SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR the quarter period ended September 30, 2003
Commission File No. 0-31080
NORTH BAY BANCORP
-----------------
(Exact name of registrant as specified in its charter)
California 68-0434802
---------- ----------
(State or Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
1190 Airport Road, Suite 101, Napa, California 94558
----------------------------------------------------
(Address of principal executive office including Zip Code)
Registrant's telephone number, including area code: (707) 257-8585
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
Preferred Share Purchase Rights
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the North Bay Bancorp's Common
Stock outstanding as of November 10, 2003: 2,285,646
Part 1.
FINANCIAL INFORMATION
FORWARD LOOKING STATEMENTS
In addition to the historical information, this Quarterly Report contains
certain forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 321E of the Securities Exchange
Act of 1934, as amended, and are subject to the "Safe Harbor" created by those
Sections. The reader of this Quarterly Report should understand that all such
forward-looking statements are subject to various uncertainties and risks that
could affect their outcome. The Company's actual results could differ materially
from those suggested by such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, (i)
variances in the actual versus projected growth in assets, return on assets,
loan losses, expenses, rates charged on loans and earned on securities
investments, rates paid on deposits, and fee and other noninterest income
earned; (ii) competitive pressures among depository and other financial
institutions may increase significantly and have an effect on pricing, spending,
third-party relationships and revenues; (iii) enactment of adverse government
regulations; (iv) adverse conditions and volatility, as a result of recent
economic uncertainty created by the United States' war on terrorism, the war in
Iraq, in the stock market, the public debt market and other capital markets and
the impact of such conditions of the Company; (v) continued changes in the
interest rate environment may reduce interest margins and adversely impact net
interest income; (vi) as well as other factors. This entire Quarterly Report
should be read to put such forward-looking statements in context and to gain a
more complete understanding of the uncertainties and risks involved in the
Company's business.
Moreover, wherever phrases such as or similar to "In Management's opinion", or
"Management considers" are used, such statements are as of and based upon the
knowledge of Management at the time made and are subject to change by the
passage of time and/or subsequent events, and accordingly such statements are
subject to the same risks and uncertainties noted above with respect to
forward-looking statements.
FINANCIAL INFORMATION
The information for the three months and nine months ended September 30, 2003
and September 30, 2002 is unaudited, but in the opinion of management reflects
all adjustments which are necessary to present fairly the financial condition of
North Bay Bancorp (Company) at September 30, 2003 and the results of operations
and cash flows for the three and nine months then ended. Results for interim
periods should not be considered as indicative of results for a full year.
2
Item 1.
FINANCIAL STATEMENTS
North Bay Bancorp
Consolidated Balance Sheets
Unaudited
(In 000's except share data)
September 30, September 30, December 31,
Assets 2003 2002 2002
-------- -------- --------
Cash and due from banks $ 34,777 $ 20,091 $ 23,785
Federal funds sold 21,750 25,154 28,525
Time deposits with other financial institutions 100 100 100
-------- -------- --------
Total cash and cash equivalents 56,627 45,345 52,410
Investment Securities:
Held-to-maturity 1,250 1,272 1,272
Available-for-sale 83,177 106,280 104,473
Equity securities 1,349 1,352 1,349
-------- -------- --------
Total investment securities 85,776 108,904 107,094
Loans, net of allowance for loan losses of $3,421 in September, 2003
$3,143 in September, 2002 and $3,290 in December, 2002 274,491 219,245 234,337
Loans held-for-sale 10,786 0 0
Bank premises and equipment, net 11,137 10,691 10,800
Accrued interest receivable and other assets 12,499 11,743 11,817
-------- -------- --------
Total assets $451,316 $395,928 $416,458
======== ======== ========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $104,594 $ 94,833 $104,142
Interest bearing 294,827 253,266 263,661
-------- -------- --------
Total deposits 399,421 348,099 367,803
Floating rate subordinated debenture (trust preferred securities) 10,000 10,000 10,000
Accrued interest payable and other liabilities 3,836 3,377 3,312
-------- -------- --------
Total liabilities 413,257 361,476 371,115
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 - 2,285,646 shares in September 2003,
2,123,687 shares in September, 2002, and 2,130,288 in December, 2002 29,209 25,269 25,387
Retained earnings 8,324 7,487 8,612
Accumulated other comprehensive income 526 1,696 1,344
-------- -------- --------
Total shareholders' equity 38,059 34,452 35,343
Total liabilities and shareholders' equity $451,316 $395,928 $416,458
======== ======== ========
The accompanying notes are an integral part of these statements
3
North Bay Bancorp
Consolidated Income Statements
(Unaudited)
(In 000's except share data)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------- ------- ------- -------
Interest Income
Loans (including fees) $ 4,853 $ 4,290 $13,780 $12,187
Federal funds sold 38 135 157 291
Investment securities - taxable 482 906 1,999 2,561
Investment securities - tax exempt 181 164 473 502
------- ------- ------- -------
Total interest income 5,554 5,495 16,409 15,541
