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.
1
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TABLE OF CONTENTS
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To Our Shareholders
Selected Financial Data
Management's Discussion
and Analysis of Financial Condition
and Results of Operations
Quantitative and Qualitative Disclosure about Market Risk
Description of Operations
Market Information
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Consolidated Notes to Financial Statements
Report of Independent Auditors
Directors
Corporate Information
2
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TO OUR SHAREHOLDERS
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As we grow into the physical infrastructure put in place this and prior years,
we anticipate our profitability will continue to improve.
Our 2003 results reflect the solid foundation laid in prior years and new
initiatives implemented to stimulate future growth. Our sales teams continued to
do an exceptional job of developing new business relationships and expanding
existing ones, while our lending teams significantly increased loan production
capacity and maintained exceptionally high credit quality.
Highlights for the year include the following:
o Net interest income increased 10% to $19.3 million.
o Pre-tax income rose 15% to $6.6 million.
o Net income increased 18% to $4.4 million.
o Earnings per share increased 15% to $1.79.
o Total loans grew 29% to $306.7 million.
o Solano Bank was solidly profitable by year-end and continues to build
momentum.
o The Vintage Bank generated excellent loan growth and continues to gain
market share.
o Asset quality remained exemplary with zero non-performing assets at
year end.
We took numerous actions to expand and improve our franchise in 2003 including
opening a new Vintage Bank Gateway office, located in the growing industrial
area south of downtown Napa; we occupied new administrative offices in and near
the Gateway branch and relocated Solano Bank's Fairfield office to a much more
dynamic location. While the investment for these expansions increased costs in
2003, we are confident they will provide solid contributions to earnings in the
future.
In addition to the start-up costs for our franchise expansion, two unusual items
impacted 2003 earnings. First, we incurred abnormally high legal fees in the
first half of the year due to litigation with our former data processing
provider. We also incurred significant professional fees related to tax and
technology-related consulting. With our expansion efforts during the past few
years now beginning to contribute to profitability, excluding any unusual
events, we anticipate our operating costs will level out.
Our net interest margin dropped more than we had anticipated in 2003 to 4.99%
from 5.31% in 2002, as declining interest rates impacted yields on loans and
investments more than the cost of funds. Fourth quarter margin increased to
5.14% from 4.94% in the fourth quarter of 2002. More than 25% of our deposits
are in non-interest bearing accounts, and an additional 50% of deposits are in
money market and NOW accounts which are our second most efficient funding
source. While interest rates have remained relatively stable in the first part
of 2004, competition for deposits is increasing in our markets, which could
further impact margins this year.
Over the course of last year, we recognized that in order to reach our profit
targets and continue to generate record results, we needed to be diligent in
controlling discretionary expenses and staffing levels. Consequently, our number
of full time equivalent employees was below budget and discretionary spending
was kept to a minimum. Our efficiency ratio for the year reflected the unusual
items referred to above and rose to 69.00% from 67.71% in 2002. The cost control
efforts, however, generated solid improvement in our efficiency ratio in the
fourth quarter, dropping to 59.43% from 65.24% in the fourth quarter of 2002.
In June 2003, we took further steps to improve our management processes to bring
more structure and accountability to our operations and to facilitate
communications as we grow. With some professional assistance, we developed an
organizational model that more logically groups functions within departments and
accommodates future growth. These changes are producing sound results and we
anticipate further benefits from them in 2004.
We have also decided to simplify and streamline our corporate structure by
combining our three Boards of directors into a single Board. The charters of The
Vintage Bank and Solano Bank will be combined,
3
conditional on obtaining regulatory approval. The Board of Directors of North
Bay will be expanded from 9 members to 16 with new seats filled by members of
the Boards of The Vintage Bank and Solano Bank. We believe these changes will
greatly enhance the efficiency of our management team in directing the
operations of both banks and the holding company by saving costs and freeing
senior management to devote more time and attention to customers and prospects.
These structural changes will not affect the day-to-day operations of our banks
and should be transparent to our customers and employees.
As we grow into the physical infrastructure put in place this and prior years,
we anticipate our profitability will continue to improve. Our staffing levels
and branch footprint now have more than adequate capacity to accommodate our
growth plans for the next few years and take advantage of the opportunities in
our markets. Our strategy and vision remain on course. We continue to seek
opportunities for expansion in contiguous markets while gaining market share in
our existing markets. We are committed to being the premier financial services
provider in markets we serve, to skillfully use technology to competitive
advantage and to generate financial returns that exceed industry peers.
I am grateful to our employees for their hard work, to the directors of North
Bay, The Vintage Bank and Solano Bank for their dedication, to our customers for
their continuing partnership, and to our shareholders for entrusting us with
their capital. We successfully met the challenges of 2003 and now are looking
forward to a fast-paced and prosperous year in 2004.
Sincerely,
Terry Robinson
President and CEO
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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,
2003. 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)
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
Interest income $ 22,251 $ 21,179 $ 20,307 $ 16,700 $ 13,688
Interest expense 2,995 3,691 5,887 5,612 4,364
---------- ---------- ---------- ---------- ----------
Net interest income 19,256 17,488 14,420 11,088 9,324
Provision for loan losses 238 576 447 385 240
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 19,018 16,912 13,973 10,703 9,084
Noninterest income 3,847 3,111 2,691 2,140 1,777
Noninterest expense 16,315 14,316 11,955 8,583 6,496
Provision for income taxes 2,179 1,999 1,687 1,647 1,650
---------- ---------- ---------- ---------- ----------
Net Income $ 4,371 $ 3,708 $ 3,022 $ 2,613 $ 2,715
========== ========== ========== ========== ==========
BASIC PER SHARE DATA: (1)
Earnings per share $ 1.83 $ 1.60 $ 1.33 $ 1.23 $ 1.40
Average shares outstanding 2,382,093 2,313,461 2,264,170 2,123,830 1,943,490
DILUTED PER SHARE DATA: (1)
Earnings per share $ 1.79 $ 1.56 $ 1.32 $ 1.21 $ 1.36
Average shares outstanding 2,439,604 2,371,214 2,288,948 2,159,636 1,989,457
BALANCE SHEET DATA:
Total assets $ 459,482 $ 416,458 $ 326,806 $ 247,469 $ 197,106
Net loans 303,139 234,337 183,548 150,008 120,166
Total deposits 406,445 367,803 292,441 216,638 172,380
Shareholders' equity 39,441 35,343 29,980 26,636 18,090
(1) All per share amounts have been adjusted to reflect the 5% stock dividends
declared January 28, 1999, January 8, 2000, January 29, 2001, January 28, 2002,
January 27, 2003 and January 26, 2004.
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.
These forward-looking statements speak only as of the date on which these
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 these 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, these 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.
These financial statements should be read in conjunction with the financial
statements and the notes included herein.
OVERVIEW
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North Bay 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 $4,371,000 or $1.79 per
diluted share, in 2003 compared with $3,708,000 or $1.56 per diluted share, in
2002 and $3,022,000 or $1.32 per diluted share, in 2001, equating to a return on
average assets of 1.00%, .99% and 1.00% for years 2003, 2002 and 2001,
respectively. The return on average equity was 11.70% in 2003 compared with
11.36% and 10.61% in 2002 and 2001, respectively.
As of December 31, 2003, total assets were $459,482,000 compared with total
assets of $416,458,000 and $326,806,000 at year end 2002 and 2001, respectively,
representing a 10% increase in 2003 and a 27% increase in 2002. Deposits
increased 11% in 2003 compared with a 26% increase in 2002. Loans, net of the
allowance for loan losses, increased 29% in 2003 compared with a 28% increase in
2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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The Company's accounting policies are integral to understanding the results
reported. The most complex accounting policies require management's judgment to
ascertain the valuation of assets, liabilities, commitments and contingencies.
The Company has established detailed policies and control procedures that are
intended to ensure valuation methods are well controlled and applied
consistently from period to period. In addition, the policies and procedures are
intended to ensure that the process for changing methodologies occurs in an
appropriate manner. The following is a brief description of our current
accounting policies involving significant management valuation judgments.
6
Allowance for Loan Losses.
The allowance for loan losses represents management's best estimate of losses
inherent in the existing loan portfolio. The allowance for loan losses is
increased by the provision for loan losses charged to expense and reduced by
loans charged-off, net of recoveries.
We evaluate our allowance for loan loss on a monthly basis. We believe that the
allowance for loan loss is a "critical accounting estimate" because it is based
upon management's assessment of various factors affecting the collectibility of
the loans, including current and projected economic conditions, past credit
experience, delinquency status, the value of the underlying collateral, if any,
and a continuing review of the portfolio of loans and commitments.
We determine the appropriate level of the allowance for loan losses, primarily
on an analysis of the various components of the loan portfolio, including all
significant credits on an individual basis. We segment the loan portfolios into
as many components as practical. Each component would normally have similar
characteristics, such as risk classification, past due status, type of loan,
industry or collateral.
Management has an established methodology for calculating the level of the
allowance for loan losses. We analyze the following components of the portfolio
and provide for them in the allowance for loan losses:
Specific allowances defined as:
o Management assessment of all loans classified as substandard or worse,
with an outstanding balance of $100,000.
o A specific allowance is provided for any amount by which the loan's
collateral fair value is insufficient to cover the loan; or
discounting estimated further cash flows, or by observing the loan's
market price if it is of a kind for which there is a secondary market.
General allowance defined as:
o An allowance for all loans outstanding within the portfolio and not
contained in the specific reserve
Judgmental allowance defined as:
o National and local economic trends and conditions
o Trends in volume of loans
o Changes in underwriting standards and/or lending personnel
o Concentrations of credit within the portfolio
No assurance can be given that the company will not sustain loan losses that are
sizable in relation to the amount reserved, or that subsequent evaluations of
the loan portfolio will not require an increase in the allowance. Prevailing
factors in association with the methodology may include improvement or
deterioration of individual commitments or pools of similar loans, or loan
concentrations.
