-term borrowings............. 1.02% .58% .83%
FHLB advances..................... 6.66 4.82 4.03
Securities sold under agreement
to repurchase.................... 6.38 --- ---
Years Ended June 30,
---------------------------
1995 1994 1993
------- ------- -------
(Dollars in thousands)
Maximum amount of borrowings
outstanding at any month end:
Short-term borrowings............... $ 3,610 $ 3,688 $ 5,339
FHLB advances....................... 81,142 47,695 21,417
Securities sold under agreement to
repurchase......................... 7,800 --- ---
Approximate average short-term
borrowings outstanding:
Short-term borrowings............... $ 2,113 $ 2,784 $ 2,959
FHLB advances....................... 68,845 26,078 12,301
Securities sold under agreement
to repurchase...................... 1,825 --- ---
Approximate weighted average rate/(1)/:
Short-term borrowings............... 1.27% .73% 0.87%
FHLB advances....................... 6.04 4.25 4.34
Securities sold under agreement
to repurchase...................... 6.39 --- ---
- ---------
(1) Based on average month end balances.
27
Competition
The Bank encounters strong competition both in the attraction of deposits
and in the making of real estate and other loans. Its most direct competition
for deposits has historically come from commercial banks and other savings and
loan institutions in its market area. The Bank competes for savings by
offering depositors a high level of personal service together with a wide
range of savings accounts, checking accounts, convenient office locations,
drive up facilities, automatic teller machines and other various financial
services.
The competition for real estate and other loans comes principally from
savings institutions, commercial banks and mortgage banking companies. This
competition for loans has increased substantially in recent years due to the
large number of institutions choosing to compete in its market area.
The Bank competes for loans primarily through the interest rates and loan
fees it charges, and the efficiency and quality of services it provides
borrowers, real estate brokers and builders. Factors which affect competition
include the general and local economic conditions, current interest rate
levels and volatility in the mortgage markets. There are six savings and loan
associations and eight commercial banks headquartered in the Bank's market
area. Based on its asset size as of June 30, 1995, the Bank is the fifth
largest of these financial institutions based in the market area. The other
financial institutions in the Bank's market area are branches of statewide
organizations and rank above the Bank in terms of aggregate asset size.
Personnel
As of June 30, 1995, the Corporation, including its subsidiaries, had 111
full-time employees and 12 part-time employees. The employees are not
represented by a collective bargaining unit. The Corporation believes its
relationship with its employees to be good.
REGULATION
General
Northbay Savings is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of San Francisco and is subject to certain limited
regulation by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). As the savings and loan holding company of Northbay Savings,
the Corporation also is subject to federal regulation and oversight. The
purpose of the regulation of the Corporation and other holding companies is to
protect subsidiary savings associations. Northbay Savings is a member of the
SAIF and the deposits of the Bank are insured by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
28
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Northbay Savings is required to file
periodic reports with the OTS and is subject to periodic examinations by the
OTS and the FDIC. The last regular OTS and FDIC examina tions of the Bank
were as of December 31, 1994 and March 31, 1990, respectively. Under agency
scheduling guidelines, it is likely that another examination will be initiated
in the near future. When these examinations are conducted by the OTS and the
FDIC, the examiners may require the Bank to provide for higher general or
specific loan loss reserves. All savings associations are subject to a semi-
annual assessment, based upon the savings association's total assets. The
Bank's OTS assessment for the fiscal year ended June 30, 1995, was $89,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the
Corporation. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
OTS. Except under certain circumstances, public disclosure of final
enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of Northbay
Savings is prescribed by federal laws and regulations, and it is prohibited
from engaging in any activities not permitted by such laws and regulations.
For instance, no savings institution may invest in non-investment grade
corporate debt securities. In addition, the permissible level of investment
by federal associations in loans secured by non-residential real property may
not exceed 400% of total capital, except with approval of the OTS. Federal
savings associations are also generally authorized to branch nationwide. The
Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At June 30, 1995, the Bank's lending limit under this restriction was $5.03
million. The Bank did not have any lending relationships in excess of this
limit.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on certain matters
including loan underwriting and documentation, internal controls and audit
systems, interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these standards must
submit a compliance plan. A failure to submit a plan or to comply with an
approved plan will subject the institution to further enforcement action. The
OTS and the other federal banking agencies have also proposed additional
guidelines on asset quality. No assurance can be given as to the final form
of the proposed regulations or the effect of such regulations on the Bank.