Interest Expense
Deposits 550 859 1,907 2,511
Short term borrowings 2 0 10 0
Long term debt 129 153 411 192
------- ------- ------- -------
Total interest expense 681 1,012 2,328 2,703
Net interest income 4,873 4,483 14,081 12,838
Provision for loan losses 45 144 135 432
------- ------- ------- -------
Net interest income after
provision for loan losses 4,828 4,339 13,946 12,406
Non interest income 848 731 2,285 2,009
Gains on securities transactions, net 207 0 637 66
------- ------- ------- -------
Total non interest income 1,055 731 2,922 2,075
Non interest expenses
Salaries and employee benefits 2,338 1,978 6,896 5,858
Occupancy 356 228 931 680
Equipment 485 450 1,230 1,392
Other 1,088 1,041 3,536 2,589
------- ------- ------- -------
Total non interest expense 4,267 3,697 12,593 10,519
------- ------- ------- -------
Income before provision for income taxes 1,616 1,373 4,275 3,962
Provision for income taxes 452 446 1,204 1,380
------- ------- ------- -------
Net income $ 1,164 $ 927 $ 3,071 $ 2,582
======= ======= ======= =======
Basic earnings per common share: $ 0.51 $ 0.42 $ 1.36 $ 1.18
======= ======= ======= =======
Diluted earnings per common share: $ 0.50 $ 0.41 $ 1.32 $ 1.15
======= ======= ======= =======
Dividends Paid: $ 0.00 $ 0.00 $ 0.20 $ 0.20
======= ======= ======= =======
The accompanying notes are an integral part of these statements
4
North Bay Bancorp
Consolidated Statement of Change in Shareholders' Equity
For the Nine Months Ended
September 30, 2003
(Unaudited)
(In 000's except share data)
Accumulated
Other Total
Common Shares Common Retained Comprehensive Shareholders' Comprehensive
Outstanding Stock Earnings Income Equity Income
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2002 2,130,288 $ 25,387 $ 8,612 $ 1,344 $ 35,343
Stock dividend 106,295 2,918 (2,932) (14)
Cash dividend (427) (427)
Comprehensive income:
Net income 3,071 3,071 $ 3,071
Other comprehensive loss,
net oftax:
Change in net unrealized losses
on available-for-sale
securities, net of tax of $375 (818) (818) (818)
-----------
Comprehensive income $ 2,253
===========
Stock options exercised, net of tax
of $260 49,063 904 904
--------- ----------- -----------
BALANCE, SEPTEMBER 30, 2003 2,285,646 $ 29,209 $ 8,324 $ 526 $ 38,059
========= =========== =========== =========== ===========
The accompanying notes are an integral part of these statements
5
North Bay Bancorp
Consolidated Statement of Cash Flows
Unaudited
(In 000's)
Nine Months Ended September 30,
2003 2002
--------- ---------
Cash Flows From Operating Activities:
Net income $ 3,071 $ 2,582
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,171 1,076
Provision for loan losses 135 432
Amortization of deferred loan fees (498) (374)
Proceeds from sale of loans held-for-sale 269,120 0
Purchase of loans held-for-sale (279,906) 0
Premium amortization (discount accretion), net 919 672
Gain on securities transactions (637) (66)
Loss on sale of capital assets 0 1
Changes in:
Interest receivable and other assets (101) (2,157)
Interest payable and other liabilities 784 838
--------- ---------
Net cash (used) provided by operating activities (5,942) 3,004
--------- ---------
Cash Flows From Investing Activities:
Investment securities held-to-maturity:
Proceeds from maturities and principal payments 22 42
Investment securities available-for-sale:
Proceeds from maturities and principal payments 28,558 33,577
Proceeds from sale of securities 34,626 5,112
Purchases (43,569) (60,056)
Equity securities:
Proceeds from sale of securities 50 10
Purchases (50) (120)
Net increase in loans (39,791) (35,755)
Sale of capital assets 0 1
Capital expenditures (1,508) (2,440)
--------- ---------
Net cash used in investing activities (21,662) (59,629)
--------- ---------
Cash Flows From Financing Activities:
Net increase in deposits 31,618 55,658
Repayment of long-term debt 0 (1,846)
Stock options exercised 644 1,153
Proceeds from issuance of Trust Preferred Securities 0 10,000
Dividends paid (441) (406)
--------- ---------
Net cash provided by financing activities 31,821 64,559
--------- ---------
Net increase in cash and cash equivalents 4,217 7,934
Cash and cash equivalents at beginning of year 52,410 37,411
--------- ---------
Cash and cash equivalents at end of period $ 56,627 $ 45,345
========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 2,394 $ 2,849
Taxes paid $ 845 $ 1,740
The accompanying notes are an integral part of these statements
6
NORTH BAY BANCORP
Notes to the Consolidated Financial Statements
(Unaudited)
September 30, 2003
NOTE 1 - Basis of Presentation
The accompanying consolidated financial statements, which include the accounts
of North Bay Bancorp and its subsidiaries together the "Company", have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and in Management's opinion, include all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of results
for such interim periods. The subsidiaries consist of two community banks, The
Vintage Bank, established in 1985, and Solano Bank, which opened in 2000, North
Bay Statutory Trust 1 which was established in September 2002 and Vintage
Capital Trust, a subsidiary of The Vintage Bank, which was established in
February 2003. All significant intercompany transactions and balances have been
eliminated. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to SEC rules or regulations; however, the
Company believes that the disclosures made are adequate to make the information
presented not misleading. The interim results for the nine months ended
September 30, 2003 and 2002, are not necessarily indicative of results for the
full year. It is suggested that these financial statements be read in
conjunction with the financial statements and the notes included in the
Company's Annual Report for the year ended December 31, 2002.
