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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 June 30, 2003
Commission File No. 0-31080
NORTH BAY BANCORP
-----------------
(Exact name of registrant as specified in its charter)
California 68-0434802
---------- ----------
(State or Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
1190 Airport Road, Suite 101, Napa, California 94558
----------------------------------------------------
(Address of principal executive office including Zip Code)
Registrant's telephone number, including area code: (707) 257-8585
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
Preferred Share Purchase Rights
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the North Bay Bancorp's Common
Stock outstanding as of August 6, 2003: 2,284,563
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 and six months ended June 30, 2003 and June
30, 2002 is unaudited, but in the opinion of management reflects all adjustments
which are necessary to present fairly the financial condition of North Bay
Bancorp (Company) at June 30, 2003 and the results of operations and cash flows
for the three and six 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)
June 30, June 30, December 31,
Assets 2003 2002 2002
-------- -------- --------
Cash and due from banks $ 27,559 $ 14,135 $ 23,785
Federal funds sold 20,670 26,648 28,525
Time deposits with other financial institutions 100 100 100
-------- -------- --------
Total cash and cash equivalents 48,329 40,883 52,410
Investment Securities:
Held-to-maturity 1,250 1,293 1,272
Available-for-sale 85,839 88,713 104,473
Equity securities 1,398 1,267 1,349
-------- -------- --------
Total investment securities 88,487 91,273 107,094
Loans, net of allowance for loan losses of $3,373 in June, 2003
$3,005 in June, 2002 and $3,290 in December, 2002 256,440 206,899 234,337
Loans held-for-sale 19,538 0 0
Bank premises and equipment, net 11,166 10,647 10,800
Accrued interest receivable and other assets 11,484 12,989 11,817
-------- -------- --------
Total assets $435,444 $362,691 $416,458
======== ======== ========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $102,107 $ 86,419 $104,142
Interest bearing 282,332 231,153 263,661
-------- -------- --------
Total deposits 384,439 317,572 367,803
Accrued interest payable and other liabilities 3,300 2,724 3,312
-------- -------- --------
Total liabilities 387,739 320,296 371,115
Floating rate subordinated debenture (trust preferred securities) 10,000 10,000 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 - 2,282,521 shares in June 2003,
2,098,313 shares in June, 2002, and 2,130,288 in December, 2002 29,145 24,833 25,387
Retained earnings 7,160 6,560 8,612
Accumulated other comprehensive income 1,400 1,002 1,344
-------- -------- --------
Total shareholders' equity 37,705 32,395 35,343
Total liabilities and shareholders' equity $435,444 $362,691 $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 Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------- ------- ------- -------
Interest Income
Loans (including fees) $ 4,571 $ 4,096 $ 8,927 $ 7,897
Federal funds sold 56 98 119 156
Investment securities - taxable 735 790 1,517 1,655
Investment securities - tax exempt 132 189 292 338
------- ------- ------- -------
Total interest income 5,494 5,173 10,855 10,046
Interest Expense
Deposits 670 817 1,357 1,652
Short term borrowings 8 0 8 0
Long term debt 141 24 282 39
------- ------- ------- -------
Total interest expense 819 841 1,647 1,691
Net interest income 4,675 4,332 9,208 8,355
Provision for loan losses 45 144 90 288
------- ------- ------- -------
Net interest income after
provision for loan losses 4,630 4,188 9,118 8,067
Non interest income 728 645 1,437 1,278
Gains on securities transactions, net 331 0 430 66
------- ------- ------- -------
Total non interest income 1,059 645 1,867 1,344
Non interest expenses
Salaries and employee benefits 2,252 1,976 4,558 3,880
Occupancy 318 218 575 452
Equipment 295 466 745 942
Other 1,446 795 2,448 1,548
------- ------- ------- -------
Total non interest expense 4,311 3,455 8,326 6,822
------- ------- ------- -------
Income before provision for
income taxes 1,378 1,378 2,659 2,589
Provision for income taxes 366 501 752 934
------- ------- ------- -------
Net income $ 1,012 $ 877 $ 1,907 $ 1,655
======= ======= ======= =======
