SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OTHER
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
September 30, 1995.
OR
/ / SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ -------
Commission file number 1-10203
NORTHBAY FINANCIAL CORPORATION
HOLDING COMPANY FOR NORTHBAY SAVINGS BANK, F.S.B.
(Exact name of registrant as specified in its charter)
Delaware 68-02085083
---------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1360 Redwood Way, Petaluma, California 94954
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (707) 792-7409
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 proceeding 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 the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date.
Class Outstanding at September 30, 1995
---------------------- ----------------------------------
Common Stock, Par Value $.10 2,750,522 Shares
INDEX
NORTHBAY FINANCIAL CORPORATION
(HOLDING COMPANY FOR NORTHBAY SAVINGS BANK, FSB)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements to Northbay Financial
Corporation and Subsidiary (Unaudited):
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Other Information
Signatures
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
September June
30, 1995 30, 1995
In Thousands (Unaudited)
- - -------------------------------------------------------------------------------
Assets
Cash, including noninterest-bearing deposits of $6,666
and $7,303 $7,227 $7,816
Overnight federal funds - 425
Certificates of deposit 1,361 1,444
Investment securities held to maturity (market value:
$13,444 and $12,427) 3,504 12,526
Investment securities available for sale (net of
valuation adjustments of:($46) and ($51) 3,495 2,887
Mortgage-backed securities held to maturity
(market value: $2,786 and $1,647) 2,815 1,672
Mortgage-backed securities available for sale (net of
valuation adjustment of: $108 and $90) 11,621 8,441
Loans receivable (net of allowance of $2,353 and $2,232) 343,270 343,853
Interest receivable:
Loans 2,174 2,067
Mortgage-backed securities 70 56
Investments 355 281
Office property, equipment, and leasehold improvements, net 2,380 2,474
Real estate acquired through settlement of loans, net 1,440 1,556
Stock of Federal Home Loan Bank of San Francisco, at cost 3,333 3,291
Deferred premiums on loans sold 49 51
Prepaid expenses and other assets 2,155 2,218
- - -------------------------------------------------------------------------------
$395,249 $391,058
===============================================================================
Liabilities and Stockholders' Equity
Savings accounts 282,916 283,909
Advances from the Federal Home Loan Bank 61,636 60,036
Other borrowings 11,869 9,332
Other liabilities and accrued expenses 2,664 1,989
Deferred income taxes 864 653
Deferred gain on sale of buildings 552 561
- - -------------------------------------------------------------------------------
360,501 356,480
===============================================================================
Stockholders' equity:
Common stock (par value $.10 per share, 4,000,000
shares authorized and issued; 2,750,522 and
2,741,123 shares outstanding) 275 275
Additional paid-in capital 20,849 20,849
Retained earnings - substantially restricted 13,762 13,619
Debt incurred by ESOP (175) (188)
Unrealized gain (loss) on securities available for sale 37 23
- - -------------------------------------------------------------------------------
34,748 34,578
$395,249 $391,058
===============================================================================
See accompanying notes to consolidated financial statements.
Northbay Financial Corporation and Subsidiary
Consolidated Statements of Operations (Unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
-------------------------------
(In Thousands Except Per Share Amounts) 1995 1994
- - -------------------------------------------------------------------------------
Interest income
Loans 6,521 5,945
Mortgage-backed securities 200 134
Interest and dividends on investments 366 244
- - -------------------------------------------------------------------------------
Total interest income 7,087 6,323
- - -------------------------------------------------------------------------------
Interest expense
Savings accounts 3,161 2,172
Advances and other borrowings 1,145 757
- - -------------------------------------------------------------------------------
Total interest expense 4,306 2,929
- - -------------------------------------------------------------------------------
Net interest income 2,781 3,394
Provision for loan losses 120 127
- - -------------------------------------------------------------------------------
Net interest income after provision for loan
losses 2,661 3,267
- - -------------------------------------------------------------------------------
Noninterest income
Service charges 205 187
Gain on sale of loans and mortgage-backed
securities, net - -
Write down deferred servicing premiums - (2)
Loss from real estate acquired in settlement
of loans (7) (48)
Gain on sale of investment securities held
for sale - -
Other 56 59
- - -------------------------------------------------------------------------------
Total noninterest income 254 196
- - -------------------------------------------------------------------------------
Noninterest expense
Compensation and benefits 1,066 1,107
Occupancy 314 308
Depreciation & amortization 106 112
Data processing 148 140
Advertising and supplies 59 74
Federal Deposit Insurance Corporation premiums 161 155
Other 348 408
- - -------------------------------------------------------------------------------
Total noninterest expense 2,202 2,304
- - -------------------------------------------------------------------------------
Income before taxes and cumulative effect of
change in accounting principle 713 1,159
Income tax expense 267 447
- - -------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 446 712
Cumulative effect of change in accounting
principle for income taxes - -
- - -------------------------------------------------------------------------------
Net income $446 $712
===============================================================================
Consolidated Statements of Operations (continued)
Three Months Three Months
Ended Ended
September 30, September 30,
------------- --------------
(In Thousands Except Per Share Amounts) 1995 1994
- - -------------------------------------------------------------------------------