29
Insurance of Accounts and Regulation by the FDIC
Northbay Savings is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
risk to the FDIC. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines
that the institution has engaged or is engaging in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted
assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital
ratio of at least 10%) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (i.e., core or Tier 1
risk-based capital ratios of less than 4% or a risk-based capital ratio of
less than 8%) and considered of substantial supervisory concern pay the
highest premium. Risk classification of all insured institutions will be made
by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio
to that designated reserve level, or such higher reserve ratio as established
by the FDIC. The FDIC also may impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the Bank Insurance Fund
(the "BIF") of the FDIC in order to maintain the reserve ratio of the BIF at
1.25% of BIF insured deposits. The FDIC has revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits in
anticipation of the BIF achieving its statutory reserve ratio. As a result,
such institutions generally will pay lower insurance premiums than SAIF
insured institutions. The revisions became effective in the third quarter of
1995.
The SAIF is not expected to attain the designated reserve ratio until the
year 2002 due to the shrinking deposit base for SAIF assessments and the
requirement that SAIF premiums be used to make the interest payments on bonds
issued by the Financing Corporation ("FICO") in order to finance the costs of
resolving thrift failures in the 1980s. As a result, SAIF insured members
will generally be subject to higher deposit insurance premiums than banks
until, all things being equal, the SAIF attains the required reserve ratio.
30
The effect of this potential disparity on Northbay Savings and other SAIF
members is uncertain at this time. It may have the effect of permitting BIF-
insured banks to offer loan and deposit products on more attractive terms than
SAIF members due to the cost savings achieved through lower deposit premiums,
thereby placing SAIF members at a competitive disadvantage. No assurance can
be given as to whether or in what form the FDIC proposal will be adopted. A
number of proposals are being considered to recapitalize the SAIF in order to
eliminate this disparity. One plan currently being considered by the Treasury
Department, the FDIC, the OTS and the Congress provides for a one time
assessment of .85% to .90% to be imposed on all deposits assessed at SAIF
rates as of March 31, 1995, including those held by commercial banks, and for
BIF deposit insurance premiums to be used to pay the FICO bond interest on a
pro rata basis together with SAIF premiums. The BIF and SAIF would be merged
into one fund as soon as practicable, but no later than January 1, 1998.
There can be no assurance that any particular proposal will be implemented or
that premiums for either BIF or SAIF members will not be adjusted in the
future by the FDIC or by legislative action.
Regulatory Capital Requirements
Federally insured savings associations, such as Northbay Savings, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1995, the Bank had intangible assets in the form
of a premium paid to acquire deposits of another institution of $74,000.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with
the capital requirements, all subsidiaries engaged solely in activities
permissible for national banks or engaged in certain other activities solely
as agent for its customers are "includable" subsidiaries that are consolidated
for capital purposes in proportion to the association's level of ownership.
For excludable subsidiaries the debt and equity investments in such
subsidiaries are deducted from assets and capital. The Bank's subsidiary is
an includable subsidiary.
At June 30, 1995, the Bank had tangible capital of $33.6 million, or
8.58% of adjusted total assets, which is approximately $27.7 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital
plus certain intangible assets, including
31
a limited amount of purchased credit card relationships. As a result of the
prompt corrective action provisions discussed below, however, a savings
association must maintain a core capital ratio of at least 4% to be considered
adequately capitalized unless its supervisory condition is such to allow it to
maintain a 3% ratio.
At June 30, 1995, the Bank had core capital equal to $33.6 million, or
8.60% of adjusted total assets, which is $21.9 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent
of core capital. The OTS is also authorized to require a savings association
to maintain an additional amount of total capital to account for concentration
of credit risk and the risk of non-traditional activities. At June 30, 1995,
the Bank had no capital instruments that qualify as supplementary capital and
$2.1 million of general loss reserves, which was less than 1.25% of risk-
weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Northbay Savings had
no such exclusions from capital and assets at June 30, 1995.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by the FNMA or
FHLMC.