Basic earnings per common share: $ 0.45 $ 0.40 $ 0.85 $ 0.76
======= ======= ======= =======
Diluted earnings per common share: $ 0.44 $ 0.39 $ 0.82 $ 0.74
======= ======= ======= =======
Dividends Paid: $ 0.00 $ 0.00 $ 0.20 $ 0.20
======= ======= ======= =======
The accompanying notes are an integral part of these statements
4
North Bay Bancorp
Consolidated Statement of Change in Shareholders' Equity
For the Six Months Ended
June 30, 2003
(Unaudited)
(In 000's except share data)
Accumulated
Other Total
Common Common Retained Comprehensive Shareholders' Comprehensive
Shares
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 1,907 1,907 $1,907
Other comprehensive
loss, net of tax:
Change in net
unrealized losses on
available-for-sale
securities, net of tax 56 56 56
------
Comprehensive income $1,963
======
Stock options exercised 45,938 840 840
--------- ------- -------
BALANCE, JUNE 30, 2003 2,282,521 $29,145 $7,160 $1,400 $37,705
========= ======= ======= ====== =======
The accompanying notes are an integral part of these statements
5
North Bay Bancorp
Consolidated Statement of Cash Flows
Unaudited
(In 000's)
Six Months Ended June 30,
2003 2002
--------- ---------
Cash Flows From Operating Activities:
Net income $ 1,907 $ 1,655
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 778 723
Provision for loan losses 90 288
Amortization of deferred loan fees (329) (244)
Proceeds from sale of loans held-for-sale 138,764 0
Purchase of loans held-for-sale (158,302) 0
Premium amortization (discount accretion), net 594 467
Gain on securities transactions (430) (66)
Loss on sale of capital assets 0 1
Changes in:
Interest receivable and other assets 291 (2,702)
Interest payable and other liabilities 235 185
--------- ---------
Net cash (used) provided by operating activities (16,402) 307
--------- ---------
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 18,536 20,582
Proceeds from sale of securities 22,472 5,112
Purchases (22,440) (30,476)
Equity securities:
Proceeds from sale of securities 0 10
Purchases (48) (36)
Net increase in loans (21,864) (23,395)
Sale of capital assets 0 1
Capital expenditures (1,144) (2,043)
--------- ---------
Net cash used in investing activities (4,466) (30,224)
--------- ---------
Cash Flows From Financing Activities:
Net increase in deposits 16,636 25,131
Repayment of long-term debt 0 (1,846)
Stock options exercised 592 510
Proceeds from issuance of Trust Preferred Securities 0 10,000
Dividends paid (441) (406)
--------- ---------
Net cash provided by financing activities 16,787 33,389
--------- ---------
Net (decrease) increase in cash and cash equivalents (4,081) 3,472
Cash and cash equivalents at beginning of year 52,410 37,411
--------- ---------
Cash and cash equivalents at end of period $ 48,329 $ 40,883
========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,656 $ 1,856
Taxes paid $ 595 $ 991
The accompanying notes are an integral part of these statements
6
NORTH BAY BANCORP
Notes to the Consolidated Financial Statements
(Unaudited)
June 30, 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, North
Bay Statutory Trust 1 which was established in June 2002 and Vintage Capital
Trust, a subsidiary of The Vintage Bank, which was established in February 2003.
All significant intercompany transactions and balances have been eliminated.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to SEC rules or regulations; however, the Company
believes that the disclosures made are adequate to make the information
presented not misleading. The interim results for the six months ended June 30,
2003 and 2002, are not necessarily indicative of results for the full year. It
is suggested that these financial statements be read in conjunction with the
financial statements and the notes included in the Company's Annual Report for
the year ended December 31, 2002.
NOTE 2 - Commitments
The Company has outstanding standby Letters of Credit of approximately $994,000,
undisbursed real estate and construction loans of approximately $22,303,000, and
undisbursed commercial and consumer lines of credit of approximately
$52,098,000, as of June 30, 2003. The Company had outstanding standby Letters of
Credit of approximately $748,000, undisbursed real estate and construction loans
of approximately $13,672,000, and undisbursed commercial and consumer lines of
credit of approximately $48,937,000, as of June 30, 2002.
