EXHIBIT 13
NORTH BAY BANCORP 2002 ANNUAL REPORT TO SHAREHOLDERS
FORWARD LOOKING STATEMENT
This annual report 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.
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TABLE OF CONTENTS
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To Our Shareholders 3
Selected Financial Data 5
Management's Discussion 6
and Analysis of Financial Condition
and Results of Operations
Quantitative and Qualitative Disclosure about Market Risk 11
Description of Operations 13
Securities of the Holding Company 14
Balance Sheets 16
Income Statements 17
Statements of Changes in Shareholders' Equity 18
Statements of Cash Flows 19
Notes to Financial Statements 20
Reports of Independent Auditors 41
Directors 43
Corporate Information 44
Change in Accountants 46
2
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TO OUR SHAREHOLDERS
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North Bay Bancorp passed several milestones during the year 2002. The Company
opened two new offices in January--Solano Bank's Vallejo Office and The Vintage
Bank's St. Helena Office, bringing our full service banking locations to a total
of eight. We completed a $10 million trust preferred financing in June, thereby
adding significantly to our regulatory capital and financial flexibility.
Effective September 3, 2002, North Bay Bancorp began listing on the Nasdaq
National Market under the symbol NBAN. Lastly, we adopted a Shareholder's Rights
Plan intended to protect the long-term value of the Company for its
shareholders.
Another notable event of 2002 was the change in responsibilities of the Chief
Executive Officers for our two subsidiary banks. In accordance with our
long-term plan, Terry Robinson stepped down from his position of President & CEO
of The Vintage Bank to focus full-time attention on Company business, notably
shareholder relations, expansion opportunities, capital adequacy and corporate
governance matters. Effective April 1, 2002, Glen Terry, the founding CEO of
Solano Bank, assumed the reins as President and CEO of The Vintage Bank. John
Nerland, a banker with over 15 years of commercial lending and management
experience, was hired to fill the position of President and CEO of Solano Bank
vacated by Mr. Terry's move. Although these changes may have temporarily slowed
our momentum, they are beneficial to the long-term interests of North Bay
Bancorp. We will be "transitioning" the Board Chairmen at North Bay Bancorp and
The Vintage Bank during 2003 in accordance with our established practice of
rotating the Board Chairs every three years; David Gaw will become Chairman of
North Bay Bancorp and James Tidgewell will become Chairman of The Vintage Bank
following our annual meeting in the Spring of 2003.
Consolidated growth for the Company during 2002 was on target with our plans,
ending the year with total assets of $416 million. Consolidated net income of
$3.7 million was 3% below our budget; the modest shortfall was primarily due to
nonrecurring fees and professional expenses related to the Nasdaq listing, the
trust preferred financing, revised stock option/benefit plans, shareholder
rights, new SEC regulations and corporate governance legislation. We anticipate
2003 to be a strong year for our Company, with consolidated asset growth
approaching 20% and net income growth of nearly 30%. As we have stated since
1999 when we formulated our plans for organizing Solano Bank, the net income
"payoff" from our aggressive growth strategy begins in year 2003.
Our vision and goals remain unchanged: (1) remain independent, (2) grow beyond
$500 million by year-end 2003, (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 to a competitive
advantage. Serving our shareholders appropriately while remaining independent
requires us to grow faster than the underlying economy while maintaining the
safety and soundness of our banks and, over the long term, attaining returns
that exceed our industry peers; we believe we are on course to deliver on that
vision. Over three years ago when we set our goal of $500 million in total
assets by year-end 2003, we believed the goal was attainable only by completing
an acquisition or starting a second "de novo" bank. While we continue to explore
expansion opportunities, reaching that goal from "internal" growth is now
feasible. The Vintage Bank unquestionably has attained the position of being the
premier financial services provider in its market and Solano Bank is steadily
building its "franchise" in the Solano market. Technological changes completed
in 2002 and those scheduled for implementation during the first half of 2003
will reduce long-term costs and will place us ahead of virtually all competitors
in our ability to deliver quality electronic-based services.
Year 2002 marked a watershed for shareholder expectations regarding corporate
ethics and quality of financial reporting. Our Company has consistently
maintained the highest ethical standards for directors and employees, beginning
with the organization of The Vintage Bank in 1984. Our culture has always been
one of full disclosure of all relevant financial information accompanied by a
low tolerance for credit and interest rate risk. That culture has remained
despite our significant growth and structural changes. Our Audit
3
Committee is composed of qualified directors, skillfully chaired by Conrad
Hewitt, former Ernst & Young Managing Partner and former Commissioner of
Financial Institutions for the State of California. While work remains to be
done, we believe we have been "ahead of the curve" on corporate governance
issues, and we are committed to continuing in that position.
As always, we thank our shareholders for their support and patronage and look
forward to 2003 with enthusiastic optimism.
Very truly yours,
/s/Terry L. Robinson /s/ Thomas F. Malloy
Terry L. Robinson Thomas F. Malloy
President & Chief Executive Officer Chairman of the Board
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,
2002. 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)
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
Interest income $ 21,179 $ 20,307 $ 16,700 $ 13,688 $ 11,907
Interest expense 3,691 5,887 5,612 4,364 3,992
---------- ---------- ---------- ---------- ----------
Net interest income 17,488 14,420 11,088 9,324 7,915
Provision for loan losses 576 447 385 240 240
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 16,912 13,973 10,703 9,084 7,675
Noninterest income 3,111 2,691 2,140 1,777 1,397
Noninterest expense 14,316 11,955 8,583 6,496 5,660
Provision for income taxes 1,999 1,687 1,647 1,650 1,301
---------- ---------- ---------- ---------- ----------
Net Income $ 3,708 $ 3,022 $ 2,613 $ 2,715 $ 2,111
========== ========== ========== ========== ==========
BASIC PER SHARE DATA: (1)
Earnings per share $ 1.68 $ 1.40 $ 1.29 $ 1.47 $ 1.16
Average shares outstanding 2,203,296 2,156,352 2,022,695 1,850,943 1,818,721
DILUTED PER SHARE DATA: (1)
Earnings per share $ 1.64 $ 1.39 $ 1.27 $ 1.43 $ 1.12
Average shares outstanding 2,258,299 2,179,950 2,056,796 1,894,721 1,875,255
BALANCE SHEET DATA:
Total assets $ 416,458 $ 326,806 $ 247,469 $ 197,106 $ 180,291
Net loans 234,337 183,548 150,008 120,166 94,775
Total deposits 367,803 292,441 216,638 172,380 162,173
Shareholders' equity 35,343 29,980 26,636 18,090 16,910
(1) All per share amounts have been adjusted to reflect the 5% stock dividends
declared January 26, 1998, January 28, 1999, January 18, 2000, January 29, 2001,
January 28, 2002 and January 27, 2003.
5
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MANAGEMENT'S DISCUSSION
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AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD LOOKING STATEMENT
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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.
Moreover, wherever phrases such as or similar to "in Managements opinion", or
"Management considers" are used, such statements are as of and based upon
knowledge of Management, at the time made and are subject to change by the
passage of time and/or subsequent events, and accordingly such statements are
subject to the same risk and uncertainties noted above with respect to
forward-looking statements.
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
$3,707,836, or $1.64 per diluted earnings share, in 2002 compared with
$3,022,166, or $1.39 per diluted earnings share, in 2001 and $2,612,585, or
$1.27 per diluted earnings share, in 2000, equating to a return on average
assets of .99%, 1.00% and 1.17% for years 2002, 2001 and 2000, respectively. The
return on average equity was 11.36% in 2002 compared with 10.61% and 11.70% in
2001 and 2000, respectively.
As of December 31, 2002, total assets were $416,457,827 compared with total
assets of $326,805,690 and $247,469,066 at year end 2001 and 2000, respectively,
representing a 27% increase in 2002 and a 32% increase in 2001. Deposits
increased 26% in 2002 compared with a 35% increase in 2001. Loans, net of the
allowance for loan losses, increased 28% in 2002 compared with a 22% increase in
2001.
These financial statements should be read in conjunction with the financial
statements and the notes included herein.
CRITICAL ACCOUNTING POLICIES
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The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in future periods. Not all of these critical accounting policies require
management to make difficult, subjective or complex judgments or estimates.
However, the Company believes that the determination of the adequacy of its
allowance for loan losses is particularly susceptible to management's judgment
and estimates. The Company maintains an
6
Allowance for Loan Losses to absorb losses inherent in the Company's loan
portfolio. 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.
SUMMARY OF EARNINGS
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Net Interest Income
Net interest income before provision for loan losses was $17,488,224,
$14,420,237, and $11,088,108 in 2002, 2001 and 2000, respectively, representing
increases of 21% in 2002 and 30% in 2001.
