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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR the quarter period ended March 31, 2003
Commission File No. 0-31080
NORTH BAY BANCORP
(Exact name of registrant as specified in its charter)
California 68-0434802
(State or Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
1190 Airport Road, Suite 101, Napa, California 94558
Prior address: 1500 Soscol Ave., Napa, California 94559
(Address of principal executive office including Zip Code)
Registrant's telephone number, including area code: (707) 257-8585
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Preferred Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes ___ No _X_
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the North Bay Bancorp's Common
Stock outstanding as of May 12, 2003: 2,244,793
Part 1.
FINANCIAL INFORMATION
FORWARD LOOKING STATEMENTS
In addition to the historical information, this Quarterly Report contains
certain forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 321E of the Securities Exchange
Act of 1934, as amended, and are subject to the "Safe Harbor" created by those
Sections. The reader of this Quarterly Report should understand that all such
forward-looking statements are subject to various uncertainties and risks that
could affect their outcome. The Company's actual results could differ materially
from those suggested by such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, (i)
variances in the actual versus projected growth in assets, return on assets,
loan losses, expenses, rates charged on loans and earned on securities
investments, rates paid on deposits, and fee and other noninterest income
earned; (ii) competitive pressures among depository and other financial
institutions may increase significantly and have an effect on pricing, spending,
third-party relationships and revenues; (iii) enactment of adverse government
regulations; (iv) adverse conditions and volatility, as a result of recent
economic uncertainty created by the September 11, 2001 terrorists attacks on the
World Trade Center and the Pentagon, the United States' war on terrorism, the
war in Iraq, in the stock market, the public debt market and other capital
markets and the impact of such conditions of the Company; (v) continued changes
in the interest rate environment may reduce interest margins and adversely
impact net interest income; (vi) as well as other factors. This entire Quarterly
Report should be read to put such forward-looking statements in context and to
gain a more complete understanding of the uncertainties and risks involved in
the Company's business.
Moreover, wherever phrases such as or similar to "In Management's opinion", or
"Management considers" are used, such statements are as of and based upon the
knowledge of Management at the time made and are subject to change by the
passage of time and/or subsequent events, and accordingly such statements are
subject to the same risks and uncertainties noted above with respect to
forward-looking statements.
FINANCIAL INFORMATION
The information for the three months ended March 31, 2003 and March 31, 2002 is
unaudited, but in the opinion of management reflects all adjustments which are
necessary to present fairly the financial condition of North Bay Bancorp
(Company) at March 31, 2003 and the results of operations and cash flows for the
three months then ended. Results for interim periods should not be considered as
indicative of results for a full year.
2
Item 1.
FINANCIAL STATEMENTS
North Bay Bancorp
Consolidated Balance Sheets
Unaudited
(in 000's except share data)
March 31, March 31, December 31,
Assets 2003 2002 2002
-------- -------- --------
Cash and due from banks $ 28,995 $ 17,023 $ 23,785
Federal funds sold 14,729 30,533 28,525
Time deposits with other financial institutions 100 100 100
-------- -------- --------
Total cash and cash equivalents 43,824 47,656 52,410
Investment Securities:
Held-to-maturity 1,250 1,293 1,272
Available-for-sale 98,337 73,341 104,473
Equity securities 1,349 1,268 1,349
-------- -------- --------
Total investment securities 100,936 75,902 107,094
Loans, net of allowance for loan losses of $3,327 in March, 2003
$2,861 in March, 2002 and $3,290 in December, 2002 237,646 193,334 234,337
Loans-held-for-sale 14,189 0 0
Bank premises and equipment, net 11,320 10,216 10,800
Accrued interest receivable and other assets 11,679 10,889 11,817
-------- -------- --------
Total assets $419,594 $337,997 $416,458
======== ======== ========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 93,903 $ 81,355 $104,142
Interest bearing 276,746 222,274 263,661
-------- -------- --------
Total deposits 370,649 303,629 367,803
Long term debt 0 1,615 0
-------- -------- --------
Total borrowings 0 1,615 0
Accrued interest payable and other liabilities 3,083 2,466 3,312
-------- -------- --------
Total liabilities 373,732 307,710 371,115
-------- -------- --------
