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TABLE OF CONTENTS
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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
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TO OUR SHAREHOLDERS
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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
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SELECTED FINANCIAL DATA
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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
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MANAGEMENT'S DISCUSSION
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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
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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.
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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
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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
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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
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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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
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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
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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
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