Primary earnings per share
Before cumulative effect of accounting change $0.15 $0.24
Cumulative effect of accounting change - -
Net Income $0.15 $0.24
- - -------------------------------------------------------------------------------
Fully diluted $0.15 $0.24
===============================================================================
See accompanying notes to consolidated financial statements.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statement of Cash Flows (Unaudited)
Three months
ended September,
(In Thousand) 1995 1994
- - ----------------------------------------------------------------------------------
Net cash flows from operating activities:
Net income $446 $712
Adjustments to reconcile net income to net cash
Depreciation and amortization 105 112
Amortization of:
Deferred premiums 2 1
Deferred loan fees (167) (461)
Deferred gain on sale/leaseback of buildings (8) (8)
Other (3) 19
Provision for loan loss 120 127
Loss from real estate activities 7 34
Increase in income taxes payable and deferred 266 447
(Increase) in accrued interest receivable (196) (85)
Increase (Decrease) in other liabilities and accrued
expenses 636 (377)
Decrease (increase) in prepaid and other assets 63 (515)
Write down deferred servicing premium - 2
Long-term loans originated as held for sale - (619)
Proceeds from sales of loans held for sale - 619
Investment securities purchased as held for sale (602) (1)
Mortgage backed securities purchased as available for
sale (3,476) (1,052)
Proceeds from sales of investment securities held for
sale - -
FHLB stock dividend (42) (32)
Other 23 1
- - ----------------------------------------------------------------------------------
Net cash (used in), provided by operating activities (2,726) (1,076)
- - ----------------------------------------------------------------------------------
Net cash flows from investing activities:
Principal payments on loans 14,615 32,737
Principal payments on mortgage backed securities 248 532
Long-term loans originated as held to maturity (13,630) (51,042)
Long-term loans purchased as held to maturity (242) (1)
Net (increase) decrease in short-term loans (262) 213
Maturities of investment securities held to maturity 1,582 580
Purchases of mortgage-backed securities held to maturity (1,227) (1,189)
Purchases of investment securities held to maturity (2,473) (1,189)
Purchases of premises and equipment (11) (41)
Purchase of FHLB stock - (1,400)
Proceed from sale of real estate received in settlement
of loans 271 284
- - ----------------------------------------------------------------------------------
Net cash used in investing activities (1,129) (20,516)
- - ----------------------------------------------------------------------------------
Cash flows provided from financing activities:
Dividends paid on common stock (303) (251)
Net (decrease) increase in savings accounts (993) (3,219)
Net increase in short-term borrowings 4,137 26,777
- - ----------------------------------------------------------------------------------
Net cash provided by financing activities 2,841 23,307
- - ----------------------------------------------------------------------------------
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statement of Cash Flows (Unaudited)
Three months
ended September,
(In Thousand) 1995 1994
- - ----------------------------------------------------------------------------------
Increase in cash and cash equivalents (1,014) 1,715
Cash and cash equivalents at beginning of year 8,241 7,255
- - ----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $7,227 $8,970
==================================================================================
Supplemental disclosures of cash flow information:
Noncash investing in financing activities:
Real estate acquired in settlement of loans $161 $640
Cash paid during the year for:
Income taxes $25 $0
Interest on deposits $3,172 $2,183
See accompanying notes to consolidated financial statements.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1995
Note 1 - Basis of Presentation
In the opinion of Northbay Financial Corporation (the "Corporation") the
accompanying consolidated financial statements contain all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the Corporation's consolidated financial condition, the results of its
operations and its cash flows.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a complete presentation of financial
condition, results of operations and statements of cash flows in conformity with
generally accepted accounting principles. When necessary, reclassifications
have been made to prior period balances to conform to current period
presentation. The results of operations for the three month period ended
September 30, 1995, are not necessarily indicative of the results to be expected
for the fiscal year.
Earnings per share and shares outstanding have been adjusted in all periods to
reflect a 10%stock dividend effective January 29, 1993, a 10% stock dividend
effective June 24, 1994, and a 20% stock split accounted for as a dividend
declared September 30, 1994, payable October 28, 1994.
Note 2 - Change in Accounting Principal - Income Taxes
On February 10, 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 109, entitled Accounting for
Income Taxes. This statement supersedes SFAS 96 and changes the criteria for
recognition and measurement of deferred tax assets and various other
requirements of SFAS 96 and reduces its complexity. Under SFAS 109 deferred tax
liabilities are recognized on all taxable temporary differences, and deferred
tax assets are recognized on all deductible temporary differences, operating
loss and tax credit carry-forwards. Valuation allowances are recognized to
reduce deferred tax assets if it is determined to be "more likely than not"
that all or some portion of the potential deferred tax assets will not be
realized. Other significant changes made by SFAS 109 include:(1) the
comprehensive scheduling of temporary differences required by SFAS 96 will not
be required; (2) a deferred tax asset may be recognized for the financial
statement general valuation allowance for loans and real estate owned, while
a deferred tax liability must be recognized for that portion of the tax bad
debt reserve exceeding the "base year" reserves; (3) tax-planning strategies
must be prudent and feasible, and; (4) tax benefits recognized as a result of
all tax planning strategies should be net of any expenses or losses.
