SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR the quarter period ended September 30, 2002 Commission File No. 0-31080 NORTH BAY BANCORP ----------------- (Exact name of registrant as specified in its charter) California 68-0434802 ---------- ---------- (State or Jurisdiction of incorporation) (I.R.S. Employer Identification No.) 1500 Soscol Avenue, Napa, California 94559-1314 ----------------------------------------------- (Address of principal executive office including Zip Code) Registrant's telephone number, including area code: (707) 257-8585 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value -------------------------- Preferred Share Purchase Rights ------------------------------- 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 No ------- ----------- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of the North Bay Bancorp's Common Stock outstanding as of November 8, 2002: 2,123,687 Part 1. FINANCIAL INFORMATION FORWARD LOOKING STATEMENTS In addition to the historical information, this Quarterly Report contains certain forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 321E of the Securities Exchange Act of 1934, as amended, and are subject to the "Safe Harbor" created by those Sections. The reader of this Quarterly Report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Company's actual results could differ materially from those suggested by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, (i) variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments, rates paid on deposits, and fee and other noninterest income earned; (ii) competitive pressures among depository and other financial institutions may increase significantly and have an effect on pricing, spending, third-party relationships and revenues; (iii) enactment of adverse government regulations; (iv) adverse conditions and volatility, as a result of recent economic uncertainty created by the September 11, 2001 terrorists attacks on the World Trade Center and the Pentagon, the United States' war on terrorism, in the stock market, the public debt market and other capital markets and the impact of such conditions of the Company; (vi) continued changes in the interest rate environment may reduce interest margins and adversely impact net interest income; (vii) as well as other factors. This entire Quarterly Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company's business. Moreover, wherever phrases such as or similar to "In Management's opinion", or "Management considers" are used, such statements are as of and based upon the knowledge of Management at the time made and are subject to change by the passage of time and/or subsequent events, and accordingly such statements are subject to the same risks and uncertainties noted above with respect to forward-looking statements. FINANCIAL INFORMATION The information for the three months and nine months ended September 30, 2002 and September 30, 2001 is unaudited, but in the opinion of management reflects all adjustments which are necessary to present fairly the financial condition of North Bay Bancorp (Company) at September 30, 2002 and the results of operations and cash flows for the three and nine months then ended. Results for interim periods should not be considered as indicative of results for a full year. 2 Item 1. FINANCIAL STATEMENTS North Bay Bancorp Consolidated Balance Sheets Unaudited (In 000's) September 30, September 30, December 31, Assets 2002 2001 2001 -------- -------- -------- Cash and due from banks $ 20,091 $ 17,467 $ 19,311 Federal funds sold 25,154 1,992 18,000 Time deposits with other financial institutions 100 100 100 -------- -------- -------- Total cash and cash equivalents 45,345 19,559 37,411 Investment Securities: Held-to-maturity 1,272 1,314 1,314 Available-for-sale 106,280 89,990 83,565 Equity securities 1,352 1,249 1,241 -------- -------- -------- Total investment securities 108,904 92,553 86,120 Loans, net of allowance for loan losses of $3,143 in September, 2002 $2,601 in September, 2001 and $2,717 in December, 2001 219,245 183,229 183,548 Bank premises and equipment, net 10,691 9,286 9,329 Accrued interest receivable and other assets 11,743 8,441 10,398 -------- -------- -------- Total assets $395,928 $313,068 $326,806 ======== ======== ======== Liabilities and Shareholders' Equity Deposits: Non-interest bearing $ 94,833 $ 72,897 $ 77,117 Interest bearing 253,266 206,429 215,324 -------- -------- -------- Total deposits 348,099 279,326 292,441 Long term debt 0 2,077 1,846 -------- -------- -------- Total borrowings 0 2,077 1,846 Accrued interest payable and other liabilities 3,377 1,877 2,539 -------- -------- -------- Total liabilities 351,476 283,280 296,826 Floating rate subordinated debenture (trust preferred securities) 10,000 0 0 Shareholders' equity: Preferred stock - no par value: Authorized, 500,000 shares; Issued and outstanding - none Common stock - no par value: Authorized, 10,000,000 shares; Issued and outstanding - 2,123,687 shares in September 2002, 1,960,902 shares in September, 2001, and 1,960,902 in December, 2001 25,269 21,935 21,973 Retained earnings 7,487 6,526 7,454 Accumulated other comprehensive income 1,696 1,327 553 -------- -------- -------- Total shareholders' equity 34,452 29,788 29,980 Total liabilities and shareholders' equity $395,928 $313,068 $326,806 ======== ======== ======== The accompanying notes are an integral part of these statements 3 North Bay Bancorp Consolidated Income Statements (Unaudited) (In 000's except per share data) Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ------ ------ ------- ------- Interest Income Loans (including fees) $4,290 $3,993 $12,187 $11,374 Federal funds sold 135 298 291 903 Investment securities - taxable 906 869 2,561 2,392 Investment securities - tax exempt 164 164 502 496 ------ ------ ------- ------- Total interest income 5,495 5,324 15,541 15,165 Interest Expense Deposits 859 1,448 2,511 4,650 Short term borrowings 0 0 0 2 Long term debt 153 34 192 141 ------ ------ ------- ------- Total interest expense 1,012 1,482 2,703 4,793 Net interest income 4,483 3,842 12,838 10,372 Provision for loan losses 144 111 432 333 ------ ------ ------- ------- Net interest income after provision for loan losses 4,339 3,731 12,406 10,039 Non interest income 731 547 2,009 1,659 Gains on securities transactions, net 0 0 66 0 ------ ------ ------- ------- Total non interest income 731 547 2,075 1,659 Non interest expenses Salaries and employee benefits 1,978 1,671 5,858 4,621 Occupancy 228 228 680 649 Equipment 450 308 1,392 981 Other 1,041 739 2,589 2,241 ------ ------ ------- ------- Total non interest expense 3,697 2,946 10,519 8,492 ------ ------ ------- ------- Income before provision for income taxes 1,373 1,332 3,962 3,206 Provision for income taxes 446 414 1,380 1,112 ------ ------ ------- ------- Net income $ 927 $ 918 $ 2,582 $ 2,094 ====== ====== ======= ======= Basic earnings per