UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2006
Commission File No. 0-31080
NORTH BAY BANCORP
(Exact name of registrant as specified in its charter)
California
68-0434802
(State or other jurisdiction
(I.R.S. Employer IdentificationNo.)
of incorporation or organization)
1190 Airport Road, Suite 101, Napa, California 94558
(Address of principal executive offices including zip code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Registrant’s telephone number, including area code: (707) 252-5026
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [ X ]
Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
As of May 4, 2006, there were 4,123,116 shares of the registrant’s Common Stock, no par value, outstanding.
North Bay Bancorp
Quarterly Report of Form 10-Q
March 31, 2006
Table of Contents
Page
Forward-Looking Statements
Part I – Financial Information
Item 1.
Financial Statements (Unaudited)
4
Consolidated Balance Sheets
4
Consolidated Statements of Income
5
Consolidated Statements of Comprehensive Income
6
Consolidated Statements of Changes in Shareholders’ Equity
7
Consolidated Statements of Cash Flows
8
Notes to Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
19
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
25
Item 4.
Controls and Procedures
26
Part II – Other Information
Item 1.
Legal Proceedings
27
Item 1A.
Risk Factors
27
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
Item 3.
Defaults Upon Senior Securities
27
Item 4.
Submission of Matters to a Vote of Security Holders
27
Item 5.
Other Information
27
Item 6.
Exhibits
27
Signatures
28
Exhibits
29
2
FORWARD-LOOKING STATEMENTS
In addition to the historical information, this Quarterly Report contains certain forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which is subject to the “Safe Harbor” created by those Sections. The reader of this Quarterly Report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Company’s actual results could differ materially from those suggested by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, (i) variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments, rates paid on deposit s, and fee and other noninterest income earned; (ii) competitive pressures among depository and other financial institutions may increase significantly and have an effect on pricing, spending, third-party relationships and revenues; (iii) enactment of adverse government regulation; (iv) adverse conditions and volatility, including the United States’ war on terrorism, the war in Iraq, in the stock market, the public debt market and other capital markets and the impact of such conditions of the Company; (v) continued changes in the interest rate environment may reduce interest margins and adversely impact net interest income; (vi) the ability to satisfy the requirements of the Sarbanes-Oxley Act and other regulations governing internal controls; and (vii) as well as other factors. This entire Quarterly Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company’s business.
Moreover, wherever phrases such as or similar to “In Management’s opinion”, or ”Management considers” are used, such statements are as of and based upon the knowledge of Management at the time made and are subject to change by the passage of time and/or subsequent events, and accordingly such statements are subject to the same risks and uncertainties noted above with respect to forward-looking statements.
The reader is directed to the Company’s annual report of Form 10-K for the year ended December 31, 2005 for further discussion of factors which could affect the Company’s business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report.
3
Part I - Financial Information | |||||
Item 1 - Financial Statements | |||||
FINANCIAL STATEMENTS | |||||
North Bay Bancorp | |||||
Consolidated Balance Sheets | |||||
(In thousands, except share data; unaudited) | |||||
At March 31, | At December 31, | ||||
2006 | 2005 | 2005 | |||
Assets | |||||
Cash and due from banks | $28,422 | $27,838 | $28,174 | ||
Federal funds sold | - | 22,230 | 7,170 | ||
Total cash and cash equivalents | 28,422 | 50,068 | 35,344 | ||
Time deposits with other financial institutions | 100 | 100 | 100 | ||
Investment securities | 122,247 | 92,656 | 124,510 | ||
Loans, net of allowance for loan losses of $5,020 in March, 2006, $4,317 in March, 2005 | |||||
and $4,924 in December, 2005 | 427,169 | 397,846 | 409,504 | ||
Loans held-for-sale | - | 481 | - | ||
Premises and equipment, net | 9,293 | 10,038 | 9,475 | ||
Cash value of life insurance | 10,158 | 8,593 | 10,053 | ||
Other intangible assets | 708 | - | 734 | ||
Interest receivable and other assets | 13,213 | 8,538 | 12,977 | ||
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Total assets | $611,310 | $568,320 | $602,697 | ||
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Liabilities and Shareholders' Equity |
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Deposits: |
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Non-interest bearing | $161,582 | $138,437 | $155,320 | ||
Interest bearing | 348,309 | 351,145 | 361,073 | ||
Total deposits | 509,891 | 489,582 | 516,393 | ||
Accrued interest payable and other liabilities | 7,859 | 4,213 | 6,941 | ||
Other borrowings | 31,800 | 19,000 | 19,000 | ||
Junior subordinated debt | 10,310 | 10,310 | 10,310 | ||
Total liabilities | 559,860 | 523,105 | 552,644 | ||
Commitments and contingencies | |||||
Shareholders' equity: |
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Preferred stock, no par value: 500,000 shares authorized; none issued and outstanding | - | - | - | ||
Common stock, no par value: 15,000,000 shares authorized; 4,120,919, 4,077,442 | |||||
and 4,100,376 shares issued and outstanding at March 31, 2006, March 31, 2005 | |||||
and December 31, 2005, respectively | 40,329 | 39,352 | 39,965 | ||
Stock dividend declared | 5,811 | - | - | ||
Additional Paid-In Capital | 85 | - | - | ||
Retained earnings | 6,865 | 6,396 | 11,566 | ||
Accumulated other comprehensive loss | (1,640) | (533) | (1,478) | ||
Total shareholders' equity | 51,450 | 45,215 | 50,053 | ||
Total liabilities and shareholders' equity | $611,310 | $568,320 | $602,697 | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements | |||||
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4
North Bay Bancorp | |||
Consolidated Statements of Income | |||
(In thousands, except share data; unaudited) | |||
Three Months Ended March 31, | |||
2006 | 2005 | ||
Interest Income | |||
Loans, including fees | $7,672 | $6,600 | |
Investment securities - taxable | 1,028 | 835 | |
Investment securities - tax exempt | 231 | 110 | |
Federal funds sold | 21 | 130 | |
Time deposits with other financial institutions | 1 | 1 | |
Total interest income | 8,953 | 7,676 | |
Interest Expense | |||
Deposits | 1,170 | 751 | |
Federal funds purchased | 28 | - | |
