-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SrvS3hk+HN95VPgmqSdKWbIQSh+80UqcnyuW6D+9rkGATcUmGXIe9XMXsIhtuc3p +GdNtjxBSTzYbJzfdeqxEQ== 0000950005-02-000343.txt : 20020415 0000950005-02-000343.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950005-02-000343 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH BAY BANCORP/CA CENTRAL INDEX KEY: 0001102595 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 680434802 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-93537 FILM NUMBER: 02588267 BUSINESS ADDRESS: STREET 1: 1500 SOSCOL AVE CITY: NAPA STATE: CA ZIP: 94559 BUSINESS PHONE: 7072578500 MAIL ADDRESS: STREET 1: 1500 SOSCOL AVE CITY: NAPA STATE: CA ZIP: 94559 10-K 1 p15097_form10k.txt FORM 10-K 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 EX-10.10 3 p15097_ex10-10.txt ROBINSON/LIFE INSURANCE AGREEMENT EXHIBIT 10.10 LIFE INSURANCE ENDORSEMENT METHOD SPLIT DOLLAR PLAN AGREEMENT INSURER/POLICY NUMBER: Mass Mutual/0044448 New York Life/56600432 BANK: The Vintage Bank, a state-chartered commercial bank and wholly-owned subsidiary of North Bay Bancorp (the "Holding Company") INSURED: Terry L. Robinson RELATIONSHIP OF INSURED TO BANK: Executive Officer DATE: September 21, 2001 The respective rights and duties of the Bank and the Insured in the above policy(ies) (the "Policy" or "Policies") shall be as follows: I. DEFINITIONS 1. Refer to the Policy provisions for the definition of all terms in this Agreement other than those contained herein or set forth below: 2. The term "Affiliate" shall mean a corporation or entity of any type directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Bank, within the meaning of Rule 144 under the Securities Act of 1933, as amended. II. POLICY TITLE AND OWNERSHIP Title and ownership shall reside in the Bank for its use and for the use of the Insured all in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values. Where the Bank and the Insured (or beneficiary[ies] or assignee[s], with the consent of the Insured) mutually agree to exercise the right to increase the coverage under the subject split dollar Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. 1 III. BENEFICIARY DESIGNATION RIGHTS The Insured (or beneficiary[ies] or assignee[s]) shall have the right and power to designate a beneficiary or beneficiaries to receive his share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement. IV. PREMIUM PAYMENT METHOD The Bank shall pay an amount equal to the planned premiums and any other premium payments that might become necessary to maintain the Policy in force. V. TAXABLE BENEFIT Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Insured the amount of imputed income received each year on Form W-2 or its equivalent. VI. DIVISION OF DEATH PROCEEDS Subject to Paragraph VII herein, the division of the death proceeds of the Policy is as follows: 1. If death occurs before age seventy one (71), the Insured's beneficiary(ies) shall be entitled to the lesser of $1,200,000, or one hundred percent (100%) of the net at risk insurance proceeds. If death occurs after age seventy one (71) but on or before age eighty one (81), the Insured's beneficiaries shall be entitled to the lesser of $840,000, or one hundred percent (100%) of the net at risk insurance proceeds. If death occurs after age eighty one (81), the Insured's beneficiaries shall be entitled to the lesser of $480,000, or one hundred percent (100%) of the net at risk insurance proceeds. The net at risk insurance portion is the total proceeds less the cash value of the Policy. 2. The Bank and the Insured (or beneficiary[ies] or assignee[s]) shall share in any interest due on the death proceeds on a pro rata basis in the ratio that the proceeds due the Bank and the Insured, respectively, bears to the total proceeds, excluding any such interest. 3 In the event that the Policy is terminated other than as a result of (a) a termination of this Agreement pursuant to paragraph X or (b) any intentional act of the Insured which results in the termination of the Policy, then the Bank shall pay to the Insider's beneficiary(ies) an amount which will provide a total after-tax death benefit equal to the benefit that the Insured would have received if the Policy had not been terminated. 2 VII. DIVISION OF CASH SURRENDER VALUE The Bank shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Bank. IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS In the event the Policy involves an endowment or annuity element, the Bank's right and interest in any endowment proceeds or annuity benefits shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value of such annuity benefits as the Policy's cash value. Such endowment proceeds or annuity benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT This Agreement shall terminate at the option of the Bank following thirty (30) days written notice to the Insured upon the happening of any one of the following: (i) the Insured commits fraud, theft or embezzlement against the Bank, or any subsidiary or Affiliate thereof; (ii) the Insured commits a felony or a crime involving moral turpitude; (iii) the Insured compromises trade secrets or other proprietary information of the Bank, or any subsidiary or Affiliate thereof; (iv) the Insured breaches any non-solicitation agreement with the Bank, or any subsidiary or Affiliate thereof; (v) the Insured breaches any of the material terms of any employment agreement entered into with the Bank or Holding Company and, if given the right in any such employment agreement, fails to cure said breach in accordance therewith; (vi) the Insured breaches any of the material terms of this Agreement; (vii) the Insured engages in any grossly negligent act or willful misconduct that causes, or could be reasonably expected to cause, harm to the business, operations or reputation of the Bank, or any subsidiary or Affiliate thereof; or (viii) the Bank, or any subsidiary or Affiliate thereof, is ordered to terminate any employment agreement by any governmental regulatory agency with supervisory authority over the Bank, or any subsidiary or Affiliate thereof.: Upon such termination, the Insured (or beneficiary[ies] or assignee[s]) shall have a ninety (90) day option to receive from the Bank an absolute assignment of the Policy in consideration of a 3 cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment shall be the greater of: 1. The Bank's share of the cash value of the Policy on the date of such assignment, as defined in this Agreement. 2. The amount of the premiums which have been paid by the Bank prior to the date of such assignment. Should the Insured (or beneficiary[ies] or assignee[s]) fail to exercise this option within the prescribed ninety (90) day period, the Insured (or beneficiary[ies] or assignee[s]) agrees that all of his rights, interest and claims in the Policy shall terminate as of the date of the termination of this Agreement. Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above. XI. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS The Insured may not, without the prior written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the Policy nor any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES This Agreement shall be binding upon the Insured and the Bank, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR The Holding Company is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Holding Company shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. XIV. FUNDING POLICY The funding Policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. 4 XV. CLAIM PROCEDURES Claim forms or claim information as to the subject Policy can be obtained by contacting The Benefit Marketing Group, Inc. (770-952-1529). When the Named Fiduciary has a claim which may be covered under the provisions described in the Policy, it should contact the office named above, and they will either complete a claim form and forward it to an authorized representative of the Insurer or advise the named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. XVI. GENDER Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as set forth herein upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. IN WITNESS WHEREOF, the Insured and a duly authorized Bank officer have signed this Agreement as of the above written date. THE VINTAGE BANK INSURED By: _____________________________________ By: ________________________________ Thomas H. Lowenstein Terry L. Robinson Chairman of the Board 5 Acceptance of Named Fiduciary Designation: NORTH BAY BANCORP By: _____________________________________ Thomas F. Malloy Chairman of the Board 6 BENEFICIARY DESIGNATION FORM Primary Designation: Name Relationship - ---- ------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ Contingent Designation: - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ _____________, 2001 Signed: ____________________________ Terry L. Robinson 7 EX-10.11 4 p15097_ex10-11.txt BRAIN/LIFE INSURANCE AGREEMENT EXHIBIT 10.11 LIFE INSURANCE ENDORSEMENT METHOD SPLIT DOLLAR PLAN AGREEMENT INSURER/POLICY NUMBER: Southland Life/0660015169 BANK: The Vintage Bank, a state-chartered commercial bank and wholly-owned subsidiary of North Bay Bancorp (the "Holding Company") INSURED: Dale Brain RELATIONSHIP OF INSURED TO BANK: Executive Officer DATE: September 21, 2001 The respective rights and duties of the Bank and the Insured in the above policy(ies) (the "Policy" or "Policies") shall be as follows: I. DEFINITIONS 1. Refer to the Policy provisions for the definition of all terms in this Agreement other than those contained herein or set forth below: 2. The term "Affiliate" shall mean a corporation or entity of any type directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Bank, within the meaning of Rule 144 under the Securities Act of 1933, as amended. II. POLICY TITLE AND OWNERSHIP Title and ownership shall reside in the Bank for its use and for the use of the Insured all in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values. Where the Bank and the Insured (or beneficiary[ies] or assignee[s], with the consent of the Insured) mutually agree to exercise the right to increase the coverage under the subject split dollar Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. III. BENEFICIARY DESIGNATION RIGHTS 1 The Insured (or beneficiary[ies] or assignee[s]) shall have the right and power to designate a beneficiary or beneficiaries to receive his share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement. IV. PREMIUM PAYMENT METHOD The Bank shall pay an amount equal to the planned premiums and any other premium payments that might become necessary to maintain the Policy in force. V. TAXABLE BENEFIT Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Insured the amount of imputed income received each year on Form W-2 or its equivalent. VI. DIVISION OF DEATH PROCEEDS Subject to Paragraph VII herein, the division of the death proceeds of the Policy is as follows: 1. If death occurs before age seventy one (71), the Insured's beneficiary(ies) shall be entitled to the lesser of $500,000, or one hundred percent (100%) of the net at risk insurance proceeds. If death occurs after age seventy one (71) but on or before age eighty one (81), the Insured's beneficiaries shall be entitled to the lesser of $350,000, or one hundred percent (100%) of the net at risk insurance proceeds. If death occurs after age eighty one (81), the Insured's beneficiaries shall be entitled to the lesser of $200,000, or one hundred percent (100%) of the net at risk insurance proceeds. The net at risk insurance portion is the total proceeds less the cash value of the Policy. 2. The Bank and the Insured (or beneficiary[ies] or assignee[s]) shall share in any interest due on the death proceeds on a pro rata basis in the ratio that the proceeds due the Bank and the Insured, respectively, bears to the total proceeds, excluding any such interest. 3 In the event that the Policy is terminated other than as a result of (a) a termination of this Agreement pursuant to paragraph X or (b) any intentional act of the Insured which results in the termination of the Policy, then the Bank shall pay to the Insider's beneficiary(ies) an amount which will provide a total after-tax death benefit equal to the benefit that the Insured would have received if the Policy had not been terminated. 2 VII. DIVISION OF CASH SURRENDER VALUE The Bank shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Bank. IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS In the event the Policy involves an endowment or annuity element, the Bank's right and interest in any endowment proceeds or annuity benefits shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value of such annuity benefits as the Policy's cash value. Such endowment proceeds or annuity benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT This Agreement shall terminate at the option of the Bank following thirty (30) days written notice to the Insured upon the happening of any one of the following: (i) the Insured commits fraud, theft or embezzlement against the Bank, or any subsidiary or Affiliate thereof; (ii) the Insured commits a felony or a crime involving moral turpitude; (iii) the Insured compromises trade secrets or other proprietary information of the Bank, or any subsidiary or Affiliate thereof; (iv) the Insured breaches any non-solicitation agreement with the Bank, or any subsidiary or Affiliate thereof; (v) the Insured breaches any of the material terms of any employment agreement entered into with the Bank or Holding Company and, if given the right in any such employment agreement, fails to cure said breach in accordance therewith; (vi) the Insured breaches any of the material terms of this Agreement; (vii) the Insured engages in any grossly negligent act or willful misconduct that causes, or could be reasonably expected to cause, harm to the business, operations or reputation of the Bank, or any subsidiary or Affiliate thereof; or (viii) the Bank, or any subsidiary or Affiliate thereof, is ordered to terminate any employment agreement by any governmental regulatory agency with supervisory authority over the Bank, or any subsidiary or Affiliate thereof.: Upon such termination, the Insured (or beneficiary[ies] or assignee[s]) shall have a ninety (90) day option to receive from the Bank an absolute assignment of the Policy in consideration of a 3 cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment shall be the greater of: 1. The Bank's share of the cash value of the Policy on the date of such assignment, as defined in this Agreement. 2. The amount of the premiums which have been paid by the Bank prior to the date of such assignment. Should the Insured (or beneficiary[ies] or assignee[s]) fail to exercise this option within the prescribed ninety (90) day period, the Insured (or beneficiary[ies] or assignee[s]) agrees that all of his rights, interest and claims in the Policy shall terminate as of the date of the termination of this Agreement. Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above. XI. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS The Insured may not, without the prior written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the Policy nor any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES This Agreement shall be binding upon the Insured and the Bank, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR The Holding Company is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Holding Company shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. XIV. FUNDING POLICY The funding Policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. 