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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, 2001
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.)
1500 Soscol Avenue, Napa, California 94559-1314
(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
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|_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not 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 . |_|
State the aggregate market value of Common Stock held by non-affiliates of North
Bay Bancorp as of March 4, 2002: $36,885,164.
State the number of shares of the North Bay Bancorp's Common Stock outstanding
as of March 4, 2002: 1,960,902
Documents Incorporated by Reference:
2001 Annual Report to Stockholders. Part II, Items 6 and 7 and Part III,
Item 13
Proxy Statement for 2002 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 25
Item 3 - Legal Proceedings
Item 4 - Submission of Matters to a Vote of Security Holders 27
PART II
Item 5 - Market for the Company's Common Stock and Related
Security Holder Matters 28
Item 6 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7 - Financial Statements and Supplementary Data 29
Item 7A - Quantitative and Qualitative Disclosure about Market Risk 29
Item 8 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
PART III
Item 9 - Directors, Executive Officers, Promoters and Control
Persons Compliance with Section 16(a) of the Exchange Act 31
Item 10 - Executive Compensation 31
Item 11 - Security Ownership of Certain Beneficial Owners and Management 32
Item 12 - Certain Relationships and Related Transactions 32
Item 13 - Exhibits and Reports on Form 8-K 32
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) the
potential effects of the California energy crisis; (v) 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, in the stock market, the public
debt market and other capital markets and the impact of such conditions on the
Company; (vi) continued changes in the interest rate environment may reduce
interest margins and adversely impact net interest income; (vii) as well as
other factors. This entire 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), which are wholly owned subsidiaries, collectively
(the Company). North Bay 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.
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 three branches, one located at 3271 Browns Valley Road,
Napa, California, one at 3626 Bel Aire Plaza, Napa, California and one located
at 1065 Main Street, St. Helena, 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
3
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 branches, 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. Solano Bank makes
annuities and mutual funds available to its customers through an unaffiliated
corporation, Raymond James Financial Services.
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, 2001, total loans
outstanding were $186,265,550 resulting in a loan-to-deposit ratio of 63.7%. At
December 31, 2000, total loans outstanding were $152,275,841 resulting in a
loan-to-deposit ratio of 70.2%.
As of December 31, 2001, The Vintage Bank's loan limits to individual customers
were $3,181,000 for unsecured loans and $8,483,000 for unsecured and secured
loans combined. Solano Bank loan limits to individual customers were $1,156,000
for unsecured loans and $3,084,000 for unsecured and secured loans combined. As
of December 31, 2000, The Vintage Bank's lending limits were $3,218,000 for
unsecured loans and $5,365,000 for unsecured and secured loans combined. Solano
Bank lending limits were $1,269,000 for unsecured loans and $2,115,000 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, 2001, the Banks' commercial loans outstanding totaled
$29,730,027 (16% 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 total loans),
real estate loans totaled $86,886,297 (57.1% of total
4
loans) and installment loans totaled $23,431,838 (15.4% of total loans). At
December 31, 1999, commercial loans outstanding totaled $21,463,022 (17.6% of
total loans), commercial loans secured by real estate totaled $13,010,890 (10.6%
of total loans), construction loans totaled $8,441,142 (6.9% of the total
loans), real estate loans totaled $58,368,548 (47.8% of total loans), and
installment loans totaled $20,868,859 (17.1% of total loans).
As of December 31, 2001, the total of undisbursed loans and similar commitments
was $59,692,000 as contrasted with $53,317,000 as of December 31, 2000 and
$35,079,602 as of December 31, 1999. The Banks expect all but approximately
$1,249,000 of their undisbursed loans and similar commitments to be exercised
during 2002. The Banks take real estate, listed securities, savings and time
deposits, automobiles, machinery and equipment, inventory and accounts
receivable as collateral for loans.
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 79% 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 21% 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 10.25% 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 they do receive a loan fee. Prior to 1995, The
Vintage Bank sold the major portion of its residential real estate loans to the
Federal Home Loan Mortgage Corporation, commonly referred to as Freddie Mac,
with servicing retained by The Vintage Bank. No loans were sold to Freddie Mac
in 2001, 2000 or 1999. As of December 31, 2001, the Banks' residential mortgage
loan portfolio was $14,155,118 of which $4,449,824 constitutes loans sold to
Freddie Mac and serviced by The Vintage Bank. As of December 31, 2000 the
residential mortgage loan portfolio was $16,974,361 of which $5,730,193
constituted loans sold to Freddie Mac and serviced by The Vintage Bank. As of
December 31, 1999, the residential mortgage loan portfolio was $17,825,710 of
which $6,747,863 constituted loans sold to Freddie Mac and serviced by The
Vintage Bank.
Real Estate Construction Loans
The Banks make loans to finance the construction of commercial, industrial and
residential projects and to finance land development. The majority of the Banks'
construction loans were made to finance the construction of residential
projects. Construction loans typically have maturities of less than one year,
have a floating rate of interest based on Banks' 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
5
commercial construction loans, or 75% of the appraised value in the case of
owner occupied residential construction loans. Commercial loans secured by real
estate normally comply with these same guidelines.
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 Company and are approved by the Boards of Directors of North Bay Bancorp, The
Vintage Bank and Solano Bank. The Boards of Directors have established internal
procedures, which limit loan approval authority of its 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. For The Vintage Bank this includes any
loan in excess of $800,000 if secured by a residential first deed of trust or
$900,000 if secured by a commercial first deed of trust, $700,000 if secured by
a second deed of trust, $400,000 if unsecured or secured by equipment,
receivables, inventory, or other personal property. For Solano Bank this
includes any loan in excess of $375,000 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 second deed of trust, $225,000 if unsecured or secured by
equipment, receivables, inventory, or other personal property. 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
features.
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, 2001 were $292,441,196. Total deposits as of
December 31, 2000 were $216,637,862. 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, 2001, the Company employed one hundred fifty-two (152) persons,
twenty-six (26) of whom are 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. At December 31, 1999, the Company
6
employed eighty five (85) persons, twenty-four (24) of whom were part-time
employees, including five (5) executive officers and twenty (20) 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.
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 2001 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 2001, 2000 and 1999, 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, 2001, 2000
and 1999.