NOTE 3 - Earnings Per Common Share
The Company declared a 5% stock dividend on January 27, 2003. As a result of the
stock dividend the number of common shares outstanding and earnings per share
data was adjusted retroactively for all periods presented.
The following table (in thousands except share data) reconciles the numerator
and denominator of the Basic and Diluted earnings per share computations:
Weighted Average Per-Share
Net Income Shares Amount
---------- ------ ------
(Dollars in 000's except share data)
For the three months ended June 30, 2003
----------------------------------------
Basic earnings per share $1,012 2,263,920 $0.45
Dilutive effect of stock options 50,766
Diluted earnings per share 2,314,686 $0.44
For the three months ended June 30, 2002
----------------------------------------
Basic earnings per share $877 2,184,894 $0.40
Dilutive effect of stock options 66,093
Diluted earnings per share 2,250,987 $0.39
Weighted Average Per-Share
Net Income Shares Amount
---------- ------ ------
For the six months ended June 30, 2003
----------------------------------------
Basic earnings per share $1,907 2,251,794 $0.85
Dilutive effect of stock options 61,416
Diluted earnings per share 2,313,210 $0.82
For the six months ended June 30, 2002
----------------------------------------
Basic earnings per share $1,655 2,173,984 $0.76
Dilutive effect of stock options 61,577
Diluted earnings per share 2,235,561 $0.74
7
NOTE 4- Stock-Based Compensation
The Company uses the intrinsic value method to account for its stock option
plans (in accordance with the provisions of Accounting Principles Board Opinion
No. 25 and related interpretations). Under this method, compensation expense is
recognized for awards of options to purchase shares of common stock to employees
under compensatory plans only if the fair market value of the stock at the
option grant date (or other measurement date, if later) is greater than the
amount the employee must pay to acquire the stock. Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation", permits companies to continue using the intrinsic-value method to
account for stock option plans or adopt a fair value based method. The fair
value based method results in recognizing as expense over the vesting period the
fair value of all stock-based awards on the date of grant. The Company has
elected to continue to use the intrinsic value method and the pro forma
disclosures required by SFAS 123. Using the fair value method the Company's net
income and earnings per share amounts would have been reduced to the pro forma
amounts as indicated below:
(In 000's except share data)
For the three months ended June 30,
2003 2002
------ ----
Net income as reported $1,012 $877
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 $953 $816
Earnings per share:
As reported:
Basic $.45 $.40
Diluted $.44 $.39
Pro forma:
Basic $.44 $.36
Diluted $.42 $.35
(In 000's except share data)
For the six months ended June 30,
2003 2002
------ ------
Net income as reported $1,907 $1,655
Total stock-based employee
compensation
expense determined under
the fair value based method
for all awards, net of related
tax effects 122 118
------ ------
Net income pro forma $1,785 $1,537
Earnings per share:
As reported:
Basic $.85 $.76
Diluted $.82 $.74
Pro forma:
Basic $.79 $.71
Diluted $.77 $.36
NOTE 5 - Impact of Recently Issued Accounting Standards
On May 15, 2003, the Financial Accounting Standards Board issued 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.
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 floating rate subordinated debenture (trust preferred securities)
of $10,000,000 were reclassified as liabilities on July 1, 2003.
8
FASB Interpretation No. 46, Consolidation of Variable Interest Entities. This
Interpretation addresses consolidation by business enterprises of variable
interest entities, which have one or both of the following characteristics: 1)
the equity investment at risk is not sufficient to permit the entity to finance
its activities without additional financial support from other parties, or 2)
the equity investors lack one or more of the following essential characteristics
of a controlling financial interest: a) the direct or indirect ability to make
decisions about the entity's activities through voting or similar rights, b) the
obligation to absorb the expected losses of the entity if they occur, or c) the
right to receive the expected residual returns of the entity if they occur. The
Interpretation requires existing variable interest entities to be consolidated
if those entities do not effectively disburse risks among parties involved. The
Company does not expect adoption to have a material impact on the financial
position of the Company.