The cumulative effect to July 1, 1993 of adopting SFAS 109, which resulted in a
cumulative tax benefit of $220,000 to the Corporation, has been shown as a
separate item in the accompanying statement of operations for the six months
ended June 30, 1994. The adoption of this accounting method did not have a
material impact on income tax expense and net income before the cumulative
effect of adopting SFAS 109 for 1994 over the amount that would have been
recorded under SFAS 96.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1995
Temporary differences between the financial statement carrying amounts and the
tax base of assets and liabilities that give rise to significant portions of
deferred tax liability at September 30, 1995 relate to the following:
09/30/95
--------
Deferred tax assets:
Book allowance for loan losses
in excess of tax 430,807
Gain on sale of building 229,821
Deferred Compensation 99,676
California Franchise Tax 33,408
Other 5,065
---------
Deferred tax assets 798,777
Less valuation allowance 0
---------
Net Deferred Tax Assets 798,777
Deferred tax liabilities:
Loan fees deferred for tax purposes 1,010,368
FHLB dividends 199,314
Tax depreciation in excess of book 166,375
Other 87,804
---------
Net Deferred Tax Liabilities 1,463,861
Net deferred taxes 665,084
==========
The following is a summary of deferred taxes under SFAS 109:
Deferred Valuation Deferred Net
Tax Asset Allowance Tax liab Total
--------- --------- -------- ---------
Balance at September 30, 1995 798,777 --- 1,463,861 665,084
Note 3 - Capital
In accordance with Statement of Financial Accounting Standard (SFAS) 115, which
the Bank adopted on June 30, 1994, securities classified as available-for-sale
are carried at fair market value with the net unrealized gain or loss recorded
in equity. The net unrealized gain at September 30, 1995 approximately was $37
thousand compared to a net unrealized gain of approximately $23 thousand at June
30, 1995.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
Financial Condition
- - -------------------
For the first time in nearly three years the Federal Reserve Bank (FRB),
signaled a shift in the direction of interest rates with an easing of the
Federal Funds rate on July 2, 1995 from 6% to 5.75%. Beginning with the quarter
ended March 31, 1995, we have now experienced three consecutive quarters of
stable or declining interest rates. During the period from December 31, 1994 to
September 30, 1995, we have experienced a decline in rates, with maturities of
one year and greater of approximately 150 basis points. For example, interest
rates on the one year treasury note declined from 7.18% at December 31, 1994
to 5.72% at September 30, 1995.
The positive impact of this generally declining interest rate environment is
beginning to become evident in the Banks operating results in the form of a
growing net interest rate spread and growth of net interest income between the
quarters ended March 31, 1995 and September 30, 1995. Just as the
Bank suffered a declining net interest rate spread during a period of rapidly
rising rates as a result of its exposure to the 11th District Cost of Fund Index
(COFI) the Bank should now experience a widening of the interest rate spread as
a result of the lagging nature of that index in a declining rate environment. It
is significant to note that the Banks net interest margin reached a low of 2.45%
in January and has since steadily progressed to 2.60% for the quarter ended
September 30, 1995. This widening of the net interest margin follows a period in
which the margin had been eroding continually for the previous seven quarters
from a peak of 5.05% for the quarter ended March 31, 1993 to a low of 2.45% for
the quarter ended March 31, 1995.
The Bank continued to focus on strategies designed to address the issues brought
about as a result of the previous rising interest rate environment. First, with
the dramatic rise in interest rates, and the corresponding decline in demand for
home refinancing with low rate fixed rate loans, the Bank concentrated its
efforts at reducing operating expense associated with the subdued demand for
home financing. Despite the rather dramatic decline in interest rates over the
last nine month period, the corresponding increase in consumer demand for
housing is yet to appear. The Bank's efforts at controlling operating expenses
are evident in a decline in operating expense to average assets from 2.42% for
the three-months ended September 30, 1994 to 2.24% for the similar three month
period in 1995. Second, after initially aggressively pricing its residential
adjustable rate loans and increasing its loan portfolio by $17.7 million in the
quarter ended September 30, 1994, the Bank has now chosen to price that
adjustable rate product more conservatively, electing to focus on product
profitability as opposed to increasing market share. Third, the Bank continued
to follow a strategy aimed at protecting its interest margins, choosing not to
pursue growth through aggressive pricing of its core retail deposits, electing
instead to fund loan growth with short-term borrowings and advances from the
Federal Home Loan Bank of San Francisco (FHLB). Asset growth of approximately
$4.2 million along with a corresponding decline in retail savings deposits of
$1 million, was funded with growth in FHLB advances and repurchase agreements
of $4.2 million. These two strategies have allowed the Bank to preserve a low
rate cost of retail funds. The Bank's net interest rate spread continued to
widen as the yields on the adjustable
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
rate loan portfolio increased more rapidly than the rising cost of retail and
wholesale funds.