NOTE 2 - Commitments
The Company has outstanding standby Letters of Credit of approximately $927,000,
undisbursed real estate and construction loans of approximately $21,310,000, and
undisbursed commercial and consumer lines of credit of approximately
$70,610,000, as of September 30, 2003. The Company had outstanding standby
Letters of Credit of approximately $474,000, undisbursed real estate and
construction loans of approximately $16,388,000, and undisbursed commercial and
consumer lines of credit of approximately $59,628,000, as of September 30, 2002.
NOTE 3 - Earnings Per Common Share
The Company declared a 5% stock dividend on January 27, 2003. As a result of the
stock dividend the number of common shares outstanding and earnings per share
data was adjusted retroactively for all periods presented.
The following table (in thousands except share data) reconciles the numerator
and denominator of the Basic and Diluted earnings per share computations:
Weighted Average Per-Share
Net Income Shares Amount
---------- ------ ------
(Dollars in 000's except share data)
For the three months ended September 30, 2003
---------------------------------------------
Basic earnings per share $1,164 2,284,859 $0.51
Dilutive effect of stock options 41,211
Diluted earnings per share 2,326,070 $0.50
For the three months ended September 30, 2002
---------------------------------------------
Basic earnings per share $927 2,222,547 $0.42
Dilutive effect of stock options 49,051
Diluted earnings per share 2,271,598 $0.41
For the nine months ended September 30, 2003
---------------------------------------------
Basic earnings per share $3,071 2,262,936 $1.36
Dilutive effect of stock options 54,682
Diluted earnings per share 2,317,618 $1.32
For the nine months ended September 30, 2002
---------------------------------------------
Basic earnings per share $2,582 2,190,818 $1.18
Dilutive effect of stock options 57,401
Diluted earnings per share 2,248,219 $1.15
7
NOTE 4- 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 the Company's net
income and earnings per share amounts would have been reduced to the pro forma
amounts as indicated below:
(In 000's except share data)
For the three months ended
September 30,
2003 2002
--------- -------
Net income as reported $ 1,164 $ 927
Total stock-based employee
compensation expense
determined under the fair
value based method for all
awards, net of related tax effects 75 59
--------- -------
Net income pro forma $ 1,089 $ 868
Earnings per share:
As reported:
Basic $ .51 $ .42
Diluted $ .50 $ .41
Pro forma:
Basic $ .48 $ .39
Diluted $ .47 $ .38
(In 000's except share data)
For the nine months ended
September 30,
2003 2002
--------- -------
Net income as reported $ 3,071 $ 2,582
Total stock-based employee
compensation expense
determined under the fair
value based method for all
awards, net of related tax effects 197 177
--------- -------
Net income pro forma $ 2,874 $ 2,405
Earnings per share:
As reported:
Basic $ 1.36 $ 1.18
Diluted $ 1.32 $ 1.15
Pro forma:
Basic $ 1.27 $ 1.10
Diluted $ 1.24 $ 1.07
NOTE 5 - Impact of Recently Issued Accounting Standards
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 does not expect adoption to have a material impact on the financial
position or operations of the Company.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to the historical information this Quarterly Report contains certain
forward-looking statements. The reader of this Quarterly Report should
understand that all such forward-looking statements are subject to various
uncertainties and risks that could affect their outcome. The Company's actual
results could differ materially from those suggested by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, variances in the actual versus projected growth in
assets, return on assets, loan losses, expenses, rates charged on loans and
earned on securities investments, rates paid on deposits, competition effects,
fee and other noninterest income earned, the economic uncertainty created by the
United States' war on terrorism and the war in Iraq, as well as other factors.
This entire Quarterly Report should be read to put such forward-looking
statements in context and to gain a more complete understanding of the
uncertainties and risks involved in the Company's business.
Moreover, wherever phrases such as or similar to "In Management's opinion"
"Management considers" are used, such statements are as of and based upon the
knowledge of Management at the time made and are subject to change by the
passage of time and/or subsequent events, and accordingly such statements are
subject to the same risks and uncertainties noted above with respect to
forward-looking statements.