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 2002 compared with 2001 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 2002 to 5.31% from 5.36% in 2001. The decrease in the net interest
margin is primarily the result of a lower average loan-to-deposit ratio in 2002
compared to 2001 and changes in the market interest rates. 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 of holding tax exempt securities and loans) increased $911,648 or
7%, in 2002 compared with 2001. Increases in the volume of earning assets
accounted for increasing interest income by $4,491,210, offset by a decrease of
$3,779,562 attributable to lower rates. An increase in taxable-equivalent
interest income of $3,590,234 or 21% in 2001 compared with 2000 consisted of a
$5,285,413 increase due to growth of earning assets and offset by a decrease of
$1,695,179 attributable to lower rates on earning assets.
Interest paid on interest-bearing liabilities decreased $2,196,135 in 2002
compared with 2001. Increases in the volume of deposits and other borrowings
increased interest paid by $1,254,416 offset by a $3,450,651 decrease
attributable to a decline in rates. Interest paid on interest-bearing
liabilities increased $274,821 in 2001 compared with 2000; the effect of volume
increases accounted for $1,373,981 offset by a decrease of $1,099,160
attributable to lower rates.
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.
7
As of December 31, 2002, net loans increased $51 million, a 28% increase from
year-end 2001. On an average balance basis the Company's loan portfolio
increased $39 million over the average balance in 2001. In 2001, average
balances increased from the prior year by 22% or $33 million. The increase in
2002 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 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 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 are
taken into consideration when evaluating the Company's allowance for loan
losses.
As of December 31, 2002 the allowance for loan losses of $3,290,209 represented
1.38% of loans outstanding. This compared with an allowance balance of
$2,717,249 at December 31, 2001, representing 1.46% of loans outstanding. During
2002, 2001 and 2000, $576,000, $447,000 and $385,000, 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, 2002 and 2001
there were no nonaccrual loans.
8
Historical Loan Loss & Recovery Experience
(In 000's)
Solano Bank The Vintage Bank Consolidated
2002 2001 2002 2001 2002 2001
--------- --------- --------- --------- --------- ---------
Loans charged-off $ 0 $ 0 $ 10 $ 4 $ 10 $ 4
Recoveries 0 0 (7) (6) (7) (6)
--------- --------- --------- --------- --------- ---------
Net charge-off
(recovery) 0 0 3 (2) 3 (2)
Allowance for loan
losses 418 112 2,872 2,605 3,290 2,717
% of charged-off
loans to the
reserve 0.000% 0.000% 0.001% (0.001%) 0.001% (0.001%)
Loan portfolio $ 44,206 $ 25,827 $ 193,421 $ 160,438 $ 237,627 $ 186,265
% of reserve to
portfolio .95% .43% 1.48% 1.62% 1.38% 1.46%
There have been no transactions in the past year to impact the allocation of
loan losses. The increased allocation is due primarily to overall growth in the
loan portfolio and related inherent risk of loss. Net loans charged off were a
modest $3,040 within the portfolio for The Vintage Bank and recoveries for 2001
out- paced charged-off loans. Solano Bank, as a new company, has sustained no
losses since opening for business July 2000.
Based on the current conditions of the loan portfolio, Management believes that
the $3,290,209 allowance for loan losses at December 31, 2002 is adequate to
absorb potential losses inherent in the Banks' loan portfolios. No assurance can
be given, however, that adverse economic conditions or other circumstances will
not result in increased losses in the portfolio.
Noninterest Income
Details of noninterest income are as follows:
(In 000's)
2002 2001 2000
---- ---- ----
Service charge on deposit
accounts $1,321 $1,186 $956
Gains (losses) on securities
transactions 399 325 (3)
Other 1,391 1,180 1,187
------ ------ ------
Total $3,111 $2,691 $2,140
====== ====== ======
Noninterest income for year 2002 increased $420,000, or 16%, compared with 2001.
Most noninterest income derives from service charges on deposit accounts.
Service charge income increased proportionately less than growth in deposits
because the average balance of deposit accounts increased during the year,
resulting in fewer accounts generating service charges.
Noninterest Expense
Details of noninterest expense are as follows:
9
(In 000's)
2002 2001 2000
------- ------- -------
Salaries & benefits $ 7,893 $ 6,349 $ 4,574
Occupancy 916 855 654
Equipment 1,614 1,451 747
Other 3,893 3,300 2,608
------- ------- -------
Total $14,316 $11,955 $ 8,583
======= ======= =======
Salaries and benefits expense increased 24% and 39% in 2002 and 2001,
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 141 at year-end 2002. The increase was
primarily the result of staffing for opening Solano Bank and new branches
throughout the Company.
The 7% increase in occupancy expense during 2002 compared with 2001 was
primarily in rent and depreciation associated with opening two new branches.
Equipment expense increased 11% in 2002 compared with 2001. The increase was
primarily in depreciation and maintenance expense. The Company installed a new
core processing system in 2002. Equipment is depreciated over periods of three
to five years.
The key components of other expenses are as follows:
(In 000's)
2002 2001 2000
------ ------ ------
Professional services $ 830 $ 755 $ 547
Business promotion 525 379 434
ATM expenses 261 222 167
Stationery & supplies 318 274 259
Insurance 188 111 76
Other 1,771 1,559 1,124
------ ------ ------
Total $3,893 $3,300 $2,607
====== ====== ======
Professional services increased 10% in 2002 compared with a 38% increase in
2001; the increase in 2002 was primarily due to increases in legal fees
associated with our Nasdaq listing, our trust preferred offering, revised
benefits plans, new corporate governance legislation and changes in regulatory
requirements. The 38% increase in 2001 compared with 2000 was due to increases
in legal fees and fees for audits. Business promotion expense increased 39% in
2002 compared with 2001; these variations were primarily the result of increased
marketing expenditures. ATM expense increased 18% in 2002 compared with 2001 and
33% when comparing 2001 to 2000; these increases are primarily due to increases
in the number of ATM's the Company operates. Stationery and supplies expense
increased 16% and 6% in 2001 and 2000, respectively, reflecting overall volume
increases and costs associated with the system conversion and opening new
branches. Insurance expenses increased 69% and 46% in 2001 and 2000,
respectively; these increases are consistent with increases in volumes and
number of locations, as well as increases in workers' compensation costs. Other
expenses increased 14% and 39% in 2002 and 2001, 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 $1,999,065, $1,687,171 and
$1,647,347 for years 2002, 2001 and 2000, 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 and life
insurance products. The Company has not been subject to an alternative minimum
tax (AMT).
BALANCE SHEET
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Total assets as of December 31, 2002 were $416,457,827 compared with
$326,805,690 and $247,469,066, as of year-end 2001 and 2000, respectively,
representing a 27% increase in 2002 and a 32% increase in
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2001. Total deposits grew $75,362,006 to $367,803,202 in 2002, representing a
26% increase, compared with a 35% increase in 2001. Total loans, net of
allowance for loan losses, grew $50,788,811 to $234,337,112 in 2002,
representing a 28% increase compared with a 22% increase in 2001. Investment
securities increased $20,974,539 from year-end 2001 to $107,094,255 in 2002, a
24% increase, compared with an increase of 44% during 2001.
Liquidity and Capital Adequacy
The Company's liquidity is determined by the level of assets (such as cash,
federal funds sold and unpledged marketable securities together with other
funding sources) that are readily convertible to cash and cash equivalents 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, 2002,
"Held-to-Maturity" securities had an amortized cost of $1,272,020 and
"Available-for-Sale" securities had a fair value of $104,473,355 with an
unrealized gain, net of income taxes, of $1,343,558 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
$1,348,900.
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, 2002, the
Company had approximately $126 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.
At year-end 2002, liquid assets (defined as cash, Federal funds sold, deposits
in other financial institutions and securities categorized as
available-for-sale) represented 38% of total assets, as compared with 37% as of
year-end 2001. The level of liquid assets at December 31, 2002 exceeds the
liquidity required by the Company's liquidity policy. Management expects to be
able to meet the liquidity needs of the Company during 2003 primarily through
balancing loan growth with corresponding increases in deposits. The Company did
not borrow at FHLB or on the federal funds lines during 2002.
The Company's capital ratios remained relatively steady during 2002 compared
with 2001 levels. As of December 31, 2002, the Company's total risk-based
capital ratio, Tier I risk-based capital ratio and leverage ratio were 14.9%,
13.9% and 10.9%, respectively. These compare with ratios of 13.2%, 12.1% and
9.2% as of December 31, 2001.
In January, 2003, the Company declared a 5% stock dividend and a $.20 per share
cash dividend for shareholders of record as of March 10, 2003. 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 $430,000, equating to a reduction in the
Company's leverage ratio of approximately .01%.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. Although
the Company manages other risks, as in credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to be
principally a market risk. The Company relies on loan reviews, prudent
underwriting standards and an adequate allowance for loan losses to mitigate
credit risk. Other types of market risks, such as foreign currency exchange rate
risk, do not arise in the normal course of the Company's business activities.