7
[PAGE INTENTIONALLY LEFT BLANK]
8
December 31, 2001 December 31, 2000
----------------- -----------------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
------------------------------------------------------------------------------
ASSETS
Loans (1) (2) $174,049,609 $15,318,956 8.80% $141,075,523 $12,927,364 9.16%
Investment securities:
Taxable 57,500,910 3,394,718 5.90% 39,258,078 2,572,133 6.55%
Non-taxable (3) 13,797,310 739,073 5.36% 13,993,026 856,056 6.12%
------------ ---------- ------------ ----------
TOTAL LOANS AND INVESTMENT SECURITIES 245,347,829 19,452,747 7.93% 194,326,627 16,355,553 8.42%
Due from banks, time 100,000 6,862 6.86% 100,000 5,558 5.56%
Federal funds sold 26,576,528 1,012,299 3.81% 8,609,157 520,563 6.05%
------------ ---------- ------------ ----------
TOTAL EARNING ASSETS 272,024,357 20,471,908 7.53% $203,035,784 $16,881,674 8.31%
Cash and due from banks 17,123,768 12,060,166
Allowance for loan losses
(2,507,902) (2,084,692)
Premises and equipment, net 8,005,281 4,497,805
Accrued interest receivable
and other assets 6,927,403 6,721,787
------------ ------------
TOTAL ASSETS $301,575,907 $224,230,850
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing demand $105,485,349 $2,164,149 2.05% $66,741,386 $1,655,546 2.48%
Savings 19,381,135 234,233 1.21% 16,037,493 299,751 1.87%
Time 72,291,011 3,318,013 4.59% 64,075,610 3,420,704 5.34%
------------ ---------- ------------ ----------
TOTAL DEPOSITS 197,157,495 5,716,395 2.90% 146,854,489 5,376,001 3.66%
Borrowings 2,211,539 170,759 7.72% 3,542,308 236,332 6.67%
TOTAL INTEREST BEARING
LIABILITIES $199,369,034 $5,887,154 2.95% $150,396,797 $5,612,333 3.73%
------------ ---------- ------------ ----------
Noninterest bearing DDA 71,798,279 49,879,300
Accrued interest payable
and other liabilities 1,919,008 1,633,449
Shareholders' equity 28,489,586 22,321,304
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $301,575,907 $224,230,850
============ ============
NET INTEREST INCOME $14,584,754 $11,269,341
=========== ============
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin (4)) 5.36% 5.55%
December 31, 1999
-----------------
Average Income/ Average
Balance Expense Yield/Rate
---------------------------------------
ASSETS
Loans (1) (2) $110,609,432 $9,818,961 8.88%
Investment securities:
Taxable 46,262,004 2,980,760 6.44%
Non-taxable (3) 14,146,831 903,398 6.39%
------------ ----------
TOTAL LOANS AND INVESTMENT SECURITIES 171,018,267 13,703,119 8.01%
Due from banks, time 125,000 6,947 5.56%
Federal funds sold 3,089,490 192,223 6.22%
------------ ----------
TOTAL EARNING ASSETS $174,232,757 $13,902,289 7.98%
Cash and due from banks 9,790,202
Allowance for loan losses
(1,882,877)
Premises and equipment, net 2,802,875
Accrued interest receivable
and other assets 5,901,102
------------
TOTAL ASSETS $190,844,059
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing demand $58,440,048 $1,338,642 2.29%
Savings 15,931,371 298,280 1.87%
Time 54,217,935 2,530,100 4.67%
------------ ----------
TOTAL DEPOSITS 128,589,354 4,167,022 3.24%
Borrowings 3,783,333 197,069 5.21%
TOTAL INTEREST BEARING
LIABILITIES $132,372,687 $4,364,091 3.30%
------------ ----------
Noninterest bearing DDA 39,988,858
Accrued interest payable
and other liabilities 1,214,180
Shareholders' equity 17,268,334
------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $190,844,059
============
NET INTEREST INCOME $9,538,198
===========
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin (4)) 5.47%
9
(1) Average loans include nonaccrual loans.
(2) Loan interest income includes loan fee income of $1,052,766 in 2001,
$646,359 in 2000 and $671,247 in 1999.
(3) Average yields shown are taxable-equivalent. On a non- taxable basis, 2001
income was $574,556 with an average yield of 4.14%, 2000 interest income was
$674,823 with an average yield of 4.82%; and in 1999 non-taxable income was
$689,683 and the average yield was 4.88%.
(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, 2001 over 2000; December 31, 2000 over 1999; and
December 31, 1999 over 1998 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.
2001 Over 2000 2000 over 1999
-------------- --------------
Volume Rate Total Volume Rate Total
------------------------------------------------------------------------------
Increase (Decrease) In
Interest and Fee Income
Time Deposits With Other
Financial Institutions $0 $1,304 $1,304 ($1,384) ($5) ($1,389)
Investment Securities:
Taxable 1,194,177 (371,592) 822,585 (452,540) 43,913 (408,627)
Non-Taxable (1) (11,661) (105,322) (116,983) (9,244) (38,098) (47,342)
Federal Funds Sold 1,087,317 (595,581) 491,736 343,267 (14,927) 328,340
Loans 3,015,580 (623,988) 2,391,592 2,708,545 399,858 3,108,403
---------- ---------- ---------- ---------- --------- ----------
Total Interest and Fee Income 5,285,413 (1,695,179) 3,590,234 2,588,644 390,741 2,979,385
---------- ---------- ---------- ---------- --------- ----------
Increase (Decrease) In
Interest Expense
Deposits:
Interest Bearing
Transaction Accounts 960,491 (451,888) 508,603 189,736 127,168 316,904
Savings 62,676 (128,194) (65,518) 1,621 (150) 1,471
Time Deposits 439,636 (542,327) (102,691) 462,231 428,373 890,604
---------- ---------- ---------- ---------- --------- ----------
Total Deposits 1,462,803 (1,122,409) 340,394 653,588 555,391 1,208,979
Borrowings (88,822) 23,249 (65,573) (12,515) 51,778 39,263
---------- ---------- ---------- ---------- --------- ----------
Total Interest Expense 1,373,981 (1,099,160) 274,821 641,073 607,169 1,248,242
---------- ---------- ---------- ---------- --------- ----------
Net Interest Income $3,911,432 ($596,019) $3,315,413 $1,947,571 ($216,428) $1,731,143
========== ========== ========== ========== ========= ==========
1999 Over 1998
--------------
Volume Rate Total
---------------------------------------
Increase (Decrease) In
Interest and Fee Income
Time Deposits With Other
Financial Institutions ($4,128) $57 ($4,071)
Investment Securities:
Taxable 464,933 43,123 508,056
Non-Taxable (1) 265,794 (17,561) 248,233
Federal Funds Sold (345,801) 76,985 (268,816)
Loans 2,053,954 (699,996) 1,353,958
---------- --------- ----------
Total Interest and Fee Income 2,434,752 (597,392) 1,837,360
---------- --------- ----------
Increase (Decrease) In
Interest Expense
Deposits:
Interest Bearing
Transaction Accounts 222,019 12,053 234,072
Savings 43,361 8,329 51,690
Time Deposits 200,354 (310,920) (110,566)
---------- --------- ----------
Total Deposits 465,734 (290,538) 175,196
Borrowings 105,555 91,514 197,069
---------- --------- ----------
Total Interest Expense 571,289 (199,024) 372,265
---------- --------- ----------
Net Interest Income $1,863,463 ($398,368) $1,465,095
========== ========= ==========
(1) The interest earned is taxable-equivalent. On a non-taxable basis 2001
interest was $110,267 less than 2000; 2000 interest income was $14,860 less than
in 1999; and 1999 interest income was $193,017 more than in 1998.