CRITICAL ACCOUNTING POLICIES
In preparing its consolidated financial statements, the Company is required to
make judgments and estimates that may have a significant impact upon its
financial results. Certain accounting policies require the Company to make
significant estimates and assumptions, which have a material impact on the
carrying value of certain assets and liabilities, and are considered critical
accounting policies. The estimates and assumptions used are based on the
historical experiences and other factors, which are believed to be reasonable
under the circumstances. Actual results could differ significantly from these
estimates and assumptions , which could have a material impact on the carrying
value of assets and liabilities at the balance sheet dates and results of
operations for the reporting periods. The Company's determination of the
adequacy of its allowance for loan losses is particularly susceptible to
management's judgment and estimates. For further information, see Provision and
Allowance for Loan Losses on page 16.
9
OVERVIEW
Net income was $1,164,000 or $.50 per diluted share for the three months ended
September 30, 2003, compared with $927,000 or $.41 per diluted share for the
three months ended September 30, 2002, an increase of 26%. Net income was
$3,071000 or $1.32 per diluted share for the nine months ended September 30,
2003, compared with $2,582,000 or $1.15 per diluted share for the nine months
ended September 30, 2002, an increase of 19%. Total assets were $451,316,000 as
of September 30, 2003; equating to a 14% growth in assets during the twelve
months ended September 30, 2003.
SUMMARY OF EARNINGS
NET INTEREST INCOME
The following table provides a summary of the components of interest income,
interest expense and net interest margins for the three months ended September
30, 2003 and September 30, 2002:
(In 000's)
2003 2002
------------------------------------- -------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
------- ------- ---------- ------- ------- ----------
Loans(1)(2) $ 294,276 $ 4,853 6.06% $ 217,261 $ 4,290 7.90%
Investment securities:
Taxable 70,601 481 2.73% 80,747 905 4.48%
Non-taxable(3) 20,596 254 4.93% 13,852 196 5.66%
--------- --------- --------- ---------
TOTAL LOANS AND INVESTMENT
SECURITIES 385,473 5,588 5.80% 311,860 5,391 6.91%
Due from banks, time 100 1 4.00% 100 1 4.00%
Federal funds sold 11,987 38 1.27% 34,834 135 1.55%
--------- --------- --------- ---------
TOTAL EARNING ASSETS 397,560 $ 5,627 5.66% 346,794 $ 5,527 6.37%
--------- --------- --------- ---------
Cash and due from banks 32,208 22,242
Allowance for loan losses (3,405) (3,100)
Premises and equipment, net 11,156 10,706
Accrued interest receivable
and other assets 12,340 12,820
--------- ---------
TOTAL ASSETS $ 449,859 $ 389,462
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Interest bearing demand $ 187,448 $ 217 0.46% $ 143,524 $ 303 0.84%
Savings 34,015 17 0.20% 26,520 64 0.97%
Time 72,882 316 1.73% 77,683 492 2.53%
--------- --------- --------- ---------
294,345 550 247,727 859
Long-term debt 10,000 129 5.16% 10,000 153 6.12%
Short-term borrowings 0 2 0.00% 0 0 0.00%
--------- --------- --------- ---------
10,000 131 10,000 153
TOTAL INTEREST BEARING
LIABILITIES 304,345 $ 681 .90% 257,727 $ 1,012 1.57%
--------- --------- --------- ---------
Noninterest bearing DDA 104,066 94,669
Accrued interest payable
and other liabilities 3,755 3,345
Shareholders' equity 37,693 33,721
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 449,859 $ 389,462
========= =========
NET INTEREST INCOME $ 4,946 $ 4,515
========= =========
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin(4)) 4.98% 5.21%
10
(1) Average loans would include nonaccrual loans. The Company had no nonaccrual
loans during 2003 or 2002.
(2) Loan interest income includes loan fee income of $273 and $318 for the three
months ended September 30, 2003 and September 30, 2002, respectfully.
(3) Average yields shown are on a taxable-equivalent basis. On a non-taxable
basis, 2003 interest income was $181 with an average yield of 3.52%; in 2002, on
a non-taxable basis, interest income was $164 with an average yield of 4.74%.