Other borrowings | 154 | 136 | |
Junior subordinated debt | 227 | 165 | |
Total interest expense | 1,579 | 1,052 | |
Net interest income | 7,374 | 6,624 | |
Provision for loan losses | 100 | 185 | |
Net interest income after | |||
provision for loan losses | 7,274 | 6,439 | |
Non interest income | |||
Service charges and other fees | 500 | 523 | |
Increase in cash value of life insurance | 105 | 91 | |
Other income | 442 | 342 | |
Total noninterest income | 1,047 | 956 | |
Non interest expenses | |||
Salaries and employee benefits | 3,206 | 2,724 | |
Occupancy | 475 | 394 | |
Equipment | 479 | 547 | |
Other | 1,619 | 1,370 | |
Total operating expense | 5,779 | 5,035 | |
Income before provision for | |||
income taxes | 2,542 | 2,360 | |
Provision for income taxes | 827 | 898 | |
Net income | $1,715 | $1,462 | |
Basic earnings per common share: | $0.42 | $0.36 | |
Diluted earnings per common share: | $0.40 | $0.34 | |
Dividends declared: | $0.14 | $0.14 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements |
5
North Bay Bancorp | ||
Consolidated Statements of Comprehensive Income | ||
(In thousands; unaudited) | ||
Three Months Ended March 31, | ||
2006 | 2005 | |
Net Income | $1,715 | $1,462 |
Other comprehensive loss: | ||
Unrealized holding losses on available-for-sale securities | (288) | (1,187) |
Tax effect | 118 | 493 |
Unrealized holding losses on available-for-sale securities, net of tax | (170) | (694) |
Minimum pension liability adjustment | 13 | - |
Tax effect | (5) | - |
Minimum pension liability adjustment, net of tax | 8 | - |
Other comprehensive loss | (162) | (694) |
Comprehensive income | $1,553 | $768 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements |
6
North Bay Bancorp | ||||||||
Consolidated Statement of Changes in Shareholders' Equity | ||||||||
(In thousands, except per share data) | ||||||||
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| Accumulated |
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| Stock | Additional |
| Other | Total | |
| Common Stock | Dividend | Paid-In | Retained | Comprehensive | Shareholders' | ||
| Shares | Amount | Declared | Capital | Earnings | Income (Loss) | Equity | |
Balance at December 31, 2004 | 3,823,353 | $ 33,473 | $ - | $ - | $ 10,500 | $ 161 | $ 44,134 | |
Net income | - | - | - | - | 1,462 | - | 1,462 | |
Other comprehensive income, net of taxes: | ||||||||
Unrealized net losses on investment securities | - | - | - | - | - | (694) | (694) | |
Minimum pension liability adjustment, net | - | - | - | - | - | - | - | |
Stock dividends declared | 193,571 | 4,996 | - | - | (5,011) | - | (15) | |
Cash dividends declared $0.14 per share of common stock | - | - | - | - | (555) | - | (555) | |
Stock options exercised, including related tax benefits | 60,518 | 883 | - | - | - | - | 883 | |
Balance at March 31, 2005 | 4,077,442 | $ 39,352 | $ - | $ - | $ 6,396 | $ (533) | $ 45,215 | |
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Balance at December 31, 2005 | 3,904,651 | $ 39,965 | - | - | $ 11,566 | $ (1,478) | $ 50,053 | |
Net income | - | - | - | - | 1,715 | - | 1,715 | |
Other comprehensive income, net of taxes: | ||||||||
Unrealized net losses on investment securities | - | - | - | - | - | (170) | (170) | |
Minimum pension liability adjustment, net | - | - | - | - | - | 8 | 8 | |
Stock dividends declared | 195,725 | - | 5,811 | - | (5,827) | - | (16) | |
Cash dividends declared $0.14 per share of common stock | - | - | - | - | (589) | - | (589) | |
Stock compensation expense recognized in earnings | - | - | - | 85 | - | - | 85 | |
Stock options excercised, including related tax benefits | 20,543 | 364 | - | - | - | - | 364 | |
Balance at March 31, 2006 | 4,120,919 | $ 40,329 | $ 5,811 | $ 85 | $ 6,865 | $ (1,640) | $ 51,450 | |
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The accompanying notes are an integral part of these statements | ||||||||
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7
North Bay Bancorp | ||||
Consolidated Statement of Cash Flows | ||||
(In thousands; unaudited) | ||||
For the three months ended March 31, | ||||
2006 | 2005 | |||
Cash Flows From Operating Activities: |
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| ||
Net income | $1,715 | $1,462 | ||
Adjustment to reconcile net income to net cash | ||||
provided by operating activities: |
| |||
Depreciation and amortization | 463 | 405 | ||
Provision for loan losses | 100 | 185 | ||
Amortization of deferred loan fees | (209) | (259) | ||
Proceeds from sale of loans held-for-sale | - | 22,906 | ||
Purchase of loans held-for-sale | - | (18,783) | ||
Premium amortization, net | - | 11 | ||
Stock-based compensation expense | 85 | - | ||
Tax benefit from stock-based compensation arrangements | (131) | - | ||
Increase in cash value of bank-owned life insurance | (105) | (91) | ||
Changes in: | ||||
Interest receivable and other assets | (238) | (148) | ||
Interest payable and other liabilities | 444 | 229 | ||
Net cash provided by operating activities | 2,124 | 5,917 | ||
Cash Flows From Investing Activities: | ||||
Investment securities available-for-sale: | ||||
Proceeds from maturities and principal payments | 1,975 | 2,934 | ||
Net increase in loans | (17,556) | (24,143) | ||
Capital expenditures | (127) | (107) | ||
Net cash used in investing activities | (15,708) | (21,316) | ||
Cash Flows From Financing Activities: | ||||
Net (decrease) increase in deposits | (6,502) | 5,089 | ||
Proceeds from other borrowings | 12,800 | - | ||
Stock options exercised | 233 | 741 | ||
Tax benefits realized from stock-based compensation arrangements | 131 | - | ||
Cash dividends on common stock | - | (570) | ||
Net cash provided by financing activities | 6,662 | 5,260 | ||
Net decrease in cash and cash equivalents | (6,922) | (10,139) | ||
Cash and cash equivalents at beginning of year | 35,344 | 60,207 | ||
Cash and cash equivalents at end of period | $28,422 | $50,068 | ||
Supplemental disclosure of cash flow activity: |
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Cash paid for interest expense | $1,297 | $887 | ||
Cash paid for income taxes | $400 | $345 | ||
Income tax benefit from exercise of stock options | - | $142 | ||
Supplemental disclosure of noncash activities: | ||||
Unrealized (loss) gain on investment securities available for sale | $(288) | $1,187 | ||
Stock dividends declared | $5,811 | $4,996 | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements | ||||
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8
NORTH BAY BANCORP
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2006
Note 1: General Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three month periods ended March 31, 2006 and 2005 are not necessarily indicative of the results expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, The Vintage Bank (the "Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation.
