EX-13 7 p18310_ex13.txt NORTH BAY BANCORP 2003 AR TO SHAREHOLDERS. FORWARD LOOKING STATEMENT This annual report contains forward-looking statements with respect to the financial condition, results of operation and business of North Bay Bancorp and its subsidiaries. These include, but are not limited to, statements that relate to or are dependent on estimates or assumptions relating to the prospects of loan growth, credit quality and certain operating efficiencies resulting from the operations of The Vintage Bank and Solano Bank. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressure among financial services companies increases significantly; (2) changes in the interest rate environment reduce interest margins; (3) general economic conditions, internationally, nationally or in the State of California are less favorable than expected; (4) legislation or regulatory requirements or changes adversely affect the business in which the combined organization will be engaged; and (5) other risks detailed in the North Bay Bancorp reports filed with the Securities and Exchange Commission. 1 -------------------------------------------------------------------------------- TABLE OF CONTENTS -------------------------------------------------------------------------------- To Our Shareholders Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosure about Market Risk Description of Operations Market Information Consolidated Balance Sheets Consolidated Income Statements Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Consolidated Notes to Financial Statements Report of Independent Auditors Directors Corporate Information 2 -------------------------------------------------------------------------------- TO OUR SHAREHOLDERS -------------------------------------------------------------------------------- As we grow into the physical infrastructure put in place this and prior years, we anticipate our profitability will continue to improve. Our 2003 results reflect the solid foundation laid in prior years and new initiatives implemented to stimulate future growth. Our sales teams continued to do an exceptional job of developing new business relationships and expanding existing ones, while our lending teams significantly increased loan production capacity and maintained exceptionally high credit quality. Highlights for the year include the following: o Net interest income increased 10% to $19.3 million. o Pre-tax income rose 15% to $6.6 million. o Net income increased 18% to $4.4 million. o Earnings per share increased 15% to $1.79. o Total loans grew 29% to $306.7 million. o Solano Bank was solidly profitable by year-end and continues to build momentum. o The Vintage Bank generated excellent loan growth and continues to gain market share. o Asset quality remained exemplary with zero non-performing assets at year end. We took numerous actions to expand and improve our franchise in 2003 including opening a new Vintage Bank Gateway office, located in the growing industrial area south of downtown Napa; we occupied new administrative offices in and near the Gateway branch and relocated Solano Bank's Fairfield office to a much more dynamic location. While the investment for these expansions increased costs in 2003, we are confident they will provide solid contributions to earnings in the future. In addition to the start-up costs for our franchise expansion, two unusual items impacted 2003 earnings. First, we incurred abnormally high legal fees in the first half of the year due to litigation with our former data processing provider. We also incurred significant professional fees related to tax and technology-related consulting. With our expansion efforts during the past few years now beginning to contribute to profitability, excluding any unusual events, we anticipate our operating costs will level out. Our net interest margin dropped more than we had anticipated in 2003 to 4.99% from 5.31% in 2002, as declining interest rates impacted yields on loans and investments more than the cost of funds. Fourth quarter margin increased to 5.14% from 4.94% in the fourth quarter of 2002. More than 25% of our deposits are in non-interest bearing accounts, and an additional 50% of deposits are in money market and NOW accounts which are our second most efficient funding source. While interest rates have remained relatively stable in the first part of 2004, competition for deposits is increasing in our markets, which could further impact margins this year. Over the course of last year, we recognized that in order to reach our profit targets and continue to generate record results, we needed to be diligent in controlling discretionary expenses and staffing levels. Consequently, our number of full time equivalent employees was below budget and discretionary spending was kept to a minimum. Our efficiency ratio for the year reflected the unusual items referred to above and rose to 69.00% from 67.71% in 2002. The cost control efforts, however, generated solid improvement in our efficiency ratio in the fourth quarter, dropping to 59.43% from 65.24% in the fourth quarter of 2002. In June 2003, we took further steps to improve our management processes to bring more structure and accountability to our operations and to facilitate communications as we grow. With some professional assistance, we developed an organizational model that more logically groups functions within departments and accommodates future growth. These changes are producing sound results and we anticipate further benefits from them in 2004. We have also decided to simplify and streamline our corporate structure by combining our three Boards of directors into a single Board. The charters of The Vintage Bank and Solano Bank will be combined, 3 conditional on obtaining regulatory approval. The Board of Directors of North Bay will be expanded from 9 members to 16 with new seats filled by members of the Boards of The Vintage Bank and Solano Bank. We believe these changes will greatly enhance the efficiency of our management team in directing the operations of both banks and the holding company by saving costs and freeing senior management to devote more time and attention to customers and prospects. These structural changes will not affect the day-to-day operations of our banks and should be transparent to our customers and employees. As we grow into the physical infrastructure put in place this and prior years, we anticipate our profitability will continue to improve. Our staffing levels and branch footprint now have more than adequate capacity to accommodate our growth plans for the next few years and take advantage of the opportunities in our markets. Our strategy and vision remain on course. We continue to seek opportunities for expansion in contiguous markets while gaining market share in our existing markets. We are committed to being the premier financial services provider in markets we serve, to skillfully use technology to competitive advantage and to generate financial returns that exceed industry peers. I am grateful to our employees for their hard work, to the directors of North Bay, The Vintage Bank and Solano Bank for their dedication, to our customers for their continuing partnership, and to our shareholders for entrusting us with their capital. We successfully met the challenges of 2003 and now are looking forward to a fast-paced and prosperous year in 2004. Sincerely, Terry Robinson President and CEO 4 -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA -------------------------------------------------------------------------------- The following table presents a summary of selected consolidated data for North Bay Bancorp and subsidiaries (the Company) for the five years ended December 31, 2003. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto appearing elsewhere in the annual report:
(In 000's except share data) 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- STATEMENTS OF OPERATIONS DATA: Interest income $ 22,251 $ 21,179 $ 20,307 $ 16,700 $ 13,688 Interest expense 2,995 3,691 5,887 5,612 4,364 ---------- ---------- ---------- ---------- ---------- Net interest income 19,256 17,488 14,420 11,088 9,324 Provision for loan losses 238 576 447 385 240 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 19,018 16,912 13,973 10,703 9,084 Noninterest income 3,847 3,111 2,691 2,140 1,777 Noninterest expense 16,315 14,316 11,955 8,583 6,496 Provision for income taxes 2,179 1,999 1,687 1,647 1,650 ---------- ---------- ---------- ---------- ---------- Net Income $ 4,371 $ 3,708 $ 3,022 $ 2,613 $ 2,715 ========== ========== ========== ========== ========== BASIC PER SHARE DATA: (1) Earnings per share $ 1.83 $ 1.60 $ 1.33 $ 1.23 $ 1.40 Average shares outstanding 2,382,093 2,313,461 2,264,170 2,123,830 1,943,490 DILUTED PER SHARE DATA: (1) Earnings per share $ 1.79 $ 1.56 $ 1.32 $ 1.21 $ 1.36 Average shares outstanding 2,439,604 2,371,214 2,288,948 2,159,636 1,989,457 BALANCE SHEET DATA: Total assets $ 459,482 $ 416,458 $ 326,806 $ 247,469 $ 197,106 Net loans 303,139 234,337 183,548 150,008 120,166 Total deposits 406,445 367,803 292,441 216,638 172,380 Shareholders' equity 39,441 35,343 29,980 26,636 18,090
(1) All per share amounts have been adjusted to reflect the 5% stock dividends declared January 28, 1999, January 8, 2000, January 29, 2001, January 28, 2002, January 27, 2003 and January 26, 2004. 5 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION -------------------------------------------------------------------------------- AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENT -------------------------------------------------------------------------------- This Annual Report contains statements relating to future results of the Company that are considered to be "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, loan loss reserve adequacy, simulation of changes in interest rates and litigation results. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within the Company's markets, equity and fixed income market fluctuations, personal and corporate customers' bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological change, changes in law, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required as well as other risks and uncertainties. These forward-looking statements speak only as of the date on which these statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which these statement is made or to reflect the occurrence of unanticipated events. Moreover, wherever phrases such as or similar to "in Managements opinion", or "Management considers" are used, these statements are as of and based upon knowledge of Management, at the time made and are subject to change by the passage of time and/or subsequent events, and accordingly such statements are subject to the same risk and uncertainties noted above with respect to forward-looking statements. These financial statements should be read in conjunction with the financial statements and the notes included herein. OVERVIEW -------------------------------------------------------------------------------- North Bay Bancorp, organized November 1, 1999, is the holding company for The Vintage Bank and Solano Bank (Banks), which are wholly owned subsidiaries. The consolidated entity (the Company) reported net income of $4,371,000 or $1.79 per diluted share, in 2003 compared with $3,708,000 or $1.56 per diluted share, in 2002 and $3,022,000 or $1.32 per diluted share, in 2001, equating to a return on average assets of 1.00%, .99% and 1.00% for years 2003, 2002 and 2001, respectively. The return on average equity was 11.70% in 2003 compared with 11.36% and 10.61% in 2002 and 2001, respectively. As of December 31, 2003, total assets were $459,482,000 compared with total assets of $416,458,000 and $326,806,000 at year end 2002 and 2001, respectively, representing a 10% increase in 2003 and a 27% increase in 2002. Deposits increased 11% in 2003 compared with a 26% increase in 2002. Loans, net of the allowance for loan losses, increased 29% in 2003 compared with a 28% increase in 2002. CRITICAL ACCOUNTING POLICIES AND ESTIMATES -------------------------------------------------------------------------------- The Company's accounting policies are integral to understanding the results reported. The most complex accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. The Company has established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments. 6 Allowance for Loan Losses. The allowance for loan losses represents management's best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged-off, net of recoveries. We evaluate our allowance for loan loss on a monthly basis. We believe that the allowance for loan loss is a "critical accounting estimate" because it is based upon management's assessment of various factors affecting the collectibility of the loans, including current and projected economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans and commitments. We determine the appropriate level of the allowance for loan losses, primarily on an analysis of the various components of the loan portfolio, including all significant credits on an individual basis. We segment the loan portfolios into as many components as practical. Each component would normally have similar characteristics, such as risk classification, past due status, type of loan, industry or collateral. Management has an established methodology for calculating the level of the allowance for loan losses. We analyze the following components of the portfolio and provide for them in the allowance for loan losses: Specific allowances defined as: o Management assessment of all loans classified as substandard or worse, with an outstanding balance of $100,000. o A specific allowance is provided for any amount by which the loan's collateral fair value is insufficient to cover the loan; or discounting estimated further cash flows, or by observing the loan's market price if it is of a kind for which there is a secondary market. General allowance defined as: o An allowance for all loans outstanding within the portfolio and not contained in the specific reserve Judgmental allowance defined as: o National and local economic trends and conditions o Trends in volume of loans o Changes in underwriting standards and/or lending personnel o Concentrations of credit within the portfolio No assurance can be given that the company will not sustain loan losses that are sizable in relation to the amount reserved, or that subsequent evaluations of the loan portfolio will not require an increase in the allowance. Prevailing factors in association with the methodology may include improvement or deterioration of individual commitments or pools of similar loans, or loan concentrations. Available for Sale Securities. SFAS 115 requires that Available for Sale securities be carried at fair value. We believe this is a "critical accounting estimate" in that the fair value of a security is based on quoted market prices or if quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments. Adjustments to the Available for Sale securities fair value impact the consolidated financial statements by increasing or decreasing assets and stockholders' equity. Deferred Tax Assets. Deferred income taxes reflect the estimated future tax effects of temporary differences between the reported amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. 7 SUMMARY OF EARNINGS -------------------------------------------------------------------------------- Net Interest Income Net interest income before provision for loan losses was $19,256,000, $17,488,000 and $14,420,000 in 2003, 2002 and 2001, respectively, representing increases of 10% in 2003 and 21% in 2002. The following table sets forth average daily balances of assets, liabilities, and shareholders' equity during 2003, 2002 and 2001, along with total interest income earned and expense paid, and the average yields earned or rates paid thereon and the net interest margin for the years ended December 31, 2003, 2002 and 2001.