Available for Sale Securities.
SFAS 115 requires that Available for Sale securities be carried at fair value.
We believe this is a "critical accounting estimate" in that the fair value of a
security is based on quoted market prices or if quoted market prices are not
available, fair values are extrapolated from the quoted prices of similar
instruments. Adjustments to the Available for Sale securities fair value impact
the consolidated financial statements by increasing or decreasing assets and
stockholders' equity.
Deferred Tax Assets.
Deferred income taxes reflect the estimated future tax effects of temporary
differences between the reported amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations. We
use an estimate of future earnings to support our position that the benefit of
our deferred tax assets will be realized. If future income should prove
non-existent or less than the amount of the deferred tax assets within the tax
years to which they may be applied, the asset may not be realized and our net
income will be reduced.
7
SUMMARY OF EARNINGS
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Net Interest Income
Net interest income before provision for loan losses was $19,256,000,
$17,488,000 and $14,420,000 in 2003, 2002 and 2001, respectively, representing
increases of 10% in 2003 and 21% in 2002.
The following table sets forth average daily balances of assets, liabilities,
and shareholders' equity during 2003, 2002 and 2001, along with total interest
income earned and expense paid, and the average yields earned or rates paid
thereon and the net interest margin for the years ended December 31, 2003, 2002
and 2001.
(In 000's)
December 31, 2003 December 31, 2002 December 31, 2001
---------------------------- ----------------------------- ------------------------------
Average Income/ Rate/ Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield Balance Expense Yield
-------- ------- ----- -------- ------- ----- -------- ------- ------
ASSETS
Loans (1) $277,220 $18,782 6.78% $212,735 $16,602 7.80% $174,050 $15,319 8.80%
Investment securities:
Taxable 78,457 2,535 3.23% 78,186 3,490 4.46% 57,501 3,395 5.90%
Non-taxable (2) 16,948 958 5.65% 14,002 868 6.20% 13,797 739 5.36%
-------- ------- -------- ------- -------- -------
Total loans and investment 372,625 22,275 5.98% 304,923 20,960 6.87% 245,348 19,453 7.93%
securities
Due from banks, time 100 2 2.00% 100 5 5.59% 100 7 6.86%
Federal funds sold 18,104 207 1.14% 28,138 418 1.49% 26,577 1,012 3.81%
-------- ------- -------- ------- -------- -------
Total earning assets 390,829 22,484 5.75% 333,161 21,383 6.42% 272,025 20,472 7.53%
-------- ------- -------- ------- -------- -------
Cash and due from banks 28,216 20,376 17,124
Allowance for loan losses (3,403) (3,031) (2,507)
Premises and equipment, net 11,125 10,484 8,006
Accrued interest receivable
and other assets 12,157 11,951 6,928
-------- -------- --------
Total assets $438,924 $372,941 $301,576
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Interest bearing demand $176,724 916 0.52% $136,134 1,118 0.82% $105,485 2,164 2.05%
Savings 32,678 107 0.33% 25,798 228 0.88% 19,381 234 1.21%
Time 77,198 1,430 1.85% 77,112 2,006 2.60% 72,291 3,318 4.59%
-------- ------- -------- ------- -------- -------
Total deposits 286,600 2,453 0.86% 239,044 3,352 1.40% 197,157 5,716 2.90%
Borrowings 10,750 542 5.04% 6,468 339 5.25% 2,212 171 7.72%
Total interest bearing
liabilities 297,350 2,995 1.01% 245,512 3,691 1.50% 199,369 5,887 2.95%
-------- ------- -------- ------- -------- -------
Noninterest bearing demand 100,342 91,763 71,798
Accrued interest payable
and other liabilities 3,876 3,039 1,919
Shareholders' equity 37,356 32,627 28,490
-------- -------- --------
Total liabilities and
shareholders' equity $438,924 $372,941 $301,576
======== ======== ========
Net interest income $19,489 $17,692 $14,585
Net interest income to
average earning assets
(Net interest margin (3)) 4.99% 5.31% 5.36%
(1) Loan interest income includes loan fee income of $1,119 in 2003, $1,167 in
2002 and $1,053 in 2001.
(2) Average yields shown are taxable-equivalent. On a non-taxable basis, 2003
interest income was $725 with an average yield of 4.28%, 2002 interest income
was $663 with an average yield of 4.74%; and in 2001 non-taxable interest income
was $575 and the average yield was 4.16%.
(3) Net interest margin is calculated by dividing net interest income by the
average balance of total earning assets for the applicable year.
8
The following table sets forth a summary of the changes in interest earned and
interest paid in December 31, 2003 over 2002, December 31, 2002 over 2001 and
December 31, 2001 over 2000 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 2002 over 2001 2001 over 2000
------------------------ ----------------------- ------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------------------------ ----------------------- ------------------------
Increase (decrease) in
Interest and fee income
Loans $5,032 ($2,852) $2,180 $3,402 ($2,119) $1,283 $3,016 ($624) $2,392
Time deposits with other
financial institutions 0 (3) (3) 0 (2) (2) 0 2 2
Investment securities:
Taxable 12 (967) (955) 1,218 (1,123) 95 1,194 (371) 823
Non-taxable (1) 183 (93) 90 11 118 129 (12) (105) (117)
Federal funds sold (149) (62) (211) 60 (654) (594) 1,087 (596) 491
------ ------- ------ ------ ----- ------ ------ ----- ------
Total interest and fee
income 5,078 (3,977) 1,101 4,691 (3,780) 911 5,285 (1,694) 3,591
Increase (decrease) in
Interest expense
Deposits:
Interest bearing
Transaction accounts 333 (535) (202) 627 (1,673) (1,046) 960 (452) 508
Savings 61 (182) (121) 79 (85) (6) 63 (128) (65)
Time deposits 2 (578) (576) 220 (1,532) (1,312) 440 (543) (103)
------ ------- ------ ------ ----- ------ ------ ----- ------
Total deposits 396 (1,295) (899) 926 (3,290) (2,364) 1,463 (1,123) 340
Borrowings 224 (21) 203 328 (160) 168 (88) 23 (65)
------ ------- ------ ------ ----- ------ ------ ----- ------
Total interest expense 620 (1,316) (696) 1,254 (3,450) (2,196) 1,375 (1,100) 275
------ ------- ------ ------ ----- ------ ------ ----- ------
Net Interest income $4,458 ($2,661) $1,797 $3,437 ($330) $3,107 $3,910 ($594) $3,316
====== ======= ====== ====== ===== ====== ====== ===== ======
(1) The interest earned is taxable-equivalent. On a non-taxable basis 2003
income interest was $62 more than 2002; 2002 interest income was $88 more than
in 2001; and 2001 interest income was $100 less than in 2000.
Net interest income is impacted by changes in the volume and mix of earning
assets and interest-bearing liabilities and changes in interest rates. The
increase in net interest income in 2002 compared with 2001 was primarily the
result of volume increases in loans. The net interest margin (defined as net
interest income divided by average earning assets) decreased significantly in
2003 to 4.99% from 5.31% in 2002. The decrease in the net interest margin is
primarily the result of a lower average yields on earning assets, partially
offset by lower expenses on deposits. The impact of declining general interest
rates during the first half of 2003 to unprecedented low levels resulted in a
significant narrowing of the margin, as reductions in rates paid on deposits and
other borrowings could not adequately offset the reduction in yields on earning
assets. Also, investment portfolio yield reductions were intensified by the
impact of having mortgage-backed securities purchased at a premium in the
portfolio; the premium is amortized over the estimated average life of a
particular security. Higher than anticipated prepayments on the underlying
mortgages resulted in significant reductions in the yield on these investments.
Despite these factors, the Company continues to enjoy a net interest margin
higher than peer institutions of comparable size due to its low cost of funds.
Taxable-equivalent interest income (defined as interest income adjusted for the
tax benefit of holding tax exempt securities and loans) increased $1,101,000 or
5%, in 2003 compared with 2002. Increases in the volume of earning assets
accounted for increasing interest income by $5,078,000, offset by a decrease of
$3,977,000 attributable to lower rates. An increase in taxable-equivalent
interest income of $911,000 or 7% in 2002 compared with 2001 consisted of a
$4,491,000 increase due to growth of earning assets offset by a decrease of
$3,779,000 attributable to lower rates on earning assets.
Interest paid on interest-bearing liabilities decreased $696,000 in 2003
compared with 2002. Increases in the volume of deposits and other borrowings
increased interest paid by $620,000 offset by a $1,316,000
9
decrease attributable to a decline in rates. Interest paid on interest-bearing
liabilities decreased $2,196,000 in 2002 compared with 2001; the effect of
volume increases accounted for $1,254,000 offset by a decrease of $3,450,000
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 probable 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 the 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.
The existing portfolio consists of commercial loans to businesses, both
commercial and residential real estate loans and consumer products. The
portfolio contains variable rate loans as well as loans with rates fixed for up
to ten years. Fixed rate loans primarily are associated with real estate
lending.
As of December 31, 2003, net loans increased $69 million, from year-end 2002, a
29% increase. On an average balance basis the Company's loan portfolio increased
$64 million, or 30% over the average balance in 2002. In 2002, average balances
increased from the prior year by $39 million, or 22%. The increases in 2003 and
2002 were due to strong loan demand for commercial real estate loans along with
an aggressive calling program.