Nature of Operations
The Bank operates 10 branch offices in the California counties of Napa and Solano. The Bank offers a full range of commercial banking services to individuals and the business and agricultural communities in Napa and Solano Counties. The Bank emphasizes retail commercial banking operations and accepts checking and savings deposits, makes consumer, commercial, construction and real estate loans, and provides other customary banking services. The Bank does not offer trust services and does not plan to do so in the near future. There have been no material changes in services offered by the Bank. The Bank makes annuities and mutual funds available to its customers through Linsco Private Ledger.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and 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. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, income taxes, contingencies and supplemental retirement plan liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results ma y differ from these estimates under different assumptions or conditions. The allowance for loan losses, income taxes and supplemental retirement plan liabilities are the only accounting estimates that materially affect the Company's consolidated financial statements.
Significant Group Concentration of Credit Risk
The Bank concentrates its lending activities in commercial, installment, construction and real estate loans made primarily to businesses and individuals located in Napa and Solano Counties. The Company has a diversified loan portfolio within the business segments located in this geographical area.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold.
Investment Securities
The Company classifies its debt and marketable equity securities into one of two categories: available-for-sale or held-to-maturity. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities are classified as available-for-sale. During the three months ended March 31, 2006, and throughout 2005, the Company did not have any securities classified as held-to-maturity.
Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of accumulated other comprehensive income (loss) in shareholders' equity until realized.
9
Premiums and discounts are amortized or accreted over the life of the related investment 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 are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Unrealized losses due to fluctuations in fair value of securities held to maturity or available for sale are recognized through earnings when it is determined that an other than temporary decline in value has occurred.
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.
Loans
Loans are reported at the principal amount outstanding, net of unearned income and the allowance for loan losses. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield over the estimated life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in Management's judgment are well secured and in the process of collection, they may be classified as accrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the f uture collection of principal is probable. 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. All impaired loans are classified as nonaccrual loans.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is established through a provision for losses - unfunded commitments charged to noninterest expense. The reserve for unfunded commitments is an amount that Management believes will be adequate to absorb probable losses inherent in existing commitments, including unused portions of revolving lines of credits and other loans, standby letters of credits, and unused deposit account overdraft privilege. The reserve for unfunded commitments is based on evaluations of the collectibility, and prior loss experience of unfunded commitments. The evaluations take into consideration such factors as changes in the nature and size of the loan portfolio, overall loan portfolio quality, loan concentrations, specific problem loans and related unfunded commitments, and current economic conditions that may affect the borrower's or depositor's ability to pay.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans and deposit related overdrafts are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely. The allowance is an amount that Management believes will be adequate to absorb probable losses inherent in existing loans and leases, based on evaluations of the collectibility, impairment and prior loss experience of loans and leases. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrower's ability to pay. The Company defines a loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measure d based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured 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.
Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb losses inherent in the Company's loan portfolio. This is maintained through periodic charges to earnings. These charges are shown in the Consolidated Income Statements as provision for loan losses. The balance of the Company's allowance for loan losses is meant to be an estimate of probable losses inherent in the portfolio. For purposes of this discussion, "loans" shall include all loans and lease contracts that are part of the Company's portfolio.
10
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 loan commitments. These assessments include the 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. Re-grading of larger problem loans occur at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies.
The Company's method for assessing the appropriateness of the allowance for loan losses and the reserve for unfunded commitments includes specific allowances for identified problem loans and leases as determined by SFAS 114, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.).
Based on the current conditions of the loan portfolio, Management believes that the allowance for loan losses, which stands at $5,020,000 at March 31, 2006, is adequate to absorb probable losses inherent in the Company's loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
The following tables summarize the activity in the allowance for loan losses for the periods indicated:
For the three months ended | |||
(in thousands) | March 31, 2006 | March 31, 2005 | |
Allowance for loan losses: | |||
Balance at beginning of period | $4,924 | $4,136 | |
Provision for loan losses | 100 | 185 | |
Loans charged off | (5) | (6) | |
Recoveries of loans previously charged-off | 1 | 2 | |
Net Charge-offs | (4) | (4) | |
Balance at end of period | $5,020 | $4,317 | |
As a percentage of total loans: | |||
Allowance for loan losses | 1.16% | 1.07% |
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commercial letters of credit, standby letters of credit, and deposit account overdraft privilege. Such financial instruments are recorded when they are funded.
Premises and Equipment
Land is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the estimated useful lives of the related assets or lease terms, whichever is less. Asset lives range from 3-7 years for furniture and equipment and 10-31 years for land improvements and buildings.
Intangible Assets
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and periodically reviewed for impairment.
As of March 31, 2006, the Company had identifiable intangible assets consisting of unrecognized prior service costs of the Company’s supplemental retirement plan (minimum pension liabilities). These intangible assets are amortized on a straight-line basis over eight years.
11
The following table summarizes the Company’s minimum pension liability intangible as of March 31, 2006 and December 31, 2005.
December 31, | March 31, | |||||||
(in thousands) | 2005 | Additions | Reductions |
| 2006 | |||
Minimum pension liability intangible | $734 | - | (26) | $708 |
Income Taxes
The Company's accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws.
Stock-Based Compensation
On January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), using the modified-prospective transition method. Under this transition method, compensation cost recognized during the quarter ended March 31, 2006 includes: (a) compensation cost for all share-based awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant-date fair value and related service period estimates in accordance with the original provisions of SFAS 123 and (b) compensation cost for all share-based awards granted subsequent to January 1, 2006, based on the grant-date fair value and related service periods estimated in accordance with the prov isions of SFAS 123R. Under the provisions of the modified-prospective transition method, results for the three months ended March 31, 2005 have not been restated. Historically, stock options are the only type of share-based award granted by the Company.
Prior to the adoption of SFAS 123R, the Company used the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25). Intrinsic value is the difference between share fair market value and option exercise price. Under this method, compensation expense was recognized for awards of options to purchase shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) was greater than the amount the employee was required to pay to acquire the stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), permitted companies to continue using the intrinsic value method or to adopt a fair value based &n bsp;method to account for stock option plans. The fair value based method would have resulted in the recognition, as expense over the vesting period, of the fair value of all stock-based awards on the date of grant.
SFAS 123R clarifies and expands the guidance in SFAS 123 in several areas, including measuring fair value and attributing compensation cost to reporting periods. SFAS 123R includes a requirement to: (a) estimate forfeitures of share-based awards at the date of grant, (b) expense share-based awards granted to retirement eligible employees and those employees with non-substantive non-compete agreements immediately, (c) attribute compensation costs of share-based award grants to the stated future vesting period, (d) recognize compensation cost of all share-based awards based upon the grant-date fair value (including pre-2006 options).
The Company did not recognize any gain or loss resulting from the cumulative effect of a change in accounting principle upon adoption of SFAS 123R on January 1, 2006. Based on the stock-based compensation awards outstanding as of December 31, 2005, for which the requisite service was not fully rendered prior to January 1, 2006, and any subsequent option grants as of March 31, 2006, the Company expects to recognize total pre-tax compensation cost of approximately
$563,000 related to outstanding stock option grants, of which $85,000 was recognized in the first quarter of 2006, in accordance with the accounting requirements of SFAS 123R. The after-tax effect of adopting SFAS 123R was a reduction of net income of $71,000, and a reduction in diluted earnings per share of $0.02, for the first quarter of 2006. Future levels of compensation cost recognized related to stock-based compensation awards may be impacted by new awards and/or modifications, repurchases and cancellations of existing awards before and after the adoption SFAS 123R.