9
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.
CRITICAL ACCOUNTING POLICIES
In preparing its consolidated financial statements, the Company is required to
make judgments and estimates that may have a significant impact upon its
financial results. Certain accounting policies require the Company to make
significant estimates and assumptions, which have a material impact on the
carrying value of certain assets and liabilities, and are considered critical
accounting policies. The estimates and assumptions used are based on the
historical experiences and other factors, which are believed to be reasonable
under the circumstances. Actual results could differ significantly from these
estimates and assumptions , which could have a material impact on the carrying
value of assets and liabilities at the balance sheet dates and results of
operations for the reporting periods. The Company's determination of the
adequacy of its allowance for loan losses is particularly susceptible to
management's judgment and estimates. For further information, see Provision and
Allowance for Loan Losses on page 14.
10
OVERVIEW
Net income was $1,012,000 or $.44 per diluted share for the three months ended
June 30, 2003, compared with $877,000 or $.39 per diluted share for the three
months ended June 30, 2002, an increase of 15%. Net income was $1,907,000 or
$.82 per diluted share for the six months ended June 30, 2003, compared with
$1,655,000 or $.74 per diluted share for the six months ended June 30, 2002, an
increase of 15%. Total assets were $435,444,000 as of June 30, 2003; equating to
a 20% growth in assets during the twelve months ended June 30, 2003.
SUMMARY OF EARNINGS
NET INTEREST INCOME
The following table provides a summary of the components of interest income,
interest expense and net interest margins for the six months ended June 30, 2003
and June 30, 2002:
(In 000's)
2003 2002
---- ----
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
----------------------------------------------------------------------------
Loans (1) (2) $257,598 $8,925 6.93% $200,580 $7,897 7.87%
Investment securities:
Taxable 85,865 1478 3.44% 68,833 1,652 4.80%
Non-taxable (3) 13,585 434 6.39% 14,238 406 5.70%
------- ------- ------- -------
TOTAL LOANS AND INVESTMENT
SECURITIES 357,048 10,837 6.07% 283,651 9,955 7.02%
Due from banks, time 100 2 4.00% 100 3 6.00%
Federal funds sold 21,820 119 1.09% 19,844 156 1.57%
------- ------- ------- -------
TOTAL EARNING ASSETS 378,968 $10,958 5.78% 303,595 $10,114 6.66%
------- ------- ------- -------
Cash and due from banks 24,292 18,606
Allowance for loan losses (3,353) (2,885)
Premises and equipment, net 11,171 10,262
Accrued interest receivable
and other assets 11,766 10,859
------- ------
TOTAL ASSETS $442,844 $340,437
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Interest bearing demand $162,083 $471 0.58% $122,104 $500 0.82%
Savings 30,535 71 0.47% 23,904 113 0.95%
Time 82,012 815 1.99% 75,699 1,039 2.75%
------- ------- ------- -------
274,630 1,357 221,707 1,652
Long-term debt 10,000 282 5.64% 1,709 39 4.56%
Short-term borrowings 1,500 8 1.07% 0 0 0.00%
------- ------- ------- -------
11,500 290 1,709 39
TOTAL INTEREST BEARING
LIABILITIES 286,130 $1,647 1.15% 223,416 $1,691 1.51%
------- ------- ------- -------
Noninterest bearing DDA 96,576 82,102
Accrued interest payable
and other liabilities 3,745 3,937
Shareholders' equity 36,393 30,982
------ ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $422,844 $340,437
======== ========
NET INTEREST INCOME $9,311 $8,423
====== ======
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin (4)) 4.91% 5.55%
11
(1) Average loans would include nonaccrual loans. The Company had no nonaccrual
loans during 2003 or 2002.
(2) Loan interest income includes loan fee income of $538 and $563 for the six
months ended June 30, 2003 and June 30, 2002, respectfully.
(3) Average yields shown are on a taxable-equivalent basis. On a non-taxable
basis, 2003 interest income was $331 with an average yield of 4.87%; in 2002, on
a non-taxable basis, interest income was $338 with an average yield of 4.75%.
