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
December 31, 1995.
OR
/ / SECURITIES EXCHANGE ACT OF 1934 For the transition period
from _____ to_____
Commission file number 1-10203
NORTHBAY FINANCIAL CORPORATION
(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)792-7400
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 December 31, 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 PAGE
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 (Unaudited)
December June
(In Thousands Except Per Share Amounts) 31, 1995 30, 1995
- --------------------------------------------------------------------------------
Assets
Cash, including noninterest-bearing deposits of
$7,525 and $7,303 $ 8,833 $ 7,816
Overnight federal funds - 425
Certificates of deposit 1,067 1,444
Investment securities held to maturity
(market value: $15,686 and $12,427) 15,658 12,526
Investment securities available for sale
(net of valuation adjustments of:($33) and ($51) 3,311 2,887
Mortgage-backed securities held to maturity
(market value: $2,802 and $1,647) 2,792 1,672
Mortgage-backed securities available for sale
(net of valuation adjustment of: $215 and $90) 12,373 8,441
Loans receivable (net of allowance of $2,356 and $2,232) 341,524 343,853
Interest receivable:
Loans 2,223 2,067
Mortgage-backed securities 63 56
Investments 342 281
Office property, equipment, and leasehold improvements, net 2,279 2,474
Real estate acquired through settlement of loans, net 782 1,556
Stock of Federal Home Loan Bank of San Francisco, at cost 3,467 3,291
Deferred premiums on loans sold 46 51
Prepaid expenses and other assets 2,081 2,218
- --------------------------------------------------------------------------------
$396,841 $391,058
================================================================================
Liabilities and Stockholders' Equity:
Savings accounts 284,109 283,909
Advances from the Federal Home Loan Bank 69,336 60,036
Other borrowings 4,852 9,332
Other liabilities and accrued expenses 2,015 1,989
Deferred income taxes 629 653
Deferred gain on sale of buildings 544 561
- --------------------------------------------------------------------------------
$361,485 $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 14,285 13,619
Debt incurred by ESOP (162) (188)
Unrealized gain on securities available for sale 109 23
- --------------------------------------------------------------------------------
35,356 34,578
$396,841 $391,058
================================================================================
See accompanying notes to consolidated financial statements.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
- --------------------------------------------------------------------------------
In Thousands Except Per Share Amounts 1995 1994 1995 1994
- --------------------------------------------------------------------------------
Interest income
Loans $ 6,773 $ 5,998 $13,294 $11,943
Mortgage-backed securities 243 153 443 287
Interest and dividends on investments 382 303 747 547
- --------------------------------------------------------------------------------
Total interest income 7,398 6,454 14,484 12,777
- --------------------------------------------------------------------------------
Interest expense
Savings accounts 3,216 2,365 6,377 4,537
Advances and other borrowings 1,169 1,034 2,314 1,791
- --------------------------------------------------------------------------------
Total interest expense 4,385 3,399 8,691 6,328
- --------------------------------------------------------------------------------
Net interest income 3,013 3,055 5,793 6,449
Provision for loan losses 50 95 170 222
- --------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,963 2,960 5,623 6,227
- --------------------------------------------------------------------------------
Noninterest income
Service charges 198 199 403 386
Write down of deferred servicing premiums (1) - (1) (3)
Gain on sale of investment securities
available for sale - 117 - 117
Loss from real estate acquired in
settlement of loans (72) (30) (78) (78)
Other 66 52 122 111
- --------------------------------------------------------------------------------
Total noninterest income 191 338 446 533
- --------------------------------------------------------------------------------
Noninterest expense
Compensation and benefits 1,023 1,082 2,089 2,189
Occupancy 307 300 622 608
Depreciation and amortization 104 110 209 221
Data processing 149 148 297 289
Advertising and supplies 54 62 113 136
Federal Deposit Insurance Corporation premiums 162 154 323 309
Other 506 441 854 849
- --------------------------------------------------------------------------------