On August 31, 1993, the Office of Thrift Supervision (OTS) published a final
regulation incorporating an interest rate risk component in the risk-based
capital rules. The rule took effect January 1, 1994 and will require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. A savings institution's interest rate risk will be
measured in terms of the sensitivity of its "net portfolio value" to changes in
interest rates. Net portfolio value is defined, generally, as the present value
of expected cash inflows from existing assets and off-balance-sheet contracts
less the present value of expected cash outflows from existing liabilities.
A savings association will be considered to have a "normal" level of interest
rate risk if the decline in the market value of its portfolio equity after an
immediate 200 basis point increase or decrease in market interest rates
(whichever leads to the greater decline) is less than two percent of the current
estimated market value of its assets. A savings institution with a greater than
normal interest rate risk will be required to deduct from total capital, for
purposes of calculating its risk-based capital requirement, an amount (the
interest rate risk component "IRR") equal to one-half the difference between the
institution's measured interest rate risk and the normal level of interest rate
risk, multiplied by the economic value of its total assets.
The OTS will calculate the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule included in its
quarterly Thrift Financial Report and utilize the interest rate risk measurement
model adopted by the OTS. The amount of the IRR, if any, is to be deducted from
a savings institution's risk-based capital. The IRR is to be computed quarterly,
and the capital requirement for the IRR will have an effective lag of two
calendar quarters. The first quarter to be measured has once again been
postponed indefinitely until questions regarding a review procedure for
institutions challenging the results of the OTS model has been resolved. Based
on the Bank's current level of adjustable rate, shorter-term assets and
regulatory capital, management does not expect the Bank's IRR to have a material
effect on the Bank's regulatory capital level or its compliance with regulatory
capital requirements.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
The Bank exceeds all of the regulatory capital standards at September 30, 1995,
with ratios of core, tangible, and risk-based capital to assets of 8.64%, 8.62%
and 14.92%, respectively. Components of the Bank's regulatory capital at
September 30, 1995 are summarized as follows:
Tangible % of Core % of Risk- % of Risk-
(unaudited) Capital Adjusted Capital Adjusted based basted
Assets Assets Capital Assets
- - ----------------------- -------- --------- ------- -------- ------- ----------
Common Stock $ 275 .07% $ 275 .07% $ 275 .11%
Additional Paid-in Capital 20,849 5.28% 20,849 5.28% 20,849 8.54%
Retained Earnings 13,209 3.34% 13,209 3.34% 13,209 5.41%
ESOP Loan (175) (.04)% (175) (.04)% (175) (.07)%
General Loan Loss Reserves - - - - 2,307 .95%
Intangible Deposit Premium (69) (.02)% - - _- -
Unrealized loss on Certain
Available-for-Sale Securities (36) (.01) (36) (.01) (36) (.02)
Total 34,053 8.62% 34,122 8.64% 36,429 14.92%
Minimum Capital Required 5,927 1.50% 11,855 3.00% 19,536 8.00%
Excess Regulatory Capital $28,126 7.12% $22,267 5.64% $16,893 0.0692
The Bank's assessment for deposit insurance premiums (expressed in terms of per-
centage of total savings accounts) is 23 basis points. The minimum rate may be
decreased to not less than 18 basis points for the period of January 1, 1994
through December 31, 1997 and declining further to 15 basis points thereafter.
However, the Federal Deposit Insurance Corporation (FDIC) may increase the
assessment rate to 32.5 basis points, if certain reserve fund ratios are not
met. Although the FDIC insures both commercial banks as well as savings and
loans, the reserve funds have been segregated to the Bank Insurance Fund (BIF)
and the Savings Association Insurance Fund (SAIF). During the quarter ended
September 30, 1995 the FDIC reduced the premiums for most BIF members while
keeping existing assessment rates intact for savings associations. While the
SAIF members will continue paying premiums on a risk-related basis ranging from
23 cents to 31 cents per $100 of domestic deposits, the assessment rate charged
to BIF-insured members was reduced to an average of 4.4 cents for every $100,
down from 23 cents. SAIF-insured institutions will pay a higher rate than BIF-
insured institutions because the SAIF remains seriously undercapitalized. As of
March 31, 1995 the SAIF had a balance of $2.2 billion or only .31 percent of
insured deposits. At the current pace, the SAIF is unlikely to reach the minimum
reserve ratio of 1.25% until the year 2002.
The BIF on the other hand achieved a reserve ratio of 1.25% of BIF-insured
deposits, or approximately $24 billion during the quarter ended June 30, 1995.
A primary reason the SAIF is undercapitalized is that SAIF premiums have been
diverted to uses other than rebuilding the fund. As described in a recent report
by the General Accounting Office, since 1989 $7.4 billion, approximately three-
quarters of SAIF assessments, have been used to pay off obligations arising
from the governments' efforts to resolve the thrift failures of the 1980's. SAIF
assessments were diverted to fund the Resolution Funding Corporation, the
Federal
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
Savings and Loan Insurance Corporation Resolution Fund and FICO. FICO was estab-
lished by Congress in 1987 in an attempt to recapitalize the Federal Savings
and Loan Insurance Fund (FSLIC). From 1987 to 1989 the FICO issued approximately
$8.2 billion in bonds, proceeds of which were channeled to the FSLIC.