The majority of the Company's interest rate risk arises from instruments,
positions and transactions entered into for purposes other than trading. They
include loans, securities available-for-sale, deposit liabilities, short-term
borrowings and long-term debt. Interest rate risk occurs when assets and
liabilities reprice at different times as interest rates change.
The Company manages interest rate risk through its Audit Committee which serves
as the Asset Liability Committee (ALCO). The ALCO manages the balance sheet to
maintain the forecasted impact on net
11
interest income and present value of equity within acceptable ranges despite
unforeseeable changes in interest rates. The ALCO monitors these risks on a
quarterly basis using both a traditional gap analysis and simulation analysis.
The Company utilizes a simulation model as its primary tool for interest rate
risk. This model considers the effects of lags and different ranges of interest
rate changes among various classes of earning assets and interest-bearing
liabilities following a 1% or 2% change in the Fed Funds rate, and produces a
more accurate projection of the impact changing interest rates will have on the
Company. Readers are referred to management's "Forward Looking Statement" in
connection with this information.
12
Interest Rate Sensitivity
The following table sets forth the repricing opportunities for rate-sensitive
assets and rate-sensitive liabilities at December 31, 2002. Rate sensitivity
analysis usually excludes noninterest-bearing demand deposits. Including these
deposits, which totaled $104,142,052, would result in a significant shift in the
gap position. Rate-sensitive assets and rate-sensitive liabilities are
classified by the earliest possible repricing date or maturity, whichever comes
first.
(In 000's)
3 Months Over 3 Mos. Over 1 Yr. Over 5
or Less To 1 Yr. To 5 Yrs. Years Total
--------- --------- --------- --------- ---------
Interest rate-sensitive assets:
Loans, gross $ 79,236 $ 26,471 $ 87,971 $ 43,949 $ 237,627
Interest-bearing deposits in
Other banks 0 0 100 0 100
Investment securities 1,005 3,150 45,084 57,855 107,094
Federal funds sold 28,525 0 0 0 28,525
--------- --------- --------- --------- ---------
Total 108,766 29,621 133,155 101,804 373,346
Interest rate-sensitive liabilities:
Interest-bearing demand
Deposits 154,769 0 0 0 154,769
Time deposits >$100,000 24,662 10,068 4,695 0 39,425
Other time deposits 18,091 16,487 5,414 0 39,992
Savings deposits 29,475 0 0 0 29,475
Long-term borrowings 10,000 0 0 0 10,000
--------- --------- --------- --------- ---------
Total $ 236,997 $ 26,555 $ 10,109 $ 0 $ 273,661
Interest rate sensitivity gap ($128,231) $ 3,066 $ 123,046 $ 101,804 $ 99,685
========= ========= ========= ========= =========
Cumulative interest rate
sensitivity gap ($128,231) ($125,165) ($ 2,119) $ 99,685
========= ========= ========= =========
Ratio of interest rate sensitivity
to earning assets (34.35%) .82% 32.96% 27.27%
This table indicates that the Company has a "negative" GAP for three months into
the future and a "positive" GAP beyond. The implication is that during the
negative GAP "horizon" Company earnings will increase in a falling interest rate
environment, as there are more rate sensitive liabilities subject to repricing
downward than rate sensitive assets; conversely, earnings would decline in a
rising rate environment. This traditional analysis does not recognize or assume
any "lag" in interest rate changes on earning assets and interest-bearing
liabilities, and it assumes that all earning assets and interest-bearing
liabilities reprice to the same absolute degree regardless of the mix of earning
assets and interest-bearing liabilities. The 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 liability sensitive. As of December 31, 2002, the analysis
from the model indicates that our net interest income for the next 12 months
would decrease $277,000 or 1.58% if rates increase 100 basis points, and
increase $186,000 or 1.06% if rates decrease 100 basis points.
DESCRIPTION OF OPERATIONS
- --------------------------------------------------------------------------------
North Bay Bancorp (Bancorp) is a California corporation organized November 1,
1999 and is registered with the Board of Governors of the Federal Reserve System
as a financial holding company under the Bank Holding Company Act of 1956, as
amended. The Vintage Bank is a wholly-owned subsidiary of the Bancorp, organized
as a state chartered Bank in 1984; Solano Bank is also a wholly-owned subsidiary
of the Bancorp, organized as a state chartered Bank in 2000. The Vintage Bank
engages in the commercial banking business in Napa County from its main banking
office located at 1500 Soscol Avenue, Napa, California. The Vintage Bank has
four other business locations, one located in the Brown's Valley
13
Shopping Center at 3271 Brown's Valley Road, Napa, California, 3626 Bel Aire
Plaza, Napa, California, 1065 Main Street in St. Helena, California and one at
1190 Airport Road, , Napa, California which opened in March 2003. 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 one located at 976 Admiral
Callahan Lane, Vallejo, California. 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.
PROSPECTIVE ACCOUNTING CHANGES
- --------------------------------------------------------------------------------
FIBS Statement No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. The provisions of this Statement are effective for exit and disposal
activities that are initiated after December 31, 2002. This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The Company does not currently have
plans to exit or dispose of activities.
SECURITIES OF THE HOLDING COMPANY
- --------------------------------------------------------------------------------
The Company's outstanding securities consist of one class, Common Stock, of
which there were 2,136,563 shares outstanding at March 10, 2003, held by 1,034
shareholders of record. The stock is listed in the Nasdaq National Market under
the symbol NBAN effective September 3, 2002. Prior to the Nasdaq listing, the
stock traded over-the-counter and was quoted on the OTC "Bulletin Board".
The following table (adjusted for the 2002 and 2003 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, 2001 $19.00 $16.41
June 30, 2001 18.14 17.24
September 30, 2001 18.60 17.24
December 31, 2001 18.59 17.24
March 31, 2002 26.19 18.14
June 30, 2002 26.19 22.62
September 30, 2002 27.38 21.05
December 31, 2002 25.24 22.62
There may be other transactions of which 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 2003,
2002 and 2001. 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,
14
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, 2002, the Company had retained earnings of $8,612,381 eligible for
dividends.
15
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31, 2002 and 2001
(In 000's except share data)
2002 2001
-------- --------
ASSETS
CASH AND DUE FROM BANKS $ 23,785 $ 19,311
FEDERAL FUNDS SOLD 28,525 18,000
-------- --------
Cash and cash equivalents 52,310 37,311
TIME DEPOSITS WITH OTHER
FINANCIAL INSTITUTIONS 100 100
INVESTMENT SECURITIES:
Held-to-maturity 1,272 1,314
Available-for-sale 104,473 83,565
Equity securities 1,349 1,241
-------- --------
Total investment securities 107,094 86,120
LOANS, net of allowance for loan losses of
$3,290 in 2002 and $2,717 in 2001 234,337 183,548
BANK PREMISES AND EQUIPMENT, net 10,800 9,329
INTEREST RECEIVABLE AND OTHER ASSETS 11,817 10,398
-------- --------
Total assets $416,458 $326,806
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Non-interest bearing $104,142 $ 77,117
Interest-bearing 263,661 215,324
-------- --------
Total deposits 367,803 292,441
LONG-TERM DEBT 0 1,846
INTEREST PAYABLE AND OTHER LIABILITIES 3,312 2,539
-------- --------
Total liabilities 371,115 296,826
COMMITMENTS AND CONTINGENT LIABILITIES (Note 5)
FLOATING RATE SUBORDINATED
DEBENTURE (Trust Preferred Securities) 10,000 0
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - Authorized 500,000 shares;
Issued and outstanding - None
Common stock, no par value - Authorized 10,000,000 shares;
Issued and outstanding - 2,130,288 shares in 2002
and 1,960,902 shares in 2001 25,387 21,973
Retained earnings 8,612 7,454
Accumulated other comprehensive income 1,344 553
-------- --------
Total shareholders' equity 35,343 29,980
Total liabilities and shareholders' equity $416,458 $326,806
======== ========
The accompanying notes are an integral part of these statements.