Total noninterest expense 2,305 2,297 4,507 4,601
- --------------------------------------------------------------------------------
Income before taxes 849 1,001 1,562 2,159
Income tax expense 326 379 593 825
- --------------------------------------------------------------------------------
Net income $ 523 $ 622 $ 969 $ 1,334
================================================================================
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operation (Unaudited) (continued)
Three Months Ended Six Months Ended
December 31, December 31,
- --------------------------------------------------------------------------------
In Thousands Except Per Share Amounts 1995 1994 1995 1994
- --------------------------------------------------------------------------------
Primary earnings per share $ 0.18 $ 0.21 $ 0.33 $ 0.46
Fully diluted earnings per share $ 0.18 $ 0.21 $ 0.33 $ 0.46
See accompanying notes to consolidated financial statements.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statement of Cash Flows (Unaudited)
Six months ended December 31,
(In Thousands Except Per Share Amounts) 1995 1994
- --------------------------------------------------------------------------------
Net cash flows from operating activities:
Net income $ 969 $ 1,334
Adjustments to reconcile net income to net cash
Depreciation and amortization 209 221
Amortization of:
Deferred premiums 4 2
Deferred loan fees (300) (737)
Deferred gain on sale/leaseback of buildings (17) (17)
Other (7) (3)
Provision for loan loss 170 222
Loss from real estate activities 78 64
Gain on sale of investment securities available for sale - (116)
Increase in income taxes payable and deferred (24) (5)
(Increase) in accrued interest receivable (224) (168)
Increase (Decrease) in other liabilities and
accrued expenses 26 (270)
Decrease (increase) in prepaid and other assets 137 (470)
Write down deferred servicing premium 1 3
Long-term loans originated as available for sale - (649)
Proceeds from sales of loans available for sale - 649
Investment securities purchased as available for sale (1,104) (3)
Mortgage backed securities purchased as available for sale (4,389) (1,052)
Proceeds from sales of investment
securities available for sale - 124
FHLB stock dividend (86) (71)
Other 6 -
- --------------------------------------------------------------------------------
Net cash (used in), provided by operating activities (4,551) (942)
- --------------------------------------------------------------------------------
Net cash flows from investing activities:
Principal payments on loans 32,372 57,724
Principal payments on mortgage backed securities 697 730
Long-term loans originated as held to maturity (29,140) (77,426)
Long-term loans purchased as held to maturity (507) (1)
Net (increase) decrease in short-term loans (189) 143
Maturities of investment securities held to maturity 3,743 978
Purchases of mortgage-backed securities held to maturity (1,227) -
Purchases of investment securities held to maturity (5,773) (2,573)
Purchases of premises and equipment (14) (115)
Purchase of FHLB stock (89) (1,706)
Proceed from sale of real estate received in
settlement of loans 855 284
- --------------------------------------------------------------------------------
Net cash used in investing activities 728 (21,962)
- --------------------------------------------------------------------------------
/TABLE
Consolidated Statement of Cash Flows (continued)
Six months ended December 31,
(In Thousands Except Per Share Amounts) 1995 1994
- --------------------------------------------------------------------------------
Cash flows provided from financing activities:
Dividends paid on common stock $ (605) $ (508)
Net (decrease) increase in savings accounts 200 (5,528)
Net increase in short-term borrowings 4,820 32,801
- --------------------------------------------------------------------------------
Net cash provided by financing activities 4,415 26,765
- --------------------------------------------------------------------------------
Increase in cash and cash equivalents 592 3,861
Cash and cash equivalents at beginning of year 8,241 7,255
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,833 $ 11,116
================================================================================
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 $ 609 $ 830
Interest on deposits $ 6,391 $ 4,533
/TABLE
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 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 six month period ended
December 31, 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 20% stock split, accounted for as a dividend, declared September 30,
1994, paid October 28, 1994.