(4) Net interest margin is calculated by dividing net interest income by the
average balance of total earning assets for the applicable period
The following table provides a summary of the components of interest income,
interest expense and net interest margins for the nine months ended September
30, 2003 and September 30, 2002:
11
(In 000's)
2003 2002
------------------------------------- -------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
------- ------- ---------- ------- ------- ----------
Loans(1)(2) $ 269,824 $ 13,780 6.81% $ 205,925 $ 12,187 7.89%
Investment securities:
Taxable 80,777 1,997 3.30% 72,805 2,556 4.68%
Non-taxable(3) 15,922 649 5.43% 14,109 602 5.69%
--------- --------- --------- ---------
TOTAL LOANS AND INVESTMENT
SECURITIES 366,523 16,426 5.98% 292,839 15,345 6.99%
Due from banks, time 100 2 2.67% 100 5 6.67%
Federal funds sold 18,542 157 1.13% 24,840 291 1.56%
--------- --------- --------- ---------
TOTAL EARNING ASSETS 385,165 $ 16,585 5.74% 317,779 $ 15,641 6.56%
--------- --------- --------- ---------
Cash and due from banks 26,931 19,818
Allowance for loan losses (3,370) (2,957)
Premises and equipment, net 11,166 10,410
Accrued interest receivable
and other assets 11,957 11,729
--------- ---------
TOTAL ASSETS $ 431,849 $ 356,779
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Interest bearing demand $ 170,537 $ 688 0.54% $ 129,244 $ 803 0.83%
Savings 31,695 88 0.37% 24,776 177 0.95%
Time 78,969 1,131 1.91% 76,360 1,531 2.67%
--------- --------- --------- ---------
281,201 1,907 230,380 2,511
Long-term debt 10,000 411 5.48% 5,291 192 4.84%
Short-term borrowings 1,000 10 1.33% 0 0 0.00%
--------- --------- --------- ---------
11,000 421 5,291 192
TOTAL INTEREST BEARING
LIABILITIES 292,201 $ 2,328 1.06% 235,671 $ 2,703 1.53%
--------- --------- --------- ---------
Noninterest bearing DDA 99,073 86,291
Accrued interest payable
and other liabilities 3,749 2,922
Shareholders' equity 36,826 31,895
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 431,849 $ 356,779
========= =========
NET INTEREST INCOME $ 14,257 $ 12,938
========= =========
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin(4)) 4.94% 5.43%
(1) Average loans would include nonaccrual loans. The Company had no nonaccrual
loans during 2003 or 2002.
(2) Loan interest income includes loan fee income of $811 and $881 for the nine
months ended September 30, 2003 and September 30, 2002, respectfully.
(3) Average yields shown are on a taxable-equivalent basis. On a non-taxable
basis, 2003 interest income was $473 with an average yield of 3.96%; in 2002, on
a non-taxable basis, interest income was $502 with an average yield of 4.74%.
(4) Net interest margin is calculated by dividing net interest income by the
average balance of total earning assets for the applicable period
12
Net interest income represents the amount by which interest earned on earning
assets (primarily loans and investments) exceeds the amount of interest paid on
deposits. Net interest income is a function of volume, interest rates and level
of non-accrual loans. Non-refundable loan origination fees are deferred and
amortized into income over the life of the loan.
Net interest income before the provision for loan losses on a taxable-equivalent
basis for the three months ended September 30, 2003 and September 30, 2002 was
$4,946,000 and $4,515,000, respectively. These results equate to a 10% increase
in net interest income for the third quarter of 2003 compared to the third
quarter of 2002. Loan fee income, which is included in interest income from
loans, was $273,000 for the three months ended September 30, 2003, compared with
$318,000 for the three months ended September 30, 2002. Net interest income
before the provision for loan losses on a taxable-equivalent basis for the nine
months ended September 30, 2003 and September 30, 2002 was $14,257,000 and
$12,938,000, respectively. These results equate to a 10% increase in net
interest income for the first nine months of 2003 compared to the same period in
2002. Loan fee income, which is included in interest income from loans, was
$811,000 for the nine months ended September 30, 2003, compared with $881,000
for the nine months ended September 30, 2002.
Taxable-equivalent interest income increased $100,000 or 2% in the third quarter
of 2003 compared with the same period of 2002. The net increase of $100,000 was
attributed to an increase in the volume of earning assets accounting for
$1,414,000 of this increase, offset by a decrease of $1,314,000 attributable to
lower rates. Interest paid on interest-bearing liabilities decreased $331,000 in
the third quarter of 2003 compared with the third quarter of 2002. Although
increases in the volume of deposits and other borrowings accounted for an
increase of $78,000 it was offset by $409,000 attributed to lower rates.
Taxable-equivalent interest income increased $944,000 or 6% in the first nine
months of 2003 compared with the same period of 2002. The net increase of
$944,000 was attributed to an increase in the volume of earning assets
accounting for $4,062,000 of this increase, offset by a decrease of $3,118,000
attributable to lower rates. The average balance of interest-bearing liabilities
increased $56,530,000 or 24% during the first nine month of 2003 compared with
the same period in 2002. Interest paid on interest-bearing liabilities decreased
$375,000 in 2003 compared with 2002. Although increases in the volume of
deposits and other borrowings accounted for an increase of $529,000 it was
offset by $904,000 attributed to lower rates.
The average balance of earning assets increased $67,386,000 or 21% when compared
with September 30, 2002 and the average balance of interest-bearing liabilities
increased $56,530,000 or 24% compared with the same period in 2002. Management
does not expect a material change in the Company's net interest margin during
the next twelve months as the result of a modest increase or decrease in general
interest rates.
13
The following table sets forth a summary of the changes in interest earned and
interest paid for the three months ended September 30, 2003 over the same period
of 2002 resulting from changes in assets and liabilities volumes and rates. The
change in interest due to both rate and volume has been allocated in proportion
to the relationship of absolute dollar amounts of change in each.
