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 March 31, 2005
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 May 10, 2005: 3,883,790
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) the ability to satisfy the requirements of the
Sarbanes-Oxley Act and other regulations governing internal controls; and (vii)
as well as other factors. This entire Quarterly Report should be read to put
such forward-looking statements in context and to gain a more complete
understanding of the uncertainties and risks involved in the Company's business.
Moreover, wherever phrases such as or similar to "In Management's opinion", or
"Management considers" are used, such statements are as of and based upon the
knowledge of Management at the time made and are subject to change by the
passage of time and/or subsequent events, and accordingly such statements are
subject to the same risks and uncertainties noted above with respect to
forward-looking statements.
FINANCIAL INFORMATION
- ---------------------
The information for the three months ended March 31, 2005 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 March
31, 2005 and the results of operations and cash flows for the three 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)
March 31, March 31, December 31,
2005 2004 2004
--------- --------- ---------
Assets
Cash and due from banks $ 27,838 $ 36,772 $ 27,342
Federal funds sold 22,230 27,000 32,865
--------- --------- ---------
Total cash and cash equivalents 50,068 63,772 60,207
Time deposits with other financial institutions 100 100 100
Investment Securities:
Available-for-sale 90,656 77,984 94,788
Equity securities 4,595 1,358 4,595
--------- --------- ---------
Total investment securities 95,251 79,342 99,383
Loans, net of allowance for loan losses of $4,317 in March, 2005
$3,703 in March, 2004 and $4,136 in December, 2004 397,846 317,386 373,629
Loans held-for-sale 481 3,398 4,604
Investment in subsidiary 310 310 310
Bank premises and equipment, net 10,038 10,629 10,336
Accrued interest receivable and other assets 14,226 13,165 13,494
--------- --------- ---------
Total assets $ 568,320 $ 488,102 $ 562,063
========= ========= =========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 138,437 $ 111,632 $ 127,250
Interest bearing 351,145 322,451 357,243
--------- --------- ---------
Total deposits 489,582 434,083 484,493
Subordinated debentures 10,310 10,310 10,310
Long Term Borrowings 19,000 0 19,000
Accrued interest payable and other liabilities 4,213 3,170 4,126
--------- --------- ---------
Total liabilities 523,105 447,563 517,929
Shareholders' equity:
Preferred stock - no par value:
Authorized, 500,000 shares;
Issued and outstanding - none
Common stock - no par value:
Authorized, 15,000,000 shares;
Issued and outstanding - 3,883,278 shares in March, 2005,
3,786,569 shares in March, 2004, and 3,641,289 in December, 2004 39,352 33,023 33,473
Retained earnings 6,396 6,477 10,500
Accumulated other comprehensive (loss) income (533) 1,039 161
--------- --------- ---------
Total shareholders' equity 45,215 40,539 44,134
Total liabilities and shareholders' equity $ 568,320 $ 488,102 $ 562,063
========= ========= =========
<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
----------------------
March 31, March 31,
2005 2004
------ ------
Interest Income
Loans (including fees) $6,600 $5,256
Federal funds sold 130 41
Investment securities - taxable 835 607
Investment securities - tax exempt 111 160
------ ------
Total interest income 7,676 6,064
Interest Expense
Deposits 751 557
Long term debt 301 131
------ ------
Total interest expense 1,052 688
Net interest income 6,624 5,376
Provision for loan losses 185 186
------ ------
Net interest income after
provision for loan losses 6,439 5,190
Non interest income 956 986
Non interest expenses
Salaries and employee benefits 2,724 2,504
Occupancy 394 367
Equipment 547 492
Other 1,370 1,234
------ ------
Total non interest expense 5,035 4,597
------ ------
Income before provision for
income taxes 2,360 1,579
Provision for income taxes 898 544
------ ------
Net income $1,462 $1,035
====== ======
Basic earnings per common share: $ 0.38 $ 0.27
====== ======
Diluted earnings per common share: $ 0.36 $ 0.26
====== ======