(4) Net interest margin is calculated by dividing net interest income by the
average balance of total earning assets for the applicable period
Net interest income represents the amount by which interest earned on earning
assets (primarily loans and investments) exceeds the amount of interest paid on
deposits. Net interest income is a function of volume, interest rates and level
of non-accrual loans. Non-refundable loan origination fees are deferred and
amortized into income over the life of the loan.
Net interest income before the provision for loan losses on a taxable-equivalent
basis for the three months ended June 30, 2003 and June 30, 2002 was $4,696,000
and $4,364,000, respectively. These results equate to a 7% increase in net
interest income for the second quarter of 2003 compared to the second quarter of
2002. Loan fee income, which is included in interest income from loans, was
$280,000 for the three months ended June 30, 2003, compared with $299,000 for
the three months ended June 30, 2002. Net interest income before the provision
for loan losses on a taxable-equivalent basis for the six months ended June 30,
2003 and June 30, 2002 was $9,311,000 and $8,423,000, respectively. These
results equate to an 11% increase in net interest income for the first six
months of 2003 compared to the same period in 2002. Loan fee income, which is
included in interest income from loans, was $538,000 for the six months ended
June 30, 2003, compared with $563,000 for the six months ended June 30, 2002.
Taxable-equivalent interest income increased $310,000 or 6% in the second
quarter of 2003 compared with the same period of 2002. The net increase of
$310,000 was attributed to an increase in the volume of earning assets
accounting for $1,368,000 of this increase, offset by a decrease of $1,058,000
attributable to lower rates. Interest paid on interest-bearing liabilities
decreased $22,000 in the second quarter of 2003 compared with the second quarter
of 2002. Although increases in the volume of deposits and other borrowings
accounted for an increase of $162,000 it was offset by $184,000 attributed to
lower rates. The average balance of earning assets increased $75,373,000 or 25%
during the twelve months ended June 30, 2003. Taxable-equivalent interest income
increased $844,000 or 8% in the first six months of 2003 compared with the same
period of 2002. The net increase of $844,000 was attributed to an increase in
the volume of earning assets accounting for $2,644,000 of this increase, offset
by a decrease of $1,800,000 attributable to lower rates. The average balance of
interest-bearing liabilities increased $62,714,000 or 28% during the first six
month of 2003 compared with the same period in 2002. Interest paid on
interest-bearing liabilities decreased $44,000 in 2003 compared with 2002.
Although increases in the volume of deposits and other borrowings accounted for
an increase of $475,000 it was offset by $519,000 attributed to lower rates.
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.
12
The following table sets forth a summary of the changes in interest earned and
interest paid for the first six 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 409 (583) (174)
Non-Taxable (1) (19) 47 28
Federal Funds Sold 15 (52) (37)
Loans 2,239 (1,211) 1,028
------- ------- -------
Total Interest and Fee Income 2,644 (1,800) 844
------- ------- -------
Increase (Decrease) In
Interest Expense
Deposits:
Interest Bearing
Transaction Accounts 165 (194) (29)
Savings 32 (74) (42)
Time Deposits 89 (313) (224)
------- ------- -------
Total Deposits 286 (581) (295)
Long-term Debt 189 54 243
Short-term Borrowings 0 8 8
------- ------- -------
Total Interest Expense 472 (519) (44)
------- ------- -------
Net Interest Income $ 2,169 $(1,281) $ 888
======= ======= =======
(1) The interest earned is taxable-equivalent.
13
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 June 30, 2003 the allowance for loan losses of
$3,373,000 represented 1.30% of loans outstanding. As of June 30, 2002, the
allowance represented 1.43% of loans outstanding. During the three months ended
June 30, 2003 $45,000 was charged to expense for the loan loss provision,
compared with $144,000 for the same period in 2002. During the six months ended
June 30, 2003, $90,000 was charged to expense for the loan loss provision,
compared with $288,000 for the same period in 2002.There were net charge-offs of
$7,000 during the first six months of 2003 compared with no net charge-offs
during the first six months of 2002.