16
- --------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENTS
- --------------------------------------------------------------------------------
For the Years Ended December 31, 2002, 2001 and 2000
(In 000's except share data)
2002 2001 2000
-------- -------- --------
INTEREST INCOME:
Interest and fees on loans $ 16,602 $ 15,319 $ 12,927
Interest on federal funds sold 418 1,012 521
Interest on investment securities - taxable 3,490 3,395 2,572
Interest on investment securities - tax exempt 664 574 675
Interest on time deposits with other
financial institutions 5 7 5
-------- -------- --------
Total interest income 21,179 20,307 16,700
-------- -------- --------
INTEREST EXPENSE:
Interest on interest-bearing
transaction deposits 1,118 2,164 1,656
Interest on time and savings deposits 2,234 3,552 3,720
Interest on long-term debt 339 168 147
Interest on short-term borrowings 0 3 89
-------- -------- --------
Total interest expense 3,691 5,887 5,612
-------- -------- --------
Net interest income 17,488 14,420 11,088
PROVISION FOR LOAN LOSSES 576 447 385
-------- -------- --------
Net interest income after
provision for loan losses 16,912 13,973 10,703
NONINTEREST INCOME:
Service charges on deposit accounts 1,321 1,186 956
Gain (loss) on securities transactions, net 399 325 (3)
Other 1,391 1,180 1,187
-------- -------- --------
Total noninterest income 3,111 2,691 2,140
-------- -------- --------
NONINTEREST EXPENSE:
Salaries and related benefits 7,893 6,349 4,574
Occupancy 916 855 654
Equipment 1,614 1,451 747
Other 3,893 3,300 2,608
-------- -------- --------
Total noninterest expense 14,316 11,955 8,583
-------- -------- --------
Income before provision for income taxes 5,707 4,709 4,260
PROVISION FOR INCOME TAXES 1,999 1,687 1,647
-------- -------- --------
NET INCOME $ 3,708 $ 3,022 $ 2,613
======== ======== ========
BASIC EARNINGS PER SHARE: $ 1.68 $ 1.40 $ 1.29
DILUTED EARNINGS PER SHARE: $ 1.64 $ 1.39 $ 1.27
The accompanying notes are an integral part of these statements.
17
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY &
COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
For the Years Ended December 31,
2002, 2001 and 2000 (In 000's except share data)
Accumulated
Other
Common Shares Common Retained Comprehensive Shareholders' Comprehensive
Outstanding Stock Earnings Income (Loss) Equity Income
--------- --------- -------- --------- -------- ---------
BALANCE, DECEMBER 31, 1999 1,536,568 $ 12,894 $ 6,368 (1,171) $ 18,091
Stock dividend 76,509 1,913 (1,921) (8)
Cash dividend (307) (307)
Comprehensive income:
Net income 2,613 2,613 $ 2,613
Other comprehensive loss, net of tax:
Change in net unrealized loss on
available-for-sale
securities, net of tax and
reclassification adjustment 1,253 1,253 1,253
---------
Comprehensive income $ 3,866
=========
Issuance of common stock, net of 227,273 4,867 4,867
issuance expenses of $133
Stock options exercised, including a
tax benefit of $26 10,095 128 128
--------- --------- -------- --------- --------
BALANCE, DECEMBER 31, 2000 1,850,445 19,802 6,753 82 26,637
Stock dividend 92,307 1,938 (1,950) (12)
Cash dividend (371) (371)
Comprehensive income:
Net income 3,022 3,022 $ 3,022
Other comprehensive income, net
of tax:
Change in net unrealized gain on
available-for-sale
securities, net of tax of and
reclassification adjustment 471 471 471
---------
Comprehensive income $ 3,493
=========
Stock options exercised, including a 18,150 233 233
tax benefit of $36
--------- --------- -------- --------- --------
BALANCE, DECEMBER 31, 2001 1,960,902 21,973 7,454 553 29,980
Stock dividend 97,408 2,143 (2,158) (15)
Cash dividend (392) (392)
Comprehensive income:
Net income 3,708 3,708 $ 3,708
Other comprehensive income, net
of tax:
Change in net unrealized gain on
available-for-sale
securities, net of tax of and
reclassification adjustment 791 791 791
---------
Comprehensive income $ 4,499
=========
Stock options exercised, including a 71,978 1,271 1,271
tax benefit of $362
--------- --------- -------- --------- --------
BALANCE, DECEMBER 31, 2002 2,130,288 $ 25,387 $ 8,612 $ 1,344 $ 35,343
========= ========= ======== ========= ========
18
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Years Ended December 31, 2002, 2001 and 2000 (In 000's)
2002 2001 2000
-------- -------- --------
Cash Flows From Operating Activities:
Net income $ 3,708 $ 3,022 $ 2,613
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,441 1,352 634
Provision for loan losses 576 447 385
Amortization of deferred loan fees (514) (471) (288)
Amortization of investment securities
premiums, net 938 121 13
Provision for deferred income taxes (398) (308) (171)
Losses on sale or retirement of capital assets 1 0 11
Gain on securities transactions (399) (325) (7)
Changes in:
Interest receivable and other assets (1,582) (3,265) (541)
Interest payable and other liabilities 1,135 1,150 (184)
-------- -------- --------
Net cash provided by operating activities 4,906 1,723 2,465
-------- -------- --------
Cash Flows From Investing Activities:
Investment securities held to maturity:
Proceeds from maturities and principal payments 42 39 37
Investment securities available for sale:
Proceeds from maturities and principal payments 40,368 25,981 8,880
Proceeds from sales and recoveries 21,380 12,228 5,156
Purchases (81,842) (63,745) (14,577)
Equity securities:
Proceeds from sales 10 31 0
Purchases (120) (40) (307)
Net increase in loans (50,851) (33,516) (29,939)
Sale and disposition of capital assets 1 42 0
Capital expenditures (2,914) (5,481) (3,006)
-------- -------- --------
Net cash used in investing activities (73,926) (64,461) (33,756)
-------- -------- --------
Cash Flows From Financing Activities:
Net increase in deposits 75,362 75,803 44,258
Decrease in short-term borrowings 0 0 (5,000)
Increase in long-term borrowings 0 0 3,000
Proceeds from issuance of trust preferred securities 10,000 0 0
Repayment of long-term borrowings (1,846) (923) (231)
Stock options exercised 909 196 102
Stock issued, net of costs 0 0 4,867
Dividends (406) (383) (315)
-------- -------- --------
Net cash provided by financing activities 84,019 74,693 46,681
-------- -------- --------
Net increase in cash and cash equivalents 14,999 11,955 15,390
Cash and cash equivalents at beginning of year 37,311 25,356 9,966
-------- -------- --------
Cash and cash equivalents at end of year $ 52,310 $ 37,311 $ 25,356
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 3,755 $ 5,622 $ 6,370
Income taxes paid $ 2,290 $ 1,448 $ 1,738
Retirement of fixed assets $ 0 $ 139 $ 1,044
The accompanying notes are an integral part of these statements.
19
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 2002, 2001 and 2000
(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 five 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 of America. 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 of America 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. For the Company, the most significant accounting estimate is
the allowance for loans losses. See "Allowance for loan losses" below. 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.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a charge to
earnings and the corresponding establishment of a new cost basis for the
security. Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity or available-for-sale security as an adjustment to
yield using the effective interest method. Dividend and interest income are
recognized when earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings and are derived
using the specific identification method for determining the cost of securities
sold.
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. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full and timely collection of interest or
principal or when a loan becomes contractually past due by ninety days or more
with respect to interest or principal. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period interest income. Interest accruals are resumed on such loans only
when they are brought fully current with respect to interest and principal and
when, in the judgment of management, the loans are estimated to be fully
collectible as to both principal and interest. Restructured loans are loans on
which concessions in terms have been granted because of the borrowers' financial
difficulties. Interest is generally accrued on such loans in accordance with the
new terms.
20
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. 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.
Bank 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 Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
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.
21
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 and related interpretations). 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:
(In 000's except share data)
2002 2001 2000
--------- --------- ---------
Net income as reported $ 3,708 $ 3,022 $ 2,613
Total stock-based employee
compensation
expense determined under
the fair value based method
for all awards, net of related
tax effects 235 294 249
--------- --------- ---------
Net income pro forma $ 3,473 $ 2,728 $ 2,364
Earnings per share:
As reported:
Basic $ 1.68 $ 1.40 $ 1.29
Diluted $ 1.64 $ 1.39 $ 1.27
Pro forma:
Basic $ 1.58 $ 1.33 $ 1.29
Diluted $ 1.54 $ 1.31 $ 1.27
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 shares (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 accumulated other comprehensive
income.
Derivative instruments Derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities are required
to be recognized as either assets or liabilities in the statements of financial
position and measures those instruments at fair value. The Company does not
currently utilize derivative instruments in its operations and does not engage
in hedging activities.
Accounting and reporting changes Financial Accounting Standards Board (FASB)
Statement No. 142, Goodwill and Other Intangible Assets. The Statement was
adopted effective January 1, 2002. Statement No. 142 requires that goodwill and
intangible assets with indefinite lives no longer be amortized, but instead
tested for impairment at least annually in accordance with the provisions of
Statement No. 142. Statement No. 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The Company does not have any goodwill and
intangible assets acquired in business combinations.
FASB Statement No. 143, Accounting for Asset Retirement Obligations. The
Statement addresses the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The Statement requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation
22
associated with the retirement of a tangible long-lived asset. This Statement
was adopted effective June 15, 2002 and adoption din not have a material impact
on the Company.
FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Statement No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The provisions of this Statement
were adopted effective January 1, 2002. Adoption did not have a material impact
on the financial condition or operating results of the Company.