(In 000's) December 31, 2003 December 31, 2002 December 31, 2001 ---------------------------- ----------------------------- ------------------------------ Average Income/ Rate/ Average Income/ Rate/ Average Income/ Rate/ Balance Expense Yield Balance Expense Yield Balance Expense Yield -------- ------- ----- -------- ------- ----- -------- ------- ------ ASSETS Loans (1) $277,220 $18,782 6.78% $212,735 $16,602 7.80% $174,050 $15,319 8.80% Investment securities: Taxable 78,457 2,535 3.23% 78,186 3,490 4.46% 57,501 3,395 5.90% Non-taxable (2) 16,948 958 5.65% 14,002 868 6.20% 13,797 739 5.36% -------- ------- -------- ------- -------- ------- Total loans and investment 372,625 22,275 5.98% 304,923 20,960 6.87% 245,348 19,453 7.93% securities Due from banks, time 100 2 2.00% 100 5 5.59% 100 7 6.86% Federal funds sold 18,104 207 1.14% 28,138 418 1.49% 26,577 1,012 3.81% -------- ------- -------- ------- -------- ------- Total earning assets 390,829 22,484 5.75% 333,161 21,383 6.42% 272,025 20,472 7.53% -------- ------- -------- ------- -------- ------- Cash and due from banks 28,216 20,376 17,124 Allowance for loan losses (3,403) (3,031) (2,507) Premises and equipment, net 11,125 10,484 8,006 Accrued interest receivable and other assets 12,157 11,951 6,928 -------- -------- -------- Total assets $438,924 $372,941 $301,576 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing demand $176,724 916 0.52% $136,134 1,118 0.82% $105,485 2,164 2.05% Savings 32,678 107 0.33% 25,798 228 0.88% 19,381 234 1.21% Time 77,198 1,430 1.85% 77,112 2,006 2.60% 72,291 3,318 4.59% -------- ------- -------- ------- -------- ------- Total deposits 286,600 2,453 0.86% 239,044 3,352 1.40% 197,157 5,716 2.90% Borrowings 10,750 542 5.04% 6,468 339 5.25% 2,212 171 7.72% Total interest bearing liabilities 297,350 2,995 1.01% 245,512 3,691 1.50% 199,369 5,887 2.95% -------- ------- -------- ------- -------- ------- Noninterest bearing demand 100,342 91,763 71,798 Accrued interest payable and other liabilities 3,876 3,039 1,919 Shareholders' equity 37,356 32,627 28,490 -------- -------- -------- Total liabilities and shareholders' equity $438,924 $372,941 $301,576 ======== ======== ======== Net interest income $19,489 $17,692 $14,585 Net interest income to average earning assets (Net interest margin (3)) 4.99% 5.31% 5.36%
(1) Loan interest income includes loan fee income of $1,119 in 2003, $1,167 in 2002 and $1,053 in 2001. (2) Average yields shown are taxable-equivalent. On a non-taxable basis, 2003 interest income was $725 with an average yield of 4.28%, 2002 interest income was $663 with an average yield of 4.74%; and in 2001 non-taxable interest income was $575 and the average yield was 4.16%. (3) Net interest margin is calculated by dividing net interest income by the average balance of total earning assets for the applicable year. 8 The following table sets forth a summary of the changes in interest earned and interest paid in December 31, 2003 over 2002, December 31, 2002 over 2001 and December 31, 2001 over 2000 resulting from changes in assets and liabilities volumes and rates. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.
(In 000's) 2003 over 2002 2002 over 2001 2001 over 2000 ------------------------ ----------------------- ------------------------ Volume Rate Total Volume Rate Total Volume Rate Total ------------------------ ----------------------- ------------------------ Increase (decrease) in Interest and fee income Loans $5,032 ($2,852) $2,180 $3,402 ($2,119) $1,283 $3,016 ($624) $2,392 Time deposits with other financial institutions 0 (3) (3) 0 (2) (2) 0 2 2 Investment securities: Taxable 12 (967) (955) 1,218 (1,123) 95 1,194 (371) 823 Non-taxable (1) 183 (93) 90 11 118 129 (12) (105) (117) Federal funds sold (149) (62) (211) 60 (654) (594) 1,087 (596) 491 ------ ------- ------ ------ ----- ------ ------ ----- ------ Total interest and fee income 5,078 (3,977) 1,101 4,691 (3,780) 911 5,285 (1,694) 3,591 Increase (decrease) in Interest expense Deposits: Interest bearing Transaction accounts 333 (535) (202) 627 (1,673) (1,046) 960 (452) 508 Savings 61 (182) (121) 79 (85) (6) 63 (128) (65) Time deposits 2 (578) (576) 220 (1,532) (1,312) 440 (543) (103) ------ ------- ------ ------ ----- ------ ------ ----- ------ Total deposits 396 (1,295) (899) 926 (3,290) (2,364) 1,463 (1,123) 340 Borrowings 224 (21) 203 328 (160) 168 (88) 23 (65) ------ ------- ------ ------ ----- ------ ------ ----- ------ Total interest expense 620 (1,316) (696) 1,254 (3,450) (2,196) 1,375 (1,100) 275 ------ ------- ------ ------ ----- ------ ------ ----- ------ Net Interest income $4,458 ($2,661) $1,797 $3,437 ($330) $3,107 $3,910 ($594) $3,316 ====== ======= ====== ====== ===== ====== ====== ===== ======
(1) The interest earned is taxable-equivalent. On a non-taxable basis 2003 income interest was $62 more than 2002; 2002 interest income was $88 more than in 2001; and 2001 interest income was $100 less than in 2000. Net interest income is impacted by changes in the volume and mix of earning assets and interest-bearing liabilities and changes in interest rates. The increase in net interest income in 2002 compared with 2001 was primarily the result of volume increases in loans. The net interest margin (defined as net interest income divided by average earning assets) decreased significantly in 2003 to 4.99% from 5.31% in 2002. The decrease in the net interest margin is primarily the result of a lower average yields on earning assets, partially offset by lower expenses on deposits. The impact of declining general interest rates during the first half of 2003 to unprecedented low levels resulted in a significant narrowing of the margin, as reductions in rates paid on deposits and other borrowings could not adequately offset the reduction in yields on earning assets. Also, investment portfolio yield reductions were intensified by the impact of having mortgage-backed securities purchased at a premium in the portfolio; the premium is amortized over the estimated average life of a particular security. Higher than anticipated prepayments on the underlying mortgages resulted in significant reductions in the yield on these investments. Despite these factors, the Company continues to enjoy a net interest margin higher than peer institutions of comparable size due to its low cost of funds. Taxable-equivalent interest income (defined as interest income adjusted for the tax benefit of holding tax exempt securities and loans) increased $1,101,000 or 5%, in 2003 compared with 2002. Increases in the volume of earning assets accounted for increasing interest income by $5,078,000, offset by a decrease of $3,977,000 attributable to lower rates. An increase in taxable-equivalent interest income of $911,000 or 7% in 2002 compared with 2001 consisted of a $4,491,000 increase due to growth of earning assets offset by a decrease of $3,779,000 attributable to lower rates on earning assets. Interest paid on interest-bearing liabilities decreased $696,000 in 2003 compared with 2002. Increases in the volume of deposits and other borrowings increased interest paid by $620,000 offset by a $1,316,000 9 decrease attributable to a decline in rates. Interest paid on interest-bearing liabilities decreased $2,196,000 in 2002 compared with 2001; the effect of volume increases accounted for $1,254,000 offset by a decrease of $3,450,000 attributable to lower rates. Provision and Allowance for Loan Losses Credit risk is inherent in the business of lending. As a result, the Company maintains an Allowance for Loan Losses to absorb probable losses inherent in the Company's loan portfolio. This is maintained through periodic charges to earnings. These charges are shown in the Consolidated Income Statement as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company's Allowance for Loan Losses is meant to be an estimate of the probable losses inherent in the portfolio. The Company's written lending policies, along with applicable laws and regulations governing the extension of credit, require risk analysis as well as ongoing portfolio and credit management through loan product diversification, lending limits, ongoing credit reviews both internal and external along with approval policies prior to funding of any loan. The Company manages and controls credit risk through diversification, close monitoring of any portfolio concentrations, loan limits to individuals and reviewing historical losses incurred by the Company. Loans that are performing but have shown some signs of weakness are subjected to more stringent reporting and oversight. Management has established a monitoring system for any concentration within the portfolio. The existing portfolio consists of commercial loans to businesses, both commercial and residential real estate loans and consumer products. The portfolio contains variable rate loans as well as loans with rates fixed for up to ten years. Fixed rate loans primarily are associated with real estate lending. As of December 31, 2003, net loans increased $69 million, from year-end 2002, a 29% increase. On an average balance basis the Company's loan portfolio increased $64 million, or 30% over the average balance in 2002. In 2002, average balances increased from the prior year by $39 million, or 22%. The increases in 2003 and 2002 were due to strong loan demand for commercial real estate loans along with an aggressive calling program. Management recognizes that the estimation of probable losses in the portfolio is not a science and therefore the current Allowance for Loan Losses is not expected to be equal to the result of the assessment. It is expected, however, that the assessment will demonstrate that the actual reserve is adequate for coverage of probable loan losses in the existing portfolio. To the extent that the current allowance is deemed insufficient to cover the estimate of unidentified losses, Management will record an additional provision for loan loss. If the allowance is greater than appears to be required at that point in time, the provision expense may be adjusted accordingly. Assessment of the Adequacy of the Allowance for Loan Losses and the Allocation Process The Company formally assesses the adequacy of the allowance on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding loan portfolio and, to a lesser extent, the Company's unfunded loan commitments. These assessments include periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment or if they become delinquent on a frequent basis. Re-grading of problem loans will occur at least monthly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by regulatory examiners. The Company evaluates individual loans that meet its criteria (loans over $100,000 and graded substandard or lower) to determine if impaired and to establish a specific allowance as necessary. The Company establishes percentage allowance requirements for all other loans, according to their classification as determined by the Company's internal grading system. These loans are identified through the following categories: 10 Watch - These loans are not classified, but they contain potentially unsatisfactory characteristics. Special Mention - These assets constitute an undue and unwarranted credit risk, but not to the point of justifying a classification to substandard. Substandard - These are loans inadequately protected by current sound worth, paying capacity of the borrower or pledged collateral. Substandard loans normally have one or more well-defined weaknesses that could jeopardize the repayment of the debt. Doubtful - The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, writing down the loan and recognizing the loss is deferred until its more exact status may be determined. The above, along with specific allocations for concentrations in real estate are taken into consideration when evaluating the Company's allowance for loan losses. As of December 31, 2003 the allowance for loan losses of $3,524,000 representing 1.15% of loans outstanding, as compared with an allowance balance of $3,290,000 at December 31, 2002, representing 1.38% of loans outstanding. During 2003, 2002 and 2001, $238,000, $576,000 and $447,000, respectively, was charged to expense for the provision of loan losses. Non-performing Loans The Company's policy is to place loans on nonaccrual status when, for any reason, principal or interest is past due for ninety days or more unless they are both well secured and in the process of collection. Any interest accrued, but unpaid, is reversed against current income. Thereafter, interest is recognized as income only as it is collected in cash. As of December 31, 2003 and 2002 there were no nonaccrual loans, loans that were past due ninety days or more, or trouble debt restructurings. Historical Loan Loss & Recovery Experience The following table provides a summary of the Banks' loan loss experience for the years ended December 31, 2003, 2002, 2001, 2000 and 1999.
(In 000's) December 31, ------------ 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- Average loans for the period $ 277,220 $ 212,735 $ 174,050 $ 141,076 $ 110,609 Loans outstanding at end of period 306,663 237,627 186,265 152,276 122,152 Allowance for Loan Losses Balance, beginning of period $ 3,290 $ 2,717 $ 2,268 $ 1,987 $ 1,752 Less loans charged off: Real estate loans 0 0 0 0 13 Commercial loans 0 0 0 99 0 Installment loans 12 10 4 6 12 --------- --------- --------- --------- --------- Total loans charged off 12 10 4 105 25 Recoveries: Real estate loans 0 0 0 0 0 Commercial loans 0 0 0 1 7 Installment loans 8 7 6 0 13 --------- --------- --------- --------- --------- Total recoveries 8 7 6 1 20 Net loans charged off (recovered) 4 3 (2) 104 5 Provision for loan losses 238 576 447 385 240 --------- --------- --------- --------- --------- Balance, end of period $ 3,524 $ 3,290 $ 2,717 $ 2,268 $ 1,987 ========= ========= ========= ========= ========= Net loans charged off (recovered) to average loans by types: Real estate loans 0.00% 0.00% 0.00% 0.00% .001% Commercial loans 0.00% 0.00% 0.00% .069% (.006%) Installment loans .01% .01% (.001%) .004% .001% Net losses (recoveries) to average loans outstanding .001% .001% (.001%) .074% .004%
11 The following tables, in thousands, summarize the allocation of the allowance for loan losses among loan types at December 31, 2003, 2002, 2001, 2000 and 1999.