The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the
present value of its assets. This exposure is a measure of the potential
decline in the net portfolio value of a savings association, greater than 2%
of the present value of its assets, based upon a hypothetical 200 basis point
increase or decrease in interest rates (whichever results in a greater
decline). Net portfolio value is the present value of expected cash flows
from assets, liabilities and off-balance sheet contracts. The rule provides
for a two quarter lag between calculating interest rate risk and recognizing
any deduction from capital. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest
rate risk deduction determination. It is uncertain as to when this evaluation
may be completed. Any savings association with less than $300 million in
assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise. Based upon the Bank's level
of adjustable rate loans, shorter term assets
32
and strong level of regulatory capital, management does not expect the Bank's
interest rate risk component to have a material impact on the Bank's
regulatory capital level or its compliance with regulatory capital
requirements.
On June 30, 1995, the Bank had total capital of $35.7 million (including
$33.6 million in core capital and $2.1 million in qualifying supplementary
capital) and risk-weighted assets of $245 million (including $16.5 million in
converted off-balance sheet assets); or total capital of 14.56% of risk-
weighted assets. This amount was $16.1 million above the 8% requirement in
effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to
meet their capital requirements. The OTS is generally required to take action
to restrict the activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. Any undercapitalized association is also subject to
the general enforcement authority of the OTS or the FDIC, including the
appointment of a receiver or conservator. As a condition to the approval of
the capital restoration plan, any company controlling an undercapitalized
association must agree that it will enter into a limited capital maintenance
guarantee with respect to the institution's achievement of its capital
requirements. The OTS is also authorized to impose the additional restrictions
that are applicable to significantly undercapitalized associations.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a
forced merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less)
is subject to further mandatory restrictions on its activities in addition to
those applicable to significantly undercapitalized associations. In addition,
the OTS must appoint a receiver (or conservator with the concurrence of the
FDIC) for a savings association, with certain limited exceptions, within 90
days after it becomes critically undercapitalized.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Northbay Savings may have a substantial adverse effect on the Bank's
operations and profitability. Corporation stockholders do not have preemptive
rights, and therefore, if the Corporation is directed by the OTS or the FDIC
to issue additional shares of common stock, such issuance may result in the
dilution in the percentage of ownership of the Corporation.
33
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions or requirements on
associations with respect to their ability to pay dividends or make other
distributions of capital. OTS regulations prohibit an association from
declaring or paying any dividends or from repurchasing any of its stock if, as
a result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers
and other transactions charged to the capital account (see "--Regulatory
Capital Requirements").
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital
requirements, may make capital distributions during any calendar year equal to
the greater of 100% of net income for the year-to-date plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, or the amount authorized for a
Tier 2 association. However, a Tier 1 association deemed to be in need of
more than normal supervision by the OTS may be downgraded to a Tier 2 or Tier
3 association as a result of such a determination. The Bank meets the
requirements for a Tier 1 association and has not been notified of a need for
more than normal supervision. Tier 2 associations, which are associations
that before and after the proposed distribution meet their current minimum
capital requirements, may make capital distributions of up to 75% of net
income over the most recent four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution
and Tier 2 associations that propose to make a capital distribution in excess
of the noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make
any capital distribution need only submit written notice to the OTS 30 days
prior to such distribution. As a subsidiary of the Corporation, the Bank is
required to give the OTS 30 days' notice prior to declaring any dividend on
its stock. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. See "- Regulatory Capital
Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered
structure and the safe-harbor percentage limitations. Under the proposal a
savings association may make a capital distribution without notice to the OTS
(unless it is a subsidiary of a holding company) provided that it has a CAMEL
1 or 2 rating, is not in troubled condition (as defined by regulation) and
would remain adequately capitalized (as defined in the OTS prompt corrective
action regulations) following the proposed distribution. Savings associations
that would remain adequately capitalized following the proposed distribution
but do not meet the other noted requirements must notify the OTS 30 days prior
to declaring a capital distribution. The OTS stated it will generally regard
as permissible that amount of capital distributions that do not exceed 50% of
the institution's excess
34
regulatory capital plus net income to date during the calendar year. A
savings association may not make a capital distribution without prior approval
of the OTS and the FDIC if it is undercapitalized before, or as a result of,
such a distribution. As under the current rule, the OTS may object to a
capital distribution if it would constitute an unsafe or unsound practice. No
assurance may be given as to whether or in what form the regulations may be
adopted.