4 XV. CLAIM PROCEDURES Claim forms or claim information as to the subject Policy can be obtained by contacting The Benefit Marketing Group, Inc. (770-952-1529). When the Named Fiduciary has a claim which may be covered under the provisions described in the Policy, it should contact the office named above, and they will either complete a claim form and forward it to an authorized representative of the Insurer or advise the named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. XVI. GENDER Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as set forth herein upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. IN WITNESS WHEREOF, the Insured and a duly authorized Bank officer have signed this Agreement as of the above written date. THE VINTAGE BANK INSURED By: _____________________________________ By: ________________________________ Terry L. Robinson Dale Brain President and Chief Executive Officer 5 Acceptance of Named Fiduciary Designation: NORTH BAY BANCORP By: _____________________________________ Terry L. Robinson President and Chief Executive Officer 6 BENEFICIARY DESIGNATION FORM Primary Designation: Name Relationship - ---- ------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ Contingent Designation: - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ _____________, 2001 Signed: ____________________________ Dale Brain 7 EX-10.12 5 p15097_ex10-12.txt CIMINO/LIFE INSURANCE AGREEMENT Exhibit 10.12 LIFE INSURANCE ENDORSEMENT METHOD SPLIT DOLLAR PLAN AGREEMENT INSURER/POLICY NUMBER: New York Life/56600430 BANK: The Vintage Bank, a state-chartered commercial bank and wholly-owned subsidiary of North Bay Bancorp (the "Holding Company") INSURED: Lee-Ann Cimino RELATIONSHIP OF INSURED TO BANK: Executive Officer DATE: September 21, 2001 The respective rights and duties of the Bank and the Insured in the above policy(ies) (the "Policy" or "Policies") shall be as follows: I. DEFINITIONS 1. Refer to the Policy provisions for the definition of all terms in this Agreement other than those contained herein or set forth below: 2. The term "Affiliate" shall mean a corporation or entity of any type directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Bank, within the meaning of Rule 144 under the Securities Act of 1933, as amended. II. POLICY TITLE AND OWNERSHIP Title and ownership shall reside in the Bank for its use and for the use of the Insured all in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values. Where the Bank and the Insured (or beneficiary[ies] or assignee[s], with the consent of the Insured) mutually agree to exercise the right to increase the coverage under the subject split dollar Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. III. BENEFICIARY DESIGNATION RIGHTS 1 The Insured (or beneficiary[ies] or assignee[s]) shall have the right and power to designate a beneficiary or beneficiaries to receive his share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement. IV. PREMIUM PAYMENT METHOD The Bank shall pay an amount equal to the planned premiums and any other premium payments that might become necessary to maintain the Policy in force. V. TAXABLE BENEFIT Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Insured the amount of imputed income received each year on Form W-2 or its equivalent. VI. DIVISION OF DEATH PROCEEDS Subject to Paragraph VII herein, the division of the death proceeds of the Policy is as follows: 1. If death occurs before age seventy one (71), the Insured's beneficiary(ies) shall be entitled to the lesser of $750,000, or one hundred percent (100%) of the net at risk insurance proceeds. If death occurs after age seventy one (71) but on or before age eighty one (81), the Insured's beneficiaries shall be entitled to the lesser of $525,000, or one hundred percent (100%) of the net at risk insurance proceeds. If death occurs after age eighty one (81), the Insured's beneficiaries shall be entitled to the lesser of $300,000, or one hundred percent (100%) of the net at risk insurance proceeds. The net at risk insurance portion is the total proceeds less the cash value of the Policy. 2. The Bank and the Insured (or beneficiary[ies] or assignee[s]) shall share in any interest due on the death proceeds on a pro rata basis in the ratio that the proceeds due the Bank and the Insured, respectively, bears to the total proceeds, excluding any such interest. 3 In the event that the Policy is terminated other than as a result of (a) a termination of this Agreement pursuant to paragraph X or (b) any intentional act of the Insured which results in the termination of the Policy, then the Bank shall pay to the Insider's beneficiary(ies) an amount which will provide a total after-tax death benefit equal to the benefit that the Insured would have received if the Policy had not been terminated. 2 VII. DIVISION OF CASH SURRENDER VALUE The Bank shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Bank. IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS In the event the Policy involves an endowment or annuity element, the Bank's right and interest in any endowment proceeds or annuity benefits shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value of such annuity benefits as the Policy's cash value. Such endowment proceeds or annuity benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT This Agreement shall terminate at the option of the Bank following thirty (30) days written notice to the Insured upon the happening of any one of the following: (i) the Insured commits fraud, theft or embezzlement against the Bank, or any subsidiary or Affiliate thereof; (ii) the Insured commits a felony or a crime involving moral turpitude; (iii) the Insured compromises trade secrets or other proprietary information of the Bank, or any subsidiary or Affiliate thereof; (iv) the Insured breaches any non-solicitation agreement with the Bank, or any subsidiary or Affiliate thereof; (v) the Insured breaches any of the material terms of any employment agreement entered into with the Bank or Holding Company and, if given the right in any such employment agreement, fails to cure said breach in accordance therewith; (vi) the Insured breaches any of the material terms of this Agreement; (vii) the Insured engages in any grossly negligent act or willful misconduct that causes, or could be reasonably expected to cause, harm to the business, operations or reputation of the Bank, or any subsidiary or Affiliate thereof; or (viii) the Bank, or any subsidiary or Affiliate thereof, is ordered to terminate any employment agreement by any governmental regulatory agency with supervisory authority over the Bank, or any subsidiary or Affiliate thereof.: Upon such termination, the Insured (or beneficiary[ies] or assignee[s]) shall have a ninety (90) day option to receive from the Bank an absolute assignment of the Policy in consideration of a 3 cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment shall be the greater of: 1. The Bank's share of the cash value of the Policy on the date of such assignment, as defined in this Agreement. 2. The amount of the premiums which have been paid by the Bank prior to the date of such assignment. Should the Insured (or beneficiary[ies] or assignee[s]) fail to exercise this option within the prescribed ninety (90) day period, the Insured (or beneficiary[ies] or assignee[s]) agrees that all of his rights, interest and claims in the Policy shall terminate as of the date of the termination of this Agreement. Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above. XI. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS The Insured may not, without the prior written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the Policy nor any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES This Agreement shall be binding upon the Insured and the Bank, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR The Holding Company is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Holding Company shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. XIV. FUNDING POLICY The funding Policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. 4 XV. CLAIM PROCEDURES Claim forms or claim information as to the subject Policy can be obtained by contacting The Benefit Marketing Group, Inc. (770-952-1529). When the Named Fiduciary has a claim which may be covered under the provisions described in the Policy, it should contact the office named above, and they will either complete a claim form and forward it to an authorized representative of the Insurer or advise the named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. XVI. GENDER Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as set forth herein upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. IN WITNESS WHEREOF, the Insured and a duly authorized Bank officer have signed this Agreement as of the above written date. THE VINTAGE BANK INSURED By: _____________________________________ By: ________________________________ Terry L. Robinson Lee-Ann Cimino President and Chief Executive Officer 5 Acceptance of Named Fiduciary Designation: NORTH BAY BANCORP By: _____________________________________ Terry L. Robinson President and Chief Executive Officer 6 BENEFICIARY DESIGNATION FORM Primary Designation: Name Relationship - ---- ------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ Contingent Designation: - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ _____________, 2001 Signed: ____________________________ Lee-Ann Cimino 7 EX-10.13 6 p15097_ex10-13.txt METRO/LIFE INSURANCE AGREEMENT Exhibit 10.13 LIFE INSURANCE ENDORSEMENT METHOD SPLIT DOLLAR PLAN AGREEMENT INSURER/POLICY NUMBER: Union Central/U200001383 BANK: The Vintage Bank, a state-chartered commercial bank and wholly-owned subsidiary of North Bay Bancorp (the "Holding Company") INSURED: Kathi Metro RELATIONSHIP OF INSURED TO BANK: Executive Officer DATE: September 21, 2001 The respective rights and duties of the Bank and the Insured in the above policy(ies) (the "Policy" or "Policies") shall be as follows: I. DEFINITIONS 1. Refer to the Policy provisions for the definition of all terms in this Agreement other than those contained herein or set forth below: 2. The term "Affiliate" shall mean a corporation or entity of any type directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Bank, within the meaning of Rule 144 under the Securities Act of 1933, as amended. II. POLICY TITLE AND OWNERSHIP Title and ownership shall reside in the Bank for its use and for the use of the Insured all in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values. Where the Bank and the Insured (or beneficiary[ies] or assignee[s], with the consent of the Insured) mutually agree to exercise the right to increase the coverage under the subject split dollar Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. III. BENEFICIARY DESIGNATION RIGHTS 1 The Insured (or beneficiary[ies] or assignee[s]) shall have the right and power to designate a beneficiary or beneficiaries to receive his share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement. IV. PREMIUM PAYMENT METHOD The Bank shall pay an amount equal to the planned premiums and any other premium payments that might become necessary to maintain the Policy in force. V. TAXABLE BENEFIT Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Insured the amount of imputed income received each year on Form W-2 or its equivalent. VI. DIVISION OF DEATH PROCEEDS Subject to Paragraph VII herein, the division of the death proceeds of the Policy is as follows: 1. If death occurs before age seventy one (71), the Insured's beneficiary(ies) shall be entitled to the lesser of $750,000, or one hundred percent (100%) of the net at risk insurance proceeds. If death occurs after age seventy one (71) but on or before age eighty one (81), the Insured's beneficiaries shall be entitled to the lesser of $525,000, or one hundred percent (100%) of the net at risk insurance proceeds. If death occurs after age eighty one (81), the Insured's beneficiaries shall be entitled to the lesser of $300,000, or one hundred percent (100%) of the net at risk insurance proceeds. The net at risk insurance portion is the total proceeds less the cash value of the Policy. 2. The Bank and the Insured (or beneficiary[ies] or assignee[s]) shall share in any interest due on the death proceeds on a pro rata basis in the ratio that the proceeds due the Bank and the Insured, respectively, bears to the total proceeds, excluding any such interest. 3 In the event that the Policy is terminated other than as a result of (a) a termination of this Agreement pursuant to paragraph X or (b) any intentional act of the Insured which results in the termination of the Policy, then the Bank shall pay to the Insider's beneficiary(ies) an amount which will provide a total after-tax death benefit equal to the benefit that the Insured would have received if the Policy had not been terminated. 2 VII. DIVISION OF CASH SURRENDER VALUE The Bank shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Bank. IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS In the event the Policy involves an endowment or annuity element, the Bank's right and interest in any endowment proceeds or annuity benefits shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value of such annuity benefits as the Policy's cash value. Such endowment proceeds or annuity benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT This Agreement shall terminate at the option of the Bank following thirty (30) days written notice to the Insured upon the happening of any one of the following: (i) the Insured commits fraud, theft or embezzlement against the Bank, or any subsidiary or Affiliate thereof; (ii) the Insured commits a felony or a crime involving moral turpitude; (iii) the Insured compromises trade secrets or other proprietary information of the Bank, or any subsidiary or Affiliate thereof; (iv) the Insured breaches any non-solicitation agreement with the Bank, or any subsidiary or Affiliate thereof; (v) the Insured breaches any of the material terms of any employment agreement entered into with the Bank or Holding Company and, if given the right in any such employment agreement, fails to cure said breach in accordance therewith; (vi) the Insured breaches any of the material terms of this Agreement; (vii) the Insured engages in any grossly negligent act or willful misconduct that causes, or could be reasonably expected to cause, harm to the business, operations or reputation of the Bank, or any subsidiary or Affiliate thereof; or (viii) the Bank, or any subsidiary or Affiliate thereof, is ordered to terminate any employment agreement by any governmental regulatory agency with supervisory authority over the Bank, or any subsidiary or Affiliate thereof.: Upon such termination, the Insured (or beneficiary[ies] or assignee[s]) shall have a ninety (90) day option to receive from the Bank an absolute assignment of the Policy in consideration of a 3 cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment shall be the greater of: 1. The Bank's share of the cash value of the Policy on the date of such assignment, as defined in this Agreement. 2. The amount of the premiums which have been paid by the Bank prior to the date of such assignment. Should the Insured (or beneficiary[ies] or assignee[s]) fail to exercise this option within the prescribed ninety (90) day period, the Insured (or beneficiary[ies] or assignee[s]) agrees that all of his rights, interest and claims in the Policy shall terminate as of the date of the termination of this Agreement. Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above. XI. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS The Insured may not, without the prior written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the Policy nor any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES This Agreement shall be binding upon the Insured and the Bank, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR The Holding Company is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Holding Company shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. XIV. FUNDING POLICY The funding Policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. 