10-Q 1 p17095_10q.txt QUARTERLY REPORT 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