The following table summarizes changes in the allowance for loan losses:
(In 000's)
For the six months ended
June 30, 2003 June 30, 2002
Balance, beginning of period $3,290 $2,717
Provision for loan losses 90 288
Loans charged off (11) (2)
Recoveries of loans previously charged off 4 2
------ ------
Balance, end of period $3,373 $3,005
====== ======
Allowance for loan losses to total outstanding loans 1.30% 1.43%
There were no loans on non-accrual status as of June 30, 2003, June 30, 2002 or
December 31, 2002. There were no loans 90 days or more past due and still
accruing interest or restructured loans at June 30, 2003, June 30, 2002 or
December 31, 2002.
NON-INTEREST INCOME
Non-interest income, excluding gains on the sale of securities, was $728,000 for
the three months ended June 30, 2003 compared with $645,000 for the same period
in 2002, a 13% increase. Non-interest income, excluding gains on the sale of
securities was $1,437,000 for the six months ended June 30, 2003 compared with
$1,278,000 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 $331,000 and $430,000 for the three and six months ended June 30,
2003, respectively, resulted from the sale of several available-for-sale
securities. Net gains of $66,000 for the six months ended June 30, 2002 also
resulted from the sale of several available-for-sale securities. There were no
gains or losses for the three months ended June 30, 2002.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended June 30, 2003 and June 30, 2002
was $4,311,000 and $3,455,000, respectively, a 25% increase. Non-interest
expense for the six months ended June 30, 2003 and June 30, 2002 was $8,326,000
and $6,822,000, respectively, a 22% increase. Salaries and employee benefits
expense for the three months ended June 30, 2003 and 2002 were $2,252,000 and
$1,976,000, respectively, a 14% increase. Salaries and employee benefits expense
for the six months ended June 30, 2003 and 2002 were $4,558,000 and $3,880,000,
respectively, a 17% increase. The increase in 2003 resulted from increased
salaries paid to Company officers and employees, and an increase of
approximately ten full-time equivalent (FTE) employees from 134 at June 30, 2002
to 144 at June 30, 2003. The increases in FTE were related to increasing sales
activity and staffing new offices. Occupancy expense for the three months ended
June 30, 2003 and 2002 were $318,000 and $218,000, respectively, a 46% increase.
Occupancy expense for the six months ended June 30, 2003 and 2002 were $575,000
and $452,000, respectively, representing a 27% increase. The increase in 2003 is
attributed to opening a branch office in March 2003 and obtaining rented
locations for Executive and Administration offices. Equipment expenses for the
three months ended June 30, 2003 and 2002 was $295,000 and $466,000,
respectively, representing a decrease of 37%. Equipment expenses for the six
months ended June 30, 2003 and 2002 was $745,000 and $942,000, respectively, a
decrease of 21%. The decrease in 2003 was primarily due to increased
depreciation expense in 2002 resulting from accelerated depreciation on the host
banking system, which was replaced in July 2002. Other expenses for the three
months ended June 30, 2003 and June 30, 2002 were $1,446,000 and $795,000,
respectively, approximately an 82% increase. Other expenses for the six months
ended June 30, 2003 and June 30, 2002 were $2,448,000 and $1,548,000,
respectively, a 58% increase. Components of other non-interest expenses that
increased materially were legal and professional fees. Legal fees were $290,000
and $400,000 for the three and six months ended June 30, 2003, respectively.
This compares with $53,000 and $100,000 for the same periods in 2002. The
increase in legal fees is primarily due to litigation with our former host
systems provider. Now that the suit has been settled, legal fees are expected to
be proportionately less the remainder of 2003. Professional fees were $187,000
and $308,000 for the three and six months ended June 30, 2003, respectively.
This compares with $40,000 and $76,000 for the same periods in 2002. The
increase in professional fees were primarily the result of outsourced
information technology and consulting services.