12
For the three months ended March 31, 2005, had compensation cost for the Company’s option plans been determined using the fair-value method of SFAS 123, the Company’s net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
(in thousands, except per share amounts) | ||
Net income | As reported | $1,462 |
Pro forma | $1,388 | |
Basic earnings per share | As reported | $0.36 |
Pro forma | $0.34 | |
Diluted earnings per share | As reported | $0.34 |
Pro forma | $0.33 | |
Stock-based employee compensation | ||
cost, net of related tax effects, | As reported | $0 |
included in net income | Pro forma | $74 |
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.
In February 2002, the Company adopted the North Bay Bancorp 2002 Stock Option Plan (2002 Plan) covering officers, employees, directors, and certain independent contractors of the Company. Under the 2002 Plan, the option price cannot be less than the fair market value of the Common Stock at the date of grant except in the case of substitute options. Options for the 2002 Plan expire no later than the tenth anniversary of the grant date. Vesting schedules under the 2002 Plan are determined individually for each grant.
As of March 31, 2006, options for the purchase of 236,540 remained available for grant under the 2002 Plan. Shares
issued under the Company’s option plans are "new issue" shares rather than treasury shares.
Stock option activity for the three months ended March 31, 2006 and 2005 is summarized in the following tables:
Weighted | Weighted | |||||
Average | Average | |||||
Number | Option Price | Exercise | Fair Value | |||
of Shares | Per Share | Price | of Grants | |||
Outstanding at December 31, 2005 | 534,419 | $9.92 | to | $27.87 | $15.47 | |
Options granted | - | - | to | - | - | - |
Options exercised | (21,569) | $9.92 | to | $15.84 | $10.76 | |
Options forfeited | (2,054) | $9.92 | to | $25.00 | $21.48 | |
Outstanding at March 31, 2006 | 510,796 | $9.92 | to | $27.87 | $15.64 | |
Outstanding at December 31, 2004 | 617,408 | $9.92 | to | $24.73 | $14.74 | |
Options granted | - | - | to | - | - | - |
Options exercised | (63,545) | $9.92 | to | $19.03 | $11.66 | |
Options forfeited | (2,759) | $9.92 | to | $11.55 | $10.42 | |
Outstanding at March 31, 2005 | 551,104 | $9.92 | to | $24.73 | $15.12 |
13
During the three months ended March 31, 2006, the intrinsic value of options exercised and the fair value of options that vested were $343,000 and $85,000, respectively. No options were granted during the three months ended March 31, 2006.
During the three months ended March 31, 2005, the intrinsic value of options exercised and the fair value of options that vested were $1,023,000 and $123,000, respectively. No options were granted during the three months ended March 31, 2005.
The total intrinsic value of stock options exercised during the quarter ended March 31, 2006 was $343,000 for which no compensation costs were previously recognized nor tax benefits recognized in equity upon issuance. Cash received from the exercise of stock options during the three months ended March 31, 2006 totaled $233,000.
The following table shows the number, weighted-average exercise price, and the weighted average remaining contractual life of options outstanding, and the number and weighted-average exercise price of options exercisable as of March 31, 2006 by range of exercise price:
Outstanding Options | Exercisable Options | |||||
Weighted-Average | ||||||
Range of | Weighted-Average | Remaining | Weighted-Average | |||
Exercise Price | Number | Exercise Price | Contractual Term (yrs.) | Number | Exercise Price | |
$9.92-$11.00 | 135,268 | $10.53 | 4.77 | 119,953 | $10.58 | |
$11.01-$13.00 | 50,656 | $11.62 | 3.86 | 50,656 | $11.62 | |
$13.01-$15.00 | 58,995 | $14.09 | 6.48 | 34,876 | $14.08 | |
$15.01-$17.00 | 96,042 | $15.83 | 7.26 | 37,472 | $15.82 | |
$17.01-$19.00 | 15,194 | $17.12 | 7.68 | 6,512 | $17.12 | |
$19.01-$23.00 | 121,159 | $20.73 | 8.57 | 59,515 | $20.75 | |
$23.01-$26.00 | 26,657 | $24.97 | 9.01 | 19,008 | $25.06 | |
$26.01-$27.87 | 6,825 | $27.67 | 9.62 | 6,825 | $27.67 | |
510,796 | $15.64 | 6.62 | 334,817 | $14.79 |
The following table shows the number, weighted-average exercise price, intrinsic value, weighted average remaining contractual life, average remaining vesting period, and remaining compensation cost to be recognized over the remaining vesting period of options exercisable, options not yet exercisable, and total options outstanding as of March 31, 2006:
Currently | Currently Not | Total | |||
(dollars in thousands except exercise price) | Exercisable | Exercisable | Outstanding | ||
Number of options | 334,817 | 175,979 | 510,796 | ||
Weighted average exercise price | $14.79 | $17.26 | $15.64 | ||
Intrinsic value | $4,764 | $2,070 | $6,834 | ||
Weighted average remaining contractual term (yrs.) | 6.14 | 7.52 | 6.62 |
The 175,979 options that are not currently exercisable as of March 31, 2006 are expected to vest, on a weighted-average basis, over the next 1.63 years, and the Company is expected to recognize $478,000 of compensation costs related to these
options as they vest.
14
Earnings Per Common Share
Basic Earnings per Share (EPS) 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).
The following table reconciles the numerator and denominator of the Basic and Diluted earnings per share computations:
(In 000's except share data) | ||||
Net Income | Weighted Average Shares | Per-Share Amount | ||
For the three months ended March 31, 2006 | ||||
Basic earnings per share | 1,715 | 4,111,968 | $0.42 | |
Dilutive effect of stock options | 163,625 | |||
Diluted earnings per share | 4,275,593 | $0.40 | ||
For the three months ended March 31, 2005 | ||||
Basic earnings per share | 1,462 | 4,041,189 | $0.36 | |
Dilutive effect of stock options | 203,098 | |||
Diluted earnings per share | 4,244,287 | $0.34 |
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
15
The components of accumulated other comprehensive loss, included in shareholders' equity, are as follows:
March 31, | December 31, | ||
(in thousands) | 2006 | 2005 | |
Net unrealized (loss) gain on available-for-sale securities | $(2,247) | $(1,956) | |
Tax effect | 934 | 813 | |
Unrealized holding (losses) gains on available-for-sale securities, net of tax | (1,313) | (1,143) | |
Minimum pension liability | (559) | (573) | |
Tax effect | 232 | 238 | |
Minimum pension liability, net of tax | (327) | (335) | |
Accumulated other comprehensive loss | $(1,640) | $(1,478) |
Retirement Plans
The Company has supplemental retirement plans covering directors and key executives. These plans are non-qualified defined benefit plans and the Company’s obligations under the plans are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends to use the cash values of these policies to pay the retirement obligations.