Dividends Paid: $ 0.15 $ 0.13
====== ======
The accompanying notes are an integral part of these statements
4
North Bay Bancorp
Consolidated Statement of Change in Shareholders' Equity
For the Three Months Ended
March 31, 2005
(Unaudited)
(In 000's except share data)
Accumulated
Other Total
Common Shares Common Retained Comprehensive Shareholders'Comprehensive
Outstanding Stock Earnings Income Equity Income
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 3,641,289 $33,473 $10,500 $161 $44,134
Stock dividend 184,353 4,996 (5,011) (15)
Cash dividend (555) (555)
Comprehensive income:
Net income 1,462 1,462 $1,462
Other comprehensive loss,
net of tax:
Change in net unrealized
losses on
available-for-sale
securities, net of (694) (694) (694)
tax of $493 -----
Comprehensive income $ 768
=====
Stock options exercised, including a
tax benefit of $142 57,636 883 883
--------- ------- -------
BALANCE, MARCH 31, 2005 3,883,278 $39,352 $ 6,396 ($533) $45,215
========= ======= ======= ====== =======
<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)
Three Months Ended March 31,
----------------------------
2005 2004
-------- --------
Cash Flows From Operating Activities:
Net income $ 1,462 $ 1,035
Adjustment to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 405 397
Provision for loan losses 185 186
Amortization of deferred loan fees (259) (171)
Proceeds from sale of loans held-for-sale 22,906 10,204
Purchase of loans held-for-sale (18,783) (10,507)
Premium amortization (discount accretion), net 11 112
Changes in:
Interest receivable and other assets (239) (1,189)
Interest payable and other liabilities 229 (406)
-------- --------
Net cash used by operating activities 5,917 (339)
-------- --------
Cash Flows From Investing Activities:
Investment securities available-for-sale:
Proceeds from maturities and principal payments 2,934 13,296
Equity securities:
Purchases 0 (7)
Net increase in loans (24,143) (14,262)
Capital expenditures (107) (117)
-------- --------
Net cash (used) provided in investing activities (21,316) (1,090)
-------- --------
Cash Flows From Financing Activities:
Net increase in deposits 5,089 27,638
Stock options exercised 741 87
Dividends paid (570) (475)
-------- --------
Net cash provided by financing activities 5,260 27,250
-------- --------
Net increase (decrease) in cash and cash equivalents (10,139) 25,821
Cash and cash equivalents at beginning of year 60,207 37,951
-------- --------
Cash and cash equivalents at end of period $ 50,068 $ 63,772
======== ========
Supplemental Disclosures of Non-Cash Investing and Finance Activities:
Unrealized (loss) gain on securities $ 1,187 $ 737
Tax benefit on non-qualified options exercised $ 142 $ 20
Stock dividends $ 4,996 $ 3,706
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 887 $ 777
Taxes paid $ 345 $ 880
<FN>
The accompanying notes are an integral part of these statements
</FN>
6
NORTH BAY BANCORP
Notes to the Consolidated Financial Statements
(Unaudited)
March 31, 2005
NOTE 1 - Basis of Presentation
- ------------------------------
The accompanying consolidated financial statements, which include the accounts
of North Bay Bancorp and its subsidiary 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 subsidiary is The Vintage Bank, a community bank
established in 1985, and its operating division Solano Bank which opened in 2000
and Vintage Capital Trust, a subsidiary of The Vintage Bank, which was
established in February 2003. All significant intercompany transactions and
balances have been eliminated.
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 ended March
31, 2005 and 2004, 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, 2004.
NOTE 2 - Commitments
- --------------------
The Company has outstanding standby Letters of Credit of approximately
$7,108,000, undisbursed real estate and construction loans of approximately
$23,162,000, and undisbursed commercial and consumer lines of credit of
approximately $92,394,000, as of March 31, 2005. The Company had outstanding
standby Letters of Credit of approximately $1,359,000, undisbursed real estate
and construction loans of approximately $13,340,000, and undisbursed commercial
and consumer lines of credit of approximately $75,262,000, as of March 31, 2004.