common share: $ 0.44 $ 0.45 $ 1.24 $ 1.02 ====== ====== ======= ======= Diluted earnings per common share: $ 0.43 $ 0.44 $ 1.21 $ 1.01 ====== ====== ======= ======= Dividends Paid $ 0 $ 0 $ .20 $ .20 ====== ====== ======= ======= The accompanying notes are an integral part of these statements 4 North Bay Bancorp Consolidated Statement of Change in Shareholders' Equity For the Nine Months Ended September 30, 2002 (Unaudited except share data) (In 000's) Accumulated Other Total Common Shares Common Retained Comprehensive Shareholders Comprehensive Outstanding Stock Earnings Income Equity Income --------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 1,960,902 $ 21,973 $ 7,454 $ 553 $29,980 Stock dividend 97,408 2,143 (2,157) (14) Cash dividend (392) (392) Comprehensive income: Net income 2,582 2,582 $ 2,582 Other comprehensive loss, net of tax: Change in net unrealized losses on available-for-sale securities, net of tax 1,143 1,143 1,143 ------- Comprehensive income $ 3,725 ======= Stock options exercised 65,377 1,153 1,153 --------- -------- ------- BALANCE, SEPTEMBER 30, 2002 2,123.687 $ 25,269 $ 7,487 $ 1,696 $34,452 ========= ======== ======= ======= ======= The accompanying notes are an integral part of these statements 5 North Bay Bancorp Consolidated Statement of Cash Flows Unaudited (In 000's) Nine Months Ended September 30, 2002 2001 ---- ---- Cash Flows From Operating Activities: Net income $ 2,582 $ 2,094 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,076 774 Provision for loan losses 432 333 Amortization of deferred loan fees (374) (337) Premium amortization (discount accretion), net 672 35 Gain on securities transactions (66) 0 Loss on sale of capital assets 1 0 Changes in: Interest receivable and other assets (2,157) (2,167) Interest payable and other liabilities 838 451 -------- -------- Net cash provided by operating activities 3,004 1,183 -------- -------- Cash Flows From Investing Activities: Investment securities held-to-maturity: Proceeds from maturities and principal payments 42 39 Investment securities available-for-sale: Proceeds from maturities and principal payments 33,577 12,060 Proceeds from sale of securities 5,112 0 Purchases (60,056) (42,936) Equity securities: Proceeds from sale of securities 10 23 Purchases (120) (40) Net increase in loans (35,755) (33,217) Sale of capital assets 1 42 Capital expenditures (2,440) (4,860) -------- -------- Net cash used in investing activities (59,629) (68,889) -------- -------- Cash Flows From Financing Activities: Net increase in deposits 55,658 62,688 Repayment of long-term debt (1,846) (692) Stock options exercised 1,153 196 Proceeds from issuance of Trust Preferred Securities 10,000 0 Dividends paid (406) (383) -------- -------- Net cash provided by financing activities 65,559 61,809 -------- -------- Net increase (decrease) in cash and cash equivalents 7,934 (5,897) Cash and cash equivalents at beginning of year 37,411 25,456 -------- -------- Cash and cash equivalents at end of period $ 45,345 $ 19,559 ======== ======== Supplemental Disclosures of Cash Flow Information: Interest paid $ 2,849 $ 4,496 Taxes paid $ 1,740 $ 851 Retired assets $ 0 $ 139 The accompanying notes are an integral part of these statements 6 NORTH BAY BANCORP Notes to the Consolidated Financial Statements (Unaudited) September 30, 2002 NOTE 1 - Basis of Presentation The accompanying consolidated financial statements, which include the accounts of North Bay Bancorp and its subsidiaries (the "Company"), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in Management's opinion, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of results for such interim periods. The subsidiaries consist of two community banks, The Vintage Bank, established in 1985, and Solano Bank, which was opened July 17, 2000. All significant intercompany transactions and balances have been eliminated. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to SEC rules or regulations; however, the Company believes that the disclosures made are adequate to make the information presented not misleading. The interim results for the nine months ended September 30, 2002 and 2001, are not necessarily indicative of results for the full year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Company's Annual Report for the year ended December 31, 2001. NOTE 2 - Commitments The Company has outstanding standby Letters of Credit of approximately $474,000, undisbursed real estate and construction loans of approximately $16,388,000, and undisbursed commercial and consumer lines of credit of approximately $59,628,000, as of September 30, 2002. NOTE 3 - Earnings Per Common Share The Company declared a 5% stock dividend on January 28, 2002. As a result of the stock dividend the number of common shares outstanding and earnings per share data was adjusted retroactively for all periods presented. The following table reconciles the numerator and denominator of the Basic and Diluted earnings per share computations: Weighted Average Per-Share Net Income Shares Amount ---------- ------ ------ For the three months ended September 30, 2002 --------------------------------------------- Basic earnings per share $927,000 2,116,711 $0.44 Dilutive effect of stock options 46,716 Diluted earnings per share 2,163,427 $0.43 For the three months ended September 30, 2001 --------------------------------------------- Basic earnings per share $918,000 2,056,844 $0.45 Dilutive effect of stock options 22,459 Diluted earnings per share 2,079,303 $0.44 Weighted Average Per-Share Net Income Shares Amount ---------- ------ ------ For the nine months ended September 30, 2002 -------------------------------------------- Basic earnings per share $2,582,000 2,086,493 $1.24 Dilutive effect of stock options 54,669 Diluted earnings per share 2,141,162 $1.21 For the nine months ended September 30, 2001 -------------------------------------------- Basic earnings per share $2,094,000 2,051,537 $1.02 Dilutive effect of stock options 23,247 Diluted earnings per share 2,074,784 $1.01 NOTE 4- Segment Reporting The Company's operating segments consist of its traditional community banking activities provided through its Banks and activities related to the Bancorp. Community banking activities include the Banks' commercial and retail lending, deposit gathering and investment and liquidity management activities. As permitted, the Company has aggregated the results of the separate banks and branches into a single reportable segment, and the Bancorp activities are reported as "Other". The Bancorp provides services such as Data Processing and Management services to the Banks. 