Note 2 - 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 unrealized gain or loss, net of
applicable taxes, recorded in equity. The net unrealized gain at December 31,
1995 was approximately $109 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
DECEMBER 31, 1995
Financial Condition
- -------------------
On November 10, 1995 Northbay Financial Corporation announced it had signed a
definitive agreement to be acquired along with its wholly-owned subsidiary,
Northbay Savings Bank, FSB (the "Bank") by Bank of the West. Under the
agreements, the aggregate purchase price is approximately $47.1 million in cash
or $15.75 per share, subject to adjustment in certain circumstances. The
acquisition of Northbay Financial is subject to various regulatory approvals
and a vote by the existing shareholders of Northbay Financial and is expected
to be completed during the second quarter of 1996.
The trend in declining interest rates which began during the quarter ended
March 31, 1995 continued at an accelerated pace during the quarter ended
December 31, 1995. The decline in rates was accentuated by a further cut of 25
basis points in the Federal Funds rate. For the second time in the last six-
month period the Federal Reserve Bank (FRB), implemented an easing of the
Federal Funds rate on December 19, 1995 from 5.75% to 5.50%. Beginning with
the quarter ended March 31, 1995, we have now experienced four consecutive
quarters of stable or declining interest rates. During the calendar year ended
December 31, 1995, we have experienced a decline in rates, with maturities of
one-year and greater of approximately 200 basis points. For example, interest
rates on the one year treasury note declined from 7.18% at December 31, 1994 to
5.15% at December 31, 1995 a decline of 202 basis points. Similarly, the rate
on the thirty-year treasury declined from 7.85% at December 31, 1994 to 5.97%
at December 31, 1995, a decline of 188 basis points.
The positive impact of this generally declining interest rate environment is
continuing to become evident in the Bank's operating results in the form of a
growing net interest rate spread, which grew from 2.45% during the quarter
ended March 31, 1995 to 2.81% for the quarter ended December 31, 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
Funds Index (COFI), it is expected that the Bank would now experience a
widening of the interest rate spread as a result of the lagging nature of that
index in a declining rate environment. 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.
Despite the rather dramatic decline in interest rates over the last twelve
month period, the corresponding increase in consumer demand for housing in
Northbay's market area is yet to appear. This reduced consumer demand for home
financing has been the focus of the Bank's attention for both the three- and
six-month periods ended December 31, 1995. The Bank has addressed this issue
with a reduction of staff and overhead associated with the loan origination
function. Slow consumer demand combined with a somewhat less aggressive
pricing policy on new loan production has caused new production volume to
decline from approximately $80 million for the six months ended December 31,
1994 to approximately $29 million for the six months ended December 31, 1995.
Consequently, the Bank's net loan portfolio has declined from $343.9 million
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1995
at June 30, 1995 to $341.5 million at December 31, 1995. The demand for
mortgage financing was replaced with the purchase of investment and mortgage-
backed securities which increased by $3.5 million and $5.1 million respectively
during the six months ended December 31, 1995.
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 investment growth with advances from
the Federal Home Loan Bank of San Francisco (FHLB). Net asset growth of
approximately $5.8 million was funded almost entirely with growth in FHLB
advances. The Bank's net interest rate spread continued to widen as the yields
on the adjustable rate loan portfolio increased more rapidly than the rising
cost of retail funds, while the cost of short-term wholesale borrowings
continued to decrease.
The Office of Thrift Supervision (OTS) has adopted a final regulation
incorporating an interest rate risk component in the risk-based capital rules.