Management recognizes that the estimation of probable losses 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 unfunded loan 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
$100,000 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 Company's internal grading system. These loans are identified
through the following categories:
10
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, 2003 the allowance for loan losses of $3,524,000 representing
1.15% of loans outstanding, as compared with an allowance balance of $3,290,000
at December 31, 2002, representing 1.38% of loans outstanding. During 2003, 2002
and 2001, $238,000, $576,000 and $447,000, respectively, was charged to expense
for the provision of 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 they
are 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, 2003
and 2002 there were no nonaccrual loans, loans that were past due ninety days or
more, or trouble debt restructurings.
Historical Loan Loss & Recovery Experience
The following table provides a summary of the Banks' loan loss experience for
the years ended December 31, 2003, 2002, 2001, 2000 and 1999.
(In 000's)
December 31,
------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Average loans for the period $ 277,220 $ 212,735 $ 174,050 $ 141,076 $ 110,609
Loans outstanding at end
of period 306,663 237,627 186,265 152,276 122,152
Allowance for Loan Losses
Balance, beginning of period $ 3,290 $ 2,717 $ 2,268 $ 1,987 $ 1,752
Less loans charged off:
Real estate loans 0 0 0 0 13
Commercial loans 0 0 0 99 0
Installment loans 12 10 4 6 12
--------- --------- --------- --------- ---------
Total loans charged off 12 10 4 105 25
Recoveries:
Real estate loans 0 0 0 0 0
Commercial loans 0 0 0 1 7
Installment loans 8 7 6 0 13
--------- --------- --------- --------- ---------
Total recoveries 8 7 6 1 20
Net loans charged off
(recovered) 4 3 (2) 104 5
Provision for loan losses 238 576 447 385 240
--------- --------- --------- --------- ---------
Balance, end of period $ 3,524 $ 3,290 $ 2,717 $ 2,268 $ 1,987
========= ========= ========= ========= =========
Net loans charged off (recovered)
to average loans by types:
Real estate loans 0.00% 0.00% 0.00% 0.00% .001%
Commercial loans 0.00% 0.00% 0.00% .069% (.006%)
Installment loans .01% .01% (.001%) .004% .001%
Net losses (recoveries) to average loans
outstanding .001% .001% (.001%) .074% .004%
11
The following tables, in thousands, summarize the allocation of the allowance
for loan losses among loan types at December 31, 2003, 2002, 2001, 2000 and
1999.
December 31, 2003
------------------------------------------------------------------
Percentage of Loans
Amount Allocated for in Each Category to
Composition of Loans Loan Losses Total Loans
-------------------- -------------------- --------------------
Commercial loans $ 45,991 $ 801 15.0%
Commercial loans secured by
real estate 33,519 186 10.9%
Installment loans 28,860 158 9.4%
Real estate loans 163,088 2,018 53.2%
Construction loans 35,205 361 11.5%
-------- -------- ----
Total loans outstanding 306,663
Less allowance for loan losses 3,524 $ 3,524 100.0%
--------
Total loans, net $303,139
========
December 31, 2002
------------------------------------------------------------------
Percentage of Loans
Amount Allocated for in Each Category to
Composition of Loans Loan Losses Total Loans
-------------------- -------------------- --------------------
Commercial loans $ 46,061 $ 587 19.4%
Commercial loans secured by
real estate 16,991 294 7.2%
Installment loans 24,102 272 10.1%
Real estate loans 131,167 1,688 55.2%
Construction loans 19,306 449 8.1%
-------- -------- ----
Total loans outstanding 237,627
Less allowance for loan losses 3,290 $ 3,290 100.0%
--------
Total loans, net $234,337
========
December 31, 2001
------------------------------------------------------------------
Percentage of Loans
Amount Allocated for in Each Category to
Composition of Loans Loan Losses Total Loans
-------------------- -------------------- --------------------
Commercial loans $ 29,730 $ 632 16.0%
Commercial loans secured by
real estate 7,930 71 4.3%
Installment loans 20,301 259 10.9%
Real estate loans 106,851 1,588 57.3%
Construction loans 21,453 167 11.5%
-------- -------- ----
Total loans outstanding 186,265
Less allowance for loan losses 2,717 $ 2,717 100.0%
--------
Total loans, net $183,548
========
12
December 31, 2000
------------------------------------------------------------------
Percentage of Loans
Amount Allocated for in Each Category to
Composition of Loans Loan Losses Total Loans
-------------------- -------------------- --------------------
Commercial loans $ 28,600 $ 703 18.8%
Commercial loans secured by
real estate 5,115 61 3.4%
Installment loans 23,432 193 15.4%
Real estate loans 86,886 1,195 57.0%
Construction loans 8,243 116 5.4%
-------- -------- ----
Total loans outstanding 152,276
Less allowance for loan losses 2,268 $ 2,268 100.0%
--------
Total loans, net $150,008
========
December 31, 1999
------------------------------------------------------------------
Percentage of Loans
Amount Allocated for in Each Category to
Composition of Loans Loan Losses Total Loans
-------------------- -------------------- --------------------
Commercial loans $ 21,463 $ 350 17.6%
Commercial loans secured by
real estate 13,011 212 10.6%
Installment loans 20,869 338 17.1%
Real estate loans 58,368 950 47.8%
Construction loans 8,441 137 6.9%
-------- -------- ----
Total loans outstanding 122,152
Less allowance for loan losses 1,987 $ 1,987 100.0%
--------
Total loans, net $120,165
========
The increase in the loan loss reserve is due primarily to overall growth in the
loan portfolio and related inherent risk of loss. Net loans charged off were a
modest $4,000 within the portfolio for The Vintage Bank in 2003 compared with
net charge offs of $3,000 in 2002. Solano Bank has sustained no losses since
opening for business July 2000.
Based on the current conditions of the loan portfolio, Management believes that
the $3,524,000 allowance for loan losses at December 31, 2003 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)
2003 2002 2001
------ ------ ------
Service charge on deposit
accounts $1,645 $1,321 $1,186
Gains (losses) on securities
transactions 637 399 325
Other 1,565 1,391 1,180
------ ------ ------
Total $3,847 $3,111 $2,691
====== ====== ======
Noninterest income for year 2003 increased $736,000, or 24%, compared with 2002.
Increases during 2002 compared with 2001 were $420,000, or 16%. Most noninterest
income derives from service charges on deposit accounts. Service charge income
increased proportionately more than growth in deposits because
13
of improved collection efforts and implementation of an overdraft privilege
program that commenced on September 15, 2003. Service charges increased
approximately $200,000 in the fourth quarter of 2003 compared with the previous
quarter.
Gains on securities transactions in all three years resulted primarily from
selling securities with less than one year to maturity to provide funding for
loans or to reinvest in securities with a longer duration and higher effective
yield to maturity. In an overall environment of falling general interest rates,
as has characterized the market for the past several years, net gain will
normally result.
Noninterest Expense
Details of noninterest expense are as follows:
(In 000's)
2003 2002 2001
------- ------- -------
Salaries & benefits $8,795 $7,893 $6,349
Occupancy 1,289 916 855
Equipment 1,453 1,614 1,451
Other 4,778 3,893 3,300
------- ------- -------
Total $16,315 $14,316 $11,955
======= ======= =======
Salaries and benefits expense increased 11% and 24% in 2003 and 2002,
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 132 at year-end 2000 to 151 at year-end 2003. The increase
was primarily the result of staffing for new branches throughout the Company.
The 41% increase in occupancy expense during 2003 compared with 2002 was
primarily in rent and depreciation associated with opening a new branch, along
with new executive offices and an administration center during the first quarter
of 2003.
Equipment expense decreased in 2003 compared with 2002. During 2002 the Company
had additional depreciation expense resulting from accelerated depreciation on
the host banking system, which was replaced in July 2002. Also, the Company
reversed approximately $168,000 in accrual maintenance fees during 2003 as the
result of settling litigation with a former software supplier.
14
The key components of other expenses are as follows:
(In 000's)
2003 2002 2001
------ ------ ------
Professional services $1,387 $830 $755
Business promotion 554 525 379
ATM expenses 250 261 222
Stationery & supplies 380 318 274
Insurance 224 188 111
Other 1,983 1,771 1,559
------ ------ ------
Total $4,778 $3,893 $3,300
====== ====== ======
Professional services increased 67% in 2003 compared with the prior year; 2002
expenses were 10% higher than 2001. The increase in 2003 was primarily due to
increases in legal fees associated with litigation with our former host system
provider and outsourced information technology and tax consulting services. The
10% increase in 2002 compared with 2001 was due to NASDAQ listing fees, fees
associated with the trust preferred offering and consulting fees associated with
revised benefits plans, new corporate governance legislation and changes in
regulatory requirements. Business promotion expense increased 6% in 2003
compared with 2002; the increase was primarily the result of increased marketing
expenditures. ATM expense decreased in 2003 compared with 2002, primarily the
result of a major card replacement project during 2002. The 18% increase in ATM
expenses when comparing 2002 to 2001 was primarily due to increases in the
number of ATM's the Company operates and the card replacement project in 2002.
Stationery and supplies expense increased 19% and 16% in 2003 and 2002,
respectively, reflecting overall volume increases and costs associated with the
system conversion and opening new branches. Insurance expenses increased 19% and
69% in 2003 and 2002, respectively; these increases are consistent with
increases in volumes and number of locations, as well as increases in workers'
compensation costs. Other expenses increased 12% and 14% in 2003 and 2002,
respectively, primarily due to increased expenses for telephone, postage,
courier services, conferences and other miscellaneous expenses.
Provision for Income Taxes
The Company reported a provision for income taxes of $2,179,000, $1,999,000 and
$1,687,0000 for years 2003, 2002 and 2001, 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).
Return on Equity and Assets
The following sets forth key ratios for the periods ending December 31, 2003,
2002 and 2001.