4 XV. CLAIM PROCEDURES Claim forms or claim information as to the subject Policy can be obtained by contacting The Benefit Marketing Group, Inc. (770-952-1529). When the Named Fiduciary has a claim which may be covered under the provisions described in the Policy, it should contact the office named above, and they will either complete a claim form and forward it to an authorized representative of the Insurer or advise the named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. XVI. GENDER Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as set forth herein upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. IN WITNESS WHEREOF, the Insured and a duly authorized Bank officer have signed this Agreement as of the above written date. THE VINTAGE BANK INSURED By: _____________________________________ By: ________________________________ Terry L. Robinson Kathi Metro President and Chief Executive Officer 5 Acceptance of Named Fiduciary Designation: NORTH BAY BANCORP By: _____________________________________ Terry L. Robinson President and Chief Executive Officer 6 BENEFICIARY DESIGNATION FORM Primary Designation: Name Relationship - ---- ------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ Contingent Designation: - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ _____________, 2001 Signed: _____________________________ Kathi Metro 7 EX-10.14 7 p15097_ex10-14.txt TERRY/LIFE INSURANCE AGREEMENT EXHIBIT 10.14 LIFE INSURANCE ENDORSEMENT METHOD SPLIT DOLLAR PLAN AGREEMENT INSURER/POLICY NUMBER: Southland Life/0660015170 Union Central/U200001371 BANK: Solano Bank, a state-chartered commercial bank and wholly-owned subsidiary of North Bay Bancorp (the "Holding Company") INSURED: Glen C. Terry RELATIONSHIP OF INSURED TO BANK: Executive Officer DATE: September 21, 2001 The respective rights and duties of the Bank and the Insured in the above policy(ies) (the "Policy" or "Policies") shall be as follows: I. DEFINITIONS 1. Refer to the Policy provisions for the definition of all terms in this Agreement other than those contained herein or set forth below: 2. The term "Affiliate" shall mean a corporation or entity of any type directly or indirectly controlling or controlled by, or under direct or indirect common control with, the Bank, within the meaning of Rule 144 under the Securities Act of 1933, as amended. II. POLICY TITLE AND OWNERSHIP Title and ownership shall reside in the Bank for its use and for the use of the Insured all in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values. Where the Bank and the Insured (or beneficiary[ies] or assignee[s], with the consent of the Insured) mutually agree to exercise the right to increase the coverage under the subject split dollar Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. 1 III. BENEFICIARY DESIGNATION RIGHTS The Insured (or beneficiary[ies] or assignee[s]) shall have the right and power to designate a beneficiary or beneficiaries to receive his share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement. IV. PREMIUM PAYMENT METHOD The Bank shall pay an amount equal to the planned premiums and any other premium payments that might become necessary to maintain the Policy in force. V. TAXABLE BENEFIT Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Insured the amount of imputed income received each year on Form W-2 or its equivalent. VI. DIVISION OF DEATH PROCEEDS Subject to Paragraph VII herein, the division of the death proceeds of the Policy is as follows: 1. If death occurs before age seventy one (71), the Insured's beneficiary(ies) shall be entitled to the lesser of $750,000, or one hundred percent (100%) of the net at risk insurance proceeds. If death occurs after age seventy one (71) but on or before age eighty one (81), the Insured's beneficiaries shall be entitled to the lesser of $525,000, or one hundred percent (100%) of the net at risk insurance proceeds. If death occurs after age eighty one (81), the Insured's beneficiaries shall be entitled to the lesser of $300,000, or one hundred percent (100%) of the net at risk insurance proceeds. The net at risk insurance portion is the total proceeds less the cash value of the Policy. 2. The Bank and the Insured (or beneficiary[ies] or assignee[s]) shall share in any interest due on the death proceeds on a pro rata basis in the ratio that the proceeds due the Bank and the Insured, respectively, bears to the total proceeds, excluding any such interest. 3 In the event that the Policy is terminated other than as a result of (a) a termination of this Agreement pursuant to paragraph X or (b) any intentional act of the Insured which results in the termination of the Policy, then the Bank shall pay to the Insider's beneficiary(ies) an amount which will provide a total after-tax death benefit equal to the benefit that the Insured would have received if the Policy had not been terminated. 2 VII. DIVISION OF CASH SURRENDER VALUE The Bank shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Bank. IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS In the event the Policy involves an endowment or annuity element, the Bank's right and interest in any endowment proceeds or annuity benefits shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value of such annuity benefits as the Policy's cash value. Such endowment proceeds or annuity benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT This Agreement shall terminate at the option of the Bank following thirty (30) days written notice to the Insured upon the happening of any one of the following: (i) the Insured commits fraud, theft or embezzlement against the Bank, or any subsidiary or Affiliate thereof; (ii) the Insured commits a felony or a crime involving moral turpitude; (iii) the Insured compromises trade secrets or other proprietary information of the Bank, or any subsidiary or Affiliate thereof; (iv) the Insured breaches any non-solicitation agreement with the Bank, or any subsidiary or Affiliate thereof; (v) the Insured breaches any of the material terms of any employment agreement entered into with the Bank or Holding Company and, if given the right in any such employment agreement, fails to cure said breach in accordance therewith; (vi) the Insured breaches any of the material terms of this Agreement; (vii) the Insured engages in any grossly negligent act or willful misconduct that causes, or could be reasonably expected to cause, harm to the business, operations or reputation of the Bank, or any subsidiary or Affiliate thereof; or (viii) the Bank, or any subsidiary or Affiliate thereof, is ordered to terminate any employment agreement by any governmental regulatory agency with supervisory authority over the Bank, or any subsidiary or Affiliate thereof.: Upon such termination, the Insured (or beneficiary[ies] or assignee[s]) shall have a ninety (90) day option to receive from the Bank an absolute assignment of the Policy in consideration of a 3 cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment shall be the greater of: 1. The Bank's share of the cash value of the Policy on the date of such assignment, as defined in this Agreement. 2. The amount of the premiums which have been paid by the Bank prior to the date of such assignment. Should the Insured (or beneficiary[ies] or assignee[s]) fail to exercise this option within the prescribed ninety (90) day period, the Insured (or beneficiary[ies] or assignee[s]) agrees that all of his rights, interest and claims in the Policy shall terminate as of the date of the termination of this Agreement. Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above. XI. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS The Insured may not, without the prior written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the Policy nor any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES This Agreement shall be binding upon the Insured and the Bank, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR The Holding Company is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Holding Company shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. XIV. FUNDING POLICY The funding Policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. 4 XV. CLAIM PROCEDURES Claim forms or claim information as to the subject Policy can be obtained by contacting The Benefit Marketing Group, Inc. (770-952-1529). When the Named Fiduciary has a claim which may be covered under the provisions described in the Policy, it should contact the office named above, and they will either complete a claim form and forward it to an authorized representative of the Insurer or advise the named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. XVI. GENDER Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as set forth herein upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. IN WITNESS WHEREOF, the Insured and a duly authorized Bank officer have signed this Agreement as of the above written date. SOLANO BANK INSURED By: _____________________________________ By: ________________________________ Thomas Gavin Glen C. Terry Chairman of the Board 5 Acceptance of Named Fiduciary Designation: NORTH BAY BANCORP By: _____________________________________ Terry L. Robinson President and Chief Executive Officer 6 BENEFICIARY DESIGNATION FORM Primary Designation: Name Relationship - ---- ------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ Contingent Designation: - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ - --------------------------------------- ------------------------------------ _____________, 2001 Signed: ____________________________ Glen C. Terry 7 EX-13 8 p15097_ex13.txt ANNUAL REPORT - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- To Our Shareholders 2 Selected Financial Data 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Balance Sheets 14 Income Statements 15 Statements of Changes in Shareholders' Equity 16 Statements of Cash Flows 17 Notes to Financial Statements 18 Report of Independent Public Accountants 36 Directors 37 Corporate Information 38 - -------------------------------------------------------------------------------- TO OUR SHAREHOLDERS - -------------------------------------------------------------------------------- We are pleased to report that your Company remains on course to realize its ambitious vision. Our major goals continue as follows: (1) remain independent, (2) grow beyond $500 million in assets within two years, (3) capitalize on opportunities to enter underserved contiguous markets, (4) be the premier financial services provider in markets we serve and (5) skillfully utilize technology for competitive advantage. We believe effective execution of this strategy will provide an excellent return on shareholders' equity and growth in earnings per share that should advance us towards our objective for North Bay Bancorp stock to command a market premium and provide consistent liquidity. Both subsidiary banks exceeded our growth projections for 2001, with a 32% consolidated growth in assets. Our net income of $3,022,166, or $1.46 per share, slightly exceeded our plan. The return on average equity of 10.61% was consistent with our plan, while the return on average assets of 1.0% was slightly below plan due to the growth in deposits outpacing the growth in loans. The third and fourth quarters of 2001 were particularly strong as we were able to realize financial returns from our substantial asset growth. Unlike most of our California community bank peers, our net interest margin did not narrow significantly during the year. This is the result of managing our balance sheet to be as interest rate "neutral" as possible, so that changes in market interest rates do not significantly impact our net income. We believe this is the optimum position to assume for the sake of long-term financial returns. We anticipate strong growth again in 2002, bolstered by the January 2002 openings of The Vintage Bank's St. Helena Office and Solano Bank's Vallejo Office. Returns on average equity and average assets are expected to be slightly better than in 2001, but short of our long-term goal of earning a return on shareholders' equity of 15% or more. Solano Bank is projected to reach break-even operations during the third quarter of 2002. The Vintage Bank is expected to continue its strong earnings through 2002, although the opening of the St. Helena Office (and the associated occupancy and personnel expense) will have a temporary dampening impact on earnings. Additionally, we anticipate some narrowing of our net interest margin during the year, an inevitable result of our current low interest rate environment and intense price competition on loan and deposit rates. We continue to project that year 2003, when Solano Bank will be operating profitably for the entire year, will mark our return to generating financial returns above our peers. During 2003, we anticipate The Vintage Bank's St. Helena expansion will be contributing to profits and the consolidated Company attaining a size that allows us to realize the economies of scale we have sought with our rapid growth strategy. We have continued to build a "foundation" for our planned growth. While we have excellent physical facilities and technology equipment, our success is most dependent on effectively deploying our human capital. We have reached outside our Company to attract people with specific skills and backgrounds while restructuring roles and responsibilities of existing key members of our management team to better capitalize on their strengths. We are evolving into a Customer Relationship Management (CRM) organization, structured to focus our efforts on serving our best and most profitable customers while attracting more customers with similar characteristics. 2 In summary, we remain on course towards the vision initiated in 1999 with the decision to form a holding company for The Vintage Bank and commence organization of a new bank in Solano County. The journey thus far has been both challenging and rewarding. We thank you, our Shareholders, for embracing the vision and supporting our endeavor. We remain convinced this is the optimum strategy to best serve your interests. Very truly yours, Terry L. Robinson Thomas F. Malloy President & Chief Executive Officer Chairman of the Board This letter to shareholders contains forward-looking statements with respect to the financial condition, results of operation and business of North Bay Bancorp and its subsidiaries. These include, but are not limited to, statements that relate to or are dependent on estimates or assumptions relating to the prospects of loan growth, credit quality and certain operating efficiencies resulting from the operations of The Vintage Bank and Solano Bank. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressure among financial services companies increases significantly; (2) changes in the interest rate environment reduce interest margins; (3) general economic conditions, internationally, nationally or in the State of California are less favorable than expected; (4) legislation or regulatory requirements or changes adversely affect the business in which the combined organization will be engaged; and (5) other risks detailed in the North Bay Bancorp reports filed with the Securities and Exchange Commission. 3 [Intentionally Left Blank] 4 - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- The following table presents a summary of selected consolidated data for North Bay Bancorp and subsidiaries (the Company) for the five years ended December 31, 2001. This information 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 appearing elsewhere in the annual report:
(In 000's except share data) 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- STATEMENTS OF OPERATIONS DATA: Interest income $20,307 $16,700 $13,688 $11,907 $10,085 Interest expense 5,887 5,612 4,364 3,992 3,141 ------- ------- ------- ------- ------- Net interest income 14,420 11,088 9,324 7,915 6,944 Provision for loan losses 447 385 240 240 240 ------- ------- ------- ------- ------- Net interest income after provision for loan losses 13,973 10,703 9,084 7,675 6,704 Noninterest income 2,691 2,140 1,777 1,397 1,443 Noninterest expense 11,955 8,583 6,496 5,660 5,050 Provision for income taxes 1,687 1,647 1,650 1,301 1,243 ------- ------- ------- ------- ------- Net income $3,022 $2,613 $2,715 $2,111 $1,854 ======= ======= ======= ======= ======= BASIC PER SHARE DATA: (1) Earnings per share $1.47 $1.35 $1.54 $1.22 $1.12 Average shares outstanding 2,053,669 1,926,376 1,762,803 1,732,115 1,655,155 DILUTED PER SHARE DATA: (1) Earnings per share $1.46 $1.33 $1.50 $1.18 $1.09 Average shares outstanding 2,076,143 1,958,853 1,804,496 1,785,957 1,707,431 BALANCE SHEET DATA: Total assets $326,806 $247,469 $197,106 $180,291 $146,982 Net loans 183,548 150,008 120,166 94,775 80,991 Total deposits 292,441 216,638 172,380 162,173 131,390 Shareholders' equity 29,980 26,636 18,090 16,910 14,486