The following table sets forth the net periodic benefit cost recognized for the plans:
Three Months Ended | ||
March 31, | March 31, | |
(in thousands) | 2006 | 2005 |
Components of net periodic benefits cost: | ||
Service cost - benefits earned during the period | $32 | $24 |
Interest cost on projected benefit obligation | 33 | 23 |
Amortization of prior service cost | 26 | 19 |
Amortization of unrecognized loss | 13 | 9 |
Net periodic benefit cost | $104 | $75 |
During the three months ended March 31, 2006 and 2005, the Company paid out as benefits $9,000 and $8,000, respectively, to participants under the plans. For the year ending December 31, 2006, the Company expects to pay out as benefits $36,000 to participants under the plans.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim reporting period of the Company’s fiscal year beginning after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer are an alternative to financial statement recognition. The Company ado pted SFAS 123R on January 1, 2006 using a modified version of prospective application ("modified prospective application"). Under modified prospective application, as it is applicable to the Company, SFAS 123R applies to new grants and to grants modified, repurchased, or cancelled after January 1, 2006. Additionally, compensation cost for the portion of grants for which the requisite service has not been rendered (generally referring to non-vested grants) that are outstanding as of January 1, 2006 must be recognized as the remaining requisite service is rendered during the period of and/or the periods after the adoption of SFAS 123R. The attribution of compensation cost for those earlier grants will be based on the same method and on the same grant-date fair values previously determined for the pro forma disclosures required for companies that did not adopt the fair value accounting method for stock-based employee compensation.
16
The Company did not recognize any gain or loss resulting from the cumulative effect of a change in accounting principle upon adoption of SFAS 123R on January 1, 2006. Based on the stock-based compensation awards outstanding as of December 31, 2005, for which the requisite service was not fully rendered prior to January 1, 2006, and any subsequent option grants as of March 31, 2006, the Company expects to recognize total pre-tax compensation cost of approximately $563,000 related to outstanding stock option grants, of which $85,000 was recognized in the first quarter of 2006, in accordance with the accounting requirements of SFAS 123R. The after-tax effect of adopting SFAS 123R was a reduction of net income of $71,000, and a reduction in diluted earnings per share of $0.02, for the first quarter of 2006. Future levels of compensation cost recognized related to stock-based compensation awards may be impacted by new awards and/or modifications, repurchases and cancellations of existing awards before and after the adoption SFAS 123R.
Reclassifications
Certain amounts previously reported in the 2005 financial statements have been reclassified to conform to the 2006 presentation. These reclassifications did not affect previously reported net income or total shareholders’ equity.
17
NORTH BAY BANCORP | |||
Financial Summary | |||
(in thousands, except per share amounts; unaudited) | |||
Three months ended | |||
March 31, | |||
2006 | 2005 | ||
Net Interest Income | $7,374 | $6,624 | |
Provision for loan losses | 100 | 185 | |
Noninterest income | 1,047 | 956 | |
Noninterest expense | 5,779 | 5,035 | |
Provision for income taxes | 827 | 898 | |
Net income | 1,715 | 1,462 | |
Earnings per share: | |||
Basic | $0.42 | $0.36 | |
Diluted | $0.40 | $0.34 | |
Per Share: | |||
Dividends declared | $0.14 | $0.14 | |
Book value at period end | $12.49 | $11.09 | |
Tangible book value at period end | $12.31 | $11.09 | |
Average common shares outstanding | 4,111,968 | 4,041,189 | |
Average diluted shares outstanding | 4,275,593 | 4,244,287 | |
Shares outstanding at period end | 4,120,919 | 4,077,442 | |
At period end: | |||
Loans, net | $427,169 | $397,846 | |
Total assets | 611,310 | 568,320 | |
Total deposits | 509,891 | 489,582 | |
Other borrowings | 31,800 | 19,000 | |
Junior subordinated debt | 10,310 | 10,310 | |
Shareholders' equity | 51,450 | 45,215 | |
Financial Ratios: | |||
During the period (annualized): | |||
Return on assets | 1.17% | 1.06% | |
Return on equity | 13.43% | 13.02% | |
Net interest margin (1) | 5.56% | 5.38% | |
Net loan charge-offs to average loans | 0.00% | 0.00% | |
Efficiency ratio (1) | 65.85% | 65.54% | |
At period end: | |||
Equity to assets | 8.42% | 7.96% | |
Allowance for losses to loans | 1.16% | 1.07% | |
1 Fully taxable equivalent (FTE) |
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
As North Bay Bancorp (the "Company") has not commenced any business operations independent of The Vintage Bank (the "Bank"), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, income taxes, contingencies and supplemental retirement plan liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the ca rrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. (See Note 1 to Condensed Consolidated Financial Statements – Allowance for Loan Losses).
Results of Operations
The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank's financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the Notes thereto.
Following is a summary of the components of net income for the periods indicated (dollars in thousands):
Three months ended | |||
March 31, | |||
2006 | 2005 | ||
Net Interest Income | $7,374 | $6,624 | |
Provision for loan losses | 100 | 185 | |
Noninterest income | 1,047 | 956 | |
Noninterest expense | 5,779 | 5,035 | |
Provision for income taxes | 827 | 898 | |
Net income | 1,715 | 1,462 |
The Company had quarterly earnings of $1,715,000, or $0.40 per diluted share, for the three months ended March 31, 2006. These results represent a 17.6% increase from the $0.34 earnings per diluted share reported for the three months ended March 31, 2005 on earnings of $1,462,000. The improvement in results from the year-ago quarter was due to a $750,000 (11.3 %) increase in net interest income to $7,374,000, an $85,000 (45.9%) decrease in the provision for loan losses to $100,000, and a $91,000 (9.5%) increase in noninterest income to $1,047,000. These contributing factors were partially offset by a $744,000 (14.8%) increase in noninterest expense to $5,779,000 for the quarter ended March 31, 2006.
19
Net Interest Income
Following is a summary of the components of net interest income for the periods indicated (dollars in thousands):
Three months ended | |||
March 31, | |||
2006 | 2005 | ||
Interest income | $8,953 | $7,676 | |
Interest expense | (1,579) | (1,052) | |
Net interest income | $7,374 | $6,624 | |
Average interest-earning assets | $546,143 | $503,767 | |
Net interest margin (FTE) | 5.56% | 5.38% |
Net interest income represents the amount by which interest earned on earning assets (primarily loans and investments) exceeds the amount of interest paid on deposits. Net interest income is a function of volume, interest rates and level of non-accrual loans. Non-refundable loan origination fees are deferred and amortized into income over the life of the loan.