14
INCOME TAXES
The Company reported a provision for income tax for the three months ended June
30, 2003 and 2002 of $366,000 and $501,000, respectively. The Company reported a
provision for income tax for the six months ended June 30, 2003 and 2002 of
$752,000 and $934,000, respectively. Both the 2003 and 2002 provisions reflect
tax accruals at statutory rates for federal income taxes, adjusted primarily for
the effect of the Company's investments in tax-exempt municipal securities, bank
owned life insurance policies and state taxes. The Vintage Bank established a
Real Estate Investment Trust (REIT) subsidiary in February 2003, which provided
approximately $60,000 in tax benefits during the first quarter of 2003 and an
additional $118,000 in tax benefits during the second quarter of 2003.
BALANCE SHEET
Total assets as of June 30, 2003 were $435,444,000 compared with $362,691,000 as
of June 30, 2002, and $416,458,000 at December 30, 2002 equating to a 20%
increase during the twelve months ended June 30, 2003, and a 5% increase for the
six months ended June 30, 2003. Total deposits as of June 30, 2003 were
$384,439,000 compared with $317,572,000 as of June 30, 2002, and $367,803,000 at
December 30, 2002 representing a 21% increase during the twelve months then
ended, and a 5% increase for the six months ended June 30, 2003. Gross loans
outstanding as of June 30, 2003 were $259,813,000 compared with $209,904,000 as
of June 30, 2002, and $237,627,000 at December 30, 2002 equating to a 24%
increase during the twelve months then ended and a 9% increase for the six
months ended June 30, 2003.
LOANS HELD FOR SALE
The Company had $19.5 million in purchased participations in mortgage loans as
of June 30, 2003. Loans originated or purchased and considered held for sale are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
TRUST PREFERRED SECURITIES
On 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 investment in unpledged marketable securities) that are
readily convertible to cash to meet customer withdrawals and borrowings.
Management reviews the Company's liquidity position on a regular basis to ensure
that it is adequate to meet projected loan funding and potential withdrawal of
deposits. The Company has a comprehensive Asset/Liability Management and
Liquidity Policy, which it uses to determine adequate liquidity. As of June 30,
2003 liquid assets were 31% of total assets, compared with 36% as of June 30,
2002.
The Federal Deposit Insurance Corporation Improvement Act (FDICA) 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 June 30, 2003, the Company's risk-based capital
ratio was 14.49%. The Company's tier 1 risk-based capital ratio and leverage
ratio were 13.50% and 11.00%, respectively.
15
As the following table indicates, the Company currently exceeds the regulatory
capital minimum requirements. The Company 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 June 30, 2003:
Total Capital (to Risk
Weighted Assets)
Consolidated $49,678 14.49% $27,432 >8.00% $34,290 >10.00%
- -
The Vintage Bank 29,726 11.24% 22,275 >8.00% 27,843 >10.00%
- -
Solano Bank 7,384 12.72% 4,920 >8.00% 6,150 >10.00%
- -
Tier I Capital (to Risk
Weighted Assets)
Consolidated 46,305 13.50% 13,716 >4.00% 20,574 >6.00%
- -
The Vintage Bank 28,425 10.21% 11,137 >4.00% 16,706 >6.00%
- -
Solano Bank 7,315 11.90% 2,460 >4.00% 3,690 >6.00%
- -
Tier I Capital (to
Average Assets)
Consolidated 46,305 11.00% 16,840 >4.00% 21,050 >5.00%
-
The Vintage Bank 28,425 9.65% 13,639 >4.00% 17,049 >5.00%
- -
Solano Bank 7,315 8.34% 3,032 >4.00% 3,790 >5.00%
- -
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. Although
the Company manages other risks, as in credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to be a
principal market risk. Other types of market risks, such as foreign currency
exchange rate risk, do not arise in the normal course of the Company's business
activities. The majority of the Company's interest rate risk arises from
instruments, positions and transactions entered into for purposes other than
trading. They include loans, securities available-for-sale, deposit liabilities,
short-term borrowings and long-term debt. Interest rate risk occurs when assets
and liabilities reprice at different times as interest rates change.