Approximately $4.3 billion of SAIF assessments have been utilized to service the
debt on these FICO obligations. Currently approximately 45% of all SAIF
assessments are utilized to pay interest on the FICO debt rather than to
replenish the fund. Without these diversions it has been estimated that the
SAIF would have reached its designated reserve ratio of 1.25% at some point in
1994.
There is currently a proposal within Congress to eliminate duplicate charters
which separate BIF-insured members from SAIF-insured members. The single charter
would be part of comprehensive legislation designed to resolve the looming
disparity between deposit insurance premiums paid by BIF and SAIF members. The
Wall Street Journal reported that as the proposal is being developed, SAIF
members would be required to pay a one-time assessment of approximately 85 basis
points of total retail savings liabilities to replenish the fund and reduce
future deposit premiums to 5 basis points. After the replenishment of the SAIF
fund the two funds, SAIF and BIF, would be merged and the FICO debt obligation
would be shared by all members.
Effective January 1, 1993, a transitional risk-based methodology for determining
FDIC insurance premiums was implemented. Under the transitional risk-based
system, the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC based
upon the institution's level of capitalization and the FDIC's judgement of the
risk posed by the institution. Each institution is assigned to one of three
groups, ("well-capitalized", "adequately-capitalized" or "under-capitalized")
based on its capital ratios. A well-capitalized institution is one that has at
least a 10% total risk-based capital ratio, and a 6% core capital to risk-based
assets. An adequately-capitalized institution is one that has an 8% total risk-
based capital ratio, a 4% core capital to risk-based assets ratio and a 4%
leveraged capital ratio. An under-capitalized institution is one that does not
meet either of the above definitions. The FDIC also assigns each institution to
one of three subgroups based upon review by the institution's primary federal or
state supervisory agency, statistical analysis of financial statements and other
information relevant to gauging the risk posed by the institution. The
assessment for well-capitalized, institutions is three basis points less than
the average assessment rate for insured depository institutions. Adequately-
capitalized institutions that do not present supervisory concern pay the average
assessment rate. All other institutions pay an assessment rate for insured
deposit institutions ranging from 23 basis points to 31 basis points.
The Bank's nonperforming assets (loans 90 days or more delinquent, non-
performing loans, and foreclosed real estate) were $4.86 million or 1.23% of
assets at September 30, 1995, compared to $2.9 million to .74% at June 30, 1995.
The increase in nonperforming assets during the quarter ended September 30, 1995
can be attributed primarily to three commercial loans totaling $1.5 million and
one land development loan totaling $900 thousand. Although the Bank's market
area of Northern California did not experience the deepness of a recession that
was, in fact, realized in Southern California, Northern California definitely
followed
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
the pattern of the sluggish California economy over the past couple of years. As
the California economy is now recovering, the Bank's market areas too have shown
marked improvement in terms of growth and lower unemployment over the past nine
months. As of September 30, 1995, the unemployment numbers of Sonoma County, the
Bank's primary market, stood at approximately 4.6% compared to 7.6% for the
State of California and 5.6% nationally.
In addition to the four loans mentioned above, the remaining balance of non-
performing assets at September 30, 1995 is divided between loans delinquent 90
days or more of approximately $1 million and real estate acquired as a result of
foreclosure of approximately $1.4 million. Nonperforming loans can be further
broken into three categories. First, included within nonperforming loans are
five nonmortgage commercial loans totaling $281 thousand. Second, are two
construction and development real estate loans totaling $262 thousand. Third,
and finally, are four loans secured by single family residential properties
which in aggregate total $460 thousand. Real estate acquired through foreclosure
consists, of six single family residential units and one land loan, which in
aggregate are valued at $1.4 million. The Bank has recognized write downs of
approximately $347 thousand to record these properties at an estimate of fair
market value less selling costs. The Bank is in the process of resolving these
problem assets and does not anticipate material losses will be incurred in the
resolution of these assets.
Several factors within the Bank's loan portfolio contributed to the provision of
$120 thousand to the loan loss reserve for the quarter ended September 30, 1995.
Lack of growth in the Bank's loan portfolio combined with a shrinking volume of
more risk-oriented loans such as construction and commercial, were more than
offset by the growth of nonperforming assets and assets with an
adverse internal classification in determining the Bank's provision for loan
losses. That reserve now stands at approximately $2.35 million or 48% of the
total nonperforming assets. This compares to a peer group average of reserves to
troubled assets of all west coast savings and loans at June 30, 1995 of 51%.
Further, the Bank's current ratio of nonperforming assets to total assets of
1.23% compares to a percentage of 1.58% as of June 30, 1995, for the same peer
group of institutions referred to above. The Bank continues to monitor and
evaluate its loan and real estate portfolios and provide loss reserves as
considered necessary. In the opinion of management, loss reserves at September
30, 1995, were adequate to cover potential losses.