7 The components of the Company's business segments for the three months ended September 30, 2002 were as follows: (In 000's) Community Intersegment Banking Other Adjustments Consolidated ------- ----- ----------- ------------ Interest Income $5,482 $13 0 $5,495 Interest Expense 859 153 0 1,012 --- --- - ----- Net Interest Income 4,623 (140) 0 4,483 Provision for loan losses 144 0 0 144 Equity in net income of subsidiaries 0 1,199 (1,199) 0 Noninterest Income 772 1,430 (1,471) 731 Noninterest Expense 3,415 1,753 (1,471) 3,697 ----- ----- ------- ----- Income Before Tax 1,836 736 (1,199) 1,373 Provision for Income Taxes 637 (191) 0 446 --- ----- - --- Net Income $1,199 $927 ($1,199) $927 ------ ---- -------- ---- The components of the Company's business segments for the three months ended September 30, 2001 were as follows: (In 000's) Community Intersegment Banking Other Adjustments Consolidated ------- ----- ----------- ------------ Interest Income $5,324 $0 $0 $5,324 Interest Expense 1,447 35 0 1,482 ----- -- - ----- Net Interest Income 3,877 (35) 0 3,842 Provision for loan losses 111 0 0 111 Equity in net income of subsidiaries 0 1,002 (1,002) 0 Noninterest Income 586 1,282 (1,321) 547 Noninterest Expense 2,886 1,381 (1,321) 2,946 ----- ----- ------- ----- Income Before Tax 1,466 868 (1,002) 1,332 Provision for Income Taxes 464 (50) 0 414 --- ---- - --- Net Income $1,002 $918 ($1,002) $918 ------ ---- -------- ---- The components of the Company's business segments for the nine months ended September 30, 2002 were as follows: (In 000's) Community Intersegment Banking Other Adjustments Consolidated ------- ----- ----------- ------------ Interest Income $15,541 $13 ($13) $15,541 Interest Expense 2,524 192 (13) 2,703 ----- --- ---- ----- Net Interest Income 13,017 (179) 0 12,838 Provision for loan losses 432 0 0 432 Equity in net income of subsidiaries 0 3,089 (3,089) 0 Noninterest Income 2,199 4,172 (4,296) 2,075 Noninterest Expense 9,963 4,852 (4,296) 10,519 ----- ----- ------- ------ Income Before Tax 4,821 2,230 (3,089) 3,962 Provision for Income Taxes 1,732 (352) 0 1,380 ----- ----- - ----- Net Income $3,089 $2,582 ($3,089) $2,582 ------ ------ -------- ------ Assets $389,994 $45,698 ($39,764) $395,928 Loans, Net 219,245 0 0 219,245 Deposits 354,186 0 (6,087) 348,099 Equity 33,677 34,452 (33,677) 34,452 8 The components of the Company's business segments for the nine months ended September 30, 2001 were as follows: (In 000's) Community Intersegment Banking Other Adjustments Consolidated ------- ----- ----------- ------------ Interest Income $15,165 $0 $0 $15,165 Interest Expense 4,652 141 0 4,793 ----- --- - ----- Net Interest Income 10,513 (141) 0 10,372 Provision for loan losses 333 0 0 333 Equity in net income of subsidiaries 0 2,493 (2,493) 0 Noninterest Income 1,783 3,486 (3,610) 1,659 Noninterest Expense 8,081 4,021 (3,610) 8,492 ----- ----- ------- ----- Income Before Tax 3,882 1,817 (2,493) 3,206 Provision for Income Taxes 1,389 (277) 0 1,112 ----- ----- - ----- Net Income $2,493 $2,094 ($2,493) $2,094 ------ ------ -------- ------ Assets $311,711 $32,475 ($31,118) $313,068 Loans, Net 183,229 0 0 183,229 Deposits 281,552 0 (2,226) 279,326 Equity 28,892 29,788 (28,892) 29,788 NOTE 5 - Impact of Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted the provisions of Statement 141 in fiscal year 2001 and Statement 142 effective January 1, 2002. The Company does not have any goodwill and intangible assets acquired in business combinations completed before July 1, 2001. The adoption of Statements No. 141 and 142 did not have a material impact on the financial condition or operating results of the Company. NOTE 6 - Accounting for Asset Retirement Obligations The FASB recently issued Statement No. 143, Accounting for Asset Retirement Obligations in August 2001. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. As a result, FASB Statement No. 143 applies to all entities that have legal obligations associated with the retirement of long-lived tangible assets that result from the acquisition, construction, development or normal use of the asset. As used in this Statement, a legal obligation results from existing law, statute, ordinance, written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppel. Statement No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. Since the requirement is to recognize the obligation when incurred, approaches that have been used in the past to accrue the asset retirement obligation over the life of the asset are no longer acceptable. Statement No. 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) and to depreciate that cost over the remaining useful life of the asset. The liability is changed at the end of each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. Enterprises are required to adopt Statement No. 143 for fiscal years beginning after September 15, 2002. Early adoption is encouraged. The Company does not expect adoption of Statement No. 143 to have a material impact on the financial condition or operating results of the Company. 9 NOTE 7 - Accounting for the Impairment or Disposal of Long-Lived Assets On October 3, 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced management's ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. The Company adopted the provisions of Statement 144 on January 1, 2002. The adoption of Statement No. 144 did not have a material impact on the financial condition or operating results of the Company. NOTE 8 - Rescission of SFAS No. 4, 44, and 64, Amendments of SFAS No. 13, and Technical Corrections Statement Financial Accounting Standards No. 145 rescinds SFAS No. 4, which requires all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion No. 30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has been rescinded. The accounting, disclosure and financial statements provision of SFAS No. 145 are effective for financial statements in fiscal years beginning after May, 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion No. 30 for classification as an extraordinary item shall be reclassified. The implementation of Statement No. 145 is not expected to have a material impact on the financial condition or operating results of the Company. NOTE 9 - Accounting for Costs Associated with Exit or Disposal Activities The FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (SFAS 146), which requires the Company to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of SFAS 146 are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of Statement No. 146 did not have a material impact on the financial condition or operating results of the Company. NOTE 10- Trust Preferred Securities On June 26, 2002, North Bay Statutory Trust I (Trust), a Connecticut statutory business trust and wholly-owned subsidiary of North Bay Bancorp, issued $10 million in floating rate Cumulative Trust Preferred Securities (Securities). The Securities bear a rate of Libor plus 3.45% and have an initial interest rate of 5.34%; the Securities will mature on June 26, 2032, but earlier redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. The principal asset of the trust is a $10,310,000 floating rate subordinated debenture of the Company. The Securities, the subordinated debentures, and