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 June 30, 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 Identification No.)
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 August 4, 2006, there were 4,126,116 shares of the registrant’s Common Stock, no par value, outstanding.
North Bay Bancorp
Quarterly Report of Form 10-Q
June 30, 2006
Table of Contents
Page
Forward-Looking Statements
Part I – Financial Information
Item 1.
Financial Statements (Unaudited)
4
Condensed Consolidated Balance Sheets
4
Condensed Consolidated Statements of Income
5
Condensed Consolidated Statements of Comprehensive Income
6
Condensed Consolidated Statements of Changes in Shareholders’ Equity
7
Condensed Consolidated Statements of Cash Flows
8
Notes to Condensed Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition
20
and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
30
Item 4.
Controls and Procedures
31
Part II – Other Information
Item 1.
Legal Proceedings
32
Item 1A.
Risk Factors
32
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
Item 3.
Defaults Upon Senior Securities
32
Item 4.
Submission of Matters to a Vote of Security Holders
32
Item 5.
Other Information
32
Item 6.
Exhibits
32
Signatures
33
Exhibits
34
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, 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 deposits, and fee and oth er 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, as a result of economic uncertainty created by 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 busin ess.
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 Condensed Consolidated Balance Sheets | ||||||
(In thousands, except share data; unaudited) | ||||||
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| At June 30, |
| At December 31, | |||
| 2006 |
| 2005 |
| 2005 | |
Assets |
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| |
Cash and due from banks | $ 40,451 |
| $ 24,369 |
| $ 28,174 | |
Federal funds sold | - |
| 40,080 |
| 7,170 | |
Total cash and cash equivalents | 40,451 |
| 64,449 |
| 35,344 | |
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| |
Time deposits with other financial institutions | 100 |
| 100 |
| 100 | |
Investment securities - available for sale | 108,395 |
| 91,172 |
| 124,510 | |
Loans, net of allowance for loan losses of $5,112 in June, 2006, $4,541 in June, 2005 |
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and $4,924 in December, 2005 | 450,887 |
| 396,961 |
| 409,956 | |
Loans held-for-sale | - |
| 9,707 |
| - | |
Premises and equipment, net | 9,349 |
| 9,731 |
| 9,475 | |
Cash value of life insurance | 10,259 |
| 9,930 |
| 10,053 | |
Other intangible assets | 682 |
| - |
| 734 | |
Accrued interest receivable and other assets | 15,632 |
| 8,107 |
| 12,525 | |
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| |
Total assets | $ 635,755 |
| $ 590,157 |
| $ 602,697 | |
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| |
Liabilities and Shareholders' Equity |
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Deposits: |
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| |
Non-interest bearing | $168,523 |
| $ 152,065 |
| $ 155,320 | |
Interest bearing | 313,666 |
| 357,596 |
| 361,073 | |
Total deposits | 482,189 |
| 509,661 |
| 516,393 | |
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| |
Accrued interest payable and other liabilities | 5,826 |
| 3,958 |
| 6,941 | |
Federal funds purchased | 12,000 |
| - |
| - | |
Other borrowings | 73,000 |
| 19,000 |
| 19,000 | |
Junior subordinated debentures | 10,310 |
| 10,310 |
| 10,310 | |
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| |
Total liabilities | 583,325 |
| 542,929 |
| 552,644 | |
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Commitments and contingencies |
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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; 4,126,116, 4,078,935 |
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and 4,100,376 shares issued and outstanding at June 30, 2006, June 30, 2005 |
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and December 31, 2005, respectively | 46,074 |
| 39,476 |
| 39,965 | |
Additional Paid-In Capital | 338 |
| - |
| - | |
Retained earnings | 8,515 |
| 7,981 |
| 11,566 | |
Accumulated other comprehensive loss | (2,497) |
| (229) |
| (1,478) | |
Total shareholders' equity | 52,430 |
| 47,228 |
| 50,053 | |
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|
|
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| |
Total liabilities and shareholders' equity | $ 635,755 |
| $ 590,157 |
| $ 602,697 | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. | ||||||
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4
North Bay Bancorp Condensed Consolidated Statements of Income | |||||||||||
(In thousands, except share data; unaudited) | |||||||||||
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| ||||
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||
| 2006 |
| 2005 |
| 2006 |
| 2005 | ||||
Interest Income |
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| ||||
Loans, including fees | $ 8,320 |
| $ 6,978 |
| $ 15,992 |
| $ 13,578 | ||||
Investment securities - taxable | 977 |
| 787 |
| 2,005 |
| 1,622 | ||||
Investment securities - tax exempt | 228 |
| 110 |
| 459 |
| 220 | ||||
Federal funds sold | 15 |
| 210 |
| 36 |
| 340 | ||||
Time deposits with other financial institutions | - |
| - |
| 1 |
| 1 | ||||
Total interest income | 9,540 |
| 8,085 |
| 18,493 |
| 15,761 | ||||
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Interest Expense |
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Deposits | 1,285 |
| 848 |
| 2,455 |
| 1,599 | ||||
Federal funds purchased | 47 |
| - |
| 75 |
| - | ||||
Other borrowings | 658 |
| 138 |
| 812 |
| 274 | ||||
Junior subordinated debentures | 228 |
| 185 |
| 455 |
| 350 | ||||
Total interest expense | 2,218 |
| 1,171 |
| 3,797 |
| 2,223 | ||||
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Net interest income | 7,322 |
| 6,914 |
| 14,696 |
| 13,538 | ||||
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Provision for loan losses | 100 |
| 230 |
| 200 |
| 415 | ||||
Net interest income after |
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provision for loan losses | 7,222 |
| 6,684 |
| 14,496 |
| 13,123 | ||||
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Non interest income |
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Service charges and other fees | 518 |
| 516 |
| 1,018 |
| 1,039 | ||||
Gain on sale of loans | 126 |
| - |
| 126 |
| - | ||||
Increase in cash value of life insurance | 101 |
| 85 |
| 206 |
| 176 | ||||
Other income | 447 |
| 480 |
| 889 |
| 822 | ||||
Total noninterest income | 1,192 |
| 1,081 |
| 2,239 |
| 2,037 | ||||
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Non interest expenses |
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Salaries and employee benefits | 3,154 |
| 2,735 |
| 6,360 |
| 5,459 | ||||
Occupancy | 431 |
| 446 |
| 906 |
| 840 | ||||
Equipment | 489 |
| 532 |
| 968 |
| 1,079 | ||||
Other | 1,703 |
| 1,460 |
| 3,322 |
| 2,830 | ||||
Total operating expense | 5,777 |
| 5,173 |
| 11,556 |
| 10,208 | ||||
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Income before provision for |
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income taxes | 2,637 |
| 2,592 |
| 5,179 |
| 4,952 | ||||
Provision for income taxes | 988 |
| 1,007 |
| 1,815 |
| 1,905 | ||||
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Net income | $ 1,649 |
| $ 1,585 |
| $ 3,364 |
| $ 3,047 | ||||
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Average shares outstanding | 4,123,466 |
| 4,078,370 |
| 4,117,749 |
| 4,059,883 | ||||
Diluted average shares outstanding | 4,279,727 |
| 4,235,915 |
| 4,277,672 |
| 4,240,203 | ||||
Per share data: |
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Basic earnings per common share: | $ 0.40 |
| $ 0.39 |
| $ 0.82 |
| $ 0.75 | ||||
Diluted earnings per common share: | $ 0.39 |
| $ 0.37 |
| $ 0.79 |
| $ 0.72 | ||||
Dividends paid: | $ 0.14 |
| $ - |
| $ 0.14 |
| $ 0.14 | ||||
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. |
5
North Bay Bancorp Condensed Consolidated Statements of Comprehensive Income (In thousands; unaudited) | ||||||
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| Three Months Ended June 30, |
| Six Months Ended June 30, | |||
| 2006 | 2005 |
| 2006 | 2005 | |
Net Income | $ 1,649 | $ 1,585 |
| $ 3,364 | $ 3,047 | |
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Other comprehensive income (loss): |
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Unrealized holding gains (losses) on | (1,466) | 515 |
| (1,754) | (661) | |
Tax effect | 601 | (211) |
| 719 | 271 | |
Unrealized holding gains (losses) on available-for-sale | (865) | 304 |
| (1,035) | (390) | |
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Minimum pension liability adjustment | 13 | - |
| 26 | - | |
Tax effect | (5) | - |
| (10) | - | |
Minimum pension liability adjustment, net of tax | 8 | - |
| 16 | - | |
Other comprehensive income (loss) | (857) | 304 |
| (1,019) | (390) | |
Comprehensive income | $ 792 | $ 1,889 |
| $ 2,345 | $ 2,657 | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. |
6
North Bay Bancorp Condensed Consolidated Statements of Changes in Shareholders' Equity (In thousands, except share data; unaudited) | |||||||
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| Accumulated |
| |
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| Additional |
| Other | Total | |
| Common Stock | Paid-In | Retained | Comprehensive | Shareholders' | ||
| Shares |
| Amount | Capital | Earnings | Income (Loss) | Equity |
Balance at December 31, 2004 | 3,823,353 |
| $ 33,473 | $ - | $ 10,500 | $ 161 | $ 44,134 |
Net income | - |
| - | - | 3,047 | - | 3,047 |
Other comprehensive income, net of taxes: |
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Unrealized net losses on investment securities | - |
| - | - | - | (390) | (390) |
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 | 62,011 |
| 1,007 | - | - | - | 1,007 |
Balance at June 30, 2005 | 4,078,935 |
| $ 39,476 | $ - | $ 7,981 | $ (229) | $ 47,228 |