2003 2002 2001
------ ------ ------
Net income as a percentage of
average assets 1.00% .99% 1.00%
Net income as a percentage of
average equity 11.70% 11.36% 10.61%
Average equity as a percentage
of average assets 8.50% 8.75% 9.45%
Dividends declared per share
as a percentage of net
Income per share 11.17% 12.20% 13.70%
15
BALANCE SHEET
- --------------------------------------------------------------------------------
Total assets as of December 31, 2003 were $459,482,000 compared with
$416,458,000 and $326,806,000, as of year-end 2002 and 2001, respectively,
representing a 10% increase in 2003 and a 27% increase in 2002. Total deposits
grew $38,642,000 to $406,445,000 in 2003, representing an 11% increase, compared
with a 26% increase in 2002. Total loans, net of allowance for loan losses, grew
$68,802,000 to $303,139,000 in 2003, representing a 29% increase compared with a
28% increase in 2002. Investment securities decreased $15,088,000 from year-end
2002 to $92,006,000 in 2003, a 14% decrease, compared with an increase of 24%
during 2002.
Trust Preferred Securities
On June 26, 2002, North Bay Statutory Trust I (Trust), a Connecticut statutory
business trust and wholly-owned subsidiary of North Bay Bancorp, issued $10
million in floating rate Cumulative Trust Preferred Securities (Securities). The
Securities bear a rate of 90 day Libor plus 3.45% and had an initial interest
rate of 5.34% and the rate as of December 31, 2003 was 4.62%; the Securities
will mature on June 26, 2032, but earlier redemption is permitted under certain
circumstances, such as changes in tax or regulatory capital rules. The principal
asset of the trust is a $10,310,000 floating rate subordinated debenture of the
Company.
The Securities, the subordinated debentures, and the common securities issued by
the Trust are redeemable in whole or in part on or after June 26, 2007, or at
any time in whole, but not in part, upon the occurrence of certain events. The
Securities are included in Tier 1 capital for regulatory capital adequacy
determination purposes, subject to certain limitations. The Company fully and
unconditionally guarantees the obligations of the Trust with respect to the
issuance of the Securities.
Subject to certain exceptions and limitations, the Company may, from time to
time, defer subordinated debenture interest payments, which would result in a
deferral of distribution payments on the Securities and, with certain
exceptions, prevent the Company from declaring or paying cash distributions on
the Company's common stock or debt securities that rank junior to the
subordinated debentures.
Off Balance Sheet Arrangement
The Company does not have off-balance sheet arrangements, as defined by
Regulation SK. The Company does have loan commitments and letters of credit. For
additional information please see footnote eight to the Consolidated Financial
Statements.
Borrowings
There were no short-term borrowings at December 31, 2003 or December 31, 2002.
Short-term borrowings consist primarily of federal funds purchased and
borrowings from the Federal Home Loan Bank of San Francisco (FHLB). The Banks
maintain collateralized lines of credit with the FHLB. Based on the FHLB stock
requirements at December 31, 2003, the lines provided for maximum borrowings of
approximately $116 million; the Company also has available unused lines of
credit totaling $17.5 million for Federal funds transactions at December 31,
2003. At December 31, 2003 and 2002, there were no outstanding borrowings.
Contractual Obligations
The Company has entered into non-cancelable contracts for leased premises, data
processing and other service agreements. The Company has no capital leases. The
following table summarizes our significant contractual obligation and
commitments as of December 31, 2003:
(In 000's)
Less than One to Four to
Total one year three years five years Thereafter
------- --------- ------------ ---------- ------------
Trust preferred securities $10,000 $0 $0 $0 $10,000
Operating leases 4,079 703 1,210 784 1,382
Other obligations 102 80 22 0 0
------- ---- ------ ---- -------
Total $14,181 $783 $1,232 $784 $11,382
======= ==== ====== ==== =======
16
Time Deposits
The following table sets forth the maturity of time certificates of deposit of
$100,000 or more at December 31, 2003, 2002 and 2001.
(In 000's)
2003 2002 2001
---- ---- ----
3 months or less $17,584 49.8% $24,661 62.5% $19,260 50.4%
Over 3 months through
6 months 6,122 17.4% 6,182 15.7% 8,243 21.6%
Over 6 months through
12 months 3,822 10.8% 3,887 9.9% 6,302 16.5%
Over 12 months 7,762 22.00% 4,695 11.9% 4,419 11.5%
------- ------ ------- ----- ------- -----
$35,290 100% $39,425 100% $38,224 100%
======= ====== ======= ===== ======= =====
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, 2003, the Company had
no securities carried as "Held-to-Maturity". "Available-for-Sale" securities had
a fair value of $90,655,000 with an unrealized gain, net of income taxes, of
$608,000 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 $1,351,000.
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, 2003, the
Company had approximately $133.5 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 2003, liquid assets (defined as cash, Federal funds sold, deposits
in other financial institutions and securities categorized as
available-for-sale) represented 28% of total assets, as compared with 38% as of
year-end 2002. The level of liquid assets at December 31, 2003 exceeds the
liquidity required by the Company's liquidity policy. Management expects to be
able to meet the liquidity needs of the Company during 2004 primarily through
balancing loan growth with corresponding increases in deposits. The Company did
occasionally rely on borrowings from FHLB and on the federal funds lines during
2003.
The Company's capital ratios remained relatively steady during 2003 compared
with 2002 levels. As of December 31, 2003, the Company's total risk-based
capital ratio, Tier I risk-based capital ratio and leverage ratio were 13.5%,
12.6% and 10.6%, respectively. These compare with ratios of 14.9%, 13.9% and
10.9% as of December 31, 2002.
In January, 2004, the Company declared a 5% stock dividend and a $.20 per share
cash dividend for shareholders of record as of March 12, 2004. 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 $460,000, equating to a reduction in the
Company's leverage ratio of approximately .01%.
17
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. Although
the Company manages other risks, as in credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to be
principally a market risk. The Company relies on loan reviews, prudent
underwriting standards and an adequate allowance for loan losses to mitigate
credit risk. Other types of market risks, such as foreign currency exchange rate
risk, do not arise in the normal course of the Company's business activities.
The majority of the Company's interest rate risk arises from instruments,
positions and transactions entered into for 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 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.
Interest Rate Sensitivity
The following table sets forth the repricing opportunities for rate-sensitive
assets and rate-sensitive liabilities at December 31, 2003. Rate sensitivity
analysis usually excludes noninterest-bearing demand deposits. Including these
deposits, which totaled $103,401,000, 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 $ 58,340 $ 43,028 $146,251 $ 59,044 $306,663
Interest-bearing deposits in
other banks 0 100 0 0 100
Investment securities 1,001 439 36,798 53,768 92,006
Federal funds sold 9,195 0 0 0 9,195
--------- ------- -------- -------- --------
Total 68,536 43,567 183,049 112,812 407,964
Interest rate-sensitive liabilities:
Interest-bearing demand
Deposits 194,046 0 0 0 194,046
Time deposits >$100,000 17,584 9,944 7,762 0 35,290
Other time deposits 17,720 13,894 5,494 0 37,108
Savings deposits 36,599 0 0 0 36,599
Long-term borrowings 10,000 0 0 0 10,000
--------- ------- -------- -------- --------
Total $275,949 $ 23,838 $ 13,256 $ 0 $313,043
Interest rate sensitivity gap ($207,413) $ 19,729 $169,793 $112,812 $ 94,921
========= ========= ======== ======= ========
Cumulative interest rate
sensitivity gap ($207,413) ($187,684) ($17,891) $94,921
========= ========= ======== =======
Ratio of interest rate sensitivity
to earning assets (50.84%) 4.84% 41.62% 27.65%
18
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. During a positive GAP "horizon" earnings would decrease
in a falling interest rate environment, as there would be more rate sensitive
assets subject to repricing downwards than rate sensitive liabilities. This
traditional analysis does not recognize or assume any "lag" in interest rate
changes on earning assets and interest-bearing liabilities, and it assumes that
all earning assets and interest-bearing liabilities reprice to the same absolute
degree regardless of the mix of earning assets and interest-bearing liabilities.
The following table, utilizing a simulation model to measure interest rate risk,
shows the approximate pre-tax dollar and percentage change in forecasted net
interest income over a 12-month period. The simulation analysis uses an income
simulation approach to measure the change in interest income and expense under
rate shock conditions. The model considers the three major factors of (a) volume
differences, (b) repricing differences and (c) timing in its income simulation.
The model begins by disseminating data into appropriate repricing buckets based
on internally supplied algorithms (or overridden by calibration). Next, each
major asset and liability type is assigned a "multiplier" or beta to simulate
how much that particular balance sheet category type will reprice when interest
rates change. The model uses eight asset and liability multipliers consisting of
bank-specific or default multipliers. The remaining step is to simulate the
timing effect of assets and liabilities by modeling a month-by-month simulation
to estimate the change in interest income and expense over the next 12-month
period.
19
(In 000's)
December 31, 2003
---------------------------------------------
Dollar change in Percent change in
Change in interest rates: net interest income net interest income
100 basis points decline $261 1.36%
100 basis points rise ($460) (2.39%)
200 basis points rise ($931) (4.83%)
(In 000's)
December 31, 2002
---------------------------------------------
Dollar change in Percent change in
Change in interest rates: net interest income net interest income
100 basis points decline $186 1.06%
100 basis points rise ($277) (1.58%)
200 basis points rise ($552) (3.16%)
As illustrated in the above tables, the Company is currently liability
sensitive. The implication of this is that the Company's earnings will increase
in a falling interest rate environment, as there are more rate sensitive
liabilities subject to reprice downward than rate sensitive assets; conversely,
earnings would decrease in a rising rate environment. Therefore, an increase in
market rates could adversely affect net interest income. In contrast, a decrease
in market rates may improve net interest income.