Floating rate subordinated debenture (trust preferred securities) 10,000 0 10,000
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 - 2,244,793 shares in March 2003,
2,068,989 shares in March, 2002, and 2,130,288 in December, 2002 28,460 24,247 25,387
Retained earnings 6,148 5,683 8,612
Accumulated other comprehensive income 1,254 357 1,344
-------- -------- --------
Total shareholders' equity 35,862 30,287 35,343
Total liabilities and shareholders' equity $419,594 $337,997 $416,458
======== ======== ========
The accompanying notes are an integral part of these statements
3
North Bay Bancorp
Consolidated Income Statements
(Unaudited)
(in 000's except share data)
Three Months Ended March 31,
2003 2002
------ ------
Interest Income
Loans (including fees) $4,356 $3,801
Federal funds sold 63 58
Investment securities taxable 782 865
Investment securities tax exempt 160 149
------ ------
Total Interest income 5,361 4,873
Interest Expense
Deposits 687 835
Short term borrowings 0 0
Long term debt 141 15
------ ------
Total Interest expense 828 850
Net interest income 4,533 4,023
Provision for loan losses 45 144
------ ------
Net interest income after
provision for loan losses 4,488 3,879
Non interest income 709 633
Gains on securities transactions, net 99 66
Non interest expenses
Salaries and employee benefits 2,306 1,904
Occupancy 257 234
Equipment 450 476
Other 1,002 753
------ ------
Total non interest expense 4,015 3,367
------ ------
Income before provision for
income taxes 1,281 1,211
Provision for income taxes 386 433
------ ------
Net income $ 895 $ 778
====== ======
Basic earnings per common share: $ 0.40 $ 0.36
====== ======
Diluted earnings per common share: $ 0.39 $ 0.35
====== ======
Dividends paid: $ 0.20 $ 0.20
====== ======
The accompanying notes are an integral part of these statements
4
North Bay Bancorp
Consolidated Statement of Change in Shareholders' Equity
For the Three Months Ended
March 31, 2003
(Unaudited)
(in 000's except share data)
Accumulated
Other Total
Common Shares Common Retained Comprehensive Shareholders' Comprehensive
Outstanding Stock Earnings Income Equity Income
------------- ------ -------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2002 2,130,288 $ 25,387 $ 8,612 $ 1,344 $ 35,343
Stock dividend 106,295 2,918 (2,932) (14)
Cash dividend (427) (427)
Comprehensive income:
Net income 895 895 $ 895
Other comprehensive loss, net of tax:
Change in net unrealized
losses on available-for-sale
securities, net of tax (90) (90) (90)
-----------
Comprehensive income $ 805
===========
Stock options exercised 8,210 155 155
--------- ----------- -----------
BALANCE, MARCH 31, 2003 2,244,793 $ 28,460 $ 6,148 $ 1,254 $ 35,862
========= =========== =========== =========== ===========
The accompanying notes are an integral part of these statements
5
North Bay Bancorp
Consolidated Statement of Cash Flows
Unaudited
(In 000's)
Three Months
Ended March 31,
2003 2002
-------- --------
Cash Flows From Operating Activities:
Net income $ 895 $ 778
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 376 357
Provision for loan losses 45 144
Amortization of deferred loan fees (141) (126)
Premium amortization (discount accretion), net 294 256
Gain on securities transactions (99) (66)
Changes in:
Interest receivable and other assets 200 (352)
Interest payable and other liabilities (188) (73)
-------- --------
Net cash provided by operating activities 1,382 918
-------- --------
Cash Flows From Investing Activities:
Investment securities held-to-maturity:
Proceeds from maturities and principal payments 22 21
Investment securities available-for-sale:
Proceeds from maturities and principal payments 9,922 4,587
Proceeds from sale of securities 10,241 5,112
Purchases (14,374) 0
Equity securities:
Purchases 0 (27)
Net increase in loans (17,402) (9,804)
Capital expenditures (896) (1,244)
-------- --------
Net cash used in investing activities (12,487) (1,355)
-------- --------
Cash Flows From Financing Activities:
Net increase in deposits 2,846 11,188
Repayment of long-term debt 0 (231)
Stock options exercised 114 131
Dividends paid (441) (406)
-------- --------
Net cash provided by financing activities 2,519 10,682
-------- --------
Net (decrease) increase in cash and cash equivalents (8,586) 10,245
Cash and cash equivalents at beginning of year 52,410 37,411
-------- --------
Cash and cash equivalents at end of period $ 43,824 $ 47,656
======== ========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 809 $ 929
Taxes paid $ 135 $ 331
The accompanying notes are an integral part of these statements
6
NORTH BAY BANCORP
Notes to the Consolidated Financial Statements
(Unaudited)
March 31, 2003
NOTE 1 - Basis of Presentation
The accompanying consolidated financial statements, which include the accounts
of North Bay Bancorp and its subsidiaries (the "Company"), have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) and in Management's opinion, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of results for