December 31, 2003 ------------------------------------------------------------------ Percentage of Loans Amount Allocated for in Each Category to Composition of Loans Loan Losses Total Loans -------------------- -------------------- -------------------- Commercial loans $ 45,991 $ 801 15.0% Commercial loans secured by real estate 33,519 186 10.9% Installment loans 28,860 158 9.4% Real estate loans 163,088 2,018 53.2% Construction loans 35,205 361 11.5% -------- -------- ---- Total loans outstanding 306,663 Less allowance for loan losses 3,524 $ 3,524 100.0% -------- Total loans, net $303,139 ======== December 31, 2002 ------------------------------------------------------------------ Percentage of Loans Amount Allocated for in Each Category to Composition of Loans Loan Losses Total Loans -------------------- -------------------- -------------------- Commercial loans $ 46,061 $ 587 19.4% Commercial loans secured by real estate 16,991 294 7.2% Installment loans 24,102 272 10.1% Real estate loans 131,167 1,688 55.2% Construction loans 19,306 449 8.1% -------- -------- ---- Total loans outstanding 237,627 Less allowance for loan losses 3,290 $ 3,290 100.0% -------- Total loans, net $234,337 ======== December 31, 2001 ------------------------------------------------------------------ Percentage of Loans Amount Allocated for in Each Category to Composition of Loans Loan Losses Total Loans -------------------- -------------------- -------------------- Commercial loans $ 29,730 $ 632 16.0% Commercial loans secured by real estate 7,930 71 4.3% Installment loans 20,301 259 10.9% Real estate loans 106,851 1,588 57.3% Construction loans 21,453 167 11.5% -------- -------- ---- Total loans outstanding 186,265 Less allowance for loan losses 2,717 $ 2,717 100.0% -------- Total loans, net $183,548 ======== 12 December 31, 2000 ------------------------------------------------------------------ Percentage of Loans Amount Allocated for in Each Category to Composition of Loans Loan Losses Total Loans -------------------- -------------------- -------------------- Commercial loans $ 28,600 $ 703 18.8% Commercial loans secured by real estate 5,115 61 3.4% Installment loans 23,432 193 15.4% Real estate loans 86,886 1,195 57.0% Construction loans 8,243 116 5.4% -------- -------- ---- Total loans outstanding 152,276 Less allowance for loan losses 2,268 $ 2,268 100.0% -------- Total loans, net $150,008 ======== December 31, 1999 ------------------------------------------------------------------ Percentage of Loans Amount Allocated for in Each Category to Composition of Loans Loan Losses Total Loans -------------------- -------------------- -------------------- Commercial loans $ 21,463 $ 350 17.6% Commercial loans secured by real estate 13,011 212 10.6% Installment loans 20,869 338 17.1% Real estate loans 58,368 950 47.8% Construction loans 8,441 137 6.9% -------- -------- ---- Total loans outstanding 122,152 Less allowance for loan losses 1,987 $ 1,987 100.0% -------- Total loans, net $120,165 ========
The increase in the loan loss reserve is due primarily to overall growth in the loan portfolio and related inherent risk of loss. Net loans charged off were a modest $4,000 within the portfolio for The Vintage Bank in 2003 compared with net charge offs of $3,000 in 2002. Solano Bank has sustained no losses since opening for business July 2000. Based on the current conditions of the loan portfolio, Management believes that the $3,524,000 allowance for loan losses at December 31, 2003 is adequate to absorb potential losses inherent in the Banks' loan portfolios. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. Noninterest Income Details of noninterest income are as follows: (In 000's) 2003 2002 2001 ------ ------ ------ Service charge on deposit accounts $1,645 $1,321 $1,186 Gains (losses) on securities transactions 637 399 325 Other 1,565 1,391 1,180 ------ ------ ------ Total $3,847 $3,111 $2,691 ====== ====== ====== Noninterest income for year 2003 increased $736,000, or 24%, compared with 2002. Increases during 2002 compared with 2001 were $420,000, or 16%. Most noninterest income derives from service charges on deposit accounts. Service charge income increased proportionately more than growth in deposits because 13 of improved collection efforts and implementation of an overdraft privilege program that commenced on September 15, 2003. Service charges increased approximately $200,000 in the fourth quarter of 2003 compared with the previous quarter. Gains on securities transactions in all three years resulted primarily from selling securities with less than one year to maturity to provide funding for loans or to reinvest in securities with a longer duration and higher effective yield to maturity. In an overall environment of falling general interest rates, as has characterized the market for the past several years, net gain will normally result. Noninterest Expense Details of noninterest expense are as follows: (In 000's) 2003 2002 2001 ------- ------- ------- Salaries & benefits $8,795 $7,893 $6,349 Occupancy 1,289 916 855 Equipment 1,453 1,614 1,451 Other 4,778 3,893 3,300 ------- ------- ------- Total $16,315 $14,316 $11,955 ======= ======= ======= Salaries and benefits expense increased 11% and 24% in 2003 and 2002, respectively, from the previous year. The increases were primarily due to increases in the number of full-time equivalent employees, which has increased from approximately 132 at year-end 2000 to 151 at year-end 2003. The increase was primarily the result of staffing for new branches throughout the Company. The 41% increase in occupancy expense during 2003 compared with 2002 was primarily in rent and depreciation associated with opening a new branch, along with new executive offices and an administration center during the first quarter of 2003. Equipment expense decreased in 2003 compared with 2002. During 2002 the Company had additional depreciation expense resulting from accelerated depreciation on the host banking system, which was replaced in July 2002. Also, the Company reversed approximately $168,000 in accrual maintenance fees during 2003 as the result of settling litigation with a former software supplier. 14 The key components of other expenses are as follows: (In 000's) 2003 2002 2001 ------ ------ ------ Professional services $1,387 $830 $755 Business promotion 554 525 379 ATM expenses 250 261 222 Stationery & supplies 380 318 274 Insurance 224 188 111 Other 1,983 1,771 1,559 ------ ------ ------ Total $4,778 $3,893 $3,300 ====== ====== ====== Professional services increased 67% in 2003 compared with the prior year; 2002 expenses were 10% higher than 2001. The increase in 2003 was primarily due to increases in legal fees associated with litigation with our former host system provider and outsourced information technology and tax consulting services. The 10% increase in 2002 compared with 2001 was due to NASDAQ listing fees, fees associated with the trust preferred offering and consulting fees associated with revised benefits plans, new corporate governance legislation and changes in regulatory requirements. Business promotion expense increased 6% in 2003 compared with 2002; the increase was primarily the result of increased marketing expenditures. ATM expense decreased in 2003 compared with 2002, primarily the result of a major card replacement project during 2002. The 18% increase in ATM expenses when comparing 2002 to 2001 was primarily due to increases in the number of ATM's the Company operates and the card replacement project in 2002. Stationery and supplies expense increased 19% and 16% in 2003 and 2002, respectively, reflecting overall volume increases and costs associated with the system conversion and opening new branches. Insurance expenses increased 19% and 69% in 2003 and 2002, respectively; these increases are consistent with increases in volumes and number of locations, as well as increases in workers' compensation costs. Other expenses increased 12% and 14% in 2003 and 2002, respectively, primarily due to increased expenses for telephone, postage, courier services, conferences and other miscellaneous expenses. Provision for Income Taxes The Company reported a provision for income taxes of $2,179,000, $1,999,000 and $1,687,0000 for years 2003, 2002 and 2001, respectively. These provisions reflect accrual for taxes at the applicable rates for Federal and California State income taxes based upon reported pre-tax income, and adjusted for the beneficial effect of the Company's investment in qualified municipal securities and life insurance products. The Company has not been subject to an alternative minimum tax (AMT). Return on Equity and Assets The following sets forth key ratios for the periods ending December 31, 2003, 2002 and 2001. 2003 2002 2001 ------ ------ ------ Net income as a percentage of average assets 1.00% .99% 1.00% Net income as a percentage of average equity 11.70% 11.36% 10.61% Average equity as a percentage of average assets 8.50% 8.75% 9.45% Dividends declared per share as a percentage of net Income per share 11.17% 12.20% 13.70% 15 BALANCE SHEET -------------------------------------------------------------------------------- Total assets as of December 31, 2003 were $459,482,000 compared with $416,458,000 and $326,806,000, as of year-end 2002 and 2001, respectively, representing a 10% increase in 2003 and a 27% increase in 2002. Total deposits grew $38,642,000 to $406,445,000 in 2003, representing an 11% increase, compared with a 26% increase in 2002. Total loans, net of allowance for loan losses, grew $68,802,000 to $303,139,000 in 2003, representing a 29% increase compared with a 28% increase in 2002. Investment securities decreased $15,088,000 from year-end 2002 to $92,006,000 in 2003, a 14% decrease, compared with an increase of 24% during 2002. Trust Preferred Securities On June 26, 2002, North Bay Statutory Trust I (Trust), a Connecticut statutory business trust and wholly-owned subsidiary of North Bay Bancorp, issued $10 million in floating rate Cumulative Trust Preferred Securities (Securities). The Securities bear a rate of 90 day Libor plus 3.45% and had an initial interest rate of 5.34% and the rate as of December 31, 2003 was 4.62%; the Securities will mature on June 26, 2032, but earlier redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. The principal asset of the trust is a $10,310,000 floating rate subordinated debenture of the Company. The Securities, the subordinated debentures, and the common securities issued by the Trust are redeemable in whole or in part on or after June 26, 2007, or at any time in whole, but not in part, upon the occurrence of certain events. The Securities are included in Tier 1 capital for regulatory capital adequacy determination purposes, subject to certain limitations. The Company fully and unconditionally guarantees the obligations of the Trust with respect to the issuance of the Securities. Subject to certain exceptions and limitations, the Company may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the Securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company's common stock or debt securities that rank junior to the subordinated debentures. Off Balance Sheet Arrangement The Company does not have off-balance sheet arrangements, as defined by Regulation SK. The Company does have loan commitments and letters of credit. For additional information please see footnote eight to the Consolidated Financial Statements. Borrowings There were no short-term borrowings at December 31, 2003 or December 31, 2002. Short-term borrowings consist primarily of federal funds purchased and borrowings from the Federal Home Loan Bank of San Francisco (FHLB). The Banks maintain collateralized lines of credit with the FHLB. Based on the FHLB stock requirements at December 31, 2003, the lines provided for maximum borrowings of approximately $116 million; the Company also has available unused lines of credit totaling $17.5 million for Federal funds transactions at December 31, 2003. At December 31, 2003 and 2002, there were no outstanding borrowings. Contractual Obligations The Company has entered into non-cancelable contracts for leased premises, data processing and other service agreements. The Company has no capital leases. The following table summarizes our significant contractual obligation and commitments as of December 31, 2003:
(In 000's) Less than One to Four to Total one year three years five years Thereafter ------- --------- ------------ ---------- ------------ Trust preferred securities $10,000 $0 $0 $0 $10,000 Operating leases 4,079 703 1,210 784 1,382 Other obligations 102 80 22 0 0 ------- ---- ------ ---- ------- Total $14,181 $783 $1,232 $784 $11,382 ======= ==== ====== ==== =======
16 Time Deposits The following table sets forth the maturity of time certificates of deposit of $100,000 or more at December 31, 2003, 2002 and 2001.