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Balance at December 31, 2005 | 3,904,651 |
| $ 39,965 | - | $ 11,566 | $ (1,478) | $ 50,053 |
Net income | - |
| - | - | 3,364 | - | 3,364 |
Other comprehensive income, net of taxes: |
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Unrealized net losses on investment securities | - |
| - | - | - | (1,035) | (1,035) |
Minimum pension liability adjustment, net | - |
| - | - | - | 16 | 16 |
Stock dividends declared and fractional shares paid | 195,725 |
| 5,811 | - | (5,826) | - | (15) |
Cash dividends declared $0.14 per share of common stock | - |
| - | - | (589) | - | (589) |
Stock-based compensation expense recognized in earnings | - |
| - | 186 | - | - | 186 |
Stock options excercised, including related tax benefits | 25,740 |
| 298 | 152 | - | - | 450 |
Balance at June 30, 2006 | 4,126,116 |
| $ 46,074 | $ 338 | $ 8,515 | $ (2,497) | $ 52,430 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. |
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7
North Bay Bancorp |
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Condensed Consolidated Statements of Cash Flows |
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(In thousands; unaudited) |
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| For the six months ended June 30, |
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| 2006 |
| 2005 |
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Cash Flows From Operating Activities: |
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Net income | $ 3,364 |
| $ 3,047 |
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Adjustment to reconcile net income to net cash |
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provided by (used in) operating activities: |
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Depreciation and amortization | 859 |
| 806 |
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Provision for loan losses | 200 |
| 415 |
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Amortization of deferred loan fees | (380) |
| (432) |
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Proceeds from sale of SBA loans | 2,178 |
| - |
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Gain on sale of SBA loans | (126) |
| - |
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Proceeds from sale of loans held-for-sale | - |
| 48,434 |
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Purchase of loans held-for-sale | - |
| (53,537) |
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Premium (accretion) amortization, net | (3) |
| 28 |
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Stock-based compensation expense | 186 |
| - |
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Tax benefit from stock-based compensation arrangements | (152) |
| (240) |
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Increase in cash value of bank-owned life insurance | (206) |
| (176) |
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Changes in: |
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Interest receivable and other assets | (2,579) |
| (1,488) |
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Interest payable and other liabilities | (963) |
| 72 |
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Net cash provided by (used in) operating activities | 2,378 |
| (3,071) |
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Cash Flows From Investing Activities: |
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Investment securities available-for-sale: |
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Proceeds from maturities and principal payments | 14,346 |
| 6,453 |
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Purchases | - |
| (1,533) |
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Net increase in loans | (42,803) |
| (22,976) |
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Capital expenditures | (456) |
| (236) |
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Net cash used in investing activities | (28,913) |
| (18,292) |
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Cash Flows From Financing Activities: |
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Net (decrease) increase in deposits | (34,204) |
| 25,168 |
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Proceeds from other borrowings | 66,000 |
| - |
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Stock options exercised | 298 |
| 767 |
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Tax benefits realized from stock-based compensation arrangements | 152 |
| 240 |
|
Cash dividends and fractional shares paid on common stock | (604) |
| (570) |
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Net cash provided by financing activities | 31,642 |
| 25,605 |
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Net increase in cash and cash equivalents | 5,107 |
| 4,242 |
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Cash and cash equivalents at beginning of year | 35,344 |
| 60,207 |
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Cash and cash equivalents at end of period | $ 40,451 |
| $ 64,449 |
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Supplemental disclosure of cash flow activity: |
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Cash paid for interest expense | $ 3,804 |
| $ 2,198 |
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Cash paid for income taxes | $ 2,340 |
| $ 1,955 |
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Supplemental disclosure of noncash activities: |
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Unrealized loss on investment securities available for sale | $ (1,754) |
| $ (661) |
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Stock dividends paid | $ 5,811 |
| $ 4,996 |
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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)
June 30, 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 and six month periods ended June 30, 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 and contingencies. 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 may differ from these estimates under different assumption s or conditions. The allowance for loan losses, income taxes and supplemental retirement plan liabilities are 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. The bank has a concentration in higher risk commercial real estate loans (“CRE”) loans. Approximately 59% of the Bank’s lending portfolio is classified as CRE.
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.
9
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 that the Company has the ability and intent to hold until maturity. All other securities are classified as available-for-sale. During the six months ended June 30, 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.
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 t he extent that cash is received and where the future 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. For purposes of this discussion, “loans” shall include all loans and lease contracts that are part of the Company’s portfolio.
Sales and Servicing of SBA Loans
The Company originates loans to customers under a Small Business Administration ("SBA") program that generally provides for SBA guarantees of 70% to 90% of each loan. On occasion, the Company sells the guaranteed portion of the SBA loan to a third party and retains the unguaranteed portion in its own portfolio. The Company may be required to refund a portion of the sales premium received if the borrower makes a payment 10 or more days late within 90 days of the settlement date or the loan prepays within 90 days of the settlement date. As a result, the Company estimates a reserve, based upon historical prepayment and default activity and does not recognizes the entire gain on these loan sales until the 90 day period elapses. To calculate the gain (loss) on sale, the Company's investment in an SBA loan is allocated among the retained portion of the loan and the sold portion of the loan, based on the relative fair value of each por tion. The gain (loss) on the sold portion of the loan is recognized at the time of sale based on the difference between the sale proceeds and the allocated investment. As a result of the relative fair value allocation, the carrying value of the retained portion is discounted, with the discount accreted to interest income over the life of the loan. The Company retains the servicing of the sold SBA loans and receives a 1% servicing fee. Related servicing assets are immaterial as of June 30, 2006.
10
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 measured 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 the 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 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. 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 these unknown but 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.
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 review s 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 $5,112,000 at June 30, 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.
11
The following tables summarize the activity in the allowance for loan losses for the periods indicated:
|
|
|
|
|
|
|
|
| ||||
| For the three months ended |
| For the six months ended |
| ||||||||
(in thousands) | June 30, 2006 |
| June 30, 2005 |
| June 30, 2006 |
| June 30, 2005 |
| ||||
Allowance for loan losses: |
|
|
|
|
|
|
|
| ||||
Balance at beginning of period | $ 5,020 |
| $ 4,317 |
| $ 4,924 |
| $ 4,136 |
| ||||
Provision for loan losses | 100 |
| 230 |
| 200 |
| 415 |
| ||||
Loans charged off | (9) |
| (6) |
| (15) |
| (12) |
| ||||
Recoveries of loans previously charged-off | 1 |
| - |
| 3 |
| 2 |
| ||||
Net Charge-offs | (8) |
| (6) |
| (12) |
| (10) |
| ||||
Balance at end of period | $ 5,112 |
| $ 4,541 |
| $ 5,112 |
| $ 4,541 |
| ||||
|
|
|
|
|
|
|
|
| ||||
Allowance for loan losses |
|
|
|
| $ 5,112 |
| $ 4,541 |
| ||||
As a percentage of total loans |
|
|
|
| 1.12% |
| 1.13% |
| ||||
|
|
|
|
|
|
|
|
|
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 and have not materially changed from December 31, 2005.