such interim periods. The subsidiaries consist of two community banks, The
Vintage Bank, established in 1985, and Solano Bank, which opened in 2000 and
North Bay Statutory Trust 1 which was established in June 2002. All significant
intercompany transactions and balances have been eliminated. Certain information
and note disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been omitted
pursuant to SEC rules or regulations; however, the Company believes that the
disclosures made are adequate to make the information presented not misleading.
The interim results for the three months ended March 31, 2003 and 2002, are not
necessarily indicative of results for the full year. It is suggested that these
financial statements be read in conjunction with the financial statements and
the notes included in the Company's Annual Report for the year ended December
31, 2002.
NOTE 2 - Commitments
The Company has outstanding standby Letters of Credit of approximately $658,000,
undisbursed real estate and construction loans of approximately $25,209,000, and
undisbursed commercial and consumer lines of credit of approximately
$58,560,000, as of March 31, 2003. At March 31, 2002 the Company has outstanding
standby Letters of Credit of approximately $1,286,000, undisbursed real estate
and construction loans of approximately $17,451,000, and undisbursed commercial
and consumer lines of credit of approximately $36,975,000.
NOTE 3 - Earnings Per Common Share
The Company declared a 5% stock dividend on January 27, 2003. As a result of the
stock dividend the number of common shares outstanding and earnings per share
data was adjusted retroactively for all periods presented.
The following table (in thousands except share data) reconciles the numerator
and denominator of the Basic and Diluted earnings per share computations:
Weighted Average Per-Share
Net Income Shares Amount
---------- --------- -------
For the three months ended March 31, 2003
Basic earnings per share $ 895 2,239,532 $ .40
Dilutive effect of stock options 72,067
---------
Diluted earnings per share 2,311,599 $ .39
For the three months ended March 31, 2002
Basic earnings per share $ 778 2,162,738 $ .36
Dilutive effect of stock options 57,061
---------
Diluted earnings per share 2,219,799 $ .35
NOTE 4- Stock-Based Compensation
The Company uses the intrinsic value method to account for its stock option
plans (in accordance with the provisions of Accounting Principles Board Opinion
No. 25 and related interpretations). Under this method, compensation expense is
recognized for awards of options to purchase shares of common stock to employees
under compensatory plans only if the fair market value of the stock at the
option grant date (or other measurement date, if later) is greater than the
amount the employee must pay to acquire the stock. Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation", permits companies to continue using the intrinsic-value method to
account for stock option plans or adopt a fair value based method. The fair
value based method results in recognizing as expense over the vesting period the
fair value of all stock-based awards on the date of grant. The Company has
elected to continue to use the intrinsic value method and the pro forma
disclosures required by SFAS 123. Using the fair value method the Company's net
income and earnings per share amounts would have been reduced to the pro forma
amounts as indicated below:
(In 000's except share data)
For the three months ended March 31,
2003 2002
------- -------
Net income as reported $ 895 $ 778
Total stock-based employee
compensation
expense determined under
the fair value based method
for all awards, net of related
tax effects 59 61
------- -------
Net income pro forma $ 836 $ 717
Earnings per share:
As reported:
Basic $ .40 $ .36
Diluted $ .39 $ .35
Pro forma:
Basic $ .37 $ .33
Diluted $ .36 $ .32
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to the historical information this Quarterly Report contains certain
forward-looking statements. The reader of this Quarterly Report should
understand that all such forward-looking statements are subject to various
uncertainties and risks that could affect their outcome. The Company's actual
results could differ materially from those suggested by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, variances in the actual versus projected growth in
assets, return on assets, loan losses, expenses, rates charged on loans and
earned on securities investments, rates paid on deposits, competition effects,
fee and other noninterest income earned, the economic uncertainty created by the
September 11, 2001 terrorist attacks on the World Trade Center and the United
States' war on terrorism and the war in Iraq, as well as other factors. This
entire Quarterly Report should be read to put such forward-looking statements in
context and to gain a more complete understanding of the uncertainties and risks
involved in the Company's business.