(In 000's)
2003 Over 2002
Volume Rate Total
------------------------------------------------
Increase (Decrease) In
Interest and Fee Income
Time Deposits With Other
Financial Institutions $ 0 ($0) ($0)
Investment Securities:
Taxable (114) (310) (424)
Non-Taxable (1) 95 (37) 58
Federal Funds Sold (89) (8) (97)
Loans 1,522 (959) 563
------------------------------------------------
Total Interest and Fee Income 1,414 (1,314) 100
------------------------------------------------
Increase (Decrease) In
Interest Expense
Deposits:
Interest Bearing
Transaction Accounts 91 (177) (86)
Savings 18 (65) (47)
Time Deposits (31) (145) (176)
------------------------------------------------
Total Deposits 78 (387) (309)
Long-term Debt 0 2 2
Short-term Borrowings 0 (24) (24)
------------------------------------------------
Total Interest Expense 78 (409) (331)
------------------------------------------------
Net Interest Income $1,336 ($905) $431
================================================
(1) The interest earned is taxable-equivalent.
14
The following table sets forth a summary of the changes in interest earned and
interest paid for the first nine months in 2003 over 2002 resulting from changes
in assets and liabilities volumes and rates. The change in interest due to both
rate and volume has been allocated in proportion to the relationship of absolute
dollar amounts of change in each.
(In 000's)
2003 Over 2002
Volume Rate Total
------------------------------------------------
Increase (Decrease) In
Interest and Fee Income
Time Deposits With Other
Financial Institutions $0 ($3) ($3)
Investment Securities:
Taxable 279 (838) (559)
Non-Taxable (1) (77) (30) 47
Federal Funds Sold (74) (60) (134)
Loans 3,780 (2,187) 1,593
------------------------------------------------
Total Interest and Fee Income 4,062 (3,118) 944
------------------------------------------------
Increase (Decrease) In
Interest Expense
Deposits:
Interest Bearing
Transaction Accounts 259 (374) (115)
Savings 49 (138) (89)
Time Deposits 50 (450) (400)
------------------------------------------------
Total Deposits 358 (962) (604)
Long-term Debt 171 48 219
Short-term Borrowings 0 10 10
------------------------------------------------
Total Interest Expense 529 (904) (375)
------------------------------------------------
Net Interest Income $3,533 ($2,214) $1,319
================================================
(1) The interest earned is taxable-equivalent.
15
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses at a level considered
adequate to provide for losses that can be reasonably anticipated. The allowance
is increased by the provision for loan losses and reduced by net charge offs.
The allowance for loan losses is based on estimates, and ultimate losses may
vary from current estimates. These estimates are reviewed periodically and as
adjustments become necessary they are reported in earnings in the periods in
which they become known. The Company conducts credit reviews of the loan
portfolio and considers current economic conditions, historical loan loss
experience and other factors in determining the adequacy of the allowance
balance. This evaluation establishes a specific allowance for all classified
loans over $50,000 and establishes percentage allowance requirements for all
other loans, according to the classification as determined by the Company's
internal grading system. As of September 30, 2003 the allowance for loan losses
of $3,421,000 represented 1.23% of loans outstanding. As of September 30, 2002,
the allowance represented 1.41% of loans outstanding. During the three months
ended September 30, 2003 $45,000 was charged to expense for the loan loss
provision, compared with $144,000 for the same period in 2002. During the nine
months ended September 30, 2003, $135,000 was charged to expense for the loan
loss provision, compared with $432,000 for the same period in 2002.There were
net charge-offs of $4,000 during the first nine months of 2003 compared with
$6,000 net charge-offs during the first nine months of 2002.
The following table summarizes changes in the allowance for loan losses:
(In 000's)
For the nine months ended
September 30, 2003 September 30, 2002
------- -------
Balance, beginning of period $ 3,290 $ 2,717
Provision for loan losses 135 432
Loans charged off (11) (10)
Recoveries of loans previously charged off 7 4
------- -------
Balance, end of period $ 3,421 $ 3,143
======= =======
Allowance for loan losses to total
outstanding loans 1.23% 1.41%
There were no loans on non-accrual status as of September 30, 2003, September
30, 2002 or December 31, 2002. There were no loans 90 days or more past due and
still accruing interest or restructured loans at September 30, 2003, September
30, 2002 or December 31, 2002.
NON-INTEREST INCOME
Non-interest income, excluding gains on the sale of securities, was $848,000 for
the three months ended September 30, 2003 compared with $731,000 for the same
period in 2002, a 16% increase. Non-interest income, excluding gains on the sale
of securities was $2,285,000 for the nine months ended September 30, 2003
compared with $2,009,000 for the same period in 2002, a 14% increase.
Non-interest income primarily consists of service charges and other fees related
to deposit accounts. The increase in non-interest income resulted primarily from
an increase in the number of deposit accounts, transaction volumes and directly
related service charges.
GAINS ON SECURITIES
Net gains of $207,000 and $637,000 for the three and nine months ended September
30, 2003, respectively, resulted from the sale of several available-for-sale
securities. Net gains of $66,000 for the nine months ended September 30, 2002
also resulted from the sale of several available-for-sale securities. There were
no gains or losses for the three months ended September 30, 2002.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended September 30, 2003 and September
30, 2002 was $4,267,000 and $3,697,000, respectively, a 15% increase.