At the time of Northbay Savings' conversion from the mutual to the stock
form of organization, the Bank entered into a dividend limitation agreement
with the OTS which provides that the Bank may pay dividends of up to 100% of
cumulative net income, less dividends paid for the previous eight quarters, if
the Bank meets its fully phased-in capital requirements. If the Bank does not
meet its fully phased-in capital requirements, its dividends to the
Corporation would be limited to 50% of net income, less dividends paid for the
previous eight quarters. This requirement has not had a material adverse
effect on the Bank's dividend practices and management does not expect this
requirement to have any such effect on the Bank's dividend practices in the
future. See Note 16 to Notes to Consolidated Financial Statements.
Liquidity
All savings associations, including Northbay Savings, are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" in the Corporation's Annual Report to Stockholders. This liquid
asset ratio requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. At the present time, the required minimum liquid asset ratio is
5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily
balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid
asset ratio requirement. At June 30, 1995, the Bank was in compliance with
both requirements, with an overall liquid asset ratio of 6.40% and a short-
term liquid assets ratio of 3.68%.
Accounting
An OTS policy statement applicable to all savings associations clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with GAAP. Under the
policy statement, management must support its classification of and accounting
for loans and securities (i.e., whether held for investment, sale or trading)
with appropriate documentation. The Bank is in compliance with these amended
rules.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent then GAAP by the OTS, to require that transactions be
reported in a manner that
35
best reflects their underlying economic substance and inherent risk and that
financial reports must incorporate any other accounting regulations or orders
prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including Northbay Savings, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least
65% of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At June 30, 1995, the Bank met the test and has always met the
test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and
is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe
and sound banking practices to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with the
examination of Northbay Savings, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for
the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the
CRA in the past few years, the Bank may be required to devote additional funds
for investment and lending in its local community. The Bank
36
was last examined by the OTS for CRA compliance in January 1995 and received a
rating of outstanding.
Transactions with Affiliates
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to affiliates, are restricted to a percentage of
the association's capital. Affiliates of Northbay Savings include the
Corporation and any company which is under common control with the Bank. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the
securities of most affiliates. The Bank's subsidiary is not deemed an
affiliate, however, the OTS has the discretion to treat subsidiaries of
savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Holding Company Regulation
The Corporation is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Corporation is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
the Corporation and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Corporation generally
is not subject to activity restrictions. If the Corporation acquires control
of another savings association as a separate subsidiary, it would become a
multiple savings and loan holding company, and the activities of the
Corporation and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to such restrictions
unless such other associations each qualify as a QTL and were acquired in a
supervisory acquisition.
If the Bank fails the QTL test, the Corporation must obtain the approval
of the OTS prior to continuing after such failure, directly or through its
other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure the Corporation must register as,
and will become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company are more
limited than are the activities authorized for a unitary or multiple savings
and loan holding company. See "--Qualified Thrift Lender Test."
The Corporation must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are
generally prohibited if they result in a
37
multiple savings and loan holding company controlling savings associations in
more than one state. However, such interstate acquisitions are permitted
based on specific state authorization or in a supervisory acquisition of a
failing savings association.
Federal Securities Law
The stock of the Corporation is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Corporation is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Corporation stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Corporation may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Corporation meets specified current public information
requirements, each affiliate of the Corporation is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking
accounts). At June 30, 1995, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
Northbay Savings is a member of the FHLB of San Francisco, which is one
of 12 regional FHLBs, that administers the home financing credit function of
savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes loans to members (i.e., advances) in accordance with policies and
procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of San Francisco. At June 30, 1995, the Bank had $3.29 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on
38
its FHLB stock. Over the past five fiscal years ended June 30, such dividends
have averaged 4.40% and were 4.91% for the fiscal year ended June 30, 1995.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in the Bank's capital.