the common securities issued by the Trust are redeemable in whole or in part on or after June 26, 2007, or at any time in whole, but not in part, upon the occurrence of certain events. The Securities are included in Tier 1 capital for regulatory capital adequacy determination purposes, subject to certain limitations. The Company fully and unconditionally guarantees the obligations of the Trust with respect to the issuance of the Securities. Subject to certain exceptions and limitations, the Company may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the Securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company's common stock or debt securities that rank junior to the subordinated debentures. NOTE 11 - Acquisitions of Certain Financial Institutions On October 1, the Financial Accounting Standards Board issued Financial Accounting Standard (FAS) Statement No. 147, Acquisitions of Certain Financial Institutions. This Statement brings all business combinations involving financial institutions, except mutuals, into the scope of FAS 141, Business Combinations. FAS 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with FAS 141 and the related intangibles accounted for in accordance with FAS 142, Goodwill and Other Intangible Assets. FAS 147 removes such acquisitions from the scope of FAS 72, Accounting for Certain Acquisitions of Banking or Thrifts Institutions, which was adopted in February 1983 to address financial institutions acquisitions during a period when many of such acquisitions involved "troubled" institutions. 10 FAS 147 also amends FAS 144, Accounting for the Impairment of Disposal of Long-Lived Assets to include in its scope long-term customer-relations intangible assets of financial institutions. FAS 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of FAS 72. 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS In addition to the historical information this Quarterly Report contains certain forward-looking statements. The reader of this Quarterly Report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Company's actual results could differ materially from those suggested by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments, rates paid on deposits, competition effects, fee and other noninterest income earned, the economic uncertainty created by the September 11, 2001 terrorist attacks on the World Trade Center and the United States' war on terrorism, as well as other factors. This entire Quarterly Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company's business. Moreover, wherever phrases such as or similar to "In Management's opinion" "Management considers" are used, such statements are as of and based upon the knowledge of Management at the time made and are subject to change by the passage of time and/or subsequent events, and accordingly such statements are subject to the same risks and uncertainties noted above with respect to forward-looking statements. CRITICAL ACCOUNTING POLICIES In preparing its consolidated financial statements, the Company is required to make judgments and estimates that may have a significant impact upon its financial results. Certain accounting policies require the Company to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and are considered critical accounting policies. The estimates and assumptions used are based on the historical experiences and other factors, which are believed to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions , which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods. The Company's determination of the adequacy of its allowance for loan losses is particularly susceptible to management's judgment and estimates. For further information, see Provision and Allowance for Loan Losses on page 15. OVERVIEW Net income was $927,000 or $.43 per diluted share for the three months ended September 30, 2002, compared with $918,000 or $.44 per diluted share for the three months ended September 30, 2001. Net income was $2,582,000 or $1.21 per diluted share for the nine months ended September 30, 2002, compared with $2,094,000 or $1.01 per diluted share for the nine months ended September 30, 2001, an increase of 23%. Total assets were $395,928,000 as of September 30, 2002; equating to a 26% growth in assets during the twelve months ended September 30, 2002. SUMMARY OF EARNINGS NET INTEREST INCOME The following table provides a summary of the components of interest income, interest expense and net interest margins for the nine months ended September 30, 2002 and September 30, 2001: 12 (In 000's) 2002 2001 ---- ---- Average Income/ Average Average Income/ Average Balance Expense Yield/Rate Balance Expense Yield/Rate ------------------------------------------------------------------------- Loans (1) (2) $206,141 $12,187 7.88% $169,934 $11,374 8.92% Investment securities: Taxable 72,779 2,556 4.68% 53,710 2,387 5.93% Non-taxable (3) 14,109 602 5.69% 13,772 625 6.05% -------- ------- -------- ------- TOTAL LOANS AND INVESTMENT SECURITIES 293,029 15,345 7.98% 237,416 14,386 8.08% Due from banks, time 100 5 6.67% 100 5 6.67% Federal funds sold 24,840 291 1.56% 26,332 903 4.57% -------- ------- -------- ------- TOTAL EARNING ASSETS 317,969 $15,641 6.56% 263,848 $15,294 7.73% -------- ------- -------- ------- Cash and due from banks 19,818 16,389 Allowance for loan losses (2,958) (2,451) Premises and equipment, net 10,410 7,566 Accrued interest receivable and other assets 11,434 6,272 -------- -------- TOTAL ASSETS $356,673 $291,624 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing demand $129,244 $803 0.83% $100,010 $ 1,819 2.43% Savings 24,776 177 0.95% 18,899 180 1.27% Time 76,360 1,531 2.67% 71,401 2,651 4.95% -------- ------- -------- ------- 230,380 2,511 1.45% 190,310 4,650 3.25% Long-term debt 5,290 192 4.84% 2,258 141 8.33% Short-term borrowings 0 0 0.00% 75 2 3.56% -------- ------- -------- ------- 5,290 192 2,333 143 TOTAL INTEREST BEARING LIABILITIES 235,670 $ 2,703 1.53% 192,643 $ 4,793 3.32% -------- ------- -------- ------- Noninterest bearing DDA 86,291 69,267 Accrued interest payable and other liabilities 2,851 1,755 Shareholders' equity 31,861 27,959 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $356,673 $291,624 ======== ======== NET INTEREST INCOME $12,938 $10,501 ======= ======= NET INTEREST INCOME TO AVERAGE EARNING ASSETS (Net Interest Margin (4)) 5.43% 5.31% (1) Average loans would include nonaccrual loans. The Company had no nonaccrual loans during 2002 or 2001. (2) Loan interest income includes loan fee income of $881 in 2002 and $723 in 2001 for the nine months ended September 30, 2002 and September 30, 2001, respectfully. (3) Average yields shown are taxable-equivalent. On a non- taxable basis, 2002 interest income was $502 with an average yield of 4.74%; in 2001 non-taxable income was $496 and the average yield was 4.80%. (4) Net interest margin is calculated by dividing net interest income by the average balance of total earning assets for the applicable period. 