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 June 30, 2006, the Company had identifiable intangible assets consisting of unrecognized prior service costs of the Company’s supplemental retirement plan (minimum pension liability). This intangible asset is amortized on a straight-line basis over eight years.
The following table summarizes the Company’s minimum pension liability intangible as of June 30, 2006 and December 31, 2005.
|
| December 31, |
|
|
|
| June 30, | |
(in thousands) |
| 2005 |
| Additions |
| Reductions |
| 2006 |
Minimum pension liability intangible |
| $ 734 |
| - |
| (52) |
| $ 682 |
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.
12
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 six months ended June 30, 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 provisions of SFAS 123R that have vested during the reporting period. Under the pr ovisions of the modified-prospective transition method, results for the three and six months ended June 30, 2005 have not been restated.
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 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 and restricted stock grants as of June 30, 2006, the Company expects to recognize total pre-tax stock-based compensation cost of approximately $1,452,000 related to outstanding stock option and restricted stock grants, of which $186,000 was recognized during the six months ended June 30, 2006, and $101,000 during the three months ended June 30, 2006 in accordance with the accounting requirements of SFAS 123R. The after-tax e ffect of adopting SFAS 123R was a reduction of net income of $151,000, and a reduction in diluted earnings per share of $0.04, for the six months ended June 30, 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.
For the three and six months ended June 30, 2005, had the 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) | June 30, 2005 | |||
|
| Three months ended |
| Six months ended |
Net income | As reported | $ 1,585 |
| $ 3,047 |
| Pro forma | $ 1,406 |
| $ 2,787 |
Basic earnings per share | As reported | $ 0.39 |
| $ 0.75 |
| Pro forma | $ 0.34 |
| $ 0.69 |
Diluted earnings per share | As reported | $ 0.37 |
| $ 0.72 |
| Pro forma | $ 0.33 |
| $ 0.66 |
Stock-based employee compensation |
|
|
| |
cost, net of related tax effects, | As reported | $ 0 |
| $ 0 |
included in net income | Pro forma | $ 179 |
| $ 260 |
|
|
|
|
|
13
The fair value of employee stock option grants is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for the six months ended June 30, 2006.
Option-Pricing Model Assumptions: | |
|
|
Dividend yield | 0.00% |
Expected life (in years) | 5.0 |
Expected volatility | 32.52% |
Risk-free interest rate | 5.03% |
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. 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.
On May 17, 2006, at the 2006 Annual Meeting of Shareholders, the shareholders of North Bay Bancorp approved amendments to the North Bay Bancorp 2002 Stock Option Plan (the 2002 Plan). As a result of the amendments, the 2002 Plan is now entitled the North Bay Bancorp Amended and Restated 2002 Incentive Compensation Plan (the “Amended and Restated Plan”). In addition to certain nonsubstantive changes, the Amended and Restated Plan increases the number of shares of the Company’s Common Stock available for grant and expands the types of equity-based awards that may be granted. The Amended and Restated Plan will be administered by the Compensation Committee, except that any awards to directors or executive officers of the Company or its affiliates recommended by the Compensation Committee must be approved by the independent members of the Board of Directors of the Company.
The Amended and Restated Plan permits the grant of stock appreciation rights, restricted stock, performance shares and performance units in addition to grants of incentive stock options and non-statutory stock options. The Amended and Restated Plan has also been amended to increase the number of shares of Common Stock available for grant under the 2002 Plan by 92,664 shares, from 236,540 to 329,204 shares. As a result, the number of shares available for grant under the Amended and Restated Plan when combined with the number of shares of Common Stock currently subject to outstanding options under the 2002 Plan would equal 840,000 or 20.4% of the current outstanding Common Stock of the Company.
Restricted Common Stock Awards
On June 1, 2006, the Company granted 20,700 shares of restricted common stock to selected officers, which had a fair market value of $28.65 per share on the date of grant. These restricted common stock awards cliff vest on the fifth anniversary of the grant date. As of June 30, 2006, 20,700 shares of restricted stock are outstanding, nonvested and expected to vest. The compensation cost that has been charged against income for restricted stock awards was $10,000 for the six months and three months ended , June 30, 2006. The total income tax benefit recognized in the income statement for restricted stock awards was $4,000 for the six months and three months ended June 30, 2006. At June 30, 2006, the total compensation cost related to nonvested restricted common stock but not yet recognized was $583,000. Restricted common stock compensation expense is recognized on a straight-line basis over the vesting period. This cos t is expected to be recognized over a weighted average remaining period of approximately 4.9 years and will be adjusted for subsequent changes in estimated forfeitures. The intrinsic value of restricted common stock outstanding was $1,000 as of June 30, 2006.
14
Stock Option Awards
Stock option activity for the six months ended June 30, 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 | 21,800 | $ 28.65 | to | $ 28.65 | $ 28.65 | $ 10.32 |
Options exercised | (26,766) | $ 9.92 | to | $ 20.79 | $ 11.10 |
|
Options forfeited | (4,683) | $ 9.92 | to | $ 25.00 | $ 19.63 |
|
Outstanding at June 30, 2006 | 524,770 | $ 9.92 | to | $ 28.65 | $ 16.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004 | 617,408 | $ 9.92 | to | $ 24.73 | $ 14.74 |
|
Options granted | 13,125 | $ 24.52 | to | $ 25.00 | $ 24.77 | $ 8.97 |
Options exercised | (65,038) | $ 9.92 | to | $ 20.79 | $ 11.80 |
|
Options forfeited | (11,891) | $ 9.92 | to | $ 20.79 | $ 16.02 |
|
Outstanding at June 30, 2005 | 553,604 | $ 9.92 | to | $ 25.00 | $ 15.30 |
|
|
|
|
|
|
|
|
During the six months ended June 30, 2006, the intrinsic value of options exercised and the fair value of options that vested were $420,000 and $176,000, respectively. 21,800 options were granted during the six months ended June 30, 2006.
During the six months ended June 30, 2005, the intrinsic value of options exercised and the fair value of options that vested were $1,034,000 and $441,000, respectively. 13,125 options were granted during the six months ended June 30, 2005.
The total intrinsic value of stock options exercised during the six months ended June 30, 2006 was $420,000 for which no compensation costs nor tax benefits were previously recognized in equity upon issuance. Cash received from the exercise of stock options and the related tax benefit during the six months ended June 30, 2006 totaled $298,000 and $152,000, respectively.
