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 FOR the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 0-31080
NORTH BAY BANCORP
-----------------
(Name of Registrant in its Charter)
California 68-0434802
(State or Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
1190 Airport Road, Suite 101, Napa, California 94558
----------------------------------------------------
(Address of principal office including Zip Code)
Issuer'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
-------------------------------
Check whether the issuer (1) 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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of Common Stock held by non-affiliates of North
Bay Bancorp as of June 30, 2002: $44,054,554.
State the number of shares of the North Bay Bancorp's Common Stock outstanding
as of March 10, 2003: 2,136,563
Documents Incorporated by Reference:
- ------------------------------------
2002 Annual Report to Stockholders. Part II, Items 6 and 7 and Part III,
Item 13
Proxy Statement for 2003 Annual Meeting Part III, Items 9, 10, 11 and 12
of Shareholders to be filed pursuant to
Regulation 14A.
TABLE OF CONTENTS
PART I
Item 1 - Business 3
Item 2 - Properties 29
Item 3 - Legal Proceedings 31
Item 4 - Submission of Matters to a Vote of Security Holders 31
PART II
Item 5 - Market for the Company's Common Stock and Related Security Holder Matters 32
Item 6 - Selected Financial Data 33
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 33
Item 7A - Quantitative and Qualitative Disclosure about Market Risk 33
Item 8 - Financial Statements and Supplementary Data 35
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35
PART III
Item 10 - Directors, Executive Officers, Promoters and Control Persons Compliance
with Section 16(a) of the Exchange Act 35
Item 11 - Executive Compensation 35
Item 12 - Security Ownership of Certain Beneficial Owners and Management 35
Item 13 - Certain Relationships and Related Transactions 36
Item 14 - Controls and Procedures 36
PART IV
Item 15 - Exhibits and Reports on Form 8-K 37
2
FORWARD LOOKING STATEMENTS
In addition to the historical information, this Annual Report contains certain
forward-looking information within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the "Safe Harbor" created by those Sections. The
reader of this Annual 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 regulation; (iv) adverse
conditions and volatility, including 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, the war in Iraq, in the
stock market, the public debt market and other capital markets and the impact of
such conditions on the Company; (v) continued changes in the interest rate
environment may reduce interest margins and adversely impact net interest
income; (vi) as well as other factors. This entire Annual 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.
PART I
Item 1 - Business
North Bay Bancorp
General
North Bay Bancorp (Bancorp), headquartered in Napa, California, is a California
corporation incorporated in 1999. Bancorp is the Holding Company for The Vintage
Bank and Solano Bank (Banks) and North Bay Statutory Trust 1, which are wholly
owned subsidiaries, collectively (the Company). North Bay Statutory Trust 1 was
formed in June 2002 for the purpose of issuing trust preferred securities.
Bancorp is a registered financial holding company under the Bank Holding Company
Act of 1956, as amended, and is subject to the regulations of, and examination
by, the Board of Governors of the Federal Reserve System. At present, Bancorp
does not engage in any material business activities other than the ownership of
the Banks.
3
The Vintage Bank
General
The Vintage Bank is a California corporation organized as a state chartered bank
in 1984. The Vintage Bank engages in commercial banking business in Napa County
from its main banking office located at 1500 Soscol Avenue in Napa, California.
The Vintage Bank has four other banking offices; one located at 3271 Browns
Valley Road, Napa, California, one at 3626 Bel Aire Plaza, Napa, California, one
located at 1065 Main Street, St. Helena, California and one at 1190 Airport
Road, Napa, California. Automated teller machines are located at all offices and
at Ranch Market Too in Yountville, providing 24-hour service. The Vintage Bank
is a member of the STAR, VISA and PLUS ATM networks, providing customers with
access to Point of Sale and ATM service worldwide. The Vintage Bank offers its
customers Internet banking services; this service supports account inquiries,
transfers between accounts, and automatic reconciliation and bill payment
services. The Vintage Bank is a member of the Federal Reserve System. The
deposits of each depositor of The Vintage Bank are insured by the Federal
Deposit Insurance Corporation up to the maximum allowed by law.
The Vintage Bank offers a full range of commercial banking services to
individuals and the business and agricultural communities in Napa County. The
Vintage Bank emphasizes retail commercial banking operations. The Vintage Bank
accepts checking and savings deposits, makes consumer, commercial, construction
and real estate loans, and provides other customary banking services. The
Vintage Bank does not offer trust services and does not plan to do so in the
near future. There have been no material changes in services offered by The
Vintage Bank. The Vintage Bank makes annuities and mutual funds available to its
customers through Protective Financial and Insurance Services, Inc. (PFIS) and
one of PFIS affiliate's, ProEquities, Inc.
Solano Bank
General
Solano Bank is a California corporation organized as a state chartered bank in
2000. Solano Bank engages in commercial banking business in Solano County from
its main banking office located at 403 Davis Street in Vacaville, California.
Solano Bank has three other banking offices; one located at 1100 Texas Street,
Fairfield, California, one at 1395 E. Second Street, Benicia, California, and
one located at 976-A Admiral Callaghan Lane, Vallejo, California. Automated
teller machines are located at all offices, providing 24-hour service. Solano
Bank is a member of the STAR, VISA and PLUS ATM networks, providing customers
with access to Point of Sale and ATM service worldwide. Solano Bank offers its
customers Internet banking services; this service supports account inquiries,
transfers between accounts, and automatic reconciliation and bill payment
services. Solano Bank is a member of the Federal Reserve System. The deposits of
each depositor of Solano Bank are insured by the Federal Deposit Insurance
Corporation up to the maximum allowed by law.
Solano Bank offers a full range of commercial banking services to individuals
and the business and agricultural communities in Solano County. Solano Bank
emphasizes retail commercial banking operations. Solano Bank accepts checking
and savings deposits, makes consumer, commercial, construction and real estate
loans, and provides other customary banking services. Solano Bank does not offer
trust services and does not plan to do so in the near future.
4
Solano Bank makes annuities and mutual funds available to its customers through
an unaffiliated corporation, Raymond James Financial Services.
Website Access to Reports
The Company maintains the following websites, www.northbaybancorp.com,
www.vintagebank.com and www.solanobank.com. The Company makes available, free of
charge, on its www.northbaybancorp.com website the annual report on Form 10-K,
the quarterly reports on Form 10-Q and current reports on Form 8-K as soon as
reasonably practical after we file such reports with the Securities & Exchange
Commission. Each of the Banks' websites have an investor relations page that
hyperlinks to the Bancorp website.
Consolidated Lending Activities
The Banks concentrate their lending activities in commercial, installment,
construction, and real estate loans made primarily to businesses and individuals
located in Napa and Solano Counties. At December 31, 2002, total loans
outstanding were $237,627,321 resulting in a loan-to-deposit ratio of 64.6%. At
December 31, 2001, total loans outstanding were $186,265,550 resulting in a
loan-to-deposit ratio of 63.7%.
As of December 31, 2002, The Vintage Bank's loan limits to individual customers
were $3,892,000 for unsecured loans and $10,380,000 for unsecured and secured
loans combined. Solano Bank loan limits to individual customers were $1,120,000
for unsecured loans and $2,987,000 for unsecured and secured loans combined. As
of December 31, 2001, The Vintage Bank's lending limits were $3,181,000 for
unsecured loans and $8,483,000 for unsecured and secured loans combined. Solano
Bank lending limits were $1,156,000 for unsecured loans and $3,984,000 for
unsecured and secured loans combined. For customers desiring loans in excess of
the Bank's lending limits, the Banks may loan on a participation basis with
another bank taking the amount of the loan in excess of Banks' lending limits.
At December 31, 2002, the Banks' commercial loans outstanding totaled
$46,060,599 (19.4% of total loans), commercial loans secured by real estate
totaled $16,991,592 (7.2% of total loans), construction loans totaled
$19,305,902 (8.1% of total loans), real estate loans totaled $131,166,687 (55.2%
of total loans), and installment loans totaled $24,102,541 (10.1% of total
loans). At December 31, 2001, commercial loans outstanding totaled $29,730,027
(16.0% of total loans), commercial loans secured by real estate totaled
$7,930,041 (4.3% of total loans), construction loans totaled $21,453,418 (11.5%
of total loans), real estate loans totaled $106,850,930 (57.3% of total loans)
and installment loans totaled $20,301,134 (10.9% of total loans). At December
31, 2000, commercial loans outstanding totaled $28,599,887 (18.8% of total
loans), commercial loans secured by real estate totaled $5,114,931 (3.3% of
total loans), construction loans totaled $8,242,918 (5.4% of the total loans),
real estate loans totaled $86,886,297 (57.1% of total loans), and installment
loans totaled $23,431,838 (15.4% of total loans).
As of December 31, 2002, the total of undisbursed loans and similar commitments
was $84,564,000 as contrasted with $59,692,000 as of December 31, 2001 and
$53,317,000 as of December 31, 2000. The Banks expect all but approximately
$729,000 of their undisbursed loans and similar commitments to be exercised
during 2003. The Banks take real estate, listed securities, savings and time
deposits, automobiles, machinery and equipment, inventory and accounts
receivable as collateral for loans.
5
The interest rates charged for the various loans made by the Banks vary with the
degree of risk and the size and maturity of the loans involved and are generally
affected by competition and by current money market rates.
Commercial Loans
The Banks make commercial loans primarily to professionals, individuals and
businesses in the Counties of Napa and Solano. The Banks offer a variety of
commercial lending products, including revolving lines of credit, working
capital loans, equipment financing and issuance of letters of credit. Typically,
lines of credit have a floating rate of interest based on the Banks' Base Rate
and are for a term of one year or less. Working capital and equipment loans have
a floating or a fixed rate typically with a term of five years or less.
Approximately 73% of the Banks' commercial loans are unsecured or secured by
personal property and, therefore, represent a higher risk of ultimate loss than
loans secured by real estate. However, as a result of the lending policies and
procedures implemented by the Company, management believes it has adequate
commercial loan underwriting and review procedures in place to manage the risks
inherent in commercial lending. In addition, commercial loans not secured by
real estate typically require higher quality credit characteristics to meet
underwriting requirements. The remaining 27% of the Banks' commercial loans are
secured by real estate.
Real Estate Loans
Real estate loans consist of loans secured by deeds of trust on residential and
commercial properties. The purpose of these loans is to purchase real estate or
refinance an existing real estate loan, as compared with real estate secured
commercial loans, which have a commercial purpose unrelated to the purchase or
refinance of the real estate taken as collateral. The Banks' real estate loans
bear interest at rates ranging from 4.75% to 11.00% and have maturities of
thirty years or less.
The Banks originate and service residential mortgage loans. Most of the
residential mortgage loans originated by the Banks are sold to institutional
investors according to their guidelines. Servicing of these loans is not
retained by the Banks, however the Banks do receive a loan fee.
Real Estate Construction Loans
The Banks' make loans to finance the construction of commercial, industrial and
residential projects and to finance land development. The Banks portfolio is
diversified between the categories of residential, spec, and commercial
construction. This segment of the portfolio represents less than 100% of
combined capital and does not require additional monitoring. Construction loans
typically have maturities of less than one year, have a floating rate of
interest based on Bank's base rate and are secured by first deeds of trust.
Generally, the Banks' do not extend credit in an amount greater than 50% of the
appraised value of the real estate securing land and land development loans, or
in an amount greater than 70% of the appraised value of the real estate securing
non-owner occupied residential construction loans and commercial constructions,
or 80% of the appraised value in the case of owner occupied residential
construction loans. Commercial loans secured by real estate are generally
granted in an amount no greater than 75% of the appraised value.
Installment Loans
Installment loans are made to individuals for household, family and other
personal expenditures. These loans typically have fixed rates and have
maturities of five years or less.
Lending Policies and Procedures
The Banks' lending policies and procedures are established by senior management
of the Company and are approved by the Boards of Directors of Bancorp, The
Vintage Bank and Solano Bank. The Boards of Directors have established
6
internal procedures, which limit loan approval authority of the Banks' loan
officers. The Board of Directors of each bank has delegated some lending
authority to executive and loan officers and an internal loan committee
consisting of two executive officers and selected loan officers.
The Directors' Loan Committee of each Bank must approve all new loans and loan
renewals in excess of specified amounts (excluding savings secured, which is
unlimited in amount). For The Vintage Bank this includes any loan in excess of
$1,000,000 if secured by a residential first deed of trust or $1,500,000 if
secured by a commercial first deed of trust, $900,000 if secured by a second
deed of trust on residential, and $600,000 if secured by a second deed of trust
on commercial, $700,000 if unsecured or secured by equipment, receivables,
inventory, or other personal property. The Vintage Bank has established
individual limits of up to $700,000 for equipment leases.
For Solano Bank this includes any loan in excess of $400,000 if secured by a
residential first deed of trust or $300,000 if secured by a commercial first
deed of trust, $300,000 if secured by a residential second deed of trust,
$150,000 is unsecured or secured by equipment, receivables, inventory, or other
personal property. Solano Bank has also established individual approval limits
of up to $400,000 for equipment leases. Further, the Directors Loan Committee
must approve any loan not substantially conforming to written loan policy.
Loans to directors and executive officers of the Banks or their affiliates must
be approved in all instances by a majority of the Board of Directors. In
accordance with law, directors and officers are not permitted to participate in
the discussion of or to vote on loans made to them or their related interests.
In addition, loans to directors and officers must be made on substantially the
same terms, including interest rates and collateral requirements, as those
prevailing for comparable transactions with other nonaffiliated persons at the
time each loan was made, subject to the limitations and other provisions in
California and Federal law. These loans also must not involve more than the
normal risk of collectibility or present other unfavorable terms.
Consolidated Deposits
Napa County and "south-central" Solano County currently constitutes the
Company's primary service areas and most of the Banks' deposits are attracted
from these areas. No material portion of the Banks' deposits have been obtained
from a single person or a few persons, the loss of any one or more of which
would have a material adverse effect on the business of the Banks. Total
deposits as of December 31, 2002 were $367,803,202. Total deposits as of
December 31, 2001 were $292,441,196. The Banks offer courier service in both
Napa County and Solano County.
Business Hours
In order to attract loan and deposit business, both The Vintage Bank and Solano
Bank maintain lobby hours at their Main Offices between 9:00 a.m. and 5:00 p.m.
Monday through Thursday, between 9:00 a.m. and 6:00 p.m. on Friday, and between
9:00 a.m. and 1:00 p.m. on Saturday. Drive-up hours are between 8:00 a.m. and
6:00 p.m. Monday through Friday, and between 9:00 a.m. and 1:00 p.m. on Saturday
at The Vintage Bank's Main Office. All branch offices are open between 9:00 a.m.
and 5:00 p.m. Monday through Thursday, between 9:00 a.m. and 6:00 p.m. on
Friday. All branch offices, with the exception of St. Helena and Fairfield, are
open between 9:00 a.m. and 1:00 p.m. on Saturday.
Employees
At December 31, 2002, the Company employed one hundred fifty-eight (158)
persons, twenty-one (21) of whom are part-time employees, including seven (7)
executive officers and thirty-eight (38) other officers. At December 31, 2001
7
the Company employed one hundred fifty-two (152) persons, twenty-six (26) of
whom were part-time employees, including seven (7) executive officers and thirty
(30) other officers. At December 31, 2000, the Company employed one hundred
twenty-six (126) persons, forty-six (46) of whom were part-time employees,
including five (5) executive officers and twenty-seven (27) other officers. None
of the Company's employees are presently represented by a union or covered under
a collective bargaining agreement. Management of the Company believes its
employee relations are excellent.
8
Statistical Data
The following statistical data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
the financial statements and notes thereto included in 2002 audited financial
statements incorporated herein by reference.
Distribution of Average Assets, Liabilities, and Shareholders' Equity; Interest
Rates and Interest Differential
The following table sets forth average daily balances of assets, liabilities,
and shareholders' equity during 2002, 2001 and 2000, along with total interest
income earned and expense paid, and the average yields earned or rates paid
thereon and the net interest margin for the years ended December 31, 2002, 2001
and 2000.
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
(In 000's)
ASSETS Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate Balance Expense Yield/Rate
------- ------- ---------- ------- ------- ---------- ------- ------- ----------
Loans (1) (2) $212,735 $16,602 7.80% $174,050 $15,319 8.80% $141,076 $12,927 9.16%
Investment securities:
Taxable 78,186 3,490 4.46% 57,501 3,395 5.90% 39,258 2,572 6.55%
Non-taxable (3) 14,002 868 6.20% 13,797 739 5.36% 13,993 856 6.12%
-------- ------- -------- ------- -------- -------
TOTAL LOANS AND INVESTMENT SECURITIES 304,923 20,960 6.87% 245,348 19,453 7.93% 194,327 16,355 8.42%
Due from banks, time 100 5 5.59% 100 7 6.86% 100 5 5.56%
Federal funds sold 28,138 418 1.49% 26,577 1,012 3.81% 8,609 521 6.05%
-------- ------- -------- ------- -------- -------
TOTAL EARNING ASSETS 333,161 21,383 6.42% 272,025 20,472 7.53% $203,036 $16,881 8.31%
-------- ------- -------- ------- -------- -------
Cash and due from banks 20,376 17,124 12,060
Allowance for loan losses
(3,031) (2,507) (2,085)
Premises and equipment, net 10,484 8,006 4,498
Accrued interest receivable
and other assets 11,951 6,928 6,722
-------- -------- --------
TOTAL ASSETS $372,941 $301,576 $224,231
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing demand $136,134 $ 1,118 0.82% $105,485 $2,164 2.05% $66,741 $1,656 2.48%
Savings 25,798 228 0.88% 19,381 234 1.21% 16,038 299 1.87%
Time 77,112 2,006 2.60% 72,291 3,318 4.59% 64,076 3,421 5.34%
------ ------- -------- ------- -------- -------
TOTAL DEPOSITS 239,044 3,352 1.40% 197,157 5,716 2.90% 146,855 5,376 3.66%
Borrowings 6,468 339 5.25% 2,212 171 7.72% 3,542 236 6.67%
9
TOTAL INTEREST BEARING
LIABILITIES $245,512 $ 3,691 1.50% $199,369 $5,887 2.95% $150,397 $5,612 3.73%
-------- ------- -------- ------- -------- -------
Noninterest bearing DDA 91,763 71,798 49,879
Accrued interest payable
and other liabilities 3,040 1,919 1,634
Shareholders' equity 32,627 28,490 22,321
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $372,941 $301,576 $224,231
======== ======== ========
NET INTEREST INCOME $17,692 $14,585 $11,269
======= ======== =======
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin (4)) 5.31% 5.36% 5.55%
10
(1) Average loans include nonaccrual loans.
(2) Loan interest income includes loan fee income of $1,166,939 in 2002,
$1,052,766 in 2001 and $646,359 in 2000.
(3) Average yields shown are taxable-equivalent. On a non- taxable basis, 2002
income was $663,376 with an average yield of 4.74%, 2001 interest income was
$574,556 with an average yield of 4.16%; and in 2000 non-taxable income was
$674,823 and the average yield was 4.82%.
(4) Net interest margin is calculated by dividing net interest income by the
average balance of total earning assets for the applicable year.
The following table sets forth a summary of the changes in interest earned and
interest paid in December 31, 2002 over 2001; December 31, 2001 over 2000; and
December 31, 2000 over 1999 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 2001 over 2000 2000 over 1999
-------------- -------------- --------------
Volume Rate Total Volume Rate Total Volume Rate Total
----------------------------------------------------------------------------------------------
Increase (Decrease) In
Interest and Fee Income
Time Deposits With Other
Financial Institutions $0 ($2) ($2) $0 $2 $2 $0 ($1) ($1)
Investment Securities:
Taxable 1,218 (1,123) 95 1,194 (371) 823 (453) 44 (409)
Non-Taxable (1) 11 118 129 (12) (105) (117) (9) (38) (47)
Federal Funds Sold 60 (654) (594) 1,087 (596) 491 343 (15) 328
Loans 3,402 (2,119) 1,283 3,016 (624) 2,392 2,709 400 3,109
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Interest and Fee 4,691 (3,780) 911 5,285 (1,694) 3,591 2,590 390 2,980
------ ------ ------ ------ ------ ------ ------ ------ ------
Income
Increase (Decrease) In
Interest Expense
Deposits:
Interest Bearing
Transaction Accounts 627 (1,673) (1,046) 960 (452) 508 190 127 317
Savings 79 (85) (6) 63 (128) (65) 2 0 2
Time Deposits 220 (1,532) (1,312) 440 (543) (103) 462 428 890
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Deposits 926 (3,290) (2,364) 1,463 (1,123) 340 654 555 1,209
Borrowings 328 (160) 168 (88) 23 (65) (12) 51 39
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Interest Expense 1,254 (3,450) (2,196) 1,375 (1,100) 275 642 606 1,248
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income $3,437 ($330) $3,107 $3,910 ($594) $3,316 $1,948 ($216) $1,732
====== ====== ====== ====== ====== ====== ====== ====== ======
(1) The interest earned is taxable-equivalent. On a non-taxable basis 2002
interest was $89,180 more than 2001; 2001 interest income was $100,267 less than
in 2000; and 2000 interest income was $14,860 less than in 1999.
11
Investment Securities
The following tables show the book value of investment securities as of December
31, 2002, 2001 and 2000. Book Value as of December 31, 2002
Book Value as of December 31, 2001
----------------------------------
(In 000's)
Held to Maturity Available-for-Sale Equities
---------------- ------------------ --------
Securities of the U. S. Treasury and
Government Agencies $0 $34,731 $0
Mortgage Backed Securities 1,272 44,934 0
Equity Securities 0 0 1,349
Municipal Securities 0 13,045 0
Corporate Debt Securities 0 11,763 0
- ------ -
$1,272 $104,473 $1,349
====== ======== ======
Book Value as of December 31, 2001
----------------------------------
(In 000's)
Held to Maturity Available-for-Sale Equities
---------------- ------------------ --------
Securities of the U. S. Treasury and
Government Agencies $0 $24,566 $0
Mortgage Backed Securities 1,314 28,213 0
Equity Securities 0 0 1,241
Municipal Securities 0 13,140 0
Corporate Debt Securities 0 17,646 0
- ------ -
$1,314 $83,565 $1,241
====== ======= ======
Book Value as of December 31, 2000
----------------------------------
(In 000's)
Held to Maturity Available-for-Sale Equities
---------------- ------------------ --------
Securities of the U. S. Treasury and
Government Agencies $0 $5,539 $0
Mortgage Backed Securities 1,353 23,911 0
Equity Securities 0 0 1,232
Municipal Securities 0 12,627 0
Corporate Debt Securities 0 14,943 0
- ------ -
$1,353 $57,020 $1,232
====== ======= ======
12
The following table provides a summary of the maturities and weighted average
yields of investment securities as of December 31, 2002.
MATURITY AND WEIGHTED AVERAGE YIELD
OF INVESTMENT SECURITIES AS OF
DECEMBER 31, 2002
(In 000's)
AFTER ONE AFTER FIVE
IN ONE YEAR THROUGH THROUGH AFTER
OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
AVAILABLE FOR SALE SECURITIES:
Securities of the US Treasury and other
US Government Agencies $0 0.00% $34,731 3.27% $0 0.00% $0 0.00% $34,731 3.27%
Mortgage-Backed Securities (1) 115 6.92% 3,478 3.07% 5,953 5.57% 35,388 4.38% 44,934 4.44%
Municipal Securities (2) 204 7.43% 2,658 5.40% 8,160 6.02% 2,023 6.79% 13,045 6.04%
Corporate Debt Securities 3,836 5.45% 4,217 4.31% 0 0.00% 3,710 6.00% 11,763 5.21%
----- ----- ----- ----- - ----- ----- ----- ------ -----
TOTAL $4,155 5.59% $45,084 3.48% $14,113 5.83% $41,121 4.64% $104,473 4.34%
HELD TO MATURITY SECURITIES:
Municipal Securities (2) $0 0.00% $0 0.00% $0 0.00% $1,272 8.78% $1,272 8.78%
-- ----- -- ----- -- ----- ------ ----- ------ -----
TOTAL $0 0.00% $0 0.00% $0 0.00% $1,272 8.78% $1,272 8.78%
EQUITY SECURITIES:
Equity Stocks (3) $0 0.00% $0 0.00% $0 0.00% $1,349 5.91% $1,349 5.91%
-- ----- -- ----- -- ----- ------ ----- ------ -----
$0 0.00% $0 0.00% $0 0.00% $1,349 5.91% $1,349 5.91%
(1) The maturity of mortgage-backed securities is based on contractual
maturity. The average expected life is approximately one and one half
years.
(2) Yields shown are taxable-equivalent.
(3) Consists of Federal Reserve Bank and Federal Home Loan Bank Stock
Composition of Loans
LOAN PORTFOLIO
The following table shows the composition of loans as of December 31, 2002,
2001, 2000, 1999 and 1998.
(In 000's)
2002 2001 2000 1999 1998
-------- -------- -------- -------- -------
Commercial Loans $ 46,061 $ 29,730 $ 28,600 $ 21,463 $14,410
Commercial Loans Secured by
Real Estate 16,991 7,930 5,115 13,011 6,063
Installment Loans 24,102 20,301 23,432 20,869 18,461
Real Estate Loans 131,167 106,851 86,886 58,368 51,643
Construction Loans 19,306 21,453 8,243 8,441 5,950
-------- -------- -------- -------- -------
237,627 186,265 152,276 122,152 96,527
Less - Allowance for
Loan Losses 3,290 2,717 2,268 1,987 1,752
-------- -------- -------- -------- -------
$234,337 $183,548 $150,008 $120,165 $94,775
======== ======== ======== ======== =======
13
The following table shows maturity distribution of loans and sensitivity in
interest rates as of December 31, 2002.
(In 000's)
AFTER ONE
IN ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
---------------------------------------------------------------------------------
Commercial (Including
Real Estate Secured) $17,026 $22,098 $23,928 $63,052
Installment 6,669 4,292 13,141 24,102
Real Estate 13,511 23,916 93,740 131,167
Construction 13,194 1,905 4,207 19,306
------ ----- ----- ------
$50,400 $52,211 $135,016 $237,627
======= ======= ======== ========
The following table shows maturity sensitivity to changes in interest rates as
of December 31, 2002.
(In 000's)
Loans With Fixed Interest Rates $15,821 $31,964 $31,474 $79,259
Loans With Floating Interest Rates 34,579 20,247 103,542 158,368
------ ------ ------- -------
$50,400 $52,211 $135,016 $237,627
======= ======= ======== ========
Nonaccrual Past Due and Restructured Loans
There were no nonaccrual loans as of December 31, 2002, 2001, 2000 or 1999.
Nonaccrual loans were $89,000 as of December 31, 1998. The Company held no OREO
as December 31, 2002, 2001, 2000, 1999 or 1998. There were no loans accruing
interest 90 days past due as of December 31, 2002, 2001, 2000, 1999, or 1998.
There are no loans upon which principal and interest payments were 90 days past
due at December 31, 2002 and with respect to which serious doubt existed as to
the ability of the borrower to comply with the present loan payment terms. There
were no restructured loans at December 31, 2002. See the Company's "Management
Discussion and Analysis" for policies as it relates to nonaccrual loans.
The following table sets forth the amount of the Banks' non-performing assets as
of the dates indicated:
(In 000's)
December 31,
2002 2001 2000 1999 1998
Nonaccrual loans 0 0 0 0 89
Accruing loans past due 90 days or more 0 0 0 0 0
Total nonperforming loans 0 0 0 0 89
Other real estate owned 0 0 0 0 0
Total nonperforming assets 0 0 0 0 89
Nonperforming loans to total loans NA NA NA NA 0.09%
Allowance for loan losses to nonperforming loans NA NA NA NA 1975%
Nonperforming assets to total assets NA NA NA NA 0.05%
Allowance for loan losses to nonperforming assets NA NA NA NA 1975%
14
The following tables summarize the allocation of the allowance for loan losses
between loan types at December 31, 2002, 2001, 2000, 1999, and 1998.
(In 000's)
December 31, 2002
Composition of Loans Amount Allocated for Percentage of Loans
Loan Losses in Each Category to
Total Loans
Commercial Loans $46,061 $587 19.4%
Commercial Loans Secured by
Real Estate 16,991 294 7.2%
Installment Loans 24,102 272 10.1%
Real Estate Loans 131,167 1,688 55.2%
Construction Loans 19,306 449 8.1%
-------- ----- ------
Total Loans Outstanding 237,627
Less Allowance for Loan Losses 3,290 3,290 100.0%
--------
Total Loans, net $234,337
========
(In 000's)
December 31, 2001
Composition of Loans Amount Allocated for Percentage of Loans
Loan Losses in Each Category to
Total Loans
Commercial Loans $29,730 $632 16.0%
Commercial Loans Secured by
Real Estate 7,930 71 4.3%
Installment Loans 20,301 259 10.9%
Real Estate Loans 106,851 1,588 57.3%
Construction Loans 21,453 167 11.5%
-------- ----- ------
Total Loans Outstanding 186,265
Less Allowance for Loan Losses 2,717 2,717 100.0%
--------
Total Loans, net $183,548
========
(In 000's)
December 31, 2000
Composition of Loans Amount Allocated for Percentage of Loans
Loan Losses in Each Category to
Total Loans
Commercial Loans $28,600 $703 18.8%
Commercial Loans Secured by
Real Estate 5,115 61 3.4%
Installment Loans 23,432 193 15.4%
Real Estate Loans 86,886 1,195 57.0%
Construction Loans 8,243 116 5.4%
-------- ----- ------
Total Loans Outstanding 152,276
Less Allowance for Loan Losses 2,268 2,268 100.0%
--------
Total Loans, net $150,008
========
15
(In 000's)
December 31, 1999
Composition of Loans Amount Allocated for Percentage of Loans
Loan Losses in Each Category to
Total Loans
Commercial Loans $21,463 $350 17.6%
Commercial Loans Secured by
Real Estate 13,011 212 10.6%
Installment Loans 20,869 338 17.1%
Real Estate Loans 58,368 950 47.8%
Construction Loans 8,441 137 6.9%
-------- ----- ------
Total Loans Outstanding 122,152
Less Allowance for Loan Losses 1,987 1,987 100.0%
--------
Total Loans, net $120,165
========
(In 000's)
December 31, 1998
Composition of Loans Amount Allocated for Percentage of Loans
Loan Losses in Each Category to
Total Loans
Commercial Loans $14,410 $261 14.9%
Commercial Loans Secured by
Real Estate 6,063 110 6.3%
Installment Loans 18,461 335 19.1%
Real Estate Loans 51,643 937 53.5%
Construction Loans 5,950 109 6.2%
------- ----- ------
Total Loans Outstanding 96,527
Less Allowance for Loan Losses 1,752 1,752 100.0%
-------
Total Loans, net $94,775
=======
94
Summary of Loan Loss Experience
The following table provides a summary of the Banks' loan loss experience as of
December 31, 2002, 2001, 2000, 1999, and 1998.
(In 000's)
December 31,
------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Average loans for the period $212,735 $174,050 $141,076 $110,609 $89,057
Loans outstanding at end
of period 237,627 186,265 152,276 122,152 96,527
Allowance for Loan Losses
Balance, beginning of period 2,717 2,268 1,987 1,752 1,532
Less loans charged off:
Real Estate loans 0 0 0 13 7
Commercial loans 0 0 99 0 38
Installment loans 10 4 6 12 14
------ ------ ------ ------ ------
Total loans charged off 10 4 105 25 59
Recoveries:
Real Estate loans 0 0 0 0 1
Commercial loans 0 0 1 7 37
Installment loans 7 6 0 13 1
- - - -- -
Total recoveries 7 6 1 20 39
Net loans charged off 3 (2) 104 5 20
(recovered)
Provision for loan losses 576 447 385 240 240
------ ------ ------ ------ ------
Balance, end of period $3,290 $2,717 $2,268 $1,987 $1,752
====== ====== ====== ====== ======
Net loans charged off (recovered)
to average loans by types:
Real Estate loans 0.00% 0.00% 0.00% .001% .007%
Commercial loans 0.00% 0.00% .069% (.006%) .002%
Installment loans .01% (.001%) .004% .001% .014%
Net losses (recoveries) to average loans
outstanding .001% (.001%) .074% .004% .023%
17
Time Deposits
The following table sets forth the maturity of time certificates of deposit of
$100,000 or more at December 31, 2002, 2001 and 2000.
2002 2001 2000
---- ---- ----
3 months or less $24,661 62.5% $19,260 50.4% $12,443 51.8%
Over 3 months through
6 months 6,182 15.7% 8,243 21.6% 7,141 29.8%
Over 6 months through
12 months 3,887 9.9% 6,302 16.5% 3,161 13.2%
Over 12 months 4,695 11.9% 4,419 11.5% 1,252 5.2%
------- ----- ------- ----- ------- ----
$39,425 100% $38,224 100% $23,997 100%
======= ===== ======= ===== ======= ====
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 90 day Libor plus 3.45% and had an initial interest
rate of 5.34% and the rate is currently 4.85%; 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
There were no short-term borrowings at December 31, 2002 or December 31, 2001.
Short-term borrowings consist primarily of federal funds purchased and
borrowings from the Federal Home Loan Bank of San Francisco (FHLB). The Banks'
maintain a collateralized line of credit with the FHLB. Based on the FHLB stock
requirements at December 31, 2002, the lines provided for maximum borrowings of
approximately $110 million; the Company also has available unused lines of
credit totaling $16 million for Federal funds transactions at December 31, 2002.
The Company did not borrow at FHLB during 2002.
18
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
balance at December 31, 2001 was $1,846,154. 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.
19
Return on Equity and Assets
The following sets forth key ratios for the periods ending December 31, 2002,
2001 and 2000.
2002 2001 2000
---- ---- ----
Net Income as a Percentage of
Average Assets .99% 1.00% 1.17%
Net Income as a Percentage of
Average Equity 11.36% 10.61% 11.70%
Average Equity as a Percentage
of Average Assets 10.09% 9.45% 9.95%
Dividends Declared Per Share
as a Percentage of Net
Income Per share 11.49% 13.70% 15.04%
Competition
The banking business in California, generally and in the service areas served by
the Banks specifically, is highly competitive with respect to both loans and
deposits and is dominated by few major banks which have many offices operating
over wide geographic areas. The Banks compete for deposits and loans principally
with these major banks, savings and loan associations, finance companies, credit
unions and other financial institutions located in the Banks' market areas.
Among the advantages which the major banks have over the Banks are their ability
to finance extensive advertising campaigns and to allocate their investment
assets to regions of highest yield and demand. Many of the major commercial
banks operating in the Banks' service areas offer certain services (such as
trust and international banking services) which are not offered directly by the
Banks and, by virtue of their greater total capitalization, such banks have
substantially higher lending limits than the Banks.
Moreover, banks generally, and the Banks in particular, face increasing
competition for loans and deposits from non-bank financial intermediaries such
as savings and loan associations, thrift and loan associations, credit unions,
mortgage companies insurance companies and other lending institutions. Further,
the recent trend has been for other institutions, such as brokerage firms,
credit card companies, and even retail establishments, to offer alternative
investment vehicles, such as money market funds, as well as offering traditional
banking services such as check access to money market funds and cash advances on
credit card accounts. In addition, the other entities (both public and private)
seeking to raise capital through the issuance and sale of debt or equity
securities also compete with the Banks in the acquisition of deposits.