13 Net interest income represents the amount by which interest earned on earning assets (primarily loans and investments) exceeds the amount of interest paid on deposits. Net interest income is a function of volume, interest rates and level of non-accrual loans. Non-refundable loan origination fees are deferred and amortized into income over the life of the loan. Net interest income before the provision for loan losses on a taxable-equivalent basis for the three months ended September 30, 2002 and September 30, 2001 was $4,515,000 and $3,883,000, respectively. These results equate to a 16% increase in net interest income for the third quarter of 2002 compared to the third quarter of 2001. Loan fee income, which is included in interest income from loans, was $318,000 for the three months ended September 30, 2002, compared with $271,000 for the three months ended September 30, 2001. Net interest income before the provision for loan losses on a taxable-equivalent basis for the nine months ended September 30, 2002 and September 30, 2001 was $12,938,000 and $10,501,000, respectively. These results equate to a 23% increase in net interest income for the first nine months of 2002 compared to the same period in 2001. Loan fee income, which is included in interest income from loans, was $881,000 for the nine months ended September 30, 2002, compared with $723,000 for the nine months ended September 30, 2001. Taxable-equivalent interest income increased $162,000 or 3% in the third quarter of 2002 compared with the same period of 2001. The net increase of $162,000 was attributed to an increase in the volume of earning assets accounting for $1,081,000 of this increase, offset by a decrease of $919,000 attributable to lower rates. Interest paid on interest-bearing liabilities decreased $589,000 in the third quarter of 2002 compared with the third quarter of 2001. Although increases in the volume of deposits and other borrowings accounted for an increase of $206,000 it was offset by $795,000 attributed to lower rates. The average balance of earning assets increased $54,121,000 or 21% during the twelve months ended September 30, 2002. Taxable-equivalent interest income increased $347,000 or 2% in the first nine months of 2002 compared with the same period of 2001. The net increase of $347,000 was attributed to an increase in the volume of earning assets accounting for $3,230,000 of this increase, offset by a decrease of $2,883,000 attributable to lower rates. The average balance of interest-bearing liabilities increased $43,027,000 or 22% during the first nine months of 2002 compared with the same period in 2001. Interest paid on interest-bearing liabilities decreased $2,090,000 in 2002 compared with 2001. Although increases in the volume of deposits and other borrowings accounted for an increase of $563,000 it was offset by $3,053,000 attributed to lower rates. Management does not expect a material change in the Company's net interest margin during the next twelve months as the result of a modest increase or decrease in general interest rates. 14 The following table sets forth a summary of the changes in interest earned and interest paid for the first nine months in 2002 over 2001 resulting from changes in assets and liabilities volumes and rates. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each. (In 000's) 2002 Over 2001 -------------- Volume Rate Total ------- ------- ------- Increase (Decrease) In Interest and Fee Income Time Deposits With Other Financial Institutions $ 0 $ 0 $ 0 Investment Securities: Taxable 850 (681) 169 Non-Taxable (1) 15 (38) (23) Federal Funds Sold (52) (560) (612) Loans 2,417 (1,604) 813 ------- ------- ------- Total Interest and Fee Income 3,230 (2,883) 347 ------- ------- ------- Increase (Decrease) In Interest Expense Deposits: Interest Bearing Transaction Accounts 536 (1,552) (1,016) Savings 56 (59) (3) Time Deposits 184 (1,304) (1,120) ------- ------- ------- Total Deposits 776 (2,915) (2,139) Long-term Debt 189 (138) 51 Short-term Borrowings (2) 0 (2) ------- ------- ------- Total Interest Expense 963 (3,053) (2,090) ------- ------- ------- Net Interest Income $ 2,267 $ 170 $ 2,437 ======= ======= ======= (1) The interest earned is taxable-equivalent. PROVISION AND ALLOWANCE FOR LOAN LOSSES The Company maintains an allowance for loan losses at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by the provision for loan losses and reduced by net charge offs. The allowance for loan losses is based on estimates, and ultimate losses may vary from current estimates. These estimates are reviewed periodically and as adjustments become necessary they are reported in earnings in the periods in which they become known. The Company conducts credit reviews of the loan portfolio and considers current economic conditions, historical loan loss experience and other factors in determining the adequacy of the allowance balance. This evaluation establishes a specific allowance for all classified loans over $50,000 and establishes percentage allowance requirements for all other loans, according to the classification as determined by the Company's internal grading system. As of September 30, 2002 the allowance for loan losses of $3,143,000 represented 1.41% of loans outstanding. As of September 30, 2001, the allowance represented 1.40% of loans outstanding. During the nine months ended September 30, 2002, $432,000 was charged to expense for the loan loss provision, compared with $333,000 for the same period in 2001. Net charge-offs during the first nine months of 2002 was $6,000, or .003% of loans outstanding, compared with no net charge-offs for the first nine months of 2001. The Company had no restructured loans at September 30, 2001 or 2002. 15 The following table summarizes changes in the allowance for loan losses: (In 000's) September 30, 2002 September 30, 2001 Balance, beginning of period $ 2,717 $ 2,268 Provision for loan losses 432 333 Loans charged off (10) (5) Recoveries of loans previously charged off 4 5 ------- ------- Balance, end of period $ 3,143 $ 2,601 ======= ======= Allowance for loan losses to total outstanding loans 1.41% 1.40% There were no loans on non-accrual status as of September 30, 2002, September 30, 2001 or December 31, 2001. NON-INTEREST INCOME Non-interest income, exclusive of gains on securities transactions, was $731,000 for the three months ended September 30, 2002 compared with $547,000 for the same period in 2001, a 34% increase. Non-interest income, exclusive of gains on securities transactions, was $2,009,000 for the nine months ended September 3, 2002 compared with $1,659,000 for the same period in 2001, a 21% increase. Non-interest income primarily consists of service charges and other fees related to deposit accounts. The increase in non-interest income resulted primarily from an increase in the number of deposit accounts, transaction