Results of Operations
- - ---------------------
The Bank's net income for the three-months ended September 30, 1995, was $446
thousand, a decrease of $266 thousand, or 37% below net income of $712 thousand
for the similar period in 1994.
Net interest income before provision for loan losses was $2.78 million for the
three- month period ended September 30, 1995, compared to $3.39 million for the
similar period ended September 30, 1994, representing a decrease of 18%. Despite
growth in the volume of interest earning assets and liabilities, a decrease in
the interest rate spread earned on those assets and liabilities led to decreases
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
in net interest income for the three months ended September 30, 1995. Average
interest-earning assets for the three-month period ended September 30, 1995,
increased by $13.9, compared with the similar period in 1994, while average
interest-bearing liabilities increased by $10.3 million over the similar period
in 1994. A comparison of the quarter ended September 1994 to the quarter ended
September 1995 would reveal that the net interest rate spread had declined from
3.50% to 2.60%. While the yield on average interest earning assets increased
from 6.91% for the quarter ended September 30, 1994 to 7.46% for the similar
quarter in 1995, the increase in rates paid on interest bearing liabilities
increased more rapidly, increasing from 3.41% to 4.86% for the respective
periods in 1994 and 1995.
The inability to match increasing rates on interest bearing liabilities with
similar increases in yields on interest-earning assets can be attributed in
large part to the Bank's large portfolio of adjustable rate loans indexed to the
Federal Home Loan Bank's 11th District COFI. At September 30, 1995,
approximately $267 million, or 78% of the Bank's entire loan portfolio consisted
of adjustable rate loans indexed to the COFI. After two years of steady
inflation expectations, the fifteen-month period ended December 31, 1994, is a
period in which a clear shift in interest rate cycles took place. At early
signals of inflation, the FRB took swift action, acting on six different
occasions raising the Federal funds rate, increasing that rate from 3.00% at
September 30, 1993, to 5.50% at December 31, 1994. While other "current" indices
such as the one-year Constant Maturity Treasury (CMT) increased from 3.35% at
September 30, 1993, to 7.17% at December 31, 1994, the COFI increased only
marginally from 3.82% to 4.37%.
During the nine-month period from December 31, 1994 to September 30, 1995, the
Bank witnessed a significant decline in interest rates in conjunction with a
continued flattening of the yield curve. A flattening of the yield curve refers
to the fact that the difference between short-term rates and longer-term rates
narrowed as a result of significant declines in longer-term rates without cor-
responding decreases in shorter-term rates. While rates with maturities of one
year or greater declined in general by approximately 150 basis points, short
term rates such as the three month treasury declined less dramatically by only
24 basis points. A flattening yield curve generally provides an adverse impact
because the Bank is not able to reprice its cost of funding with shorter term
liabilities to the extent of declines on investment alternatives tied to longer
term assets. Despite this fact, the Bank's portfolio of adjustable rate loans
tied to the lagging COFI index continued to reprice upward more rapidly than the
increase in its cost of funds. Increased yields on the Bank's loan and invest-
ment portfolios which out-paced corresponding rates on retail savings and FHLB
advances resulted in an increased interest rate spread. The Bank's interest rate
spread increased from 2.55% for the three-month period ended June 30, 1995 to
2.60% for the quarter ended September 30, 1995. The average rate earned on
interest-earning assets increased from 7.37% for the three-month periods ended
June 30, 1995 to 7.46% for the three-months ended September 30, 1995. The
average interest rate on average interest-bearing liabilities on the other hand
increased, to a lesser extent, from 4.82% for the three-month period ended June
30, 1995, to 4.86% for the quarter ended September 30, 1995.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
The decline in current treasury rates combined with a continued increase in COFI
from 4.37% at December 31, 1994 to 5.13% at September 30, 1995, provides a much
more promising outlook for the Bank's portfolio of COFI indexed loans. However,
due to the average reset of six months on the Bank's portfolio of COFI indexed
loans, tangible results of these changes will continue to appear slowly over the
next several months in the Bank's net interest margin. Further enforcing the
Bank's optimism regarding the future widening of its net interest margin is the
fact that the majority of the Bank's adjustable rate loans are indexed to the
COFI, an index which trails more current indices, these loans will continue to
gradually reprice upward even after other indices remain static as we have seen
in the nine month period ended September 30, 1995.
A significant event affecting both the Bank's current and future yield on
interest-earning assets has been the dramatic increase in competition in the
arena of mortgage loan financing. This general environment of increased
competition has led to both lower mortgage rates and lower loan fees charged to
the consumer to originate the loan. These loan origination fees are normally
deferred at the time of origination and amortized as a yield adjustment over the
life of the associated loans. The level of fees recognized into income as a
yield adjustment decreased approximately 63% from $461 thousand for the quarter
ended September 30, 1994 to $167 thousand for the similar quarter in 1995. As
competition has dictated a lower loan origination fee to be passed on to the
consumer, future interest income will be adversely affected as this source of
yield adjustment continues to remain depressed.