FASB Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections. This clarifies
and simplifies existing accounting pronouncements. The provisions of this
Statement related to the rescission of Statement 4 are applicable in fiscal
years beginning after May 15, 2002. The provisions of this Statement related to
Statement 13 are effective for transactions occurring after May 15, 2002. All
other provisions of this Statement are effective for financial statements issued
on or after May 15, 2002. Adoption of the provisions applicable to the year
ended December 31, 2002 did not have a material impact on the financial
condition or operating results of the Company. The Company does not expect the
provisions related to Statement No. 4 or Statement No. 13 to have any impact on
the financial condition or operating results of the Company.
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This
Interpretation addresses the disclosure to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantees. These
disclosure requirements are included in footnote 8 to the consolidated financial
statements. The Interpretation also requires the recognition of a liability by a
guarantor at the inception of certain guarantees.
The Interpretation requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, that is, the obligation to stand
ready to perform in the event that specified triggering events or conditions
occur. The initial measurement of this liability is the fair value of the
guarantee at inception. The recognition of the liability is required even it is
not probable that payments will be required under the guarantee or if the
guarantee was issued with a premium payment or as part of a transaction with
multiple elements.
As noted above the Company has adopted the disclosure requirements of the
Interpretation (see footnote 8) and will apply the recognition and measurement
provisions for all guarantees entered into or modified after December 31, 2002.
To date the Company has not entered into or modified guarantees pursuant to the
provisions of the Interpretation.
FASB Interpretation No. 46, Consolidation of Variable Interest Entities. This
Interpretation addresses consolidation by business enterprises of variable
interest entities, which have one or both of the following characteristics: 1)
the equity investment at risk is not sufficient to permit the entity to finance
its activities without additional financial support from other parties, or 2)
the equity investors lack one or more of the following essential characteristics
of a controlling financial interest: a) the direct or indirect ability to make
decisions about the entity's activities through voting or similar rights, b) the
obligation to absorb the expected losses of the entity if they occur, or c) the
right to receive the expected residual returns of the entity if they occur. The
Interpretation requires existing variable interest entities to be consolidated
if those entities do not effectively disburse risks among parties involved. The
Company has determined that it has no ownership in variable interest entities.
FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. The provisions of this Statement amend FASB Statement No. 123,
Accounting for Stock-Based Compensation, and provide alternative methods of
transition for enterprises that elect to change to the Statement No. 123 fair
value method of accounting for stock-based employee compensation. The Statement
also amends the disclosure requirements of Statement No. 123 to require
prominent disclosures about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has elected not to change its accounting method for stock-based compensation.
The Company will continue to account for the stock option plan under the
recognition and measurement principles of the APB Opinion No. 25, Accounting for
Stock Issued to Employees.
23
(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, 2002 are as follows:
(In 000's)
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ---------
Held-to-maturity:
Municipal securities $ 1,272 $ 0 $ 0 $ 1,272
-------- -------- -------- --------
Available-for-sale:
Securities of the U.S. Treasury
and other government agencies 34,089 642 0 34,731
Corporate debt securities 11,524 239 0 11,763
Mortgage-backed securities 44,226 735 27 44,934
Municipal securities 12,334 711 0 13,045
-------- -------- -------- --------
Total available-for-sale 102,173 2,327 27 104,473
Equity securities 1,349 0 0 1,349
-------- -------- -------- --------
Total investments $104,794 $ 2,327 $ 27 $107,094
======== ======== ======== ========
The amortized cost and estimated fair value of investment securities at December
31, 2001 are as follows:
(In 000's)
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ---------
Held-to-maturity:
Municipal securities $ 1,314 $ 0 $ 0 $ 1,314
------- ------- ------- -------
Available-for-sale:
Securities of the U.S. Treasury
and other government agencies 24,317 249 0 24,566
Corporate debt securities 17,257 389 0 17,646
Mortgage-backed securities 28,021 340 148 28,213
Municipal securities 13,022 163 45 13,140
------- ------- ------- -------
Total available-for-sale 82,617 1,141 193 83,565
Equity securities 1,241 0 0 1,241
------- ------- ------- -------
Total investments $85,172 $ 1,141 $ 193 $86,120
======= ======= ======= =======
24
The following table shows the amortized cost and estimated fair value of debt
securities by contractual maturity at December 31, 2002:
(In 000's)
Held-to-Maturity Available-for-Sale
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
Within one year $ 0 $ 0 $ 3,970 $ 4,041
After one but within five years 0 0 40,694 41,606
After five but within ten years 0 0 7,696 8,160
Over ten years 1,272 1,272 5,587 5,732
Mortgage-backed securities 0 0 44,226 44,934
-------- -------- -------- --------
Total $ 1,272 $ 1,272 $102,173 $104,473
======== ======== ======== ========
As of December 31, 2002 and 2001, securities carried at $2,080,787 and
$1,035,000, respectively, were pledged to secure public deposits as required by
law.
Total proceeds from the sale of securities available-for-sale during 2002 were
$21,379,585. Gross gains of $399,197 were realized on those sales.
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.
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
At December 31, 2002 and 2001, the loan portfolio consisted of the following,
net of deferred loan fees of $1,347,864 and $903,748, respectively:
(In 000's)
2002 2001
-------- --------
Real estate loans $131,167 $106,851
Installment loans 24,102 20,301
Construction loans 19,306 21,453
Commercial loans secured by real estate 16,991 7,930
Commercial loans 46,061 29,730
-------- --------
237,627 186,265
Less allowance for loan losses 3,290 2,717
-------- --------
Total $234,337 $183,548
======== ========
There were no loans on nonaccrual status at December 31, 2002 or December 31,
2001. There was no interest foregone during 2002, 2001 or 2000. As of December
31, 2002 and 2001, there were no loans 90 days or more past due but still
accruing interest. There were no restructured loans during 2002 or 2001.
Changes in the allowance for loan losses are as follows:
(In 000's)
2002 2001 2000
------- ------- -------
Balance, beginning of year $ 2,717 $ 2,268 $ 1,987
Provision for loan losses 576 447 385
Loans charged off (10) (4) (105)
Recoveries of loans
previously charged off 7 6 1
------- ------- -------
Balance, end of year $ 3,290 $ 2,717 $ 2,268
======= ======= =======
25
As of December 31, 2002, 2001 and 2000 there were no impaired loans.
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.
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2002 and 2001 consisted of the following:
(In 000's)
Accumulated
Depreciation Net Book
Cost & Amortization Value
------- -------------- --------
2002
Land $ 2,800 $ 0 $ 2,800
Premises 5,027 786 4,241
Furniture, fixtures and equipment 6,635 3,670 2,965
Leasehold improvements 1,250 456 794
------- ------- -------
Total $15,712 $ 4,912 $10,800
======= ======= =======
2001
Land $ 2,578 $ 0 $ 2,578
Premises 4,673 630 4,043
Furniture, fixtures and equipment 4,662 2,539 2,123
Leasehold improvements 893 308 585
------- ------- -------
Total $12,806 $ 3,477 $ 9,329
======= ======= =======
Depreciation and amortization expense, included in occupancy expense and
equipment expense, was $1,441,142, $1,351,536 and $634,336 in 2002, 2001 and
2000, respectively.
(5) COMMITMENTS AND CONTINGENCIES
The Banks lease the premises for their various offices. Total rent on such
leases was $373,560, $321,409 and $270,154 in 2002, 2001 and 2000, respectively,
and is included in occupancy and equipment expenses. The total commitments under
non-cancelable operating leases are as follows:
(In 000's)
Year Total
---- -----
2003 $614
2004 631
2005 580
2006 462
2007 342
Thereafter 1,023
------
Total $3,652
======
(6) TIME DEPOSITS AND INTEREST ON TIME DEPOSITS
Time certificates of deposit in denominations of $100,000 or greater were
$39,425,275 and $38,223,872 at December 31, 2002 and 2001, respectively.
Interest expense on these deposits was $893,277, $1,009,811 and $1,188,766 for
2002, 2001 and 2000, respectively.
26
At December 31, 2002, the scheduled maturities of time deposits are as follows:
(In 000's)
Year Total
---- -----
2003 $69,308
2004 4,570
2005 2,730
2006 810
2007 1,999
2008 0
-------
Total $79,417
=======
(7) BORROWINGS
There were no short-term borrowings at December 31, 2002 or December 31, 2001.
Short-term borrowings consist primarily of federal funds purchased and
borrowings from the Federal Home Loan Bank of San Francisco (FHLB). The Company
maintains a collateralized line of credit with the FHLB. Based on the FHLB stock
requirements at December 31, 2002, this line provided for maximum borrowings of
approximately $110 million; the Company also has available unused lines of
credit totaling $16 million for federal funds transactions at December 31, 2002.
On June 26, 2002, North Bay Statutory Trust I (Trust), a Connecticut statutory
business trust and wholly-owned subsidiary of North Bay Bancorp, issued $10
million in floating rate Cumulative Trust Preferred Securities (Securities). The
Securities bear a rate of the 90 day LIBOR plus 3.45% which changes quarterly.