Investment Securities
The following tables show the book value of investment securities as of December
31, 2001, 2000 and 1999.
Book Value as of December 31, 2001
Held to Maturity Available-for-Sale Equities
---------------- ------------------ --------
Securities of the U. S. Treasury and
Government Agencies $0 $24,566,295 $0
Mortgage Backed Securities 1,313,871 28,212,813 0
Equity Securities 0 0 1,241,250
Municipal Securities 0 13,139,762 0
Corporate Debt Securities 0 17,645,725 0
---------- ----------- ----------
$1,313,871 $83,564,595 $1,241,250
========== =========== ==========
11
Book Value as of December 31, 2000
Held to Maturity Available-for-Sale Equities
---------------- ------------------ --------
Securities of the U. S. Treasury and
Government Agencies $0 $5,538,580 $0
Mortgage Backed Securities 1,353,119 23,910,854 0
Equity Securities 0 0 1,231,800
Municipal Securities 0 12,627,246 0
Corporate Debt Securities 0 14,942,858 0
---------- ----------- ----------
$1,353,119 $57,019,538 $1,231,800
========== =========== ==========
Book Value as of December 31, 1999
Held to Maturity Available-for-Sale Equities
---------------- ------------------ --------
Securities of the U. S. Treasury and
Government Agencies $0 $10,383,943 $0
Mortgage Backed Securities 0 19,977,328 0
Equity Securities 0 0 924,750
Municipal Securities 1,389,964 12,364,934 0
Corporate Debt Securities 0 11,613,488 0
---------- ----------- --------
$1,389,964 $54,339,693 $924,750
========== =========== ========
The following table provides a summary of the maturities and weighted average
yields of investment securities as of December 31, 2001.
MATURITY AND WEIGHTED AVERAGE YIELD
OF INVESTMENT SECURITIES AS OF
DECEMBER 31, 2001
AFTER ONE AFTER FIVE
IN ONE YEAR THROUGH THROUGH AFTER
OR LESS FIVE YEARS TEN YEARS TEN YEARS
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ -----
AVAILABLE FOR SALE SECURITIES:
Securities of the US Treasury and other
US Government Agencies $11,194,380 1.94% $13,371,915 4.67% $0 0.00% $0 0.00%
Mortgage-Backed Securities (1) 1,553,445 4.83% 1,323,696 5.34% 8,292,626 5.97% 17,043,046 6.23%
Municipal Securities (2) 570,179 7.83% 2,233,235 5.97% 6,898,715 6.26% 3,437,633 7.05%
Corporate Debt Securities 2,572,950 6.48% 8,905,865 5.67% 1,041,710 5.83% 5,125,200 6.24%
----------- ---- ----------- ---- ----------- ---- ----------- ----
TOTAL $15,890,954 3.17% $25,834,711 5.16% $16,233,051 6.08% $25,605,879 6.34%
HELD TO MATURITY SECURITIES:
Municipal Securities (2) $0 0.00% $0 0.00% $0 0.00% $1,313,871 8.78%
-- ---- -- ---- -- ---- ---------- ----
TOTAL $0 0.00% $0 0.00% $0 0.00% $1,313,871 8.78%
EQUITY SECURITIES:
Equity Stocks (3) $0 0.00% $0 0.00% $0 0.00% $1,241,250 5.91%
-- ---- -- ---- -- ---- ---------- ----
$0 0.00% $0 0.00% $0 0.00% $1,241,250 5.91%
TOTAL
AMOUNT YIELD
------ -----
AVAILABLE FOR SALE SECURITIES:
Securities of the US Treasury and other
US Government Agencies $24,566,295 3.43%
Mortgage-Backed Securities (1) 28,212,813 6.03%
Municipal Securities (2) 13,139,762 6.49%
Corporate Debt Securities 17,645,725 5.96%
----------- ----
TOTAL $83,564,595 5.32%
HELD TO MATURITY SECURITIES:
Municipal Securities (2) $1,313,871 8.78%
---------- ----
TOTAL $1,313,871 8.78%
EQUITY SECURITIES:
Equity Stocks (3) $1,241,250 5.91%
---------- ----
$1,241,250 5.91%
(1) The maturity of mortgage-backed securities is based on contractual
maturity. The average expected life is approximately two and one half
years.
(2) Yields shown are taxable-equivalent.
(3) Consists of Federal Reserve Bank and Federal Home Loan Bank Stock
12
LOAN PORTFOLIO
Composition of Loans
The following table shows the composition of loans as of December 31, 2001,
2000, 1999, 1998 and 1997.