(1) All per share amounts have been adjusted to reflect the 5% stock dividends declared January 27, 1997, January 26, 1998, January 28, 1999, January 18, 2000, January 29, 2001 and January 28, 2002 as well as a two-for-one stock split effective October 1, 1997. 5 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENT This Annual Report contains statements relating to future results of the Company that are considered to be "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, loan loss reserve adequacy, simulation of changes in interest rates and litigation results. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within the Company's markets, equity and fixed income market fluctuations, personal and corporate customers' bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological change, changes in law, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required as well as other risks and uncertainties. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. OVERVIEW - -------------------------------------------------------------------------------- North Bay Bancorp (Bancorp), organized November 1, 1999, is the holding company for The Vintage Bank and Solano Bank (Banks), which are wholly owned subsidiaries. The consolidated entity (the Company) reported net income of $3,022,166, or $1.46 per share, in 2001 compared with $2,612,585, or $1.33 per share, in 2000 and $2,715,377, or $1.50 per share, in 1999, equating to a return on average assets of 1.00%, 1.17% and 1.44% for years 2001, 2000 and 1999, respectively. The return on average equity was 10.61% in 2001 compared with 11.70% and 15.52% in 2000 and 1999, respectively. The decrease in net income during 2000 compared with 1999 resulted primarily from costs associated with opening and operating Solano Bank, which commenced operation in July, 2000. As of December 31, 2001, total assets were $326,805,690 compared with total assets of $247,469,066 and $197,106,319 at year end 2000 and 1999, respectively, representing a 32% increase in 2001 and a 26% increase in 2000. Deposits increased 35% in 2001 compared with a 26% increase in 2000. Loans, net of the allowance for loan losses, increased 22% in 2001 compared with a 25% increase in 2000. - -------------------------------------------------------------------------------- SUMMARY OF EARNINGS Net Interest Income Net interest income before provision for loan losses was $14,420,237, $11,088,108 and $9,324,483 in 2001, 2000 and 1999, respectively, representing increases of 30% in 2001 and 19% in 2000. Net interest income is impacted by changes in the volume and mix of earning assets and interest-bearing liabilities and changes in interest rates. The increase in net interest income in 2001 compared with 2000 was primarily the result of volume increases in loans and investments. The net interest margin (defined as net interest income divided by average earning assets) decreased slightly in 2001 to 5.30% from 5.46% in 2000 as the loan-to-deposit ratio decreased in 2001 compared to 2000. The Company has historically enjoyed an overall cost of funds lower than peer institutions of comparable size. Taxable-equivalent interest income (defined as interest income adjusted for the tax benefit for holding tax exempt securities and loans) increased $3,590,234, or 21%, in 2001 compared with 2000. Increases in the 6 volume of earning assets accounted for increasing interest income by $5,285,413, offset by a decrease of $1,695,179 attributable to lower rates. An increase in taxable-equivalent income of $2,979,385 or 21% in 2000 compared with 1999 consisted of a $2,588,644 increase due to growth of earning assets and an increase of $390,741 attributable to higher rates on earning assets. Interest paid on interest-bearing liabilities increased $274,821 in 2001 compared with 2000. Increases in the volume of deposits and other borrowings increased interest paid by $1,373,981 offset by a $1,099,160 decrease attributable to a decline in rates. Interest paid on interest-bearing liabilities increased $1,248,242 in 2000 compared with 1999; the effect of volume increases accounted for $641,073 with an increase of $607,169 attributable to higher rates. The net interest margin, using taxable equivalent interest income, was 5.36% in 2001 compared with 5.55% in 2000. The decrease in the net interest margin is primarily the result of a lower average loan-to-deposit ratio in 2001 compared to 2000 and changes in the market interest rates. Assuming there are no dramatic changes in market interest rates or deposit mix, the net interest margin is expected to decline modestly during 2002, consistent with recent interest rate trends. Provision and Allowance for Loan Losses Credit risk is inherent in the business of lending. As a result, the Company maintains an Allowance for Loan Losses to absorb losses inherent in the Company's loan portfolio. This is maintained through periodic charges to earnings. These charges are shown in the Consolidated Income Statement as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company's Allowance for Loan Losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio. The Company's written lending policies, along with applicable laws and regulations governing the extension of credit, require risk analysis as well as ongoing portfolio and credit management through loan product diversification, lending limits, ongoing credit reviews both internal and external along with approval policies prior to funding of any loan. The Company manages and controls credit risk through diversification, close monitoring of any portfolio concentrations, loan limits to individuals and reviewing historical losses incurred by the Company. Loans that are performing but have shown some signs of weakness are subjected to more stringent reporting and oversight. Management has established a monitoring system for any concentration within the portfolio. Currently monitoring controls are in place for commercial real estate loans. The existing portfolio consists of commercial loans to businesses, both commercial and residential real estate loans and consumer products. The portfolio contains variable rate loans as well as loans with rates fixed for up to ten years. Fixed rate loans primarily are associated with real estate lending. As of December 31, 2001, loans increased $34 million, a 22% increase over that of 2000. On an average balance basis the Company's loan portfolio increased $33 million over the average balance in 2000. In 2000, average balances increased from the prior year by 28% or $30 million. The increase in 2001 was due to strong loan demand for commercial real estate loans along with an aggressive calling program. Management recognizes that the estimation of probable loss in the portfolio is not a science and therefore the current Allowance for Loan Losses is not expected to be equal to the result of the assessment. It is expected, however, that the assessment will demonstrate that the actual reserve is adequate for coverage of probable loan losses in the existing portfolio. To the extent that the current allowance is deemed insufficient to cover the estimate of unidentified losses, Management will record an additional provision for loan loss. If the allowance is greater than appears to be required at that point in time, the provision expense may be adjusted accordingly. Assessment of the Adequacy of the Allowance for Loan Losses and the Allocation Process The Company formally assesses the adequacy of the allowance on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding loan portfolio and, to a 7 lesser extent, the Company's off balance sheet commitments. These assessments include periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment or if they become delinquent on a frequent basis. Re-grading of problem loans will occur at least monthly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by regulatory examiners. The Company evaluates individual loans that meet the its criteria (loans over $50,000 and graded substandard or lower) to determine if impaired and to establish a specific allowance as necessary. The Company establishes percentage allowance requirements for all other loans, according to their classification as determined by the Bank's internal grading system. These loans are identified through the following categories: Watch - These loans are not classified, but they contain potentially unsatisfactory characteristics. Special Mention - These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification to substandard. Substandard - These are loans inadequately protected by current sound worth, paying capacity of the borrower or pledged collateral. Substandard loans normally have one or more well-defined weaknesses that could jeopardize the repayment of the debt. Doubtful - The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, writing down the loan and recognizing the loss is deferred until its more exact status may be determined. The above, along with specific allocations for concentrations in real estate, off balance sheet, etc., are taken into consideration when evaluating the Company's allowance for loan losses. As of December 31, 2001 the allowance for loan losses of $2,717,249 represented 1.46% of loans outstanding. This compared with an allowance balance of $2,268,048 December 31, 2000, representing 1.49% of loans outstanding. During 2001, 2000 and 1999 $447,000, $385,000 and $240,000, respectively was charged to expense for the provision for loan losses. Non Performing Loans The Company's policy is to place loans on nonaccrual status when, for any reason, principal or interest is past due for ninety days or more unless it is both well secured and in the process of collection. Any interest accrued, but unpaid, is reversed against current income. Thereafter, interest is recognized as income only as it is collected in cash. As of December 31, 2001 and 2000 there were no nonaccrual loans. Historical Loan Loss & Recovery Experience
Solano Bank The Vintage Bank Consolidated 2001 2000 2001 2000 2001 2000 ----------- ---------- ------------ ------------ ------------ ------------ Losses $0 $0 $4,105 $105,508 $4,105 $105,508 Recoveries 0 0 6,306 1,625 6,306 1,625 ----------- ---------- ------------ ------------ ------------ ------------ Net loss (recovery) 0 0 (2,201) 103,883 (2,201) 103,883 Loan loss reserve 112,000 25,000 2,605,249 2,243,048 2,717,249 2,268,048 % of reserve charge-off 0.000% 0.000% -0.001% 0.046% -0.001% 0.046% Loan portfolio $25,827,435 $2,138,063 $160,438,115 $150,137,778 $186,265,550 $152,275,871 % of reserve to portfolio .43% 1.17% 1.62% 1.49% 1.46% 1.49%
There have been no transactions in the past year to impact the allocation for loan loss. The increased allocation is due primarily to overall growth in the loan portfolio and related inherent risk of loss. 8 Recoveries for 2001 out paced charged off loans within the portfolio for The Vintage Bank. Solano Bank, as a new company, has sustained no losses since opening for business July 2000. The Company reports minimal historical loss of $103,883 for the year 2000. Conclusion Based on the current conditions of the loan portfolio, Management believes that the $2,717,249 allowance for loan losses at December 31, 2001 is adequate to absorb probable losses inherent in the Bank's loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. Noninterest Income Noninterest income was $2,690,637 in 2001 compared with $2,140,266 in 2000 and $1,777,144 in 1999. The 26% increase in 2001 was primarily due to realizing net gains on the sale of investment securities. Fee income from service charges on deposit accounts increased 24% or $229,270 from the previous year compared with a decrease of 2% in 2000. The decrease in 2000 was due primarily to a fee "grace period" and waivers associated with a major systems conversion. Noninterest Expense Details of noninterest expense are as follows: (In 000's) 2001 2000 1999 ------- ------ ------ Salaries & benefits $6,349 $4,574 $3,497 Occupancy 854 655 401 Equipment/data processing 1,451 747 463 Other 3,300 2,607 2,135 ------- ------ ------ Total $11,954 $8,583 $6,496 ======= ====== ====== Salaries and benefits expense increased 39% and 31% in 2001 and 2000, respectively, from the previous year. The increases were primarily due to increases in the number of full-time equivalent employees, which has increased from approximately 79 at year-end 1999 to 131 at year-end 2001. The increase was primarily the result of opening Solano Bank and new branches throughout the Company. It is anticipated that full-time equivalents will increase by approximately 5 during the year 2002 due to additional new branch openings. The 30% increase in occupancy expense during 2001 compared with 2000 was primarily in rent and depreciation associated with opening three branches of Solano Bank. Occupancy expense is expected to increase approximately 30% in the year 2002 compared to 2001 due to the anticipated opening of three new offices. Equipment and Data Processing expense increased 94% in 2001 compared with 2000. The increase was primarily due to an increase in depreciation expense resulting from accelerated depreciation on its host banking system in anticipation of a host system change during 2002. Equipment is depreciated over periods of three to five years. Major anticipated capital purchases during 2002 include software for a new host banking system, leasehold improvements to new branch locations, some remodel of existing offices, additional equipment and furniture needed to equip new offices. Expenditures in these areas are anticipated to total approximately $1,750,000. All other anticipated expenditures for equipment during 2002, including routine purchases of vehicles and miscellaneous equipment, are expected to total less than $400,000. The financial impact of these capital expenditures, if all are made, will be to increase monthly depreciation expense by approximately $35,000. 