The rate at December 31, 2002 was 4.85%. The Securities will mature on June 26,
2032, but earlier redemption is permitted under certain circumstances, such as
changes in tax or regulatory capital rules. The principal asset of the trust is
a $10,310,000 floating rate subordinated debenture of the Company.
The Securities, the subordinated debenture, and the common securities issued by
the Trust are redeemable in whole or in part on or after June 26, 2007, or at
any time in whole, but not in part, upon the occurrence of certain events. The
Securities are included in Tier 1 capital for regulatory capital adequacy
determination purposes, subject to certain limitations. The Company fully and
unconditionally guarantees the obligations of the Trust with respect to the
issuance of the Securities.
Subject to certain exceptions and limitations, the Company may, from time to
time, defer subordinated debenture interest payments, which would result in a
deferral of distribution payments on the Securities and, with certain
exceptions, prevent the Company from declaring or paying cash distributions on
the Company's common stock or debt securities that rank junior to the
subordinated debentures.
The Company had a $3,000,000 unsecured loan with Union Bank of California that
was to mature in 2003 with principal and interest payments due quarterly. The
balance at December 31, 2001 was $1,846,154. The loan was a variable rate loan
tied to Union Bank's reference rate. The Company paid the loan in full in June,
2002 with the proceeds of the Trust Preferred Securities.
(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.
27
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 2003 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, 2002 were as follows:
(In 000's)
Contractual Amounts
2002 2001
---- ----
Loan commitments $83,835 $58,443
Standby letters of credit $729 $1,249
The Banks issue both financial and performance standby letters of credit. The
financial standby letters of credit are primarily to guarantee payment to third
parties. At December 31, 2002 there were $288,000 issued in financial standby
letters of credit and the Banks carried no liability. The performance standby
letters of credit are typically issued to municipalities as specific performance
bonds. At December 31, 2002 there were $441,000 issued in performance standby
letters of credit and the Banks carried no liability. The terms of the
guarantees will expire primarily in 2003 and 2004 with 3% expiring in 2007. The
Banks have experienced no draws on these letters of credit, and do not expect to
in the future; however, should a triggering event occur, the Banks either have
collateral in excess of the letter of credit or imbedded agreements of recourse
from the customer.
(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 78% of the loans are secured by real
estate. This concentration is presented below:
(In 000's)
As of December 31, 2002
Construction/land development:
Land development $4,575
Residential 6,506
Commercial 8,224
Real estate 131,167
Commercial loans secured by real estate 16,992
Installment loans secured by real estate 18,917
--------
Total $186,381
========
(10) INCOME TAXES
The provision (benefit) for federal and state income taxes for the years ended
December 31, 2002, 2001 and 2000 consisted of: (In 000's)
2002 2001 2000
------- ------- -------
Current
Federal $ 1,712 $ 1,471 $ 1,303
State 685 524 515
------- ------- -------
2,397 1,995 1,818
Deferred
Federal (297) (324) (116)
State (101) 16 (55)
------- ------- -------
(398) ($ 308) ($ 171)
------- ------- -------
Total $ 1,999 $ 1,687 $ 1,647
======= ======= =======
28
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, 2002 and 2001:
(In 000's)
2002 2001
------ ------
Deferred Tax Assets:
Allowance for loan losses $1,300 $1,062
Deferred compensation 372 276
State income tax 191 178
Depreciation 68 44
Other 33 0
------ ------
$1,964 $1,560
====== ======
Deferred Tax Liabilities:
Unrealized gain on securities $ 956 $ 394
Accumulated accretion 147 117
Depreciation 0 0
Other 0 24
------ ------
1,103 535
------ ------
Net Deferred Tax Asset $ 861 $1,025
====== ======
The Company believes that a valuation allowance is not needed to reduce the
deferred tax assets as it is more likely than not that the deferred tax assets
will be realized through recovery of taxes previously paid and/or future taxable
income.
The total tax differs from the federal statutory rate of 34% because of the
following:
(In 000's)
2002 2001 2000
---- ---- ----
Amount Rate Amount Rate Amount Rate
------- ---- ------- ---- ------- ----
Tax provision at statutory rate $ 1,940 34.0% $ 1,601 34.0% $ 1,448 34.0%
Interest on obligations of
states and political
subdivisions exempt from
federal taxation (191) (3.3%) (161) (3.4%) (172) (4%)
State franchise taxes 385 6.7% 319 6.8% 316 7.4%
Life insurance policies (133) (2.3%) (101) (2.2%)
Other, net (2) (.1%) 29 .6% 55 1.3%
------- ---- ------- ---- ------- ----
Total $ 1,999 35.0% $ 1,687 35.8% $ 1,647 38.7%
======= ==== ======= ==== ======= ====
(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
29
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 management fees charged to 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 18, 2000, January 29, 2001,
January 28, 2002 and January 27, 2003. 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. There were no shares considered
anti-dilutive in 2002 or 2000.
The following table reconciles the numerator and denominator of the
Basic and Diluted earnings per share computations:
(In 000's except share data)
Weighted Average Per-Share
Net Income Shares Amount
---------- ------ ------
For the year ended 2002
-----------------------
Basic earnings per share $3,708 2,203,296 $1.68
Stock options 55,003
Diluted earnings per share 2,258,299 $1.64
For the year ended 2001
-----------------------
Basic earnings per share $3,022 2,156,352 $1.40
Stock options 23,598
Diluted earnings per share 2,179,950 $1.39
For the year ended 2000
-----------------------
Basic earnings per share $2,613 2,022,695 $1.29
Stock options 34,101
Diluted earnings per share 2,056,796 $1.27
(13) OTHER NONINTEREST INCOME AND EXPENSE
The components of Other Noninterest Income for the years ended December 31,
2002, 2001 and 2000 were as follows:
(In 000's)
2002 2001 2000
------ ------ ------
ATM surcharge $ 294 $ 249 $ 359
Increase of cash value on
insurance policies 393 296 134
Merchant services income 280 265 150
Commission on sale of non-
deposit products 204 158 193
Other 220 212 351
------ ------ ------
Total $1,391 $1,180 $1,187
====== ====== ======
30
The components of Other Noninterest Expense for the years ended December 31,
2002, 2001 and 2000 were as follows:
(In 000's)
2002 2001 2000
------ ------ ------
Professional services $ 830 $ 755 $ 547
Business promotions 525 379 434
ATM expenses 261 222 167
Stationary & supplies 318 274 259
Insurance 188 111 76
Other 1,771 1,559 1,125
------ ------ ------
Total $3,893 $3,300 $2,608
====== ====== ======
(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".
The components of the Company's business segments for 2002 were as follows:
(In 000's)
Community Intersegment
Banking Other Adjustments Consolidated
--------- -------- ------------- ------------
Interest income $ 21,151 $ 41 ($ 13) $ 21,179
Interest expense 3,365 339 (13) 3,691
-------- -------- -------- --------
Net interest income 17,786 (298) 0 17,488
Provision for loan
losses 576 0 0 576
Noninterest income 3,275 5,681 (5,845) 3,111
Equity income of
subsidiaries 0 4,497 (4,497) 0
Noninterest expense 13,415 6,746 (5,845) 14,316
-------- -------- -------- --------
Income before tax 7,070 3,134 (4,497) 5,707
Provision for
income taxes 2,573 1,128 (1,702) 1,999
-------- -------- -------- --------
Net income $ 4,497 $ 2,006 ($ 2,795) $ 3,708
======== ======== ======== ========
Assets $411,196 $ 46,728 ($41,466) $416,458
Loans, net 234,337 0 0 234,337
Deposits 374,536 0 (6,733) 367,803
Equity 34,733 35,343 (34,733) 35,343
31
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 2,169 914 (1,396) 1,687
-------- -------- -------- --------
Net income $ 3,852 $ 1,626 ($ 2,456) $ 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 2,176 748 (1,277) 1,647
-------- -------- -------- --------
Net income $ 3,358 $ 1,331 ($ 2,076) $ 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
The Company has determined that there are not separate reporting segments, as
defined by the Financial Accounting Standards Board; therefore, this schedule
will not be included in future financial reports.
(15) STOCK OPTION PLAN
The Company has a stock option plan under which it may grant up to 830,276
options. The Company has granted 606,504 options through December 31, 2002. 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 or more years. The
Equity compensation plans have been approved by the security holders.