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Commercial Loans $29,730,027 $28,599,857 $21,463,022 $14,410,117 $16,458,361
Commercial Loans Secured by
Real Estate 7,930,041 5,114,931 13,010,890 6,062,585 9,610,793
Installment Loans 20,301,134 23,431,838 20,868,859 18,460,555 15,918,156
Real Estate Loans 106,850,930 86,886,297 58,368,548 51,643,406 34,089,199
Construction Loans 21,453,418 8,242,918 8,441,142 5,950,207 6,446,381
------------ ------------ ------------ ----------- -----------
186,265,550 152,275,841 122,152,461 96,526,870 82,522,890
Less - Allowance for
Loan Losses 2,717,249 2,268,048 1,986,931 1,751,693 1,532,128
------------ ------------ ------------ ----------- -----------
$183,548,301 $150,007,793 $120,165,530 $94,775,177 $80,990,762
============ ============ ============ =========== ===========
The following table shows maturity distribution of loans and sensitivity in
interest rates as of December 31, 2001
AFTER ONE
IN ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
--------------------------------------------------------------
Commercial (Including
Real Estate Secured) $10,064,427 $14,348,936 $13,246,705 $37,660,068
Installment 651,574 6,093,084 13,556,476 20,301,134
Real Estate 6,880,341 22,703,772 77,266,817 106,850,930
Construction 11,793,248 5,157,616 4,502,554 21,453,418
----------- ----------- ------------ ------------
$29,389,590 $48,303,408 $108,572,552 $186,265,550
=========== =========== ============ ============
The following table shows maturity sensitivity to changes in interest rates as
of December 31, 2001.
Loans With Fixed Interest Rates $8,640,097 $27,500,605 $40,477,566 $76,618,268
Loans With Floating Interest Rates 20,749,493 20,802,803 68,094,986 109,647,282
----------- ----------- ------------ ------------
$29,389,590 $48,303,408 $108,572,552 $186,265,550
=========== =========== ============ ============
Nonaccrual Past Due and Restructured Loans
There were no nonaccrual loans as of December 31, 2001, 2000 or 1999. Nonaccrual
loans were $88,694, and $466,051 as of December 31, 1998, and 1997,
respectively. The Company held no OREO as December 31, 2001, 2000, 1999, 1998 or
1997. There were no loans accruing interest 90 days past due as of December 31,
2001, 2000, 1999, 1998, or 1997. There are no loans upon which principal and
interest payments were 90 days past due at December 31, 2001 and with respect to
which serious doubt existed as to the ability of the borrower to comply with the
present loan payment terms.
13
The following table sets forth the amount of the Banks' non-performing assets as
of the dates indicated:
December 31,
2001 2000 1999 1998 1997
Nonaccrual loans 0 0 0 88,694 466,051
Accruing loans past due 90 days or more 0 0 0 0 0
Total nonperforming loans 0 0 0 88,694 466,051
Other real estate owned 0 0 0 0 0
Total nonperforming assets 0 0 0 88,694 466,051
Nonperforming loans to total loans NA NA NA 0.09% 0.56%
Allowance for loan losses to nonperforming loans NA NA NA 1975% 329%
Nonperforming assets to total assets NA NA NA 0.05% 0.35%
Allowance for loan losses to nonperforming assets NA NA NA 1975% 329%
The following tables summarize the allocation of the allowance for loan losses
between loan types at December 31, 2001, 2000, 1999, 1998, and 1997.
December 31, 2001
Composition of Loans Amount Allocated for Percentage of Loans
Loan Losses in Each Category to
Total Loans
Commercial Loans $29,730,027 $632,377 16.0%
Commercial Loans Secured by
Real Estate 7,930,041 70,592 4.0%
Installment Loans 20,301,134 258,612 11.0%
Real Estate Loans 106,850,930 1,588,391 58.0%
Construction Loans 21,453,418 167,277 11.0%
------------ ---------
Total Loans Outstanding 186,265,550
Less Allowance for Loan Losses 2,717,249 2,717,249 100.0%
------------
Total Loans, net $183,548,301
============
December 31, 2000
Composition of Loans Amount Allocated for Percentage of Loans
Loan Losses in Each Category to
Total Loans
Commercial Loans $28,599,857 $703,095 31.0%
Commercial Loans Secured by
Real Estate 5,114,931 61,237 2.7%
Installment Loans 23,431,838 192,784 8.5%
Real Estate Loans 86,886,297 1,195,261 52.7%
Construction Loans 8,242,918 115,671 5.1%
------------ ---------
Total Loans Outstanding 152,275,841
Less Allowance for Loan Losses 2,268,048 2,268,048 100.0%
------------
Total Loans, net $150,007,793
============
14
December 31, 1999
Composition of Loans Amount Allocated for Percentage of Loans
Loan Losses in Each Category to
Total Loans
Commercial Loans $21,463,022 $349,700 17.6%
Commercial Loans Secured by
Real Estate 13,010,890 212,602 10.7%
Installment Loans 20,868,859 337,778 17.0%
Real Estate Loans 58,368,548 949,753 47.8%
Construction Loans 8,441,142 137,098 6.9%
------------ ---------
Total Loans Outstanding 122,152,461
Less Allowance for Loan Losses 1,986,931 1,986,931 100.0%
------------
Total Loans, net $120,165,530
============
December 31, 1998
Composition of Loans Amount Allocated for Percentage of Loans
Loan Losses in Each Category to
Total Loans
Commercial Loans $14,410,117 $261,002 14.9%
Commercial Loans Secured by
Real Estate 6,062,585 110,357 6.3%
Installment Loans 18,460,555 334,573 19.1%
Real Estate Loans 51,643,406 937,156 53.5%
Construction Loans 5,950,207 108,605 6.2%
------------ ---------
Total Loans Outstanding 96,526,870
Less Allowance for Loan Losses 1,751,693 1,751,693 100.0%
------------
Total Loans, net $94,775,177
============
December 31, 1997
Composition of Loans Amount Allocated for Percentage of Loans
Loan Losses in Each Category to
Total Loans
Commercial Loans $16,458,361 $304,893 19.9%
Commercial Loans Secured by
Real Estate 9,610,793 179,259 11.7%
Installment Loans 15,918,156 295,701 19.3%
Real Estate Loans 34,089,199 632,769 41.3%
Construction Loans 6,446,381 119,506 7.8%
------------ ---------
Total Loans Outstanding 82,522,890
Less Allowance for Loan Losses 1,532,128 1,532,128 100.0%
------------
Total Loans, net $80,990,762
============
15
Summary of Loan Loss Experience
The following table provides a summary of the Banks' loan loss experience as of
December 31, 2001, 2000, 1999, 1998, and 1997.