volumes and directly related service charges. GAINS ON SECURITIES Net gain of $66,000 for the nine months ended September 30, 2002 resulted from the sale of several available-for-sale securities. There were no gains or losses on securities for the three months ended September 30, 2002 or 2001 and no gains or losses on securities during the nine months ended September 30, 2001. NON-INTEREST EXPENSE Non-interest expense for the three months ended September 30, 2002 and September 30, 2001 was $3,697,000 and $2,946,000, respectively, a 25% increase. Non-interest expense for the nine months ended September 30, 2002 and September 30, 2001 was $10,519,000 and $8,492,000, respectively, a 24% increase. The increase compared with the prior reporting period is primarily due to the Company opening two new branch offices during the first quarter of 2002. Salaries and employee benefits expense for the three months ended September 30, 2002 and 2001 were $1,978,000 and $1,671,000, respectively, an 18% increase. Salaries and employee benefits expense for the nine months ended September 30, 2002 and 2001 were $5,858,000 and $4,621,000, respectively, a 27% increase. The increase in 2002 resulted from increased salaries paid to Company officers and employees, and an increase of approximately eleven full-time equivalent employees from 125 at September 30, 2001 to 136 at September 30, 2002. The Company continued to strengthen its management team by hiring nine additional managers during the first nine months of 2002. Occupancy expense for the three months ended September 30, 2002 and 2001 was $228,000. Occupancy expense for the nine months ended September 30, 2002 and 2001 were $680,000 and $649,000, respectively, representing a 5% increase. The increase in 2002 is attributed to opening two branch offices in January 2002, offset by rental income from leases at the Vacaville property, which was purchased by Solano Bank mid-2001. The Company had six branch offices at September 30, 2001 compared with eight at September 30, 2002. Equipment expenses for the three months ended September 30, 2002 and 2001 was $450,000 and $308,000, respectively, representing an increase of 46%. Equipment expenses for the nine months ended September 30, 2002 and 2001 was $1,392,000 and $981,000, respectively, an increase of 42%. The increase was primarily due to an increase in depreciation expense resulting from accelerated depreciation on the host banking system, which was replaced in 2002, as well as furniture and equipment depreciation expenses of the two new branch offices. Other expenses for the three months ended September 30, 2002 and September 30, 2001 were $1,041,000 and $739,000, respectively, approximately a 41% increase. Other expenses for the nine months ended September 30, 2002 and September 30, 2001 were $2,589,000 and $2,241,000, respectively, a 15% increase. The increase from last year is primarily due to expenses associated with listing on Nasdaq and costs associated with operating eight branch offices in 2002 in comparison to six in 2001. INCOME TAXES The Company reported a provision for income tax for the three months ended September 30, 2002 and 2001 of $446,000 and $414,000, respectively. The Company reported a provision for income tax for the nine months ended September 30, 2002 and 2001 of $1,380,000 and $1,112,000, respectively. Both the 2002 and 2001 provisions reflect tax accruals at statutory rates for both federal and state income taxes, adjusted primarily for the effect of the Company's investments in tax-exempt municipal securities and bank owned life insurance policies. BALANCE SHEET Total assets as of September 30, 2002 were $395,928,000 compared with $313,068,000 as of September 30, 2001, and $326,806,000 at December 30, 2001 equating to a 26% increase during the twelve months ended September 30, 2002, and a 21% increase for the nine months ended September 30, 2002. Total deposits as of September 30, 2002 were $348,099,000 compared with $279,326,000 as of September 30, 2001, and $292,441,000 at December 30, 2001 representing a 25% increase during the twelve months then ended, and a 19% increase for the nine months ended September 30, 2002. Loans outstanding as of September 30, 2002 were $222,658,000 compared with $185,830,000 as of September 30, 2001, and $186,265,000 at December 30, 2001 equating to a 20% increase during the twelve months then ended and a 20% increase for the nine months ended September 30, 2002. 16 TRUST PREFERRED SECURITIES On June 26, 2002, North Bay Statutory Trust I (Trust), a Connecticut statutory business trust and wholly-owned subsidiary of North Bay Bancorp, issued $10 million in floating rate Cumulative Trust Preferred Securities (Securities). The Securities bear a rate of Libor plus 3.45% and have an initial interest rate of 5.34%; the Securities will mature on June 26, 2032, but earlier redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. The principal asset of the trust is a $10,310,000 floating rate subordinated debenture of the Company. The Securities, the subordinated debentures, and the common securities issued by the Trust are redeemable in whole or in part on or after June 26, 2007, or at any time in whole, but not in part, upon the occurrence of certain events. The Securities are included in Tier 1 capital for regulatory capital adequacy determination purposes, subject to certain limitations. The Company fully and unconditionally guarantees the obligations of the Trust with respect to the issuance of the Securities. Subject to certain exceptions and limitations, the Company may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the Securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company's common stock or debt securities that rank junior to the subordinated debentures. BORROWINGS The Company had a $3,000,000 unsecured loan with Union Bank of California that was to mature in 2003 with principal and interest payments due quarterly. The loan was a variable rate loan tied to Union Bank's reference rate. The Company paid the loan in full in June, 2002 with the proceeds of the Trust Preferred Securities. LIQUIDITY AND CAPITAL ADEQUACY The Company's liquidity is determined by the level of assets (such as cash, Federal Funds, and investment in unpledged marketable securities) that are readily convertible to cash to meet customer withdrawals and borrowings. Management reviews the Company's liquidity position on a regular basis to ensure that it is adequate to meet projected loan funding and potential withdrawal of deposits. The Company has a comprehensive Asset/Liability Management and Liquidity Policy, which it uses to determine adequate liquidity. As of September 30, 2002 liquid assets were 38% of total assets, compared with 35% as of September 30, 2001. Bancorp is primarily dependent on the funds received from Management Fees charged to the subsidiary Banks' and the proceeds of the Trust Preferred Securities