32
A summary of the status of the Company's stock option plan at December 31, 2002,
2001 and 2000 and stock option activity during the years then ended is presented
in the table below:
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------ ------- ------ ------- ------
Outstanding at
beginning of year 349,368 $16.50 297,755 $15.80 182,490 $12.56
Granted 30,975 $24.34 72,490 $17.49 147,163 $19.48
Exercised (75,577) $11.46 (20,366) $ 9.69 (11,687) $ 8.29
Cancelled (17,205) $18.68 (511) $ 6.26 (20,211) $17.16
Outstanding at
end of year 287,561 $18.38 349,368 $16.50 297,755 $15.80
Exercisable at
end of year 102,259 $17.23 108,584 $14.40 66,372 $11.95
Weighted-average
fair value of
options granted
during the year $ 6.94 $ 6.23 $ 9.02
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
------------------- -------------------
Range Number Weighted-Average Number Exercisable
of Outstanding at Remaining Contractual Weighted-Average at Weighted-Average
Exercise Prices 12/31/02 (Life in years) Exercise Price 12/31/02 Exercise Price
--------------- -------- --------------- -------------- -------- --------------
$11.57 to $19.33 63,249 .76 $14.22 38,761 $14.22
$17.71 to $20.06 124,155 2.24 $19.51 49,662 $19.51
$17.23 to $24.47 100,157 3.65 $19.62 13,836 $17.49
------- -------
287,561 102,259
======= =======
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 2002, 2001 and 2000, respectively: risk-free
interest rate of 4.07% and 3.25% for options issued in 2002, 4.62% and 3.90% for
options issued in 2001 and 5.88%, 6.75% and 5.75% for options issued in 2000;
expected dividend yields of .80%, 1.01% and .93%; expected lives of 5 years and
expected volatility of 21.67%, 28.02% and 31.05%.
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, 2002 is as follows:
(In 000's)
Balance at beginning of year $4,607
Additions 4,094
Repayments 3,359
Balance at end of year $5,342
Total undisbursed commitments as of December 31, 2002 were $6,566,606.
33
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 2002, 2001 and 2000
fees of $165,000, $135,000 and $80,000, respectively, were paid to this firm.
(17) RESTRICTIONS
The Banks are required to maintain reserves with the Federal Reserve Bank of San
Francisco equal to a percentage of its reservable deposits. Reserve balances
that were required by the Federal Reserve Bank were $220,000 and $275,000 for
December 31, 2002 and 2001, 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 $263,300, $223,200 and $160,000 for the years ended December
31, 2002, 2001 and 2000, respectively.
During 1998, The Vintage Bank implemented a Director's Supplemental Retirement
Program. The Program contains a non-qualified defined benefit plan. Directors
and select officers designated by the Board of Directors of the Company are
covered by this plan. The plan is unfunded, however the Bank has purchased life
insurance on the lives of the participants and expects to use the cash values of
these policies to pay retirement obligations. Management's intentions are to
hold the policies as an investment until the death of the insured. Cash values
for these policies at December 31, 2002 were $3,050,846. At December 31, 2002
$287,406 was carried as a liability to fund the benefit. The program provides a
death benefit to beneficiaries of a deceased participant.
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 ($2,998,489 at
December 31, 2002) to pay the retirement obligations. At December 31, 2002
$218,316 was carried as a liability to fund the benefit. 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.
34
(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, 2002 and 2001:
Carrying Fair Carrying Fair
Amounts Value Amounts Value
-------- -------- -------- --------
(In 000's)
2002 2001
---- ----
Financial Assets:
Cash and cash equivalents $ 52,310 $ 52,310 $ 37,311 $ 37,311
Time deposits with other
financial institutions 100 100 100 100
Investment securities 107,094 107,094 86,120 86,120
Loans, net 234,337 236,147 183,548 185,633
Accrued interest receivable 2,256 2,256 2,015 2,015
Financial Liabilities:
Deposits $367,803 $367,486 $292,441 $291,995
Long-term borrowings 0 0 1,846 1,846
Trust Preferred Securities 10,000 10,000 0 0
Accrued interest payable 319 319 383 383
Contract Carrying Fair Contract Carrying Fair
Amounts Amounts Value Amounts Amounts Value
------- ------- ----- ------- ------- -----
(In 000's)
2002 2001
---- ----
Unrecognized financial instruments:
Loan commitments $83,835 $0 $436 $58,443 $0 $304
Standby letters of credit $729 $0 $5 $1,249 $0 $8
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
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.
Trust preferred securities - The balance approximates its fair value due to the
structure having a variable interest rate.
35
Loan commitments and standby letters of credit - The fair value is estimated
using the fees currently charged to enter into similar agreements.
(20) COMPREHENSIVE INCOME
The changes in the components of other comprehensive income (loss) for the years
ended December 31, 2002, 2001 and 2000 are reported as follows:
(In 000's)
2002 2001 2000
---- ---- ----
Unrealized holding gain (loss) arising during the period, net of
tax expense of $562 for 2002, a tax expense of $335 for
2001 and a tax expense of $891 for 2000. $1,024 $661 $1,251
Reclassification adjustment for net realized gains (losses) on
securities available-for-sale included in net income during the
year, net of tax expense of $166 for 2002, a tax expense of
$135 in 2001 and a tax benefit of $2 for 2000. (233) (190) 2
------ ---- ------
Other comprehensive income $ 791 $471 $1,253
====== ==== ======
(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, 2002, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2002, 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.
36
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, 2002:
Total capital (to risk
weighted assets)
Consolidated $47,289 14.88% $25,419 >=8.00% $31,773 >=10.00%
The Vintage Bank 28,825 11.03% 20,902 >=8.00% 26,128 >=10.00%
Solano Bank 7,815 14.57% 4,291 >=8.00% 5,363 >=10.00%
Tier I capital (to risk
weighted assets)
Consolidated 43,999 13.85% 12,709 >=4.00% 19,064 >=6.00%
The Vintage Bank 25,953 9.93% 10,451 >=4.00% 15,677 >=6.00%
Solano Bank 7,397 13.79% 2,145 >=4.00% 3,218 >=6.00%
Tier I capital (to
average assets)
Consolidated 43,999 10.86% 16,203 >=4.00% 20,253 >=5.00%
The Vintage Bank 25,953 7.52% 13,808 >=4.00% 17,260 >=5.00%
Solano Bank 7,397 12.36% 2,394 >=4.00% 2,993 >=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, 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%
37
(22) FINANCIAL STATEMENTS OF NORTH BAY BANCORP (Parent Company Only)
For the Years Ended December 31, 2002, 2001 and 2000
CONDENSED BALANCE SHEETS
(In 000's except share data)
Assets 2002 2001
------- -------
Cash and due from banks $ 6,921 $ 1,966
Available-for-sale investment securities 2,854 0
Investment in The Vintage Bank 27,166 21,623
Investment in Solano Bank 7,567 7,853
Investment in North Bay Statutory Trust 1 310 0
Premises and equipment, net 1,794 1,191
Other assets 426 138
------- -------
Total assets $47,038 $32,771
======= =======
Liabilities and shareholders' equity
Long-term borrowings $ 0 $ 1,846
Other liabilities 1,385 945
------- -------
Total liabilities $ 1,385 $ 2,791
Floating rate subordinated
debenture (trust preferred securities) 10,310 0
Shareholders' equity
Preferred stock, no par value - Authorized 500,000 shares
Issued and outstanding - None
Common stock, no par value - Authorized 10,000,000 shares
Issued and outstanding - 2,130,288 shares in 2002 and
1,960,902 shares in 2001 25,387 21,973
Retained earnings 8,612 7,454
Accumulated other comprehensive income 1,344 553
------- -------
Total shareholders' equity 35,343 29,980
Total liabilities and shareholders' equity $47,038 $32,771
======= =======
CONDENSED INCOME STATEMENTS
(In 000's)
Income 2002 2001 2000
------- ------- -------
Interest on investment securities $ 41 $ 0 $ 0
Dividends from subsidiaries 0 2,500 3,000
Service fees from subsidiaries 5,681 4,754 2,271
------- ------- -------
Total Income 5,722 7,254 5,271
Expenses
Interest on borrowings 339 168 147
Salaries and related benefits 3,836 3,275 2,013
Other expenses 2,910 2,622 1,380
------- ------- -------
Total expenses 7,085 6,065 3,540
Net income (loss) before tax benefit and equity in
net income of subsidiaries (1,363) 1,189 1,731
Tax benefit 574 482 529
------- ------- -------
Net income (loss) before equity in undistributed net income of subsidiaries (789) 1,671 2,260
Equity in undistributed net income of subsidiaries 4,497 1,351 353
------- ------- -------
Net Income $ 3,708 $ 3,022 $ 2,613
======= ======= =======
38
CONDENSED STATEMENTS OF CASH FLOWS
(In 000's)
2002 2001 2000
-------- -------- --------
Cash Flows From Operating Activities:
Net income $ 3,708 $ 3,022 $ 2,612
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 737 804 178
Amortization (accretion) of investment securities
premiums (discounts), net 5 -- --
Equity in undistributed net income of subsidiaries (4,497) (1,351) (353)
Changes in:
Other assets (288) 541 (662)
Interest payable and other liabilities 468 502 504
-------- -------- --------
Net cash provided by operating activities 133 3,518 2,279
-------- -------- --------
Cash Flows From Investing Activities:
Investment in Solano Bank 0 0 (9,000)
Investment securities available for sale:
Proceeds from maturities and principal payments 201 -- --
Purchases (3,006) -- --
Sale and disposition of capital assets 0 4 0
Capital expenditures (1,340) (519) (1,568)
-------- -------- --------
Net cash used in investing activities (4,145) (515) (10,568)
-------- -------- --------
2002 2001 2000
-------- -------- --------
Cash Flows From Financing Activities:
Increase (decrease) in long-term borrowings, net (1,846) (923) 2,769
Dividend received from The Vintage Bank in excess of
equity in net income 0 0 0
Proceeds from issuance of Trust Preferred Securities 10,310 0 0
Stock options exercised 909 196 102
Stock issued, net of cost 0 0 4,867
Dividends (406) (383) (315)
-------- -------- --------
Net cash provided by (used in) financing activities 8,967 (1,110) 7,423
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 4,955 1,893 (866)
Cash and cash equivalents at beginning of year 1,966 73 939
-------- -------- --------
Cash and cash equivalents at end of year $ 6,921 $ 1,966 $ 73
======== ======== ========
39
(23) SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth the results of operation for the four quarters
unaudited of 2002 and 2001. All per share amounts have been adjusted for the
2001, 2002 and 2003 stock dividends.