Moreover, wherever phrases such as or similar to "In Management's opinion"
"Management considers" are used, such statements are as of and based upon the
knowledge of Management at the time made and are subject to change by the
passage of time and/or subsequent events, and accordingly such statements are
subject to the same risks and uncertainties noted above with respect to
forward-looking statements.
OVERVIEW
Net income was $895,000 or $.39 per diluted share for the three months ended
March 31, 2003, compared with $778,000 or $.35 per diluted share for the three
months ended March 31, 2002, an increase of 15%. Total assets were $419,594,000
as of March 31, 2003; equating to a 24% growth in assets during the twelve
months ended March 31, 2003.
SUMMARY OF EARNINGS
NET INTEREST INCOME
The following table sets forth average balances of assets, liabilities, and
shareholders' equity and the components of interest income, interest expense and
net interest margins for the quarters ended March 31, 2003 and March 31, 2002:
8
In 000's
2003 2002
--------------------------------------- ------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
------- ------- ---------- ------- ------- ----------
Loans (1) (2) $ 246,273 $ 4,356 7.08% $ 194,523 $ 3,801 7.82%
Investment securities:
Taxable 88,757 781 3.52% 67,334 863 5.13%
Non-taxable (3) 13,595 242 7.12% 14,324 181 5.05%
--------- --------- ---- --------- --------- ----
TOTAL LOANS AND INVESTMENT
SECURITIES 348,625 5,379 6.17% 276,181 4,845 7.02%
Due from banks, time 100 1 4.00% 100 2 8.00%
Federal funds sold 22,243 63 1.13% 18,310 58 1.27%
--------- --------- --------- ---------
TOTAL EARNING ASSETS 370,968 $ 5,443 5.87% 294,591 $ 4,905 6.66%
--------- --------- --------- ---------
Cash and due from banks 23,121 16,015
Allowance for loan losses (3,348) (2,813)
Premises and equipment, net 11,110 10,035
Accrued interest receivable
and other assets 11,654 9,864
--------- ---------
TOTAL ASSETS $ 413,505 $ 327,692
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Interest bearing demand $ 155,564 $ 229 0.59% $ 118,446 $ 232 0.78%
Savings 29,643 34 0.46% 23,235 55 0.95%
Time 83,044 424 2.04% 74,035 548 2.96%
--------- --------- --------- ---------
268,251 687 1.02% 215,716 835 1.55%
Long-term debt 10,000 141 5.64% 1,615 15 3.72%
Short-term borrowings 0 0 0.00% 0 0 0.00%
--------- --------- --------- ---------
TOTAL INTEREST BEARING
LIABILITIES 278,251 $ 828 1.19% 217,331 $ 850 1.56%
--------- --------- --------- ---------
Noninterest bearing DDA 95,441 77,128
Accrued interest payable
and other liabilities 3,966 2,678
Shareholders' equity 35,847 30,555
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 413,505 $ 327,692
========= =========
NET INTEREST INCOME $ 4,615 $ 4,055
========= =========
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin (4)) 4.98% 5.51%
(1) Average loans include nonaccrual loans.