December 31,
------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Average loans for the period $174,049,609 $141,075,523 $110,609,432 $89,057,414 $78,975,833
Loans outstanding at end
of period 186,265,550 152,275,841 122,152,461 96,526,870 82,522,890
Allowance for Loan Losses
Balance, beginning of period 2,268,048 1,986,931 1,751,693 1,532,128 1,474,437
Less loans charged off:
Real Estate loans 0 0 12,776 7,300 155,079
Commercial loans 0 99,216 0 38,030 35,806
Installment loans 4,105 6,292 11,606 13,880 5,018
------------ ------------ ------------ ----------- -----------
Total loans charged off 4,105 105,508 24,382 59,210 195,903
Recoveries:
Real Estate loans 0 0 0 700 800
Commercial loans 0 1,625 6,615 36,592 12,365
Installment loans 6,306 0 13,005 1,483 429
Total recoveries 6,306 1,625 19,620 38,775 13,594
Net loans charged off (recovered) (2,201) 103,883 4,762 20,435 182,309
Provision for loan losses 447,000 385,000 240,000 240,000 240,000
------------ ------------ ------------ ----------- -----------
Balance, end of period $2,717,249 $2,268,048 $1,986,931 $1,751,693 $1,532,128
============ ============ ============ =========== ===========
Net loans charged off (recovered)
to average loans by types:
Real Estate loans 0.00% 0.00% .001% .007% .195%
Commercial loans 0.00% .069% (.006%) .002% .030%
Installment loans (.001%) .004% .001% .014% .006%
Net losses (recoveries) to average loans
outstanding (.001%) .074% .004% .023% .231%
16
TIME DEPOSITS
The following table sets forth the maturity of time certificates of deposit of
$100,000 or more at December 31, 2001, 2000 and 1999.
2001 2000 1999
---- ---- ----
3 months or less $19,259,986 50.4% $12,443,557 51.8% $11,927,749 54.4%
Over 3 months through
6 months 8,242,739 21.6% 7,140,912 29.8% 7,126,652 32.5%
Over 6 months through
12 months 6,301,867 16.5% 3,160,676 13.2% 2,001,570 9.1%
Over 12 months 4,419,280 11.5% 1,251,613 5.2% 865,947 4.0%
----------- ---- ----------- ---- ----------- ----
$38,223,872 100% $23,996,758 100% $21,921,918 100%
=========== ==== =========== ==== =========== ====
BORROWINGS
There were no short-term borrowings at December 31, 2001 or December 31, 2000.
Short-term borrowings consist primarily of federal funds purchased and
borrowings from the Federal Home Loan Bank of San Francisco (FHLB). The Vintage
Bank maintains a collateralized line of credit with the FHLB. Based on the FHLB
stock requirements at December 31, 2001, this line provided for maximum
borrowings of approximately $83 million; the Company also has available unused
lines of credit totaling $11 million for Federal funds transactions at December
31, 2001. The Company did not borrow at FHLB during 2001.
The Company has an unsecured loan with Union Bank of California, which had an
original principal balance of $3,000,000. The balance at December 31, 2001 was
$1,846,154. The loan, which matures October 3, 2003, is a variable rate loan
tied to a reference rate consistent with the prime rate with principal and
interest payments due quarterly.
RETURN ON EQUITY AND ASSETS
The following sets forth key ratios for the periods ending December 31, 2001,
2000 and 1999.
2001 2000 1999
---- ---- ----
Net Income as a Percentage of
Average Assets 1.00% 1.17% 1.44%
Net Income as a Percentage of
Average Equity 10.61% 11.70% 15.52%
Average Equity as a Percentage
of Average Assets 9.45% 9.95% 9.25%
Dividends Declared Per Share
as a Percentage of Net
Income Per share 13.70% 15.04% 13.33%
17
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.
SUPERVISION AND REGULATION
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 serves as a
source of financial and managerial strength to its subsidiary banks. The Federal
Reserve has the authority to examine North Bay Bancorp.
The Bank Holding Company Act requires North Bay 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, North Bay 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.
North Bay 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. North Bay Bancorp became a financial Holding
Company on
18
August 23, 2000. North Bay 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.
North Bay 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, North Bay 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 North Bay 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.
Payment of Dividends
The Company paid cash dividends of $0.20 per share in each of the years 2001 and
2000. The holders of common stock of the Company are entitled to receive cash
dividends when and as declared by the Board of Directors out of funds legally
available. Federal Reserve Board regulations prohibit cash dividends, except
under limited circumstances, if the distribution would result in a withdrawal of
capital or exceed the Company's net profits then on hand after deducting its
losses and bad debts. Furthermore, cash dividends cannot be paid without the
prior written approval of the Federal Reserve Board 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 shareholders right to receive dividends is also
subject to the restrictions set forth in the California General Corporation Law.
The Corporation Law provides that a corporation may make a distribution to its
shareholders if the corporation's retained earnings equal at least the amount of
the proposed distribution. The Corporation Law further provides that, in the
event that sufficient retained earnings are not available for the proposed
distribution, a corporation may nevertheless make a distribution to its
shareholders if it meets two conditions, which generally stated are as follows:
(1) The corporation's assets equal at least 1.25 times its liabilities; and (2)
the corporation's current assets equal at least its current liabilities or, if
the average of the corporation's earnings before taxes on income and before
interest expense for the two preceding fiscal years was less than the average of
the corporation's interest expense for such fiscal years, then the corporation's
current assets must equal at least 1.25 times its current liabilities. As of
December 31, 2001, the Company had retained earnings of $7,453,716 eligible for
dividends.
North Bay Bancorp
The shareholders of North Bay 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, 2001, North Bay Bancorp had no outstanding shares of preferred
stock.
19
The principal sources of cash revenue to North Bay Bancorp will be dividends and
management fees received from The Vintage Bank and Solano Bank. The Banks'
ability to make dividend payments to North Bay 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 North Bay 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.
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. 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
20
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, 2001 follow:
REQUIREMENT
----------------------------
The
ADEQUATELY WELL Vintage Solano
CAPITALIZED CAPITALIZED Bank Bank COMPANY
---------------------------- -----------------------------------
Total risk-based capital 8.0% 10.0% 11.54% 22.36% 13.24%
ratio
Tier 1 risk-based 4.0% 6.0% 10.29% 22.04% 12.13%
capital ratio
Tier 1 leverage capital 4.0% 5.0% 7.75% 16.09% 9.15%
ratio
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 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.
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 its primary regulator
in the last 12 months. Solano Bank was examined June 11, 2001 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.
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.
21
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.
Recent and Proposed Legislation
The operations of North Bay 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. North Bay
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 North Bay 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. President Clinton signed the Gramm-Leach-Bliley Act into
law in 2000. 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 Federal Reserve, FDIC, Office of
the Comptroller of the Currency) among others, continue to draft regulations to
implement the Gramm-Leach-Bliley Act. The likelihood of any major change from
these regulations, and the impact such change may have on North Bay Bancorp and
the Banks is impossible to predict.