For the fiscal year ended June 30, 1995, dividends paid by the FHLB of
San Francisco to the Bank totaled $170,000 which constitute an $80,000
increase over the amount of dividends received in fiscal year 1994. The
$45,000 dividend received for the quarter ended June 30, 1995 reflects an
annualized rate of 4.74%, or .46% above the rate for the fiscal year ended
June 30, 1995.
Federal and State Taxation
Savings associations such as the Bank that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to
establish reserves for bad debts and to make annual additions thereto which
may, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "non-qualifying loans" is computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable
income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") is
8%. The percentage bad debt deduction thus computed is reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming
the maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally
must include existing reserves in income over a four year period. No
representation can be made as to whether the Bank will meet the 60% test for
subsequent taxable years.
39
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount
by which 12% of the amount comprising savings accounts at year-end exceeds the
sum of surplus, undivided profits and reserves at the beginning of the year.
At June 30, 1995, the 6% and 12% limitations did not restrict the percentage
bad debt deduction available to the Bank. It is not expected that these
limitations would be a limiting factor in the foreseeable future.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds
the corporation's regular income tax and net operating losses can offset no
more than 90% of alternative minimum taxable income. For taxable years
beginning after 1986 and before 1996, corporations, including savings
associations such as the Bank, are also subject to an environmental tax equal
to 0.12% of the excess of alternative minimum taxable income for the taxable
year (determined without regard to net operating losses and the deduction for
the environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a stockholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad
debt losses).
The Corporation files consolidated federal income tax and combined
California franchise tax returns with the Bank and its subsidiary. Savings
associations, such as the Bank, that file federal income tax returns as part
of a consolidated group are required by applicable Treasury regulations to
reduce their taxable income for purposes of computing the percentage bad debt
deduction for losses attributable to activities of the non-savings association
members of the consolidated group that are functionally related to the
activities of the savings association member.
The consolidated federal income tax returns for years ended June 30,
1989, 1990 and 1991 were examined by the Internal Revenue Service. The exam
was finalized in September 1994 and resulted in no adjustments to taxable
income for any of the years under examination. In the opinion of management,
any examination of still open returns (including returns of subsidiaries and
predecessors of, or entities merged into, the Bank) would not result in a
deficiency which could have a material adverse effect on the financial
condition of the Bank and its consolidated subsidiary.
40
State Income Taxation. For the most part, except for bad debt
deductions, California conformed its tax laws to the federal income tax law
adopted by the Tax Reform Act of 1986. The following is a summary of some of
the key provisions of the California law effected by conforming legislation.
1. In general, one half of the Net Operating Losses incurred after 1986
are permitted to be carried forward for 5 years. California Net Operating
Loss Carryforwards may not be utilized in 1991 and 1992 due to California
Legislation.
2. The add-on preference tax was repealed and replaced with an
alternative minimum tax based on the federal structure.
3. Most of the base broadening changes in the 1986 Act were followed,
including the change to the accrual method of accounting.
4. The tax rate for taxpayers other than banks and financial
corporations was reduced to 9.3%.
The California franchise tax applicable to savings institutions is a
variable rate tax, computed under a formula that results in a rate higher than
the rate applicable to non-financial corporations, because it reflects an
amount "in lieu" of local personal property and business license taxes paid by
such corporations (but not generally paid by banks or financial institutions
such as the Bank). The tax rate for fiscal 1995 was 11.55%. The California
alternative minimum tax rate is 9.25%.
As a Delaware corporation, the Corporation is subject to an annual
franchise tax based on the number of shares of common and preferred stock
authorized under its Certificate of Incorporation.
For information regarding federal and state taxes, see Note 10 of the
Notes to Consolidated Financial Statements in the Corporation's Annual Report
to Stockholders.