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 June 30, 2006 by range of exercise price:
| Outstanding Options |
|
| Exercisable Options | ||
|
|
|
|
|
|
|
Range of |
| Weighted-Average | Weighted-Average Remaining |
|
| Weighted-Average |
Exercise Price | Number | Exercise Price | Contractual Term (yrs.) | Number | Exercise Price | |
$ 9.92-$11.00 | 131,311 | $10.55 | 4.51 |
| 124,036 | $10.56 |
$11.01-$13.00 | 50,656 | $11.62 | 3.61 |
| 50,656 | $11.62 |
$13.01-$15.00 | 58,995 | $14.09 | 6.24 |
| 34,876 | $14.08 |
$15.01-$17.00 | 94,653 | $15.83 | 7.01 |
| 38,687 | $15.80 |
$17.01-$19.00 | 15,194 | $17.12 | 7.43 |
| 6,512 | $17.12 |
$19.01-$23.00 | 118,678 | $20.73 | 8.32 |
| 58,275 | $20.75 |
$23.01-$26.00 | 26,657 | $24.97 | 8.76 |
| 22,109 | $25.01 |
$26.01-$28.65 | 28,626 | $28.42 | 9.03 |
| 6,825 | $27.67 |
| 524,770 | $16.20 | 6.48 |
| 341,976 | $14.81 |
|
|
|
|
|
|
|
15
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 June 30, 2006:
| Currently | Currently Not | Total |
(dollars in thousands except exercise price) | Exercisable | Exercisable | Outstanding |
Number of options | 341,976 | 182,794 | 524,770 |
Weighted average exercise price | $ 14.81 | $ 18.80 | $ 16.20 |
Intrinsic value | $ 4,750 | $ 1,810 | $ 6,560 |
Weighted average remaining contractual term (yrs.) | 5.90 | 7.56 | 6.48 |
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|
|
|
The 182,794 options that are not currently exercisable as of June 30, 2006 are expected to vest, on a weighted-average basis, over the next 1.80 years, and the Company is expected to recognize $682,000 of compensation costs related to these
options as they vest. The Company expects a forfeiture rate of 5.7% on nonvested options.
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 and restricted stock).
The following tables 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 June 30, 2006 | |||
Basic earnings per share | 1,649 | 4,123,466 | $ 0.40 | |
Dilutive effect of stock options |
| 156,261 |
| |
Diluted earnings per share |
| 4,279,727 | $ 0.39 | |
|
|
|
| |
| For the three months ended June 30, 2005 | |||
Basic earnings per share | 1,585 | 4,078,370 | $ 0.39 | |
Dilutive effect of stock options |
| 157,545 |
| |
Diluted earnings per share |
| 4,235,915 | $ 0.37 |
| (In 000's except share data) | ||
| Net Income | Weighted Average Shares | Per-Share Amount |
| For the six months ended June 30, 2006 | ||
Basic earnings per share | 3,364 | 4,117,749 | $ 0.82 |
Dilutive effect of stock options |
| 159,923 |
|
Diluted earnings per share |
| 4,277,672 | $ 0.79 |
|
|
|
|
| For the six months ended June 30, 2005 | ||
Basic earnings per share | 3,047 | 4,059,883 | $ 0.75 |
Dilutive effect of stock options |
| 180,320 |
|
Diluted earnings per share |
| 4,240,203 | $ 0.72 |
|
|
|
|
16
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.
The components of accumulated other comprehensive loss, included in shareholders' equity, are as follows:
| June 30, |
| December 31, |
(in thousands) | 2006 |
| 2005 |
Net unrealized loss on available-for-sale securities | $ (3,728) |
| $ (1,956) |
Tax effect | 1,550 |
| 813 |
Unrealized holding losses on available-for-sale securities, net of tax | (2,178) |
| (1,143) |
|
|
|
|
Minimum pension liability | (545) |
| (573) |
Tax effect | 226 |
| 238 |
Minimum pension liability, net of tax | (319) |
| (335) |
Accumulated other comprehensive loss | $ (2,497) |
| ��$ (1,478) |
|
|
|
|
The net unrealized loss on available-for-sale securities at June 30, 2006 increased 90.5% from December 31, 2005 due to market interest rate increases that negatively impacted the market value of the investment portfolio.
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.
17
The following table sets forth the net periodic benefit cost recognized for the plans:
| Three months ended |
| Six months ended | ||||
| June 30, |
| June 30, |
| June 30, |
| June 30, |
(in thousands) | 2006 |
| 2005 |
| 2006 |
| 2005 |
Components of net periodic benefits cost: |
|
|
|
|
|
|
|
Service cost - benefits earned during the period | $ 42 |
| $ 24 |
| $ 74 |
| $ 48 |
Interest cost on projected benefit obligation | 33 |
| 23 |
| 66 |
| 46 |
Amortization of prior service cost | 26 |
| 19 |
| 52 |
| 38 |
Amortization of unrecognized loss | 15 |
| 9 |
| 27 |
| 18 |
Net periodic benefit cost | $ 116 |
| $ 75 |
| $ 219 |
| $ 150 |
|
|
|
|
|
|
|
|
During the three months ended June 30, 2006 and 2005, the Company paid out as benefits $10,000 and $8,000, respectively, to participants under the plans.
During the six months ended June 30, 2006 and 2005, the Company paid out as benefits $19,000 and $16,000, respectively, to participants under the plans. For the year ending December 31, 2006, the Company expects to pay out as benefits $40,000 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 adopted SFA S 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 & nbsp;disclosures required for companies that did not adopt the fair value accounting method for stock-based employee compensation.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. FIN 48 requires that realization of an uncertain income tax position be "more likely than not" before it can be recognized in the financial statements. Further, FIN 48 prescribes the benefit to be recorded in the financial statements as the amount most likely to be realized assuming a review by tax authorities having all relevant information and applying current conventions. FIN 48 also clarifies the financial statement classification of tax-related penalties and interest and sets forth new disclosures regarding unrecognized tax benefits. FIN 48 is effective for fiscal years beginning after December 15, 2006. Management of the Company is currently evaluating the requirements of FIN 48 and the impact this interpretation may have on its financial sta tements.
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.
18
NORTH BAY BANCORP |
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Financial Summary |
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|
(in thousands, except per share amounts; unaudited) |
|
|
|
|
|
| ||
|
|
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|
|
|
| Three months ended |
| Six months ended |
| ||||
| June 30, |
| June 30, |
| ||||
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
Net Interest Income | $ 7,322 |
| $ 6,914 |
| $ 14,696 |
| $ 13,538 |
|
Provision for loan losses | 100 |
| 230 |
| 200 |
| 415 |
|
Noninterest income | 1,192 |
| 1,081 |
| 2,239 |
| 2,037 |
|
Noninterest expense | 5,777 |
| 5,173 |
| 11,556 |
| 10,208 |
|
Provision for income taxes | 988 |
| 1,007 |
| 1,815 |
| 1,905 |
|
Net income | $ 1,649 |
| $ 1,585 |
| $ 3,364 |
| $ 3,047 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic | $ 0.40 |
| $ 0.39 |
| $ 0.82 |
| $ 0.75 |
|
Diluted | $ 0.39 |
| $ 0.37 |
| $ 0.79 |
| $ 0.72 |
|
Per Share: |
|
|
|
|
|
|
|
|
Dividends declared | $ 0.14 |
| $ - |
| $ 0.14 |
| $ 0.14 |
|
Book value at period end | $ 12.71 |
| $ 11.58 |
| $ 12.71 |
| $ 11.58 |
|
Tangible book value at period end | $ 12.54 |
| $ 11.58 |
| $ 12.54 |
| $ 11.58 |
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding | 4,123,466 |
| 4,078,370 |
| 4,117,749 |
| 4,059,883 |
|
Average diluted shares outstanding | 4,279,727 |
| 4,235,915 |
| 4,277,672 |
| 4,240,203 |
|
Shares outstanding at period end | 4,126,116 |
| 4,078,935 |
| 4,126,116 |
| 4,078,935 |
|
At period end: |
|
|
|
|
|
|
|
|
Loans, net |
|
|
|
| $ 450,887 |
| $ 396,961 |
|
Total assets |
|
|
|
| 635,755 |
| 590,157 |
|
Total deposits |
|
|
|
| 482,189 |
| 509,661 |
|
Federal funds purchased |
|
|
|
| 12,000 |
| - |
|
Other borrowings |
|
|
|
| 73,000 |
| 19,000 |
|
Junior subordinated debt |
|
|
|
| 10,310 |
| 10,310 |
|
Shareholders' equity |
|
|
|
| 52,430 |
| 47,228 |
|
Financial Ratios: |
|
|
|
|
|
|
|
|
During the period (annualized): |
|
|
|
|
|
|
|
|
Return on assets | 1.07% |
| 1.10% |
| 1.12% |
| 1.09% |
|
Return on equity | 11.79% |
| 13.65% |
| 12.91% |
| 13.23% |
|
Net interest margin (1) | 5.32% |
| 5.32% |
| 5.43% |
| 5.36% |
|
Net loan charge-offs to average loans | 0.01% |
| 0.01% |
| 0.01% |
| 0.01% |
|
Efficiency ratio (1) | 65.50% |
| 63.90% |
| 65.67% |
| 64.70% |
|
At period end: |
|
|
|
|
|
|
|
|
Equity to assets |
|
|
|
| 8.25% |
| 8.00% |
|
Allowance for losses to loans |
|
|
|
| 1.12% |
| 1.13% |
|
|
|
|
|
|
|
|
|
|
(1) Fully taxable equivalent (FTE) |
|
|
|
|
|
|
|
|
19
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 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, income taxes, supplemental retirement plan liabilities and contingencies. 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 liabiliti es that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. (See Note 1 to the Condensed Consolidated Financial Statements).