NOTE 3 - Earnings Per Common Share
- ----------------------------------
The Company declared a 5% stock dividend on January 26, 2004 and January 26,
2005 as well as a 3-for-2 stock split in November 22, 2004. As a result of the
stock dividends the number of common shares outstanding and earnings per share
data was adjusted retroactively for all periods presented.
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
---------- ------ ------
(In 000's except share data)
For the three months ended March 31, 2005
-----------------------------------------
Basic earnings per share $1,462 3,848,751 $0.38
Dilutive effect of stock options 193,427
Diluted earnings per share 4,042,178 $0.36
For the three months ended March 31, 2004
-----------------------------------------
Basic earnings per share $1,035 3,782,129 $0.27
Dilutive effect of stock options 128,955
Diluted earnings per share 3,911,084 $0.26
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 March 31,
2005 2004
------ ------
Net income as reported $1,462 $1,035
Total stock-based employee
compensation
expense determined under
the fair value based method
for all awards, net of related
tax effects 74 83
------ ------
Net income pro forma $1,388 $952
Earnings per share:
As reported:
Basic $.38 $.27
Diluted $.36 $.26
Pro forma:
Basic $.36 $.25
Diluted $.34 $.24
NOTE 5 - Impact of Recently Issued Accounting Standards
- -------------------------------------------------------
In December 2004, the FASB revised FAS 123 through the issuance of FAS No. 123
Share Based Payment, revised ("FAS 123-R"). FAS 123-R is effective for the
Company commencing in the first quarter of 2006. FAS 123-R, among other things,
eliminates the alternative to use the intrinsic value method of accounting for
stock based compensation and requires entities to recognize the cost of employee
services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards (with limited exceptions). The
fair-value-based method in FAS 123-R is similar to the fair-value-based method
in FAS 123 in most respects, subject to certain key differences. The Company is
in the process of evaluating the impacts of adopting FAS-123-R.
In December 2003, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position No. 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer (SOP 03-3), which addresses accounting for
differences between the contractual cash flows of certain loans and debt
securities and the cash flows expected to be collected when loans or debt
securities are acquired in a transfer and those cash flow differences are
attributable, as least in part, to credit quality. As such, SOP 03-3 applies to
loans and debt securities acquired individually, in pools or part of a business
combination and does not apply to originated loans. The application of SOP 03-3
limits the interest income, including accretion of purchase price discounts,
that may be recognized for certain loans and debt securities. Additionally, SOP
03-3 does not allow the excess of contractual cash flows over cash flows
expected to be collected to be recognized as an adjustment of yield, loss
accrual or valuation allowance, such as the allowance for possible loan losses.
SOP 03-3 requires that increases in expected cash flows subsequent to the
initial investment be recognized prospectively through adjustment of the yield
on the loan or debt security over its remaining life. Decreases in expected cash
flows should be recognized as impairment. In the case of loans acquired in a
business combination where the loans show signs of credit deterioration, SOP
03-3 represents a significant change from current purchase accounting practice
whereby the acquiree's allowance for loan losses is typically added to the
acquirer's allowance for loan losses. SOP 03-3 is effective for loans and debt
securities acquired by the Company beginning January 1, 2005. The adoption of
this new standard is not expected to have a material impact on the Company's
consolidated financial statements.
8
NOTE 6 - Borrowings
- -------------------
Total borrowings were $19 million at March 31, 2005. There were no borrowings at
March 31, 2004. The following table summarizes the borrowings:
Fixed Rate Borrowings at March 31, 2005
($ 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%
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 AND ESTIMATES
- ------------------------------------------
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
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
9
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
shareholders' equity. A decline in the market value of 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, 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 $1,462,000 or $.36 per diluted share for the three months ended
March 31, 2005, compared with $1,035,000 or $.26 per diluted share for the three
months ended March 31, 2004, an increase of 41%. Total assets were $568,320,000
as of March 31, 2005; equating to a 16% growth in assets during the twelve
months ended March 31, 2005.
10
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 March 31,
2005 and March 31, 2004:
(In 000's)
2005 2004
------------------------------------------- --------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
------------------------------------------------------------------------------------
Loans (1)(2) $ 387,994 $ 6,600 6.80% $ 313,742 $ 5,256 6.70%
Investment securities:
Taxable 86,145 835 3.88% 68,275 607 3.56%
Non-taxable (3) 11,883 145 4.88% 16,464 217 5.27%
--------- --------- --------- ---------
TOTAL LOANS AND INVESTMENT
SECURITIES 486,022 7,580 6.24% 398,481 6,080 6.10%
Due from banks, time 100 1 4.00% 100 1 4.00%
Federal funds sold 17,645 130 2.95% 16,492 41 .99%
--------- --------- --------- ---------
TOTAL EARNING ASSETS 503,767 7,711 6.12% 415,073 6,122 5.90%
--------- --------- --------- ---------
Cash and due from banks 35,567 30,973
Allowance for loan losses (4,205) (3,596)
Premises and equipment, net 10,221 10,824
Investment in subsidiary 310 310
Accrued interest receivable
and other assets 13,971 13,007
--------- ---------
TOTAL ASSETS $ 559,631 $ 466,591
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Interest bearing demand $ 223,683 387 0.69% $ 200,863 247 0.49%
Savings 42,451 24 0.23% 37,978 21 0.22%
Time 76,384 340 1.78% 72,111 289 1.60%
--------- --------- --------- ---------
342,518 751 .88% 310,952 557 .72%
Long-term debt 29,310 301 4.11% 10,310 131 5.08%
TOTAL INTEREST BEARING
LIABILITIES 371,828 1,052 1.13% 321,262 688 .86%
--------- --------- --------- ---------
Noninterest bearing DDA 137,633 101,567
Accrued interest payable
and other liabilities 4,647 5,164
Shareholders' equity 45,523 38,598
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 559,631 $ 466,591
========= =========
NET INTEREST INCOME $ 6,659 $ 5,434
========= ========
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin (4)) 5.29% 5.24%
<FN>
(1) Average loans would include nonaccrual loans. The Company had no nonaccrual
loans during 2005 or 2004.
(2) Loan interest income includes loan fee income of $375 and $356 for the
three months ended March 31, 2005 and March 31, 2004, respectfully.
(3) Average yields shown are on a taxable-equivalent basis. On a non-taxable
basis, 2005 interest income on tax exempt securities was $111 with an
average yield of 3.74%; in 2004, on a non-taxable basis, interest income on
tax exempt securities was $160 with an average yield of 3.89%.
(4) Net interest margin is calculated by dividing net interest income by the
average balance of total earning assets for the applicable period.
</FN>
11
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, shown on a
taxable-equivalent basis, was $6,659,000 and $5,434,000 for the three months
ended March 31, 2005 and March 31, 2004, respectively. These results equate to a
23% increase in net interest income for the first quarter of 2005 compared to
the first quarter of 2004. Loan fee income, which is included in interest income
from loans, was $375,000 for the three months ended March 31, 2005, compared
with $356,000 for the three months ended March 31, 2004.
Taxable-equivalent interest income increased $1,589,000 or 26% in the first
quarter of 2005 compared with the same period of 2004. Of the net increase of
$1,589,000, $1,345,000 was attributable to an increase in the volume of earning
assets and $244,000 was attributable to higher rates. Interest paid on
interest-bearing liabilities increased $364,000 in the first quarter of 2005
compared with the first quarter of 2004, a 53% increase. Increases in the volume
of deposits and other borrowings accounted for $288,000 of this increase and
$76,000 was attributable to higher rates.
The average balance of earning assets increased $88,694,000 or 21% when compared
with March 31, 2004 and the average balance of interest-bearing liabilities
increased $50,566,000 or 16% compared with the same period in 2004. 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.
The following table sets forth a summary of the changes in interest earned and
interest paid for the three months ended March 31, 2005 over the same period of
2004 resulting from changes in assets and liabilities volumes and rates. Changes
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)
2005 Over 2004
Volume Rate Total
------- ------- -------
Increase (Decrease) In
Interest and Fee Income
Time Deposits With Other
Financial Institutions $ 0 $ 0 $ 0
Investment Securities:
Taxable 159 69 228
Non-Taxable (1) (61) (11) (72)
Federal Funds Sold 3 86 89
Loans 1,244 100 1,344
------- ------- -------
Total Interest and Fee Income 1,345 244 1,589
------- ------- -------
Increase (Decrease) In
Interest Expense
Deposits:
Interest Bearing
Transaction Accounts 28 112 140
Savings 2 1 3
Time Deposits 17 34 51
------- ------- -------
Total Deposits 47 147 194
Long-term Debt 241 (71) 170
------- ------- -------
Total Interest Expense 288 76 364
------- ------- -------
Net Interest Income $ 1,057 $ 168 $ 1,225
======= ======= =======
(1) The interest earned is taxable-equivalent.
12
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 and as
adjustments become necessary they are reported in earnings in the periods in
which 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 March 31, 2005 the allowance for loan losses of
$4,317,000 represented 1.07% of loans outstanding. As of March 31, 2004, the
allowance represented 1.15% of loans outstanding. During the three months ended
March 31, 2005 $185,000 was charged to expense for the loan loss provision,
compared with $186,000 for the same period in 2004. There were net charge-offs
of $4,000 during the first three months of 2005 compared with $7,000 of net
charge-offs during the first three months of 2004.
The following table summarizes changes in the allowance for loan losses:
(In 000's)
For the three months ended
------------------------------
March 31, 2005 March 31, 2004
-------------- --------------
Balance, beginning of period $4,136 $3,524
Provision for loan losses 185 186
Loans charged off (6) (8)
Recoveries of loans previously charged off 2 1
------ ------
Balance, end of period $4,317 $3,703
====== ======
Allowance for loan losses to total outstanding loans 1.07% 1.15%
There were no loans on non-accrual status as of March 31, 2005, March 31, 2004
or December 31, 2004. There were no loans 90 days or more past due and still
accruing interest or restructured loans at March 31, 2005, March 31, 2004 or
December 31, 2004.
NON-INTEREST INCOME
- -------------------
Non-interest income was $956,000 for the three months ended March 31, 2005
compared with $986,000 for the same period in 2004, a 3% decrease. Non-interest
income primarily consists of service charges and other fees related to deposit
accounts. The decrease in non-interest income resulted primarily from a decrease
in service charges related to the overdraft privilege program and a decrease in
commissions from non-deposit investment program.
GAINS ON SECURITIES
- -------------------
There were no gains or losses for the three months ending March 31, 2005 or 2004
resulting from the sale of available-for-sale securities.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense for the three months ended March 31, 2005 and March 31,
2004 was $5,035,000 and $4,597,000, respectively, a 10% increase. Salaries and
employee benefits expense for the three months ended March 31, 2005 and 2004
were $2,724,000 and $2,504,000, respectively, a 9% increase. The increase in
2005 resulted from increased salaries paid to Company officers and employees and
related benefits. The Company's full-time equivalent (FTE) employees was 160 at
both March 31, 2005 and March 31, 2004. Occupancy expense for the three months
ended March 31, 2005 and 2004 were $394,000 and $367,000, respectively, a 7%
increase. The increase in 2005 is attributable to opening a branch office in
American Canyon in August 2004. Equipment expenses for the three months ended
March 31, 2005 and 2004 was $547,000 and $492,000, respectively, representing an
increase of 11%, Other expenses for the three months ended March 31, 2005 and
March 31, 2004 were $1,370,000 and $1,234,000, respectively, an 11% increase.
Components of other non-interest expenses that increased materially were
insurance expenses, donations and general supplies.
INCOME TAXES
- ------------
The Company reported a provision for income tax for the three months ended March
31, 2005 and 2004 of $898,000, or 38% of pre-tax income and $544,000, or 34% of
pretax income respectively. Both the 2005 and 2004 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. The higher tax rate in the first
quarter of 2005 was primarly due to a lower level of tax-free municipal bonds in
the portfolio.
13
BALANCE SHEET
- -------------
Total assets as of March 31, 2005 were $568,320,000 compared with $488,102,000
as of March 31, 2004, and $562,063,000 at December 30, 2004 equating to a 16%
increase during the twelve months ended March 31, 2005, and a 1% increase for
the three months ended March 31, 2005. Total deposits as of March 31, 2005 were
$489,582,000 compared with $434,083,000 as of March 31, 2004, and $484,493,000
at December 30, 2004 representing a 13% increase during the twelve months then
ended, and a 1% increase for the three months ended March 31, 2005. Gross loans
outstanding as of March 31, 2005 were $402,163,000 compared with $321,089,000 as
of March 31, 2004, and $377,765,000 at December 30, 2004 equating to a 25%
increase during the twelve months then ended and a 6% increase for the three
months ended March 31, 2005.
LOANS HELD FOR SALE
- -------------------
The Company had $481,000, $3,398,000 and $4,604,000 in purchased participations
in mortgage loans as of March 31, 2005, March 31, 2004 and December 31, 2004,
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 are recognized through a valuation allowance by charges to
income.
SUBORDINATED DEBENTURES
- -----------------------
During June 2002, the Company formed North Bay Statutory Trust I (Trust), a
Connecticut statutory business trust, for the purpose of issuing guaranteed
undivided beneficial interest in junior subordinated debentures (trust preferred
securities). During June 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
March 31, 2005 the interest rate was 6.54%; the Securities will mature on June
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 issuer 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.
The Securities, the subordinated debentures, and the common securities issued by
the Trust are redeemable in whole or in part on or after June 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. 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 $19 million at March 31, 2005. There were no borrowings at
March 31, 2004. The following table summarizes the borrowings:
Fixed Rate Borrowings at March 31, 2005
($ 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 March 31,
2005 liquid assets were 26% of total assets, compared with 29% as of March 31,
2004 and is in excess of the limits set in the the Company's liquididity
poloicy.
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
14
of at least 10%, tier 1 risked-based capital of at least 6%, and a leverage
ratio of at least 5%. As of March 31, 2005, the Company's risk-based capital
ratio was 12.36%. The Company's tier 1 risk-based capital ratio and leverage
ratio were 11.45% and 9.96%, respectively.
As the following table indicates, the Company and the Bank currently exceed 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 March 31, 2005:
Total Capital (to Risk
Weighted Assets)
Consolidated $60,184 12.36% $38,945 8.00% $48,681 10.00%
The Vintage Bank 54,926 11.29% 38,934 8.00% 48,668 10.00%
Tier I Capital (to Risk
Weighted Assets)
Consolidated 55,748 11.45% 19,472 4.00% 29,209 6.00%
The Vintage Bank 50,490 10.37% 19,467 4.00% 29,201 6.00%
Tier I Capital (to
Average Assets)
Consolidated 55,748 9.96% 22,385 4.00% 27,982 5.00%
The Vintage Bank 50,490 9.10% 22,197 4.00% 27,746 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 be a
principal 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 Board appointed 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 March 31, 2005
and December 31, 2004 the Company is within the established exposure of a 4%
change in "return on equity" tolerance limit. There were no significant changes
in interest rate risk from the annual report on form 10-K for December 31, 2004.
15
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
Based on their evaluation as of March 31, 2005, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms
Changes in Internal Controls:
There have not been any significant changes in our internal disclosures controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
16
PART 2
OTHER INFORMATION
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to the business of the
Company, there are no material pending legal proceedings.
ITEM 2. UNREGISTERD SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
An index of exhibits begins on page 19.
17
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this quarterly report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH BAY BANCORP
A California Corporation
Date: May 11, 2005 BY: /s/ Terry L. Robinson
--------------------------------
Terry L. Robinson
President & CEO
Principal Executive Officer
Date: May 11, 2005 BY: /s/ Lee-Ann Cimino
--------------------------------
Lee-Ann Cimino
Senior Vice President
Principal Financial Officer
18
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
19