41
Executive Officers of the Corporation
The executive officers of the Corporation are as follows:
Name Age Position
---- --- --------
Herold Mahoney 81 Chairman of the Board and
President
Alfred A. Alys 58 Executive Vice President and
Chief Executive Officer
Granville I. Stark 54 Senior Vice President
Bertha Balfour 64 Senior Vice President
Herold Mahoney is Chairman of the Board and President of the Corporation.
Mr Mahoney is the President and 50% owner of Royal Petroleum Co., Petaluma,
California, an independent petroleum products company.
Alfred A. Alys is Executive Vice President and Chief Executive Officer of
the Corporation. Mr. Alys joined the Bank in 1970 and served as Executive
Vice President and Chief Executive Officer from July 1984 to October 1988.
Since October 1988 he has served as President, Chief Executive Officer and
Director of the Bank. Mr. Alys is a Director and Chairman of the Investment
Committee of the Sonoma County Employee Retirement Association. He is a
Director and Chairman of the Sonoma County Open Space Authority and is active
in various other charitable and civic organizations.
Granville I. Stark is Senior Vice President of Real Estate Loan
Administration for Northbay Savings. Mr. Stark joined the Bank in 1975 and
has served as Vice President of Real Estate Loans from July 1982 to July 1989.
In July 1989, Mr. Stark was named as Senior Vice President of Northbay
Savings. Mr. Stark is on the California League of Savings Institutions
Secondary Market Committee and is active in various other charitable and civic
organizations.
Bertha Balfour is Senior Vice President of Savings and Branch
Administration for Northbay Savings. Mrs. Balfour joined the Bank in 1970 and
has served as Vice President of Savings and Branch Administration from July
1973 to July 1989. In July 1989, Mrs. Balfour was named as Senior Vice
President of Northbay Savings. Mrs. Balfour is also active in local
charitable organizations.
42
Item 2. Properties
-------------------
Properties
The following table sets forth the location of the Bank's offices, as
well as certain additional information relating to these offices as of June
30, 1995.
Year Approximate Owned/ Lease Value at
Facility Square Leased Expiration June 30,
Opened Footage Date 1995/(1)/
- -----------------------------------------------------------------------------------------
Main Banking Office:
20 Petaluma Boulevard South
Petaluma, CA 94952................ 1974 9,009 Leased 12/20/2011 $ 156,844
Branch Banking Offices:
531 Fifth Street, West
Sonoma, CA 95476................. 1992 2,100 Leased 12/31/1996 70,384
450 Center Street
Healdsburg, CA 95448............. 1974 3,082 Leased 12/20/2010 46,457
6301 State Farm Drive
Rohnert Park, CA 94928........... 1978 4,692 Leased 12/20/2010 60,874
6661 Front Street
Forestville, CA 95436............ 1979 2,598 Owned -- 393,137
311 North McDowell Blvd.
Petaluma, CA 94953............... 1980 5,000 Leased 11/30/2014 538,244
1791 Marlow Road #1
Santa Rosa, CA 95403............. 1987 3,840 Leased 06/30/1999 115,202
888 Fourth Street
Santa Rosa, CA 95404.............. 1994 3,500 Leased 02/14/2004 168,790
Administrative and Loan Offices:
1360 Redwood Way
Petaluma, CA 94954............... 1992 11,431 Leased 03/31/2002 717,813
1330 North Dutton Avenue
Santa Rosa, CA 95403............. 1993 4,740 Leased 06/30/1998 197,822
- -----------------------------------------------------------------------------------------
/(1)/ Represents the net book value of land, building, furniture, fixtures and
equipment owned by the Bank.
43
The net book value of the Bank's investment in premises and equipment
totaled $2.47 million at June 30, 1995. See Note 5 of Notes to Consolidated
Financial Statements in the Annual Report to Stockholders.
Item 3. Legal Proceedings
--------------------------
The Corporation is not engaged in any legal proceedings of a material
nature at the present time. There are various claims and law suits in which
the Bank is periodically involved, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans
and other issues incident to the Bank's business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1995.