The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company’s 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.
Financial Condition
Total assets increased 7.7% to $635,755,000 as of June 30, 2006 compared to $590,157,000 a year ago. Loans, net of the allowance for loan losses, grew 13.6% to $450,887,000 at June 30, 2006, up from $396,961,000 as of June 30, 2005. Commercial and industrial loans increased 44.3% to $105,082,000 while commercial real estate loans grew 6.0% to $268,919,000. Construction loans decreased 22.8% to $24,682,000 and consumer loans increased 8.2% to $41,868,000.
Asset quality remained excellent at June 30, 2006 with one $44,000 non-performing loan. The allowance for loan and lease losses was $5,112,000 or 1.12% of loans outstanding, compared to $4,541,000 or 1.13% of loans outstanding at June 30, 2005. Net charge-offs were $8,000 in the second quarter of 2006 and $12,000 for the first six months of 2006 as compared to $6,000 for the second quarter 2005 and $10,000 for the six months ended June 30, 2005.
Total deposits as of June 30, 2006 decreased 5.4% to $482,189,000 from a year ago. Time deposits increased 1.2% to $81,487,000 compared to $80,521,000 a year ago. Money market accounts decreased 32.6% to $89,210,000 from $132,353,000 a year earlier. Non-interest bearing checking accounts increased 10.8% to $168,523,000 as compared to $152,065,000 a year ago. Fed Funds Purchased and Other Borrowings combined (wholesale borrowings) have increased $66,000,000 or 347% from $19,000,000 at June 30, 2005 to $85,000,000 at June 30, 2006. The decrease in interest bearing deposit account balances at June 30, 2006 compared with June 30, 2005 is the result of pricing considerations to maintain the net interest margin during a period of rising interest rates. Management decided to raise interest bearing deposit account rates at a slower pace than competing financial institutions. This resulted in a rolloff of interest bearing deposit accounts thereby increasing wholesale borrowings to fund loan growth. Management is developing a plan to lower the amount of wholesale borrowings which is expected to positively impact the net interest margin.
Book value per share increased 9.8% to $12.71 at June 30, 2006 from $11.58 at June 30, 2005.
20
Results of Operations
Following is a summary of the components of net income for the periods indicated (dollars in thousands):
| Three months ended |
| Six months ended |
| ||||
| June 30, |
| June 30, |
| ||||
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
Net interest income | $ 7,322 |
| $ 6,914 |
| $ 14,696 |
| $ 13,538 |
|
Provision for loan losses | 100 |
| 230 |
| 200 |
| 415 |
|
Noninterest income | 1,192 |
| 1,081 |
| 2,239 |
| 2,037 |
|
Noninterest expense | 5,777 |
| 5,173 |
| 11,556 |
| 10,208 |
|
Provision for income taxes | 988 |
| 1,007 |
| 1,815 |
| 1,905 |
|
Net income | $ 1,649 |
| $ 1,585 |
| $ 3,364 |
| $ 3,047 |
|
|
|
|
|
|
|
|
|
|
The Company had net income of $1,649,000, or $0.39 per diluted share, for the three months ended June 30, 2006. These results represent a 4.0% increase from the $0.37 per diluted share reported for the three months ended June 30, 2005 on earnings of $1,585,000. The improvement in results from the year-ago quarter was due to a $408,000 (5.9%) increase in net interest income to $7,322,000, a $130,000 (56.5%) decrease in the provision for loan losses to $100,000, a $111,000 (10.3%) increase in noninterest income to $1,192,000 and a $19,000 (1.9%) decrease in the provision for income taxes to $988,000. These contributing factors were partially offset by a $604,000 (11.7%) increase in noninterest expense to $5,777,000. The provision for loan losses decreased as management funded the allowance for loan losses $100,000 during the second quarter of 2006 compared to $230,000 during the same period in the prior year. The reduced funding was based upon the evaluation of the adequacy of the allowance for loan losses. Management believes that the allowance for loan losses is adequately funded at June 30, 2006.
For the six months ended June 30, 2006, the Company had earnings of $3,364,000, or $0.79 per diluted share. These results represent a 10.4% increase from the $0.72 per diluted share reported for the six months ended June 30, 2005 on earnings of $3,047,000. The improvement in results from the year-ago period was due to a $1,158,000 (8.6%) increase in net interest income to $14,696,000, a $215,000 (51.8%) decrease in the provision for loan losses to $200,000, a $202,000 (9.9%) increase in noninterest income to $2,239,000 and a $90,000 (4.7%) decrease in the provision for income taxes to $1,815,000. These contributing factors were partially offset by a $1,348,000 (13.2%) increase in noninterest expense to $11,556,000. The provision for loan losses decreased as management funded the allowance for loan losses $200,000 during the first half of 2006 compared to $415,000 during the same period in the prior year. The reduced funding wa s based upon the evaluation of the adequacy of the allowance for loan losses as noted above. Management believes that the allowance for loan losses is adequately funded at June 30, 2006.
Net Interest Income
Following is a summary of the components of net interest income for the periods indicated (dollars in thousands):
| Three months ended |
| Six months ended | ||||
| June 30, |
| June 30, | ||||
| 2006 |
| 2005 |
| 2006 |
| 2005 |
Interest income | $ 9,540 |
| $ 8,085 |
| $ 18,493 |
| $ 15,761 |
Interest expense | (2,218) |
| (1,171) |
| (3,797) |
| (2,223) |
Net interest income | $ 7,322 |
| $ 6,914 |
| $ 14,696 |
| $ 13,538 |
|
|
|
|
|
|
|
|
Average interest-earning assets | $ 560,449 |
| $ 525,398 |
| $ 554,519 |
| $ 513,620 |
|
|
|
|
|
|
|
|
Net interest margin (FTE) | 5.32% |
| 5.32% |
| 5.43% |
| 5.36% |
21
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 and borrowings. 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 $7,322,000 and $6,914,000 for the three months ended June 30, 2006 and June 30, 2005, respectively. These results equate to a 5.9% increase in net interest income for the second quarter of 2006 compared to the second quarter of 2005. For the six months ended June 30, 2006 and 2005, respectively, net interest income before the provision for loan losses was $14,696,000 and $13,538,000. These results equate to an 8.6% increase in net interest income.
Three Months Ended June 30, 2006 Compared to the Three Months Ended June 30, 2005
Interest and Fee Income
Interest and fee income for the second quarter of 2006 increased $1,455,000 (18.0%) from the second quarter of 2005. The increase was the net effect of a $35,051,000 (6.7%) increase in average balances of interest-earning assets to $560,449,000 and a 69 basis point increase in the yield on those average interest-earning assets to 6.91%. The growth in interest-earning assets was comprised of a $36,541,000 (9.0%) increase in average loan balances to $443,008,000 that was partially offset by a decrease of $24,729,000 (95.3%) in average balances of Federal funds sold to $1,225,000 due to strong loan demand and decreases in money market deposit accounts. The increase in the yield on average interest-earning assets was mainly due to the overall increase in market rates during the second quarter of 2006 compared with the second quarter of 2005.