It should be noted that the tools used to manage interest rate risk do not take
into account future management actions that may be undertaken, should a change
occur in actual market interest rates during the year. Also, certain assumptions
are required to perform modeling simulations that may have significant impact on
the results. These include assumptions about composition or mix of the balance
sheet, level of interest rates, balance changes of deposit products that do not
have stated maturities and assumptions of industry standards and future expected
pricing behaviors. The results indicated by the model could vary significantly
due to external factor such as changes in the prepayment assumptions,
competition or early withdrawal of deposits.
DESCRIPTION OF OPERATIONS
- --------------------------------------------------------------------------------
North Bay 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 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 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 1411 Oliver Road, Fairfield,
California, one at 1395 E. Second Street, Benicia, California and one located at
976 Admiral Callahan Lane, Vallejo, California. Solano Bank also has a remote
ATM at 1100 Texas Street, Fairfield, 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.
SECURITIES OF THE HOLDING COMPANY
- --------------------------------------------------------------------------------
The Company's outstanding securities consist of one class, Common Stock, of
which there were 2,290,174 shares outstanding at March 12, 2004, held by 1,001
shareholders of record. The stock is listed on the Nasdaq National Market System
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".
20
The following table (adjusted for the 2003 and 2004 stock dividends) summarizes
the common stock high and low prices based upon transactions of which the
Company is aware:
Quarter ended High Low
March 31, 2002 $24.94 $17.28
June 30, 2002 24.94 21.54
September 30, 2002 26.08 20.05
December 31, 2002 24.04 21.54
March 31, 2003 28.81 24.29
June 30, 2003 27.62 24.19
September 30, 2003 26.59 23.81
December 31, 2003 29.40 24.38
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 2004,
2003 and 2002. The holders of common stock of the Company are entitled to
receive cash dividends when and as declared by the Board of Directors out of
funds legally available. Federal Reserve Board regulations prohibit cash
dividends, except under limited circumstances, if the distribution would result
in a withdrawal of capital or exceed the Company's net profits then on hand
after deducting its losses and bad debts. Furthermore, cash dividends cannot be
paid without the prior written approval of the Federal Reserve Board if the
total of all dividends declared in one year exceeds the total of net profits for
that year plus the preceding two calendar years, less any required transfers to
surplus under state or federal law. The shareholders' right to receive dividends
is also subject to the restrictions set forth in the California General
Corporation Law. The Corporation Law provides that a corporation may make a
distribution to its shareholders if the corporation's retained earnings equal at
least the amount of the proposed distribution. The Corporation Law further
provides that, in the event that sufficient retained earnings are not available
for the proposed distribution, a corporation may nevertheless make a
distribution to its shareholders if it meets two conditions, which generally
stated are as follows: (1) The corporation's assets equal at least 1.25 times
its liabilities; and (2) the corporation's current assets equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the corporation's interest expense for such fiscal
years, then the corporation's current assets must equal at least 1.25 times its
current liabilities. As of December 31, 2003, the Company had retained earnings
of $9,623,000 eligible for dividends.
21
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31, 2003 and 2002
(In 000's except share data)
2003 2002
-------- --------
ASSETS
CASH AND DUE FROM BANKS $ 28,756 $ 23,785
FEDERAL FUNDS SOLD 9,195 28,525
-------- --------
Cash and cash equivalents 37,951 52,310
TIME DEPOSITS WITH OTHER
FINANCIAL INSTITUTIONS 100 100
INVESTMENT SECURITIES:
Held-to-maturity 0 1,272
Available-for-sale 90,655 104,473
Equity securities 1,351 1,349
-------- --------
Total investment securities 92,006 107,094
LOANS, net of allowance for loan losses of
$3,524 in 2003 and $3,290 in 2002 303,139 234,337
LOANS HELD FOR SALE 3,095 0
BANK PREMISES AND EQUIPMENT, net 10,909 10,800
INTEREST RECEIVABLE AND OTHER ASSETS 12,282 11,817
-------- --------
Total assets $459,482 $416,458
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Non-interest bearing $103,401 $104,142
Interest-bearing 303,044 263,661
-------- --------
Total deposits 406,445 367,803
TRUST PREFERRED SECURITIES 10,000 10,000
INTEREST PAYABLE AND OTHER LIABILITIES 3,596 3,312
-------- --------
Total liabilities 420,041 381,115
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 2003
and 2,130,288 shares in 2002 29,210 25,387
Retained earnings 9,623 8,612
Accumulated other comprehensive income 608 1,344
-------- --------
Total shareholders' equity 39,441 35,343
Total liabilities and shareholders' equity $459,482 $416,458
======== ========
The accompanying notes are an integral part of these statements.
22
- --------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENTS
- --------------------------------------------------------------------------------
For the Years Ended December 31, 2003, 2002 and 2001
(In 000's except share data)
2003 2002 2001
------- ------- -------
INTEREST INCOME:
Interest and fees on loans $18,782 $16,602 $15,319
Interest on federal funds sold 207 418 1,012
Interest on investment securities - taxable 2,535 3,490 3,395
Interest on investment securities - tax exempt 725 664 574
Interest on time deposits with other
financial institutions 2 5 7
------- ------- -------
Total interest income 22,251 21,179 20,307
------- ------- -------
INTEREST EXPENSE:
Interest on interest-bearing
transaction deposits 916 1,118 2,164
Interest on time and savings deposits 1,537 2,234 3,552
Interest on long-term debt 531 339 168
Interest on short-term borrowings 11 0 3
------- ------- -------
Total interest expense 2,995 3,691 5,887
------- ------- -------
Net interest income 19,256 17,488 14,420
PROVISION FOR LOAN LOSSES 238 576 447
------- ------- -------
Net interest income after
provision for loan losses 19,018 16,912 13,973
NONINTEREST INCOME:
Service charges on deposit accounts 1,645 1,321 1,186
Gain on securities transactions, net 637 399 325
Other 1,565 1,391 1,180
------- ------- -------
Total noninterest income 3,847 3,111 2,691
------- ------- -------
NONINTEREST EXPENSE:
Salaries and related benefits 8,795 7,893 6,349
Occupancy 1,289 916 855
Equipment 1,453 1,614 1,451
Other 4,778 3,893 3,300
------- ------- -------
Total noninterest expense 16,315 14,316 11,955
------- ------- -------
Income before provision for income taxes 6,550 5,707 4,709
PROVISION FOR INCOME TAXES 2,179 1,999 1,687
------- ------- -------
NET INCOME $ 4,371 $ 3,708 $ 3,022
======= ======= =======
BASIC EARNINGS PER SHARE: $ 1.83 $ 1.60 $ 1.33
DILUTED EARNINGS PER SHARE: $ 1.79 $ 1.56 $ 1.32
The accompanying notes are an integral part of these statements.
23
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES
- --------------------------------------------------------------------------------
IN SHAREHOLDERS' EQUITY & COMPREHENSIVE INCOME
For the Years Ended December 31, 2003, 2002 and 2001
(In 000's except share data)
Accumulated
Other Total
Common Shares Common Retained Comprehensive Shareholders' Comprehensive
Outstanding Stock Earnings Income (Loss) Equity Income
---------- ---------- ---------- ---------- ---------- ----------
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 loss, net of tax:
Change in net unrealized loss on
available-for-sale securities,
net of tax of $335 and
reclassification adjustment 471 471 471
---------
$3,493
=========
Comprehensive income
Stock options exercised, including
a tax benefit of $36 18,150 233 233
---------- ---------- ---------- ---------- ----------
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 $562 and
reclassification adjustment 791 791 791
---------
Comprehensive income $4,499
=========
Stock options exercised, including
a tax benefit of $362 71,978 1,271 1,271
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2002 2,130,288 25,387 8,612 1,344 35,343
Stock dividend 106,295 2,918 (2,933) (15)
Cash dividend (427) (427)
Comprehensive income:
Net income 4,371 4,371 $4,371
Other comprehensive loss, net of tax:
Change in net unrealized gain on
available-for-sale securities,
net of tax of $523 and
reclassification adjustment (736) (736) (736)
---------
$3,635
=========
Comprehensive income
Stock options exercised, including
a tax benefit of $261 49,063 905 905
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2003 2,285,646 $ 29,210 $ 9,623 $ 608 $ 39,441
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
24
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Years Ended December 31, 2003, 2002 and 2001
(In 000's)
2003 2002 2001
--------- --------- ---------
Cash Flows From Operating Activities:
Net income $ 4,371 $ 3,708 $ 3,022
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,569 1,441 1,352
Provision for loan losses 238 576 447
Proceeds from sale of loans-held-for sale 280,225 0 0
Purchase of loans-held-for sale (283,320) 0 0
Amortization of deferred loan fees (665) (514) (471)
Amortization of investment securities
premiums, net 1,079 938 121
Provision for deferred income taxes (56) (398) (308)
Losses on sale or retirement of capital assets 0 1 0
Gain on securities transactions (637) (399) (325)
Changes in:
Interest receivable and other assets 114 (1,582) (3,265)
Interest payable and other liabilities 543 1,135 1,150
--------- --------- ---------
Net cash provided by operating activities 3,461 4,906 1,723
--------- --------- ---------
Cash Flows From Investing Activities:
Investment securities held to maturity:
Proceeds from maturities and principal payments 1,272 42 39
Investment securities available for sale:
Proceeds from maturities and principal payments 36,783 40,368 25,981
Proceeds from sales and recoveries 34,626 21,380 12,228
Purchases (59,290) (81,842) (63,745)
Equity securities:
Proceeds from sales 56 10 31
Purchases (58) (120) (40)
Net increase in loans (68,375) (50,851) (33,516)
Sale and disposition of capital assets 0 1 42
Capital expenditures (1,678) (2,914) (5,481)
--------- --------- ---------
Net cash used in investing activities (56,664) (73,926) (64,461)
--------- --------- ---------
Cash Flows From Financing Activities:
Net increase in deposits 38,642 75,362 75,803
Proceeds from issuance of trust preferred securities 0 10,000 0
Repayment of long-term borrowings 0 (1,846) (923)
Stock options exercised 644 909 196
Dividends (442) (406) (383)
--------- --------- ---------
Net cash provided by financing activities 38,844 84,019 74,693
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (14,359) 14,999 11,955
Cash and cash equivalents at beginning of year 52,310 37,311 25,356
--------- --------- ---------
Cash and cash equivalents at end of year $ 37,951 $ 52,310 $ 37,311
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 3,084 $ 3,755 $ 5,622
Income taxes paid $ 1,345 $ 2,290 $ 1,448
Retirement of fixed assets $ 0 $ 0 $ 139
The accompanying notes are an integral part of these statements.