(In 000's) 2003 2002 2001 ---- ---- ---- 3 months or less $17,584 49.8% $24,661 62.5% $19,260 50.4% Over 3 months through 6 months 6,122 17.4% 6,182 15.7% 8,243 21.6% Over 6 months through 12 months 3,822 10.8% 3,887 9.9% 6,302 16.5% Over 12 months 7,762 22.00% 4,695 11.9% 4,419 11.5% ------- ------ ------- ----- ------- ----- $35,290 100% $39,425 100% $38,224 100% ======= ====== ======= ===== ======= =====
Liquidity and Capital Adequacy The Company's liquidity is determined by the level of assets (such as cash, federal funds sold and unpledged marketable securities together with other funding sources) that are readily convertible to cash and cash equivalents and other funding sources to meet customer withdrawal and borrowing needs. The Company's liquidity position is reviewed by management on a regular basis to verify that it is adequate to meet projected loan funding and potential withdrawal of deposits. The Company has a comprehensive Asset/Liability Management and Liquidity Policy that it uses to determine adequate liquidity. Securities classified as "Held-to-Maturity" are reported at amortized cost, and "Available-for-Sale" securities are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of accumulated other comprehensive income. As of December 31, 2003, the Company had no securities carried as "Held-to-Maturity". "Available-for-Sale" securities had a fair value of $90,655,000 with an unrealized gain, net of income taxes, of $608,000 reflected as a component of accumulated other comprehensive income in the shareholders' equity section of the Balance Sheet. The Company owns equity securities carried at a cost of $1,351,000. The Company also has available funding from other sources such as the Federal Home Loan Bank and federal fund lines of credit. As of December 31, 2003, the Company had approximately $133.5 million available from these sources for borrowing. The Company relies on these funding sources to assist in funding loans when loan demand outpaces deposit growth. At year-end 2003, liquid assets (defined as cash, Federal funds sold, deposits in other financial institutions and securities categorized as available-for-sale) represented 28% of total assets, as compared with 38% as of year-end 2002. The level of liquid assets at December 31, 2003 exceeds the liquidity required by the Company's liquidity policy. Management expects to be able to meet the liquidity needs of the Company during 2004 primarily through balancing loan growth with corresponding increases in deposits. The Company did occasionally rely on borrowings from FHLB and on the federal funds lines during 2003. The Company's capital ratios remained relatively steady during 2003 compared with 2002 levels. As of December 31, 2003, the Company's total risk-based capital ratio, Tier I risk-based capital ratio and leverage ratio were 13.5%, 12.6% and 10.6%, respectively. These compare with ratios of 14.9%, 13.9% and 10.9% as of December 31, 2002. In January, 2004, the Company declared a 5% stock dividend and a $.20 per share cash dividend for shareholders of record as of March 12, 2004. The stock dividend will affect the Company's capital and its capital ratios only to the extent that cash is distributed in lieu of fractional shares. Accordingly, the stock dividend will not materially impact the Company's overall capital. The cash dividend will total approximately $460,000, equating to a reduction in the Company's leverage ratio of approximately .01%. 17 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK -------------------------------------------------------------------------------- Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. Although the Company manages other risks, as in credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be principally a market risk. The Company relies on loan reviews, prudent underwriting standards and an adequate allowance for loan losses to mitigate credit risk. Other types of market risks, such as foreign currency exchange rate risk, do not arise in the normal course of the Company's business activities. The majority of the Company's interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. They include loans, securities available-for-sale, deposit liabilities, short-term borrowings and long-term debt. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. The Company manages interest rate risk through its Audit Committee which serves as the Asset Liability Committee (ALCO). The ALCO manages the balance sheet to maintain the forecasted impact on net interest income and present value of equity within acceptable ranges despite unforeseeable changes in interest rates. The ALCO monitors these risks on a quarterly basis using both a traditional gap analysis and simulation analysis. The Company utilizes a simulation model as its primary tool for interest rate risk. This model considers the effects of lags and different ranges of interest rate changes among various classes of earning assets and interest-bearing liabilities following a 1% or 2% change in the Fed Funds rate, and produces a more accurate projection of the impact changing interest rates will have on the Company. Readers are referred to management's "Forward Looking Statement" in connection with this information. Interest Rate Sensitivity The following table sets forth the repricing opportunities for rate-sensitive assets and rate-sensitive liabilities at December 31, 2003. Rate sensitivity analysis usually excludes noninterest-bearing demand deposits. Including these deposits, which totaled $103,401,000, would result in a significant shift in the gap position. Rate-sensitive assets and rate-sensitive liabilities are classified by the earliest possible repricing date or maturity, whichever comes first.
(In 000's) 3 Months Over 3 Mos. Over 1 Yr. Over 5 or Less To 1 Yr. To 5 Yrs. Years Total --------- ------- -------- -------- -------- Interest rate-sensitive assets: Loans, gross $ 58,340 $ 43,028 $146,251 $ 59,044 $306,663 Interest-bearing deposits in other banks 0 100 0 0 100 Investment securities 1,001 439 36,798 53,768 92,006 Federal funds sold 9,195 0 0 0 9,195 --------- ------- -------- -------- -------- Total 68,536 43,567 183,049 112,812 407,964 Interest rate-sensitive liabilities: Interest-bearing demand Deposits 194,046 0 0 0 194,046 Time deposits >$100,000 17,584 9,944 7,762 0 35,290 Other time deposits 17,720 13,894 5,494 0 37,108 Savings deposits 36,599 0 0 0 36,599 Long-term borrowings 10,000 0 0 0 10,000 --------- ------- -------- -------- -------- Total $275,949 $ 23,838 $ 13,256 $ 0 $313,043 Interest rate sensitivity gap ($207,413) $ 19,729 $169,793 $112,812 $ 94,921 ========= ========= ======== ======= ======== Cumulative interest rate sensitivity gap ($207,413) ($187,684) ($17,891) $94,921 ========= ========= ======== ======= Ratio of interest rate sensitivity to earning assets (50.84%) 4.84% 41.62% 27.65%
18 This table indicates that the Company has a "negative" GAP for three months into the future and a "positive" GAP beyond. The implication is that during the negative GAP "horizon" Company earnings will increase in a falling interest rate environment, as there are more rate sensitive liabilities subject to repricing downward than rate sensitive assets; conversely, earnings would decline in a rising rate environment. During a positive GAP "horizon" earnings would decrease in a falling interest rate environment, as there would be more rate sensitive assets subject to repricing downwards than rate sensitive liabilities. This traditional analysis does not recognize or assume any "lag" in interest rate changes on earning assets and interest-bearing liabilities, and it assumes that all earning assets and interest-bearing liabilities reprice to the same absolute degree regardless of the mix of earning assets and interest-bearing liabilities. The following table, utilizing a simulation model to measure interest rate risk, shows the approximate pre-tax dollar and percentage change in forecasted net interest income over a 12-month period. The simulation analysis uses an income simulation approach to measure the change in interest income and expense under rate shock conditions. The model considers the three major factors of (a) volume differences, (b) repricing differences and (c) timing in its income simulation. The model begins by disseminating data into appropriate repricing buckets based on internally supplied algorithms (or overridden by calibration). Next, each major asset and liability type is assigned a "multiplier" or beta to simulate how much that particular balance sheet category type will reprice when interest rates change. The model uses eight asset and liability multipliers consisting of bank-specific or default multipliers. The remaining step is to simulate the timing effect of assets and liabilities by modeling a month-by-month simulation to estimate the change in interest income and expense over the next 12-month period. 19 (In 000's) December 31, 2003 --------------------------------------------- Dollar change in Percent change in Change in interest rates: net interest income net interest income 100 basis points decline $261 1.36% 100 basis points rise ($460) (2.39%) 200 basis points rise ($931) (4.83%) (In 000's) December 31, 2002 --------------------------------------------- Dollar change in Percent change in Change in interest rates: net interest income net interest income 100 basis points decline $186 1.06% 100 basis points rise ($277) (1.58%) 200 basis points rise ($552) (3.16%) As illustrated in the above tables, the Company is currently liability sensitive. The implication of this is that the Company's earnings will increase in a falling interest rate environment, as there are more rate sensitive liabilities subject to reprice downward than rate sensitive assets; conversely, earnings would decrease in a rising rate environment. Therefore, an increase in market rates could adversely affect net interest income. In contrast, a decrease in market rates may improve net interest income. It should be noted that the tools used to manage interest rate risk do not take into account future management actions that may be undertaken, should a change occur in actual market interest rates during the year. Also, certain assumptions are required to perform modeling simulations that may have significant impact on the results. These include assumptions about composition or mix of the balance sheet, level of interest rates, balance changes of deposit products that do not have stated maturities and assumptions of industry standards and future expected pricing behaviors. The results indicated by the model could vary significantly due to external factor such as changes in the prepayment assumptions, competition or early withdrawal of deposits. DESCRIPTION OF OPERATIONS -------------------------------------------------------------------------------- North Bay Bancorp is a California corporation organized November 1, 1999 and is registered with the Board of Governors of the Federal Reserve System as a financial holding company under the Bank Holding Company Act of 1956, as amended. The Vintage Bank is a wholly-owned subsidiary of the Bancorp, organized as a state chartered Bank in 1984; Solano Bank is also a wholly-owned subsidiary of the Bancorp, organized as a state chartered Bank in 2000. The Vintage Bank engages in the commercial banking business in Napa County from its main banking office located at 1500 Soscol Avenue, Napa, California. The Vintage Bank has four other business locations, one located in the Brown's Valley Shopping Center at 3271 Brown's Valley Road, Napa, California, 3626 Bel Aire Plaza, Napa, California, 1065 Main Street in St. Helena, California and one at 1190 Airport Road, Napa, California which opened in March 2003. The Vintage Bank also has a remote ATM at 6498 Washington Street, Yountville, California. Solano Bank also engages in the commercial banking business in Solano County from its main banking office located at 403 Davis Street, Vacaville, California. Solano Bank has three other business locations, one located at 1411 Oliver Road, Fairfield, California, one at 1395 E. Second Street, Benicia, California and one located at 976 Admiral Callahan Lane, Vallejo, California. Solano Bank also has a remote ATM at 1100 Texas Street, Fairfield, California. The Banks conduct commercial banking business, offering a full range of commercial banking services to individuals, businesses and agricultural communities of Napa and Solano Counties. The Banks emphasize their retail commercial banking operations and accept checking and savings deposits, issues drafts, sells traveler's checks and provide other customary banking services. SECURITIES OF THE HOLDING COMPANY -------------------------------------------------------------------------------- The Company's outstanding securities consist of one class, Common Stock, of which there were 2,290,174 shares outstanding at March 12, 2004, held by 1,001 shareholders of record. The stock is listed on the Nasdaq National Market System under the symbol NBAN effective September 3, 2002. Prior to the Nasdaq listing, the stock traded over-the-counter and was quoted on the OTC "Bulletin Board". 20 The following table (adjusted for the 2003 and 2004 stock dividends) summarizes the common stock high and low prices based upon transactions of which the Company is aware: Quarter ended High Low March 31, 2002 $24.94 $17.28 June 30, 2002 24.94 21.54 September 30, 2002 26.08 20.05 December 31, 2002 24.04 21.54 March 31, 2003 28.81 24.29 June 30, 2003 27.62 24.19 September 30, 2003 26.59 23.81 December 31, 2003 29.40 24.38 There may be other transactions of which the Company is not aware and, accordingly, they are not reflected in the range of actual sales prices stated. Further, quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions. Additionally, since trading in the Company's common stock is limited, the range of prices stated are not necessarily representative of prices that would result from a more active market. The Company paid cash dividends of $0.20 per share in each of the years 2004, 2003 and 2002. The holders of common stock of the Company are entitled to receive cash dividends when and as declared by the Board of Directors out of funds legally available. Federal Reserve Board regulations prohibit cash dividends, except under limited circumstances, if the distribution would result in a withdrawal of capital or exceed the Company's net profits then on hand after deducting its losses and bad debts. Furthermore, cash dividends cannot be paid without the prior written approval of the Federal Reserve Board if the total of all dividends declared in one year exceeds the total of net profits for that year plus the preceding two calendar years, less any required transfers to surplus under state or federal law. The shareholders' right to receive dividends is also subject to the restrictions set forth in the California General Corporation Law. The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally stated are as follows: (1) The corporation's assets equal at least 1.25 times its liabilities; and (2) the corporation's current assets equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for such fiscal years, then the corporation's current assets must equal at least 1.25 times its current liabilities. As of December 31, 2003, the Company had retained earnings of $9,623,000 eligible for dividends. 21 -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS -------------------------------------------------------------------------------- December 31, 2003 and 2002
(In 000's except share data) 2003 2002 -------- -------- ASSETS CASH AND DUE FROM BANKS $ 28,756 $ 23,785 FEDERAL FUNDS SOLD 9,195 28,525 -------- -------- Cash and cash equivalents 37,951 52,310 TIME DEPOSITS WITH OTHER FINANCIAL INSTITUTIONS 100 100 INVESTMENT SECURITIES: Held-to-maturity 0 1,272 Available-for-sale 90,655 104,473 Equity securities 1,351 1,349 -------- -------- Total investment securities 92,006 107,094 LOANS, net of allowance for loan losses of $3,524 in 2003 and $3,290 in 2002 303,139 234,337 LOANS HELD FOR SALE 3,095 0 BANK PREMISES AND EQUIPMENT, net 10,909 10,800 INTEREST RECEIVABLE AND OTHER ASSETS 12,282 11,817 -------- -------- Total assets $459,482 $416,458 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS: Non-interest bearing $103,401 $104,142 Interest-bearing 303,044 263,661 -------- -------- Total deposits 406,445 367,803 TRUST PREFERRED SECURITIES 10,000 10,000 INTEREST PAYABLE AND OTHER LIABILITIES 3,596 3,312 -------- -------- Total liabilities 420,041 381,115 SHAREHOLDERS' EQUITY: Preferred stock, no par value - Authorized 500,000 shares; Issued and outstanding - None Common stock, no par value - Authorized 10,000,000 shares; Issued and outstanding - 2,285,646 shares in 2003 and 2,130,288 shares in 2002 29,210 25,387 Retained earnings 9,623 8,612 Accumulated other comprehensive income 608 1,344 -------- -------- Total shareholders' equity 39,441 35,343 Total liabilities and shareholders' equity $459,482 $416,458 ======== ========
The accompanying notes are an integral part of these statements. 22 -------------------------------------------------------------------------------- CONSOLIDATED INCOME STATEMENTS -------------------------------------------------------------------------------- For the Years Ended December 31, 2003, 2002 and 2001