The rule requires savings institutions with more than a "normal" level of
interest rate risk to maintain additional total capital. A savings
institution's interest rate risk is 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
DECEMBER 31, 1995
The Bank exceeds all of the regulatory capital standards at December 31, 1995,
with ratios of core, tangible, and risk-based capital to assets of 8.74%, 8.76%
and 15.13%, respectively. Components of the Bank's regulatory capital at
December 31, 1995 are summarized as follows (dollars in thousands):
Tangible % of Core % of Risk- % of
Capital Adjusted Capital Adjusted Based Risk-Based
Assets Assets Capital Assets
-------- -------- ------- -------- -------- --------
Common Stock $ 275 .07% $ 275 .07% $ 275 .11%
Additional Paid-in Capital 20,849 5.25% 20,849 5.25% 20,849 8.50%
Retained Earnings 13,848 3.49% 13,848 3.49% 13,848 5.65%
ESOP Loan (162) (.04)% (162) (.04)% (162) (.07)%
General Loan Loss Reserves - - - - 2,328 .95%
Intangible Deposit Premium (64) (.02)% - - - -
Unrealized loss on
Certain Available-for-
Sale Securities (32) (.01) (32) (.01) (32) (.01)
Total 34,714 8.74% 34,778 8.76% 37,106 15.13%
Minimum Capital Required 5,955 1.50% 11,910 3.00% 19,622 8.00%
Excess Regulatory Capital $28,759 7.24% $22,868 5.76% $17,484 7.13%
The Bank's assessment for deposit insurance premiums (expressed in terms of
percentage 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 as low as 4 cents for every $100, down
from 23 cents, and subsequently was reduced to as low as zero. 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.
There is currently a proposal within Congress to resolve the disparity between
deposit insurance premiums paid by BIF and SAIF members. As the proposal has
developed, SAIF members would be required to pay a one-time assessment of
approximately 85 basis points of total insured savings liabilities to replenish
the fund. It is expected this would reduce future deposit premiums to as low
as
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1995
4 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. There can be no assurance as to whether, or in what form, this
proposal will be adopted
The Bank's nonperforming assets (loans 90 days or more delinquent,
nonperforming loans, and foreclosed real estate) were $3.9 million or .99% of
assets at December 31, 1995, compared to $2.9 million to .74% at June 30, 1995.
The increase in nonperforming assets during the six months ended December 31,
1995 can be attributed primarily to one commercial real estate loan totaling
$1.1 million and one land development loan totaling $900 thousand which became
90 days delinquent during the quarter. These increases in nonperforming loans
were partially offset by the disposal of four single family residential
properties acquired as a result of foreclosure totaling approximately $800
thousand.
In addition to the two loans mentioned above, the remaining balance of
nonperforming assets at December 31, 1995 is divided between loans delinquent
90 days or more of approximately $1.1 million and real estate acquired as a
result of foreclosure of approximately $800 thousand. Nonperforming loans can
be further broken into three categories. First, included within nonperforming
loans are three nonmortgage commercial loans totaling $111 thousand. Second,
is one construction and development real estate loan totaling $129 thousand.
Third, and finally, are nine loans secured by single family residential
properties which in aggregate total $842 thousand. Real estate acquired
through foreclosure consists of four single family residential units and one
land loan, which in aggregate are valued at $782 thousand. The Bank has
previously recognized write downs of approximately $270 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.
The decline in the Bank's provision for loan loss to $50 thousand for the
quarter and $170 thousand for the six months ended December 31, 1995 compared
to $95 thousand and $222 thousand for the similar three- and six-month periods
in 1994, reflects the lack of growth in the loan portfolio during 1995.
Declines in the proportion of more risk-oriented assets such as land and
construction lending were offset somewhat by the larger volume of loans with an
adverse internal classification. The Bank's reserve for loan loss now stands
at approximately $2.36 million or 60% of the total nonperforming assets. This
compares to a peer group average of reserves to nonperforming assets of all
west coast savings and loans at September 30, 1995 of 50%. Further, the Bank's
current ratio of nonperforming assets to total assets of .99% compares to a
percentage of 1.49% as of September 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 December 31, 1995,
were adequate to cover potential losses.
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1995
Results of Operations
- ---------------------
The Bank's net income for the three months ended December 31, 1995, was $523
thousand, a decrease of $99 thousand, or 16% below net income of $622 thousand
for the similar period in 1994. However, the exclusion of merger related
expenses of approximately $170 thousand during the quarter ending December 31,
1995 would have provided net income virtually identical to the similar quarter
in 1994. Net income for the six months ended December 31, 1995 was $969
thousand a decrease of $365 thousand or 27% below the similar six-month period
ended December 31, 1994.
Net interest income before provision for loan losses was $3.01 million and
$5.79 million for the three- and six-month periods ended December 31, 1995,
compared to $3.06 million and $6.45 million for the similar periods ended
December 31, 1994, representing decreases of 1% and 10% from the respective
periods in 1994. 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 in net interest income for the three- and six-
month periods ended December 31, 1995. Average interest-earning assets for the
three- and six-month periods ended December 31, 1995, increased by $8 million
and $11 million, compared with the similar periods in 1994, while average
interest-bearing liabilities increased by $3.5 million and $6.9 million over
the similar periods in 1994. A comparison of the three- and six-month periods
ended December 31, 1994 to the similar three- and six-month periods ended
December 31 1995 would reveal that the net interest rate spread had declined
from 3.04% and 3.27% for the respective three- and six-month periods in 1994 to
2.81% and 2.70% for the similar periods in 1995. While the yield on average
interest-earning assets increased from 6.90% for the quarter ended December 31,
1994 to 7.74% for the similar quarter in 1995, the increase in rates paid on
interest-bearing liabilities increased more rapidly, increasing from 3.86% to
4.93% 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. The COFI by its nature is a
lagging index, and does not respond as quickly as current market rates when
rates change direction, either up or down. At December 31, 1995, approximately
$264 million, or 73% of the Bank's entire loan portfolio consisted of
adjustable rate loans indexed to the COFI. During the fifteen-month period
ended December 31, 1994 the FRB took action 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 twelve-month period from December 31, 1994 to December 31, 1995, the
interest rate cycle shifted once again and the Bank witnessed a significant
decline in interest rates in conjunction with a continued flattening of the
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1995
yield curve. A flattening of the yield curve refers to the fact that the
difference between shorter-term rates and longer-term rates narrowed as a
result of significant declines in longer-term rates without corresponding
decreases in shorter-term rates. While rates with maturities of one year or
greater declined in general by approximately 200 basis points, short-term rates
such as the three- month treasury declined less dramatically by only 61 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 investment 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, and 2.81% for the
quarter ended December 31, 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, and 7.74% for the three
months ended December 31, 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 and 4.93% for the quarter ended December 31, 1995.
The decline in current treasury rates combined with a continued increase in
COFI provides a much more promising outlook for the Bank's portfolio of COFI
indexed loans. While the yield on the one-year treasury declined from 7.17%
from December 31, 1994 to 5.15% at December 31, 1995, the COFI increased from
4.37% to 5.12% during this same period of time. Due to the lagging nature of
the COFI index combined with average reset of six months on the Bank's
portfolio of COFI indexed loans, tangible results of these changes are expected
to continue to enhance earnings in a declining interest rate environment.
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 59% from $737 thousand for the six
months ended December 31, 1994 to $300 thousand for the similar six months 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- and six-months ended
December 31, 1995 were $50 thousand and $170 thousand, compared with $95
thousand and $222 thousand for the similar three- and six-month periods ended
December 31, 1994. The decline in the provision for loan losses can be
attributable to a lack of growth in the loan portfolio during both the three-
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1995
and six-months ending December 31, 1995. In addition, factors such as growth
in nonperforming assets and assets with an adverse internal classification have
been offset somewhat by the decline in more risk oriented assets such as land
and construction lending. The provisions for loan losses during the three- and
six-months ended December 1994 reflect significant growth in the portfolio
combined with a lower level of problem assets. The Bank believes that the
allowance for 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.
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
unamortized 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 December 31, 1995 were $3.1 million. Impaired
loans are concentrated within three groups. First, there are two land loans
totaling $1.9 million. Second, there is one single family residential
construction loan totaling $129 thousand. Third and finally, there is one
commercial loan totaling $1.1 million. The total recorded investment in loans
for which there is no additional related allowance for credit losses is also
$3.1 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 $2.73 million for the three months
ended December 31, 1995. The Bank recognized total interest income of $38
thousand
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1995
and $72 thousand on loans classified as impaired for the three- and six-month
periods ended December 31, 1995.