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
-----------------------------------------------------
The information contained under the section captioned "Stock Market
Information" in the Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1995 (the "Annual Report") is incorporated herein by reference.
In addition to other regulatory restrictions on payment of dividends by
the Bank, federal regulations impose certain limitations on the payment of
dividends and other capital distributions by Northbay Savings. Under the
regulations, a savings association that, immediately prior to, and on a pro
forma basis after giving effect to, a proposed capital distribution, has total
capital (as defined by OTS regulation) that is equal to or greater than the
amount of its fully phased-in capital requirements (a "Tier 1 Association")
generally is permitted, after notice, to make capital distributions during a
calendar year in the amount equal to the greater of 100% of net income for the
year-to-date plus 50% of the amount by which the lesser of the association's
tangible, core or risk-based capital exceed its fully phased-in capital
requirement for such capital component, as measured at the beginning of the
calendar year, or the amount authorized for a Tier 2 Association (as defined
below). A savings institution with total capital in excess of current minimum
capital ratio requirements but not in excess of the fully phased-in
requirements (a "Tier 2 Association") generally is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period.
A savings institution that fails to meet current minimum capital requirements
(a "Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. A Tier 1 Association that has been
notified by the OTS that its is in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. Despite the above
authority, the OTS may prohibit any savings institution from
44
making a capital distribution that would otherwise be permitted by the
regulation, if the OTS were to determine that the distribution constituted an
unsafe or unsound practice. Furthermore, under the OTS prompt corrective
action regulations, which took effect on December 19, 1992, the Bank would be
prohibited from making any capital distributions if, after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of
less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or
(iii) a leverage ratio of less than 4.0%. See "Regulation -- Limitations on
Dividends and Other Capital Distributions."
At the time of Northbay Savings' conversion from the mutual to the stock
form of organization, the Bank entered into a dividend limitation agreement
with the OTS which provides that the Bank may pay dividends of up to 100% of
cumulative net income, less dividends paid for the previous eight quarters, if
the Bank meets its fully phased-in capital requirements. If the Bank does not
meet its fully phased-in capital requirements, its dividends to the
Corporation would be limited to 50% of net income, less dividends paid for the
previous eight quarters. This requirement has not had a material adverse
effect on the Bank's dividend practices and management does not expect this
requirement to have any such effect on the Bank's dividend practices in the
future. See "Regulation -- Limitations on Dividends and Other Capital
Distributions" and Note 16 to Notes to Consolidated Financial Statements.
Item 6. Selected Financial Data
--------------------------------
The information contained in the table captioned "Selected Consolidated
Financial Data" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
----------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 8. Financial Statement and Supplementary Data
---------------------------------------------------
The financial statements listed in Item 14 herein are incorporated herein
by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
---------------------------------------------------------
Not applicable.
45
Part III
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Corporation's definitive proxy statement for the
Corporation's 1995 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
The information contained in "Item 1. Business -- Executive Officers of
the Corporation" is incorporated herein by reference.
Pursuant to the Securities Exchange Act of 1934, the Corporation's
officers and directors and persons who own more than ten percent of the Common
Stock are required to file reports detailing their ownership and changes of
ownership in the Common Stock with the SEC. Officers, directors and persons
who own more than ten percent of the Common Stock are also required to furnish
the Corporation with copies of all such ownership reports that are filed.
Based solely on the Corporation's review of the copies of such ownership
reports, or written representations from officers, directors and persons who
own more than ten percent of the Common Stock that no annual report of change
in beneficial ownership is required, the Corporation believes that during the
fiscal year ended June 30, 1995 all of its officers, directors and
stockholders owning in excess of ten percent of the Common Stock have complied
with the required reporting requirements.
Item 11. Executive Compensation
--------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors - Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
-------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the Section captioned "Voting Securities and Principal Holders
Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors" of the
Proxy Statement.
(c) Management of the Corporation knows of no arrangements, including any
pledge by any person of securities of the Corporation, the operation
of which may at a subsequent date result in a change in control of
the registrant.
