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