9 The key components of other expenses are as follows: (In 000's) 2001 2000 1999 ------ ------ ------ Professional services $755 $547 $485 Business promotion 379 434 328 ATM expenses 222 167 160 Stationery & supplies 274 259 200 Insurance 111 76 64 Other 1,559 1,124 898 ------ ------ ------ Total $3,300 $2,607 $2,135 ====== ====== ====== Professional services increased 38% in 2001 compared with 13% in 2000; the increase in 2001 was primarily due to increased legal fees associated with purchases of real estate and increases in fees for audits. Business promotion expense decreased 13% in 2001 compared with 2000 and increased 32% when comparing 2000 to 1999; these variations were primarily the result of increased marketing expenditures associated with the opening of Solano Bank in 2000. ATM expense increased 33% in 2001 compared with 2000; the increase is primarily due to an increase in the number of ATM's the Company operates. Stationery and supplies expense increased 6% and 30% in 2001 and 2000, respectively, reflecting overall volume increases and costs associated with the system conversion and opening Solano Bank in July, 2000. Insurance rates increased 46% and 19% in 2001 and 2000, respectively; these increases are consistent with increases in volumes and number of locations. Other expenses increased 39% and 25% in 2001 and 2000, respectively, primarily due to increased expenses in telephone, postage, courier services, conferences and other miscellaneous expenses. The Company reported a provision for income taxes of $1,687,171 $1,647,347 and $1,650,000 for years 2001, 2000 and 1999, respectively. These provisions reflect accrual for taxes at the applicable rates for Federal and California State income taxes based upon reported pre-tax income, and adjusted for the beneficial effect of the Company's investment in qualified municipal securities. The Company has not been subject to an alternative minimum tax (AMT). BALANCE SHEET - -------------------------------------------------------------------------------- Total assets as of December 31, 2001 were $326,805,690 compared with $247,469,066 and $197,106,319, as of year-end 2000 and 1999, respectively, representing a 32% increase in 2001 and a 26% increase in 2000. Total deposits grew $75,803,334 to $292,441,196 in 2001, representing a 35% increase, compared with a 26% increase in 2000. Total loans, net of allowance for loan losses, grew $33,540,508 to $183,548,301 in 2001, representing a 22% increase compared with a 25% increase in 2000. Investment securities increased from $59,604,457 at year-end 2000 to $86,119,716 in 2001, a 44% increase, compared with an increase of 5% during 2000. Liquidity and Capital Adequacy The Company's liquidity is determined by the level of assets (such as cash, federal funds sold and marketable securities together with other funding sources) that are readily convertible and other funding sources to meet customer withdrawal and borrowing needs. The Company's liquidity position is reviewed by management on a regular basis to verify 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 that it uses to determine adequate liquidity. Securities classified as "Held-to-Maturity" are reported at amortized cost, and "Available-for-Sale" securities are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of accumulated other comprehensive income. As of December 31, 2001, "Held-to-Maturity" securities had an amortized cost of $1,313,871 and "Available-for-Sale" securities had a fair value of $83,564,595 with an unrealized gain, net of income taxes, of $553,263 reflected as a component of accumulated other comprehensive income in the shareholders' equity section of the Balance Sheet. The Company owns equity securities carried at a cost of $1,241,250. 10 The Company also has available funding from other sources such as the Federal Home Loan Bank and federal fund lines of credit. As of December 31, 2001, the Company had approximately $94 million available from these sources for borrowing. The Company relies on these funding sources to assist in funding loans when loan demand outpaces deposit growth. Additionally the Company has a $1,846,154 unsecured loan which matures October, 2003. The loan is a variable rate loan tied to a reference rate consistent with the prime rate with principal and interest payments due quarterly. At year-end 2001, liquid assets (defined as cash, Federal funds sold, deposits in other financial institutions and securities categorized as available-for-sale) represented 37% of total assets, as compared with 33% as of year-end 2000. The level of liquid assets at December 31, 2001 exceeds the liquidity required by the Company's liquidity policy. Management expects to be able to meet the liquidity needs of the Company during 2002 primarily through balancing loan growth with corresponding increases in deposits. The Company is contemplating issuing trust preferred securities during the year 2002. Issuing these securities, which have both equity and debt characteristics, would increase the Company's liquidity ratios. Other anticipated impacts of a trust preferred issue would be increases in capital ratios and interest expense. The impact on net interest income would depend on the uses for funds from the issue. Possible uses for the funds include equipment purchases, debt retirement, investments, acquisitions, capital injections into subsidiaries, purchase of Company stock or any combination of these alternatives. Interest Rate Sensitivity The following table sets forth the repricing opportunities for rate-sensitive assets and rate-sensitive liabilities at December 31, 2001. 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 =================================================================== Ratio of interest rate sensitivity to -30.51% -2.79% 29.91% 28.63% earning assets
This 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 11 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 Company utilizes a simulation model as its primary tool for asset/liability management. 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. Based on the model, the Company is slightly asset sensitive, as opposed to being liability sensitive as indicated by the preceding table using traditional GAP analysis. As of December 31, 2001, the analysis indicates that our net interest income for the next 12 months would increase $76,000 or .53% if rates increase 100 basis points, and decrease $96,000 or .67% if rates decrease100 basis points. The Company's capital ratios remained relatively steady during 2001 compared with 2000 levels. As of December 31, 2001, the Company's total risk-based capital ratio, Tier I risk-based capital ratio and leverage ratio were 13.2%, 12.1% and 9.2%, respectively. These compare with ratios of 14.9%, 13.7% and 10.8% as of December 31, 2000. In January, 2002, the Company declared a 5% stock dividend and a $.20 per share cash dividend for shareholders of record as of March 4, 2002. The stock dividend will affect the Company's capital and its capital ratios only to the extent that cash is distributed in lieu of fractional shares. Accordingly, the stock dividend will not materially impact the Company's overall capital. The cash dividend will total approximately $400,000, equating to a reduction in the Company's leverage ratio of approximately .01%. DESCRIPTION OF OPERATIONS - -------------------------------------------------------------------------------- North Bay Bancorp (Bancorp) is a California corporation organized November 1, 1999 and is registered with the Board of Governors of the Federal Reserve System as a financial holding company under the Bank Holding Company Act of 1956, as amended. The Vintage Bank is a wholly-owned subsidiary of the Bancorp, organized as a state chartered Bank in 1984; Solano Bank is also a wholly-owned subsidiary of the Bancorp, organized as a state chartered Bank in 2000. The Vintage Bank engages in the commercial banking business in Napa County from its main banking office located at 1500 Soscol Avenue, Napa, California. The Vintage Bank has three other business locations, one located in the Brown's Valley Shopping Center at 3271 Brown's Valley Road, Napa, California, 3626 Bel Aire Plaza, Napa, California and one at 1065 Main Street in St. Helena, California opened on January 31, 2002. The Vintage Bank also has a remote ATM at 6498 Washington Street, Yountville, California. Solano Bank, organized as a state chartered Bank in July, 2000, also engages in the commercial banking business in Solano County from its main banking office located at 403 Davis Street, Vacaville, California. Solano Bank has three other business locations, one located at 1100 Texas Street, Fairfield, California, one at 1395 E. Second Street, Benicia, California and a fourth branch located at 976 Admiral Callahan Lane, Vallejo, California opened January 16, 2002. The Banks conduct commercial banking business, offering a full range of commercial banking services to individuals, businesses and agricultural communities of Napa and Solano Counties. The Banks emphasize their retail commercial banking operations and accept checking and savings deposits, issues drafts, sells traveler's checks and provide other customary banking services. 12 SECURITIES OF THE HOLDING COMPANY - -------------------------------------------------------------------------------- The Company's outstanding securities consist of one class, Common Stock, of which there were 1,960,902 shares outstanding at March 4, 2002, held by 1,051 shareholders of record. The Company's common stock is traded over-the-counter and is quoted on the OTC "Bulletin Board" under the symbol NBAN. The firm of Hoefer & Arnett serves as the primary market maker in the Company's stock. The following table (adjusted for the 2001 and 2002 stock dividends) summarizes the common stock high and low bid prices based upon transactions of which the Company is aware: Quarter ended High Low March 31, 2000 $22.68 $17.23 June 30, 2000 20.64 17.91 September 30, 2000 20.41 18.59 December 31, 2000 19.50 18.59 March 31, 2001 19.95 17.23 June 30, 2001 19.05 18.10 September 30, 2001 19.53 18.10 December 31, 2001 19.52 18.10 There may be other transactions of which the Company 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 the Company's common stock is limited, the range of prices stated are not necessarily representative of prices that would result from a more active market. 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. 13 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- December 31, 2001 and 2000
2001 2000 ---------------------------------- ASSETS CASH AND DUE FROM BANKS $19,310,919 $15,881,119 FEDERAL FUNDS SOLD 18,000,000 9,475,000 ------------ ------------ Cash and cash equivalents 37,310,919 25,356,119 TIME DEPOSITS WITH OTHER FINANCIAL INSTITUTIONS 100,000 100,000 INVESTMENT SECURITIES: Held-to-maturity 1,313,871 1,353,119 Available-for-sale 83,564,595 57,019,538 Equity securities 1,241,250 1,231,800 ------------ ------------ TOTAL INVESTMENT SECURITIES 86,119,716 59,604,457 LOANS, net of allowance for loan losses of $2,717,249 in 2001 and $2,268,048 in 2000 183,548,301 150,007,793 BANK PREMISES AND EQUIPMENT, net 9,328,592 5,241,687 INTEREST RECEIVABLE AND OTHER ASSETS 10,398,162 7,159,010 ------------ ------------ Total assets $326,805,690 $247,469,066 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS: Non-interest bearing $77,117,476 $60,675,518 Interest-bearing 215,323,720 155,962,344 ------------ ------------ Total deposits 292,441,196 216,637,862 LONG-TERM DEBT 1,846,154 2,769,231 INTEREST PAYABLE AND OTHER LIABILITIES 2,538,710 1,425,589 ------------ ------------ Total liabilities 296,826,060 220,832,682 COMMITMENTS AND CONTINGENT LIABILITIES (Note 5) 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 - 1,960,902 shares in 2001 And 1,850,445 shares in 2000 21,972,651 19,801,538 Retained earnings 7,453,716 6,752,673 Accumulated other comprehensive income 553,263 82,173 ------------ ------------ Total shareholders' equity 29,979,630 26,636,384 Total liabilities and shareholders' equity $326,805,690 $247,469,066 ============ ============
The accompanying notes are an integral part of these statements. 14 - -------------------------------------------------------------------------------- CONSOLIDATED INCOME STATEMENTS - -------------------------------------------------------------------------------- For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 --------------------------------------------------- INTEREST INCOME: Interest and fees on loans $15,318,956 $12,927,364 $9,818,961 Interest on federal funds sold 1,012,299 520,563 192,223 Interest on investment securities - taxable 3,394,718 2,572,133 2,980,760 Interest on investment securities - tax exempt 574,556 674,823 689,683 Interest on time deposits with other financial institutions 6,862 5,558 6,947 ----------- ----------- ---------- Total interest income 20,307,391 16,700,441 13,688,574 ----------- ----------- ---------- INTEREST EXPENSE: Interest on interest-bearing transaction deposits 2,164,149 1,655,546 1,338,642 Interest on time and savings deposits 3,552,246 3,720,455 2,828,380 Interest on long-term debt 168,128 146,905 0 Interest on short-term borrowings 2,631 89,427 197,069 ----------- ----------- ---------- Total interest expense 5,887,154 5,612,333 4,364,091 ----------- ----------- ---------- Net interest income 14,420,237 11,088,108 9,324,483 PROVISION FOR LOAN LOSSES 447,000 385,000 240,000 ----------- ----------- ---------- Net interest income after provision for loan losses 13,973,237 10,703,108 9,084,483 NONINTEREST INCOME: Service charges on deposit accounts 1,185,183 955,913 978,858 Gain (loss) on securities transactions, net 325,456 (2,535) 9,753 Other 1,179,998 1,186,888 788,533 ----------- ----------- ---------- Total noninterest income 2,690,637 2,140,266 1,777,144 ----------- ----------- ---------- NONINTEREST EXPENSE: Salaries and related benefits 6,349,222 4,573,957 3,496,938 Occupancy 854,163 654,773 401,243 Equipment 1,451,276 747,078 462,579 Other 3,299,876 2,607,634 2,135,490 ----------- ----------- ---------- Total noninterest expense 11,954,537 8,583,442 6,496,250 ----------- ----------- ---------- Income before provision for income taxes 4,709,337 4,259,932 4,365,377 PROVISION FOR INCOME TAXES 1,687,171 1,647,347 1,650,000 ----------- ----------- ---------- NET INCOME $3,022,166 $2,612,585 $2,715,377 =========== =========== ========== BASIC EARNINGS PER SHARE: $1.47 $1.35 $1.54 DILUTED EARNINGS PER SHARE: $1.46 $1.33 $1.50
The accompanying notes are an integral part of these statements. 15 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY - --------------------------------------------------------------------------------
Accumulated Other Total Common Shares Common Retained Comprehensive Shareholders' Comprehensive Outstanding Stock Earnings Income (Loss) Equity Income - ------------- ----------- ----------- ------------- ------------- ------------- 1,437,491 $11,003,574 $5,521,351 $385,106 $16,910,031 71,442 1,571,724 (1,581,240) (9,516) (287,498) (287,498) 2,715,377 2,715,377 $2,715,377 (154,379) (1,401,415) ---------- (1,555,794) (1,555,794) (1,555,794) $1,313,962 ========== 27,635 317,891 317,891 --------- ----------- ----------- ----------- ----------- 1,536,568 12,893,189 6,367,990 (1,170,688) 18,090,491 76,509 1,912,725 (1,920,588) (7,863) (307,314) (307,314) 2,612,585 2,612,585 $2,612,585 1,252,861 1,252,861 1,252,861 ---------- $3,865,446 ========== 227,273 4,867,445 4,867,445 10,095 128,179 128,179 --------- ----------- ----------- ----------- ----------- 1,850,445 19,801,538 6,752,673 82,173 26,636,384 92,307 1,938,447 (1,949,743) (11,296) (371,380) (371,380) 3,022,166 3,022,166 $3,022,166 471,090 471,090 471,090 ---------- $3,493,256 ========== 18,150 232,666 232,666 --------- ----------- ----------- ----------- ----------- 1,960,902 $21,972,651 $7,453,716 $553,263 $29,979,630 ========= =========== =========== =========== ===========
The accompanying notes are an integral part of these statements. 16 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
For the Years Ended December 31, 2001, 2000 and 1999 (In 000's) 2001 2000 1999 ---------------------------------- Cash Flows From Operating Activities: Net income $ 3,022 $ 2,613 $ 2,715 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,352 634 362 Provision for loan losses 447 385 240 Amortization of deferred loan fees (471) (288) (262) Amortization (accretion) of investment securities premiums (discounts), net 121 13 (3) Provision for deferred income taxes (308) (171) (186) Losses (gains) on sale or retirement of capital assets 0 11 (15) Gain on securities transactions (325) (7) (8) Changes in: Interest receivable and other assets (3,265) (541) 117 Interest payable and other liabilities 1,150 (184) 510 -------- -------- -------- Total adjustments (1,299) (148) 755 -------- -------- -------- Net cash provided by operating activities 1,723 2,465 3,470 -------- -------- -------- Cash Flows From Investing Activities: Investment securities held to maturity: Proceeds from maturities and principal payments 39 37 10 Purchases 0 0 (1,400) Investment securities available for sale: Proceeds from maturities and principal payments 25,981 8,880 15,304 Proceeds from sales and recoveries 12,228 5,156 1,008 Purchases (63,745) (14,577) (12,062) Equity securities: Proceeds from sales 31 0 0 Purchases (40) (307) (148) Proceeds from sale of time deposits with other financial institutions 0 0 100 Net increase in loans (33,516) (29,939) (25,369) Sale and disposition of capital assets 42 0 22 Capital expenditures (5,481) (3,006) (517) -------- -------- -------- Net cash used in investing activities (64,461) (33,756) (23,052) -------- -------- -------- Cash Flows From Financing Activities: Net increase in deposits 75,803 44,258 10,207 Increase (decrease) in short-term borrowings 0 (5,000) 5,000 Increase in long-term borrowings 0 3,000 0 Re-payment of long-term borrowings (923) (231) 0 Stock options exercised 196 102 236 Stock issued, net of costs 0 4,867 0 Dividends (383) (315) (297) -------- -------- -------- Net cash provided by financing activities 74,693 46,681 15,146 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 11,955 15,390 (4,436) Cash and cash equivalents at beginning of year 25,356 9,966 14,402 -------- -------- -------- Cash and cash equivalents at end of year $ 37,311 $ 25,356 $ 9,966 ======== ======== ======== Supplemental Disclosures of Cash Flow Information: Interest paid $ 5,622 $ 6,370 $ 4,149 Income taxes paid $ 1,448 $ 1,738 $ 1,396 Retirement of fixed assets $ 139 $ 1,044 $ 0