(In 000's, except per share data)
2002 Quarters Ended
December 31, September 31, June 30, March 31,
Interest income $5,638 $5,495 $5,173 $4,873
Interest expense 988 1,012 841 850
------ ------ ------ ------
Net interest income 4,650 4,483 4,332 4,023
Provision for loan losses 144 144 144 144
------ ------ ------ ------
Net Interest Income after 4,506 4,339 4,188 3,879
provision for loan losses
Noninterest income 1,036 731 645 699
Noninterest expense 3,797 3,697 3,455 3,367
------ ------ ------ ------
Income before provision for 1,745 1,373 1,378 1,211
income taxes
Provision for income taxes 619 446 501 433
------ ------ ------ ------
Net income $1,126 $ 927 $ 877 $ 778
====== ====== ====== ======
Basic earnings per share: $ .50 $ .42 $ .40 $ .36
Diluted earnings per share: $ .49 $ .41 $ .39 $ .35
(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 taxes 575 414 362 336
------ ------ ------ ------
Net income $ 928 $ 918 $ 622 $ 554
====== ====== ====== ======
Basic earnings per share: $ .45 $ .43 $ .29 $ .26
Diluted earnings per share: $ .45 $ .42 $ .29 $ .26
40
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors
North Bay Bancorp:
We have audited the consolidated balance sheet of North Bay Bancorp and
subsidiaries as of December 31, 2002 and the related consolidated statements of
income, statements of changes in shareholders' equity and comprehensive income,
and statements of cash flows for the year ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The 2001 and 2000 consolidated
financial statements of North Bay Bancorp were audited by other auditors who
have ceased operations. Those auditors expressed an unqualified opinion on those
consolidated financial statements in their report dated February 19, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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
audit provides a reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of North Bay
Bancorp and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
San Francisco, California
January 29, 2003
41
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of North Bay Bancorp:
We have audited the accompanying consolidated balance sheets of North Bay
Bancorp (a California Corporation) and subsidiaries as of December 31, 2001 and
2000 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of North Bay Bancorp
and subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
San Francisco, California
February 19, 2002
This report is a copy of a previously issued report.
The predecessor auditor, Arthur Andersen, has not reissued the report.
42
- --------------------------------------------------------------------------------
DIRECTORS
- --------------------------------------------------------------------------------
NORTH BAY BANCORP
Thomas N. Gavin Owner, Gavin & Schreiner, New York Life Insurance Agency
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, Chairman Senior Partner, Malloy Imrie & Vasconi Insurance Services LLC
Terry L. Robinson President & Chief Executive Officer, North Bay Bancorp
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 Jack Anthony, III
Andrew J. Beckstoffer Gary J. Falati
David B. Gaw Thomas N. Gavin, Chairman
William L. Kastner David B. Gaw
Thomas H. Lowenstein, Chairman Fred J. Hearn, Jr.
Thomas F. Malloy Connie Klimisch
Andrew J. Nicks, M D John A. Nerland, President & CEO
Terry L. Robinson Michael D. O'Brien
Glen C. Terry, President & CEO Terry L. Robinson
Carolyn D. Sherwood Stephen C. Spencer
James E. Tidgewell, Vice Chairman Denise C. Suihkonen, Vice Chairman
Robert J. Wood
Directors Emeritus
Sandi Funseth
Houghton Gifford, M D
Harlan R. Kurtz
Joseph Vallerga
43
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Corporate Headquarters
1190 Airport Road, Suite 101
Napa, CA 94558
The Vintage Bank Office Locations:
Main Office
1500 Soscol Avenue
Napa, CA 94559-1314
3271 Browns Valley Road
Napa, CA 94558-5499
3626 Bel Aire Plaza
Napa, CA 94558-2831
1065 Main Street
St. Helena, CA 94574
1190 Airport Road, Suite 100
Napa, CA 94558
Solano Bank Office 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 Nasdaq NMS - Symbol NBAN
Market Makers Hoefer & Arnett
353 Sacramento Street, 10th Floor
San Francisco, CA 94111
1 (800) 346-5544
Keefe, Bruyette & Woods, Inc.
235 Pine St., Suite 1818
San Francisco, CA 94104
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 North Bay Bancorp Executive Offices
1190 Airport Road, Suite 101
Napa, CA 94558
May 8, 2003- 7:00 p.m.
General Counsel: Wyman G. Smith
Gaw, Van Male, Smith, Myers & Miroglio
1000 Main Street, Suite 300
Napa, CA 94559
44
Corporate Secretary: Wyman G. Smith
For additional copies of this report or Pansy F. Smith
copies of the 10-K Report contact: Assistant Corporate Secretary
North Bay Bancorp
1190 Airport Road, Suite 101
Napa, CA 94558
(707) 252-5026
Independent Auditors: KPMG LLP
Three Embarcadero Center, Suite 2000
San Francisco, CA 94111
Web Site: www.northbaybancorp.com
- --------------------------------------------------------------------------------
45
Changes in Accountants
On April 8, 2002, the Audit Committee of the Board of Directors of North Bay
Bancorp dismissed Arthur Andersen LLP, San Francisco, California, as the
independent accountant chosen to audit the Company's consolidated financial
statements.
Arthur Andersen's report on the consolidated financial statements of North Bay
for either of the years ended December 31, 2001 or 2000 did not contain an
adverse opinion or a disclaimer of opinion, and was not qualified or modified as
to uncertainty, audit scope, or accounting principles.
During North Bay's two most recent fiscal years, and during the subsequent
interim period preceding the date of Arthur Andersen's dismissal, there was no
disagreement with Arthur Andersen on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Arthur Andersen, would have
caused Arthur Andersen to make a reference to the subject matter of the
disagreement in connection with its report.
During North Bay's two most recent fiscal years, and during the subsequent
interim period preceding the date of Arthur Andersen 's dismissal, Arthur
Andersen did not advise North Bay:
o that the internal controls necessary for North Bay to develop
reliable financial information do not exist;
o that information had come to Arthur Andersen's attention that has
led it to no longer rely on management's representations or that has
made it unwilling to be associated with the financial statements
prepared by management;
o of the need to significantly expand the scope of Arthur Andersen's
audit or that information has come to Arthur Andersen's attention
during North Bay's two most current fiscal years, and during the
subsequent interim period preceding the date of Arthur Andersen's
dismissal, that if further investigated may:
o materially impact the fairness or reliability of either a
previously issued audit report or the underlying financial
statements, or the financial statements to be issued covering
the fiscal period(s) subsequent to the date of the most recent
statements covered by an audit report (including information
that may prevent it from rendering an unqualified audit report
on those financial statements), or
o cause Arthur Andersen to be unwilling to rely on management's
representations or be associated with North Bay's financial
statement;
o and, due to the Arthur Andersen's dismissal, or for any other
reason, Arthur Andersen did not so expand the scope of its
audit or conduct a further investigation; or,
o that information has come to Arthur Andersen's attention that it has
concluded materially impacts the fairness or reliability of either:
o a previously issued audit report or the underlying financial
statements, or
o the financial statements to be issued covering the fiscal
period(s) subsequent to the date of the most recent statements
covered by an audit report (including information that may
prevent it from rendering an unqualified audit report on those
financial statements);
o due to Arthur Andersen's dismissal, or for any other reason,
the issue has not been resolved to Arthur Andersen's
satisfaction prior to the dismissal.
In connection with a Current Report on Form 8-K filed by North Bay in April 2002
reporting the change of accountants, North Bay provided Arthur Andersen with a
copy of the Current Report and requested that Arthur Andersen furnish North Bay
a letter addressed to the Securities and Exchange Commission stating whether or
not Arthur Andersen agreed with the above statements. By letter dated April 11,
2002, Arthur Andersen agreed with the above statements.
46