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 June 30, 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 August 11, 2005: 3,887,950
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; (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 are prefaced with qualifiers such as or similar to
"In Management's opinion" and "Management considers" are used throughout these
statements, it is an indication that the opinion expressed was based upon the
knowledge of Management at the time made, and is subject to change by the
passage of time and/or subsequent events. 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 six months ended June 30, 2005 and June
30, 2004 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 June 30, 2005 and June 30, 2004 and the results of
operations and cash flows for the three and six 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)
June 30, June 30, December 31,
Assets 2005 2004 2004
--------- --------- --------
Cash and Cash Equivalents:
Cash and due from banks $ 24,369 $ 35,740 $ 27,342
Federal funds sold 40,080 11,180 32,865
--------- --------- --------
Total cash and cash equivalents 64,449 46,920 60,207
Time deposits with other financial institutions 100 100 100
Investment Securities:
Available-for-sale 89,173 94,427 94,788
Equity securities 4,641 2,532 4,595
--------- --------- --------
Total investment securities 93,814 96,959 99,383
Loans, net of allowance for loan losses of $4,541 in June, 2005
$3,782 in June, 2004 and $4,136 in December, 2004 396,622 334,358 373,629
Loans held-for-sale 9,707 18,855 4,604
Investment in subsidiary 310 310 310
Bank premises and equipment, net 9,731 10,691 10,336
Accrued interest receivable and other assets 15,424 13,636 13,494
--------- --------- --------
Total assets $ 590,157 $ 521,829 $562,063
========= ========= ========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 152,065 $ 114,657 $127,250
Interest bearing 357,596 334,136 357,243
--------- --------- --------
Total deposits 509,661 448,793 484,493
Subordinated debentures 10,310 10,310 10,310
Long term borrowings 19,000 19,000 19,000
Accrued interest payable and other liabilities 3,958 3,364 4,126
--------- --------- --------
Total liabilities 542,929 481,467 517,929
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 - 3,884,700 shares in June, 2005,
3,807,676 shares in June, 2004, and 3,641,289 in December, 2004 39,476 33,242 33,473
Retained earnings 7,981 7,684 10,500
Accumulated other comprehensive (loss) income (229) (564) 161
--------- --------- --------
Total shareholders' equity 47,228 40,362 44,134
Total liabilities and shareholders' equity $ 590,157 $ 521,829 $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 Six Months Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------ ------ ------- -------
Interest Income
Loans (including fees) $6,978 $5,394 $13,578 $10,650
Federal funds sold 210 58 340 100
Investment securities - taxable 848 706 1,683 1,312
Investment securities - tax exempt 109 136 220 296
------ ------ ------- -------
Total interest income 8,145 6,294 15,821 12,358
Interest Expense
Deposits 848 611 1,599 1,168
Short term borrowings 0 0 0 1
Long term debt 323 248 624 378
------ ------ ------- -------
Total interest expense 1,171 859 2,223 1,547
Net interest income 6,974 5,435 13,598 10,811
Provision for loan losses 230 174 415 360
------ ------ ------- -------
Net interest income after
provision for loan losses 6,744 5,261 13,183 10,451
Non interest income 1,021 995 1,977 1,981
Gains on securities transactions, net 0 262 0 262
------ ------ ------- -------
Total non interest income 1,021 1,257 1,977 2,243
Non interest expenses
Salaries and employee benefits 2,735 2,563 5,459 5,067
Occupancy 446 344 840 711
Equipment 532 515 1,079 1,007
Other 1,460 1,149 2,830 2,383
------ ------ ------- -------
Total non interest expense 5,173 4,571 10,208 9,168
------ ------ ------- -------
Income before provision for
Income taxes 2,592 1,947 4,952 3,526
Provision for income taxes 1,007 740 1,905 1,284
------ ------ ------- -------
Net income $1,585 $1,207 $ 3,047 $ 2,242
====== ====== ======= =======
Basic earnings per common share: $ 0.41 $ 0.32 $ 0.79 $ 0.59
====== ====== ======= =======
Diluted earnings per common share: $ 0.39 $ 0.31 $ 0.75 $ 0.57
====== ====== ======= =======
Dividends paid: $ 0.00 $ 0.00 $ 0.15 $ 0.13