The Company manages interest rate risk through its Audit Committee, which serves
as the Asset Liability Committee (ALCO). The ALCO monitors exposure to interest
rate risk on a quarterly basis using both a traditional gap analysis and
simulation analysis. Traditional gap analysis identifies short and long-term
interest rate positions or exposure. Simulation analysis uses an income
simulation approach to measure the change in interest income and expense under
rate shock conditions. The model considers the three major factors of (a) volume
differences, (b) repricing differences and (c) timing in its income simulation.
The model begins by disseminating data into appropriate repricing buckets based
on internally supplied algorithms (or overridden by calibration). Next, each
major asset and liability type is assigned a "multiplier" or beta to simulate
how much that particular balance sheet category type will reprice when interest
rates change. The model uses eight asset and liability multipliers consisting of
bank-specific or default multipliers. The remaining step is to simulate the
timing effect of assets and liabilities by modeling a month-by-month simulation
to estimate the change in interest income and expense over the next 12-month
period. The results are then expressed as the change in pre-tax net interest
income over a 12-month period for +1%, and +2% shocks.
Utilizing the simulation model to measure interest rate risk at June 30, 2003
and December 31, 2002 the Company is within the established exposure of a 4%
change in "return on equity" tolerance limit. There were no significant changes
in interest rate risk from the annual report on form 10-K for December 31, 2002.
16
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
Based on their evaluation as of June 30, 2003, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect those controls subsequent to
the date of their evaluation.
Changes in Internal Controls:
There have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. We are not aware of any significant deficiencies or material
weaknesses; therefore no corrective actions were taken.
17
PART 2
OTHER INFORMATION
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 25, 2002, Open Solutions, Inc. ("OSI") filed a complaint against the
Company in the United States District Court, District of Connecticut (Civil
Action No. 302CV1284 JCH). The Company raised appropriate affirmative defenses
and cross-complained. On June 17, 2003, the proceedings were settled and the
action dismissed. The settlement had no material impact on earnings.
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
(a) The Fourth Annual Meeting of the shareholders of the Company was
held on May 8, 2003.
(b) Proxies for the meeting were solicited pursuant to Regulation 14A
under the Act, there were no solicitations in opposition to management's
nominees as listed in the proxy statement, and all such nominees were elected.
(b) In addition to the election of directors and aside from procedural
matters, the following matters were voted upon at the annual
shareholders' meeting:
o A proposal to amend The Company's Bylaws to create a
classified Board of Directors. The affirmative vote of a
majority of the Company's outstanding shares was required for
approval. At the Fourth Annual Meeting, the proposal to amend
the Bylaws to create a classified Board of Directors was
approved with 1,197,590 affirmative votes. There were 34,042
negative votes and 11,641 abstaining votes.
o A proposal to amend the Company's Bylaws to eliminate
cumulative voting. The affirmative vote of a majority of the
Company's outstanding shares was required for approval. At the
Fourth Annual Meeting, the proposal to amend the Bylaws to
eliminate cumulative voting was approved with 1,130,282
affirmative votes. There were 103,281 negative votes and 9,710
abstaining votes.
(d) There was no settlement between the Company and any other person
terminating any solicitation subject to Rule 14a-11.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) An index of exhibits begins on page 20.
(b) On May 7, 2003 the Company filed a Current Report on Form 8-K,
reporting the issuance of a press release announcing the Company's
earning for the quarter ended March 31, 2003. No Financial statements
were filed the Current Report on Form 8-K.
18
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: August 6, 2003 BY:/s/ Terry L. Robinson
---------------------------------
Terry L. Robinson
President & CEO
Principal Executive Officer
Date: August 6, 2003 BY:/s/ Lee-Ann Cimino
---------------------------------
Lee-Ann Cimino
Senior Vice President
Principal Financial Officer
19
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Statement re: computation of per share earnings is included in
Note 3 to the unaudited condensed consolidated financial
statements of Registrant.
31.1 Certificate of Principal Executive Officer Pursuant to SEC Release
33-8238
31.2 Certificate of Principal Financial Officer Pursuant to SEC Release
33-8238
32.1 Certificate of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350
32.2 Certificate of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350
20