to service its commitments and capital purchases. The Federal Deposit Insurance Corporation Improvement Act (FDICA) established ratios used to determine whether a Company is "Well Capitalized," "Adequately Capitalized," "Undercapitalized," "Significantly Undercapitalized," or "Critically Undercapitalized." A Well Capitalized Company has risk-based capital of at least 10%, tier 1 risked-based capital of at least 6%, and a leverage ratio of at least 5%. As of September 30, 2002, the Company's risk-based capital ratio was 15.18%. The Company's tier 1 risk-based capital ratio and leverage ratio were 14.14% and 11.42%, respectively. As the following table indicates, the Bank currently exceeds the regulatory capital minimum requirements. The Bank is considered "Well Capitalized" according to regulatory guidelines. To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------------- (In 000's) Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 2002: Total Capital (to Risk Weighted Assets) Consolidated $45,899 15.18% $24,183 >8.00% $30,229 >10.00% - - The Vintage Bank 27,443 10.97% 20,016 >8.00% 25,020 >10.00% - - Solano Bank 7,713 15.96% 3,866 >8.00% 4,833 >10.00% - - Tier I Capital (to Risk Weighted Assets) Consolidated 42,756 14.14% 12,092 >4.00% 18,137 >6.00% - - The Vintage Bank 24,574 9.82% 10,008 >4.00% 15,012 >6.00% - - Solano Bank 7,439 15.39% 1,933 >4.00% 2,900 >6.00% - - Tier I Capital (to Average Assets) Consolidated 42,756 11.42% 14,970 >4.00% 18,713 >5.00% - The Vintage Bank 24,574 7.79% 12,619 >4.00% 15,774 >5.00% - - Solano Bank 7,439 12.66% 2,351 >4.00% 2,939 >5.00% - - 17 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. Although the Company manages other risks, as in credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be principally a market risk. Other types of market risks, such as foreign currency exchange rate risk, do not arise in the normal course of the Company's business activities. The majority of the Company's interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. They include loans, securities available-for-sale, deposit liabilities, short-term borrowings and long-term debt. Interest rate risk occurs when assets and liabilities reprice at different times as interest rate changes. The Company manages interest rate risk through its Audit Committee. The Audit Committee monitors exposure to interest rate risk on a quarterly basis using both a traditional gap analysis and simulation analysis. Traditional gap analysis identifies short and long-term interest rate positions or exposure. Simulation analysis uses an income simulation approach to measure the change in interest income and expense under rate shock conditions. The model considers the three major factors of (a) volume differences, (b) repricing differences and (c) timing in its income simulation. The model begins by disseminating data into appropriate repricing buckets based on internally supplied algorithms (or overridden by calibration). Next, each major asset and liability type is assigned a "multiplier" or beta to simulate how much that particular balance sheet category type will reprice when interest rates change. The model uses eight asset and liability multipliers consisting of bank-specific or default multipliers. The remaining step is to simulate the timing effect of assets and liabilities by modeling a month-by-month simulation to estimate the change in interest income and expense over the next 12-month period. The results are then expressed as the change in pre-tax net interest income over a 12-month period for +1%, and +2% shocks. Utilizing the simulation model to measure interest rate risk at September 30, 2002 and December 31, 2001 the Company is within the established exposure of a 4% change in "return on equity" tolerance limit. There were no significant changes in interest rate risk from the annual report on form 10-K for December 31, 2001. Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures: Based on their evaluation as of a date within 90 days of the filing of this Form 10-Q, the company's Chief Executive Officer and Chief Financial Officer have concluded that the company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the company's internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation. Changes in Internal Controls: There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. We are not aware of any significant deficiencies or material weaknesses, therefore no corrective actions were taken. 18 PART II - OTHER INFORMATION OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On or about September 17, 2002, the Company filed an answer and counterclaims against Open Solutions, Inc. ("OSI") in the United States District Court, District of Connecticut (Civil Action No. 302CV1284 JCH). The answer denies the allegations contained in the complaint filed by OSI and the counterclaim is for deceit/misrepresentation, breach of contract, breach of the implied covenant of good faith and fair dealing, false advertising, unfair and deceptive business acts or practices, and breach of warranty. The Company seeks monetary damages in excess of $970,000, exemplary and punitive damages, and recovery of costs and fees. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) On October 28, 2002, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, no par value (the "Common Shares"), of the Company. The dividend is payable on November 15, 2002 (the "Record Date") to the shareholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share (a "Unit") of Series A Preferred Stock, no par value (the Preferred "Stock") of the Company, at a price of $90.00 per Unit Share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and Registrar and Transfer Company as Rights Agent (the "Rights Agent"). Until the earliest to occur of (a) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership or record ownership of 10% or more of the outstanding Common Shares; (b) 10 days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership or record ownership by a person or group of 10% or more of such outstanding Common Shares; or (c) the date a person or group of affiliated or associated persons is or becomes the beneficial or record owner of 10% or more of the outstanding Common Shares and (i) the actions such person proposes to take are likely to have a material adverse impact on the business or prospects of the Company; (ii) such person intends to cause the Company to repurchase the Common Shares owned by such person; (iii) such person exercises or attempts to exercise a controlling influence over the Company; or (iv) such person transfers all or a portion of such Common Shares in a manner that results in a person owning 9.9% or more of the Common Shares (an "Adverse Person") (the earliest of such dates being called the "Distribution Date"), the Rights will be evidenced, with respect to any of the Common Share certificates outstanding as of the Record Date, by such Common Share certificate with a copy of this Summary of Rights attached thereto. The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with the Common Shares. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Share certificates issued after the Record Date, upon transfer or new issuance of Common Shares will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for Common Shares, outstanding as of the Record Date, even without such notation or a copy of this Summary of Rights being attached thereto, will also constitute the transfer of the Rights associated with the Common Shares represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Shares as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire on October 28, 2012 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed by the Company, in each case, as described below. The Purchase Price payable, and the number of Units of Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) upon the grant to holders of the Units of Preferred Stock of certain rights or warrants to subscribe for or purchase Preferred Stock at a price, or securities convertible into Preferred Stock with a conversion price, less than the then current market price of the Preferred Stock or (iii) upon the distribution to holders of the Units of Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Preferred Stock) or of subscription rights or warrants (other than those referred to above). In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that any Person becomes an Acquiring Person or an Adverse Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person or Adverse Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of Units of Preferred Stock having a 19 market value of two times the exercise price of the Right, but in no event will the purchase price per share be less than the par value of the Preferred Stock. At any time after the date an Acquiring Person obtains 10% or more of the Company's Common Shares and prior to the acquisition by the Acquiring Person of 50% of the outstanding Common Shares, the Company's Board of Directors may exchange the Rights (other than Rights owned by the Acquiring Person or its affiliates), in whole or in part, for Common Shares at an exchange ratio of one Common Share per Right (subject to adjustment for stock splits, stock dividends and or similar transactions which occur after the date of the Rights Agreement). With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional Units of Preferred Stock (other than fractions which are integral multiples of one one-hundredth) will be issued and in lieu thereof, an adjustment in cash will be made based on the market price of the Units of Preferred Stock on the last trading day prior to the date of exercise. At any time prior to the date a Person becomes an Acquiring Person or an Adverse Person, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.001 per Right (the "Redemption Price"). Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, including an amendment to extend the Final Expiration Date and, provided there is no Acquiring Person or Adverse Person, to extend the period during which the Rights may be redeemed, except that from and after such time as any person becomes an Acquiring Person or an Adverse Person no such amendment may adversely affect the interests of the holders of the Rights. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the, Company's Board of Directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors because the Rights may be redeemed by the Company at the Redemption Price prior to the occurrence of a Distribution Date. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) An index of exhibits begins on page 23. (b) On July 12, 2002 the Company filed a Current Report on Form 8-K, reporting that the Company issued a press release announcing the completion of a $10 million participation in a trust preferred pooled transaction. On July 29, 2002 the Company filed a Current Report on Form 8-K, reporting the issuance of a press release announcing the Company's earnings for the quarter ended June 30, 2002. On August 28, 2002 the Company filed a Current Report on Form 8-K, reporting that the Company issued a press release announcing its Stock Repurchase Program and its listing on the Nasdaq National Market. No Financial statements were filed with any of the Current Report on Form 8-K. 20 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTH BAY BANCORP A California Corporation Date: November 8, 2002 BY:/s/ Terry L. Robinson --------------------------------- Terry L. Robinson President & CEO Principal Executive Officer Date: November 8, 2002 BY:/s/ Lee-Ann Cimino --------------------------------- Lee-Ann Cimino Senior Vice President Principal Financial Officer 21 CERTIFICATION I, Terry L. Robinson, certify that: 1. I have reviewed this quarterly report on form 10-Q of North Bank Bancorp; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly presents in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly period. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13-a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or if other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 BY:/s/ Terry L. Robinson --------------------------------- Terry L. Robinson President & CEO Principal Executive Officer 22 CERTIFICATION I, Lee-Ann Cimino, certify that: 1. I have reviewed this quarterly report on form 10-Q of North Bank Bancorp; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly presents in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly period. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13-a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or if other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 BY:/s/ Lee-Ann Cimino --------------------------------- Lee-Ann Cimino Senior Vice President & Chief Financial Officer Principal Financial Officer 23 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 4.1 Rights Agreement, dated as of October 24, 20002, between the Company and Registrar and Trans Company, as Rights Agent. (1) 4.2 Certificate of Determination for the Series A Preferred Stock (attached as Exhibit A to Rights Agreement). (1) 4.3 Rights Certificate (attached as Exhibit B to Rights Agreement.). Printed Rights Agreement will not be mailed until the Distribution Date as defined therein. (1) 4.4 Summary of Rights to Purchase Preferred Shares (attached as Exhibit C to Rights Agreement). (1) 11 Statement re: computation of per share earnings is included in Note 3 to the unaudited condensed consolidated financial statements of Registrant. 99.1 Certificate of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 99.2 Certificate of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (1) Filed as Exhibits 4.1, 4.2, 4.3, and 4.4, respectively, to Form 8-A Registration Statement filed by North Bay Bancorp with the SEC on October 31, 2002 and incorporated herein by reference.