(In 000's except share data) 2003 2002 2001 ------- ------- ------- INTEREST INCOME: Interest and fees on loans $18,782 $16,602 $15,319 Interest on federal funds sold 207 418 1,012 Interest on investment securities - taxable 2,535 3,490 3,395 Interest on investment securities - tax exempt 725 664 574 Interest on time deposits with other financial institutions 2 5 7 ------- ------- ------- Total interest income 22,251 21,179 20,307 ------- ------- ------- INTEREST EXPENSE: Interest on interest-bearing transaction deposits 916 1,118 2,164 Interest on time and savings deposits 1,537 2,234 3,552 Interest on long-term debt 531 339 168 Interest on short-term borrowings 11 0 3 ------- ------- ------- Total interest expense 2,995 3,691 5,887 ------- ------- ------- Net interest income 19,256 17,488 14,420 PROVISION FOR LOAN LOSSES 238 576 447 ------- ------- ------- Net interest income after provision for loan losses 19,018 16,912 13,973 NONINTEREST INCOME: Service charges on deposit accounts 1,645 1,321 1,186 Gain on securities transactions, net 637 399 325 Other 1,565 1,391 1,180 ------- ------- ------- Total noninterest income 3,847 3,111 2,691 ------- ------- ------- NONINTEREST EXPENSE: Salaries and related benefits 8,795 7,893 6,349 Occupancy 1,289 916 855 Equipment 1,453 1,614 1,451 Other 4,778 3,893 3,300 ------- ------- ------- Total noninterest expense 16,315 14,316 11,955 ------- ------- ------- Income before provision for income taxes 6,550 5,707 4,709 PROVISION FOR INCOME TAXES 2,179 1,999 1,687 ------- ------- ------- NET INCOME $ 4,371 $ 3,708 $ 3,022 ======= ======= ======= BASIC EARNINGS PER SHARE: $ 1.83 $ 1.60 $ 1.33 DILUTED EARNINGS PER SHARE: $ 1.79 $ 1.56 $ 1.32
The accompanying notes are an integral part of these statements. 23 -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES -------------------------------------------------------------------------------- IN SHAREHOLDERS' EQUITY & COMPREHENSIVE INCOME For the Years Ended December 31, 2003, 2002 and 2001
(In 000's except share data) Accumulated Other Total Common Shares Common Retained Comprehensive Shareholders' Comprehensive Outstanding Stock Earnings Income (Loss) Equity Income ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 2000 1,850,445 $ 19,802 $ 6,753 $ 82 $ 26,637 Stock dividend 92,307 1,938 (1,950) (12) Cash dividend (371) (371) Comprehensive income: Net income 3,022 3,022 $3,022 Other comprehensive loss, net of tax: Change in net unrealized loss on available-for-sale securities, net of tax of $335 and reclassification adjustment 471 471 471 --------- $3,493 ========= Comprehensive income Stock options exercised, including a tax benefit of $36 18,150 233 233 ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 2001 1,960,902 21,973 7,454 553 29,980 Stock dividend 97,408 2,143 (2,158) (15) Cash dividend (392) (392) Comprehensive income: Net income 3,708 3,708 3,708 Other comprehensive income, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax of $562 and reclassification adjustment 791 791 791 --------- Comprehensive income $4,499 ========= Stock options exercised, including a tax benefit of $362 71,978 1,271 1,271 ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 2002 2,130,288 25,387 8,612 1,344 35,343 Stock dividend 106,295 2,918 (2,933) (15) Cash dividend (427) (427) Comprehensive income: Net income 4,371 4,371 $4,371 Other comprehensive loss, net of tax: Change in net unrealized gain on available-for-sale securities, net of tax of $523 and reclassification adjustment (736) (736) (736) --------- $3,635 ========= Comprehensive income Stock options exercised, including a tax benefit of $261 49,063 905 905 ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 2003 2,285,646 $ 29,210 $ 9,623 $ 608 $ 39,441 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. 24 -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------------------------------------------------- For the Years Ended December 31, 2003, 2002 and 2001
(In 000's) 2003 2002 2001 --------- --------- --------- Cash Flows From Operating Activities: Net income $ 4,371 $ 3,708 $ 3,022 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,569 1,441 1,352 Provision for loan losses 238 576 447 Proceeds from sale of loans-held-for sale 280,225 0 0 Purchase of loans-held-for sale (283,320) 0 0 Amortization of deferred loan fees (665) (514) (471) Amortization of investment securities premiums, net 1,079 938 121 Provision for deferred income taxes (56) (398) (308) Losses on sale or retirement of capital assets 0 1 0 Gain on securities transactions (637) (399) (325) Changes in: Interest receivable and other assets 114 (1,582) (3,265) Interest payable and other liabilities 543 1,135 1,150 --------- --------- --------- Net cash provided by operating activities 3,461 4,906 1,723 --------- --------- --------- Cash Flows From Investing Activities: Investment securities held to maturity: Proceeds from maturities and principal payments 1,272 42 39 Investment securities available for sale: Proceeds from maturities and principal payments 36,783 40,368 25,981 Proceeds from sales and recoveries 34,626 21,380 12,228 Purchases (59,290) (81,842) (63,745) Equity securities: Proceeds from sales 56 10 31 Purchases (58) (120) (40) Net increase in loans (68,375) (50,851) (33,516) Sale and disposition of capital assets 0 1 42 Capital expenditures (1,678) (2,914) (5,481) --------- --------- --------- Net cash used in investing activities (56,664) (73,926) (64,461) --------- --------- --------- Cash Flows From Financing Activities: Net increase in deposits 38,642 75,362 75,803 Proceeds from issuance of trust preferred securities 0 10,000 0 Repayment of long-term borrowings 0 (1,846) (923) Stock options exercised 644 909 196 Dividends (442) (406) (383) --------- --------- --------- Net cash provided by financing activities 38,844 84,019 74,693 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (14,359) 14,999 11,955 Cash and cash equivalents at beginning of year 52,310 37,311 25,356 --------- --------- --------- Cash and cash equivalents at end of year $ 37,951 $ 52,310 $ 37,311 ========= ========= ========= Supplemental Disclosures of Cash Flow Information: Interest paid $ 3,084 $ 3,755 $ 5,622 Income taxes paid $ 1,345 $ 2,290 $ 1,448 Retirement of fixed assets $ 0 $ 0 $ 139
The accompanying notes are an integral part of these statements. 25 -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- December 31, 2003, 2002 and 2001 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES North Bay Bancorp (Bancorp) is a registered financial holding company headquartered in Napa, California, established on November 1, 1999. Bancorp's principal line of business is serving as a holding company for The Vintage Bank and Solano Bank (the Banks), both California state chartered banks. The Banks operate five offices in the California county of Napa and four offices in the California county of Solano. The Banks offer a full range of commercial banking services to individuals and the business and agricultural communities. Most of the Banks' customers are retail customers and small to medium-sized businesses. The consolidated financial statements of Bancorp and subsidiaries (collectively the Company) are prepared in conformity with accounting principles generally accepted in the United States of America. The more significant accounting and reporting policies are discussed below. Principles of consolidation The consolidated financial statements include the accounts of Bancorp, North Bay Statutory Trust I, the Banks and the Real Estate Investment Trust. All material intercompany transactions and accounts have been eliminated in consolidation. Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For the Company, the most significant accounting estimate is the allowance for loans losses. See "Allowance for loan losses" below. Actual results could differ from those estimates Investment securities Investments in debt and equity securities are classified as "held-to-maturity" or "available-for-sale". Investments classified as held-to-maturity are those that the Company has the ability and intent to hold until maturity and are reported at cost, adjusted for the amortization or accretion of premiums or discounts. Investments classified as available-for-sale are reported at fair value with unrealized gains and losses net of related tax, if any, reported as other comprehensive income and are included in shareholders' equity. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Loans Loans are stated at the principal amount outstanding net of unearned income. Nonrefundable loan origination fees and loan origination costs are deferred and amortized into income over the contractual life of the loan. The majority of the Company's interest income is accrued on a simple interest basis. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Restructured loans are loans on which concessions in terms have been granted because of the borrowers' financial difficulties. Interest is generally accrued on such loans in accordance with the new terms. 26 The Banks define a loan as impaired when it is probable the Banks will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate or based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Loans held-for-sale Loans originated or purchased and considered held for sale are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Allowance for loan losses The Banks maintain an allowance for loan losses at a level considered adequate to provide for probable losses inherent in the existing loan portfolio. The allowance is increased by provisions for loan losses and reduced by net charge-offs. The allowance for loan losses is based on estimates, and ultimate losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The Banks make credit reviews of the loan portfolio and consider current economic conditions, historical loan loss experience, and other factors in determining the adequacy of the allowance. Other real estate owned Other real estate owned represents real estate acquired through foreclosure and is carried at the lower of cost or fair value less estimated selling costs. Bank premises and equipment Premises, leasehold improvements, furniture, fixtures and equipment are carried at cost net of accumulated depreciation and amortization, which are calculated on a straight-line basis over the estimated useful life of the property or the term of the lease (if less). Premises are depreciated over 40 years, furniture and fixtures are depreciated over five to 15 years, and equipment is generally depreciated over three to five years. Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Statements of cash flows The Company defines cash, due from banks, and federal funds sold as cash and cash equivalents for the statements of cash flows. Stock-based compensation The Company uses the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25 and related interpretations). Under this method, compensation expense is recognized for awards of options to purchase 27 shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", permits companies to continue using the intrinsic-value method to account for stock option plans or adopt a fair value based method. The fair value based method results in recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Company has elected to continue to use the intrinsic value method and the pro forma disclosures required by SFAS 123 using the fair value method are: (In 000's except share data) 2003 2002 2001 -------- ------- ------- Net income as reported $ 4,371 $ 3,708 $ 3,022 Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects 268 235 294 -------- ------- ------- Net income pro forma $ 4,103 $ 3,473 $ 2,728 ======== ======= ======= Earnings per share: As reported: Basic $ 1.83 $ 1.60 $ 1.33 Diluted $ 1.79 $ 1.56 $ 1.32 Pro forma: Basic $ 1.72 $ 1.50 $ 1.27 Diluted $ 1.68 $ 1.46 $ 1.25 Earnings per common share Basic Earnings per Share is computed by dividing net income by the weighted average common shares outstanding. Diluted EPS is computed by dividing net income by weighted average common shares outstanding including the dilutive effects of potential common shares (e.g. stock options). Comprehensive income For the Company, comprehensive income includes net income reported on the income statement and changes in the fair value of its available-for-sale investments reported as accumulated other comprehensive income. Derivative instruments Derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities are required to be recognized as either assets or liabilities in the statements of financial position and measures those instruments at fair value. The Company does not currently utilize derivative instruments in its operations and does not engage in hedging activities. Accounting and reporting changes Financial Accounting Standards Board (FASB) Interpretation No. 46, (as revised), Consolidation of Variable Interest Entities. This Interpretation addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: 1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support from other parties, or 2) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: a) the direct or indirect ability to make decisions about the entity's activities through voting or similar rights, b) the obligation to absorb the expected losses of the entity if they occur, or c) the right to receive the expected residual returns of the entity if they occur. The Interpretation requires existing variable interest entities to be consolidated if those entities do not effectively disburse risks among parties involved. In accordance with the FASB Interpretation No. 46, as revised, the Company will deconsolidate North Bay Statutory Trust I in the first quarter of 2004. FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The Statement requires issuers to classify as liabilities (or assets in some circumstance) three classes of freestanding financial instruments that embody obligations for the issuer. 28 Generally, the Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of the Statement on July 1, 2003. The Company did not enter into any financial instruments within the scope of the Statement during June 2003. However, as a result of adopting the Statement on July 1, 2003 for existing financial instruments entered into on or before May 31, 2003, the trust preferred securities (floating rate subordinated debenture) of $10 million were reclassified as liabilities on July 1, 2003. 29 (2) INVESTMENT SECURITIES The amortized cost and estimated fair value of investments in debt and equity securities are summarized in the following tables. Included in the tables are equity securities that do not have readily determinable fair values because ownership is restricted and they lack a market. These securities are carried at cost and consist of Federal Reserve and Federal Home Loan Bank stock. The amortized cost and estimated fair value of investment securities at December 31, 2003 are as follows: (In 000's) Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------- ------ ------ --------- Available-for-sale: Securities of the U.S. Treasury and other government agencies $35,942 $91 $108 $35,925 Corporate debt securities 1,221 7 0 1,228 Mortgage-backed securities 32,977 380 149 33,208 Municipal securities 19,474 859 39 20,294 ------- ------ ---- ------- Total available-for-sale 89,614 1,337 296 90,655 Equity securities 1,351 0 0 1,351 ------- ------ ---- ------- Total investments $90,965 $1,337 $296 $92,006 ======= ====== ==== ======= There were no unrealized losses greater than 12 months. The unrealized losses were due to changes in market rates and not attributed to credit quality. The amortized cost and estimated fair value of investment securities at December 31, 2002 are as follows: (In 000's) Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value -------- -------- -------- ---------- Held-to-maturity: Municipal securities $ 1,272 $ 0 $ 0 $ 1,272 -------- -------- -------- -------- Available-for-sale: Securities of the U.S. Treasury and other government agencies 34,089 642 0 34,731 Corporate debt securities 11,524 239 0 11,763 Mortgage-backed securities 44,226 735 27 44,934 Municipal securities 12,334 711 0 13,045 -------- -------- -------- -------- Total available-for-sale 102,173 2,327 27 104,473 Equity securities 1,349 0 0 1,349 -------- -------- -------- -------- Total investments $104,794 $ 2,327 $ 27 $107,094 ======== ======== ======== ======== There were no unrealized losses greater than 12 months. The unrealized losses were due to changes in market rates and not attributed to credit quality. 30 The following table shows the amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 2003: (In 000's) Available-for-Sale Amortized Estimated Cost Fair Value ------- ------- Within one year $1,428 $1,440 After one but within five years 36,465 36,792 After five but within ten years 10,767 11,187 Over ten years 7,977 8,028 Mortgage-backed securities 32,977 33,208 ------- ------- Total $89,614 $90,655 ======= ======= The following table provides a summary of the maturities and weighted average yields of investment securities as of December 31, 2003.