The Bank's provision for loan losses for the three-months ended September 30,
1995 was $120 thousand, compared with $127 thousand for the similar three-month
period ended September 30, 1994. Although the provision of $120 thousand in 1995
does not vary significantly from the amount recorded in 1994, the factors
driving that provision have altered greatly. During the Quarter ended September
30, 1994 the provision was driven in large part by growth in the portfolio of
1-4 family loan growth. During the quarter ended September 30, 1995 lack of
growth in the Bank's loan portfolio combined with a shrinking volume of more
risk-oriented loans such as construction and commercial, were somewhat offset
by the growth of nonperforming assets and assets with an adverse internal
classification. The Bank believes that the balance of general loan loss reserves
is adequate to cover its risk exposure.
Effective July 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan,
as amended by FAS 118 (collectively referred to as FAS 114). These statements
address the disclosure requirements and allocations of the allowance for loan
losses for certain impaired loans and amend FASB Statements No. 5 and 15.
However, they do not address the overall adequacy of the allowance for loan
losses. These Statements are effective July 1, 1995 and can only be applied
prospectively.
A loan within the scope of FAS 114 is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement,
including scheduled interest payments.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
When a loan to an individual borrower with unique risk characteristics has been
identified as being impaired, the amount of impairment will be measured by the
Bank using discounted cash flows, except when it is determined that the sole
(remaining) source of repayment for the loan is the operation or liquidation of
the underlying collateral. In such case, the current fair value of the
collateral, reduced by costs to sell, will be used in place of discounted cash
flows. Alternatively, some impaired loans will have risk characteristics similar
to other impaired loans and will be aggregated for the purpose of measuring
impairment using historical loss factors as a means of measurement.
If the measurement of the impaired loan is less than the recorded investment in
the loans (including accrued interest, net deferred loan fees or costs, and un-
amortized premium or discount), an impairment will be recognized by creating or
adjusting an existing allocation of the allowance for loan losses. FAS 114 will
not change the timing of charge-offs of loans to reflect the amount ultimately
expected to be collected.
Based upon the Bank's current interpretations, total loans within the scope of
FAS 114 that were impaired as of September 30, 1995 were $2.54 million. The
total recorded investment in loans for which there is no additional related
allowance for credit losses is also $2.54 million. The Bank follows a policy of
recording interest on impaired loans as a credit to income when earned. Interest
is reserved on loans that are 90 days or more delinquent, or considered to be
uncollectible. The average balance of loans classified as impaired was $1.81
million for the three months ended September 30, 1995. The Bank recognized total
interest income of $32 thousand on loans classified as impaired for the three
months ended September 30, 1995.
Noninterest income for the three-month period ended September 30, 1995, was $254
thousand compared with $196 thousand for the similar period in 1994. The largest
component of noninterest income, service charges on loans and retail savings
accounts, increased modestly, from $187 thousand for the quarter ended September
30, 1994 to $205 thousand for the similar period in 1995. This increase in
service charges and related income of 10% is reflective of increased average
volumes of retail loans and savings accounts being serviced combined with
increases in service charges on a number of retail services implemented late in
the quarter ended June 30, 1995.
The remaining variance in total noninterest income is concentrated in the
decline in losses from real estate acquired in settlement of loans, which
declined from a loss of $48 thousand for the quarter ended September 30, 1994 to
a loss of $7 thousand during the similar quarter in 1995. During the quarter
ended September 30, 1995, write downs and losses on disposals of three
properties totaling approximately $30 thousand were offset by the gain of $23
thousand on the disposal of another single family residential property.
Noninterest expense for the quarter ended September 30, 1995, decreased from
$2.30 million, or 2.42% of average assets, for the quarter ended September 30,
1994 to $2.20 million or 2.24% of average assets for the similar quarter in
1995. The decrease in noninterest expense represents a concentrated effort on
the part of the Bank to maintain or reduce the current level of operating
expenses while
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
continuing to grow the volume of interest earning assets and interest bearing
liabilities. Contributing to the decline in compensation and benefits have been
staff reductions and reduced hours in the area of loan origination functions to
adjust to the reduced volume of activity being generated.
Occupancy expense, increased marginally from $308 thousand for the quarter ended
September 30, 1994 to $314 thousand for the similar quarter ended September 30,
1995. This increase of approximately 2% represents increased rental expense on
long term branch leases tied to an annual CPI index.
Data processing expense increased by $8 thousand or 5.7% for the quarter ended
September 30, 1995 when compared to the similar period in 1994. The increase can
be attributed to an increase in the volume of data being processed, as well as
scheduled increases in the cost of data services provided by an independent
service bureau.
Advertising and related supplies decreased during the quarter ended September
30, 1995 to $59 thousand from $74 thousand for the similar quarter in 1994. The
decrease in expenses is reflective of the Bank's efforts to be more selective in
targeting its advertising efforts.
The growth in average retail savings deposits of approximately 3% combined with
the lagging measurement period for which the assessment is based contributed to
the increase in FDIC insurance premium from $155 thousand for the quarter ended
September 30, 1994, to $161 thousand for the similar quarter in 1995.