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. Title I acts to facilitate
affiliations among banks, insurance companies and securities firms. Title II
narrows the exemptions from the securities laws previously enjoyed by banks,
requires the Board of Governors and the SEC to work together to draft rules
governing certain securities activities of banks and creates a new, voluntary
investment bank holding company. Title III restates the proposition that the
states are the functional regulators for all insurance activities, including the
insurance activities of federally-chartered banks. The law bars the states from
prohibiting insurance activities by depository institutions. The law encourages
the states to develop uniform or reciprocal rules for the licensing of insurance
agents. Title IV prohibits the creation of additional unitary thrift holding
companies. Title V imposes significant requirements on financial institutions
related to the transfer of nonpublic personal information. These provisions
require each institution to develop and distribute to accountholders an
information disclosure policy, and requires that the policy allow customers to,
and for the institution to, honor a customer's request to "opt-out" of the
proposed transfer of specified nonpublic information to third parties. Title VI
reforms the Federal Home Loan Bank system to allow broader access among
depository institutions to the system's advance programs, and to improve the
corporate governance and capital maintenance requirements for the system. Title
VII addresses a multitude of issues including disclosure of ATM surcharging
practices, disclosure of agreements among non-governmental entities and insured
depository institutions which donate to non-governmental entities regarding
donations made in connection with the CRA, and disclosure by the recipient
non-governmental entities of how such funds are used. Additionally, the law
extends the period of time between CRA examinations of community banks.
22
Financial Holding Companies. Title I of the Gramm-Leach-Bliley Act 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. A bank holding company that qualifies as a
Financial Holding Company can expand into a wide variety of services that are
financial in nature, provided that its subsidiary depository institutions are
well-managed, well-capitalized and have received at least a "satisfactory"
rating on their last CRA examination. Services that have been deemed to be
financial in nature include securities underwriting, dealing and market making,
sponsoring mutual funds and investment companies, insurance underwriting and
agency activities and merchant banking. North Bay Bancorp became a financial
holding company on August 23, 2000. The Company continues to evaluate the
strategic opportunities presented by the broad powers granted to bank holding
companies that elect to be treated as financial holding companies.
Privacy. Under Title V of the Gramm-Leach-Bliley Act, federal banking regulators
are required to adopt rules that limit 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. Pursuant to the rules, financial institutions must
provide (i) 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; (ii) annual notices
of their privacy policies to current customers; and (iii) 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 Banks prepared
and delivered the required initial privacy policy notices to customers, and have
adopted policies and procedures designed to substantially comply with the
provisions of the regulations implementing the privacy provisions of Title V of
the Gramm-Leach-Bliley Act.
Safeguarding Confidential Customer Information. Under Title V of the
Gramm-Leach-Bliley Act, federal banking regulators are required to adopt rules
that will require 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 to: (i) identify and assess the risks that may threaten
customer information; (ii) develop a written plan containing policies and
procedures to manage and control these risks; (iii) implement and test the plan;
and (iv) adjust the plan on a continuing basis to account for changes in
technology, the sensitivity of customer information and internal or external
threats to information security.
Each of the Banks implemented a security program appropriate to its size and
complexity and the nature and scope of its operations well in advance of the
July 1, 2001 effective date for the guidelines.
Community Reinvestment Act Sunshine Requirements. In February 2001, the federal
banking agencies adopted final regulations implementing Section 711 of Title 7,
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 such agreement. The regulations impose annual
reporting requirements concerning the disbursement, receipt and use of funds or
other resources under each such agreement. The effective date of the regulations
was April 1, 2001.
Neither the Company nor the Banks are a party to any agreement that would be
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.
USA Patriot Act
As part of the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 ("USA Patriot Act"),
signed into law on October 26, 2001, Congress adopted the International Money
Laundering Abatement and Financial Anti-Terrorism Act of 2001 ("IMLAFATA").
IMLAFATA authorizes the Secretary of the Treasury, in consultation with the
heads of other government agencies, to adopt special measures applicable to
banks, bank holding companies, or other
23
financial institutions. These measures may include enhanced recordkeeping and
reporting requirements for certain financial transactions that are of primary
money laundering concern, due diligence requirements concerning the beneficial
ownership of certain types of accounts, and restrictions or prohibitions on
certain types of accounts with foreign financial institutions. Covered financial
institutions also are barred from dealing with foreign "shell" banks. In
addition, IMLAFATA expands the circumstances under which funds in a bank account
may be forfeited and requires covered financial institutions to respond under
certain circumstances to requests for information from federal banking agencies
within 120 hours.
Treasury regulations implementing the due diligence requirements must be issued
no later than April 24, 2002. Whether or not regulations are adopted, the law
becomes effective July 23, 2002. Additional regulations are to be adopted during
2002 to implement minimum standards to verify customer identity, to encourage
cooperation among financial institutions, federal banking agencies, and law
enforcement authorities regarding possible money laundering or terrorist
activities, to prohibit the anonymous use of "concentration accounts," and to
require all covered financial institutions to have in place a Bank Secrecy Act
compliance program. IMLAFATA also amends the Bank Holding Company Act and the
Bank Merger Act to require the federal banking agencies to consider the
effectiveness of a financial institution's anti-money laundering activities when
reviewing an application under these acts.
Both of the Banks have Bank Secrecy Act compliance programs in place, and engage
in very few transactions of any kind with foreign financial institutions or
foreign persons.
24
Item 2 - PROPERTIES
North Bay Bancorp
North Bay 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 North
Bay Bancorp and The Vintage, North Bay Bancorp reimburses The Vintage Bank for
the fair market value of the space utilized by North Bay Bancorp.
North Bay 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 is 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 $4,525 per month. By the terms of the
lease North Bay Bancorp is required to (i) keep the premises in good order,
condition and repair, (ii) maintain comprehensive general liability insurance,
(iii) pay all real property taxes assessed against the premises and (iv) pay for
all utilities used. By the terms of a Sublease Agreement entered into with
Solano Bank as of October 1, 2000, North Bay 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 North Bay Bancorp as a
data center.