Noninterest income for the three- and six-month periods ended December 31, 1995
was $191 thousand and $446 thousand compared with $338 thousand and $533
thousand for the similar periods in 1994. The largest component of noninterest
income, service charges on loans and retail savings accounts, remained
relatively flat, decreasing from $199 thousand for the quarter ended December
31, 1994 to $198 thousand for the similar quarter in 1995, while increasing
from $386 thousand for the six months ended December 31, 1994 to $403 thousand
for the similar period in 1995. This increase in service charges and related
income of 4% 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 primarily in
the line item "Gain on Sale of Investment Securities Available For Sale".
During the quarter ended December 31, 1994 the Bank sold approximately 2,300
shares of FHLMC stock recognizing a gain of $117 thousand. The Bank recognized
no such gain on the sale of investments or equity investments during the
similar three- and six-month periods ended December 31, 1995. The Bank
continued its policy of liquidating its portfolio of real estate acquired
through foreclosure. As a result the Bank recognized provisions for loss as
well as actual losses on the sale of real estate, totaling $78 thousand during
the quarters ended December 31, 1995 and 1994.
Noninterest expense for the three- and six-month periods ended December 31,
1995, was $2.31 million and $4.51 million compared to $2.30 million and $4.60
million for the respective periods in 1994. The general level of decrease in
noninterest expense for the six months ended December 31, 1995 represents a
concentrated effort on the part of the Bank to reduce the current level of
operating expense particularly as it relates to the decreased activity in the
real estate lending markets. Within the expenses recorded during the quarter
ended December 31, 1995 are nonrecurring merger related expenses such as legal
fees and investment advisor fees totaling approximately $170 thousand. Absent
these nonrecurring expenses the Bank would have recognized declines in
noninterest expense of approximately $160 thousand and $265 thousand or 5% for
each the three- and six-month periods ended December 31, 1995 compared to the
similar three- and six-month periods in 1994.
Compensation and employee benefits, the largest component of noninterest
expense, declined to $1.02 million and $2.09 million for the three- and six-
month periods ended December 31, 1995 from $1.08 million and $2.19 million for
the similar three- and six-month periods in 1994. 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 $300 thousand and $608 thousand for
the three- and six-month periods ended December 31, 1994 to $307 thousand and
$622 thousand for the similar periods in 1995. These increases of
approximately 2% during both the three- and six-month periods represents
increased rental
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1995
expense on long term branch leases tied to an annual Consumer Price Index.
Data processing expense increased marginally by $1 thousand and $8 thousand for
the three-and six-month periods ended December 31, 1995 compared to the similar
periods in 1994. The increases can be attributed to a new contract executed
with an independent service bureau.
The Bank chose to be more selective in targeting its advertising efforts during
both the three- and six-month periods ended December 1995. As a result
advertising expense and related supplies during both the three- and six-month
periods ended December 31, 1995 decline by $8 thousand or 13% and $23 thousand
or 17% below the similar periods in 1994.
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 $154 thousand and $309 thousand for
the three- and six-month period ended December 31, 1994 to $162 thousand and
$323 thousand for the similar three- and six-month period ended December 31,
1995.
The increase in other noninterest expense from $441 thousand and $849 thousand
from the three- and six-month period ended December 31, 1994 to $506 thousand
and $854 thousand for the similar three- and six-month period ended December
31, 1995 relate to a combination of events. Declines in recurring 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. Similar decreases in recurring
expense were more than offset in merger related expenses of approximately $170
thousand recognized in the quarter ended December 31, 1995.
Income taxes
- ------------
The Bank provided $326 thousand and $593 thousand for income taxes for the
three and six-month period ended December 31, 1995 compared to $379 thousand
and $825 thousand for the similar periods in 1994. The effective tax rate
decreased marginally from 38.2% for six months ended December 31, 1994 to 38.0%
for the similar six month period ended December 31, 1995. The decreases in
1995 can be attributed to investments in low income housing tax credits that
existed previously in relation to a smaller pre-taxable income base.
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 December 31, 1995 relate to the following:
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1995
12/31/95
----------
Deferred tax assets:
Book allowance for loan losses in excess of tax $ 505,576
Gain on sale of building 226,281
Deferred Compensation 105,159
California Franchise Tax 65,477
Other 5,065
---------
Deferred tax assets 907,558
Less valuation allowance 0
---------
Net Deferred Tax Assets 907,558
Deferred tax liabilities:
Loan fees deferred for tax purposes 1,009,264
FHLB dividends 289,593
Tax depreciation in excess of book 166,375
Other 97,150
---------
Net Deferred Tax Liabilities 1,562,382
---------
Net deferred taxes $ 654,824
==========
The following is a summary of deferred taxes:
Deferred Valuation Deferred Net
Tax Asset Allowance Tax liab Total
---------- ---------- ---------- ----------
Balance at December 31, 1995 $ 907,558 $ - $1,562,382 $
654,824
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 December 31, 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
NORTHBAY FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1995
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
- ----------------------------------
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 did not 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 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
Previously reported in the Corporations Form 10Q for the
period ended September 30, 1995.
Item 5. Other Information
On November 9, 1995, Northbay Financial Corporation
(Northbay)entered into an Agreement and Plan of Merger
(The "Merger Agreement") with Bank of The West, and an
acquisition subsidiary thereof, pursuant to which the
acquisition subsidiary will merge with and into Northbay
(The "Merger"). Upon the Merger, each share of common
stock, $0.10 par value, of Northbay shall be converted with
the right to receive an amount t in cash equal to $15.75
per
share, subject to adjustment in certain circumstances. In
addition, Northbay has entered into a Stock Option
Agreement
with Bank of The West, pursuant to which Bank of The West
has been granted an option to purchase shares of Northbay
common stock representing 19.9% of its presently
outstanding
shares at a price of $13.25 per share, upon the occurrence
of specified events.
Item 6. Exhibits and Reports on Form 8-K
The Registrant filed a report on Form 8-K dated November 9,
1995, to report, under Item 5 of Form 8-K, that it had
entered into the Merger Agreement with Bank of The West.
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: January 31, 1996 BY: (s)
-------------------------------------
ALFRED A. ALYS
President and Chief Executive Officer
DATE: January 31, 1996 BY: (s)
--------------------------------------
Gregory L. Jahn
Vice President and
Chief Financial Officer
[ARTICLE] 9
[LEGEND]
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED DECEMBER 31,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] JUN-30-1996
[PERIOD-END] DEC-31-1995
[CASH] 7,525
[INT-BEARING-DEPOSITS] 1,308
[FED-FUNDS-SOLD] 0
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 15,684
[INVESTMENTS-CARRYING] 19,517
[INVESTMENTS-MARKET] 19,545
[LOANS] 345,015
[ALLOWANCE] 2,356
[TOTAL-ASSETS] 396,841
[DEPOSITS] 284,109
[SHORT-TERM] 74,188
[LIABILITIES-OTHER] 3,188
[LONG-TERM] O
[COMMON] 275
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 35,081
[TOTAL-LIABILITIES-AND-EQUITY] 396,841
[INTEREST-LOAN] 13,294
[INTEREST-INVEST] 1,190
[INTEREST-OTHER] 0
[INTEREST-TOTAL] 14,484
[INTEREST-DEPOSIT] 6,377
[INTEREST-EXPENSE] 2,314
[INTEREST-INCOME-NET] 5,793
[LOAN-LOSSES] 170
[SECURITIES-GAINS] 0
[EXPENSE-OTHER] 4,507
[INCOME-PRETAX] 1,562
[INCOME-PRE-EXTRAORDINARY] 1,562
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 969
[EPS-PRIMARY] O.33
[EPS-DILUTED] 0.33
[YIELD-ACTUAL] 3.15%
[LOANS-NON] 3,134
[LOANS-PAST] 0
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 2,232
[CHARGE-OFFS] 46
[RECOVERIES] 0
[ALLOWANCE-CLOSE] 2,356
[ALLOWANCE-DOMESTIC] 2,356
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 2,328