====== ====== ======= =======
<FN>
The accompanying notes are an integral part of these statements
</FN>
4
North Bay Bancorp
Consolidated Statements of Comprehensive Income
(Unaudited)
(In 000's)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------- ------- ------- -------
Net income $ 1,585 $ 1,207 $ 3,047 $ 2,242
Other comprehensive income (loss), net of tax:
Change in net unrealized losses on
available-for sale securities, during the
period, net of deferred income tax (benefit)
of $215, ($1,140), ($278), and ($834),
respectively. 304 (1,603) (390) (1,172)
------- ------- ------- -------
Total other comprehensive income (loss) $ 1,889 $ (396) $ 2,657 $ 1,070
======= ======= ======= =======
<FN>
The accompanying notes are an integral part of these statements
</FN>
North Bay Bancorp
Consolidated Statement of Change in Shareholders' Equity
For the Six Months Ended
June 30, 2005
(Unaudited) (In 000's
except share data)
Accumulated
Other Total
Common Shares Common Retained Comprehensive Shareholders'
Outstanding Stock Earnings Income (loss) Equity
----------------------------------------------------------------------
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 3,047 3,047
Other comprehensive loss, net of tax:
Change in net unrealized losses on
available-for-sale securities,
net of a tax benefit of $278 (390) (390)
Comprehensive income
Stock options exercised, including a
tax benefit of $240 59,058 1,007 0 0 1,007
---------- -------- -------- ----- -------
BALANCE, JUNE 30, 2005 3,884,700 $ 39,476 $ 7,981 $(229) $47,228
========== ======== ======== ===== =======
<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)
Six Months Ended June 30,
2005 2004
-------- ---------
Cash Flows From Operating Activities:
Net income $ 3,047 $ 2,242
Adjustment to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 806 802
Provision for loan losses 415 360
Amortization of deferred loan fees (432) (297)
Proceeds from sale of loans held-for-sale 48,434 84,271
Purchase of loans held-for-sale (53,537) (100,031)
Premium amortization (discount accretion), net 28 175
Gain on securities transactions 0 (262)
Changes in:
Interest receivable and other assets (1,618) (520)
Interest payable and other liabilities 72 (211)
-------- ---------
Net cash used in operating activities (2,785) (13,471)
-------- ---------
Cash Flows From Investing Activities:
Investment securities available-for-sale:
Proceeds from maturities and principal payments 6,453 24,897
Proceeds from sale of securities 0 4,322
Purchases (1,533) (34,911)
Equity securities:
Purchases (46) (1,181)
Net increase in loans (22,976) (31,282)
Capital expenditures (236) (584)
-------- ---------
Net cash used in investing activities (18,338) (38,739)
-------- ---------
Cash Flows From Financing Activities:
Net increase in deposits 25,168 42,348
Increase in long-term borrowings 0 19,000
Stock options exercised 767 306
Dividends paid (570) (475)
-------- ---------
Net cash provided by financing activities 25,365 61,179
-------- ---------
Net increase in cash and cash equivalents 4,242 8,969
Cash and cash equivalents at beginning of year 60,207 37,951
-------- ---------
Cash and cash equivalents at end of period $ 64,449 $ 46,920
======== =========
Supplemental Disclosures of Non-Cash Investing and
Finance Activities:
Unrealized gain on securities $ 667 $ 2,007
Tax benefit on non-qualified options exercised $ 240 $ 20
Stock dividends $ 4,996 $ 3,706
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 2,198 $ 1,511
Taxes paid $ 1,955 $ 1,770
The accompanying notes are an integral part of these statements
6
NORTH BAY BANCORP
Notes to the Consolidated Financial Statements
(Unaudited)
June 30, 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 United States 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 six months ended June 30, 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
$7,691,000, undisbursed real estate and construction loans of approximately
$19,967,000, and undisbursed commercial and consumer lines of credit of
approximately $86,068,000, as of June 30, 2005. The Company had outstanding
standby Letters of Credit of approximately $2,185,000, undisbursed real estate
and construction loans of approximately $20,086,000, and undisbursed commercial
and consumer lines of credit of approximately $72,929,000, as of June 30, 2004.