Non-interest expense for the nine months ended September 30, 2003 and September
30, 2002 was $12,593,000 and $10,519,000, respectively, a 20% increase. Salaries
and employee benefits expense for the three months ended September 30, 2003 and
2002 were $2,338,000 and $1,978,000, respectively, an 18% increase. Salaries and
employee benefits expense for the nine months ended September 30, 2003 and 2002
were $6,896,000 and $5,858,000, respectively, an 18% increase. The increase in
2003 resulted from increased salaries paid to Company officers and employees,
and an increase of approximately eighteen full-time equivalent (FTE) employees
from 136 at September 30, 2002 to 154 at September 30, 2003. The increases in
FTE were related to increasing sales activity and staffing new offices.
Occupancy expense for the three months ended September 30, 2003 and 2002 were
$356,000 and $228,000, respectively, a 56% increase. Occupancy expense for the
nine months ended September 30, 2003 and 2002 were $931,000 and $680,000,
respectively, representing a 37% increase. The increase in 2003 is attributed to
opening a branch office in March 2003 and obtaining rented locations for
Executive and Administration offices. Equipment expenses for the three months
ended September 30, 2003 and 2002 was $485,000 and $450,000, respectively,
representing an increase of 8%. Equipment expenses for the nine months ended
September 30, 2003 and 2002 was $1,230,000 and $1,392,000, respectively, a
decrease of 12%. During 2002 the Company had additional depreciation expense
resulting from accelerated depreciation on the host banking system, which was
replaced in July 2002. Other expenses for the three months ended September 30,
2003 and September 30, 2002 were $1,088,000 and $1,041,000, respectively, a 5%
increase. Other expenses for the nine months ended September 30, 2003 and
September 30, 2002 were $3,536,000 and $2,589,000, respectively, a 37% increase.
Components of other non-interest expenses that increased materially were legal
and professional fees. Legal fees were $120,000 and $521,000 for the three and
nine months ended September 30, 2003, respectively. This compares with $116,000
and $216,000 for the same periods in 2002. The increase in legal fees is
primarily due to litigation with our former host systems provider. Now that the
suit has been settled, legal fees are
16
expected to be proportionately less the remainder of 2003. Professional fees
were $127,000 and $435,000 for the three and nine months ended September 30,
2003, respectively. This compares with $42,000 and $118,000 for the same periods
in 2002. The increase in professional fees were primarily the result of
outsourced information technology and consulting services.
INCOME TAXES
The Company reported a provision for income tax for the three months ended
September 30, 2003 and 2002 of $452,000 and $446,000, respectively. The Company
reported a provision for income tax for the nine months ended September 30, 2003
and 2002 of $1,204,000 and $1,380,000, respectively. Both the 2003 and 2002
provisions reflect tax accruals at statutory rates for federal income taxes,
adjusted primarily for the effect of the Company's investments in tax-exempt
municipal securities, bank owned life insurance policies and state taxes. The
Vintage Bank established a Real Estate Investment Trust (REIT) subsidiary in
February 2003, which provided approximately $292,000 and $114,000 in tax
benefits during the nine months and three months ended September 2003,
respectively.
BALANCE SHEET
Total assets as of September 30, 2003 were $451,316,000 compared with
$395,928,000 as of September 30, 2002, and $416,458,000 at December 30, 2002
equating to a 14% increase during the twelve months ended September 30, 2003,
and an 8% increase for the nine months ended September 30, 2003. Total deposits
as of September 30, 2003 were $399,421,000 compared with $348,099,000 as of
September 30, 2002, and $367,803,000 at December 30, 2002 representing a 15%
increase during the twelve months then ended, and a 9% increase for the nine
months ended September 30, 2003. Gross loans outstanding as of September 30,
2003 were $277,912,000 compared with $222,388,000 as of September 30, 2002, and
$237,627,000 at December 30, 2002 equating to a 25% increase during the twelve
months then ended and a 17% increase for the nine months ended September 30,
2003.
LOANS HELD FOR SALE
The Company had $10.8 million in purchased participations in mortgage loans as
of September 30, 2003. Loans originated or purchased and considered held for
sale are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized through a valuation allowance by
charges to income.
TRUST PREFERRED SECURITIES
On September 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 interest a rate of Libor plus 3.45% and had an
initial interest rate of 5.34%; currently the interest rate is 4.74%; the
Securities will mature on September 26, 2032, but earlier redemption is
permitted under certain circumstances, such as changes in tax or regulatory
capital rules. The principal asset of the trust is a $10,310,000 floating rate
subordinated debenture of the Company.
The Securities, the subordinated debentures, and the common securities issued by
the Trust are redeemable in whole or in part on or after September 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.
LIQUIDITY AND CAPITAL ADEQUACY
The Company's liquidity is determined by the level of assets (such as cash,
Federal Funds, and investment in unpledged marketable securities) that are
readily convertible to cash to meet customer withdrawals and borrowings.
Management reviews the Company's liquidity position on a regular basis to ensure
that it is adequate to meet projected loan funding and potential withdrawal of
deposits. The Company has a comprehensive Asset/Liability Management and
Liquidity Policy, which it uses to determine adequate liquidity. As of September
30, 2003 liquid assets were 31% of total assets, compared with 38% as of
September 30, 2002.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) established
ratios used to determine whether a Company is "Well Capitalized," "Adequately
Capitalized," "Undercapitalized," "Significantly Undercapitalized," or
"Critically Undercapitalized." A Well Capitalized Company has risk-based capital
of at least 10%, tier 1 risked-based capital of at least 6%, and a leverage
ratio of at least 5%. As of September 30, 2003, the Company's risk-based capital
ratio was 14.12%. The Company's tier 1 risk-based capital ratio and leverage
ratio were 13.17% and 10.64%, respectively.
17
As the following table indicates, the Company and the Banks currently exceeds
the regulatory capital minimum requirements. The Company and the Banks are
considered "Well Capitalized" according to regulatory guidelines.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- ----------------------
(In 000's)
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 2003:
Total Capital (to Risk
Weighted Assets)
Consolidated $50,954 14.12% $28,867 >8.00% $36,084 >10.00%
- -
The Vintage Bank 32,729 11.28% 23,219 >8.00% 29,024 >10.00%
- -
Solano Bank 7,923 11.86% 5,345 >8.00% 6,682 >10.00%
- -
Tier I Capital (to Risk
Weighted Assets)
Consolidated 47,533 13.17% 14,433 >4.00% 21,650 >6.00%
- -
The Vintage Bank 29,861 10.29% 11,609 >4.00% 17,414 >6.00%
- -
Solano Bank 7,370 11.03% 2,673 >4.00% 4,009 >6.00%
- -
Tier I Capital (to
Average Assets)
Consolidated 47,533 10.64% 17,878 >4.00% 22,347 >5.00%
-
The Vintage Bank 29,861 8.39% 14,238 >4.00% 17,797 >5.00%
- -
Solano Bank 7,370 9.32% 3,163 >4.00% 3,953 >5.00%
- -
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. Although
the Company manages other risks, as in credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to be a
principal market risk. Other types of market risks, such as foreign currency
exchange rate risk, do not arise in the normal course of the Company's business
activities. The majority of the Company's interest rate risk arises from
instruments, positions and transactions entered into for purposes other than
trading. They include loans, securities available-for-sale, deposit liabilities,
short-term borrowings and long-term debt. Interest rate risk occurs when assets
and liabilities reprice at different times as interest rates change.
The Company manages interest rate risk through its Audit Committee, which serves
as the Asset Liability Committee (ALCO). The ALCO monitors exposure to interest
rate risk on a quarterly basis using both a traditional gap analysis and
simulation analysis. Traditional gap analysis identifies short and long-term
interest rate positions or exposure. Simulation analysis uses an income
simulation approach to measure the change in interest income and expense under
rate shock conditions. The model considers the three major factors of (a) volume
differences, (b) repricing differences and (c) timing in its income simulation.
The model begins by disseminating data into appropriate repricing buckets based
on internally supplied algorithms (or overridden by calibration). Next, each
major asset and liability type is assigned a "multiplier" or beta to simulate
how much that particular balance sheet category type will reprice when interest
rates change. The model uses eight asset and liability multipliers consisting of
bank-specific or default multipliers. The remaining step is to simulate the
timing effect of assets and liabilities by modeling a month-by-month simulation
to estimate the change in interest income and expense over the next 12-month
period. The results are then expressed as the change in pre-tax net interest
income over a 12-month period for +1%, and +2% shocks.
Utilizing the simulation model to measure interest rate risk at September 30,
2003 and December 31, 2002 the Company is within the established exposure of a
4% change in "return on equity" tolerance limit. There were no significant
changes in interest rate risk from the annual report on form 10-K for December
31, 2002.
18
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
Based on their evaluation as of September 30, 2003, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls subsequent to the date of their evaluation.
Changes in Internal Controls:
There have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. We are not aware of any significant deficiencies or material
weaknesses; therefore no corrective actions were taken.
19
PART 2
OTHER INFORMATION
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to the business of the
Company, there are no material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) An index of exhibits begins on page 22.
(b) On July 28, 2003 the Company furnished a Current Report on Form
8-K, reporting the issuance of a press release announcing the Company's
earning for the quarter ended June 30, 2003.
20
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this quarterly report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH BAY BANCORP
A California Corporation
Date: November 10, 2003 BY: /s/ Terry L. Robinson
--------------------------------
Terry L. Robinson
President & CEO
Principal Executive Officer
Date: November 10, 2003 BY: /s/ Lee-Ann Cimino
--------------------------------
Lee-Ann Cimino
Senior Vice President
Principal Financial Officer
21
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Statement re: computation of per share earnings is included in
Note 3 to the unaudited condensed consolidated financial
statements of Registrant.
31.1 Certificate of Principal Executive Officer Pursuant to SEC
Release 33-8238
31.2 Certificate of Principal Financial Officer Pursuant to SEC
Release 33-8238
32.1 Certificate of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 Certificate of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350
22