Net interest income before the provision for loan losses was $7,374,000 and $6,624,000 for the three months ended March 31, 2006 and March 31, 2005, respectively. These results equate to an 11.3% increase in net interest income for the first quarter of 2006 compared to the first quarter of 2005.
Interest and Fee Income
Interest and fee income for the first quarter of 2006 increased $1,277,000 (16.6%) from the first quarter of 2005. The increase was the net effect of a $42,376,000 (8.4%) increase in average balances of interest-earning assets to $546,143,000 and a 51 basis point increase in the yield on those average interest-earning assets to 6.74%. The growth in interest-earning assets was comprised of a $32,334,000 (8.3%) increase in average loan balances to $420,328,000 that was partially offset by a decrease of $15,873,000 (90%) in average balances of Federal funds sold to $1,772,000. The increase in the yield on average interest-earning assets was mainly due to the overall increase in market rates during the first quarter of 2006 compared with the first quarter of 2005.
Interest Expense
Interest expense increased $527,000 (50%) to $1,579,000 in the first quarter of 2006 compared to the year-ago quarter. The average balance of interest-bearing liabilities increased $14,923,000 (4.0%) to $386,751,000 in the first quarter compared to the year-ago quarter. The increase in the average balance of interest-bearing liabilities was concentrated in time deposits (up $5,129,000 or 6.7%), interest-bearing demand deposits (up $4,908,000 or 2.2%), and other borrowings (up $4,154,000 or 21.9%). In addition, the average balance of noninterest-bearing deposits increased $14,681,000 (10.7%) from the year-ago quarter. The average rate paid on interest-bearing liabilities in the quarter ended March 31, 2006 increased 51 basis points to 1.66% compared to the year-ago quarter. The average rate paid for all categories of interest-bearing liabilities increased from the average rate paid in the year-ago quarter as a result of general market interest rate changes.
20
Net Interest Margin (FTE)
The following table summarizes the components of the Company’s net interest margin for the periods indicated:
Three months ended | |||
March 31, | |||
2006 | 2005 | ||
Yield on interest-earning assets | 6.74% | 6.23% | |
Rate paid on interest-bearing liabilities | 1.66% | 1.15% | |
Net interest spread | 5.08% | 5.08% | |
Impact of all other net noninterest-bearing funds | 0.48% | 0.30% | |
Net interest margin | 5.56% | 5.38% |
The net interest margin in the first quarter of 2006 increased 18 basis points compared to the first quarter of 2005. This increase in net interest margin was mainly due to the 18 basis point increase in the impact of all other net noninterest-bearing funds.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding the Company's consolidated average assets, liabilities and shareholders' equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
21
For the three months ended | |||||||||||
March 31, 2006 | March 31, 2005 | ||||||||||
Average Balance | Income/ Expense | Average Yield/Rate | Average Balance | Income/ Expense | Average Yield/Rate | ||||||
Loans (1) (2) | $420,328 | $7,672 | 7.40% | $387,994 | $6,600 | 6.90% | |||||
Investment securities: | |||||||||||
Taxable | 97,953 | 1,028 | 4.26% | 86,145 | 835 | 3.93% | |||||
Non-taxable (3) | 25,990 | 231 | 5.46% | 11,883 | 110 | 5.69% | |||||
Total loans and investment securities | 544,271 | 8,931 | 6.74% | 486,022 | 7,545 | 6.34% | |||||
|
|
| |||||||||
Due from banks, time | 100 | 1 | 4.06% | 100 | 1 | 4.06% | |||||
Federal funds sold | 1,772 | 21 | 4.81% | 17,645 | 130 | 2.99% | |||||
Total interest-earning assets | 546,143 | 8,953 | 6.74% | 503,767 | 7,676 | 6.23% | |||||
| |||||||||||
Cash and due from banks | 23,635 | 35,567 |
|
| |||||||
Allowance for loan losses | (4,924) | (4,205) |
|
| |||||||
Premises and equipment, net | 9,436 | 10,221 |
|
| |||||||
Accrued interest receivable |
|
|
| ||||||||
and other assets | 22,074 | 14,281 | |||||||||
|
| ||||||||||
Total assets | $596,364 | $559,631 |
|
| |||||||
|
|
|
| ||||||||
Liabilities and shareholders' equity |
|
|
| ||||||||
Deposits: | |||||||||||
Interest bearing demand | $228,591 | $593 | 1.05% | $223,683 | 387 | 0.70% | |||||
Savings | 43,183 | 44 | 0.41% | 42,451 | 24 | 0.23% | |||||
Time | 81,513 | 533 | 2.65% | 76,384 | 340 | 1.81% | |||||
Total Deposits | 353,287 | 1,170 | 1.34% | $342,518 | 751 | 0.89% | |||||
Junior subordinated debentures | 10,310 | 227 | 8.93% | 10,310 | 165 | 6.49% | |||||
Other borrowings | 23,154 | 182 | 3.19% | 19,000 | 136 | 2.90% | |||||
Total interest bearing liablilities | 386,751 | 1,579 | 1.66% | 371,828 | 1,052 | 1.15% | |||||
|
|
| |||||||||
Noninterest bearing DDA | 152,314 | 137,633 |
|
| |||||||
Accrued interest payable |
|
|
| ||||||||
and other liabilities | 5,495 | 4,647 |
|
| |||||||
Shareholders' equity | 51,804 | 45,523 | |||||||||
Total liabilities and |
| ||||||||||
shareholders' equity | $596,364 | $559,631 |
|
| |||||||
|
|
| |||||||||
Net interest income | $7,374 |
| $6,624 |
| |||||||
|
| ||||||||||
Net Interest Margin (4) | 5.56% | 5.38% | |||||||||
|
| ||||||||||
(1) Average loans include nonaccrual loans. The Company had $300 in nonaccrual loans during 2006 and none in 2005. | |||||||||||
(2) Loan interest income includes loan fee income of $242 and $375 for the three months ended March 31, 2006 and | |||||||||||
March 31, 2005, respectfully. | |||||||||||
(3) Average yields shown are on a fully taxable-equivalent basis. On a nonfully-taxable equivalent basis, 2006 the average yield on tax exempt securities in 2006 was 3.60%; in 2005, the average yield was 3.75% | |||||||||||
(4) Net interest margin is calculated by dividing net interest income by the average balance of total interest-earning assets for the applicable | |||||||||||
period. |
22
Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income (FTE) and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components.