(In 000's) After One After Five In One Year Through Through After or Less Five Years Ten Years Ten Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------- ------ ------- ------ ------- ------ ------ ----- ------ ----- Available-for-sale securities: Securities of the U.S. Treasury and other government agencies $0 0.00% $28,908 3.23% $0 0.00% $7,017 1.82% $35,925 2.95% Mortgage-backed securities (1) 0 0.00% 6 8.84% 1,686 6.47% 31,516 4.16% 33,208 4.28% Municipal securities (2) 439 5.78% 7,884 4.41% 11,187 5.26% 784 7.11% 20,294 5.01% Corporate debt securities 1,001 1.52% 0 0.00% 0 0.00% 227 6.22% 1,228 2.39% ------ ---- ------- ---- ------- ---- ------- ---- ------- ---- Total $1,440 2.82% $36,798 3.48% $12,873 5.42% $39,544 3.82% $90,655 3.89% Equity securities: Equity stocks (3) $0 0.00% $0 0.00% $0 0.00% $1,351 5.80% $1,351 5.80% ------ ---- ------- ---- ------- ---- ------- ---- ------- ---- $0 0.00% $0 0.00% $0 0.00% $1,351 5.80% $1,351 5.80%
(1) The maturity of mortgage-backed securities is based on contractual maturity. The average expected life is approximately five years. (2) Yields shown are taxable-equivalent. (3) Consists of Federal Reserve Bank and Federal Home Loan Bank Stock As of December 31, 2003 and 2002, securities carried at $2,740,000 and $2,081,000, respectively, were pledged to secure public deposits as required by law. Total proceeds from the sale of securities available-for-sale during 2003, 2002 and 2001 were $34,626,000, $21,380,000 and $12,228,000, respectively. Gross gains of $637,000, $399,000 and $325,000 were realized on those sales in 2003, 2002 and 2001, respectively. 31 (3) LOANS AND ALLOWANCE FOR LOAN LOSSES At December 31, 2003 and 2002, the loan portfolio consisted of the following, net of deferred loan fees of $1,248,000 and $1,348,000, respectively: (In 000's) 2003 2002 -------- -------- Real estate loans $163,088 $131,167 Installment loans 28,860 24,102 Construction loans 35,205 19,306 Commercial loans secured by real estate 33,519 16,991 Commercial loans 45,991 46,061 -------- -------- 306,663 237,627 Less allowance for loan losses 3,524 3,290 -------- -------- Total $303,139 $234,337 ======== ======== There were no loans on nonaccrual status at December 31, 2003 or December 31, 2002. There was no interest foregone during 2003, 2002 or 2001. As of December 31, 2003 and 2002, there were no loans 90 days or more past due but still accruing interest. There were no restructured loans during 2003 or 2002. Changes in the allowance for loan losses are as follows: (In 000's) 2003 2002 2001 ------ ------ ------ Balance, beginning of year $3,290 $2,717 $2,268 Provision for loan losses 238 576 447 Loans charged off (12) (10) (4) Recoveries of loans previously charged off 8 7 6 ------ ------ ------ Balance, end of year $3,524 $3,290 $2,717 ====== ====== ====== As of December 31, 2003, 2002 and 2001 there were no impaired loans. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, in which case payments received are recorded as reductions of principal. 32 (4) PREMISES AND EQUIPMENT Premises and equipment at December 31, 2003 and 2002 consisted of the following: (In 000's) Accumulated Depreciation Net Book Cost & Amortization Value ------- -------------- -------- 2003 Land $2,800 $0 $2,800 Premises 5,080 944 4,136 Furniture, fixtures and equipment 7,803 4,888 2,915 Leasehold improvements 1,707 649 1,058 ------- ------ ------- Total $17,390 $6,481 $10,909 ======= ====== ======= 2002 Land $2,800 $0 $2,800 Premises 5,027 786 4,241 Furniture, fixtures and equipment 6,635 3,670 2,965 Leasehold improvements 1,250 456 794 ------- ------ ------- Total $15,712 $4,912 $10,800 ======= ====== ======= Depreciation and amortization expense, included in occupancy expense and equipment expense, was $1,569,000, $1,441,000 and $1,352,000 in 2003, 2002 and 2001, respectively. (5) COMMITMENTS AND CONTINGENCIES The Company leases premises for their various offices. Total rent on such leases was $662,000, $374,000 and $321,000 in 2003, 2002 and 2001, respectively, and is included in occupancy and equipment expenses. The total commitments under non-cancelable operating leases are as follows: (In 000's) Year Total ---- ----- 2004 $703 2005 654 2006 556 2007 446 2008 338 Thereafter 1,382 ------ Total $4,079 ====== (6) TIME DEPOSITS AND INTEREST ON TIME DEPOSITS Time certificates of deposit in denominations of $100,000 or greater were $35,290,000 and $39,425,000 at December 31, 2003 and 2002, respectively. Interest expense on these deposits was $757,000, $893,000 and $1,010,000 for 2003, 2002 and 2001, respectively. At December 31, 2003, the scheduled maturities of total time deposits are as follows: (In 000's) Year Total ---- ------- 2004 $59,142 2005 6,251 2006 2,755 2007 2,156 2008 2,094 ------- Total $72,398 ======= 33 (7) BORROWINGS There were no short-term borrowings at December 31, 2003 or December 31, 2002. Short-term borrowings consist primarily of federal funds purchased and borrowings from the Federal Home Loan Bank of San Francisco (FHLB). The Company maintains collateralized lines of credit with the FHLB. Based on the FHLB stock requirements at December 31, 2003, these lines provided for maximum borrowings of approximately $116 million; the Company also has available unused lines of credit totaling $17.5 million for federal funds transactions at December 31, 2003. On June 26, 2002, North Bay Statutory Trust I (Trust), a Connecticut statutory business trust and wholly-owned subsidiary of North Bay Bancorp, issued $10 million in floating rate Cumulative Trust Preferred Securities (Securities). The Securities bear a rate of the 90 day LIBOR plus 3.45% which changes quarterly. The rate at December 31, 2003 was 4.62%. The Securities will mature on June 26, 2032, but earlier redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. The principal asset of the trust is a $10,310,000 floating rate subordinated debenture of the Company. The Securities, the subordinated debenture, and the common securities issued by the Trust are redeemable in whole or in part on or after June 26, 2007, or at any time in whole, but not in part, upon the occurrence of certain events. The Securities are included in Tier 1 capital for regulatory capital adequacy determination purposes, subject to certain limitations. The Company fully and unconditionally guarantees the obligations of the Trust with respect to the issuance of the Securities. Subject to certain exceptions and limitations, the Company may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the Securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company's common stock or debt securities that rank junior to the subordinated debentures. (8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Banks make commitments to extend credit in the normal course of business to meet the financing needs of their customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Banks are exposed to credit loss, in the event of non-performance by the borrower, in the contract amount of the commitment. The Banks use the same credit policies in making commitments as they do for on-balance-sheet instruments and evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks, are based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, plant and equipment and real property. The Banks also issue standby letters of credit, which are conditional commitments to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support construction bonds, private borrowing arrangements and similar transactions. Most of these guarantees are short-term commitments expiring in decreasing amounts through 2003 and are not expected to be drawn upon. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Banks hold collateral as deemed necessary, as described above. The contract amounts of commitments not reflected on the Balance Sheet at December 31, 2003 and 2002 were as follows: (In 000's) Contractual Amounts ---------------------- 2003 2002 ------- ------- Loan commitments $86,984 $83,835 Standby letters of credit $1,108 $729 34 The Banks issue both financial and performance standby letters of credit. The financial standby letters of credit are primarily to guarantee payment to third parties. At December 31, 2003 there was $369,000 issued in financial standby letters of credit and the Banks carried no liability. The performance standby letters of credit are typically issued to municipalities as specific performance bonds. At December 31, 2003 there were $739,000 issued in performance standby letters of credit and the Banks carried no liability. The terms of the guarantees will expire primarily in 2004 with 1% expiring in 2007 and 27% expiring in 2008. The Banks have experienced no draws on these letters of credit, and do not expect to in the future; however, should a triggering event occur, the Banks either have collateral in excess of the letter of credit or imbedded agreements of recourse from the customer. (9) CONCENTRATIONS OF CREDIT RISKS The majority of the Banks' loan activity is with customers located in California, primarily in the counties of Napa and Solano. Although the Banks' have a diversified loan portfolio, a large portion of their loans are for commercial property, and many of the Banks' loans are secured by real estate in Napa and Solano County. Approximately 84% of the loans are secured by real estate. This concentration is presented below: (In 000's) December 31, 2003 Construction/land development: ----------------- Land development $7,181 Residential 7,212 Commercial 20,812 Real estate 163,088 Commercial loans secured by real estate 33,519 Installment loans secured by real estate 24,884 -------- Total $256,696 ======== (10) INCOME TAXES The provision (benefit) for federal and state income taxes for the years ended December 31, 2003, 2002 and 2001 consisted of: (In 000's) 2003 2002 2001 ------ ------ ------ Current Federal $1,521 $1,712 $1,471 State 602 685 524 ------ ------ ------ 2,123 2,397 1,995 Deferred Federal 70 (297) (324) State (14) (101) 16 ------ ------ ------ 56 (398) (308) ------ ------ ------ Total $2,179 $1,999 $1,687 ====== ====== ====== 35 Deferred tax assets and liabilities result from differences in the timing of the recognition of certain income and expense items for tax and financial accounting purposes. The sources of these differences and the amount of each are as follows as of December 31, 2003 and 2002: (In 000's) 2003 2002 ------ ------ Deferred tax assets: Allowance for loan losses $1,398 $1,300 Deferred compensation 512 372 State income tax 213 191 Depreciation 0 68 Other 0 33 ------ ------ $2,123 $1,964 ------ ------ Deferred tax liabilities: Unrealized gain on securities $ 433 $ 956 Accumulated accretion 162 147 Depreciation 139 0 Other 61 0 ------ ------ $ 795 $1,103 ------ ------ Net deferred tax asset $1,328 $ 861 ====== ====== The Company believes that a valuation allowance is not needed to reduce the deferred tax assets as it is more likely than not that the deferred tax assets will be realized through recovery of taxes previously paid and/or future taxable income. The total tax differs from the federal statutory rate of 34% because of the following:
(In 000's) 2003 2002 2001 -------------- ---------------- ----------------- Amount Rate Amount Rate Amount Rate ------ ----- ------ ------ ------ ----- Tax provision at statutory rate $2,227 34.0% $1,940 34.0% $1,601 34.0% Interest on obligations of states and political subdivisions exempt from federal taxation (233) (3.5%) (191) (3.3%) (161) (3.4%) State franchise taxes 382 5.8% 385 6.7% 319 6.8% Life insurance policies (115) (1.8%) (133) (2.3%) (101) (2.2%) Other, net (82) (1.2%) (2) (.1%) 29 .6% ------ ----- ------ ------ ------ ----- Total $2,179 33.3% $1,999 35.0% $1,687 35.8% ====== ====== ====== ====== ====== =====