North Bay Bancorp owns certain leasehold improvements and furniture, fixtures
and equipment located at its offices, all of which are used in North Bay
Bancorp's business. In the opinion of management, the properties of North Bay
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, 2002, monthly rental was $3,207 per month. By
the terms of the lease The Vintage Bank is required to (i) maintain and repair
the leased premises, (ii) maintain combined single limit, bodily injury and
property damage insurance, and (iii) 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, 2002, monthly rental was $6,318 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 (i)
maintain and repair the leased premises, (ii) pay for all utilities used, (iii)
maintain public liability insurance, (iv) pay its pro rata share of common area
maintenance, and (v) 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 December 2001 The Vintage Bank entered into a lease for its planned Napa
Valley Gateway Business Park branch in the southern part of Napa County. The
premises will be located in a multi-tenant professional office building to be
constructed at the southeast corner of Devlin Road and Gateway Road East. It is
anticipated that the building and leasehold improvements will be completed in
25
the third quarter with occupancy by The Vintage Bank in the fourth quarter. The
Vintage Bank is required to pay for the leasehold improvements to the premises
at an estimated cost of $400,000. The lease term will commence upon substantial
completion of the premises and issuance of a certificate of occupancy for the
building and the premises, for a term of ten years, with two successive options
to renew for five years each upon at least 120 days' notice. Rent does not
commence until the term commences. Monthly rental for the initial year of the
term of the lease will be $11,810 per month. Rent is subject to annual
adjustment 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 (i) maintain and repair the
leased premises, (ii) pay for all utilities used, (iii) maintain public
liability insurance, and (iv) pay its pro rata share of common area operating
expenses, including real property taxes.
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. By the terms of the Agreement the subject
property will become part of the bank's St. Helena branch property upon
consummation of the purchase. The purchase is subject to the approval of the
City of St. Helena. The purchase of the property will not be financed. The
property is currently improved with a parking lot which will be used to
supplement existing branch parking. It is not anticipated that any additional
improvements will be made to the property.
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 13,200
square feet are occupied by BC Stocking, Inc., and Rob Wood, a director of
Solano Bank, occupies approximately 750 square feet. Wells Fargo Home Mortgage,
Inc. currently occupies approximately 3000 square feet under a short-term rental
agreement.
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 cost of $2,980 per month.
Effective January 1, 2002, monthly rental was $3,842 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 (i) maintain and repair the leased premises,
(ii) pay for all utilities used, (iii) maintain public liability insurance, (iv)
pay its pro rata share of common area maintenance, and (v) pay its pro rata
share of all real property taxes assessed against the shopping center of which
the premises are a part. The lease for the Benicia Office is presently held by
North Bay Bancorp. Subject to regulatory approval the lease will be assigned to
Solano Bank.
Solano Bank subleases from North Bay 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 North Bay
Bancorp's master lease or on August 31, 2005, whichever is earlier. The sublease
is subject to extension for five years in the event North Bay 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 North Bay 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 cost of $4,332 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 (i) maintain and repair the leased premises, (ii) pay
for all utilities used, (iii) maintain public liability insurance, (iv) pay its
pro rata share of common area maintenance, and (v) 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.
26
Item 3 - LEGAL PROCEEDINGS
Neither North Bay Bancorp, The Vintage Bank nor Solano Bank are parties to, nor
are any of their properties the subject of, any material pending legal
proceedings other than ordinary, routine litigation incidental to Company
business, nor are any of such proceedings known to be contemplated by government
authority. No director, officer, affiliate, more than 5% shareholder of the
Company or any associate of these persons is a party adverse to the Company or
has a material interest adverse to the Company in any material legal proceeding.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
27
PART II
Item 5 - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
On November 1, 1999, North Bay Bancorp's common stock began trading
over-the-counter on the OTC "Bulletin Board" under the symbol NBAN. Prior to
November 1, 1999, The Vintage Bank's common stock was quoted on the OTC
"Bulletin Board" under the symbol VTGB. The firm of Hoefer & Arnett,
Incorporated serves as primary market maker in North Bay Bancorp's common stock.
The following table (adjusted for the 2000, 2001, and 2002 stock dividends)
summarizes the common stock high and low bid prices based upon transactions of
which North Bay Bancorp or The Vintage Bank is aware:
Quarter ended High Low
December 31, 2000 $19.50 $18.59
September 30, 2000 20.41 18.59
June 30, 2000 20.64 17.91
March 31, 2000 22.68 17.23
December 31, 2001 19.52 18.10
September 30, 2001 19.53 18.10
June 30, 2001 19.05 18.10
March 31, 2001 19.95 17.23
There may be other transactions of which North Bay 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 North Bay 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 2000 and $0.20 per share
in 2001. The holders of common stock of North Bay 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 28, 2002, the Board of Director of North Bay Bancorp declared a $0.20
per share cash dividend and a 5% stock dividend payable March 22, 2002 to
shareholders of record as of March 4, 2002.
North Bay Bancorp is restricted in its ability to pay dividends to its
shareholders as a matter of law. For a discussion of restrictions imposed by
law, see "SUPERVISION and REGULATION - Payment of Dividends."
As of March 4, 2002, there were 1,051 holders of record of North Bay Bancorp's
common stock.
Item 6 - 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 North Bay Bancorp's 2001 Annual Report to Shareholders
on pages 6 through 12 which information is incorporated herein by reference.
28
Item 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
North Bay 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 North Bay Bancorp's 2001 Annual Report to
Shareholders on page 14 through 18 which information is incorporated herein by
reference.
Item 7A - 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 an 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.
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.
29
The following table, using traditional gap analysis, sets forth the repricing
opportunities for rate-sensitive assets and rate-sensitive liabilities at
December 31, 2001. Traditional gap analysis identifies short and long-term
interest rate positions or exposure. Rate sensitivity analysis usually excludes
Noninterest-bearing demand deposits. Including these deposits, which totaled
$77,117,476, 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 $64,367 $12,234 $69,134 $40,531 $186,266
Interest-bearing deposits in
Other banks 0 100 0 0 100
Investment securities 1,013 14,878 25,835 44,394 86,120
Federal funds sold 18,000 0 0 0 18,000
--------------------------------------------------------------------
Total 83,380 27,212 94,969 84,925 290,486
Interest rate-sensitive liabilities:
Interest-bearing demand
deposits 116,809 0 0 0 116,809
Time deposits >$100,000 19,260 14,545 3,912 507 38,224
Other time deposits 13,198 20,770 4,168 1,266 39,402
Savings deposits 20,889 0 0 0 20,889
Long-term borrowings 1,846 0 0 0 1,846
--------------------------------------------------------------------
Total $172,002 $35,315 $8,080 1,773 $217,170
Interest rate sensitivity gap ($88,622) ($8,103) $86,889 $83,152 $73,316
====================================================================
Cumulative interest rate gap ($88,622) ($96,725) (9,826) $73,316
Ratio of interest rate sensitivity to -30.51% -2.79% 29.91% 28.63%
earning assets
The preceding table indicates that the Company has a "negative" GAP for twelve
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 interest rates on interest-bearing liabilities
reprice downward more rapidly than rates on earning 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.