(2) Loan interest income includes loan fee income of $258 in 2003 and $264
in 2002.
(3) Average yields shown are taxable-equivalent. On a non- taxable basis,
2003 interest income was $160 with an average yield of 4.71%; in 2002
non-taxable income was $149 and the average yield was 4.16%.
(4) Net interest margin is calculated by dividing net interest income by
the average balance of total earning assets for the applicable period.
9
Net interest income represents the amount by which interest earned on earning
assets (primarily loans and investments) exceed the amount of interest paid on
deposits. Net interest income is a function of volume, interest rates and level
of non-accrual loans. Non-refundable loan origination fees are deferred and
amortized into income over the life of the loan. Net interest income before the
provision for loan losses on a taxable-equivalent basis for the three months
ended March 31, 2003 and March 31, 2002 was $4,615,000 and $4,055,000,
respectively. These results equate to a 14% increase in net interest income for
the first quarter of 2003 compared to the first quarter of 2002. Loan fee
income, which is included in interest income, was $258,000 for the three months
ended March 31, 2003, compared with $264,000 for the three months ended March
31, 2002. The average balance of earning assets increased $76,377,000 or 26%
during the twelve months ended March 31, 2003. Taxable-equivalent interest
income increased $538,000 in the first quarter of 2003 compared with the first
quarter of 2002. Increase in the volume of earning assets accounted for
$1,292,000 of this increase, offset by a decrease of $754,000 attributable to
lower rates. The average balance of interest-bearing liabilities increased
$60,920,000 or 28% during the first three months of 2003 compared with the same
period in 2002. Interest paid on interest-bearing liabilities decreased $22,000
in 2003 compared with 2002.The decrease is attributed to a decrease in rates of
$253,000 offset by an increase in the volume of deposits of $231,000. Management
does not expect a material change in the Company's net interest margin during
the next twelve months as the result of a modest increase or decrease in general
interest rates.
The following table sets forth a summary of the changes in interest earned and
interest paid for the first three months in 2003 over 2002 resulting from
changes in assets and liabilities volumes and rates. The change in interest due
to both rate and volume has been allocated in proportion to the relationship of
absolute dollar amounts of change in each.
In 000's
2003 Over 2002
---------------------------------
Volume Rate Total
------- ------- -------
Increase (Decrease) In
Interest and Fee Income
Time Deposits With Other
Financial Institutions $ 0 $ (1) ($ 1)
Investment Securities:
Taxable 275 (357) (82)
Non-Taxable (1) (9) 70 61
Federal Funds Sold 13 (8) 5
Loans 1,013 (458) 555
------- ------- -------
Total Interest and Fee Income 1,292 (754) 538
------- ------- -------
Increase (Decrease) In
Interest Expense
Deposits:
Interest Bearing
Transaction Accounts 71 (74) (3)
Savings 15 (36) (21)
Time Deposits 67 (191) (124)
------- ------- -------
Total Deposits 153 (301) (148)
Long-term Debt 78 48 126
------- ------- -------
Total Interest Expense 231 (253) (22)
------- ------- -------
Net Interest Income $ 1,061 $ (501) $ 560
======= ======= =======
(1) The interest earned is taxable-equivalent.
10
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses at a level considered
adequate to provide for losses that can be reasonably anticipated. The allowance
is increased by the provision for loan losses and reduced by net charge offs.