25
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 2003, 2002 and 2001
(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 subsidiaries (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, North Bay Statutory Trust I, the Banks and the Real Estate
Investment Trust. 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.
26
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.
Loans held-for-sale 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.
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.
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
27
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)
2003 2002 2001
-------- ------- -------
Net income as reported $ 4,371 $ 3,708 $ 3,022
Total stock-based employee
compensation expense
determined under the fair
value based method for all
awards, net of related tax effects 268 235 294
-------- ------- -------
Net income pro forma $ 4,103 $ 3,473 $ 2,728
======== ======= =======
Earnings per share:
As reported:
Basic $ 1.83 $ 1.60 $ 1.33
Diluted $ 1.79 $ 1.56 $ 1.32
Pro forma:
Basic $ 1.72 $ 1.50 $ 1.27
Diluted $ 1.68 $ 1.46 $ 1.25
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)
Interpretation No. 46, (as revised), 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. In accordance with the FASB Interpretation No. 46, as
revised, the Company will deconsolidate North Bay Statutory Trust I in the first
quarter of 2004.
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. The Statement requires issuers
to classify as liabilities (or assets in some circumstance) three classes of
freestanding financial instruments that embody obligations for the issuer.
28
Generally, the Statement is effective for financial instruments entered into or
modified after May 31, 2003 and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company adopted the
provisions of the Statement on July 1, 2003.
The Company did not enter into any financial instruments within the scope of the
Statement during June 2003. However, as a result of adopting the Statement on
July 1, 2003 for existing financial instruments entered into on or before May
31, 2003, the trust preferred securities (floating rate subordinated debenture)
of $10 million were reclassified as liabilities on July 1, 2003.
29
(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, 2003 are as follows:
(In 000's)
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------- ------ ------ ---------
Available-for-sale:
Securities of the U.S. Treasury
and other government agencies $35,942 $91 $108 $35,925
Corporate debt securities 1,221 7 0 1,228
Mortgage-backed securities 32,977 380 149 33,208
Municipal securities 19,474 859 39 20,294
------- ------ ---- -------
Total available-for-sale 89,614 1,337 296 90,655
Equity securities 1,351 0 0 1,351
------- ------ ---- -------
Total investments $90,965 $1,337 $296 $92,006
======= ====== ==== =======
There were no unrealized losses greater than 12 months. The unrealized losses
were due to changes in market rates and not attributed to credit quality.
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
======== ======== ======== ========
There were no unrealized losses greater than 12 months. The unrealized losses
were due to changes in market rates and not attributed to credit quality.
30
The following table shows the amortized cost and estimated fair value of debt
securities by contractual maturity at December 31, 2003: (In 000's)
Available-for-Sale
Amortized Estimated
Cost Fair Value
------- -------
Within one year $1,428 $1,440
After one but within five years 36,465 36,792
After five but within ten years 10,767 11,187
Over ten years 7,977 8,028
Mortgage-backed securities 32,977 33,208
------- -------
Total $89,614 $90,655
======= =======
The following table provides a summary of the maturities and weighted average
yields of investment securities as of December 31, 2003.
(In 000's)
After One After Five
In One Year Through Through After
or Less Five Years Ten Years Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ------ ------- ------ ------- ------ ------ ----- ------ -----
Available-for-sale securities:
Securities of the U.S. Treasury
and other government agencies $0 0.00% $28,908 3.23% $0 0.00% $7,017 1.82% $35,925 2.95%
Mortgage-backed securities (1) 0 0.00% 6 8.84% 1,686 6.47% 31,516 4.16% 33,208 4.28%
Municipal securities (2) 439 5.78% 7,884 4.41% 11,187 5.26% 784 7.11% 20,294 5.01%
Corporate debt securities 1,001 1.52% 0 0.00% 0 0.00% 227 6.22% 1,228 2.39%
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
Total $1,440 2.82% $36,798 3.48% $12,873 5.42% $39,544 3.82% $90,655 3.89%
Equity securities:
Equity stocks (3) $0 0.00% $0 0.00% $0 0.00% $1,351 5.80% $1,351 5.80%
------ ---- ------- ---- ------- ---- ------- ---- ------- ----
$0 0.00% $0 0.00% $0 0.00% $1,351 5.80% $1,351 5.80%
(1) The maturity of mortgage-backed securities is based on contractual maturity.
The average expected life is approximately five years.
(2) Yields shown are taxable-equivalent.
(3) Consists of Federal Reserve Bank and Federal Home Loan Bank Stock
As of December 31, 2003 and 2002, securities carried at $2,740,000 and
$2,081,000, respectively, were pledged to secure public deposits as required by
law.
Total proceeds from the sale of securities available-for-sale during 2003, 2002
and 2001 were $34,626,000, $21,380,000 and $12,228,000, respectively. Gross
gains of $637,000, $399,000 and $325,000 were realized on those sales in 2003,
2002 and 2001, respectively.
31
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
At December 31, 2003 and 2002, the loan portfolio consisted of the following,
net of deferred loan fees of $1,248,000 and $1,348,000, respectively:
(In 000's)
2003 2002
-------- --------
Real estate loans $163,088 $131,167
Installment loans 28,860 24,102
Construction loans 35,205 19,306
Commercial loans secured by real estate 33,519 16,991
Commercial loans 45,991 46,061
-------- --------
306,663 237,627
Less allowance for loan losses 3,524 3,290
-------- --------
Total $303,139 $234,337
======== ========
There were no loans on nonaccrual status at December 31, 2003 or December 31,
2002. There was no interest foregone during 2003, 2002 or 2001. As of December
31, 2003 and 2002, there were no loans 90 days or more past due but still
accruing interest. There were no restructured loans during 2003 or 2002.
Changes in the allowance for loan losses are as follows:
(In 000's)
2003 2002 2001
------ ------ ------
Balance, beginning of year $3,290 $2,717 $2,268
Provision for loan losses 238 576 447
Loans charged off (12) (10) (4)
Recoveries of loans previously
charged off 8 7 6
------ ------ ------
Balance, end of year $3,524 $3,290 $2,717
====== ====== ======
As of December 31, 2003, 2002 and 2001 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.
32
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2003 and 2002 consisted of the following:
(In 000's)
Accumulated
Depreciation Net Book
Cost & Amortization Value
------- -------------- --------
2003
Land $2,800 $0 $2,800
Premises 5,080 944 4,136
Furniture, fixtures and equipment 7,803 4,888 2,915
Leasehold improvements 1,707 649 1,058
------- ------ -------
Total $17,390 $6,481 $10,909
======= ====== =======
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
======= ====== =======
Depreciation and amortization expense, included in occupancy expense and
equipment expense, was $1,569,000, $1,441,000 and $1,352,000 in 2003, 2002 and
2001, respectively.
(5) COMMITMENTS AND CONTINGENCIES
The Company leases premises for their various offices. Total rent on such leases
was $662,000, $374,000 and $321,000 in 2003, 2002 and 2001, 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
---- -----
2004 $703
2005 654
2006 556
2007 446
2008 338
Thereafter 1,382
------
Total $4,079
======
(6) TIME DEPOSITS AND INTEREST ON TIME DEPOSITS
Time certificates of deposit in denominations of $100,000 or greater were
$35,290,000 and $39,425,000 at December 31, 2003 and 2002, respectively.
Interest expense on these deposits was $757,000, $893,000 and $1,010,000 for
2003, 2002 and 2001, respectively.
At December 31, 2003, the scheduled maturities of total time deposits are as
follows:
(In 000's)
Year Total
---- -------
2004 $59,142
2005 6,251
2006 2,755
2007 2,156
2008 2,094
-------
Total $72,398
=======
33
(7) BORROWINGS
There were no short-term borrowings at December 31, 2003 or December 31, 2002.
Short-term borrowings consist primarily of federal funds purchased and
borrowings from the Federal Home Loan Bank of San Francisco (FHLB). The Company
maintains collateralized lines of credit with the FHLB. Based on the FHLB stock
requirements at December 31, 2003, these lines provided for maximum borrowings
of approximately $116 million; the Company also has available unused lines of
credit totaling $17.5 million for federal funds transactions at December 31,
2003.
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, 2003 was 4.62%. 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.
(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 non-performance by the
borrower, in the contract amount of the commitment. The Banks use the same
credit policies in making commitments as they do for on-balance-sheet
instruments and evaluate each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Banks, are
based on management's credit evaluation of the borrower. Collateral held varies,
but may include accounts receivable, inventory, plant and equipment and real
property.
The Banks also issue standby letters of credit, which are conditional
commitments to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support construction bonds, private borrowing
arrangements and similar transactions. Most of these guarantees are short-term
commitments expiring in decreasing amounts through 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, 2003 and 2002 were as follows:
(In 000's)
Contractual Amounts
----------------------
2003 2002
------- -------
Loan commitments $86,984 $83,835
Standby letters of credit $1,108 $729
34
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, 2003 there was $369,000 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, 2003 there were $739,000 issued in performance standby
letters of credit and the Banks carried no liability. The terms of the
guarantees will expire primarily in 2004 with 1% expiring in 2007 and 27%
expiring in 2008. 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 84% of the loans are secured by real
estate. This concentration is presented below:
(In 000's)
December 31, 2003
Construction/land development: -----------------
Land development $7,181
Residential 7,212
Commercial 20,812
Real estate 163,088
Commercial loans secured by real estate 33,519
Installment loans secured by real estate 24,884
--------
Total $256,696
========
(10) INCOME TAXES
The provision (benefit) for federal and state income taxes for the years ended
December 31, 2003, 2002 and 2001 consisted of:
(In 000's)
2003 2002 2001
------ ------ ------
Current
Federal $1,521 $1,712 $1,471
State 602 685 524
------ ------ ------
2,123 2,397 1,995
Deferred
Federal 70 (297) (324)
State (14) (101) 16
------ ------ ------
56 (398) (308)
------ ------ ------
Total $2,179 $1,999 $1,687
====== ====== ======
35
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, 2003 and 2002:
(In 000's)
2003 2002
------ ------
Deferred tax assets:
Allowance for loan losses $1,398 $1,300
Deferred compensation 512 372
State income tax 213 191
Depreciation 0 68
Other 0 33
------ ------
$2,123 $1,964
------ ------
Deferred tax liabilities:
Unrealized gain on securities $ 433 $ 956
Accumulated accretion 162 147
Depreciation 139 0
Other 61 0
------ ------
$ 795 $1,103
------ ------
Net deferred tax asset $1,328 $ 861
====== ======
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)
2003 2002 2001
-------------- ---------------- -----------------
Amount Rate Amount Rate Amount Rate
------ ----- ------ ------ ------ -----
Tax provision at statutory rate $2,227 34.0% $1,940 34.0% $1,601 34.0%
Interest on obligations of
states and political
subdivisions exempt from
federal taxation (233) (3.5%) (191) (3.3%) (161) (3.4%)
State franchise taxes 382 5.8% 385 6.7% 319 6.8%
Life insurance policies (115) (1.8%) (133) (2.3%) (101) (2.2%)
Other, net (82) (1.2%) (2) (.1%) 29 .6%
------ ----- ------ ------ ------ -----
Total $2,179 33.3% $1,999 35.0% $1,687 35.8%
====== ====== ====== ====== ====== =====
(11) DIVIDEND RESTRICTIONS
The Company is regulated by the Board of Governors of the Federal Reserve
System. Federal Reserve Board regulations prohibit cash dividends, except under
limited circumstances, if the distribution would result in a withdrawal of
capital or exceed the Bancorp's net profits then on hand after deducting its
losses and bad debts. Furthermore, cash dividends cannot be paid without the
prior written approval of the Federal Reserve Board if the total of all
dividends declared in one year exceeds the total of net profits for that year,
plus the preceding two calendar years, and less any required transfers to
surplus under state or federal law.
The shareholders of North Bay Bancorp are entitled to receive dividends when and
as declared by its Board of Directors out of funds legally available, subject to
the restrictions set forth in the California General Corporation Law. The
Corporation Law provides that a corporation may make a distribution to its
shareholders if the corporation's retained earnings equal at least the amount of
the proposed distribution. The Corporation Law further provides that, in the
event that sufficient retained earnings are not available for the proposed
distribution, a corporation may nevertheless make a distribution to its
shareholders if it meets two conditions, which generally stated are as follows:
1) the corporation's assets equal at least 1.25 times its liabilities; and 2)
the corporation's current assets equal at least its current liabilities or, if
the
36
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 29, 2001, January 28, 2002,
January 27, 2003 and January 26, 2004. As a result of the stock dividends, the
number of common shares outstanding and per share data was adjusted
retroactively for all periods presented in the following tables. 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 2003.
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 2003
-----------------------
Basic earnings per share $4,371 2,382,093 $1.83
Stock options 57,511
Diluted earnings per share 2,439,604 $1.79
For the year ended 2002
-----------------------
Basic earnings per share $3,708 2,313,461 $1.60
Stock options 57,753
Diluted earnings per share 2,371,214 $1.56
For the year ended 2001
-----------------------
Basic earnings per share $3,022 2,264,170 $1.33
Stock options 24,778
Diluted earnings per share 2,288,948 $1.32
(13) OTHER NONINTEREST INCOME AND EXPENSE
The components of Other Noninterest Income for the years ended December 31,
2003, 2002 and 2001 were as follows:
(In 000's)
2003 2002 2001
------ ------ ------
ATM surcharge $279 $294 $249
Increase of cash value on
insurance policies 338 393 296
Merchant services income 293 280 265
Commission on sale of non-
deposit products 214 204 158
Commission on sale of
mortgage products 232 0 0
Other 209 220 212
------ ------ ------
Total $1,565 $1,391 $1,180
====== ====== ======
37
The components of Other Noninterest Expense for the years ended December 31,
2003, 2002 and 2001 were as follows:
(In 000's)
2003 2002 2001
------ ------ ------
Professional services $1,387 $830 $755
Business promotions 554 525 379
ATM expenses 250 261 222
Stationary & supplies 380 318 274
Insurance 224 188 111
Other 1,983 1,771 1,559
------ ------ ------
Total $4,778 $3,893 $3,300
====== ====== ======
(14) STOCK OPTION PLAN
The Company has a stock option plan under which it may grant up to 871,790
options. The Company has granted 723,570 options through December 31, 2003. The
option exercise price equals the stock's market price on the date of grant. The
options become exercisable over four or five years and expire in five or more
years. The equity compensation plans have been approved by the security holders.
A summary of the status of the Company's stock option plan at December 31, 2003,
2002 and 2001 and stock option activity during the years then ended is presented
in the table below:
2003 2002 2001
Weighted Weighted Weighted
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 301,939 $17.50 366,836 $15.71 312,642 $15.05
Granted 86,741 $25.05 32,524 $23.18 76,114 $16.65
Exercised (51,930) $11.74 (79,356) $10.91 (21,383) $ 9.22
Cancelled (18,276) $15.86 (18,065) $17.79 (537) $ 5.96
Outstanding at
end of year 318,474 $20.80 301,939 $17.50 366,836 $15.71
Exercisable at
end of year 120,377 $18.44 107,372 $16.41 114,013 $13.71
Weighted-average
fair value of
options granted
during the year $6.16 $6.94 $6.23
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
------------------- -------------------
Range Number Weighted-Average Weighted- Number Weighted-
of Outstanding at Contractual Average Exercisable at Average
Exercise Prices 12/31/03 (Life in years) Exercise Price 12/31/03 Exercise Price
- ----------------- -------------- ---------------- -------------- ---------------- --------------
$16.42 to $19.58 93,807 1.03 $18.68 61,006 $18.57
$16.41 to $18.10 105,402 2.20 $17.37 51,815 $17.52
$23.13 to $28.31 119,265 4.25 $25.51 7,556 $23.60
------- -------
318,474 120,377
======= =======
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 2003, 2002 and 2001,
38
respectively: risk-free interest rate of 2.48%, 2.66%, 2.82%, 3.27% 3.37%, 3.46%
and 3.55% for options issued in 2003, 4.07% and 3.25% for options issued in 2002
and 4.62% and 3.90% for options issued in 2001; expected dividend yields of
..73%, .80% and 1.01%; expected lives of 5 years and expected volatility of
16.08%, 21.67% and 28.02%.
(15) 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, 2003 is as follows:
(In 000's)
Balance at beginning of year $5,342
Additions 7,788
Repayments 2,973
-------
Balance at end of year $10,157
=======
Total undisbursed commitments as of December 31, 2002 were $5,329,000.
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 2003, 2002 and 2001
fees of $196,000, $165,000 and $135,000, respectively, were paid to this firm.
(16) 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 $25,000 and $220,000 for
December 31, 2003 and 2002, respectively, and are reported in cash and due from
banks on the balance sheet.
(17) 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 $415,000, $263,000 and $223,000 for the years ended December
31, 2003, 2002 and 2001, respectively.
The Company has 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 Company has purchased life insurance on the
lives of the participants and expects to use the death benefit of these policies
to pay the obligation in event the participants death precedes retirement.
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, 2003 were
$3,188,000. At December 31, 2003 $387,000 was carried as a liability to fund the
benefit. The program provides a death benefit to beneficiaries of a deceased
participant.
The Company has 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 death
benefit of these policies to pay the obligation in event the participants death
precedes retirement. At December 31, 2003 $314,000 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.
39
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2003 and 2002:
(In 000's)
2003 2002
-------------------- ---------------------
Carrying Fair Carrying Fair
Amounts Value Amounts Value
-------- -------- -------- --------
Financial assets:
Cash and cash equivalents $37,951 $37,951 $52,310 $52,310
Time deposits with other
financial institutions 100 100 100 100
Investment securities 92,006 92,006 107,094 107,094
Loans, net 303,139 305,874 234,337 236,147
Accrued interest receivable 2,051 2,051 2,256 2,256
Financial liabilities:
Deposits $406,445 $406,209 $367,803 $367,486
Trust preferred securities 10,000 10,000 10,000 10,000
Accrued interest payable 237 237 319 319
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.
Loan commitments and standby letters of credit - The fair value is estimated
using the fees currently charged to enter into similar agreements.
40
(19) COMPREHENSIVE INCOME
The changes in the components of other comprehensive income (loss) for the years
ended December 31, 2003, 2002 and 2001 are reported as follows:
(In 000's)
2003 2002 2001
----- ---- ----
Unrealized holding (loss) gain arising during the period,
net of tax benefit of $523 for 2003 and tax expense of
$562 and $335 for 2002 and 2001, respectively ($363) $1,024 $661
Reclassification adjustment for net realized gains on securities
available-for-sale included in net income during the
year, net of tax expense of $265, $166 and $135 for
2003, 2002 and 2001, respectively. (373) (233) (190)
----- ---- ----
Other comprehensive (loss) income ($736) $791 $471
===== ==== ====
(20) 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, 2003, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2003, 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.
41
The Company's actual capital amounts and ratios are also presented in thousands
in the following tables:
(In 000's)
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2003:
Total capital (to risk
weighted assets)
Consolidated $52,356 13.47% $31,089 >8.00% $38,861 >10.00%
The Vintage Bank 34,321 11.07% 24,806 >8.00% 31,007 >10.00%
Solano Bank 8,029 10.70% 6,001 >8.00% 7,501 >10.00%
Tier I capital (to risk
weighted assets)
Consolidated 48,833 12.57% 15,544 >4.00% 23,316 >6.00%
The Vintage Bank 31,442 10.14% 12,403 >4.00% 18,604 >6.00%
Solano Bank 7,385 9.84% 3,001 >4.00% 4,501 >6.00%
Tier I capital (to
average assets)
Consolidated 48,833 10.61% 18,408 >4.00% 23,010 >5.00%
The Vintage Bank 31,442 8.66% 14,517 >4.00% 18,146 >5.00%
Solano Bank 7,385 8.82% 3,350 >4.00% 4,187 >5.00%
(In 000's)
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -----------------------
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%
42
(21) FINANCIAL STATEMENTS OF NORTH BAY BANCORP (Parent Company Only)
For the Years Ended December 31, 2003, 2002 and 2001
CONDENSED BALANCE SHEETS
(In 000's except share data)
Assets 2003 2002
------- -------
Cash and due from banks $ 2,949 $ 6,921
Available-for-sale investment securities 6,503 2,854
Investment in The Vintage Bank 32,010 27,166
Investment in Solano Bank 7,407 7,567
Investment in North Bay Statutory Trust 1 310 310
Premises and equipment, net 1,761 1,794
Other assets 461 426
------- -------
Total assets $51,401 $47,038
======= =======
Liabilities and shareholders' equity
Floating rate subordinated
debenture (trust preferred securities) $10,310 $10,310
Other liabilities 1,650 1,385
------- -------
Total liabilities $11,960 $11,695
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 2003 and
2,130,288 shares in 2002 29,210 25,387
Retained earnings 9,623 8,612
Accumulated other comprehensive income 608 1,344
------- -------
Total shareholders' equity 39,441 35,343
Total liabilities and shareholders' equity $51,401 $47,038
======= =======
43
CONDENSED INCOME STATEMENTS
(In 000's)
2003 2002 2001
------- ------- -------
Income
Interest on investment securities $ 123 $ 41 $ 0
Dividends from subsidiaries 0 0 2,500
Service fees from subsidiaries 6,177 5,681 4,754
------- ------- -------
Total Income 6,300 5,722 7,254
Expenses
Interest on borrowings 531 339 168
Salaries and related benefits 4,104 3,836 3,275
Other expenses 3,342 2,910 2,622
------- ------- -------
Total expenses 7,977 7,085 6,065
Net (loss) income before tax benefit and equity in
net income of subsidiaries (1,677) (1,363) 1,189
Tax benefit 642 574 482
------- ------- -------
Net (loss) income before equity in undistributed net
income of subsidiaries (1,035) (789) 1,671
Equity in undistributed net income of subsidiaries 5,406 4,497 1,351
------- ------- -------
Net Income $ 4,371 $ 3,708 $ 3,022
======= ======= =======
44
CONDENSED STATEMENTS OF CASH FLOWS
2003 2002 2001
-------- -------- --------
Cash Flows From Operating Activities:
Net income $ 4,371 $ 3,708 $ 3,022
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 812 737 804
Amortization of investment securities
premiums, net 117 5 0
Equity in undistributed net income of subsidiaries (5,406) (4,497) (1,351)
Changes in:
Interest receivable and other assets (35) (288) 541
Interest payable and other liabilities 533 468 502
-------- -------- --------
Net cash provided by operating activities 392 133 3,518
-------- -------- --------
Cash Flows From Investing Activities:
Investment securities available for sale:
Proceeds from maturities and principal payments 785 201 0
Purchases (4,573) (3,006) 0
Sale and disposition of capital assets 0 0 4
Capital expenditures (779) (1,340) (519)
-------- -------- --------
Net cash used in investing activities (4,567) (4,145) (515)
-------- -------- --------
Cash Flows From Financing Activities:
Decrease in long-term borrowings, net 0 (1,846) (923)
Proceeds from issuance of Trust Preferred Securities 0 10,310 0
Stock options exercised 644 909 196
Dividends (441) (406) (383)
-------- -------- --------
Net cash provided by (used in) financing activities 203 8,967 (1,110)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (3,972) 4,955 1,893
Cash and cash equivalents at beginning of year 6,921 1,966 73
-------- -------- --------
Cash and cash equivalents at end of year $ 2,949 $ 6,921 $ 1,966
======== ======== ========
45
(22) SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth the results of operation for the four quarters
unaudited of 2003, 2002 and 2001. All per share amounts have been adjusted for
the 2001, 2002, 2003 and 2004 stock dividends.
(In 000's except share data)
2003 Quarters Ended
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
Interest income $5,842 $5,554 $5,494 $5,361
Interest expense 667 681 819 828
------ ------ ------ ------
Net interest income 5,175 4,873 4,675 4,533
Provision for loan losses 103 45 45 45
------ ------ ------ ------
Net interest income after 5,072 4,828 4,630 4,488
provision for loan losses
Noninterest income 925 1,055 1,059 808
Noninterest expense 3,722 4,267 4,311 4,015
------ ------ ------ ------
Income before provision for 2,275 1,616 1,378 1,281
income taxes
Provision for income taxes 975 452 366 386
------ ------ ------ ------
Net income $1,300 $1,164 $1,012 $ 895
====== ====== ====== ======
Basic earnings per share: $ .53 $ .47 $ .43 $ .38
Diluted earnings per share: $ .53 $ .47 $ .42 $ .37
2002 Quarters Ended
December 31, September 30, 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: $ .48 $ .40 $ .38 $ .34
Diluted earnings per share: $ .47 $ .39 $ .37 $ .34
46
2001 Quarters Ended
December 31, September 30, 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: $ .43 $ .41 $ .28 $ .25
Diluted earnings per share: $ .43 $ .40 $ .28 $ .25
47
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors
North Bay Bancorp:
We have audited the accompanying consolidated balance sheets of North Bay
Bancorp and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated income statements, statements of changes in shareholders' equity
and comprehensive income, and cash flows for each of the years in the two-year
period ended December 31, 2003. 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 audits. The 2001
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 audits 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 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 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, 2003 and 2002, and the results of their
operations and their cash flows for each the years in the two-year period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
/s/ KPMG LLP
February 19, 2004
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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To the Shareholders and Board of Directors of North Bay Bancorp:
We have audited the accompanying consolidated balance sheets of North Bay
Bancorp (a California Corporation) and subsidiaries as of December 31, 2001 and
2000 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of North Bay Bancorp
and subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
San Francisco, California
February 19, 2002
This report is a copy of a previously issued report.
The predecessor auditor, Arthur Andersen, has not reissued the report.
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DIRECTORS
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NORTH BAY BANCORP
Thomas N. Gavin Owner, Gavin & Schreiner, New York Life Insurance Agency
David B. Gaw, Chairman Attorney with Gaw, Van Male, Smith, Myers & Miroglio
A Professional Law Corporation
Fred J. Hearn, Jr. Chief Executive Officer
Hearn Pacific Corporation dba Hearn Construction
Conrad W. Hewitt Retired, Commissioner of California State Department of Financial
Institutions
Richard S. Long, Vice Chairman Chief Executive Officer
Regulus Integrated Solutions, LLC
Thomas H. Lowenstein President, North Bay Plywood
Thomas F. Malloy 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 Attorney with Gaw, Van Male, Smith, Myers & Miroglio
A Professional Law Corporation
THE VINTAGE BANK SOLANO BANK
Lauren Ackerman John Anthony, III
James L. Asbury Gary J. Falati
Andrew J. Beckstoffer David B. Gaw
William L. Kastner Fred J. Hearn, Jr.
Thomas H. Lowenstein Connie Klimisch
Thomas F. Malloy Michael D. O'Brien
Terry L. Robinson Terry L. Robinson
Thomas H. Shelton Stephen C. Spencer
Stephen T. Silva Robert J. Wood
Carolyn D. Sherwood John A. Nerland, President and CEO
Glen C. Terry, President & CEO Thomas N. Gavin, Chairman
James E. Tidgewell, Chairman Denise C. Suikhonen, Vice Chairman
Andrew J. Nicks, M D, Vice Chairman
Directors Emeritus
Sandi Funseth
Houghton Gifford, M D
Harlan R. Kurtz
Joseph Vallerga
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CORPORATE INFORMATION
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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
1411 Oliver Road
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
Transfer Agent Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
1 (800) 368-5948
Notice of Annual Meeting COPIA 500
First Street Napa, CA 94559
May 6, 2004- 7:00 p.m.
General Counsel: Wyman G. Smith
Gaw, Van Male, Smith, Myers & Miroglio
1000 Main Street, Suite 300
Napa, CA 94559
Corporate Secretary: Wyman G. Smith
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
Potland, OR 97201
1 (800) 368-5948
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
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