Three months ended March 31, 2006 | |||||
compared with three months | |||||
ended March 31, 2005 | |||||
(in thousands) | Volume | Rate | Total | ||
Increase (Decrease) In |
| ||||
Interest and Fee Income | |||||
Loans | $551 | $521 | $1,072 | ||
Due from banks, time | - | - | - | ||
Investment Securities: | |||||
Taxable | 114 | 79 | 193 | ||
Non-Taxable (1) | 130 | (9) | 121 | ||
Federal Funds Sold | (117) | 8 | (109) | ||
Total Interest and Fee Income | 678 | 599 | 1,277 | ||
Increase (Decrease) In |
|
| |||
Interest Expense | |||||
Deposits: | |||||
Interest Bearing |
|
| |||
Transaction Accounts | 8 | 198 | 206 | ||
Savings | 0 | 20 | 20 | ||
Time Deposits | 24 | 169 | 193 | ||
Total Deposits | 32 | 387 | 419 | ||
|
| ||||
Junior Subordinated Debentures | (0) | 62 | 62 | ||
Other Borrowings | 30 | 16 | 46 | ||
Total Interest Expense | 62 | 465 | 527 | ||
Net Interest Income | $616 | $134 | $750 | ||
(1) The interest earned is taxable-equivalent. |
Provision for Loan Losses
The Company provided $100,000 for loan losses in the first quarter of 2006 versus $185,000 in the first quarter of 2005. During the first quarter of 2006 and 2005, the Company recorded $4,000 of net loan charge-offs.
23
Noninterest Income
The following table summarizes the components of noninterest income for the periods indicated.
Three months ended | |||
March 31, | |||
(in thousands) | 2006 | 2005 | |
Service charges and other fees | $500 | $523 | |
Increase in cash value of life insurance | $105 | $91 | |
Other income | 442 | 342 | |
Total noninterest income | $1,047 | $956 |
Noninterest incomefor the three months ended March 31, 2006 increased $91,000, or 9.5%, compared to the the same period in the prior year. Increases in ATM fees, commissions on investment products sold and earnings on non-marketable equity securities contributed to the increase in other income.
Noninterest Expense
The following table summarizes the components of noninterest expense for the periods indicated.
Details of noninterest expense are as follows:
Three months ended | |||
March 31, 2006 | |||
(in thousands) | 2006 | 2005 | |
Salaries and related benefits | $3,206 | $2,724 | |
Occupancy | 475 | 394 | |
Equipment | 479 | 547 | |
Professional services | 520 | 486 | |
Business promotion | 250 | 134 | |
Stationery & supplies | 149 | 124 | |
Insurance | 63 | 71 | |
Other | 637 | 555 | |
Total | $5,779 | $5,035 |
Noninterest expense for the first quarter of 2006 increased $744,000 (14.8%) to $5,779,000 from $5,035,000 in the first quarter of 2005. The $482,000 (17.7%) increase in salaries and related benefits expense during 2006 compared with 2005 was due to new additions and changes to the senior management team, staffing increases in the risk management, compliance and internal audit functions and $85,000 of stock option expense recorded in the first quarter of 2006 in accordance with SFAS 123R. The 21% increase in occupancy is due to rent increases on leased premises and higher vacancy rates in a building owned by the Company.
Provision for Income Tax
The effective tax rate for the three months ended March 31, 2006 was 32.5% and reflects a decrease from 38.1% for the three months ended March 31, 2005. The lower effective tax rate during the first quarter of 2006 was due to a $2 million investment in an affordable housing bond issue near year-end 2005 that generates income tax credits for the Company.
BALANCE SHEET
Total assets as of March 31, 2006 were $611,310,000 compared with $602,697,000 as of year-end 2005, representing a 1.4% increase. Total deposits declined from $516,393,000 at December 31, 2005 to $509,891,000 at March 31, 2006. Total loans, net of the allowance for loan losses, grew to $427,169,000 at March 31, 2006 compared to $409,504,000 at December 31, 2005, representing a 4.3% increase. Investment securities decreased from $124,510,000 at December 31, 2005 to $122,247,000 at March 31, 2006.
Liquidity
The Company's liquidity is determined by the level of assets (such as cash, Federal funds sold, and investments in unpledged marketable securities) that are readily convertible to cash to meet customer withdrawals and credit commitments. Management reviews the Company’s liquidity position on a regular basis to ensure that it is adequate to meet projected loan funding and potential withdrawal of deposits. The Company has a comprehensive Asset/Liability Management and Liquidity Policy, which it uses to determine adequate liquidity. As of March 31, 2006 liquid assets were 20% of total assets, compared with 26% as of March 31, 2005 and is in excess of the minimum limits set in the the Company’s liquidity policy.
24
Capital Resources
The following summarizes the Bank’s ratios of capital to risk-adjusted assets for the periods indicated:
At March 31, | At | Minimum | |||||
December 31, | Regulatory | ||||||
2006 | 2005 | 2005 | Requirement | ||||
Tier 1 Capital | 10.89% | 10.37% | 11.00% | 4.00% | |||
Total Capital | 11.87% | 11.29% | 11.99% | 8.00% | |||
Leverage Ratio | 9.61% | 9.10% | 9.11% | 4.00% |
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as of March 31, 2006:
Less than | 1-3 | 3-5 | |||||||
(in thousands) | Total | one year | years | years | Thereafter | ||||
FHLB loan, fixed rate of 2.24% | $5,000 | $5,000 | $- | $- | $- | ||||
payable on April 17, 2006 | |||||||||
FHLB loan, fixed rate of 2.83% | 5,000 | - | 5,000 | - | - | ||||
payable on April 16, 2007 | |||||||||
FHLB loan, fixed rate of 3.23% | 9,000 | - | 9,000 | - | - | ||||
payable on April 14, 2008 | |||||||||
Junior subordinated debt, adjustable rate | 10,310 | - | - | - | 10,310 | ||||
of three-month LIBOR plus 3.45%, | |||||||||
callable in whole or in part by the | |||||||||
Company on a quarterly basis beginning | |||||||||
June 26, 2007, matures June 26, 2032. | |||||||||
Operating lease obligations | 3,446 | 903 | 1,225 | 732 | 586 | ||||
Other obligations | 228 | 129 | 99 | - | - | ||||
Total contractual obligations | $32,984 | $6,032 | $15,324 | $732 | $10,896 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company’s exposure to market risk exists primarily in interest rate risk in the balance sheet. The objective of market risk management is to mitigate an undue adverse impact on earnings and capital arising from changes in interest rates and other market variables. This risk management objective supports the Company’s broad objective of enhancing shareholder value, which encompasses stable earnings growth over time.
The Board of Directors, through its Asset & Liability Management Committee (ALCO), approves the ALM Policy, which governs the management of market risk and liquidity. ALCO is responsible for ongoing management of interest rate risk as well as liquidity risk, including formulation of risk management strategies. The Chief Financial Officer is primarily responsible for the implementation of risk management strategies approved by ALCO and for operating management of market risk through the funding and investment activities of the Company.