46
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors - Transactions
with Management" of the Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
-----------------------------------------------------------------
(a) 1. Independent Auditors' Report
Northbay Financial Corporation and Subsidiaries
(a) Consolidated Statements of Financial
Condition at June 30, 1995 and 1994
(b) Consolidated Statements of Operations for
the years ended June 30, 1995, 1994 and 1993
(c) Consolidated Statements of Stockholders'
Equity for the years ended June 30, 1995, 1994 and 1993
(d) Consolidated Statements of Cash Flows for the
years ended June 30, 1995, 1994 and 1993
(e) Notes to Consolidated Financial Statements
2. All schedules have been omitted as the required information is
either inapplicable or included in this Form 10-K, the Consolidated
Financial Statements or the Notes to Consolidated Financial
Statements.
3. Exhibits
3.1 Certificate of Incorporation (Incorporated by reference to
the Registrant's Form S-1 Registration Statement, No.
33-26172)
3.2 Bylaws (Incorporated by reference to the Registrant's Form
S-1 Registration Statement, No. 33-26172)
10.1 Stock Option and Incentive Plan (Incorporated by reference to
the Registrant's Form S-1 Registration Statement, No.
33-26172)
10.2 Salary Continuation Agreement between Northbay Savings and
Alfred A. Alys (Incorporated by reference to the Registrant's
Form S-1 Registration Statement No. 33-26172)
47
10.3 Employment Agreement between the Registrant and Alfred A. Alys
(Incorporated by reference to the Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1994)
10.4 Employment Agreement between Northbay Savings and Alfred A.
Alys (Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994)
10.5 Severance Agreement between Northbay Savings and Granville I.
Starke
10.6 Severance Agreement between Northbay Savings and Bertha
Balfour
13 Portions of Annual Report to Stockholders for Fiscal Year
Ended June 30, 1995
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
(b) No reports on Form 8-K dated were filed during the last quarter of
the fiscal year covered by this report.
(c) All required exhibits are filed as attached.
(d) No financial statement schedules are required.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NORTHBAY FINANCIAL CORPORATION
Date: September 27, 1995 By: /s/ Alfred A. Alys
------------------------------
Alfred A. Alys, Executive Vice
President and Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Dated
---------- -----
/s/ Alfred A. Alys September 27, 1995
-----------------------------------
Alfred A. Alys
Principal Executive Officer and
Director
/s/ Greg Jahn September 27, 1995
-----------------------------------
Greg Jahn
Principal Financial and
Accounting Officer
/s/ Victor L. DeCarli September 27, 1995
-----------------------------------
Victor L. DeCarli
Director
/s/ Herold Mahoney September 27, 1995
-----------------------------------
Herold Mahoney
Director
/s/ Raymond Nizibian September 27, 1995
-----------------------------------
Raymond Nizibian, D.D.S.
Director
/s/ Donald P. Ramatici September 27, 1995
-----------------------------------
Donald P. Ramatici
Director
/s/ Martin A. Stinar September 27, 1995
-----------------------------------
Martin A. Stinar
Director
Signatures Dated
---------- -----
/s/ Eugene W. Traverso September 27, 1995
-----------------------------------
Eugene W. Traverso
Director
INDEX TO EXHIBITS
3.1 Certificate of Incorporation (Incorporated
by reference to the Registrant's Form S-1
Registration Statement, No. 33-26172)
3.2 Bylaws (Incorporated by reference to the Registrant's
Form S-1 Registration Statement, No. 33-26172)
10.1 Stock Option and Incentive Plan (Incorporated
by reference to the Registrant's Form S-1
Registration Statement, No. 33-26172)
10.2 Salary Continuation Agreement between Northbay
Savings and Alfred A. Alys (Incorporated by
reference to the Registrant's Form S-1
Registration Statement No. 33-26172)
10.3 Employment Agreement between the Registrant
and Alfred A. Alys (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1994)
10.4 Employment Agreement between Northbay Savings
and Alfred A. Alys (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1994)
10.5 Severance Agreement between Northbay Savings and Granville I. Starke
10.6 Severance Agreement between Northbay Savings and Bertha Balfour
13 Portions of Annual Report to Stockholders for Fiscal Year Ended June
30, 1995
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule