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 QUARTER PERIOD ENDED SEPTEMBER 30, 2004
Commission File No. 0-31080
NORTH BAY BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0434802
- ---------------------------------------- ------------------------------------
(State or Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
1190 Airport Road, Suite 101, Napa, California 94558
----------------------------------------------------------
(Address of principal executive office including Zip Code)
Registrant's telephone number, including area code: (707) 252-5026
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
Preferred Share Purchase Rights
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the North Bay Bancorp's Common
Stock outstanding as of November 11, 2004: 2,427,688
Part 1.
FINANCIAL INFORMATION
FORWARD LOOKING STATEMENTS
- --------------------------
In addition to the historical information, this Quarterly Report contains
certain forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 321E of the Securities Exchange
Act of 1934, as amended, and are subject to the "Safe Harbor" created by those
Sections. The reader of this Quarterly Report should understand that all such
forward-looking statements are subject to various uncertainties and risks that
could affect their outcome. The Company's actual results could differ materially
from those suggested by such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, (i)
variances in the actual versus projected growth in assets, return on assets,
loan losses, expenses, rates charged on loans and earned on securities
investments, rates paid on deposits, and fee and other noninterest income
earned; (ii) competitive pressures among depository and other financial
institutions may increase significantly and have an effect on pricing, spending,
third-party relationships and revenues; (iii) enactment of adverse government
regulations; (iv) adverse conditions and volatility, as a result of recent
economic uncertainty created by the United States' war on terrorism, the war in
Iraq, in the stock market, the public debt market and other capital markets and
the impact of such conditions of the Company; (v) continued changes in the
interest rate environment may reduce interest margins and adversely impact net
interest income; (vi) as well as other factors. This entire Quarterly Report
should be read to put such forward-looking statements in context and to gain a
more complete understanding of the uncertainties and risks involved in the
Company's business.
Moreover, wherever phrases such as or similar to "In Management's opinion", or
"Management considers" are used, such statements are as of and based upon the
knowledge of Management at the time made and are subject to change by the
passage of time and/or subsequent events, and accordingly such statements are
subject to the same risks and uncertainties noted above with respect to
forward-looking statements.
FINANCIAL INFORMATION
- ---------------------
The information for the three months and nine months ended September 30, 2004
and September 30, 2003 is unaudited, but in the opinion of management reflects
all adjustments which are necessary to present fairly the financial condition of
North Bay Bancorp (Company) at September 30, 2004 and September 30, 2003 and the
results of operations and cash flows for the three and nine months then ended.
Results for interim periods should not be considered as indicative of results
for a full year.
2
Item 1.
FINANCIAL STATEMENTS
North Bay Bancorp
Consolidated Balance Sheets
(Unaudited)
(In 000's except share data)
September 30, September 30, December 31,
Assets 2004 2003 2003
-------- -------- --------
Cash and due from banks $ 42,626 $ 34,777 $ 28,756
Federal funds sold 15,585 21,750 9,195
-------- -------- --------
Total cash and cash equivalents 58,211 56,527 37,951
Time deposits with other financial institutions 100 100 100
Investment Securities:
Held-to-maturity 0 1,250 0
Available-for-sale 92,617 83,177 90,655
Equity securities 2,554 1,349 1,351
-------- -------- --------
Total investment securities 95,171 85,776 92,006
Loans, net of allowance for loan losses of $4,040 in September, 2004
$3,421 in September, 2003 and $3,524 in December, 2003 354,403 274,491 303,139
Loans held-for-sale 20,232 10,786 3,095
Investment in subsidiary 310 0 0
Bank premises and equipment, net 10,657 11,137 10,909
Accrued interest receivable and other assets 13,415 12,499 12,282
-------- -------- --------
Total assets $552,499 $451,316 $459,482
======== ======== ========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $127,768 $104,594 $103,401
Interest bearing 349,024 294,827 303,044
-------- -------- --------
Total deposits 476,792 399,421 406,445
Subordinated debentures 10,310 10,000 10,000
Long Term Borrowings 19,000 0 0
Accrued interest payable and other liabilities 3,667 3,836 3,596
-------- -------- --------
Total liabilities 509,769 413,257 420,041
Shareholders' equity:
Preferred stock - no par value:
Authorized, 500,000 shares;
Issued and outstanding - none
Common stock - no par value:
Authorized, 10,000,000 shares;
Issued and outstanding - 2,426,762 shares in September, 2004,
2,285,646 shares in September, 2003, and 2,285,646 in December, 2003 33,459 29,209 29,210
Retained earnings 8,934 8,324 9,623
Accumulated other comprehensive income 337 526 608
-------- -------- --------
Total shareholders' equity 42,730 38,059 39,441
-------- -------- --------
Total liabilities and shareholders' equity $552,499 $451,316 $459,482
======== ======== ========
<FN>
The accompanying notes are an integral part of these statements
</FN>
3
North Bay Bancorp
Consolidated Income Statements
(Unaudited)
(In 000's except share data)
Three Months Ended Nine months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------- ------- ------- -------
Interest Income
Loans (including fees) $ 5,865 $ 4,853 $16,515 $13,780
Federal funds sold 39 38 139 157
Investment securities - taxable 805 482 2,117 1,999
Investment securities - tax exempt 113 181 409 473
------- ------- ------- -------
Total interest income 6,822 5,554 19,180 16,409
Interest Expense
Deposits 677 550 1,845 1,907
Short term borrowings 0 2 1 10
Long term debt 284 129 662 411
------- ------- ------- -------
Total interest expense 961 681 2,508 2,328
------- ------- ------- -------
Net interest income 5,861 4,873 16,672 14,081
Provision for loan losses 180 45 540 135
------- ------- ------- -------
Net interest income after
provision for loan losses 5,681 4,828 16,132 13,946
Non interest income 986 848 2,967 2,285
Gains on securities transactions, net 0 207 262 637
------- ------- ------- -------
Total non interest income 986 1,055 3,229 2,922
Non interest expenses
Salaries and employee benefits 2,566 2,338 7,633 6,896
Occupancy 369 356 1,080 931
Equipment 502 485 1,509 1,230
Other 1,230 1,088 3,613 3,536
------- ------- ------- -------
Total non interest expense 4,667 4,267 13,835 12,593
------- ------- ------- -------
Income before provision for
Income taxes 2,000 1,616 5,526 4,275
Provision for income taxes 750 452 2,034 1,204
------- ------- ------- -------
Net income $ 1,250 $ 1,164 $ 3,492 $ 3,071
======= ======= ======= =======
Basic earnings per common share: $ 0.52 $ 0.49 $ 1.45 $ 1.29
======= ======= ======= =======
Diluted earnings per common share: $ 0.50 $ 0.48 $ 1.40 $ 1.26
======= ======= ======= =======
Dividends paid: $ 0.00 $ 0.00 $ 0.20 $ 0.20
======= ======= ======= =======
<FN>
The accompanying notes are an integral part of these statements
</FN>
4
North Bay Bancorp
Consolidated Statement of Change in Shareholders' Equity
For the Nine months Ended
September 30, 2004
(Unaudited)
(In 000's except share data)
Accumulated
Other Total
Common Shares Common Retained Comprehensive Shareholders' Comprehensive
Outstanding Stock Earnings Income (loss) Equity Income
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 2,285,646 $29,210 $9,623 $608 $39,441
Stock dividend 113,997 3,706 (3,723) (17)
Cash dividend (458) (458)
Comprehensive income:
Net income 3,492 3,492 $3,492
Other comprehensive loss, net of tax:
Change in net unrealized losses on
available-for-sale securities, net of
tax of $193 (271) (271) (271)
------
Comprehensive income $3,221
======
Stock options exercised, including tax of $65 27,119 543 543
--------- ------- -------
BALANCE, SEPTEMBER 30, 2004 2,426,762 $33,459 $8,934 $337 $42,730
========= ======= ====== ==== =======
<FN>
The accompanying notes are an integral part of these statements
</FN>
5
North Bay Bancorp
Consolidated Statement of Cash Flows
(Unaudited )
(In 000's)
Nine months Ended
September 30,
2004 2003
--------- ---------
Cash Flows From Operating Activities:
Net income $ 3,492 $ 3,071
Adjustment to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 1,212 1,171
Provision for loan losses 540 135
Amortization of deferred loan fees (442) (498)
Proceeds from sale of loans held-for-sale 182,777 269,120
Purchase of loans held-for-sale (199,914) (279,906)
Premium amortization (discount accretion), net 199 919
Gain on securities transactions (262) (637)
Changes in:
Interest receivable and other assets (940) (101)
Interest payable and other liabilities 136 784
--------- ---------
Net cash used by operating activities (13,202) (5,942)
Cash Flows From Investing Activities:
Investment securities held-to-maturity:
Proceeds from maturities and principal payments 0 22
Investment securities available-for-sale:
Proceeds from maturities and principal payments 30,226 28,558
Proceeds from sale of securities 4,322 34,626
Purchases (36,911) (43,569)
Equity securities:
Proceeds from sale of securities 0 50
Purchases (1,203) (50)
Net increase in loans (51,362) (39,791)
Capital expenditures (960) (1,508)
--------- ---------
Net cash used in investing activities (55,888) (21,662)
Cash Flows From Financing Activities:
Net increase in deposits 70,347 31,618
Increase in long-term borrowings 19,000 0
Stock options exercised 478 644
Dividends paid (475) (441)
--------- ---------
Net cash provided by financing activities 89,350 31,821
--------- ---------
Net increase in cash and cash equivalents 20,260 4,217
Cash and cash equivalents at beginning of year 37,951 52,310
--------- ---------
Cash and cash equivalents at end of period $ 58,211 $ 56,527
========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 2,299 $ 2,394
Taxes paid $ 2,860 $ 845
<FN>
The accompanying notes are an integral part of these statements
</FN>
6
NORTH BAY BANCORP
Notes to the Consolidated Financial Statements
(Unaudited)
September 30, 2004
NOTE 1 - Basis of Presentation
- ------------------------------
The accompanying consolidated financial statements, which include the accounts
of North Bay Bancorp and its subsidiaries together the "Company", have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and in Management's opinion, include all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of results
for such interim periods. The subsidiaries consist of two community banks, The
Vintage Bank, established in 1985, and Solano Bank, which opened in 2000 and
Vintage Capital Trust, a subsidiary of The Vintage Bank, which was established
in February 2003. North Bay has received regulatory approval to consolidate its
subsidiary banks to simplify the Company's corporate structure. The Merger of
Solano Bank into The Vintage Bank is expected to occur during the first quarter
of 2005. All significant intercompany transactions and balances have been
eliminated. The Company de-consolidated its subsidiary, North Bay Statutory
Trust 1, effective March 31, 2004. The Trust has no independent assets or
operations and exists solely for the purpose of issuing and selling trust
preferred securities.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to SEC rules or regulations; however, the Company
believes that the disclosures made are adequate to make the information
presented not misleading. The interim results for the three months and nine
months ended September 30, 2004 and 2003, are not necessarily indicative of
results for the full year. It is suggested that these financial statements be
read in conjunction with the financial statements and the notes included in the
Company's Annual Report for the year ended December 31, 2003.
NOTE 2 - Commitments
- --------------------
The Company has outstanding standby Letters of Credit of approximately
$2,221,000, undisbursed real estate and construction loans of approximately
$24,123,000, and undisbursed commercial and consumer lines of credit of
approximately $82,961,000, as of September 30, 2004. The Company had outstanding
standby Letters of Credit of approximately $927,000, undisbursed real estate and
construction loans of approximately $21,310,000, and undisbursed commercial and
consumer lines of credit of approximately $70,610,000, as of September 30, 2003.
NOTE 3 - Earnings Per Common Share
- ----------------------------------
The Company declared a 5% stock dividend on January 26, 2004. As a result of the
stock dividend the number of common shares outstanding and earnings per share
data was adjusted retroactively for all periods presented in the table below.
The following table reconciles the numerator and denominator of the Basic and
Diluted earnings per share computations:
Weighted Average Per-Share
Net Income Shares Amount
---------- ------ ------
(Dollars in 000's except share data)
For the three months ended September 30, 2004
---------------------------------------------
Basic earnings per share $1,250 2,425,772 $0.52
Dilutive effect of stock options 65,690
---------
Diluted earnings per share 2,491,462 $0.50
---------
For the three months ended September 30, 2003
---------------------------------------------
Basic earnings per share $1,164 2,399,102 $0.49
Dilutive effect of stock options 43,272
---------
Diluted earnings per share 2,442,374 $0.48
For the nine months ended September 30, 2004
--------------------------------------------
Basic earnings per share $3,492 2,410,739 $1.45
Dilutive effect of stock options 75,231
---------
Diluted earnings per share 2,485,970 $1.40
For the nine months ended September 30, 2003
--------------------------------------------
Basic earnings per share $3,071 2,376,083 $1.29
Dilutive effect of stock options 57,416
---------
Diluted earnings per share 2,433,499 $1.26
7
NOTE 4- Stock-Based Compensation
- --------------------------------
The Company uses the intrinsic value method to account for its stock option
plans (in accordance with the provisions of Accounting Principles Board Opinion
No. 25 and related interpretations). Under this method, compensation expense is
recognized for awards of options to purchase shares of common stock to employees
under compensatory plans only if the fair market value of the stock at the
option grant date (or other measurement date, if later) is greater than the
amount the employee must pay to acquire the stock. Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation", permits companies to continue using the intrinsic-value method to
account for stock option plans or adopt a fair value based method. The fair
value based method results in recognizing as expense over the vesting period the
fair value of all stock-based awards on the date of grant. The Company has
elected to continue to use the intrinsic value method and the pro forma
disclosures required by SFAS 123. Using the fair value method the Company's net
income and earnings per share amounts would have been reduced to the pro forma
amounts as indicated below:
(In 000's except share data)
For the three months ended September 30,
2004 2003
--------- ---------
Net income as reported $ 1,250 $ 1,164
Total stock-based employee
compensation
expense determined under
the fair value based method
for all awards, net of related
tax effects 83 75
--------- ---------
Net income pro forma $ 1,167 $ 1,089
========= =========
Earnings per share:
As reported:
Basic $ .52 $ .49
Diluted $ .50 $ .48
Pro forma:
Basic $ .48 $ .45
Diluted $ .47 $ .45
(In 000's except share data)
For the nine months ended September 30,
2004 2003
--------- ---------
Net income as reported $ 3,492 $ 3,071
Total stock-based employee
compensation
expense determined under
the fair value based method
for all awards, net of related
tax effects 249 197
--------- ---------
Net income pro forma $ 3,243 $ 2,874
========= =========
Earnings per share:
As reported:
Basic $ 1.45 $ 1.29
Diluted $ 1.40 $ 1.26
Pro forma:
Basic $ 1.35 $ 1.21
Diluted $ 1.30 $ 1.18
NOTE 5 - Impact of Recently Issued Accounting Standards
- -------------------------------------------------------
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51" (FIN 46). FIN 46 provides a new framework for
identifying variable interest entities (VIEs) and determining when a company
should include the assets, liabilities, noncontrolling interests and results of
activities of a VIE in its consolidated financial statements. Prior to the
implementation of FIN 46, VIEs were generally consolidated by the company when
the company had a controlling financial interest through ownership of the
majority of the voting interest in the company. The provisions of FIN 46 were
effective immediately. In October 2003, the FASB agreed to defer the effective
date of FIN 46 for VIEs to allow time for certain implementation issues to be
addressed. On December 24, 2003, the FASB released its latest interpretation
(FIN 46R) of the appropriate accounting treatment for VIEs, which in part,
specifically addresses limited purpose trusts formed to issue trust preferred
securities. In July 2003, the Board of Governors of the Federal Reserve issued a
supervisory letter instructing bank holding companies to continue to include the
trust preferred securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of any accounting treatment changes and, if
necessary or warranted, provide further appropriate guidance. There can be no
assurance that the Federal Reserve will continue to allow institutions to
include trust preferred securities in Tier 1 capital for regulatory purposes. If
8
the trust preferred securities were no longer allowed to be included in Tier 1
capital, the Company would also be permitted to redeem the capital securities
without penalty.
The Company adopted FIN 46R effective March 31, 2004, and the effect was to
de-consolidate the subsidiary trust, North Bay Statutory Trust 1, and move the
mandatory redeemable preferred securities directly to the parent company balance
sheet under the caption "subordinated debentures". The Company prospectively
applied this ruling in the accompanying financial information.
NOTE 6 - Borrowings
- -------------------
Total borrowings were $19 million at September 30, 2004. There were no
borrowings at September 30, 2003. The following table summarizes the borrowings:
Fixed Rate Borrowings at September 30, 2004
($ in 000's)
Amount Maturity Date Interest Rate
------ ------------- -------------
Federal Home Loan Bank Advance $ 5,000 4-17-2006 2.24%
Federal Home Loan Bank Advance 5,000 4-16-2007 2.83%
Federal Home Loan Bank Advance 9,000 4-14-2008 3.23%
-------
Total $19,000
Weighted average interest rate 2.86%
9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
- --------------------------
In addition to the historical information this Quarterly Report contains certain
forward-looking statements. The reader of this Quarterly Report should
understand that all such forward-looking statements are subject to various
uncertainties and risks that could affect their outcome. The Company's actual
results could differ materially from those suggested by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, variances in the actual versus projected growth in
assets, return on assets, loan losses, expenses, rates charged on loans and
earned on securities investments, rates paid on deposits, competition effects,
fee and other noninterest income earned, the economic uncertainty created by the
United States' war on terrorism and the war in Iraq, as well as other factors.
This entire Quarterly Report should be read to put such forward-looking
statements in context and to gain a more complete understanding of the
uncertainties and risks involved in the Company's business.
Moreover, wherever phrases such as or similar to "In Management's opinion"
"Management considers" are used, such statements are as of and based upon the
knowledge of Management at the time made and are subject to change by the
passage of time and/or subsequent events, and accordingly such statements are
subject to the same risks and uncertainties noted above with respect to
forward-looking statements.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's accounting policies are integral to understanding the results
reported. The most complex accounting policies require management's judgment to
ascertain the valuation of assets, liabilities, commitments and contingencies.
The Company has established detailed policies and control procedures that are
intended to ensure valuation methods are well controlled and applied
consistently from period to period. In addition, the policies and procedures are
intended to ensure that the process for changing methodologies occurs in an
appropriate manner. The following is a brief description of our current
accounting policies involving significant management valuation judgments.
Allowance for Loan Losses.
The allowance for loan losses represents management's best estimate of losses
inherent in the existing loan portfolio. The allowance for loan losses is
increased by the provision for loan losses charged to expense and reduced by
loans charged-off, net of recoveries.
We evaluate our allowance for loan loss on a monthly basis. We believe that the
allowance for loan loss is a "critical accounting estimate" because it is based
upon management's assessment of various factors affecting the collectibility of
the loans, including current and projected economic conditions, past credit
experience, delinquency status, the value of the underlying collateral, if any,
and a continuing review of the portfolio of loans and commitments.
We determine the appropriate level of the allowance for loan losses, primarily
on an analysis of the various components of the loan portfolio, including all
significant credits on an individual basis. We segment the loan portfolios into
as many components as practical. Each component would normally have similar
characteristics, such as risk classification, past due status, type of loan,
industry or collateral.
Management has an established methodology for calculating the level of the
allowance for loan losses. We analyze the following components of the portfolio
and provide for them in the allowance for loan losses:
Specific allowances defined as:
o Management assessment of all loans classified as substandard or worse,
with an outstanding balance of $100,000 or more
o A specific allowance is provided for any amount by which the loan's
collateral fair value is insufficient to cover the loan; or
discounting estimated further cash flows, or by observing the loan's
market price if it is of a kind for which there is a secondary market
General allowance defined as:
o An allowance for all loans outstanding within the portfolio and not
contained in the specific allowances
Judgmental allowance defined as:
o National and local economic trends and conditions
o Trends in volume of loans
o Changes in underwriting standards and/or lending personnel
o Concentrations of credit within the portfolio
No assurance can be given that the Company will not sustain loan losses that are
sizable in relation to the amount provided, or that subsequent evaluations of
the loan portfolio will not require an increase in the allowance. Prevailing
factors in association with the methodology may include improvement or
deterioration of individual commitments or pools of similar loans, or loan
concentrations.
Available for Sale Securities.
SFAS 115 requires that Available for Sale securities be carried at fair value.
We believe this is a "critical accounting estimate" in that the fair value of a
security is based on quoted market prices or if quoted market prices are not
available, fair values are extrapolated from the quoted prices of similar
instruments. Adjustments to the Available for Sale securities fair value impact
the consolidated financial statements by increasing or decreasing assets and
10
shareholders' equity. A decline in the market value Investments classified as
available-for-sale are reported at fair value with unrealized gains and losses
net of related tax, if any, reported as other comprehensive income and are
included in shareholders' equity.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a charge to
earnings and the corresponding establishment of a new cost basis for the
security. Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity or available-for-sale security as an adjustment to
yield using the effective interest method. Dividend and interest income are
recognized when earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings and are derived
using the specific identification method for determining the cost of securities
sold.
Deferred Tax Assets.
Deferred income taxes reflect the estimated future tax effects of temporary
differences between the reported amount of assets and liabilities for financial
purposes and such amounts as measured by tax laws and regulations. We consider
the scheduled reversal of deferred tax liabilities, projected future taxable
income, and amounts available in the carryback periods, and tax planning
strategies to support our position that it is more likely than not the benefit
of our deferred tax assets will be realized.
OVERVIEW
- --------
Net income was $1,250,000 or $.50 per diluted share for the three months ended
September 30, 2004, compared with $1,164,000 or $.48 per diluted share for the
three months ended September 30, 2003, an increase of 7%. Net income was
$3,492,000 or $.1.40 per diluted share for the nine months ended September 30,
2004, compared with $3,071,000 or $1.26 per diluted share for the nine months
ended September 30, 2003, an increase of 14%. Total assets were $552,499,000 as
of September 30, 2004; equating to a 22% growth in assets during the twelve
months ended September 30, 2004.
SUMMARY OF EARNINGS
NET INTEREST INCOME
- -------------------
The following table provides a summary of the components of interest income,
interest expense and net interest margins for the three months ended September
30, 2004 and September 30, 2003:
(In 000's)
2004 2003
---------------------------------- ---------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
---------------------------------- ----------------------------------
Loans (1) (2) $ 369,384 $ 5,865 6.35% $ 294,276 $ 4,853 6.60%
Investment securities:
Taxable 84,778 804 3.79% 70,601 481 2.73%
Non-taxable (3) 12,241 150 4.90% 20,596 254 4.93%
--------- --------- --------- ---------
TOTAL LOANS AND INVESTMENT
SECURITIES 466,403 6,819 5.85% 385,473 5,588 5.80%
Due from banks, time 100 1 4.00% 100 1 4.00%
Federal funds sold 10,551 39 1.48% 11,987 38 1.27%
--------- --------- --------- ---------
TOTAL EARNING ASSETS 477,054 $ 6,859 5.75% 397,560 $ 5,627 5.66%
--------- --------- --------- ---------
Cash and due from banks 41,686 32,208
Allowance for loan losses (3,863) (3,405)
Premises and equipment, net 10,791 11,156
Accrued interest receivable
and other assets 13,910 12,340
--------- ---------
TOTAL ASSETS $ 539,578 $ 449,859
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Interest bearing demand $ 216,747 $ 312 0.58% $ 187,448 $ 217 0.46%
Savings 44,638 27 0.24% 34,015 17 0.20%
Time 78,006 338 1.73% 72,882 316 1.73%
--------- --------- --------- ---------
339,391 677 .80% 294,345 550 .75%
--------- --------- --------- ---------
Short-term debt 0 0 0.00% 0 2 0.00%
Long-term debt 29,000 284 3.92% 10,000 129 5.16%
--------- --------- --------- ---------
29,000 284 10,000 131
--------- --------- --------- ---------
TOTAL INTEREST BEARING
LIABILITIES 368,391 $ 961 1.04% 304,345 $ 681 .90%
--------- --------- --------- ---------
Noninterest bearing DDA 125,238 104,066
Accrued interest payable
and other liabilities 4,013 3,755
Shareholders' equity 41,936 37,693
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 539,578 $ 449,859
========= =========
NET INTEREST INCOME $ 5,898 $ 4,946
========= =========
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin (4)) 4.95% 4.98%
11
<FN>
(1) Average loans would include nonaccrual loans. The Company had no nonaccrual
loans during 2004 or 2003.
(2) Loan interest income includes loan fee income of $237 and $273 for the three
months ended September 30, 2004 and September 30, 2003, respectfully.
(3) Average yields shown are on a taxable-equivalent basis. On a non-taxable
basis, 2004 interest income on tax exempt securities was $113 with an average
yield of 3.69%; in 2003, on a non-taxable basis, interest income on tax exempt
securities was $181 with an average yield of 3.52%. (4) Net interest margin is
calculated by dividing net interest income by the average balance of total
earning assets for the applicable period.
</FN>
The following table provides a summary of the components of interest income,
interest expense and net interest margins for the nine months ended September
30, 2004 and September 30, 2003:
(In 000's)
2004 2003
-------------------------------------- ----------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
-------------------------------------- ----------------------------------
Loans (1) (2) $ 342,515 $ 16,515 6.43% $ 269,824 $ 13,780 6.81%
Investment securities:
Taxable 75,831 2,115 3.72% 80,777 1,997 3.30%
Non-taxable (3) 14,261 542 5.07% 15,922 649 5.43%
--------- --------- --------- ---------
TOTAL LOANS AND INVESTMENT
SECURITIES 432,607 19,172 5.91% 366,523 16,426 5.98%
Due from banks, time 100 2 2.67% 100 2 2.67%
Federal funds sold 16,788 139 1.10% 18,542 157 1.13%
--------- --------- --------- ---------
TOTAL EARNING ASSETS 449,495 $ 19,313 5.73% 385,165 $ 16,585 5.74%
--------- --------- --------- ---------
Cash and due from banks 35,969 26,931
Allowance for loan losses (3,720) (3,370)
Premises and equipment, net 10,784 11,166
Accrued interest receivable
and other assets 13,490 11,957
--------- ---------
TOTAL ASSETS $ 506,018 $ 431,849
--------- ---------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Interest bearing demand $ 209,482 $ 830 0.53% $ 170,537 $ 688 0.54%
Savings 41,016 71 0.23% 31,695 88 0.37%
Time 75,193 944 1.67% 78,969 1,131 1.91%
--------- --------- --------- ---------
325,691 1,845 .76% 281,201 1,907 .90%
--------- --------- --------- ---------
Short-term debt 0 1 0.00% 1,000 10 1.33%
Long-term debt 21,422 662 4.12% 10,000 411 5.48%
--------- --------- --------- ---------
21,422 663 11,000 421
--------- --------- --------- ---------
TOTAL INTEREST BEARING
LIABILITIES 347,113 $ 2,508 .96% 292,201 $ 2,328 1.06%
--------- --------- --------- ---------
Noninterest bearing DDA 114,304 99,073
Accrued interest payable
and other liabilities 4,323 3,749
Shareholders' equity 40,278 36,826
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 506,018 $ 431,849
========= =========
NET INTEREST INCOME $ 16,805 $ 14,257
========= =========
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin (4)) 4.98% 4.94%
12
<FN>
(1) Average loans would include nonaccrual loans. The Company had no nonaccrual
loans during 2004 or 2003.
(2) Loan interest income includes loan fee income of $814 and $811 for the nine
months ended September 30, 2004 and September 30, 2003, respectfully.
(3) Average yields shown are on a taxable-equivalent basis. On a non-taxable
basis, 2004 interest income on tax exempt securities was $409 with an average
yield of 3.82%; in 2003, on a non-taxable basis, interest income on tax exempt
securities was $473 with an average yield of 3.96%.
(4) Net interest margin is calculated by dividing net interest income by the
average balance of total earning assets for the applicable period
</FN>
Net interest income represents the amount by which interest earned on earning
assets (primarily loans and investments) exceeds the amount of interest paid on
deposits. Net interest income is a function of volume, interest rates and level
of non-accrual loans. Non-refundable loan origination fees are deferred and
amortized into income over the life of the loan.
Net interest income before the provision for loan losses on a taxable-equivalent
basis for the three months ended September 30, 2004 and September 30, 2003 was
$5,898,000 and $4,946,000, respectively. These results equate to a 19% increase
in net interest income for the third quarter of 2004 compared to the third
quarter of 2003. Loan fee income, which is included in interest income from
loans, was $237,000 for the three months ended September 30, 2004, compared with
$273,000 for the three months ended September 30, 2003. Net interest income
before the provision for loan losses on a taxable-equivalent basis for the nine
months ended September 30, 2004 and September 30, 2003 was $16,805,000 and
$14,257,000, respectively. These results equate to an 18% increase in net
interest income for the first nine months of 2004 compared to the same period of
2003. Loan fee income, which is included in interest income from loans, was
$814,000 for the nine months ended September 30, 2004, compared with $811,000
for the nine months ended September 30, 2003.
Taxable-equivalent interest income increased $1,232,000 or 22% in the third
quarter of 2004 compared with the same period of 2003. The net increase of
$1,232,000 was attributable to an increase in the volume of earning assets
accounting for $1,227,000 of this increase, and an increase of $5,000
attributable to higher rates. Interest paid on interest-bearing liabilities
increased $280,000 or 12% in the third quarter of 2004 compared with the third
quarter of 2003. The increase of $280,000 was attributable to an increase in the
volume of deposits and other borrowings accounting for $304,000 of this
increase, offset by a decrease of $24,000 attributable to lower rates.
Taxable-equivalent interest income increased $2,728,000 or 16% in the first nine
months of 2004 compared with the same period of 2003. The net increase of
$2,728,000 was attributable to an increase in the volume of earning assets
accounting for $3,507,000 of this increase, offset by a decrease of $779,000
attributable to lower rates. Interest paid on interest-bearing liabilities
increased $180,000 in the first nine months of 2004 compared with the same
period of 2003. Although increases in the volume of deposits and other
borrowings account for an increase of $588,000 it was offset by a decrease of
$408,000 attributable to lower rates.
The average balance of earning assets for the nine month period increased
$64,330,000 or 17% when compared with September 30, 2003 and the average balance
of interest-bearing liabilities increased $54,912,000 or 19% compared with the
same period in 2003. Management does not expect a material change in the
Company's net interest margin during the next twelve months as the result of a
modest increase or decrease in general interest rates.
13
The following table sets forth a summary of the changes in interest earned and
interest paid for the three months ended September 30, 2004 over the same period
of 2003 resulting from changes in assets and liabilities volumes and rates. The
change in interest due to both rate and volume has been allocated in proportion
to the relationship of absolute dollar amounts of change in each.
(In 000's)
2004 Over 2003
Volume Rate Total
-----------------------------------------------------------
Increase (Decrease) in Interest and Fee Income
Time deposits with other
Financial institutions $ 0 $ 0 $ 0
Investment securities:
Taxable 97 226 323
Non-taxable (1) (103) (1) (104)
Federal funds sold (5) 6 1
Loans 1,238 (226) 1,012
-----------------------------------------------------------
Total interest and fee income 1,227 5 1,232
-----------------------------------------------------------
Increase (Decrease) in Interest Expense
Deposits:
Interest bearing
Transaction accounts 34 61 95
Savings 5 5 10
Time deposits 22 0 22
-----------------------------------------------------------
Total deposits 61 66 127
Short-term borrowings (2) 0 (2)
Long-term debt 245 (90) 155
-----------------------------------------------------------
Total Interest Expense 304 (24) 280
-----------------------------------------------------------
Net Interest Income $ 923 $ 29 $ 952
===========================================================
<FN>
(1) The interest earned is taxable-equivalent.
</FN>
The following table sets forth a summary of the changes in interest earned and
interest paid for the nine months ended September 30, 2004 over the same period
of 2003 resulting from changes in assets and liabilities volumes and rates. The
change in interest due to both rate and volume has been allocated in proportion
to the relationship of absolute dollar amounts of change in each.
(In 000's)
2004 Over 2003
Volume Rate Total
-----------------------------------------------------------
Increase (Decrease) in Interest and Fee Income
Time deposits with other
Financial institutions $ 0 $ 0 $ 0
Investment securities:
Taxable (122) 240 118
Non-taxable (1) (68) (39) (107)
Federal funds sold (15) (3) (18)
Loans 3,712 (977) 2,735
-----------------------------------------------------------
Total interest and fee income 3,507 (779) 2,728
-----------------------------------------------------------
Increase (Decrease) in Interest Expense
Deposits:
Interest bearing
Transaction accounts 157 (15) 142
Savings 26 (43) (17)
Time deposits (54) (133) (187)
-----------------------------------------------------------
Total deposits 129 (191) (62)
Short-term borrowings (10) 1 (9)
Long-term debt 469 (218) 251
-----------------------------------------------------------
Total Interest Expense 588 (408) 180
-----------------------------------------------------------
Net Interest Income $2,919 ($371) $2,548
===========================================================
<FN>
(2) The interest earned is taxable-equivalent.
</FN>
14
PROVISION AND ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------
The Company maintains an allowance for loan losses at a level considered
adequate to provide for losses that can be reasonably anticipated. The allowance
is increased by the provision for loan losses and reduced by net charge offs.
The allowance for loan losses is based on estimates, and ultimate losses may
vary from current estimates. These estimates are reviewed periodically. As
adjustments become necessary, they are reported in earnings during the periods
they become known. The Company conducts credit reviews of the loan portfolio and
considers current economic conditions, historical loan loss experience and other
factors in determining the adequacy of the allowance balance. This evaluation
establishes a specific allowance for all classified loans over $100,000 and
establishes percentage allowance requirements for all other loans, according to
the classification as determined by the Company's internal grading system. As of
September 30, 2004 the allowance for loan losses of $4,040,000 represented 1.12%
of loans outstanding. As of September 30, 2003, the allowance represented 1.23%
of loans outstanding. During the three months ended September 30, 2004 $180,000
was charged to expense for the loan loss provision, compared with $45,000 for
the same period in 2003. During the nine months ended September 30, 2004
$540,000 was charged to expense for the loan loss provision, compared with
$135,000 for the same period in 2003. The increase in the expense for the loan
loss provision was to provide for growth in the overall loan portfolio. There
were net charge-offs of $24,000 during the first nine months of 2004 compared
with $4,000 of net charge-offs during the first nine months of 2003.
The following table summarizes changes in the allowance for loan losses:
(In 000's)
For the Nine months ended
September 30, September 30,
2004 2003
------ ------
Balance, beginning of period $3,524 $3,290
Provision for loan losses 540 135
Loans charged off (109) (11)
Recoveries of loans previously charged off 85 7
------ ------
Balance, end of period $4,040 $3,421
====== ======
Allowance for loan losses to total outstanding loans 1.12% 1.23%
There were no loans on non-accrual status as of September 30, 2004, September
30, 2003 or December 31, 2003. There were no loans 90 days or more past due and
still accruing interest or restructured loans at September 30, 2004, September
30, 2003 or December 31, 2003.
NON-INTEREST INCOME
- -------------------
Non-interest income, other than gains on the sale of securities, was $986,000
for the three months ended September 30, 2004 compared with $848,000 for the
same period in 2003, a 16% increase. Non-interest income, excluding gains on the
sale of securities, was $2,967,000 for the nine months ended September 30, 2004
compared with $2,285,000 for the same period in 2003, a 30% increase.
Non-interest income primarily consists of service charges and other fees related
to deposit accounts. The increase in non-interest income resulted primarily from
an increase in the number of deposit accounts, transaction volumes and directly
15
related service charges. Service charges on deposit accounts increased
proportionately more than the increase in deposit balances because of improved
collection efforts and implementation of an overdraft privilege program that
commenced in the fourth quarter of 2003.
GAINS ON SECURITIES
- -------------------
Net gains of $262,000 for the nine months ended September 30, 2004 resulted from
the sale of several available-for-sale securities. There were no gains during
the three months ended September 30, 2004. Net gains of $207,000 and $637,000
for the three and nine months ended September 30, 2003, respectively, also
resulted from the sale of several available-for-sale securities.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense for the three months ended September 30, 2004 and September
30, 2003 were $4,667,000 and $4,267,000, respectively, a 9% increase.
Non-interest expense for the nine months ended September 30, 2004 and September
30, 2003 were $13,835,000 and $12,593,000, respectively, a 10% increase.
Salaries and employee benefits expense for the three months ended September 30,
2004 and 2003 were $2,566,000 and $2,338,000, respectively, a 10% increase.
Salaries and employee benefits expense for the nine months ended September 30,
2004 and 2003 were $7,633,000 and $6,896,000, respectively, an 11% increase. The
increase in 2004 resulted from increased salaries paid to Company officers and
employees, and an increase of approximately eleven full-time equivalent (FTE)
employees from 154 at September 30, 2003 to 165 at September 30, 2004. The
increases in FTE were related to increasing sales activity and staffing new
offices. Occupancy expense for the three months ended September 30, 2004 and
2003 were $369,000 and $356,000, respectively, a 4% increase. Occupancy expense
for the nine months ended September 30, 2004 and 2003 were $1,080,000 and
$931,000, respectively, representing a 16% increase. The increase in 2004 is
attributable to opening a branch and renting locations for Executive and
Administration offices in March 2003 and opening our 10th branch in the third
quarter of 2004. Equipment expense for the three months ended September 30, 2004
and 2003 were $502,000 and $485,000, respectively, representing an increase of
4%. Equipment expense for the nine months ended September 30, 2004 and 2003 were
$1,509,000 and $1,230,000, respectively, an increase of 23%. The primary reason
for the increase in equipment expense in 2004 compared with 2003 was the
reversal of expenses accrued during the pendency of a lawsuit. The suit was
settled on September 17, 2003. Other expenses for the three months ended
September 30, 2004 and September 30, 2003 were $1,230,000 and $1,088,000,
respectively, a 13% increase. Other expenses for the nine months ended September
30, 2004 and September 30, 2003 were $3,613,000 and $3,536,000, respectively, a
2% increase. The increase in other expense in 2004 compared with 2003 was
primarily in marketing and education expenses. Offseting these increases, was a
reduction in legal fees since there has been no litigation expenses in 2004.
Legal fees were $63,000 and $120,000 for three and nine months ended September
30, 2004, respectively. This compares with $214,000 and $521,000, respectively,
for the same period in 2003.
INCOME TAXES
- ------------
The Company reported a provision for income tax for the three months ended
September 30, 2004 and 2003 of $750,000 and $452,000, respectively. The Company
reported a provision for income tax for the nine months ended September 30, 2004
and 2003 of $2,034,000 and $1,204,000, respectively. Both the 2004 and 2003
provisions reflect tax accruals at statutory rates for federal income taxes,
adjusted primarily for the effect of the Company's investments in tax-exempt
municipal securities, bank owned life insurance policies and state taxes.
Comparison with the first nine months of 2003 were impacted by the real estate
investment trust ("REIT") state tax benefits which were reflected in net income
in the first three quarters of 2003 and were reversed in the fourth quarter of
2003.
BALANCE SHEET
- -------------
Total assets as of September 30, 2004 were $552,499,000 compared with
$451,316,000 as of September 30, 2003, and $459,482,000 at December 30, 2003
equating to a 22% increase during the twelve months ended September 30, 2004,
and a 20% increase for the nine months ended September 30, 2003. Total deposits
as of September 30, 2004 were $476,792,000 compared with $399,421,000 as of
September 30, 2003, and $406,445,000 at December 30, 2003 representing a 19%
increase during the twelve months then ended, and a 17% increase for the nine
months ended September 30, 2004. Gross loans outstanding as of September 30,
2004 were $358,443,000 compared with $277,912,000 as of September 30, 2003, and
$306,663,000 at December 30, 2003 equating to a 29% increase during the twelve
months then ended and a 17% increase for the nine months ended September 30,
2004.
LOANS HELD FOR SALE
- -------------------
The Company had $20,232,000, $10,786,000 and $3,095,000 in purchased
participations in mortgage loans as of September 30, 2004, September 30, 2003
and December 31, 2003, respectively. Loans originated or purchased and
considered held for sale are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income. There were no gains or losses
recognized during 2003 or 2004.
SUBORDINATED DEBENTURES
- -----------------------
During September 2002, the Company formed North Bay Statutory Trust I (Trust), a
Connecticut statutory business trust, for the purpose of issuing guaranteed
undivided beneficial interests in junior subordinated debentures (trust
preferred securities). During September 2002, the Trust issued $10 million in
floating rate Cumulative Trust Preferred Securities (Securities). The Securities
bear interest at a rate of Libor plus 3.45% and had an initial interest rate of
5.34%; as of September 30, 2004 the interest rate was 5.40%; the Securities will
mature on September 26, 2032, but earlier redemption is permitted under certain
circumstances, such as changes in tax or regulatory capital rules.
As previously discussed the Company de-consolidated the Trust as of March 31,
2004. As a result, the junior subordinated debentures issued by the Company to
the Trust, totaling $10,310,000 are reflected on the Company's consolidated
balance sheet, under the caption Subordinated Debentures. The Company also
recognized its $310,000 investment in the Trust, which is recorded in Investment
in Subsidiary. The Trust has no independent assets or operations and exists for
the sole purpose of issuing trust preferred securities and investing the
proceeds thereof in an equivalent amount of subordinated debentures issued by
the Company.
16
The Securities, the subordinated debenture issued by the Trust is redeemable in
whole or in part on or after September 26, 2007, or at any time in whole, but
not in part, upon the occurrence of certain events. The Securities are included
in Tier 1 capital for regulatory capital adequacy determination purposes,
subject to certain limitations. The Company fully and unconditionally guarantees
the obligations of the Trust with respect to the issuance of the Securities.
Subject to certain exceptions and limitations, the Company may, from time to
time, defer subordinated debenture interest payments, which would result in a
deferral of distribution payments on the Securities and, with certain
exceptions, prevent the Company from declaring or paying cash distributions on
the Company's common stock or debt securities that rank junior to the
subordinated debentures.
BORROWINGS
- ----------
Total borrowings were $19 million at September 30, 2004. There were no
borrowings at September 30, 2003. The following table summarizes the borrowings:
Fixed Rate Borrowings at September 30, 2004
($ in 000's)
Amount Maturity Date Interest Rate
------ ------------- -------------
Federal Home Loan Bank Advance $ 5,000 4-17-2006 2.24%
Federal Home Loan Bank Advance 5,000 4-16-2007 2.83%
Federal Home Loan Bank Advance 9,000 4-14-2008 3.23%
-------
Total $19,000
Weighted average interest rate 2.86%
LIQUIDITY AND CAPITAL ADEQUACY
- ------------------------------
The Company's liquidity is determined by the level of assets (such as cash,
Federal Funds, and investment in unpledged marketable securities) that are
readily convertible to cash to meet customer withdrawals and borrowings.
Management reviews the Company's liquidity position on a regular basis to ensure
that it is adequate to meet projected loan funding and potential withdrawal of
deposits. The Company has a comprehensive Asset/Liability Management and
Liquidity Policy, which it uses to determine adequate liquidity. As of September
30, 2004 liquid assets were 28% of total assets, compared with 32% as of
September 30, 2003.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) established
ratios used to determine whether a Company is "Well Capitalized," "Adequately
Capitalized," "Undercapitalized," "Significantly Undercapitalized," or
"Critically Undercapitalized." A Well Capitalized Company has risk-based capital
of at least 10%, tier 1 risked-based capital of at least 6%, and a leverage
ratio of at least 5%. As of September 30, 2004, the Company's risk-based capital
ratio was 12.54%. The Company's tier 1 risk-based capital ratio and leverage
ratio were 11.64% and 9.71%, respectively.
17
As the following table indicates, the Company and the Banks currently exceeds
the regulatory capital minimum requirements. The Company and the Banks are
considered "Well Capitalized" according to regulatory guidelines.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- -------------------- ----------------------
(In 000's)
Minimum regulatory Minimum regulatory
requirement requirement
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of September 30, 2004:
Total Capital (to Risk
Weighted Assets)
Consolidated $56,432 12.54% $36,005 8.00% $45,006 10.00%
The Vintage Bank 39,239 11.30% 27,770 8.00% 34,713 10.00%
Solano Bank 10,107 10.05% 8,045 8.00% 10,056 10.00%
Tier I Capital (to Risk
Weighted Assets)
Consolidated 52,392 11.64% 18,002 4.00% 27,004 6.00%
The Vintage Bank 36,112 10.40% 13,885 4.00% 20,828 6.00%
Solano Bank 9,194 9.14% 4,023 4.00% 6,034 6.00%
Tier I Capital (to
Average Assets)
Consolidated 52,392 9.71% 21,583 4.00% 26,979 5.00%
The Vintage Bank 36,112 8.56% 16,871 4.00% 21,088 5.00%
Solano Bank 9,194 8.45% 4,351 4.00% 5,439 5.00%
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. Although
the Company manages other risks, as in credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to
principally be a market risk. Other types of market risks, such as foreign
currency exchange rate risk, do not arise in the normal course of the Company's
business activities. The majority of the Company's interest rate risk arises
from instruments, positions and transactions entered into for purposes other
than trading. They include loans, securities available-for-sale, deposit
liabilities, short-term borrowings and long-term debt. Interest rate risk occurs
when assets and liabilities reprice at different times as interest rates change.
The Company manages interest rate risk through its Audit Committee, which serves
as the Asset Liability Committee (ALCO). The ALCO monitors exposure to interest
rate risk on a quarterly basis using both a traditional gap analysis and
simulation analysis. Traditional gap analysis identifies short and long-term
interest rate positions or exposure. Simulation analysis uses an income
simulation approach to measure the change in interest income and expense under
rate shock conditions. The model considers the three major factors of (a) volume
differences, (b) repricing differences and (c) timing in its income simulation.
The model begins by disseminating data into appropriate repricing buckets based
on internally supplied algorithms (or overridden by calibration). Next, each
major asset and liability type is assigned a "multiplier" or beta to simulate
how much that particular balance sheet category type will reprice when interest
rates change. The model uses eight asset and liability multipliers consisting of
bank-specific or default multipliers. The remaining step is to simulate the
timing effect of assets and liabilities by modeling a month-by-month simulation
to estimate the change in interest income and expense over the next 12-month
period. The results are then expressed as the change in pre-tax net interest
income over a 12-month period for +1%, and +2% shocks.
Utilizing the simulation model to measure interest rate risk at September 30,
2004 and December 31, 2003 the Company is within the established exposure of a
4% change in "return on equity" tolerance limit set by the Company's risk
policy. There were no significant changes in interest rate risk from the annual
report on form 10-K for December 31, 2003.
18
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
Based on their evaluation as of September 30, 2004, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
Changes in Internal Controls:
There were no significant changes in our internal controls over financial
reporting that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
19
PART 2
OTHER INFORMATION
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to the business of the
Company, there are no material pending legal proceedings, except as follow:
On March 8, 2004, in connection with the termination of her employment by North
Bay, Jennifer Rose, a former employee of North Bay filed a suit in Napa County
Superior Court (Case No. 26-24645) entitled Rose v. North Bay Bancorp. The
complaint alleges causes of action for negligent misrepresentation; wrongful
termination; violations of the California Labor Code; breach of contract;
discrimination, based on association and gender; and negligent infliction of
emotional distress, and requests unspecified compensatory and punitive damages,
double recovery under certain California statutory provisions, costs, and
attorneys' fees.
North Bay denies all allegations and has filed a motion for summary judgment
against all claims against it, which is scheduled to be heard on January 7,
2005, the date of a mandatory settlement conference. Trial is scheduled for
February 15, 2005.
Although North Bay intends to aggressively defend this action, at this point in
the proceedings, no assurance can given as to the possible outcome, or the
amount of damages, if any, that could be assessed against North Bay in the event
of an unfavorable outcome.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
In a letter to the Federal Reserve Bank of San Francisco dated October 12, 2004,
North Bay suspended its financial holding company status and will operate
instead as a bank holding company. The change in status will not affect any
non-financial subsidiaries or activities currently being conducted by North Bay,
although it will mean that, future acquisitions or expansions of non-financial
activities may require prior Federal Reserve Board approval and will be limited
to those that are permissible for bank holding companies.
ITEM 6. EXHIBITS
An index of exhibits begins on page 22.
20
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this quarterly report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH BAY BANCORP
A California Corporation
Date: November 12, 2004 BY: /s/ Terry L. Robinson
---------------------------------
Terry L. Robinson
President & CEO
Principal Executive Officer
Date: November 12, 2004 BY: /s/ Lee-Ann Cimino
---------------------------------
Lee-Ann Cimino
Senior Vice President
Principal Financial Officer
21
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
11 Statement re: computation of per share earnings is included in
Note 3 to the unaudited condensed consolidated financial
statements of Registrant.
31.1 Certificate of Principal Executive Officer Pursuant to SEC
Release 33-8238
31.2 Certificate of Principal Financial Officer Pursuant to SEC
Release 33-8238
32.1 Certificate of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 Certificate of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350
22