In order to compete with the other financial institutions in their market areas,
the Banks rely principally upon local promotional activity, personal contacts by
their officers, directors, employees and the Company's shareholders, and
specialized services. In conjunction with the Banks' business plans to serve the
financial needs of local residents and small-to medium-sized businesses, they
also rely on officer calling programs to existing and prospective customers,
focusing their overall marketing efforts towards their local communities. The
Banks' promotional activities emphasize the advantages of dealing with a locally
owned and headquartered institution sensitive to the particular needs of their
local communities. For customers whose loan demands exceed a Bank's lending
limit, the Banks attempt to arrange for such loans on a participation basis with
other financial institutions.
The Banks' strategy for meeting competition has been to maintain a sound capital
base and liquidity position, employ experienced management, and concentrate on
particular segments of the market and by offering customers a degree of personal
attention that, in the opinion of management, is not generally available through
the Banks' larger competitors.
20
Supervision And Regulation
A. General
North Bay Bancorp
North Bay Bancorp, as a bank holding company, is subject to regulation under the
Bank Holding Company Act of 1956, as amended, and is registered with and subject
to the supervision of the Board of Governors of the Federal Reserve System. It
is the policy of the Federal Reserve that each bank holding company serve as a
source of financial and managerial strength to its subsidiary banks. The Federal
Reserve has the authority to examine Bancorp.
The Bank Holding Company Act requires Bancorp to obtain the prior approval of
the Federal Reserve before acquisition of all or substantially all of the assets
of any bank or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition, Bancorp would own or control, directly or
indirectly, more than 5% of the voting shares of such bank. Recent amendments to
the Bank Holding Company Act expand the circumstances under which a bank holding
company may acquire control of or all or substantially all of the assets of a
bank located outside the State of California.
Bancorp may not engage in any business other than managing or controlling banks
or furnishing services to its subsidiaries, with the exception of certain
activities which, in the opinion of the Federal Reserve, are so closely related
to banking or to managing or controlling banks as to be incidental to banking.
The Gramm-Leach-Bliley Act, federal legislation enacted in 2000, offers bank
holding companies an opportunity to broaden the scope of activities engaged in
by electing to be treated as a financial holding company. A financial holding
company enjoys broader powers than a bank holding company, specifically
including the ability to own securities and insurance companies in addition to
financial institutions. Bancorp became a financial Holding Company on August 23,
2000. Bancorp is generally prohibited from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company unless
that company is engaged in such authorized activities and the Federal Reserve
approves the acquisition.
Bancorp and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or provision of services. For example, with certain exceptions The
Vintage Bank may not condition an extension of credit on a customer obtaining
other services provided by it, Bancorp or any other subsidiary, or on a promise
by the customer not to obtain other services from a competitor. In addition,
federal law imposes certain restrictions on transactions between The Vintage
Bank and its affiliates. As affiliates, The Vintage Bank, Solano Bank and
Bancorp are subject with certain exceptions, to the provisions of federal law
imposing limitations on and requiring collateral for extensions of credit by The
Vintage Bank and Solano Bank to any affiliate.
The Banks
As California state-chartered banks, The Vintage Bank and Solano Bank are
subject to regulation, supervision and periodic examination by the California
Department of Financial Institutions. As members of the Federal Reserve System,
The Vintage Bank and Solano Bank are also subject to regulation, supervision and
periodic examination by the Federal Reserve Bank of San Francisco. The Banks'
deposits are insured by the Federal Deposit Insurance Corporation to the maximum
amount permitted by law, which is currently $100,000 per depositor in most
cases. Insured banks are subject to FDIC regulations applicable to all insured
institutions.
The regulations of these state and federal bank regulatory agencies govern, or
will govern, most aspects of the Banks' businesses and operations, including but
not limited to, the scope of their business, its investments, its reserves
against deposits, the nature and amount of any collateral for loans, the timing
of availability of deposited funds, the issuance of securities, the payment of
dividends, bank expansion and bank activities, including real estate development
and insurance activities, and the payment of interest on certain deposits. The
Vintage Bank and Solano Bank are also subject to the requirements and
restrictions of various consumer laws, regulations and the Community
Reinvestment Act.
21
B. Payment of Dividends
North Bay Bancorp
The shareholders of Bancorp are entitled to receive dividends when and as
declared by its Board of Directors, out of funds legally available, subject to
the dividends preference, if any, on preferred shares that may be outstanding
and also subject to the restrictions of the California Corporations Code. At
December 31, 2002, Bancorp had no outstanding shares of preferred stock.
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 Trust Preferred 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.
The principal sources of cash revenue to Bancorp will be dividends and
management fees received from The Vintage Bank and Solano Bank. The Banks'
ability to make dividend payments to Bancorp is subject to state and federal
regulatory restrictions.
The Banks
Under state law, the Board of Directors of a California state chartered bank may
declare a cash dividend, subject to the restriction that the amount available
for the payment of cash dividends is limited to the lesser of the bank's
retained earnings, or the bank's net income for the latest three fiscal years,
less dividends previously declared during that period, or, with the approval of
the Commissioner of Financial Institutions, to the greater of the retained
earnings of the bank, the net income of the bank for its last fiscal year or the
net income of the bank for its current fiscal year.
Federal Reserve regulations also govern the payment of dividends by a state
member bank. Under Federal Reserve regulations, dividends may not be paid unless
both capital and earnings limitations have been met. First, no dividend may be
paid if it would result in a withdrawal of capital or exceed the member bank's
net profits then on hand, after deducting its losses and bad debts. Exceptions
to this limitation are available only upon the prior approval of the Federal
Reserve and the approval of two-thirds of the member bank's shareholders.
Second, a state member bank may not pay a dividend without the prior written
approval of the Federal Reserve if the total of all dividends declared in one
year exceeds the total of net profits for that year plus the preceding two
calendar years, less any required transfers to surplus under state or federal
law.
The Federal Reserve has broad authority to prohibit a bank from engaging in
banking practices which it considers to be unsafe or unsound. It is possible,
depending upon the financial condition of the bank in question and other
factors, that the Federal Reserve may assert that the payment of dividends or
other payments by a member bank is considered an unsafe or unsound banking
practice and therefore, implement corrective action to address such a practice.
Accordingly, the future payment of cash dividends by The Vintage Bank or Solano
Bank to Bancorp will generally depend not only on the banks' earnings during any
fiscal period but also on the banks' meeting certain capital requirements and
the maintenance of adequate allowances for loan and lease losses.
C. Change in Control
The Bank Holding Company Act of 1956, as amended and the Change in Bank Control
Act of 1978, as amended, together with regulations of the FRB and the
Comptroller, require that, depending on the particular circumstances, either FRB
approval must be obtained or notice must be furnished to the Comptroller and not
disapproved prior to any person or company acquiring "control" of a national
bank, such as the Bank, subject to exemptions for some transactions. Control is
conclusively presumed to exist if an individual or company acquires 25% or more
of any class of voting securities of the bank. Control is rebuttably presumed to
exist if a person acquires 10% or more but less than 25% of any class of voting
securities and either the company has registered securities under Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction.
22
D. Capital Standards
The Board of Governors, the FDIC and other federal banking agencies have
risk-based capital adequacy guidelines intended to provide a measure of capital
adequacy that reflects the degree of risk associated with a banking
organization's operations for both transactions reported on the balance sheet as
assets, and transactions, such as letters of credit and recourse arrangements,
which are reported as off-balance-sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off-balance-sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain U.S. government
securities, to 100% for assets with relatively higher credit risk, such as
business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off-balance-sheet
items. The regulators measure risk-adjusted assets and off-balance-sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock and minority
interests in certain subsidiaries, less most other intangible assets. Trust
preferred securities, limited to 25% of capital, are also considered Tier 1
capital for regulatory purposes up to 25% of capital. Tier 2 capital may consist
of a limited amount of the allowance for possible loan and lease losses and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. Since December 31, 1992, the
federal banking agencies have required a minimum ratio of qualifying total
capital to risk-adjusted assets and off-balance-sheet items of 8%, and a minimum
ratio of Tier 1 capital to risk-adjusted assets and off-balance-sheet items of
4%.
In addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to average
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio is
at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
A bank that does not achieve and maintain the required capital levels may be
issued a capital directive by the FDIC to ensure the maintenance of required
capital levels. As discussed above, the Company and the Banks are required to
maintain certain levels of capital. The regulatory capital guidelines as well as
the actual capitalization for the Banks and the Company on a consolidated basis
as of December 31, 2002 follow:
REQUIREMENT
------------------------------------
The
ADEQUATELY WELL Vintage Solano
CAPITALIZED CAPITALIZED Bank Bank Company
------------------ ----------------- ---------- ------------ -------------
Total risk-based 8.0% 10.0% 11.03% 14.57% 14.88%
capital ratio
Tier 1 risk-based 4.0% 6.0% 9.93% 13.79% 13.85%
capital ratio
Tier 1 leverage capital 4.0% 5.0% 7.52% 12.36% 10.86%
ratio
E. Impact of Monetary Policies
The earnings and growth of the Banks are subject to the influence of domestic
and foreign economic conditions, including inflation, recession and
unemployment. The earnings of the Banks are affected not only by general
economic conditions but also by the monetary and fiscal policies of the United
States and federal agencies, particularly the Federal Reserve. The Federal
Reserve can and does implement national monetary policy, such as seeking to curb
inflation and combat recession, by its open market operations in United States
Government securities
23
and by its control of the discount rates applicable to borrowings by banks from
the Federal Reserve System. The actions of the Federal Reserve in these areas
influence the growth of bank loans, investments and deposits and affect the
interest rates charged on loans and paid on deposits. The Federal Reserve's
policies have had a significant effect on the operating results of commercial
banks and are expected to continue to do so in the future. The nature and timing
of any future changes in monetary policies are not predictable.
F. Extensions of Credit to Insiders and Transactions with Affiliates
The Federal Reserve Act and FRB Regulation O, which are applicable to national
banks, place limitations and conditions on loans or extensions of credit to: a
bank's or bank holding company's executive officers, directors and principal
shareholders (i.e., in most cases, those persons who own, control or have power
to vote more than 10% of any class of voting securities); any company controlled
by any such executive officer, director or shareholder; or any political or
campaign committee controlled by such executive officer, director or principal
shareholder.
Loans extended to any of the above persons must comply with loan-to-one-borrower
limits, require prior full board approval when aggregate extensions of credit to
such person exceed specified amounts, must be made on substantially the same
terms (including interest rates and collateral) as, and follow
credit-underwriting procedures that are not less stringent than, those
prevailing at the time for comparable transactions with non-insiders, and must
not involve more than the normal risk of repayment or present other unfavorable
features. Regulation O also prohibits a bank from paying an overdraft on an
account of an executive officer or director, except pursuant to a written
pre-authorized interest-bearing extension of credit plan that specifies a method
of repayment or a written pre-authorized transfer of funds from another account
of the officer or director at the bank.
The provisions of Regulation O summarized above reflect substantial
strengthening as a result of the adoption of FDICIA. FDICIA also resulted in an
amendment to Regulation O which provides that the aggregate limit on extensions
of credit to all insiders of a bank as a group cannot exceed the bank's
unimpaired capital and unimpaired surplus. An exception to this limitation is
provided for banks with less than $100,000,000 in deposits. The aggregate limit
applicable to such banks is two times the bank's unimpaired capital and
unimpaired surplus, provided the bank meets or exceeds all applicable capital
requirements.
G. Consumer Protection Laws and Regulations
The bank regulatory agencies are focusing greater attention on compliance with
consumer protection laws and their implementing regulations. Examination and
enforcement have become more intense in nature, and insured institutions have
been advised to monitor carefully compliance with such laws and regulations. The
Bank is subject to many federal consumer protection statutes and regulations,
some of which are discussed below.
The Community Reinvestment Act ("CRA") is intended to encourage insured
depository institutions, while operating safely and soundly, to help meet the
credit needs of their communities. The CRA specifically directs the federal
regulatory agencies, in examining insured depository institutions, to assess a
bank's record of helping meet the credit needs of its entire community,
including low- and moderate-income neighborhoods, consistent with safe and sound
banking practices. The CRA further requires the agencies to take a financial
institution's record of meeting its community credit needs into account when
evaluating applications for, among other things, domestic branches, mergers or
acquisitions, or holding company formations. The agencies use the CRA assessment
factors in order to provide a rating to the financial institution. The ratings
range from a high of "outstanding" to a low of "substantial noncompliance." The
Vintage Bank has not been examined for CRA compliance by their primary regulator
in the last 12 months. Solano Bank was examined June 11, 2002 and was rated
satisfactory.
The Equal Credit Opportunity Act ("ECOA") generally prohibits discrimination in
any credit transaction, whether for consumer or business purposes, on the basis
of race, color, religion, national origin, sex, marital status, age (except in
limited circumstances), receipt of income from public assistance programs, or
good faith exercise of any rights under the Consumer Credit Protection Act.
24
The Truth in Lending Act ("TILA") is designed to ensure that credit terms are
disclosed in a meaningful way so that consumers may compare credit terms more
readily and knowledgeably. As a result of the TILA, all creditors must use the
same credit terminology to express rates and payments, including the annual
percentage rate, the finance charge, the amount financed, the total of payments
and the payment schedule, among other things.
The Fair Housing Act ("FH Act") regulates many practices, including making it
unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin,
sex, handicap or familial status. A number of lending practices have been found
by the courts to be, or may be considered, illegal under the FH Act, including
some that are not specifically mentioned in the FH Act itself.
The Home Mortgage Disclosure Act ("HMDA") grew out of public concern over credit
shortages in certain urban neighborhoods and provides public information that
will help show whether financial institutions are serving the housing credit
needs of the neighborhoods and communities in which they are located. The HMDA
also includes a "fair lending" aspect that requires the collection and
disclosure of data about applicant and borrower characteristics as a way of
identifying possible discriminatory lending patterns and enforcing
anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act ("RESPA") requires lenders to
provide borrowers with disclosures regarding the nature and cost of real estate
settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks,
and places limitations on the amount of escrow accounts. Penalties under the
above laws may include fines, reimbursements and other penalties. Due to
heightened regulatory concern related to compliance with the CRA, TILA, FH Act,
ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs
or be required to expend additional funds for investments in its local
community.
H. Recent and Proposed Legislation
The operations of Bancorp and the Banks are subject to extensive regulation by
federal, state, and local governmental authorities and are subject to various
laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of their respective operations. Bancorp believes
that it is in substantial compliance in all material respects with applicable
federal, state, and local laws, rules and regulations. Because the business of
Bancorp and the Banks is highly regulated, the laws, rules and regulations
applicable to each of them are subject to regular modification and change.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are frequently
made in Congress, in the California legislature and before various bank
regulatory agencies.
Sarbanes-Oxley Act
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002
implementing legislative reforms intended to address corporate and accounting
fraud. In addition to the establishment of a new accounting oversight board
which will enforce auditing, quality control and independence standards and will
be funded by fees from all publicly traded companies, the bill restricts
provision of both auditing and consulting services by accounting firms. To
ensure auditor independence, any non-audit services being provided to an audit
client will require pre-approval by the company's audit committee members. In
addition, the audit partners must be rotated. The Act requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the SEC, subject to civil and criminal
penalties if they knowingly or willfully violate this certification requirement.
In addition, under the Act, legal counsel will be required to report evidence of
a material violation of the securities laws or a breach of fiduciary duty by a
company to its chief executive officer or its chief legal officer, and, if such
officer does not appropriately respond, to report such evidence to the audit
committee or other similar committee of the board of directors or the board
itself.
Longer prison terms and increased penalties will also be applied to corporate
executives who violate federal securities laws, the period during which certain
types of suits can be brought against a company or its officers has been
extended, and bonuses issued to top executives prior to restatement of a
company's financial statements are now subject to disgorgement if such
restatement was due to corporate misconduct. Executives are also prohibited from
25
insider trading during retirement plan "blackout" periods, and loans to company
executives are restricted. The Act accelerates the time frame for disclosures by
public companies, as they must immediately disclose any material changes in
their financial condition or operations. Directors and executive officers must
also provide information for most changes in ownership in a company's securities
within two business days of the change.
The Act also prohibits any officer or director of a company or any other person
acting under their direction from taking any action to fraudulently influence,
coerce, manipulate or mislead any independent public or certified accountant
engaged in the audit of the company's financial statements for the purpose of
rendering the financial statement's materially misleading. The Act also requires
the SEC to prescribe rules requiring inclusion of an internal control report and
assessment by management in the annual report to stockholders. In addition, the
Act requires that each financial report required to be prepared in accordance
with (or reconciled to) accounting principles generally accepted in the United
States of America and filed with the SEC reflect all material correcting
adjustments that are identified by a "registered public accounting firm" in
accordance with accounting principles generally accepted in the United States of
America and the rules and regulations of the SEC.
Effective for filings due after August 29, 2002, as directed by Section 302(a)
of Sarbanes-Oxley, the Company's chief executive officer and chief financial
officer were each required to certify that the Company's Quarterly and Annual
Reports do not contain any untrue statement of a material fact. The rules have
several requirements, including having these officers certify that: they are
responsible for establishing, maintaining and regularly evaluating the
effectiveness of Company's internal controls; they have made certain disclosures
to Bancorp's auditors and the audit committee of the Board of Directors about
the Company's internal controls; and they have included information in the
Company's Quarterly and Annual Reports about their evaluation and whether there
have been significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the
evaluation.
USA PATRIOT Act
In the wake of the tragic events of September 11th, on October 26, 2001, the
President signed the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001.
Under the USA PATRIOT Act, financial institutions are subject to prohibitions
against specified financial transactions and account relationships as well as
enhanced due diligence and "know your customer" standards in their dealings with
foreign financial institutions and foreign customers. For example, the enhanced
due diligence policies, procedures, and controls generally require financial
institutions to take reasonable steps:
* To conduct enhanced scrutiny of account relationships to guard against money
laundering and report any suspicious transaction;
* To ascertain the identity of the nominal and beneficial owners of, and the
source of funds deposited into, each account as needed to guard against money
laundering and report any suspicious transactions;
* To ascertain for any foreign bank, the shares of which are not publicly
traded, the identity of the owners of the foreign bank, and the nature and
extent of the ownership interest of each such owner; and
* To ascertain whether any foreign bank provides correspondent accounts to other
foreign banks and, if so, the identity of those foreign banks and related due
diligence information.
Under the USA PATRIOT Act, financial institutions were given 180 days from
enactment to establish anti-money laundering programs. The USA PATRIOT Act sets
forth minimum standards for these programs, including:
* The development of internal policies, procedures, and controls;
* The designation of a compliance officer;
* An ongoing employee training program; and
* An independent audit function to test the programs.
26
On June 20, 2002, the Board of Directors of each of the Banks adopted
comprehensive policies and procedures to address the requirements of the USA
PATRIOT Act, and management believes that both of the Banks are currently in
full compliance with the Act.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act. This legislation eliminated many of the barriers that have separated the
insurance, securities and banking industries since the Great Depression. The
federal banking agencies (the Board of Governors, FDIC and the Office of the
Comptroller of the Currency) among others, continue to draft regulations to
implement the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act is the result
of a decade of debate in the Congress regarding a fundamental reformation of the
nation's financial system. The law is subdivided into seven titles, by
functional area.
The major provisions of the Gramm-Leach-Bliley Act are:
Financial Holding Companies and Financial Activities
Title I establishes a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other financial
service providers by revising and expanding the BHC Act framework to permit a
holding company system to engage in a full range of financial activities through
qualification as a new entity known as a financial holding company.
Activities permissible for financial subsidiaries of national banks, and, also
permissible for financial subsidiaries of state member banks, include, but are
not limited to, the following: (a) Lending, exchanging, transferring, investing
for others, or safeguarding money or securities; (b) Insuring, guaranteeing, or
indemnifying against loss, harm, damage, illness, disability, or death, or
providing and issuing annuities, and acting as principal, agent, or broker for
purposes of the foregoing, in any State; (c) Providing financial, investment, or
economic advisory services, including advising an investment company; (d)
Issuing or selling instruments representing interests in pools of assets
permissible for a bank to hold directly; and (e) Underwriting, dealing in, or
making a market in securities.
27
Securities Activities
Title II narrows the exemptions from the securities laws previously enjoyed by
banks. The Board of Governors and the SEC continue to work together to draft
rules governing certain securities activities of banks and creates a new,
voluntary investment bank holding company.
Insurance Activities
Title III restates the proposition that the states are the functional regulators
for all insurance activities, including the insurance activities of
federally-chartered banks, and bars the states from prohibiting insurance
activities by depository institutions.
Privacy
Under Title V, federal banking regulators were required to adopt rules that have
limited the ability of banks and other financial institutions to disclose
non-public information about consumers to nonaffiliated third parties. These
limitations require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal
information to a nonaffiliated third party. Federal banking regulators issued
final rules on May 10, 2000 to implement the privacy provisions of Title V.
Under the rules, financial institutions must provide:
* initial notices to customers about their privacy policies, describing the
conditions under which they may disclose nonpublic personal information to
nonaffiliated third parties and affiliates;
* annual notices of their privacy policies to current customers; and
* a reasonable method for customers to "opt out" of disclosures to nonaffiliated
third parties.
Compliance with the rules is mandatory after July 1, 2001. The Company and the
Banks were in full compliance with the rules as of or prior to their respective
effective dates.
Safeguarding Confidential Customer Information
Under Title V, federal banking regulators are required to adopt rules requiring
financial institutions to implement a program to protect confidential customer
information. In January 2000, the federal banking agencies adopted guidelines
requiring financial institutions to establish an information security program.
Each of the Banks implemented a security program appropriate to its size and
complexity and the nature and scope of its operations prior to the July 1, 2001
effective date of the regulatory guidelines, and since initial implementation
each has, as necessary, updated and improved its program.
Community Reinvestment Act Sunshine Requirements
The federal banking agencies have adopted final regulations implementing Section
711 of Title VII, the CRA Sunshine Requirements. The regulations require
nongovernmental entities or persons and insured depository institutions and
affiliates that are parties to written agreements made in connection with the
fulfillment of the institution's CRA obligations to make available to the public
and the federal banking agencies a copy of each agreement. Neither the Company
nor the Banks are a party to any agreement that would be the subject of
reporting pursuant to the CRA Sunshine Requirements.
The Banks and the Company intend to comply with all provisions of the
Gramm-Leach-Bliley Act and all implementing regulations as they become
effective. The Company and the Banks were in full compliance with the applicable
regulations implementing provisions of the Gramm-Leach-Bliley Act as of or prior
to their respective effective dates.
28
Fair Credit Reporting Act
In 1970, the U. S. Congress the Fair Credit Reporting Act (the "FCRA") in order
to ensure the confidentiality, accuracy, relevancy and proper utilization of
consumer credit report information. Under the framework of the FCRA, the United
States has developed a highly advanced and efficient credit reporting system.
The information contained in that broad system is used by financial
institutions, retailers and other creditors of every size in making a wide
variety of decisions regarding financial transactions. Employers, and law
enforcement agencies have also made wide use of the information collected and
maintained in databases made possible by the FCRA. The FCRA affirmatively
preempts state law in a number of areas, including the ability of entities
affiliated by common ownership to share and exchange information freely, the
requirements on credit bureaus to reinvestigate the contents of reports in
response to consumer complaints, among others. By its terms, the preemption
provision of the FCRA will terminate as of December 31, 2003. Termination of the
preemption provisions could significantly impact the ability of the existing
credit bureau system to continue operating.
The Banks may incur additional costs, and be required to implement additional
costly procedures and systems in the event that the preemption provisions of the
FCRA terminate at the end of 2003, and California, or other states, adopts
legislation that would have the effect of prohibiting the continued sharing of
information such as that currently collected by credit bureaus throughout the
United States. The likelihood of the FCRA preemption provisions terminating by
their terms, and of the adoption of such restrictive provisions by state
legislatures, cannot be estimated at this time.
Deposit Insurance Reform
Both houses of the 108th Congress have among the bills it is to consider during
the session a measure designed to make the administration of the deposit
insurance system more efficient by merging the Bank Insurance Fund and the
Savings Association Insurance Fund, and increasing the flexibility of the FDI
Act with regard to the appropriate level of the resulting Deposit Insurance
Fund, as established by the FDIC Board of Directors.
On February 4, 2003, Representative Spencer Bachus of Alabama introduced bill
H.R. 522, entitled the "Federal Deposit Insurance Reform Act of 2003". H.R. 522
incorporates a number of provisions requiring a merger of the Bank Insurance
Fund and the Savings Association Insurance Fund to form the Deposit Insurance
Fund, increasing the coverage amount for deposit insurance, amending the
procedure and considerations utilized by the Board of Directors of the FDIC in
setting insurance assessment rates, replacing the fixed target for the size of
the Bank Insurance Fund of 1.25 percent of estimated insured deposits to a range
of not less than 1.15 and not more than 1.4 percent of estimate deposits, making
technical changes to the manner in which the FDIC gathers information to assess
the risk of future bank failures for use in analyzing the adequacy of the Bank
Insurance Fund and other technical amendments regarding refunds, dividends and
credits from the Deposit Insurance Fund. Finally, H.R. 522 directs the
Comptroller General, the Board of Directors of the FDIC and the National Credit
Union Administration Board variously to conduct a number of studies on issues
including the utility of the prompt corrective provisions of the FDI Act as
implemented by the federal banking agencies, the appropriateness of the
organizational structure of the FDIC, and the feasibility of creating a system
of private deposit insurance for amounts over the maximum public deposit
insurance provided and the feasibility of converting to a voluntary or private
deposit insurance system.
On January 29, 2003, Senator Tim Johnson of South Dakota introduced S. 229,
entitled "A bill for the merger of the bank and savings association deposit
insurance funds, to modernize and improve the safety and fairness of the Federal
deposit insurance system, and for other purposes." S. 229 also seeks to merge
the Bank Insurance Fund with the Savings Association Insurance Fund to form the
Deposit Insurance Fund, to increase the level of federal deposit insurance
coverage generally to $130,000 per account, replacing the fixed target for the
size of the Bank Insurance Fund of 1.25 percent of estimated insured deposits to
a range of not less than 1.10 and not more than 1.5 percent of estimate
deposits, inserting a requirement that the FDIC refund any overpaid assessment,
and require studies, first by the Board of Directors of the FDIC and the
National Credit Union Administration Board on the feasibility of increasing
deposit insurance coverage for municipalities and other units of local
government, the feasibility of creating a system of private deposit insurance
for amounts over the maximum public deposit insurance provided, and of the
feasibility of using actual deposits rather than estimated deposits in the
calculation of the reserve ratio of the Deposit Insurance Fund.
No assurance can be given as to the passage, or failure, of the House or Senate
bills.
29
California Financial Information Privacy Act
California Senate Bill 1, introduced on December 2, 2002, would enact the
California Financial Information Privacy Act, which would require a financial
institution to provide specific information to a consumer related to the sharing
of that consumer's nonpublic personal information. The bill would allow a
consumer to direct the financial institution not to share his or her nonpublic
personal information with affiliated or nonaffiliated companies with which a
financial institution has contracted to provide financial products and services,
and would require that permission from each such consumer be acquired by a
financial institution prior to sharing such information. These provisions are
more restrictive than the privacy provisions of the GLB Act, and would require
the Bank to adopt new policies, procedures and disclosure documentation if
enacted. The cost of complying with this bill if enacted as law in California is
not predictable at this time.
I. Other
Various other legislation, including proposals to overhaul the bank regulatory
system and to limit the investments that a depository institution may make with
insured funds, is introduced into Congress or the California Legislature from
time to time. The Bancorp and the Banks cannot determine the ultimate effect
that any potential legislation, if enacted, or regulations promulgated
thereunder, would have upon the financial condition or operations of the Bancorp
or the Banks.
Item 2 - PROPERTIES
North Bay Bancorp
The Bancorp utilizes space in The Vintage Bank's main office at 1500 Soscol
Avenue, Napa, California, and at 3626 Bel Aire Plaza, Napa, California. Pursuant
to the terms of a Reimbursement Agreement entered into between Bancorp and The
Vintage, Bancorp reimburses The Vintage Bank for the fair market value of the
space utilized by Bancorp.
Bancorp leases a building located at 1100 Texas Street, Fairfield, California,
containing approximately 5,700 square feet. The lease term commenced on August
15, 2000, for an initial term of five years and one-half month, with one option
to renew for five years provided notice is given not less than ninety days but
not more than one hundred eighty days prior to expiration of the initial term.
Rent was subject to adjustment on September 1, 2001, and annually thereafter in
accordance with increases in the Consumer Price Index. Effective January 1,
2002, the monthly rental was $4,582 per month. By the terms of the lease Bancorp
is required to:
o keep the premises in good order, condition and repair
o maintain comprehensive general liability insurance
o pay all real property taxes assessed against the premises and
o pay for all utilities used. By the terms of a Sublease Agreement
entered into with Solano Bank as of October 1, 2000, Bancorp leased
approximately 2,254 square feet of the building to Solano Bank for use
as a branch location and granted Solano Bank the right to jointly use
approximately 740 square feet of common area. The remainder of the
building is used by Bancorp as a data center.
Bancorp leases a portion of a multi-tenant professional office building located
at 222 Gateway Road, West, Napa, California, containing approximately 8,523
square feet rentable space and 8,453 square feet usable space, in which will
reside centralized servicing departments for the Company. The lease commenced on
March 1, 2003, for an initial term of five years with one option to renew for an
additional five-year term provided notice is given not less than 3 months but
not more than 6 months prior to the expiration of the initial term. Rent is
$10,399 per month subject to annual adjustments not greater than 3% based upon
increases in the Consumer Price Index and Fair Market Value. By the terms of the
lease Bancorp is required to:
o maintain and repair the leased premises
o maintain comprehensive general liability insurance
o pay its share of real property taxes assessed against the premises,
and
o pay for all utilities used.
30
Bancorp utilizes approximately 1,918 square feet in The Vintage Bank's Gateway
Branch located at 1190 Airport Boulevard, suite 101. Pursuant to the terms of a
sublease between Bancorp and The Vintage Bank, Bancorp will pay to The Vintage
Bank 38.31% of the rent that The Vintage Bank pays on its lease of the Gateway
facility, making the initial rent $5,762.21. Rent is then subject to annual
adjustments in accordance with adjustments to The Vintage Bank's rent, based on
increases in the Consumer Price Index with a minimum annual increase of 2.5% and
a maximum annual increase of 5%.
Bancorp owns certain leasehold improvements and furniture, fixtures and
equipment located at its offices, all of which are used in Bancorp's business.
In the opinion of management, the properties of Bancorp are adequately covered
by insurance.
The Vintage Bank
The Vintage Bank's main office is located in a two-story building at 1500 Soscol
Avenue, Napa, California. The real property on which the building is located was
acquired by The Vintage Bank in 1988, and construction of the building was
completed in 1989. In 1993 an additional 2,500 square feet of previously
unoccupied space in the Main Office was remodeled, thereby increasing usable
space from approximately 7,500 to 10,000 square feet. The real property and all
improvements at the Main Office are owned by The Vintage Bank. In January, 1996
The Vintage Bank purchased approximately 11,000 square feet of land adjacent to
the Main Office to facilitate expansion of The Vintage Bank's motor banking
facility.
The Vintage Bank leases the premises for its Browns Valley Office, consisting of
approximately 2,000 square feet, located at 3271 Browns Valley Road, Napa,
California. The lease commenced on October 22, 1990 for a term of five years,
with three successive options to renew for five years each. To exercise an
option, the lease requires three months prior notice of the bank's intent to
renew. The lease was renewed for an additional five years in October 2000. Rent
is subject to annual adjustment in accordance with increases in the Consumer
Price Index. Effective January 1, 2003, monthly rental was $3,207 per month. By
the terms of the lease The Vintage Bank is required to:
o maintain and repair the leased premises
o maintain combined single limit, bodily injury and property damage
insurance, and
o pay its pro rata share of real property taxes and common area
maintenance expenses.
The Vintage Bank leases the premises for its Bel Aire Shopping Center Office,
consisting of approximately 5,850 square feet, located at 3626 Bel Aire Plaza,
Napa, California. The lease term commenced on January 1, 1997, for a term of ten
years, with two successive options to renew for five years each upon at least
180 days' notice. Effective January 1, 2003, monthly rental was $8,393 per
month. Rent is subject to annual adjustment in accordance with a schedule set
forth in the lease and thereafter in accordance with increases in the Consumer
Price Index. By the terms of the lease The Vintage Bank is required to:
o maintain and repair the leased premises
o pay for all utilities used
o maintain public liability insurance
o pay its pro rata share of common area maintenance, and
o pay its pro rata share of all real property taxes assessed against the
shopping center.
In January 2001 The Vintage Bank entered into an agreement for the purchase of a
building and real property located at 1065 Main Street, St. Helena, California,
for the sum of $1,500,000. The purchase of the Main Street property was
consummated on February 2, 2001. The purchase of the property was not financed.
The Vintage Bank completed an extensive remodel of the building in January, 2002
at a cost of approximately $965,000.
In November 2001 The Vintage Bank entered into a Real Estate Purchase Agreement
for the purchase of real property located adjacent to the bank's St. Helena
branch for the sum of $175,000. The subject property became part of the bank's
St. Helena branch property. The purchase of the property was not financed. The
property is currently improved with a parking lot, which is used to supplement
existing branch parking. It is not anticipated that any additional improvements
will be made to the property.
In December 2001 The Vintage Bank entered into a lease for its Gateway branch
located at 1190 Airport Boulevard, suite 100. The lease commenced in February
2003, after the majority of construction was completed, for an initial
31
term of ten years with two successive options to renew for ten years each upon
at least 120 days' notice. The premises is located in a multi-tenant
professional office building consisting of 16,000 square feet, of which The
Vintage Bank occupies approximately 5,100 square feet. The branch opened for
business March 6, 2003. The Vintage Bank paid for the leasehold improvements to
the premises at an approximate cost of $400,000. Monthly rent for the initial
year is $11,810 per month plus $3,231 monthly for the common area. Rent is then
subject to annual adjustments in accordance with increases in the Consumer Price
Index with a minimum annual increase of 2.5% and a maximum annual increase of
5%. By the terms of the lease The Vintage Bank is required to:
o maintain and repair the leased premises
o pay for all utilities used
o maintain public liability insurance, and
o pay its pro rata share of common area operating expenses, including
real property taxes.
The Vintage Bank owns certain leasehold improvements and furniture, fixtures and
equipment located at its offices, all of which are used in the banking business.
In the opinion of management, the properties of The Vintage Bank are adequately
covered by insurance.
Solano Bank
Solano Bank's Main Office is located in a multi-tenant building at 403 Davis
Street, Vacaville, California. On July 23, 2001, Solano Bank consummated the
purchase of the building for the sum $2,200,000. The purchase was not financed.
The building contains a total of approximately 22,000 square feet of which
Solano Bank occupies approximately 5,000 square feet, approximately 10,300
square feet are occupied by BC Stocking, Inc., Rob Wood, a director of Solano
Bank, occupies approximately 650 square feet and Chase Manhattan currently
occupies approximately 1,956 square feet.
Solano Bank leases the premises for its Benicia Office, consisting of
approximately 2,000 square feet located at 1395 E. 2nd Street, Benicia,
California. The lease commenced December 1, 1999 at an initial monthly rent of
$2,980. Effective January 1, 2003, monthly rental was $3,996 per month. The
initial lease is for a period of five (5) years and four (4) months, with three
options to extend for five years each. To exercise the option, the lease
requires three months prior notice of the bank's intent to renew. Rent is
subject to adjustments with increases in the Consumer Price Index. By the terms
of the lease Solano Bank is required to:
o maintain and repair the leased premises
o pay for all utilities used
o maintain public liability insurance
o pay its pro rata share of common area maintenance, and
o pay its pro rata share of all real property taxes assessed against the
shopping center of which the premises are a part.
Solano Bank subleases from Bancorp the premises for its Fairfield Office,
consisting of approximately 2,254 square feet, together with the right to make
joint use of approximately 740 square feet of common area. The sublease term
commenced October 1, 2000, and expires upon expiration of Bancorp's master lease
or on August 31, 2005, whichever is earlier. The sublease is subject to
extension for five years in the event Bancorp extends the master lease. By the
terms of the sublease Solano Bank is required to pay 38% of the rent and other
costs to be borne by Bancorp under the master lease. The rent under the master
lease is subject to adjustment annually based upon changes in the Consumer Price
Index.
Solano Bank leases the premises for its Vallejo Office, consisting of
approximately 2,166 square feet located at 976-A Admiral Callaghan Lane,
Vallejo, California. The lease commenced March 15, 2001 at an initial monthly
rent of $4,332. Effective January 1, 2003, monthly rental was $4,462 per month.
The initial lease is for a period of five (5) years, with three options to
extend for five years each. To exercise the option, the lease requires 180 days
prior notice of the bank's intent to renew. Rent is subject to annual adjustment
with increases in the Consumer Price Index. By the terms of the lease Solano
Bank is required to:
o maintain and repair the leased premises
o pay for all utilities used
o maintain public liability insurance
o pay its pro rata share of common area maintenance, and
32
o pay its pro rata share of all real property taxes assessed against the
shopping center of which the premises are a part. The premises were
improved to make them suitable for a branch bank at a cost of
$119,019.
Solano Bank owns certain leasehold improvements and furniture, fixtures and
equipment located in its offices, all of which are used in the banking business.
In the opinion of management, the properties of Solano Bank are adequately
covered by insurance.
Item 3 - 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 4 - Submission of Matters to a Vote of Security Holders
None
33
PART II
Item 5 - Market for the COMPANY'S Common Stock and Related Security Holder
Matters
The stock is listed in the Nasdaq National Market System under the symbol NBAN
effective September 3, 2002. Prior to the Nasdaq listing, the stock traded
over-the-counter and is quoted on the OTC "Bulletin Board".
The following table (adjusted for the 2001, 2002, and 2003 stock dividends)
summarizes the common stock high and low bid prices based upon transactions of
which Bancorp is aware:
Quarter ended High Low
March 31, 2001 $19.00 $16.41
June 30, 2001 18.14 17.24
September 30, 2001 18.60 17.24
December 31, 2001 18.59 17.24
March 31, 2002 26.19 18.14
June 30, 2002 26.19 22.62
September 30, 2002 27.38 21.05
December 31, 2002 25.24 22.62
There may be other transactions of which Bancorp is not aware and accordingly,
they are not reflected in the range of actual sales prices stated. Further,
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. Additionally, since
trading in Bancorp's common stock is limited, the range of prices stated is not
necessarily representative of prices which would result from a more active
market.
The Company paid cash dividends of $0.20 per share in 2001 and $0.20 per share
in 2002. The holders of common stock of Bancorp are entitled to receive cash
dividends when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends.
On January 27, 2003, the Board of Director of Bancorp declared a $0.20 per share
cash dividend and a 5% stock dividend payable March 28, 2003 to shareholders of
record as of March 10, 2003.
North Bay Bancorp is restricted in its ability to pay dividends to its
shareholders. For a discussion of restrictions imposed see "SUPERVISION and
REGULATION - Payment of Dividends."
As of March 10, 2003, there were 1,034 holders of record of North Bay Bancorp's
common stock.
The following chart provides information as of December 31, 2002 concerning the
Company's Stock Option Plans, the Company's only equity compensation plans:
34
Plan Category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants, and rights warrants and rights equity compensation
plans (excluding
securities reflecting in
column (a))
(a) (b) (c)
Equity compensation plans
approved by security
holders 287,561 $18.38 223,772
Equity compensation plans
not approved by security
holders 0 0 0
- - -
Total 287,561 $18.38 223,772
Item 6 - SELECTED FINANCIAL DATA
The selected financial data is included in Bancorp's 2002 Annual Report to
Shareholders on page 5 which information is incorporated herein by reference.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The management's discussion and analysis of financial condition and results of
operations is included in Bancorp's 2002 Annual Report to Shareholders on pages
6 through 14 which information is incorporated herein by reference.
Item 7 A - QUANTITATIVE AND QUALITATIVE DISCLOUSURE 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. The Company relies on loan reviews, prudent
underwriting standards and an adequate allowance for loan losses to mitigate
credit 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 the purpose 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 rates change.
The Company manages interest rate risk through its Audit Committee, which serves
as the Asset Liability Committee (ALCO). The ALCO manages the balance sheet to
maintain the forecasted impact on net interest income and present value of
equity within acceptable ranges despite unforeseeable changes in interest rates.
The ALCO monitors these risks on a quarterly basis using both a traditional gap
analysis and simulation analysis.
35
The Company utilizes a simulation model as its primary tool for interest rate
risk. This model considers the effects of lags and different ranges of interest
rate changes among various classes of earning assets and interest-bearing
liabilities following a 1% or 2% change in the Fed Funds rate, and produces a
more accurate projection of the impact changing interest rates will have on the
Company. Readers are referred to management's "Forward Looking Statement" in
connection with this information.
The following table sets forth the repricing opportunities for rate-sensitive
assets and rate-sensitive liabilities at December 31, 2002. Rate sensitivity
analysis usually excludes Noninterest-bearing demand deposits. Including these
deposits, which totaled $104,142,052, would result in a significant shift in the
gap position. Rate-sensitive assets and rate-sensitive liabilities are
classified by the earliest possible repricing date or maturity, whichever comes
first.
(In 000's)
3 Months Over 3 Mos. Over 1 Yr. Over 5
or Less To 1 Yr. To 5 Yrs. Years Total
------- -------- --------- ----- -----
Interest rate-sensitive assets:
Loans, gross $79,236 $26,471 $87,971 $43,949 $237,627
Interest-bearing deposits in
Other banks 0 0 100 0 100
Investment securities 1,005 3,150 45,084 57,855 107,094
Federal funds sold 28,525 0 0 0 28,525
----------- ------------- ------------------- ------------ -----------
Total 108,766 29,621 133,155 101,804 373,346
Interest rate-sensitive liabilities:
Interest-bearing demand
Deposits 154,769 0 0 0 154,769
Time deposits >$100,000 24,662 10,068 4,695 0 39,425
Other time deposits 18,091 16,487 5,414 0 39,992
Savings deposits 29,475 0 0 0 29,475
Long-term borrowings 10,000 0 0 0 10,000
------------- ------------- ------------------- ------------ -----------
Total $236,997 $26,555 $10,109 $0 $273,661
Interest rate sensitivity gap ($128,231) $3,066 $123,046 $101,804 $99,685
============= =============== ================= ============ ===========
Cumulative interest rate
sensitivity gap ($128,231) ($125,165) ($2,119) $99,685
============= =============== ================= ============ ===========
Ratio of interest rate sensitivity -34.35% .82% 32.96% 27.27%
to earning assets
The preceding indicates that the Company has a "negative" GAP for three months
into the future and a "positive" GAP beyond. The implication is that during the
negative GAP "horizon" Company earnings will increase in a falling interest rate
environment, as there are more rate sensitive liabilities subject to repricing
downward than rate sensitive assets; conversely, earnings would decline in a
rising rate environment. This traditional analysis does not recognize or assume
any "lag" in interest rate changes on earning assets and interest-bearing
liabilities, and it assumes that all earning assets and interest-bearing
liabilities reprice to the same absolute degree regardless of the mix of earning
assets and interest-bearing liabilities.
The following table, utilizing a simulation model to measure interest rate risk,
shows the approximate pre-tax dollar and percentage change in forecasted net
interest income over a 12-month period. The 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.
36
December 31, 2002 Dollar change in net interest income Percent change in net interest income
Change in interest rates: (In 000's)
100 basis points decline $186 1.06%
100 basis points rise ($277) (1.58%)
200 basis points rise ($552) (3.16%)
As illustrated in the above table, the Company is currently liability sensitive.
The implication of this is that the Company's earnings will increase in a
falling interest rate environment, as there are more rate sensitive liabilities
subject to reprice downward than rate sensitive assets; conversely, earnings
would decrease in a rising rate environment. Therefore, an increase in market
rates could adversely affect net interest income. In contrast, a decrease in
market rates may improve net interest income.
It should be noted that the tools used to manage interest rate risk do not take
into account future management actions that may be undertaken, should a change
occur in actual market interest rates during the year. Also, certain assumptions
are required to perform modeling simulations that may have significant impact on
the results. These include assumptions about composition or mix of the balance
sheet, level of interest rates, balance changes of deposit products that do not
have stated maturities and assumptions of industry standards and future expected
pricing behaviors. The results indicated by the model could vary significantly
due to external factor such as changes in the prepayment assumptions,
competition or early withdrawal of deposits.
Item 8 - Financial Statements and Supplementary Data
Bancorp's consolidated balance sheets, statements of operations, statements of
changes in shareholders' equity, statements of cash flows and related notes
thereto are included in Bancorp's 2002 Annual Report to Shareholders on page 15
through 18 which information is incorporated herein by reference.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
N/A
PART III
Item 10 - Directors, Executive Officers, Promoters and Control Persons
Compliance with Section 16(a) of the Exchange Act
For information regarding the directors, executive officers, promoters and
control persons of Bancorp, see "ELECTION OF DIRECTORS" and "REPORTS OF CHANGES
IN BENEFICIAL OWNERSHIP" on pages 4 through 8 and 28 of the Company's definitive
proxy statement for the 2003 Annual Meeting of Shareholders to be filed pursuant
to Regulation 14A (the "Proxy Statement"), which is incorporated herein by
reference.
Item 11 - Executive Compensation
For information concerning compensation of the executive officers of Bancorp,
see "EXECUTIVE COMPENSATION" on pages 17 to 20 of the Proxy Statement, which is
incorporated herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
For information concerning the security ownership of certain beneficial owners
and management of Bancorp, see "SECURITY OWNERSHIP OF MANAGEMENT" on pages 13 to
16 of the Proxy Statement, which is incorporated herein by reference.
37
Item 13 - Certain Relationships and Related Transactions
For information concerning certain relationships and related transactions, see
"MANAGEMENT INDEBTEDNESS" on page 27 to 28 of the Proxy Statement, which is
incorporated herein by reference.
Item 14. CONTROLS AND PROCEEDURES
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
Within the 90 days prior to the date of this Annual Report on Form 10-K, the
Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"), and its "internal
controls and procedures for financial reporting" ("Internal Controls"). This
evaluation (the "Controls Evaluation") was done under the supervision and with
the participation of management, including our President and Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"). Rules adopted by the SEC
require that in this section of the Annual Report we present the conclusions of
the CEO and the CFO about the effectiveness of our Disclosure Controls and
Internal Controls based on and as of the date of the Controls Evaluation.
CEO and CFO Certifications.
Appearing immediately following the Signatures section of this Annual Report
there are two separate forms of "Certifications" of the CEO and the CFO. The
first form of Certification is required in accord with Section 302 of the
Sarbanes-Oxley Act of 2002 (the "Section 302 Certification"). The section of the
Annual Report which you are currently reading is the information concerning the
Controls Evaluation referred to in the Section 302 Certification and this
information should be read in conjunction with the Section 302 Certifications
for a more complete understanding of the topics presented.
Disclosure Controls and Internal Controls.
Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Exchange Act, such as this Annual Report, is recorded, processed, summarized
and reported within the time periods specified in the Commission's rules and
forms. Disclosure Controls are also designed with the objective of ensuring that
such information is accumulated and communicated to our management, including
the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure. Internal Controls are procedures which are designed with the
objective of providing reasonable assurance that (1) our transactions are
properly authorized; (2) our assets are safeguarded against unauthorized or
improper use; and (3) our transactions are properly recorded and reported, all
to permit the preparation of our financial statements in conformity with
generally accepted accounting principles.
Limitations on the Effectiveness of Controls.
The Company's management, including the CEO and CFO, does not expect that our
Disclosure Controls or our Internal Controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Scope of the Controls Evaluation.
The CEO/CFO evaluation of our Disclosure Controls and our Internal Controls
included a review of the controls' objectives and design, the controls'
implementation by the Company and the effect of the controls on the information
38
generated for use in this Annual Report. In the course of the Controls
Evaluation, we sought to identify data errors, controls problems or acts of
fraud and to confirm that appropriate corrective action, including process
improvements, were being undertaken. This type of evaluation will be done on a
quarterly basis so that the conclusions concerning controls effectiveness can be
reported in our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.
Our Internal Controls are also evaluated on an ongoing basis by our Internal
Audit Department and by other personnel in our organization. The overall goals
of these various evaluation activities are to monitor our Disclosure Controls
and our Internal Controls and to make modifications as necessary; our intent in
this regard is that the Disclosure Controls and the Internal Controls will be
maintained as dynamic systems that change (including with improvements and
corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in the Company's
Internal Controls, or whether the Company had identified any acts of fraud
involving personnel who have a significant role in the Company's Internal
Controls. This information was important both for the Controls Evaluation
generally and because items 5 and 6 in the Section 302 Certifications of the CEO
and CFO require that the CEO and CFO disclose that information to our Board's
Audit Committee and to our independent auditors and to report on related matters
in this section of the Annual Report. In the professional auditing literature,
"significant deficiencies" are referred to as "reportable conditions"; these are
control issues that could have a significant adverse effect on the ability to
record, process, summarize and report financial data in the financial
statements. A "material weakness" is defined in the auditing literature as a
particularly serious reportable condition where the internal control does not
reduce to a relatively low level the risk that misstatements caused by error or
fraud may occur in amounts that would be material in relation to the financial
statements and not be detected within a timely period by employees in the normal
course of performing their assigned functions. We also sought to deal with other
controls matters in the Controls Evaluation, and in each case if a problem was
identified, we considered what revision, improvement and/or correction to make
in accord with our on-going procedures. We concluded that were no material
weaknesses in the Company's Internal Controls.
In accord with Commission requirements, the CEO and CFO note that, since the
date of the Controls Evaluation to the date of this Annual Report, there have
been no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Conclusions.
Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject
to the limitations noted above, our Disclosure Controls are effective to ensure
that material information relating to the Company and its consolidated
subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being prepared, and
that our Internal Controls are effective to provide reasonable assurance that
our financial statements are fairly presented in conformity with generally
accepted accounting principles.
Part IV
Item 15 - Exhibits and Reports on Form 8-K
Page of 2002
Annual Report
-------------
(a) 1. Financial Statements
--------------------
(i) Balance Sheets, December 31, 2002 and
2001 15
(ii) Income Statements for the years
ended December 2002, 2001, and 2000 16
(iii) Statements of Changes in Shareholders' Equity for the years ended December
31, 2002, 2001, and 2000 17
39
(iv) Statements of Cash Flows for the years ended December 31, 2002, 2001, and
2000 18
(v) Notes to Financial Statements 19
(vi) Report of Independent Auditors 40
Schedules have been omitted as inapplicable or because the information required
is included in the financial statements or notes thereto.
3. Exhibits
See Exhibit Index on page 42 of this Report.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended December 31,
2002.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NORTH BAY BANCORP
By: /s/Terry L. Robinson
------------------------------------------------------
Terry L. Robinson, President & Chief Executive Officer
Dated: March 24, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/Thomas N. Gavin Director March 21, 2003
- -------------------------------------------------
Thomas N. Gavin
/s/David B. Gaw Director March 27, 2003
- -------------------------------------------------
David B. Gaw
/s/Fred J. Hearn Jr. Director March 26, 2003
- -------------------------------------------------
Fred J. Hearn Jr.
/s/Conrad W. Hewitt Director March 22, 2003
- -------------------------------------------------
Conrad W. Hewitt
/s/Harlan R. Kurtz Director March 27, 2003
- -------------------------------------------------
Harlan R. Kurtz
/s/Richard S. Long Director March 22, 2003
- -------------------------------------------------
Richard S. Long
/s/Thomas H. Lowenstein Director March 24, 2003
- -------------------------------------------------
Thomas H. Lowenstein
/s/Thomas F. Malloy Director and March 24, 2003
- ------------------------------------------------- Chairman of the Board
Thomas F. Malloy
/s/Terry L. Robinson President, Chief March 24, 2003
- ------------------------------------------------- Executive Officer and Director
Terry L. Robinson (Principal Executive Officer)
/s/James E. Tidgewell Director March 24, 2003
- -------------------------------------------------
James E. Tidgewell
/s/Lee-Ann Cimino Sr. Vice President March 24, 2003
- ------------------------------------------------- Chief Financial Officer
Lee-Ann Cimino (Principal Financial Officer)
41
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Terry L. Robinson certify that:
1. I have reviewed this annual report on Form 10-K of North Bay Bancorp for
the fiscal year ended December 31, 2002.
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present 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 annual report;
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 13a-14 and 15d-14) for the registrant and 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 annual 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 annual report (the "Evaluation Date"); and
c. presented in this annual 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 functions):
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 weaknesses 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
annual report whether there were significant changes in internal controls
or in 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: March 24, 2003 /s/ Terry L. Robinson
------------------------------------------
Terry L. Robinson
President and Chief Executive Officer
(Principal Executive Officer)
42
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Lee-Ann Cimino, certify that:
1. I have reviewed this annual report on Form 10-K of North Bay Bancorp
for the fiscal year ended December 31, 2002.
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present 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 annual report;
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 13a-14 and 15d-14) for the registrant and
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 annual 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
annual report (the "Evaluation Date"); and
c. presented in this annual 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 functions):
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 weaknesses 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
annual report whether there were significant changes in internal
controls or in 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: March 24, 2003 /s/ Lee-Ann Cimino
----------------------------------------------------
Lee-Ann Cimino
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
43
EXHIBIT INDEX
Exhibit No. Description
2.1 Plan of Reorganization and Merger Agreement entered into as of
July 30, 1999 by and among The Vintage Bank, Vintage Merger Co.
and North Bay Bancorp. (1)
3.1 Articles of Incorporation of Registrant. (2)
3.2 Bylaws as amended of Registrant. (2)
4.1 Certificate Evidencing Floating Rate Capital Securities (6)
4.2 Floating Rate Junior Subordinated Deferrable Interest Debenture
(6)
4.3 Certificate Evidencing Floating Rate Common Securities (6)
4.4 Guarantee Agreement (6)
4.5 Indenture dated June 26, 2002 , North Bay Bancorp Issuer, State
Street Bank and Trust Company of Connecticut, N.A., as Trustee
for Floating Rate Junior Subordinated Deferrable Interest
Debenture (6)
4.6 Rights Agreement, dated as of October 24, 20002, between the
Company and Registrar and Trans Company, as Rights Agent. (7)
4.7 Certificate of Determination for the Series A Preferred Stock
(attached as Exhibit A to Rights Agreement). (7)
4.8 Rights Certificate (attached as Exhibit B to Rights Agreement.).
Printed Rights Agreement will not be mailed until the
Distribution Date as defined therein. (7)
4.9 Summary of Rights to Purchase Preferred Shares (attached as
Exhibit C to Rights Agreement). (7)
10.1 Amended North Bay Bancorp Stock Option Plan. (6) *
10.2 North Bay Bancorp 2002 Stock Option Plan and Related Agreement
(8)*
10.3 Sublease by and between The Vintage Bank, as Lessor, and North
Bay Bancorp, as Lessee, with respect to premises at 1190 Airport
Road, Napa California
10.4 Reserved
10.5 North Bay Bancorp Directors Deferred Fee Plan.(4)*
10.6 Amended and Restated Employment Agreement entered into as of May
1, 2001 by and between North Bay Bancorp and Terry L. Robinson.
(5) *
10.7 Employment Agreement entered into as of May 1, 2001 by and
between Solano Bank and Glen C. Terry. (5) *
10.8 Employment Agreement entered into as of May 1, 2001 by and
between North Bay Bancorp and Kathi Metro. (5) *
10.9 Employment Agreement entered into as of May 1, 2001 by and
between North Bay Bancorp and Dale Brain. (5) *
44
10.10 Life Insurance Endorsement Method Split Dollar Plan Agreement
for Terry L. Robinson (9). *
10.11 Life Insurance Endorsement Method Split Dollar Plan Agreement
for Dale Brain (9). *
10.12 Life Insurance Endorsement Method Split Dollar Plan Agreement
for Lee-Ann Cimino (9). *
10.13 Life Insurance Endorsement Method Split Dollar Plan Agreement
for Kathi Metro. (9)*
10.14 Life Insurance Endorsement Method Split Dollar Plan Agreement
for Glen C. Terry. (9)*
10.15 Employment Agreement dated as of April 15, 2002 by and between
Solano Bank and John A. Nerland* (6)
10.16 North Bay Bancorp 2002 Deferred Fee Plan (6)*
10.17 Amended and Restated Declaration of Trust by and Among State
Street Bank and Trust Company of Connecticut, N.A, as
Institutional Trustee, North Bay Bancorp as Sponsor, and
Administrators, Dated as of June 26, 2002. (6)
11. Statement re: computation of per share earnings is included in
Note 1 to the financial statements to the prospectus included in
Part I of this Registration Statement.
13. North Bay Bancorp 2002 Annual Report to Shareholders.
21. Subsidiaries of Registrant are: The Vintage Bank, a California
banking corporation, Solano Bank, a California Corporation, and
North Bay Bancorp Statutory Trust I, a Connecticut trust.
23. Consent of KPMG LLP as independent public accountants for North
Bay Bancorp, The Vintage Bank and Solano Bank.
25. Power of Attorney.
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
* Employment Contracts and Compensation Plans.
(1) Attached as Exhibit 7(c)(2) to North Bay Bancorp's Current Report on Form
8-K filed with the Securities and Exchange Commission on November 29,
1999, and incorporated herein by reference.
(2) Attached as Exhibits 3.1, 3.2, and 10.2, respectively, to Registration
Statement No. 333-93365 filed by North Bay Bancorp with the Securities and
Exchange Commission under the Securities Act of 1933, and incorporated
herein by reference.
(3) Intentionally left blank.
(4) Attached as Exhibits 10.5 to North Bay Bancorp's Annual Report as Form
10-KSB for the year ended December 31, 2000 filed with the Securities and
Exchange Commission, and incorporated herein by reference.
(5) Attached as Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to North
Bay Bancorp's Quarterly Report as Form 10-Q for the quarter ended June 30,
2001 filed with the Securities and Exchange Commission, and incorporated
herein by reference.
45
(6) Attached as Exhibits 4.1, 4.2, 4.3, 4.4, 4.5, 10.1, 10.15, 10.16, and
10.17, respectively, to North Bay Bancorp's Quarterly Report as Form 10-Q
for the quarter ended June 30, 2002 filed with the Securities and Exchange
Commission, and incorporated herein by reference.
(7) Attached as Exhibits 4.1, 4.2, 4.3, and 4.4, respectively, to the Form 8-A
Registration Statement filed by North Bay Bancorp with the Securities and
Exchange Commission on October 31, 2002 and incorporated herein by
reference.
(8) Attached as Exhibit 99.1 to Registration Statement No. 333-90006 on Form
S-8 filed by North Bay Bancorp with the Securities and Exchange Commission
on June 7, 2002 and incorporated herein by reference.
(9) Attached as Exhibits 10.10, 10.11, 10.12, 10.13, and 10.14, respectively,
to North Bay Bancorp's Annual Report as Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange Commission and
incorporated herein by reference.
46