The allowance for loan losses is based on estimates, and ultimate losses may
vary from current estimates. These estimates are reviewed periodically and as
adjustments become necessary they are reported in earnings in the periods in
which they become known. The Company conducts credit reviews of the loan
portfolio and considers current economic conditions, historical loan loss
experience and other factors in determining the adequacy of the allowance
balance. This evaluation establishes a specific allowance for all classified
loans over $50,000 and establishes percentage allowance requirements for all
other loans, according to the classification as determined by the Company's
internal grading system. As of March 31, 2003 the allowance for loan losses of
$3,327,000 represented 1.30% of loans outstanding. As of March 31, 2002 the
allowance represented 1.46% of loans outstanding. During the three months ended
March 31, 2003 $45,000 was charged to expense for the loan loss provision,
compared with $144,000 for the same period in 2002. There were net charge-offs
of $8,000 during the first quarter of 2003 compared with no net charge-offs
during the first quarter of 2002. The following table summarizes changes in the
allowance for loan losses:
In 000's
March 31, March 31,
2003 2002
------- -------
Balance, beginning of period $ 3,290 $ 2,717
Provision for loan losses 45 144
Loans charged off (11) (1)
Recoveries of loans previously charged off 3 1
------- -------
Balance, end of period $ 3,327 $ 2,861
======= =======
Allowance for loan losses to total outstanding
loans 1.30% 1.46%
There was one loan on non-accrual status totaling $312,000 as of March 31, 2003.
There were no loans on non-accrual status as of March 31, 2002 or December 31,
2002.
NON-INTEREST INCOME
Non-interest income was $709,000, exclusive of gains on securities transactions,
for the three months ended March 31, 2003 compared with $633,000 for the same
period in 2002, a 12% increase. Non-interest income primarily consists of
service charges and other fees related to deposit accounts. The increase in
non-interest income resulted primarily from an increase in the number of deposit
accounts, transaction volumes and directly related service charges.
GAINS ON SECURITIES
Net gains of $99,000 and $66,000 for the three months ended March 31, 2003 and
March 31, 2002, respectively, resulted from the sale of several
available-for-sale securities.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended March 31, 2003 and March 31,
2002 was $4,015,000 and $3,367,000, respectively, a 19% increase. Salaries and
employee benefits expense for the three months ended March 31, 2003 and 2002
were $2,306,000 and $1,904,000, respectively, a 21% increase. The increase in
2003 resulted from increased salary rates and related benefits paid to Company
officers and employees, and an increase of approximately eight full-time
equivalent employees (FTE) from 131 at March 31, 2002 to 139 at March 31, 2003.
The increases in FTE were related to increasing sales activity and staffing new
offices. Occupancy expense for the three months ended March 31, 2003 and 2002
was $257,000 and $234,000, respectively, a 10% increase. The increase in 2003 is
attributed to opening a new branch office in January 2003. Equipment expense for
the three months ended March 31, 2003 and 2002 was $450,000 and $476,000,
respectively, representing a decrease of 5%. The decrease was primarily due to
an increased depreciation expense in 2002 resulting from accelerating
depreciation of the core banking system which was replaced in July, 2002. Other
expenses for the three months ended March 31, 2003 and March 31, 2002 were
$1,002,000 and $753,000, respectively, a 33% increase. Components of other
non-interest expenses that increased materially were legal and professional
fees. Legal fees were $110,000 for the three months ended March 31, 2003
compared with $47,000 for the comparable period in 2002, representing an
increase of 134%. Professional fees for the three months ended March 31, 2003
and 2002 were $121,000 and $36,000, respectively, representing an increase of
236%. Legal fees increased primarily due to ongoing litigation with our former
host systems provider while professional fee increases were primarily related to
outsourced information technology services.
INCOME TAXES
The Company reported a provision for income tax for the three months ended March
31, 2003 and 2002 of $386,000 and $433,000, respectively. Both the 2003 and 2002
provisions reflect tax accruals at the federal statutory rate, adjusted
primarily for the effect of the Company's investments in tax-exempt municipal
securities and bank owned life insurance policies and state taxes. The Vintage
Bank established a Real Estate Investment Trust (REIT) subsidiary in February
2003, which provided approximately $60,000 in tax benefits during the first
quarter of 2003.
BALANCE SHEET
Total assets as of March 31, 2003 were $419,594,000 compared with $337,997,000
as of March 31, 2002, and $416,458,000 at December 31, 2002 equating to a 24%
increase during the twelve months ended March 31, 2003, and a 1% increase for
the three month ended March 31, 2003. Total deposits as of March 31, 2003 were
$370,649,000 compared with $303,629,000 as of March
11
31, 2002, and $367,803,000 at December 31, 2002 representing a 22% increase
during the twelve months then ended, and a 1% increase for the three months
ended March 31, 2003. Loans outstanding as of March 31, 2003 were $255,162,000
compared with $196,195,000 as of March 31, 2003, and $237,627,000 at December
31, 2002 equating to a 30% increase during the twelve months then ended and a 7%
increase for the three months ended March 31, 2003.
LOANS HELD FOR SALE
The Company had $14 million in purchased participations in mortgage loans as of
March 31, 2003. Loans originated or purchased and considered held for sale are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
BORROWINGS
The Company had a $3,000,000 unsecured loan with Union Bank of California that
was to mature in 2003, with principal and interest payments due quarterly. The
balance at March 31, 2002 was $1,615,000 and was paid in full in June 2002 with
the proceeds of the Trust Preferred Securities.
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 interest a rate of Libor plus 3.45% and had an initial interest
rate of 5.34%; currently the interest rate is 4.74%; the Securities will mature
on 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.
LIQUIDITY AND CAPITAL ADEQUACY
The Company's liquidity is determined by the level of assets (such as cash,
Federal Funds, and unpledged investment in marketable securities) that are
readily convertible to cash to meet customer withdrawals and borrowings.
Management reviews the Company's liquidity position on a regular basis to ensure
that it is adequate to meet projected loan funding and potential withdrawal of
deposits. The Company has a comprehensive Asset/Liability Management and
Liquidity Policy, which it uses to determine adequate liquidity. As of March 31,
2003 liquid assets were 32% of total assets, compared with 36% as of March 31,
2002.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) established
ratios used to determine whether a Company is "Well Capitalized," "Adequately
Capitalized," "Undercapitalized," "Significantly Undercapitalized," or
"Critically Undercapitalized." A Well Capitalized Company has risk-based capital
of at least 10%, tier 1 risked-based capital of at least 6%, and a leverage
ratio of at least 5%. As of March 31, 2003, the Company's risk-based capital
ratio was 14.88%. The Company's tier 1 risk-based capital ratio and leverage
ratio were 13.84% and 10.78%, respectively.
As the following table indicates, the Bank currently exceeds the regulatory
capital minimum requirements. The Bank is considered "Well Capitalized"
according to regulatory guidelines.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -----------------------
(In 000's)
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- -------
As of March 31, 2003:
Total Capital (to Risk
Weighted Assets)
Consolidated $47,935 14.88% $25,776 >8.00% $32,204 >10.00%
The Vintage Bank 29,968 11.41% 21,012 >8.00% 26,265 >10.00%
Solano Bank 7,868 13.94% 4,516 >8.00% 5,645 >10.00%
Tier I Capital (to Risk
Weighted Assets)
Consolidated 44,608 13.84% 12,888 >4.00% 19,332 >6.00%
The Vintage Bank 27,104 10.32% 10,506 >4.00% 15,759 >6.00%
Solano Bank 7,405 13.12% 2,258 >4.00% 3,387 >6.00%
Tier I Capital (to
Average Assets)
Consolidated 44,608 10.78% 16,545 >4.00% 20,682 >5.00%
The Vintage Bank 27,104 8.12% 13,352 >4.00% 16,691 >5.00%
Solano Bank 7,405 10.93% 2,709 >4.00% 3,386 >5.00%
12
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. Although
the Company manages other risks, as in credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to be a
principal market risk. Other types of market risks, such as foreign currency
exchange rate risk, do not arise in the normal course of the Company's business
activities. The majority of the Company's interest rate risk arises from
instruments, positions and transactions entered into for purposes other than
trading. They include loans, securities available-for-sale, deposit liabilities,
short-term borrowings and long-term debt. Interest rate risk occurs when assets
and liabilities reprice at different times as interest rates change.