The accompanying notes are an integral part of these statements. 17 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- December 31, 2001, 2000 and 1999 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES North Bay Bancorp (Bancorp) is a registered financial holding company headquartered in Napa, California, established on November 1, 1999. Bancorp's principal line of business is serving as a holding company for The Vintage Bank and Solano Bank (the Banks), both California state chartered banks. The Banks operate four offices in the California county of Napa and four offices in the California county of Solano. The Banks offer a full range of commercial banking services to individuals and the business and agricultural communities. Most of the Banks' customers are retail customers and small to medium-sized businesses. The consolidated financial statements of Bancorp and the Banks (collectively the Company) are prepared in conformity with accounting principles generally accepted in the United States and general practice within the banking industry. The more significant accounting and reporting policies are discussed below. Principles of Consolidation The consolidated financial statements include the accounts of Bancorp and the Banks. All material intercompany transactions and accounts have been eliminated in consolidation. Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment securities Investments in debt and equity securities are classified as "held-to-maturity" or "available-for-sale". Investments classified as held-to-maturity are those that the Company has the ability and intent to hold until maturity and are reported at cost, adjusted for the amortization or accretion of premiums or discounts. Investments classified as available-for-sale are reported at fair value with unrealized gains and losses net of related tax, if any, reported as other comprehensive income and are included in shareholders' equity. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest incomes are recognized when earned. Realized gains and losses are computed on the specific identification method. Securities with unrealized losses judged by the Company to be other than temporary are written down in the period such a determination is made. Loans Loans are stated at the principal amount outstanding net of unearned income. Nonrefundable loan origination fees and loan origination costs are deferred and amortized into income over the contractual life of the loan. The majority of the Company's interest income is accrued on a simple interest basis. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The Company's policy is to place loans on nonaccrual status when management believes the borrower's financial condition, after giving consideration to economic and business conditions and collection efforts, is such that the presumption of collectibility of interest no longer is prudent. When a loan is placed on nonaccrual status, any accrued and unpaid interest receivable is reversed and charged against current earnings. In determining income recognition on loans, generally no interest is recognized with respect to loans on which a default of interest or principal has occurred for a period of 90 days or more. The Banks define a loan as impaired when it is probable the Banks will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate or based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. 18 When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Allowance for loan losses The Banks maintain an allowance for loan losses at a level considered adequate to provide for probable losses inherent in the existing loan portfolio. The allowance is increased by provisions 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 Banks make credit reviews of the loan portfolio and consider current economic conditions, historical loan loss experience, and other factors in determining the adequacy of the allowance. Other real estate owned Other real estate owned represents real estate acquired through foreclosure and is carried at the lower of cost or fair value less estimated selling costs. Premises and equipment Premises, leasehold improvements, furniture, fixtures and equipment are carried at cost net of accumulated depreciation and amortization, which are calculated on a straight-line basis over the estimated useful life of the property or the term of the lease (if less). Premises are depreciated over 40 years, furniture and fixtures are depreciated over five to 15 years, and equipment is generally depreciated over three to five years. Income taxes For financial reporting purposes, the Company records a provision for income taxes using the liability method. A deferred tax liability or asset is recorded for all temporary differences between financial and tax reporting. Deferred tax expense or benefit results from the net change during the year of the deferred tax assets and liabilities. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. Statements of cash flows The Company defines cash, due from banks, and federal funds sold as cash and cash equivalents for the statements of cash flows. Stock-based compensation The Company uses the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25). Under this method, compensation expense is recognized for awards of options to purchase shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", permits companies to continue using the intrinsic-value method to account for stock option plans or adopt a fair value based method. The fair value based method results in recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Company has elected to continue to use the intrinsic value method and the pro forma disclosures required by SFAS 123 using the fair value method are included in Note 15. Earnings per common share Basic Earnings per Share is computed by dividing net income by the weighted average common shares outstanding. Diluted EPS is computed by dividing net income by weighted average common shares outstanding including the dilutive effects of potential common share (e.g. stock options). Comprehensive income For the Company, comprehensive income includes net income reported on the income statement and changes in the fair value of its available-for-sale investments reported as other comprehensive income. Accounting and reporting changes Financial Accounting Standards Board SFAS No. 133; "Accounting for Derivative Instruments and Hedging Activities" (as amended by SFAS No. 137 and SFAS No. 138), established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statements of financial position and measures those instruments at fair value. 19 Effective July 1, 1999, the Company adopted SFAS 133. The adoption of SFAS 133 did not materially impact the Company's financial position or results of operations. The Company does not currently utilize derivative instruments in its operations and does not engage in hedging activities. Under the provisions of SFAS No. 133, and in connection with its adoption, the Company reclassified investment securities carried at $13,506,000 with a fair value of $13,242,000 from the held-to-maturity classification to the available-for-sale classification. As a result of this transfer, an unrealized loss of $154,000, net of tax, was recognized in 1999's other comprehensive income as a cumulative effect of change in accounting principle. (2) INVESTMENT SECURITIES The amortized cost and estimated fair value of investments in debt and equity securities are summarized in the following tables. Included in the tables are equity securities that do not have readily determinable fair values because ownership is restricted and they lack a market. These securities are carried at cost and consist of Federal Reserve and Federal Home Loan Bank stock. The amortized cost and estimated fair value of investment securities at December 31, 2001 are as follows:
Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- Held-to-maturity: Municipal securities $1,313,871 $0 $0 $1,313,871 ----------- ---------- -------- ----------- Available-for-sale: Securities of the U.S. Treasury and other government agencies 24,317,312 248,983 0 24,566,295 Corporate debt securities 17,257,180 388,545 0 17,645,725 Mortgage-backed securities 28,021,340 339,577 148,104 28,212,813 Municipal securities 13,021,881 163,199 45,318 13,139,762 ----------- ---------- -------- ----------- Total available-for-sale 82,617,713 1,140,304 193,422 83,564,595 Equity securities 1,241,250 0 0 1,241,250 ----------- ---------- -------- ----------- Total investments $85,172,834 $1,140,304 $193,422 $86,119,716 =========== ========== ======== ===========
The amortized cost and estimated fair value of investment securities at December 31, 2000 are as follows:
Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- Held-to-maturity: Municipal securities $1,353,119 $0 $0 $1,353,119 ----------- -------- -------- ----------- Available-for-sale: Securities of the U.S. Treasury and other government agencies 5,539,365 25,714 26,499 5,538,580 Corporate debt securities 14,890,844 90,054 38,040 14,942,858 Mortgage-backed securities 23,885,783 162,395 137,324 23,910,854 Municipal securities 12,562,911 130,150 65,815 12,627,246 ----------- -------- -------- ----------- Total available-for-sale 56,878,903 408,313 267,678 57,019,538 Equity securities 1,231,800 0 0 1,231,800 ----------- -------- -------- ----------- Total investments $59,463,822 $408,313 $267,678 $59,604,457 =========== ======== ======== ===========
20 The following table shows the amortized cost and estimated fair value of investment securities by contractual maturity at December 31, 2001:
Held-to-Maturity Available-for-Sale Equities Amortized Estimated Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value Cost Fair Value ----------- ----------- ----------- ----------- ----------- ----------- Within one year $0 $0 $14,221,554 $14,337,509 $0 $0 After one but within five years 0 0 24,064,356 24,511,015 0 0 After five but within ten years 0 0 7,860,376 7,940,425 0 0 Over ten years 1,313,871 1,313,871 8,450,087 8,562,833 0 0 Equity securities 0 0 0 0 1,241,250 1,241,250 Mortgage-backed securities 0 0 28,021,340 28,212,813 0 0 ----------- ----------- ----------- ----------- ----------- ----------- Total $ 1,313,871 $ 1,313,871 $82,617,713 $83,564,595 $ 1,241,250 $ 1,241,250 =========== =========== =========== =========== =========== ===========
As of December 31, 2001 and 2000, securities carried at $1,035,000 and $502,500, respectively, were pledged to secure public deposits as required by law. Total proceeds from the sale of securities available-for-sale during 2001 were $12,228,173. Gross gains of $325,456 were realized on those sales. Total proceeds from the sale of securities available-for-sale during 2000 were $5,150,683. Gross losses of $7,510 were realized on those sales. The Company also recovered $4,975 on previously charged off securities. Total proceeds from the sale of securities available-for-sale during 1999 were $1,004,179. Gross gains of $4,752 were realized on those sales. The Company also recovered $5,001 on previously charged off securities. (3) LOANS AND ALLOWANCE FOR LOAN LOSSES At December 31, 2001 and 2000, the loan portfolio consisted of the following, net of deferred loan fees of $903,748 and $779,290, respectively: 2001 2000 ------------ ------------ Real estate loans $106,850,930 $86,886,297 Installment loans 20,301,134 23,431,838 Construction loans 21,453,418 8,242,918 Commercial loans secured by real estate 7,930,041 5,114,931 Commercial loans 29,730,027 28,599,857 ------------ ------------ 186,265,550 152,275,841 Less allowance for loan losses 2,717,249 2,268,048 ------------ ------------ Total $183,548,301 $150,007,793 ============ ============ There were no loans on nonaccrual status at December 31, 2001 or December 31, 2000. There was no interest foregone during 2001, 2000 or 1999. As of December 31, 2001 and 2000, there were no loans 90 days or more past due but still accruing interest. Changes in the allowance for loan losses are as follows: 2001 2000 1999 ----------- ----------- ----------- Balance, beginning of year $ 2,268,048 $ 1,986,931 $ 1,751,693 Provision for loan losses 447,000 385,000 240,000 Loans charged off (4,105) (105,508) (24,382) Recoveries of loans previously charged off 6,306 1,625 19,620 ----------- ----------- ----------- Balance, end of year $ 2,717,249 $ 2,268,048 $ 1,986,931 =========== =========== =========== 21 As of December 31, 2001 and 2000 there were no impaired loans. As of December 31, 1999 the Banks' recorded investment in impaired loans was $1,084,740, and the related valuation allowance was $231,737. This valuation allowance is included in the allowance for loan losses on the balance sheet. The average recorded investment in impaired loans was $0, $0 and $933,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, in which case payments received are recorded as reductions of principal. The Banks recognized interest income on impaired loans of $0, $0 and $81,697 in 2001, 2000 and 1999, respectively. (4) PREMISES AND EQUIPMENT Premises and equipment at December 31, 2001 and 2000 consisted of the following:
Accumulated Depreciation Net Book Cost & Amortization Value ----------- -------------- ---------- 2001 Land $2,578,200 $0 $2,578,200 Premises 4,673,102 629,978 4,043,124 Furniture, fixtures and equipment 4,662,400 2,539,237 2,123,163 Leasehold improvements 893,174 309,069 584,105 ----------- ---------- ---------- Total $12,806,876 $3,478,284 $9,328,592 =========== ========== ========== 2000 Land $706,277 $0 $706,277 Premises 1,748,164 439,054 1,309,110 Furniture, fixtures and equipment 3,839,507 1,549,377 2,290,130 Leasehold improvements 1,171,259 235,089 936,170 ----------- ---------- ---------- Total $7,465,207 $2,223,520 $5,241,687 =========== ========== ==========