The decline in other noninterest expense from $408 thousand for the quarter
ended September 30, 1994 to $348 thousand for the similar quarter in 1995
represents a decrease in variable operating expenses such as telephone, postage,
supplies associated with the dramatic decrease in loan origination activity.
Income taxes
- - ------------
On February 10, 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 109, entitled Accounting for Income
Taxes. This statement which supersedes SFAS 96 and changed the criteria for
recognition and measurement of deferred tax assets and various other
requirements of SFAS 96 and reduces its complexity. Under SFAS 109 deferred tax
liabilities are recognized on all taxable temporary differences, and deferred
tax assets are recognized on all deductible temporary differences, operating
loss and tax credit carry-forwards. Valuation allowances are recognized to
reduce deferred tax assets if it is determined to be "more likely than not" that
all or some portion of the potential deferred tax assets will not be realized.
Other significant changes made by SFAS 109 include: (1) the comprehensive
scheduling of temporary differences required by SFAS 96 will not be required;
(2) a deferred tax asset may be recognized for the financial statement general
valuation allowance for loans and real estate owned, while a deferred tax
liability must be recognized for the portion of the tax bad debt reserve
exceeding the "base year" reserves; (3) tax-planning strategies must be prudent
and feasible, and (4) tax benefits
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
recognized as a result of all tax planning strategies should be net of any
expenses or losses.
The Bank provided $267 thousand for income taxes for the quarter ended September
30, 1995, compared to $447 thousand for the similar quarter ended September 30,
1994. The effective tax rate decreased from 38.6% for the quarter ended
September 30, 1994 to 37.4% for the similar quarter ended September 30, 1995.
The decreases in 1995 can be attributed in investments in low income housing
tax credits that existed previously in relation to a smaller pre-taxable income
base.
Liquidity and Capital Resources
- - -------------------------------
Under current Office of Thrift Supervision regulations, the Bank is required to
maintain liquid assets of 5% or more of its net withdrawable deposits plus
short-term borrowings. The Bank has at all times maintained liquidity levels
above those required by regulation. At September 30, 1995, the Bank's liquidity
ratio was 6.02%.
The principal sources of liquidity are deposit accounts, short-term borrowings,
advances from the FHLB of San Francisco, principal and interest payments on
loans, proceeds from the sale of loans and mortgage-backed securities, and
interest and dividends on investments. The Bank uses its capital resources
principally to fund real estate and consumer loans, repay maturing borrowings,
fund maturing savings certificates and to provide for maintenance of its
liquidity. The Bank considers its liquidity and capital resources to be
adequate to meet its foreseeable needs.
Impact of New Accounting Standards
- - ----------------------------------
Accounting for Impaired Loans.
In October, 1994 the FASB issued Statement of Financial Accounting Standards No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments." SFAS 119 requires disclosures about derivative financial
instruments such as futures, option contracts and other financial instruments
with similar characteristics. SFAS 119 also amends SFAS 105, "Disclosures about
Fair Value of Financial Instruments." This statement is effective for fiscal
years ending after December 15, 1994 and is not expected to have a material
impact on the financial condition or operating results of the Bank.
In May, 1995, the FASB issued Statement of Financial Accounting Standard No.
122, "Accounting for Mortgage Servicing Rights." SFAS 122 amends SFAS 65,
"Accounting for Certain Mortgage Banking Activities," to require that an
institution recognize, as separate assets, rights to service mortgage loans for
others. An institution that acquires mortgage servicing rights through purchase
of origination of mortgage loans an sells those loans with servicing rights
retained, should allocate the total cost of the mortgage loans to the mortgage
servicing rights and loans based on their relative fair values. SFAS 122
requires the institution to assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights with the impairment
recognized through a
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
valuation allowance. SFAS 122 is effective for fiscal years beginning after
December 15, 1995 and applies prospectively to retained servicing rights,
including purchases prior to the adoption of the statement. SFAS 122 is not
expected to have a material impact on the financial condition or operating
results of the Bank.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On October 18, 1995, the Corporation held its seventh annual
meeting of stockholders. At this meeting, incumbent Directors,
Victor DeCarli and Eugene Traverso were re-elected to three-year
terms as Directors. In addition, the stockholders approved the
ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors for the Corporation for the year ending
June 30, 1996.
Item 5. Other Information
-----------------
On June 21, 1995, Northbay Financial Corporation announced that
its Board of Directors had declared a cash dividend of $0.11 per
share, payable to stockholders of record on July 5, 1995, to be
paid July 19, 1995. On September 21, 1995 Northbay Financial
Corporation announced that its Board of Directors had declared a
cash dividend of $0.11 per share, payable to stockholders of
record on October 4, 1995, to be paid October 18, 1995.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The Bank did not file a report 8-K Form during the three months
ended September 30, 1995.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHBAY FINANCIAL CORPORATION
Registrant
DATE: November 08, 1995 BY:(S)
-------------------------------------
Alfred A. Alys
President and Chief Executive Officer
DATE: November 08, 1995 BY:(s)
-------------------------------------
Gregory L. Jahn
Chief Financial Officer