30
December 31, 2001 Dollar change in net interest income Percent change in net interest income
Change in interest rates:
200 basis point decline ($195,000) (1.35%)
100 basis points decline ($96,000) (.67%)
100 basis points rise $76,000 .53%
200 basis points rise $145,000 1.01%
As illustrated in the above table, the Company is currently asset sensitive, as
opposed to being liability sensitive as indicated by the table using traditional
GAP analysis. The implication of this is that the Company's earnings will
decrease in a falling interest rate environment, as interest rates on earning
assets reprice downward more rapidly than rates on interest-bearing liabilities;
conversely, earnings would increase in a rising rate environment. Therefore, a
decrease in market rates could adversely affect net interest income. In
contrast, an increase rate environment 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 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 9 - 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 North Bay Bancorp, see "ELECTION OF DIRECTORS" and "REPORTS
OF CHANGES IN BENEFICIAL OWNERSHIP" on pages 3 through 7 and 23 of the Bank's
definitive proxy statement for the 2002 Annual Meeting of Shareholders to be
filed pursuant to Regulation 14A (the "Proxy Statement"), which is incorporated
herein by reference.
Item 10 - EXECUTIVE COMPENSATION
For information concerning compensation of the executive officers of North Bay
Bancorp, see "EXECUTIVE COMPENSATION" on pages 16 to 19 of the Proxy Statement,
which is incorporated herein by reference.
31
Item 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning the security ownership of certain beneficial owners
and management of North Bay Bancorp, see "SECURITY OWNERSHIP OF MANAGEMENT" on
pages 12 to 15 of the Proxy Statement, which is incorporated herein by
reference.
Item 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related transactions, see
"MANAGEMENT INDEBTEDNESS" on page 23 of the Proxy Statement, which is
incorporated herein by reference.
Item 13 - EXHIBITS AND REPORTS ON FORM 8-K
Page of 2001
Annual Report
-------------
(a) 1. Financial Statements
(i) Balance Sheets, December 31, 2001 and
2000 14
(ii) Income Statements for the years
ended December 2001, 2000, and 1999 15
(iii) Statements of Changes in Shareholders'
Equity for the years ended December 31,
2001, 2000, and 1999 16
(iv) Statements of Cash Flows for the years
ended December 31, 2001, 2000, and 1999 17
(v) Notes to Financial Statements 18
(vi) Report of Independent Public
Accountants 36
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 35 of this Report.
(b) Reports on Form 8-K
A current report on Form 8-K was filed with the Securities and Exchange
Commission on October 25, 2001 reporting, under Item. 5 "Other Matters," the
issuance of a press release by North Bay Bancorp announcing its earnings for the
quarter ended September 30, 2001.
32
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 and Chief Executive Officer
Dated: March 25, 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 25, 2002
- --------------------------
Thomas N. Gavin
/s/David B. Gaw Director March 25, 2002
- --------------------------
David B. Gaw
/s/Fred J. Hearn Jr. Director March 25, 2002
- --------------------------
Fred J. Hearn Jr.
/s/Conrad W. Hewitt Director March 25, 2002
- --------------------------
Conrad W. Hewitt
/s/Harlan R. Kurtz Director March 25, 2002
- --------------------------
Harlan R. Kurtz
/s/Richard S. Long Director March 25, 2002
- --------------------------
Richard S. Long
/s/Thomas H. Lowenstein Director March 25, 2002
- --------------------------
Thomas H. Lowenstein
/s/Thomas F. Malloy Director and March 25, 2002
- -------------------------- Chairman of the Board
Thomas F. Malloy
/s/Terry L. Robinson President, Chief March 25, 2002
- -------------------------- Executive Officer and Director
Terry L. Robinson (Principal Executive Officer)
33
/s/James E. Tidgewell Director March 25, 2002
- --------------------------
James E. Tidgewell
/s/Lee-Ann Cimino Sr. Vice President March 25, 2002
- -------------------------- Chief Financial Officer
Lee-Ann Cimino (Principal Financial Officer)
34
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)
10.1 Amended North Bay Bancorp Stock Option Plan. (3) *
10.2 [Reserved]
10.3 Lease by and between B&C Stocking LLC, as Lessor, and North
Bay Bancorp, as Lessee, with respect to premises at 403 Davis
Street, Vacaville, California. (3)
10.4 Lease by and between Davies Partners II, as Lessor, and North
Bay Bancorp, as Lessee, with respect to premises at 1395 E. 2d
Street, Benicia, California. (3)
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) *
10.10 Life Insurance Endorsement Method Split Dollar Plan Agreement
for Terry L. Robinson. *
10.11 Life Insurance Endorsement Method Split Dollar Plan Agreement
for Dale Brain. *
10.12 Life Insurance Endorsement Method Split Dollar Plan Agreement
for Lee-Ann Cimino. *
10.13 Life Insurance Endorsement Method Split Dollar Plan Agreement
for Kathi Metro. *
10.14 Life Insurance Endorsement Method Split Dollar Plan Agreement
for Glen C. Terry. *
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 2001 Annual Report to Shareholders.
21. Subsidiaries of Registrant are: The Vintage Bank, a California
banking corporation and Solano Bank, a California Corporation.
23. Consent of Arthur Andersen LLP as independent public
accountants for North Bay Bancorp, The Vintage Bank and Solano
Bank.
25. Power of Attorney.
99.1 Letter re: Receipt of Assurance from Arthur Andersen LLP
* Employment Contracts and Compensation Plans.
35
(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) Attached as Exhibits 10.1, 10.3, and 10.4 to North Bay Bancorp's Annual
Report as Form 10KSB for the year ended December 31, 1999 filed with
the Security and Exchange Commission, and incorporated herein by
reference.
(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 Security and
Exchange Commission, and incorporated herein by reference.
(5) Attached as Exhibits 10.1, 10.2, 10.3, and 10.4 to North Bay Bancorp's
Quarterly Report as Form 10-Q for the quarter ended June 30, 2001 filed
with the Security and Exchange Commission, and incorporated herein by
reference.
36