Depreciation and amortization expense, included in occupancy expense and equipment expense, was $1,351,536, $634,336 and $361,854 in 2001, 2000 and 1999, respectively. (5) COMMITMENTS AND CONTINGENCIES The Banks lease the premises for their various offices. Total rent on such leases was $295,510, $270,154 and $138,654 in 2001, 2000 and 1999, respectively, and is included in occupancy and equipment expenses. The total commitments under non-cancelable leases are as follows: Year Total ---- ----- 2002 $344,629 2003 481,888 2004 489,481 2005 438,034 2006 325,261 Thereafter 1,223,688 ---------- Total $3,302,981 ========== (6) TIME DEPOSITS AND INTEREST ON TIME DEPOSITS Time certificates of deposit in denominations of $100,000 or greater were $38,223,872 and $23,996,758 at December 31, 2001 and 2000, respectively. Interest expense on these deposits was $1,009,811, $1,188,766 and $813,293 for 2001, 2000 and 1999, respectively. 22 At December 31, 2001, the scheduled maturities of time deposits are as follows: Year Total ---- ----- 2002 $67,772,004 2003 7,131,251 2004 948,974 2005 961,623 2006 758,313 2007 53,421 ----------- Total $77,625,586 =========== (7) 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 Company 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 has an unsecured loan with Union Bank of California. The balance at December 31, 2001 was $1,846,154. The loan is a variable rate loan tied to a reference rate consistent with the prime rate which was 4.75% at December 31, 2001. Principal and interest payments are due quarterly on the loan and matures October 3, 2003. (8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Banks make commitments to extend credit in the normal course of business to meet the financing needs of their customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Banks are exposed to credit loss, in the event of nonperformance by the borrower, in the contract amount of the commitment. The Banks use the same credit policies in making commitments as they do for on-balance-sheet instruments and evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks, are based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, plant and equipment and real property. The Banks also issue standby letters of credit, which are conditional commitments to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support construction bonds, private borrowing arrangements and similar transactions. Most of these guarantees are short-term commitments expiring in decreasing amounts through 2002 and are not expected to be drawn upon. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Banks hold collateral as deemed necessary, as described above. The contract amounts of commitments not reflected on the Balance Sheet at December 31, 2001 were as follows: Contractual Amounts ------------------- Loan commitments $58,443,000 Standby letters of credit $1,249,000 (9) CONCENTRATIONS OF CREDIT RISKS The majority of the Banks' loan activity is with customers located in California, primarily in the counties of Napa and Solano. Although the Banks' have a diversified loan portfolio, a large portion of their loans are for commercial property, and many of the Banks' loans are secured by real estate in Napa and Solano County. Approximately 82% of the loans are secured by real estate. This concentration is presented below: 23 As of December 31, 2001 ----------------- Construction/Land Development: Land development $4,941,336 Residential 5,781,296 Commercial 10,730,786 Real Estate 106,850,930 Commercial loans secured by real estate 7,930,041 Installment loans secured by real estate 17,350,185 ------------ Total $153,584,574 ============ (10) INCOME TAXES The provision (benefit) for federal and state income taxes for the years ended December 31, 2001, 2000 and 1999 consisted of: 2001 2000 1999 ----------- ----------- ----------- Current Federal $ 1,471,000 $ 1,303,000 $ 1,345,000 State 524,000 515,000 491,000 ----------- ----------- ----------- 1,995,000 1,818,000 1,836,000 Deferred Federal (324,000) (116,000) (164,000) State 16,000 (55,000) (22,000) ----------- ----------- ----------- (308,000) ($ 171,000) ($ 186,000) ----------- ----------- ----------- Total $ 1,687,000 $ 1,647,000 $ 1,650,000 =========== =========== =========== Deferred tax assets and liabilities result from differences in the timing of the recognition of certain income and expense items for tax and financial accounting purposes. The sources of these differences and the amount of each are as follows as of December 31, 2001 and 2000: 2001 2000 ---------- ---------- Deferred Tax Assets: Allowance for loan losses $1,062,000 $ 879,000 Deferred compensation 276,000 0 State income tax 178,000 175,000 Depreciation 44,000 0 Other 0 116,000 ---------- ---------- $1,560,000 $1,170,000 ========== ========== Deferred Tax Liabilities: Unrealized gain on securities $ 394,000 $ 70,000 Accumulated accretion 117,000 63,000 Depreciation 0 265,000 Other 323,000 30,000 ---------- ---------- 834,000 428,000 ---------- ---------- Net Deferred Tax Asset $ 726,000 $ 742,000 ========== ========== The Company had no valuation allowance as of December 31, 2001 or 2000. 24 The total tax differs from the federal statutory rate of 34% because of the following:
2001 2000 1999 ---- ---- ---- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- Tax provision at statutory rate $1,628,000 34% $1,448,000 34% $1,503,000 34% Interest on obligations of states and political subdivisions exempt from federal taxation (161,000) (3.4%) (172,000) (4%) (193,000) (3%) State franchise taxes 319,000 6.8% 316,000 7.4% 317,000 7% Other, net (99,000) (1.6%) 55,000 1.3% 23,000 2% ---------- ---- ---------- ---- ---------- -- Total $1,687,000 35.8% $1,647,000 38.7% $1,650,000 40% ========== ==== ========== ==== ========== ==
(11) DIVIDEND RESTRICTIONS The Company is regulated by the Board of Governors of the Federal Reserve System. Federal Reserve Board regulations prohibit cash dividends, except under limited circumstances, if the distribution would result in a withdrawal of capital or exceed the Bancorp'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, and less any required transfers to surplus under state or federal law. 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 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. One of the primary sources of income for the Company, on a stand-alone basis, is the receipt of dividends from the Banks. The availability of dividends from the Banks is limited by various statutes and regulations. California law restricts the amount available for cash dividends by state-chartered banks to the lesser of retained earning or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). In the event a bank is unable to pay cash dividends due to insufficient retained earnings or net income for its last three fiscal years, cash dividends may be paid under certain circumstances with the prior approval of the California Department of Financial Institutions (the "DFI"). (12) SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE The Company declared 5% stock dividends on January 27, 1999, January 18, 2000, January 29, 2001 and January 28, 2002. As a result of the stock dividends, the number of common shares outstanding and earnings per share data was adjusted retroactively for all periods presented. In 2001 the effect of 8,092 outstanding options have been excluded from the calculation of diluted earnings per share as their inclusion would be anti-dilutive. 25 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 year ended 2001 Basic earnings per share $3,022,166 2,053,669 $1.47 Stock options 22,474 Diluted earnings per share 2,076,143 $1.46 For the year ended 2000 Basic earnings per share $2,612,585 1,926,376 $1.35 Stock options 32,477 Diluted earnings per share 1,958,853 $1.33 For the year ended 1999 Basic earnings per share $2,715,377 1,762,803 $1.54 Stock options 41,693 Diluted earnings per share 1,804,496 $1.50
(13) OTHER NONINTEREST INCOME AND EXPENSE The components of Other Noninterest Income for the years ended December 31, 2001, 2000 and 1999 were as follows: 2001 2000 1999 ---------- ---------- ---------- ATM surcharge $ 248,510 $ 359,167 $ 223,345 Increase of cash value on insurance policies 296,110 133,753 156,232 Merchant services income 265,115 149,933 135,183 Commission on sale of non- deposit products 157,952 193,391 74,920 Other 212,311 350,644 198,853 ---------- ---------- ---------- Total $1,179,998 $1,186,888 $ 788,533 ========== ========== ========== The components of Other Noninterest Expense for the years ended December 31, 2001, 2000 and 1999 were as follows: 2001 2000 1999 ---------- ---------- ---------- Professional services $ 754,858 $ 547,412 $ 485,320 Business promotions 379,181 433,503 328,068 ATM expenses 222,384 167,002 159,532 Stationary & supplies 274,369 258,734 199,789 Insurance 110,503 76,498 64,400 Other 1,558,581 1,124,485 898,381 ---------- ---------- ---------- Total $3,299,876 $2,607,634 $2,135,490 ========== ========== ========== (14) BUSINESS SEGMENTS The Company's operating segments consist of its traditional community banking activities provided through the Banks' branches and activities related to the Bancorp. Community banking activities include the Banks' commercial and retail lending, deposit gathering and investment and liquidity management activities. The Company has aggregated the results of the Banks' branches into a single reportable segment, and the Bancorp activities reported as "Other". 26 The components of the Company's business segments for 2001 were as follows:
(In 000's) Community Intersegment Banking Other Adjustments Consolidated -------- -------- ------------ ------------ Interest income $20,307 $0 $0 $20,307 Interest expense 5,719 168 0 5,887 -------- -------- -------- -------- Net interest income 14,588 (168) 0 14,420 Provision for loan losses 447 0 0 447 Noninterest income 2,856 4,754 (4,919) 2,691 Equity income of subsidiaries 0 3,852 (3,852) 0 Noninterest expense 10,976 5,898 (4,919) 11,955 -------- -------- -------- -------- Income before tax 6,021 2,540 (3,852) 4,709 Provision for Income taxes 2,169 (482) 0 1,687 -------- -------- -------- -------- Net income $3,852 $3,022 ($3,852) $3,022 ======== ======== ======== ======== Assets $325,513 $32,771 ($31,478) $326,806 Loans, net 183,548 0 0 183,548 Deposits 294,442 0 (2,001) 292,441 Equity 29,476 29,980 (29,476) 29,980
The components of the Company's business segments for 2000 were as follows:
(In 000's) Community Intersegment Banking Other Adjustments Consolidated -------- ------- ------------ ------------ Interest income $16,850 $0 ($150) $16,700 Interest expense 5,615 147 (150) 5,612 -------- -------- -------- -------- Net interest income 11,235 (147) 0 11,088 Provision for loan losses 385 0 0 385 Noninterest income 2,310 2,266 (2,436) 2,140 Equity income of subsidiaries 0 3,353 (3,353) 0 Noninterest expense 7,626 3,393 (2,436) 8,583 -------- -------- -------- -------- Income before tax 5,534 2,079 (3,353) 4,260 Provision for income taxes 2,176 (529) 0 1,647 -------- -------- -------- -------- Net income $3,358 $2,608 ($3,353) $2,613 ======== ======== ======== ======== Assets $246,055 $29,885 ($28,471) $247,469 Loans, net 150,008 0 0 150,008 Deposits 217,455 0 (817) 216,638 Equity 27,654 26,636 (27,654) 26,636
27 The components of the Company's business segments for 1999 were as follows:
(In 000's) Community Intersegment Banking Other Adjustments Consolidated -------- ------- ------------ ------------ Interest income $13,688 $0 $0 $13,688 Interest expense 4,363 1 0 4,364 -------- -------- -------- -------- Net interest income 9,325 (1) 0 9,324 Provision for loan losses 240 0 0 240 Noninterest income 1,777 490 (490) 1,777 Noninterest expense 6,440 56 0 6,496 -------- -------- -------- -------- Income before tax 4,422 433 (490) 4,365 Provision for income taxes 1,650 0 0 1,650 -------- -------- -------- -------- Net income $2,772 $433 ($490) $2,715 ======== ======== ======== ======== Assets $197,003 $18,090 ($17,987) $197,106 Loans, net 120,166 0 0 120,166 Deposits 173,319 0 (939) 172,380 Equity 17,047 18,090 (17,047) 18,090
(15) STOCK OPTION PLAN The Company has a stock option plan under which it may grant up to 555,739 options. The Company has granted 548,123 options through December 31, 2001. The option exercise price equals the stock's market price on the date of grant. The options become exercisable over five years and expire in five to ten years. A summary of the status of the Company's stock option plan at December 31, 2001, 2000 and 1999 and stock option activity during the years then ended is presented in the table below:
2001 2000 1999 ---- ---- ---- Weighted Weighted Weighted Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- ------ -------- ----- -------- ----- Outstanding at beginning of year 283,576 $16.59 173,800 $13.19 194,525 $11.19 Granted 69,038 $18.36 140,155 $20.46 27,783 $19.76 Exercised (19,396) $10.17 (11,130) $8.70 (31,991) $7.37 Cancelled (487) $6.57 (19,249) $18.02 (16,517) $11.67 Outstanding at end of year 332,731 $17.32 283,576 $16.59 173,800 $13.19 Exercisable at end of year 103,413 $15.12 63,211 $12.55 39,744 $11.45 Weighted-average fair value of options granted during the year $6.23 $9.02 $6.97
28 The following table summarizes information about stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable ------------------- ------------------- Range Number Weighted-Average Number Exercisable of Outstanding at Remaining Contractual Weighted-Average at Weighted-Average Exercise Prices 12/31/01 (Life in years) Exercise Price 12/31/01 Exercise Price - --------------- -------- --------------- -------------- -------- -------------- $12.15 to $18.10 120,644 .90 $13.06 72,603 $12.88 $20.30 to $21.60 75,246 3.00 $20.99 17,249 $20.90 $18.10 to $19.96 136,841 4.10 $19.80 13,561 $19.07 ------- ------- 332,731 103,413 ======= =======
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2001, 2000 and 1999, respectively: risk-free interest rate of 4.62% and 3.90% for options issued in 2001, 5.88%, 6.75% and 5.75% for options issued in 2000 and 4.75% and 6% for options issued in 1999; expected dividend yields of 1.01%, .92% and .94%; expected lives of 6 years and expected volatility of 28.02%, 31.05% and 26.32%. The Company accounts for stock options using the intrinsic value method. Had the Company used the fair value based method prescribed by SFAS No. 123, the Company's net income and earnings per share amounts would have been reduced to the pro forma amounts indicated below: 2001 2000 1999 ---- ---- ---- Net Income: As reported $3,022,166 $2,612,585 $2,715,377 Pro forma $2,608,691 $2,267,333 $2,558,261 Earnings Per Share: As reported: Basic $1.47 $1.35 $1.54 Diluted $1.46 $1.33 $1.50 Pro forma: Basic $1.27 $1.18 $1.45 Diluted $1.26 $1.16 $1.42 (16) RELATED PARTY TRANSACTIONS In the ordinary course of business, the Banks make loans to directors, officers and principal shareholders on substantially the same terms, including interest rates and collateral, as those for comparable transactions with unaffiliated persons. An analysis of net loans to related parties for the year ended December 31, 2001 is as follows: Balance at beginning of year $4,062,052 Additions 10,090,599 Repayments 9,545,606 ---------- Balance at end of year $4,607,045 ========== Total undisbursed commitments as of December 31, 2001 were $3,069,810. A law firm in which one of the Company's directors and one of its officers are principals serves as the Company's general counsel. During 2001, 2000 and 1999 fees of $135,000, $80,000 and $58,000, respectively, were paid to this firm. 29 (17) RESTRICTIONS The Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of its reservable deposits. Reserve balances that were required by the Federal Reserve Bank were $275,000 and $487,000 for December 31, 2001 and 2000, respectively, and are reported in cash and due from banks on the balance sheet. (18) RETIREMENT PLANS The Company has a Profit Sharing and Salary Deferral 401(K) Plan to enable its employees to share in the Company's profits and to defer receipt of a portion of their salaries. Employees can defer up to 15% of their base pay, up to the maximum amount allowed by the Internal Revenue Code. In addition, the Company makes discretionary contributions to the profit sharing account and the 401(K) account, which are determined by the Board of Directors each year. Amounts charged to operating expenses under this plan representing the Company's contribution were $223,200, $160,000 and $159,000 for the years ended December 31, 2001, 2000 and 1999, respectively. During 1998, The Vintage Bank implemented a Director's Supplemental Retirement Program. The Program contains a non-qualified defined benefit plan and a non-qualified defined contribution plan. Directors and select officers designated by the Board of Directors of the Company are covered by one or the other of these plans. The plans are unfunded, however the Bank has purchased life insurance on the lives of the participants and expects to use the cash values of these policies ($2,892,394 at December 31, 2001) to pay the retirement obligations. During 2001, the Company implemented an Executive Officer Supplemental Retirement Plan. The Executive Supplemental Compensation Agreements entered into with select executive officers of the Company pursuant to the Plan provide for a defined cash benefit payable monthly upon retirement upon reaching age 65 (or upon or after age 62 with a reduced benefit). Benefits under these agreements vest over five year periods at the rate of 20% per year after five years' of service with credit for up to five years of prior service. The Plan is unfunded, however the Company has purchased life insurance on the lives of the participants and expects to use the cash values of these policies ($2,843,819 at December 31, 2001) to pay the retirement obligations. The Plan also provides a life insurance benefit to the designated beneficiary of the participants upon their death pursuant to the Executive Officer Endorsement Method Split Dollar Life Insurance component of the Plan. (19) FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and fair values of the Company's financial instruments at December 31, 2001 and 2000:
Carrying Fair Carrying Fair Amounts Value Amounts Value ------- ----- ------- ----- (In 000's) 2001 2000 ---- ---- Financial Assets: Cash and cash equivalents $37,311 $37,311 $25,356 $25,356 Time deposits with other financial institutions 100 100 100 100 Investment securities 86,120 86,120 59,604 59,604 Loans, net 183,548 185,633 150,008 149,843 Accrued interest receivable 2,015 2,015 1,739 1,739 Financial Liabilities: Deposits 292,441 291,995 216,638 216,523 Short-term borrowings 0 0 0 0 Long-term borrowings 1,846 1,846 2,769 2,769 Accrued interest payable 383 383 118 118
The following methods and assumptions were used to estimate the fair value of each class of financial instruments: 30 Cash and cash equivalents - Cash and cash equivalents are valued at their carrying amounts because of the short-term nature of these instruments. Investment Securities - Investment securities are valued at quoted market prices. See Note 2 for further analysis. Loans - Loans with variable interest rates are valued at the current carrying value, because these loans are regularly adjusted to market rates. The fair value of fixed rate loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. The fair value of impaired loans is stated net of the related valuation allowance, if any. Accrued interest receivable and payable - The balance approximates its fair value. Deposits, time deposits with other Banks - The fair value of demand deposits, savings accounts and interest-bearing transaction accounts is the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the contractual cash flows at current rates offered for similar instruments with the same remaining maturities. Borrowings - The balance approximates its fair value due to the short-term nature of these borrowings and the long-term borrowing has variable interest rate. (20) COMPREHENSIVE INCOME The changes in the components of other comprehensive income (loss) for the years ended December 31, 2001, 2000 and 1999 are reported as follows:
2001 2000 1999 -------- ---------- ----------- Unrealized holding gain (loss) arising during the period, net of tax expense of $335,157 for 2001, a tax expense of $891,346 for 2000 and a tax benefit of $1,106,868 for 1999. $661,254 $1,251,380 ($1,396,051) Reclassification adjustment for net realized gains (losses) on securities available-for-sale included in net income during the year, net of tax expense of $135,292 for 2001, a tax benefit of $1,054 for 2000 and tax expense of $3,816 for 1999. (190,164) 1,481 (5,364) -------- ---------- ----------- Other comprehensive income (loss) $471,090 $1,252,861 ($1,401,415)
(21) REGULATORY MATTERS The Company is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory--and possible additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 2001, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2001, the most recent notification from the Federal Reserve Bank categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 31 The Company's actual capital amounts and ratios are also presented in the table below:
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 December 31, 2001: Total Capital (to Risk Weighted Assets) Consolidated $32,117 13.24% $19,402 >=8.00% $24,252 >=10.00% The Vintage Bank 23,788 11.54% 16,497 >=8.00% 20,621 >=10.00% Solano Bank 7,825 22.36% 2,799 >=8.00% 3,498 >=10.00% Tier I Capital (to Risk Weighted Assets) Consolidated 29,427 12.13% 9,701 >=4.00% 14,551 >=6.00% The Vintage Bank 21,210 10.29% 8,248 >=4.00% 12,373 >=6.00% Solano Bank 7,713 22.04% 1,400 >=4.00% 2,099 >=6.00% Tier I Capital (to Average Assets) Consolidated 29,427 9.15% 12,866 >=4.00% 16,082 >=5.00% The Vintage Bank 21,210 7.75% 10,948 >=4.00% 13,685 >=5.00% Solano Bank 7,713 16.09% 1,918 >=4.00% 2,397 >=5.00% 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 December 31, 2000: Total Capital (to Risk Weighted Assets) Consolidated $28,822 14.85% $15,530 >=8.00% $19,413 >=10.00% The Vintage Bank 21,374 11.78% 14,510 >=8.00% 18,138 >=10.00% Solano Bank 8,465 77.56% 873 >=8.00% 1,091 >=10.00% Tier I Capital (to Risk Weighted Assets) Consolidated 26,554 13.68% 7,765 >=4.00% 11,648 >=6.00% The Vintage Bank 19,131 10.55% 7,255 >=4.00% 10,883 >=6.00% Solano Bank 8,440 77.33% 437 >=4.00% 655 >=6.00% Tier I Capital (to Average Assets) Consolidated 26,554 10.77% 9,859 >=4.00% 12,323 >=5.00% The Vintage Bank 19,131 8.51% 9,792 >=4.00% 12,240 >=5.00% Solano Bank 8,440 38.94% 867 >=4.00% 1,084 >=5.00%
32 (22) FINANCIAL STATEMENTS OF NORTH BAY BANCORP (Parent Company Only) The Bancorp was organized as of November 1, 1999. As a result, information below is for the twelve (12) months ended December 31, 2001 and 2000 and the two month period ended December 31, 1999. Condensed Balance Sheets
Assets 2001 2000 ----------- ----------- Cash and due from banks $1,966,121 $72,764 Investment in The Vintage Bank 21,622,962 19,217,467 Investment in Solano Bank 7,853,445 8,436,538 Premises and equipment, net 1,190,562 1,479,489 Other assets 138,116 678,508 ----------- ----------- Total assets $32,771,206 $29,884,766 =========== =========== Liabilities and shareholders' equity Long-term Borrowings $1,846,154 $2,769,231 Other Liabilities 945,422 479,151 Total liabilities $2,791,576 $3,248,382 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 - 1,960,902 shares in 2001 and 1,850,445 shares in 2000 $21,972,651 $19,801,538 Retained earnings 7,453,716 6,752,673 Accumulated other comprehensive income (loss) 553,263 82,173 ----------- ----------- Total shareholders' equity 29,979,630 26,636,384 Total liabilities and shareholders' equity $32,771,206 $29,884,766 =========== ===========
Condensed Income Statements
2001 2000 1999 ---------- ---------- -------- Income Dividends from subsidiaries $2,500,000 $3,000,000 $490,055 Service fees from subsidiaries 4,753,816 2,270,856 0 ---------- ---------- -------- Total Income 7,253,816 5,270,856 490,055 Expenses Interest on borrowings 168,128 146,905 826 Salaries and related benefits 3,274,914 2,012,749 0 Other expenses 2,621,920 1,380,699 56,275 ---------- ---------- -------- Total expenses 6,064,962 3,540,353 57,101 Net income before tax benefit and equity in net income of subsidiaries 1,188,854 1,730,503 432,954 Tax benefit 482,000 528,653 0 ---------- ---------- -------- Net income before equity in undistributed net income of 1,670,854 2,259,156 432,954 subsidiaries Equity in undistributed net income of subsidiaries 1,351,312 353,429 0 ---------- ---------- -------- Net Income 3,022,166 2,612,585 432,954 ========== ========== ========
33 Condensed Statements of Cash Flows
2001 2000 1999 ---------- ---------- -------- Net income $3,022,166 $2,612,585 $432,954 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 803,981 178,083 0 Changes in: Other assets 540,392 (663,088) (15,420) Interest payable and other liabilities 502,457 503,777 0 ---------- ---------- -------- Total adjustments 1,846,830 18,772 (15,420) ---------- ---------- -------- Net cash provided by operating activities 4,868,996 2,631,357 417,534 ---------- ---------- -------- Cash Flows From Investing Activities: 2001 2000 1999 Investment in Solano Bank 0 (9,000,000) 0 Sale and disposition of capital assets 4,392 0 0 Capital expenditures (519,446) (1,568,479) (88,216) ---------- ---------- -------- Net cash used in investing activities (515,054) (10,568,479) (88,216) ---------- ---------- -------- Cash Flows From Financing Activities: Increase (decrease) in long-term borrowings, net (923,077) 2,769,231 0 Dividend received from The Vintage Bank in excess of equity in net income 0 0 609,945 Equity in undistributed net income of subsidaries (1,351,312) (353,429) 0 Stock options exercised 196,480 102,553 0 Stock issued, net of cost 0 4,867,445 0 Dividends (382,676) (315,177) 0 ---------- ---------- -------- Net cash provided by (used in) financing activities (2,460,585) 7,070,623 609,945 ---------- ---------- -------- Net increase (decrease) in cash and cash equivalents 1,893,357 (866,499) 939,263 Cash and cash equivalents at beginning of year 72,764 939,263 0 ---------- ---------- -------- Cash and cash equivalents at end of year $1,966,121 $72,764 $939,263 ========== ========== ========
34 (23) SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (Unaudited) The following table sets forth the results of operation for the four quarters of 2001 and 2000, and is Unaudited. All per share amounts have been adjusted for the 2001 and 2002 stock dividends.
(In 000's, except per share data) 2001 Quarters Ended December 31, September 31, June 30, March 31, Interest income $5,142 $5,324 $5,086 $4,755 Interest expense 1,094 1,482 1,683 1,628 ------ ------ ------ ------ Net interest income 4,048 3,842 3,403 3,127 Provision for loan losses 114 111 111 111 ------ ------ ------ ------ Net Interest Income after 3,934 3,731 3,292 3,016 provision for loan losses Noninterest income 1,032 547 567 545 Noninterest expense 3,463 2,946 2,875 2,671 ------ ------ ------ ------ Income before provision for 1,503 1,332 984 890 income taxes Provision for income tax 575 414 362 336 ------ ------ ------ ------ Net income $928 $918 $622 $554 ====== ====== ====== ====== Basic earnings per share: $.47 $.45 $.30 $.27 Diluted earnings per share: $.47 $.44 $.30 $.27 (In 000's, except per share data) 2000 Quarters Ended December 31, September 31, June 30, March 31, Interest income $4,670 $4,282 4,025 3,723 Interest expense 1,553 1,444 1,326 1,289 ------ ------ ------ ------ Net interest income 3,117 2,838 2,699 2,434 Provision for loan losses 105 100 90 90 ------ ------ ------ ------ Net interest income after 3,012 2,738 2,609 2,344 provision for loan losses Noninterest income 482 515 629 514 Noninterest expense 2,589 2,294 1,932 1,768 ------ ------ ------ ------ Income before provision for 905 959 1,306 1,090 income taxes Provision for income tax 342 369 517 419 ------ ------ ------ ------ Net income $563 $590 $789 $671 ====== ====== ====== ====== Basic earnings per share: $.28 $.29 $.43 $.38 Diluted earnings per share: $.27 $.29 $.42 $.37
35 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- To the Shareholders and Board of Directors of North Bay Bancorp: We have audited the accompanying consolidated balance sheets of North Bay Bancorp (a California Corporation) and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of North Bay Bancorp and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. San Francisco, California February 19, 2002 36 - -------------------------------------------------------------------------------- DIRECTORS - -------------------------------------------------------------------------------- NORTH BAY BANCORP Thomas N. Gavin Owner, Gavin & Schreiner David B. Gaw Attorney with Gaw, Van Male, Smith, Myers & Miroglio Vice Chairman A Professional Law Corporation Fred J. Hearn, Jr. CEO, Hearn Pacific Corporation dba Hearn Construction Conrad W. Hewitt Retired, Commissioner of California State Department of Financial Institutions Harlan R. Kurtz General Contractor and President of K-H Development Corporation Richard S. Long Chief Executive Officer, Regulus Integrated Solutions, LLC Thomas H. Lowenstein President, North Bay Plywood Thomas F. Malloy Senior Partner, Malloy Imrie & Vasconi Insurance Chairman Services LLC Terry L. Robinson President & Chief Executive Officer James E. Tidgewell Certified Public Accountant, G & J Seiberlich & Co LLP CORPORATE SECRETARY Wyman G. Smith, III Attorney with Gaw, Van Male, Smith, Myers & Miroglio A Professional Law Corporation THE VINTAGE BANK SOLANO BANK James L. Asbury Gary J. Falati Andrew J. Beckstoffer Thomas N. Gavin Chairman Sandra H. Funseth David B. Gaw David B. Gaw William L. Kastner Fred J. Hearn, Jr. Harlan R. Kurtz Michael D. O'Brien Thomas H. Lowenstein Terry L. Robinson Chairman Thomas F. Malloy Kenneth B. Ross Andrew J. Nicks, M D Stephen C. Spencer Terry L. Robinson Denise C. Suihkonen President & CEO Vice Chairman Carolyn D. Sherwood Glen C. Terry President & CEO James E. Tidgewell Vice Chairman Robert J. Wood Directors Emeritus Houghton Gifford, M D Harlan R. Kurtz Joseph Vallerga 37 - -------------------------------------------------------------------------------- CORPORATE INFORMATION - -------------------------------------------------------------------------------- Corporate Headquarters 1500 Soscol Avenue Napa, CA 94559-1314 The Vintage Bank Office Locations: Main Office 1500 Soscol Avenue Napa, CA 94558-1314 3271 Browns Valley Road Napa, CA 94558-5499 3626 Bel Aire Plaza Napa, CA 94558-2831 1065 Main Street St. Helena, CA 94574 Solano Bank Locations: Main Office 403 Davis Street Vacaville, CA 95688 1100 Texas Street Fairfield, CA 94533 1395 E. Second Street Benicia, CA 94510 976 A Admiral Callaghan Lane Vallejo, CA 94591 Shareholder Information: Trading OTC Bulletin Board - Symbol NBAN Market Makers Hoefer & Arnett 353 Sacramento Street, 10th Floor San Francisco, CA 94111 1 (800) 346-5544 Wedbush Morgan Securities 1300 S. W. Fifth Ave., Suite 2000 Portland, OR 97201 1 (800) 234-0480 Transfer Agent Registrar & Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 1 (800) 368-5948 Notice of Annual Meeting Green Valley Country Club 35 Country Club Drive Suisun, CA 94585 April 30, 2002 - 7:00 p.m. General Counsel: Wyman G. Smith, III Gaw, Van Male, Smith, Myers & Miroglio 1000 Main Street, Suite 300 Napa, CA 94559 Corporate Secretary: Wyman G. Smith, III 38 For additional copies of this report or Pansy F. Smith copies of the 10-K Report contact: Assistant Corporate Secretary North Bay Bancorp 1500 Soscol Avenue Napa, CA 94559-1314 (707) 259-2345 Independent Public Accountants: Arthur Andersen LLP 101 Second Street, Suite 1100 San Francisco, CA 94105-3601 Web Site: www.northbaybancorp.com - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EX-23 9 p15097_ex23.txt CONSENT OF ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 19, 2002 included in this Form 10-K, into North Bay Bancorp's previously filed Form S-8 Registration Statements No. 33-93537 and No. 333-43972. /s/ Arthur Andersen LLP San Francisco, California March 22, 2002 EX-25 10 p15097_ex25.txt POWER OF ATTORNEY POWER OF ATTORNEY Each person whose signature appears below hereby authorizes Terry L. Robinson or Thomas F. Malloy and either of them, as attorney-in-fact, to sign in his or her behalf, individually and in each capacity stated below, and to file this Annual Report on Form 10- KSB and all amendments and/or supplements to this file this Annual Report on Form 10- KSB 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) /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) EX-99 11 p15097_ex99-1.txt SECURITIES AND EXCHANGE COMMISSION LETTER NORTH BAY BANCORP 1500 Soscol Avenue Napa, California 94559-1314 March 22, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Dear Sir/Madam: Pursuant to Temporary Note 3T to Section 210.2-02 "Accountant's Reports" - of the Securities and Exchange Commission's Regulation S-X, Arthur Andersen LLP has presented a report to the shareholders and directors of North Bay Bancorp that Arthur Andersen has audited the consolidated financial statements of North Bay Bancorp and subsidiaries as of December 31, 2001 and for the year then ended and has issued its report thereon dated February 19, 2002. Arthur Andersen LLP has represented that this audit was subject to Arthur Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Arthur Andersen personnel working on the audit and availability of national office consultation. Arthur Andersen has also represented that the availability of personnel at foreign affiliates of Arthur Andersen was not relevant to this audit. Very truly yours, Terry L. Robinson President and Chief Executive Officer Exhibit 99.1 -----END PRIVACY-ENHANCED MESSAGE-----