The Company manages interest rate risk through its Audit Committee which serves
as the Asset Liability Committee (ALCO). The ALCO monitors exposure to interest
rate risk on a quarterly basis using both a traditional gap analysis and
simulation analysis. Traditional gap analysis identifies short and long-term
interest rate positions or exposure. Simulation analysis uses an income
simulation approach to measure the change in interest income and expense under
rate shock conditions. The model considers the three major factors of (a) volume
differences, (b) repricing differences and (c) timing in its income simulation.
The model begins by disseminating data into appropriate repricing buckets based
on internally supplied algorithms (or overridden by calibration). Next, each
major asset and liability type is assigned a "multiplier" or beta to simulate
how much that particular balance sheet category type will reprice when interest
rates change. The model uses eight asset and liability multipliers consisting of
bank-specific or default multipliers. The remaining step is to simulate the
timing effect of assets and liabilities by modeling a month-by-month simulation
to estimate the change in interest income and expense over the next 12-month
period. The results are then expressed as the change in pre-tax net interest
income over a 12-month period for +1%, and +2% shocks.
Utilizing the simulation model to measure interest rate risk at March 31, 2003
and December 31, 2002 the Company is within the established exposure of a 4%
change in "return on equity" tolerance limit. There were no significant changes
in interest rate risk from the annual report on form 10K for December 31, 2002.
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
Based on their evaluation as of a date within 90 days of the filing of this Form
10-Q, the Company's Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect those controls subsequent to the date of their
evaluation.
Changes in Internal Controls:
There have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. We are not aware of any significant deficiencies or material
weaknesses, therefore no corrective actions were taken.
13
PART II - OTHER INFORMATION
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about September 17, 2002, the Company filed an answer and counterclaims
against Open Solutions, Inc. ("OSI") in the United States District Court,
District of Connecticut (Civil Action No. 302CV1284 JCH). The answer denies the
allegations contained in the complaint filed by OSI and the counterclaim is for
deceit/misrepresentation, breach of contract, breach of the implied covenant of
good faith and fair dealing, false advertising, unfair and deceptive business
acts or practices, and breach of warranty. The Company seeks monetary damages in
excess of $970,000, exemplary and punitive damages, and recovery of costs and
fees. There have been no material developments in the legal proceedings between
Open Solutions, Inc., and the Company (United States District Court, District of
Connecticut Civil Action No. 302CV1284JCH).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) An index of exhibits begins on page 18.
(b) On January 30, 2003, the Company filed a Current Report on Form
8-K, reporting the declaration of a stock dividend of one share for every twenty
outstanding shares and a cash dividend of twenty cents ($.20) per share. On
February 19, 2003 the Company filed a Current Report on Form 8-K, reporting its
year-end results. No financial statements were filed with the Current Reports on
Form 8-K.
14
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this quarterly report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH BAY BANCORP
A California Corporation
Date: May 12, 2003 BY:/s/ Terry L. Robinson
--------------------------------
Terry L. Robinson
President & CEO
Principal Executive Officer
Date: May 12, 2003 BY:/s/ Lee-Ann Cimino
--------------------------------
Lee-Ann Cimino
Senior Vice President
Principal Financial Officer
15
FORM 10-Q CERTIFICATION
I, Terry L. Robinson, certify that:
1. I have reviewed this quarterly report on form 10-Q of North Bank
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly presents in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly period.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13-a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or if other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003 BY:/s/ Terry L. Robinson
---------------------------------
Terry L. Robinson
President & CEO
Principal Executive Officer
16
FORM 10-Q CERTIFICATION
I, Lee-Ann Cimino, certify that:
1. I have reviewed this quarterly report on form 10-Q of North Bank
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly presents in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly period.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13-a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or if other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003 BY:/s/ Lee-Ann Cimino
----------------------------
Lee-Ann Cimino
Senior Vice President
& Chief Financial Officer
Principal Financial Officer
17
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
11 Statement re: computation of per share earnings is included in Note 3
to the unaudited condensed consolidated financial statements of
Registrant.
99.1 Certificate of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350
99.2 Certificate of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350
18