(11) DIVIDEND RESTRICTIONS The Company is regulated by the Board of Governors of the Federal Reserve System. Federal Reserve Board regulations prohibit cash dividends, except under limited circumstances, if the distribution would result in a withdrawal of capital or exceed the Bancorp's net profits then on hand after deducting its losses and bad debts. Furthermore, cash dividends cannot be paid without the prior written approval of the Federal Reserve Board if the total of all dividends declared in one year exceeds the total of net profits for that year, plus the preceding two calendar years, and less any required transfers to surplus under state or federal law. The shareholders of North Bay Bancorp are entitled to receive dividends when and as declared by its Board of Directors out of funds legally available, subject to the restrictions set forth in the California General Corporation Law. The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally stated are as follows: 1) the corporation's assets equal at least 1.25 times its liabilities; and 2) the corporation's current assets equal at least its current liabilities or, if the 36 average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for such fiscal years, then the corporation's current assets must equal at least 1.25 times its current liabilities. One of the primary sources of income for the Company, on a stand-alone basis, is the management fees charged to Banks. The availability of dividends from the Banks is limited by various statutes and regulations. California law restricts the amount available for cash dividends by state-chartered banks to the lesser of retained earning or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). In the event a bank is unable to pay cash dividends due to insufficient retained earnings or net income for its last three fiscal years, cash dividends may be paid under certain circumstances with the prior approval of the California Department of Financial Institutions (the "DFI"). (12) SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE The Company declared 5% stock dividends on January 29, 2001, January 28, 2002, January 27, 2003 and January 26, 2004. As a result of the stock dividends, the number of common shares outstanding and per share data was adjusted retroactively for all periods presented in the following tables. In 2001 the effect of 8,092 outstanding options have been excluded from the calculation of diluted earnings per share as their inclusion would be anti-dilutive. There were no shares considered anti-dilutive in 2002 or 2003. The following table reconciles the numerator and denominator of the Basic and Diluted earnings per share computations: (In 000's except share data) Weighted Average Per-Share Net Income Shares Amount ---------- ------ ------ For the year ended 2003 ----------------------- Basic earnings per share $4,371 2,382,093 $1.83 Stock options 57,511 Diluted earnings per share 2,439,604 $1.79 For the year ended 2002 ----------------------- Basic earnings per share $3,708 2,313,461 $1.60 Stock options 57,753 Diluted earnings per share 2,371,214 $1.56 For the year ended 2001 ----------------------- Basic earnings per share $3,022 2,264,170 $1.33 Stock options 24,778 Diluted earnings per share 2,288,948 $1.32 (13) OTHER NONINTEREST INCOME AND EXPENSE The components of Other Noninterest Income for the years ended December 31, 2003, 2002 and 2001 were as follows: (In 000's) 2003 2002 2001 ------ ------ ------ ATM surcharge $279 $294 $249 Increase of cash value on insurance policies 338 393 296 Merchant services income 293 280 265 Commission on sale of non- deposit products 214 204 158 Commission on sale of mortgage products 232 0 0 Other 209 220 212 ------ ------ ------ Total $1,565 $1,391 $1,180 ====== ====== ====== 37 The components of Other Noninterest Expense for the years ended December 31, 2003, 2002 and 2001 were as follows: (In 000's) 2003 2002 2001 ------ ------ ------ Professional services $1,387 $830 $755 Business promotions 554 525 379 ATM expenses 250 261 222 Stationary & supplies 380 318 274 Insurance 224 188 111 Other 1,983 1,771 1,559 ------ ------ ------ Total $4,778 $3,893 $3,300 ====== ====== ====== (14) STOCK OPTION PLAN The Company has a stock option plan under which it may grant up to 871,790 options. The Company has granted 723,570 options through December 31, 2003. The option exercise price equals the stock's market price on the date of grant. The options become exercisable over four or five years and expire in five or more years. The equity compensation plans have been approved by the security holders. A summary of the status of the Company's stock option plan at December 31, 2003, 2002 and 2001 and stock option activity during the years then ended is presented in the table below:
2003 2002 2001 Weighted Weighted Weighted Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 301,939 $17.50 366,836 $15.71 312,642 $15.05 Granted 86,741 $25.05 32,524 $23.18 76,114 $16.65 Exercised (51,930) $11.74 (79,356) $10.91 (21,383) $ 9.22 Cancelled (18,276) $15.86 (18,065) $17.79 (537) $ 5.96 Outstanding at end of year 318,474 $20.80 301,939 $17.50 366,836 $15.71 Exercisable at end of year 120,377 $18.44 107,372 $16.41 114,013 $13.71 Weighted-average fair value of options granted during the year $6.16 $6.94 $6.23
The following table summarizes information about stock options outstanding at December 31, 2003:
Options Outstanding Options Exercisable ------------------- ------------------- Range Number Weighted-Average Weighted- Number Weighted- of Outstanding at Contractual Average Exercisable at Average Exercise Prices 12/31/03 (Life in years) Exercise Price 12/31/03 Exercise Price ----------------- -------------- ---------------- -------------- ---------------- -------------- $16.42 to $19.58 93,807 1.03 $18.68 61,006 $18.57 $16.41 to $18.10 105,402 2.20 $17.37 51,815 $17.52 $23.13 to $28.31 119,265 4.25 $25.51 7,556 $23.60 ------- ------- 318,474 120,377 ======= =======
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2003, 2002 and 2001, 38 respectively: risk-free interest rate of 2.48%, 2.66%, 2.82%, 3.27% 3.37%, 3.46% and 3.55% for options issued in 2003, 4.07% and 3.25% for options issued in 2002 and 4.62% and 3.90% for options issued in 2001; expected dividend yields of .73%, .80% and 1.01%; expected lives of 5 years and expected volatility of 16.08%, 21.67% and 28.02%. (15) RELATED PARTY TRANSACTIONS In the ordinary course of business, the Banks make loans to directors, officers and principal shareholders on substantially the same terms, including interest rates and collateral, as those for comparable transactions with unaffiliated persons. An analysis of net loans to related parties for the year ended December 31, 2003 is as follows: (In 000's) Balance at beginning of year $5,342 Additions 7,788 Repayments 2,973 ------- Balance at end of year $10,157 ======= Total undisbursed commitments as of December 31, 2002 were $5,329,000. A law firm in which one of the Company's directors and one of its officers are principals serves as the Company's general counsel. During 2003, 2002 and 2001 fees of $196,000, $165,000 and $135,000, respectively, were paid to this firm. (16) RESTRICTIONS The Banks are required to maintain reserves with the Federal Reserve Bank of San Francisco equal to a percentage of its reservable deposits. Reserve balances that were required by the Federal Reserve Bank were $25,000 and $220,000 for December 31, 2003 and 2002, respectively, and are reported in cash and due from banks on the balance sheet. (17) RETIREMENT PLANS The Company has a Profit Sharing and Salary Deferral 401(K) Plan to enable its employees to share in the Company's profits and to defer receipt of a portion of their salaries. Employees can defer up to 15% of their base pay, up to the maximum amount allowed by the Internal Revenue Code. In addition, the Company makes discretionary contributions to the profit sharing account and the 401(K) account, which are determined by the Board of Directors each year. Amounts charged to operating expenses under this plan representing the Company's contribution were $415,000, $263,000 and $223,000 for the years ended December 31, 2003, 2002 and 2001, respectively. The Company has a Director's Supplemental Retirement Program. The Program contains a non-qualified defined benefit plan. Directors and select officers designated by the Board of Directors of the Company are covered by this plan. The plan is unfunded, however the Company has purchased life insurance on the lives of the participants and expects to use the death benefit of these policies to pay the obligation in event the participants death precedes retirement. Management's intentions are to hold the policies as an investment until the death of the insured. Cash values for these policies at December 31, 2003 were $3,188,000. At December 31, 2003 $387,000 was carried as a liability to fund the benefit. The program provides a death benefit to beneficiaries of a deceased participant. The Company has an Executive Officer Supplemental Retirement Plan. The Executive Supplemental Compensation Agreements entered into with select executive officers of the Company pursuant to the Plan provide for a defined cash benefit payable monthly upon retirement upon reaching age 65 (or upon or after age 62 with a reduced benefit). Benefits under these agreements vest over five year periods at the rate of 20% per year after five years' of service with credit for up to five years of prior service. The plan is unfunded, however the Company has purchased life insurance on the lives of the participants and expects to use the death benefit of these policies to pay the obligation in event the participants death precedes retirement. At December 31, 2003 $314,000 was carried as a liability to fund the benefit. The Plan also provides a life insurance benefit to the designated beneficiary of the participants upon their death pursuant to the Executive Officer Endorsement Method Split Dollar Life Insurance component of the Plan. 39 (18) FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and fair values of the Company's financial instruments at December 31, 2003 and 2002: (In 000's) 2003 2002 -------------------- --------------------- Carrying Fair Carrying Fair Amounts Value Amounts Value -------- -------- -------- -------- Financial assets: Cash and cash equivalents $37,951 $37,951 $52,310 $52,310 Time deposits with other financial institutions 100 100 100 100 Investment securities 92,006 92,006 107,094 107,094 Loans, net 303,139 305,874 234,337 236,147 Accrued interest receivable 2,051 2,051 2,256 2,256 Financial liabilities: Deposits $406,445 $406,209 $367,803 $367,486 Trust preferred securities 10,000 10,000 10,000 10,000 Accrued interest payable 237 237 319 319 The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents - Cash and cash equivalents are valued at their carrying amounts because of the short-term nature of these instruments. Investment securities - Investment securities are valued at quoted market prices. See Note 2 for further analysis. Loans - Loans with variable interest rates are valued at the current carrying value, because these loans are regularly adjusted to market rates. The fair value of fixed rate loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. The fair value of impaired loans is stated net of the related valuation allowance, if any. Accrued interest receivable and payable - The balance approximates its fair value. Deposits, time deposits with other banks - The fair value of demand deposits, savings accounts and interest-bearing transaction accounts is the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the contractual cash flows at current rates offered for similar instruments with the same remaining maturities. Borrowings - The balance approximates its fair value due to the short-term nature of these borrowings and the long-term borrowing has variable interest rate. Trust preferred securities - The balance approximates its fair value due to the structure having a variable interest rate. Loan commitments and standby letters of credit - The fair value is estimated using the fees currently charged to enter into similar agreements. 40 (19) COMPREHENSIVE INCOME The changes in the components of other comprehensive income (loss) for the years ended December 31, 2003, 2002 and 2001 are reported as follows:
(In 000's) 2003 2002 2001 ----- ---- ---- Unrealized holding (loss) gain arising during the period, net of tax benefit of $523 for 2003 and tax expense of $562 and $335 for 2002 and 2001, respectively ($363) $1,024 $661 Reclassification adjustment for net realized gains on securities available-for-sale included in net income during the year, net of tax expense of $265, $166 and $135 for 2003, 2002 and 2001, respectively. (373) (233) (190) ----- ---- ---- Other comprehensive (loss) income ($736) $791 $471 ===== ==== ====
(20) REGULATORY MATTERS The Company is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory--and possible additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 2003, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2003, the most recent notification from the Federal Reserve Bank categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 41 The Company's actual capital amounts and ratios are also presented in thousands in the following tables:
(In 000's) To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------- -------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio As of December 31, 2003: Total capital (to risk weighted assets) Consolidated $52,356 13.47% $31,089 >8.00% $38,861 >10.00% The Vintage Bank 34,321 11.07% 24,806 >8.00% 31,007 >10.00% Solano Bank 8,029 10.70% 6,001 >8.00% 7,501 >10.00% Tier I capital (to risk weighted assets) Consolidated 48,833 12.57% 15,544 >4.00% 23,316 >6.00% The Vintage Bank 31,442 10.14% 12,403 >4.00% 18,604 >6.00% Solano Bank 7,385 9.84% 3,001 >4.00% 4,501 >6.00% Tier I capital (to average assets) Consolidated 48,833 10.61% 18,408 >4.00% 23,010 >5.00% The Vintage Bank 31,442 8.66% 14,517 >4.00% 18,146 >5.00% Solano Bank 7,385 8.82% 3,350 >4.00% 4,187 >5.00% (In 000's) To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------- -------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio As of December 31, 2002: Total capital (to risk weighted assets) Consolidated $47,289 14.88% $25,419 >8.00% $31,773 >10.00% The Vintage Bank 28,825 11.03% 20,902 >8.00% 26,128 >10.00% Solano Bank 7,815 14.57% 4,291 >8.00% 5,363 >10.00% Tier I capital (to risk weighted assets) Consolidated 43,999 13.85% 12,709 >4.00% 19,064 >6.00% The Vintage Bank 25,953 9.93% 10,451 >4.00% 15,677 >6.00% Solano Bank 7,397 13.79% 2,145 >4.00% 3,218 >6.00% Tier I capital (to average assets) Consolidated 43,999 10.86% 16,203 >4.00% 20,253 >5.00% The Vintage Bank 25,953 7.52% 13,808 >4.00% 17,260 >5.00% Solano Bank 7,397 12.36% 2,394 >4.00% 2,993 >5.00%
42 (21) FINANCIAL STATEMENTS OF NORTH BAY BANCORP (Parent Company Only) For the Years Ended December 31, 2003, 2002 and 2001 CONDENSED BALANCE SHEETS
(In 000's except share data) Assets 2003 2002 ------- ------- Cash and due from banks $ 2,949 $ 6,921 Available-for-sale investment securities 6,503 2,854 Investment in The Vintage Bank 32,010 27,166 Investment in Solano Bank 7,407 7,567 Investment in North Bay Statutory Trust 1 310 310 Premises and equipment, net 1,761 1,794 Other assets 461 426 ------- ------- Total assets $51,401 $47,038 ======= ======= Liabilities and shareholders' equity Floating rate subordinated debenture (trust preferred securities) $10,310 $10,310 Other liabilities 1,650 1,385 ------- ------- Total liabilities $11,960 $11,695 Shareholders' equity Preferred stock, no par value - Authorized 500,000 shares Issued and outstanding - None Common stock, no par value - Authorized 10,000,000 shares Issued and outstanding - 2,285,646 shares in 2003 and 2,130,288 shares in 2002 29,210 25,387 Retained earnings 9,623 8,612 Accumulated other comprehensive income 608 1,344 ------- ------- Total shareholders' equity 39,441 35,343 Total liabilities and shareholders' equity $51,401 $47,038 ======= =======
43 CONDENSED INCOME STATEMENTS (In 000's)
2003 2002 2001 ------- ------- ------- Income Interest on investment securities $ 123 $ 41 $ 0 Dividends from subsidiaries 0 0 2,500 Service fees from subsidiaries 6,177 5,681 4,754 ------- ------- ------- Total Income 6,300 5,722 7,254 Expenses Interest on borrowings 531 339 168 Salaries and related benefits 4,104 3,836 3,275 Other expenses 3,342 2,910 2,622 ------- ------- ------- Total expenses 7,977 7,085 6,065 Net (loss) income before tax benefit and equity in net income of subsidiaries (1,677) (1,363) 1,189 Tax benefit 642 574 482 ------- ------- ------- Net (loss) income before equity in undistributed net income of subsidiaries (1,035) (789) 1,671 Equity in undistributed net income of subsidiaries 5,406 4,497 1,351 ------- ------- ------- Net Income $ 4,371 $ 3,708 $ 3,022 ======= ======= =======
44 CONDENSED STATEMENTS OF CASH FLOWS
2003 2002 2001 -------- -------- -------- Cash Flows From Operating Activities: Net income $ 4,371 $ 3,708 $ 3,022 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 812 737 804 Amortization of investment securities premiums, net 117 5 0 Equity in undistributed net income of subsidiaries (5,406) (4,497) (1,351) Changes in: Interest receivable and other assets (35) (288) 541 Interest payable and other liabilities 533 468 502 -------- -------- -------- Net cash provided by operating activities 392 133 3,518 -------- -------- -------- Cash Flows From Investing Activities: Investment securities available for sale: Proceeds from maturities and principal payments 785 201 0 Purchases (4,573) (3,006) 0 Sale and disposition of capital assets 0 0 4 Capital expenditures (779) (1,340) (519) -------- -------- -------- Net cash used in investing activities (4,567) (4,145) (515) -------- -------- -------- Cash Flows From Financing Activities: Decrease in long-term borrowings, net 0 (1,846) (923) Proceeds from issuance of Trust Preferred Securities 0 10,310 0 Stock options exercised 644 909 196 Dividends (441) (406) (383) -------- -------- -------- Net cash provided by (used in) financing activities 203 8,967 (1,110) -------- -------- -------- Net (decrease) increase in cash and cash equivalents (3,972) 4,955 1,893 Cash and cash equivalents at beginning of year 6,921 1,966 73 -------- -------- -------- Cash and cash equivalents at end of year $ 2,949 $ 6,921 $ 1,966 ======== ======== ========
45 (22) SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following table sets forth the results of operation for the four quarters unaudited of 2003, 2002 and 2001. All per share amounts have been adjusted for the 2001, 2002, 2003 and 2004 stock dividends.
(In 000's except share data) 2003 Quarters Ended December 31, September 30, June 30, March 31, ------------ ------------- -------- --------- Interest income $5,842 $5,554 $5,494 $5,361 Interest expense 667 681 819 828 ------ ------ ------ ------ Net interest income 5,175 4,873 4,675 4,533 Provision for loan losses 103 45 45 45 ------ ------ ------ ------ Net interest income after 5,072 4,828 4,630 4,488 provision for loan losses Noninterest income 925 1,055 1,059 808 Noninterest expense 3,722 4,267 4,311 4,015 ------ ------ ------ ------ Income before provision for 2,275 1,616 1,378 1,281 income taxes Provision for income taxes 975 452 366 386 ------ ------ ------ ------ Net income $1,300 $1,164 $1,012 $ 895 ====== ====== ====== ====== Basic earnings per share: $ .53 $ .47 $ .43 $ .38 Diluted earnings per share: $ .53 $ .47 $ .42 $ .37 2002 Quarters Ended December 31, September 30, June 30, March 31, ------------ ------------- -------- --------- Interest income $5,638 $5,495 $5,173 $4,873 Interest expense 988 1,012 841 850 ------ ------ ------ ------ Net interest income 4,650 4,483 4,332 4,023 Provision for loan losses 144 144 144 144 ------ ------ ------ ------ Net Interest Income after 4,506 4,339 4,188 3,879 provision for loan losses Noninterest income 1,036 731 645 699 Noninterest expense 3,797 3,697 3,455 3,367 ------ ------ ------ ------ Income before provision for 1,745 1,373 1,378 1,211 income taxes Provision for income taxes 619 446 501 433 ------ ------ ------ ------ Net income $1,126 $ 927 $ 877 $ 778 ====== ====== ====== ====== Basic earnings per share: $ .48 $ .40 $ .38 $ .34 Diluted earnings per share: $ .47 $ .39 $ .37 $ .34
46
2001 Quarters Ended December 31, September 30, June 30, March 31, ------------ ------------- -------- --------- Interest income $5,142 $5,324 $5,086 $4,755 Interest expense 1,094 1,482 1,683 1,628 ------ ------ ------ ------ Net interest income 4,048 3,842 3,403 3,127 Provision for loan losses 114 111 111 111 ------ ------ ------ ------ Net Interest Income after 3,934 3,731 3,292 3,016 provision for loan losses Noninterest income 1,032 547 567 545 Noninterest expense 3,463 2,946 2,875 2,671 ------ ------ ------ ------ Income before provision for 1,503 1,332 984 890 income taxes Provision for income taxes 575 414 362 336 ------ ------ ------ ------ Net income $ 928 $ 918 $ 622 $ 554 ====== ====== ====== ====== Basic earnings per share: $ .43 $ .41 $ .28 $ .25 Diluted earnings per share: $ .43 $ .40 $ .28 $ .25
47 -------------------------------------------------------------------------------- REPORT OF INDEPENDENT AUDITORS -------------------------------------------------------------------------------- The Board of Directors North Bay Bancorp: We have audited the accompanying consolidated balance sheets of North Bay Bancorp and subsidiaries as of December 31, 2003 and 2002, and the related consolidated income statements, statements of changes in shareholders' equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The 2001 consolidated financial statements of North Bay Bancorp were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated February 19, 2002. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Bay Bancorp and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each the years in the two-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP February 19, 2004 48 -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS -------------------------------------------------------------------------------- To the Shareholders and Board of Directors of North Bay Bancorp: We have audited the accompanying consolidated balance sheets of North Bay Bancorp (a California Corporation) and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of North Bay Bancorp and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. San Francisco, California February 19, 2002 This report is a copy of a previously issued report. The predecessor auditor, Arthur Andersen, has not reissued the report. 49 -------------------------------------------------------------------------------- DIRECTORS --------------------------------------------------------------------------------
NORTH BAY BANCORP Thomas N. Gavin Owner, Gavin & Schreiner, New York Life Insurance Agency David B. Gaw, Chairman Attorney with Gaw, Van Male, Smith, Myers & Miroglio A Professional Law Corporation Fred J. Hearn, Jr. Chief Executive Officer Hearn Pacific Corporation dba Hearn Construction Conrad W. Hewitt Retired, Commissioner of California State Department of Financial Institutions Richard S. Long, Vice Chairman Chief Executive Officer Regulus Integrated Solutions, LLC Thomas H. Lowenstein President, North Bay Plywood Thomas F. Malloy Senior Partner, Malloy Imrie & Vasconi Insurance Services LLC Terry L. Robinson President & Chief Executive Officer, North Bay Bancorp James E. Tidgewell Certified Public Accountant, G & J Seiberlich & Co LLP CORPORATE SECRETARY Wyman G. Smith Attorney with Gaw, Van Male, Smith, Myers & Miroglio A Professional Law Corporation
THE VINTAGE BANK SOLANO BANK Lauren Ackerman John Anthony, III James L. Asbury Gary J. Falati Andrew J. Beckstoffer David B. Gaw William L. Kastner Fred J. Hearn, Jr. Thomas H. Lowenstein Connie Klimisch Thomas F. Malloy Michael D. O'Brien Terry L. Robinson Terry L. Robinson Thomas H. Shelton Stephen C. Spencer Stephen T. Silva Robert J. Wood Carolyn D. Sherwood John A. Nerland, President and CEO Glen C. Terry, President & CEO Thomas N. Gavin, Chairman James E. Tidgewell, Chairman Denise C. Suikhonen, Vice Chairman Andrew J. Nicks, M D, Vice Chairman Directors Emeritus Sandi Funseth Houghton Gifford, M D Harlan R. Kurtz Joseph Vallerga 50 -------------------------------------------------------------------------------- CORPORATE INFORMATION -------------------------------------------------------------------------------- Corporate Headquarters 1190 Airport Road, Suite 101 Napa, CA 94558 The Vintage Bank Office Locations: Main Office 1500 Soscol Avenue Napa, CA 94559-1314 3271 Browns Valley Road Napa, CA 94558-5499 3626 Bel Aire Plaza Napa, CA 94558-2831 1065 Main Street St. Helena, CA 94574 1190 Airport Road, Suite 100 Napa, CA 94558 Solano Bank Office Locations: Main Office 403 Davis Street Vacaville, CA 95688 1411 Oliver Road Fairfield, CA 94533 1395 E. Second Street Benicia, CA 94510 976 A Admiral Callaghan Lane Vallejo, CA 94591 Shareholder Information: Trading Nasdaq NMS - Symbol NBAN
Transfer Agent Registrar & Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 1 (800) 368-5948 Notice of Annual Meeting COPIA 500 First Street Napa, CA 94559 May 6, 2004- 7:00 p.m. General Counsel: Wyman G. Smith Gaw, Van Male, Smith, Myers & Miroglio 1000 Main Street, Suite 300 Napa, CA 94559 Corporate Secretary: Wyman G. Smith Market Makers Hoefer & Arnett 353 Sacramento Street, 10th Floor San Francisco, CA 94111 1 (800) 346-5544 Keefe, Bruyette & Woods, Inc. 235 Pine St., Suite 1818 San Francisco, CA 94104 Wedbush Morgan Securities 1300 S. W. Fifth Ave., Suite 2000 Potland, OR 97201 1 (800) 368-5948 For additional copies of this report or Pansy F. Smith copies of the 10-K Report contact: Assistant Corporate Secretary North Bay Bancorp 1190 Airport Road, Suite 101 Napa, CA 94558 (707) 252-5026 Independent Auditors: KPMG LLP Three Embarcadero Center, Suite 2000 San Francisco, CA 94111 Web Site: www.northbaybancorp.com
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