Interest Expense
Interest expense increased $1,047,000 (89%) to $2,218,000 in the second quarter of 2006 compared to the year-ago quarter. The average balance of interest-bearing liabilities increased $22,899,000 (6.0%) to $402,597,000 in the second quarter compared to the year-ago quarter. Average interest-bearing deposits decreased $19,631,000 (5.6%) and average other borrowings increased $38,672,000 (203.5%). Increases in average loans and decreases in average deposits has led to increases in average other borrowings. The average rate paid on interest-bearing liabilities in the quarter ended June 30, 2006 increased 97 basis points to 2.21% compared to the year-ago quarter. This increase was the result of general market interest rate increases and the increased reliance on wholesale funding sources (other borrowings) due to loan growth and decreases in money market deposits.
Six Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2005
Interest and Fee Income
Interest and fee income for the six months ended June 30, 2006 increased $2,732,000 (17.3%) from the six months ended June 30, 2005. The increase was the net effect of a $40,899,000 (8.0%) increase in average balances of interest-earning assets to $554,519,000 and a 58 basis point increase in the yield on those average interest-earning assets to 6.81%. The growth in interest-earning assets was comprised of a $34,451,000 (8.7%) increase in average loan balances to $431,957,000 that was partially offset by a decrease of $20,371,000 (93.2%) in average balances of Federal funds sold to $1,497,000 due to strong loan demand and decreases in money market deposit accounts. The increase in the yield on average interest-earning assets was mainly due to the overall increase in market rates during the six months ended June 30, 2006 compared with the six months ended June 30, 2005.
Interest Expense
Interest expense increased $1,574,000 (70.8%) to $3,797,000 during the six months ended June 30, 2006 compared to the same period in the prior year. The average balance of interest-bearing liabilities increased $18,810,000 (5.0%) to $394,719,000 during the six months ended June 30, 2006 compared to the same period in the prior year. Average interest-bearing deposits decreased $4,639,000 (1.3%) and average other borrowings increased $20,308,000 (106.9%). Increases in average loans and decreases in average deposits has led to increases in average other borrowings. The average rate paid on interest-bearing liabilities during the six months ended June 30, 2006 increased 75 basis points to 1.94% compared to the year-ago period. This increase was the result of general market interest rate increases and the increased reliance on wholesale funding sources (other borrowings) due to loan growth and decreases in money market deposits.
22
Net Interest Margin (FTE)
The following table summarizes the components of the Company’s net interest margin for the periods indicated:
| Three months ended |
| Six months ended | ||||
| June 30, |
| June 30, | ||||
| 2006 |
| 2005 |
| 2006 |
| 2005 |
Yield on interest-earning assets | 6.91% |
| 6.22% |
| 6.81% |
| 6.23% |
Rate paid on interest-bearing liabilities | 2.21% |
| 1.24% |
| 1.94% |
| 1.19% |
Net interest spread | 4.70% |
| 4.98% |
| 4.87% |
| 5.04% |
Impact of all other net noninterest-bearing funds | 0.62% |
| 0.34% |
| 0.56% |
| 0.32% |
Net interest margin | 5.32% |
| 5.32% |
| 5.43% |
| 5.36% |
The net interest margin in the second quarter of 2006 remained unchanged compared to the second quarter of 2005. A decrease in the net interest spread was offset by an increase in the impact of all other net noninterest-bearing funds. For the six months ended June 30, 2006, the net interest margin increased to 5.43% as compared to 5.36% during the same period of the prior year. A decrease in the net interest spread was offset by an 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 and certain loans 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).
23
| For the three months ended June 30, | |||||||||||||||
| 2006 |
|
|
|
|
| 2005 |
|
|
|
| |||||
| Average Balance |
| Income/ Expense |
| Average Yield/Rate |
| Average Balance |
| Income/ Expense |
| Average Yield/Rate | |||||
Loans (1) (2) | $ 443,008 |
| $ 8,320 |
| 7.53% |
| $ 406,467 |
| $ 6,978 |
| 6.89% | |||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Taxable | 90,349 |
| 977 |
| 4.34% |
| 81,021 |
| 787 |
| 3.90% | |||||
Non-taxable (3) | 25,767 |
| 228 |
| 5.38% |
| 11,856 |
| 110 |
| 5.64% | |||||
Total loans and investment securities | 559,124 |
| 9,525 |
| 6.92% |
| 499,344 |
| 7,875 |
| 6.37% | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Time deposits with other financial institutions | 100 |
| - |
| 0.00% |
| 100 |
| - |
| 0.00% | |||||
Federal funds sold | 1,225 |
| 15 |
| 4.91% |
| 25,954 |
| 210 |
| 3.25% | |||||
Total interest-earning assets | 560,449 |
| 9,540 |
| 6.91% |
| 525,398 |
| 8,085 |
| 6.22% | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and due from banks | 28,669 |
|
|
|
|
| 28,175 |
|
|
|
| |||||
Allowance for loan losses | (5,087) |
|
|
|
|
| (4,388) |
|
|
|
| |||||
Premises and equipment, net | 9,318 |
|
|
|
|
| 9,928 |
|
|
|
| |||||
Accrued interest receivable |
|
|
|
|
|
|
|
|
|
|
| |||||
and other assets | 24,743 |
|
|
|
|
| 16,838 |
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets | $ 618,092 |
|
|
|
|
| $ 575,951 |
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
| |||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest bearing demand | $ 210,744 |
| $ 625 |
| 1.19% |
| $235,566 |
| 445 |
| 0.76% | |||||
Savings | 39,183 |
| 59 |
| 0.60% |
| 41,490 |
| 23 |
| 0.22% | |||||
Time | 80,830 |
| 601 |
| 2.98% |
| 73,332 |
| 380 |
| 2.08% | |||||
Total Deposits | 330,757 |
| 1,285 |
| 1.56% |
| $350,388 |
| 848 |
| 0.97% | |||||
Federal funds purchased | 3,858 |
| 47 |
| 4.89% |
| - |
| - |
| - | |||||
Other borrowings | 57,672 |
| 658 |
| 4.58% |
| 19,000 |
| 138 |
| 2.91% | |||||
Junior subordinated debentures | 10,310 |
| 228 |
| 8.87% |
| 10,310 |
| 185 |
| 7.20% | |||||
Total interest bearing liablilities | 402,597 |
| 2,218 |
| 2.21% |
| 379,698 |
| 1,171 |
| 1.24% | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Noninterest bearing DDA | 153,245 |
|
|
|
|
| 145,789 |
|
|
|
| |||||
Accrued interest payable |
|
|
|
|
|
|
|
|
|
|
| |||||
and other liabilities | 6,133 |
|
|
|
|
| 3,879 |
|
|
|
| |||||
Shareholders' equity | 56,117 |
|
|
|
|
| 46,585 |
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total liabilities and |
|
|
|
|
|
|
|
|
|
|
| |||||
shareholders' equity | $ 618,092 |
|
|
|
|
| $ 575,951 |
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net interest income |
|
| $ 7,322 |
|
|
|
|
| $ 6,914 |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net interest income to average earning assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Interest Margin (4) |
|
|
|
| 5.32% |
|
|
|
|
| 5.32% | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(1) Average loans include nonaccrual loans. The Company had $44 in nonaccrual loans during 2006 and none in 2005. | ||||||||||||||||
(2) Loan interest income includes loan fee income of $321 and $267 for the three months ended June 30, 2006 and June 30, 2005, respectfully. | ||||||||||||||||
(3) Average yields shown are on a taxable-equivalent basis. On a non-taxable basis, 2006 the average yield on tax exempt securities | ||||||||||||||||
was 3.55%; in 2005, the average yield on a non-taxable basis was 3.72%. |
|
|
|
|
|
| ||||||||||