The Company manages the market risk associated with our asset and liability management activities as described below.
Interest Rate Risk Management
ALCO monitors interest rate risk quarterly through a variety of modeling techniques that are used to quantify the sensitivity of Net Interest Income (NII) and Economic Value of Equity (EVE) to changes in interest rates. In managing interest rate risk, ALCO monitors NII sensitivity over a twelve-month time horizon and in response to a variety of interest rate changes. The Company’s NII policy measure involves a simulation of NII in which the Company estimates the impact that proportional shifts in the yield curve would have on earnings over a twelve-month horizon, given the projected balance sheet profile.
25
Simulation of NII is the primary tool used to measure the Company’s interest rate risk. The NII simulations use a twelve-month projected balance sheet in order to model the impact of interest rate changes. Assumptions are made to model the future behavior of deposit rates and loan spreads based on management’s outlook and historical experience.
At March 31, 2006, the NII simulation showed modest asset-sensitivity to proportional rate shifts. A +200 basis point proportional shift would raise twelve-month NII by 2. 59 percent, while a similar downward shift would reduce it by 2. 58 percent. Continued enhancements to the Company’s interest rate risk modeling may make prior-year comparisons of NII less meaningful.
NII Simulation
Estimated Change in | |
NII | |
Change in Interest Rates (Basis Points) | (as a % of "flat" NII) |
+ 300 | 3.89% |
+ 200 | 2.59% |
+ 100 | 1.29% |
+ 0 (flat) | 0.00% |
- 100 | (1.29%) |
- 200 | (2.58%) |
- 300 | (3.86%) |
In addition to NII, the Company measures the sensitivity of EVE to interest rate shocks. EVE is reviewed and monitored for its compliance with ALCO limits. Consistent with the projected asset-sensitivity of earnings over time, the Company’s EVE shows asset-sensitivity as well.
Management believes that, together, our NII and EVE simulations provide management with a reasonably comprehensive view of the sensitivity of our operating results and value profile to changes in interest rates, at least over the measurement horizon. However, as with any financial model, the underlying assumptions are inherently uncertain and subject to refinement as modeling techniques and theory improve and historical data becomes more readily accessible. Consequently, the simulation models cannot predict with certainty how rising or falling interest rates might impact net interest income. Actual and simulated results will differ to the extent there are differences between actual and assumed interest rate changes, balance sheet volumes, and management strategies, among other factors.
In general, the core balance sheet is relatively asset sensitive, meaning that investments and loans generally re-price more quickly than core deposits. In managing the interest sensitivity of the balance sheet, the Company uses the investment securities portfolio as the primary tool to adjust the risk profile.
At March 31, 2006 and December 31, 2005, the securities available for sale portfolio totaled $122.2 and $124.5 million, respectively. The estimated effective duration of the available for sale portfolio was 3.1 at March 31, 2006, compared to 3.0 at December 31, 2005.
Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 3.1 suggests an expected price decline of approximately 3.1 percent for an immediate one percent increase in interest rates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures:
Based on their evaluation as of March 31, 2006, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms
Changes in Internal Controls:
There have not been any significant changes in our internal disclosures controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
26
PART 2
OTHER INFORMATION
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to the business of the Company, there are no material pending legal proceedings.
ITEM 1A.
RISK FACTORS
There have been no material changes from the risk factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
ITEM 2.
UNREGISTERD SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5.
OTHER INFORMATION
None
ITEM 6.
EXHIBITS
An index of exhibits begins on page 29.
27
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTH BAY BANCORP
A California Corporation
Date: May 10, 2006
/s/ Terry L. Robinson |
TERRY L. ROBINSON |
President and Chief Executive Officer |
Date: May 10, 2006
/s/ Patrick E. Phelan |
PATRICK E. PHELAN |
Executive Vice President and Chief Financial Officer |
28
EXHIBIT INDEX | |
Exhibit No. | Description |
11 | Statement re: computation of per share earnings is included in Note 1 to the unaudited condensed consolidated financial statements of Registrant. |
31.1 | Certificate of Principal Executive Officer Pursuant to SEC Release 33-8238 |
31.2 | Certificate of Principal Financial Officer Pursuant to SEC Release 33-8238 |
32.1 | Certificate of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 |
32.2 | Certificate of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 |
29
Exhibit 31.2
CERTIFICATION
I, Terry L. Robinson, certify that:
I have reviewed this quarterly report on Form 10-Q of North Bay Bancorp; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedure, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: May 10, 2006
/s/ Terry L. Robinson
TERRY L. ROBINSON
President and Chief Executive Officer
30
Exhibit 31.2
CERTIFICATION
I, Patrick E. Phelan, certify that:
I have reviewed this quarterly report on Form 10-Q of North Bay Bancorp;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedure, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing
the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date: May 10, 2006
/s/ Patrick E. Phelan |
PATRICK E. PHELAN |
Executive Vice President and Chief Financial Officer |
31
EXHIBIT 32.1
The following certification accompanies North Bay Bancorp’s Quarterly Report on Form 10-Q and is not filed as provided in SEC Release Nos. 33-8212, 34-47551 and IC 25967, dated March 21, 2003.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Quarterly Report on Form 10-Q of North Bay Bancorp for the quarter ended March 31, 2006, I, Terry L. Robinson, President and Chief Executive Officer of North Bay Bancorp, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
(1)
such Quarterly Report on Form 10-Q of North Bay Bancorp for the quarter ended March 31, 2006, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
the information contained in such Quarterly Report on Form 10-Q of North Bay Bancorp for the quarter ended March 31, 2006, fairly presents, in all material respects, the financial condition and results of operations of North Bay Bancorp.
Dated: May 10, 2006
/s/ Terry L. Robinson |
TERRY L. ROBINSON |
President and Chief Executive Officer |
32
EXHIBIT 32.2
The following certification accompanies North Bay Bancorp’s Quarterly Report on Form 10-Q and is not filed as provided in SEC Release Nos. 33-8212, 34-47551 and IC 25967, dated March 21, 2003.
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Quarterly Report on Form 10-Q of North Bay Bancorp for the quarter ended March 31, 2006, I, Patrick E. Phelan, Chief Financial Officer of North Bay Bancorp, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
such Quarterly Report on Form 10-Q of North Bay Bancorp for the quarter ended March 31, 2006, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
the information contained in such Quarterly Report on Form 10-Q of North Bay Bancorp for the quarter ended March 31, 2006, fairly presents, in all material respects, the financial condition and results of operations of North Bay Bancorp.
Dated: May 10, 2006
/s/ Patrick E. Phelan |
PATRICK E. PHELAN |
Executive Vice President and Chief Financial Officer |
33