(4) Net interest margin is calculated by dividing net interest income by the average balance of total interest-earning assets for the applicable period. |
24
| For the six months ended June 30, | ||||||||||
| 2006 |
| 2005 | ||||||||
| Average Balance |
| Income/ Expense |
| Average Yield/Rate |
| Average Balance |
| Income/ Expense |
| Average Yield/Rate |
Loans (1) (2) | $ 431,957 |
| $ 15,992 |
| 7.47% |
| $ 397,506 |
| $ 13,578 |
| 6.89% |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
Taxable | 95,087 |
| 2,005 |
| 4.25% |
| 82,277 |
| 1,622 |
| 3.98% |
Non-taxable (3) | 25,878 |
| 459 |
| 5.42% |
| 11,869 |
| 220 |
| 5.66% |
Total loans and investment securities | 552,922 |
| 18,456 |
| 6.82% |
| 491,652 |
| 15,420 |
| 6.37% |
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits with other financial institutions | 100 |
| 1 |
| 2.02% |
| 100 |
| 1 |
| 2.02% |
Federal funds sold | 1,497 |
| 36 |
| 4.85% |
| 21,868 |
| 340 |
| 3.14% |
Total interest-earning assets | 554,519 |
| 18,493 |
| 6.81% |
| 513,620 |
| 15,761 |
| 6.23% |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks | 26,166 |
|
|
|
|
| 29,621 |
|
|
|
|
Allowance for loan losses | (5,006) |
|
|
|
|
| (4,297) |
|
|
|
|
Premises and equipment, net | 9,377 |
|
|
|
|
| 10,074 |
|
|
|
|
Accrued interest receivable and other assets | 22,236 |
|
|
|
|
| 16,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets | $ 607,292 |
|
|
|
|
| $ 565,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand | $ 219,618 |
| $ 1,218 |
| 1.12% |
| $229,788 |
| 832 |
| 0.73% |
Savings | 41,172 |
| 103 |
| 0.50% |
| 41,980 |
| 47 |
| 0.23% |
Time | 81,170 |
| 1,134 |
| 2.82% |
| 74,831 |
| 720 |
| 1.94% |
Total Deposits | 341,960 |
| 2,455 |
| 1.45% |
| $346,599 |
| 1,599 |
| 0.93% |
Federal funds purchased | 3,141 |
| 75 |
| 4.82% |
| - |
|
|
|
|
Other borrowings | 39,308 |
| 812 |
| 4.17% |
| 19,000 |
| 274 |
| 2.91% |
Junior subordinated debentures | 10,310 |
| 455 |
| 8.90% |
| 10,310 |
| 350 |
| 6.85% |
Total interest bearing liablilities | 394,719 |
| 3,797 |
| 1.94% |
| 375,909 |
| 2,223 |
| 1.19% |
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing DDA | 154,220 |
|
|
|
|
| 139,518 |
|
|
|
|
Accrued interest payable and other liabilities | 5,816 |
|
|
|
|
| 3,835 |
|
|
|
|
Shareholders' equity | 52,537 |
|
|
|
|
| 46,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity | $ 607,292 |
|
|
|
|
| $ 565,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
| $ 14,696 |
|
|
|
|
| $ 13,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income to average earning assets |
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin (4) |
|
|
|
| 5.43% |
|
|
|
|
| 5.36% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) Average loans include nonaccrual loans. The Company had $44 in nonaccrual loans during 2006 and none in 2005. | |||||||||||
(2) Loan interest income includes loan fee income of $563 and $642 for the six months ended June 30, 2006 and June 30, 2005, respectfully. | |||||||||||
(3) Average yields shown are on a taxable-equivalent basis. On a non-taxable basis, 2006 the average yield on tax exempt securities | |||||||||||
was 3.58%; in 2005, the average yield on a non-taxable basis was 3.74%. | |||||||||||
(4) Net interest margin is calculated by dividing net interest income by the average balance of total interest-earning assets for the applicable period. |
25
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 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 June 30, 2006 | ||||
| compared with three months | ||||
| ended June 30, 2005 | ||||
(in thousands) | Volume |
| Rate |
| Total |
Increase (Decrease) In |
|
|
|
|
|
Interest and fee income: |
|
|
|
|
|
Loans | $ 632 |
| $ 710 |
| $ 1,342 |
Time deposits with other |
|
|
|
|
|
financial institutions | - |
| - |
| - |
|
|
|
|
|
|
Investment securities: |
|
|
|
|
|
Taxable | 91 |
| 99 |
| 190 |
Non-taxable (1) | 129 |
| (11) |
| 118 |
Federal funds sold | (200) |
| 5 |
| (195) |
Total interest and fee income | 652 |
| 803 |
| 1,455 |
|
|
|
|
|
|
Increase (decrease) in |
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
Interest bearing |
|
|
|
|
|
Transaction accounts | (46) |
| 226 |
| 180 |
Savings | (2) |
| 38 |
| 36 |
Time deposits | 39 |
| 182 |
| 221 |
Total deposits | (9) |
| 446 |
| 437 |
|
|
|
|
|
|
Federal funds purchansed | - |
| 47 |
| 47 |
Other borrowings | 280 |
| 240 |
| 520 |
Junior subordinated debentures | 0 |
| 43 |
| 43 |
Total interest expense | 271 |
| 776 |
| 1,047 |
Net interest income | $ 380 |
| $ 28 |
| $ 408 |
|
|
|
|
|
|
(1) The interest earned is taxable-equivalent. |
|
|
|
|
26
| Six months ended June 30, 2006 compared with six months ended June 30, 2005 | ||||
| |||||
| |||||
(in thousands) | Volume |
| Rate |
| Total |
Increase (decrease) in |
|
|
|
|
|
Interest and fee income: |
|
|
|
|
|
Loans | $ 1,181 |
| $ 1,233 |
| $ 2,414 |
Time deposits with other |
|
|
|
|
|
financial institutions | - |
| - |
| - |
|
|
|
|
|
|
Investment securities: |
|
|
|
|
|
Taxable | 255 |
| 128 |
| 383 |
Non-taxable (1) | 260 |
| (21) |
| 239 |
Federal funds sold | (317) |
| 13 |
| (304) |
Total interest and fee income | 1,379 |
| 1,353 |
| 2,732 |
|
|
|
|
|
|
Increase (decrease) in |
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
Interest bearing |
|
|
|
|
|
Transaction accounts | (38) |
| 424 |
| 386 |
Savings | (0) |
| 56 |
| 56 |
Time deposits | 61 |
| 353 |
| 414 |
Total deposits | 23 |
| 833 |
| 856 |
|
|
|
|
|
|
Federal funds purchased | - |
| 75 |
| 75 |
Other borrowings | 293 |
| 245 |
| 538 |
Junior subordinated debentures | 0 |
| 105 |
| 105 |
Total interest expense | 316 |
| 1,258 |
| 1,574 |
Net interest income | $ 1,063 |
| $ 95 |
| $ 1,158 |
|
|
|
|
|
|
Provision for Loan Losses
The Company provided $100,000 for loan losses in the second quarter of 2006 versus $230,000 in the second quarter of 2005. The Company provided $200,000 for loan losses for the six months ended 2006 versus $415,000 for the six months ended 2005. Management’s determination of the amount to provide for loan losses was based upon their evaluation of the adequacy of the allowance for loan losses. Based upon this evaluation, management believes that the allowance for loan losses is adequately funded at June 30, 2006. During the second quarter of 2006, the Company recorded $8,000 of net loan charge-offs compared to $6,000 for the second quarter of 2005. For the six months ended June 30, 2006, the Company recorded $12,000 of net loan charge-offs compared to $10,000 for the first six months ended June 30, 2005.
27
Noninterest Income
The following table summarizes the components of noninterest income for the periods indicated.
| Three months ended |
| Six months ended | ||||
| June 30, |
| June 30, | ||||
(in thousands) | 2006 |
| 2005 |
| 2006 |
| 2005 |
Service charges and other fees | $ 518 |
| $ 516 |
| $ 1,018 |
| $ 1,039 |
Increase in cash value of life insurance | 101 |
| 85 |
| 206 |
| 176 |
Gain on sale of loans | 126 |
| - |
| 126 |
| - |
Other income | 447 |
| 480 |
| 889 |
| 822 |
Total noninterest income | $ 1,192 |
| $ 1,081 |
| $ 2,239 |
| $ 2,037 |
|
|
|
|
|
|
|
|
Noninterest incomefor the three and six months ended June 30, 2006 increased $111,000 (10.3%) and $202,000 (9.9%) respectively, compared to the the same period in the prior year. The increases in both periods were primarily due to the gain on sale of SBA loans during the second quarter of 2006. Management intends to continue the practice of selling the guaranteed portion of SBA loans.
Noninterest Expense
The following table summarizes the components of noninterest expense for the periods indicated.
| Three months ended |
| Six months ended | ||||
| June 30, |
| June 30, | ||||
(in thousands) | 2006 |
| 2005 |
| 2006 |
| 2005 |
Salaries and related benefits | $ 3,154 |
| $ 2,735 |
| $ 6,360 |
| $ 5,459 |
Occupancy | 431 |
| 446 |
| 906 |
| 840 |
Equipment | 489 |
| 532 |
| 968 |
| 1,079 |
Professional services | 554 |
| 527 |
| 1,074 |
| 1,013 |
Business promotion | 108 |
| 138 |
| 358 |
| 272 |
Stationery & supplies | 156 |
| 257 |
| 305 |
| 381 |
Insurance | 31 |
| 75 |
| 94 |
| 146 |
Other | 854 |
| 463 |
| 1,491 |
| 1,018 |
Total | $ 5,777 |
| $ 5,173 |
| $ 11,556 |
| $ 10,208 |
|
|
|
|
|
|
|
|
Noninterest expense for the second quarter of 2006 increased $604,000 (11.7%) to $5,777,000 from $5,173,000 in the second quarter of 2005. The $419,000 (15.3%) increase in salaries and related benefits expense was due to new additions and changes to the senior management team, staffing increases in the risk management, compliance and internal audit functions and $101,000 of stock-based compensation expense recorded in the second quarter of 2006 in accordance with SFAS 123R. Other expenses during the second quarter of 2006 include $90,000 in amortization of an investment in an affordable housing bond that generates tax credits.
Noninterest expense for the six months ended June 30, 2006 increased $1,348,000 (13.2%) to $11,556,000 from $10,208,000 during the six months ended June 30, 2005. The $901,000 (16.5%) increase in salaries and related benefits expense was due to new additions and changes to the senior management team, staffing increases in the risk management, compliance and internal audit functions and $186,000 of stock-based compensation expense recorded during the six months ended June 30, 2006 in accordance with SFAS 123R. Other expenses during the six months ended June 30, 2006 include $209,000 in amortization of an investment in an affordable housing bond that generates tax credits.
Provision for Income Taxes
The effective tax rate for the three and six months ended June 30, 2006 was 37.5% and 35.0%, respectively, and reflects a decrease from an effective tax rate of 38.9% and 38.5% for the three and six month periods ended June 30, 2005, respectively. The lower effective tax rates in 2006 were due to a $2 million investment in an affordable housing bond issue near year-end 2005 that generates income tax credits for the Company.
28
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 June 30, 2006, liquid assets were 11% of total assets, compared with 20% as of June 30, 2005, and are within the limits set in the the Company’s liquidity policy. See “Financial Condition” at Item 2 in Management's Discussion and Analysis.
Capital Resources
The following summarizes the Bank’s and Company’s regulatory capital ratios for the periods indicated:
|
|
|
|
|
| At |
| Minimum |
|
| ||
|
| At June 30, |
| December 31, |
| Regulatory |
| Well | ||||
The Vintage Bank |
| 2006 |
| 2005 |
| 2005 |
| Requirement |
| Capitalized | ||
Tier 1 Risk-Based Capital Ratio |
| 10.75% |
| 10.58% |
| 11.00% |
| 4.00% |
| 6.00% | ||
Total Risk-Based Capital Ratio |
| 11.71% |
| 11.52% |
| 11.99% |
| 8.00% |
| 10.00% | ||
Leverage Ratio |
| 9.62% |
| 9.09% |
| 9.11% |
| 4.00% |
| 5.00% | ||
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
| At |
| Minimum |
|
| ||
|
| At June 30, |
|
|
| December 31, |
| Regulatory |
| Well | ||
North Bay Bancorp |
| 2006 |
| 2005 |
| 2005 |
| Requirement |
| Capitalized | ||
Tier 1 Risk-Based Capital Ratio |
| 11.58% |
| 11.61% |
| 12.02% |
| 4.00% |
| NA | ||
Total Risk-Based Capital Ratio |
| 12.54% |
| 12.55% |
| 13.01% |
| 8.00% |
| NA | ||
Leverage Ratio |
| 10.34% |
| 9.88% |
| 9.87% |
| 4.00% |
| NA | ||
|
|
|
|
|
|
|
|
|
|
|
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as of June 30, 2006:
|
|
| Less than |
| 1-3 |
| 3-5 |
|
| |
(in thousands) | Total |
| one year |
| years |
| years |
| Thereafter | |
|
|
|
|
|
|
|
|
|
| |
FHLB loan, fixed rate of 5.33% | $ 30,000 |
| $ 30,000 |
| $ - |
| $ - |
| $ - | |
payable on June 9, 2007 |
|
|
|
|
|
|
|
|
| |
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 debentures, 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 | 3,215 |
| 855 |
| 1,155 |
| 700 |
| 505 | |
Total contractual obligations | $ 57,525 |
| $ 35,855 |
| $ 10,155 |
| $ 700 |
| $ 10,815 | |
|
|
|
|
|
|
|
|
|
|
29
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.
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 June 30, 2006, the NII simulation showed modest asset-sensitivity to proportional rate shifts. A +200 basis point proportional shift would raise twelve-month NII by 1.17 percent, while a similar downward shift would reduce it by 1.23 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 | 1.73% | |
+ 200 | 1.17% | |
+ 100 | 0.59% | |
+ 0 (flat) | 0.00% | |
- 100 | (0.59%) | |
- 200 | (1.23%) | |
- 300 | (1.78%) | |
|
|
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.
30
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 June 30, 2006 and December 31, 2005, the securities available for sale portfolio totaled $108.4 and $124.5 million, respectively. The estimated effective duration of the available for sale portfolio was 3.2 at June 30, 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 3.2 suggests an expected price decline of approximately 3.2 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 June 30, 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 controls over financial reporting or in other factors that could significantly affect these controls.
31
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. However, at June 30, 2006 the Company’s loan-to-deposit ratio is 94.9%. This exceeds the Company’s internal policy limit of 90% which could effect the ability to fund loans in the future and possibly impact net interest margin and/or net income.
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
(a) The Seventh Annual Meeting of the shareholders of the Company was held on May 17, 2006.
(b) Proxies for the meeting were solicited pursuant to Regulation 14A under the Act, there were no solicitations in opposition to management's nominees as listed in the proxy statement, and all such nominees were elected.
(c) The North Bay Bancorp Amended and Restated 2002 Incentive Compensation Plan was approved with 1,784,677 affirmative votes. There were 198,483 negative votes, 14,077 abstaining votes, and 1,113,261 broker non-votes.
(d) The appointment of KPMG, LLP as the Company's 2006 Independent Certified Public Accountant was approved with 3,090,551 affirmative votes. There were 2,303 negative votes, and 17,644 abstaining votes.
(e) There was no settlement between the Company and any other person terminating any solicitation subject to Rule 14a-11.
ITEM 5.
OTHER INFORMATION
None
ITEM 6.
EXHIBITS
An index of exhibits begins on page 34.
32
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTH BAY BANCORP
A California Corporation
Date: August 8, 2006
/s/ Terry L. Robinson |
TERRY L. ROBINSON |
President and Chief Executive Officer |
(Principal Executive Officer) |
Date: August 8, 2006
/s/ Michael W. Wengel |
Michael W. Wengel |
Executive Vice President and Chief Financial Officer |
(Principal Financial Officer) |
33
EXHIBIT INDEX | |
Exhibit No. | Description |
|
|
10.1 | Amended and Restated 2002 Incentive Compensation Plan (1) |
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 |
|
|
| (1) Attached as Exhibit 10.1 to Registration Statement No. 333-134858 filed by |
| North Bay Bancorp with the Securities and Exchange Commission and incorporated |
| herein by reference. |
34