NOTE 3 - Earnings Per Common Share
- ----------------------------------
The Company declared 5% stock dividends on January 26, 2004 and January 26, 2005
as well as a 3-for-2 stock split November 22, 2004. As a result of the stock
dividends and stock split the number of common shares outstanding and earnings
per share data were 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
---------- ------ ------
(Dollars in 000's except share data)
For the three months ended June 30, 2005
----------------------------------------
Basic earnings per share $1,585 3,884,162 $0.41
Dilutive effect of stock options 150,042
Diluted earnings per share 4,034,205 $0.39
For the three months ended June 30, 2004
----------------------------------------
Basic earnings per share $1,207 3,814,170 $0.32
Dilutive effect of stock options 123,050
Diluted earnings per share 3,937,220 $0.31
Weighted Average Per-Share
Net Income Shares Amount
---------- ------ ------
For the six months ended June 30, 2005
--------------------------------------
Basic earnings per share $3,047 3,866,555 $0.79
Dilutive effect of stock options 171,735
Diluted earnings per share 4,038,290 $0.75
For the six months ended June 30, 2004
--------------------------------------
Basic earnings per share $2,242 3,787,596 $0.59
Dilutive effect of stock options 126,006
Diluted earnings per share 3,913,602 $0.57
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. (See Impact of Recently Issued Accounting
Standards.) 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 June 30,
2005 2004
------- -------
Net income as reported $ 1,585 $ 1,207
Total stock-based employee
compensation expense determined under
the fair value based method
for all awards, net of related
tax effects 179 83
------- -------
Net income pro forma $ 1,406 $ 1,124
Earnings per share:
As reported:
Basic $ .41 $ .32
Diluted $ .39 $ .31
Pro forma:
Basic $ .36 $ .29
Diluted $ .35 $ .29
(In 000's except share data)
For the six months ended June 30,
2005 2004
------- -------
Net income as reported $ 3,047 $ 2,242
Total stock-based employee
compensation expense determined under
the fair value based method
for all awards, net of related
tax effects 260 166
------- -------
Net income pro forma $ 2,787 $ 2,076
Earnings per share:
As reported:
Basic $ .79 $ .59
Diluted $ .75 $ .57
Pro forma:
Basic $ .72 $ .55
Diluted $ .69 $ .53
NOTE 5 - Impact of Recently Issued Accounting Standards
- -------------------------------------------------------
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities (FIN 46R), which addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (VIEs), which was issued in January
2003. The Company was required to apply FIN 46R to variable interest in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the FIN 46R will be applied beginning on January 1, 2005. For
an VIEs that must be consolidated under FIN 46R that were created before January
1, 2004, the assets, liabilities and noncontrolling interests of the VIE
initially would be measured a their carrying amounts with any difference between
the net amount added to the balance sheet and any previously recognized interest
being recognized as the cumulative effect of an accounting change. If determined
the carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE. The Company currently does not have any VIEs that are
within the scope of this Statement.
In December 2004, the FASB issued FASB Statement of Financial Accounting
Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces
SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and supercedes
APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires
all share-based payments to employees, including grants of employee stock
8
options, to be recognized in the financial statements based on their fair values
beginning with the first interim reporting period of the Company's fiscal year
beginning after June 15, 2005, with early adoption encouraged. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. The Company is required to adopt SFAS 123R
on January 1, 2006. Under SFAS 123R, the Company must determine the appropriate
fair value model to be used for valuing share-based payments, the amortization
method for compensation cost and the transition method to be used at date of
adoption. The transition methods include prospective and retroactive adoption
options. Under the retroactive option, prior periods may be restated either as
of the beginning of the year of adoption or for all periods presented. The
prospective method requires that compensation expense be recorded for all
unvested stock options at the beginning of the first quarter of adoption of SFAS
123R, while the retroactive methods would record compensation expense for all
unvested stock options and restricted stock beginning with the first period
restated. The Company is evaluating the requirements of SFAS 123R and expects
that the adoption of SFAS 123R will not have a material impact on the Company's
consolidated results of operations and earnings per share. The Company has not
yet determined the method of adoption or the effect of adopting SFAS 123R, and
it has not determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS 123.
NOTE 6 - Borrowings
- -------------------
Total borrowings were $19 million at June 30, 2005 and at June 30, 2004. The
following table summarizes the borrowings:
Fixed Rate Borrowings at June 30, 2005
($ 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%
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 are prefaced with qualifiers such as or similar to
"In Management's opinion" and "Management considers" are used throughout these
statements, it is an indication that the opinion expressed was based upon the
knowledge of Management at the time made, and is subject to change by the
passage of time and/or subsequent events. 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 losses on a monthly basis. We believe that
the allowance for loan losses 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 future 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
10
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 $1,585,000 or $.39 per diluted share for the three months ended
June 30, 2005, compared with $1,207,000 or $.31 per diluted share for the three
months ended June 30, 2004, an increase of 31%. Net income was $3,047,000 or
$.75 per diluted share for the six months ended June 30, 2005, compared with
$2,242,000 or $.57 per diluted share for the six months ended June 30, 2004, an
increase of 36%. Total assets were $590,157,000 as of June 30, 2005; equating to
a 13% growth in assets during the twelve months ended June 30, 2005.
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 June 30,
2005 and June 30, 2004:
(In 000's)
2005 2004
--------- ---------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
--------------------------------------------------------------------------
Loans (1) (2) $ 406,169 $ 6,978 6.87% $ 344,421 $ 5,394 6.26%
Investment securities:
Taxable 83,942 846 4.03% 74,431 705 3.79%
Non-taxable (3) 11,855 145 4.89% 14,078 174 4.94%
--------- --------- --------- ---------
TOTAL LOANS AND INVESTMENT
SECURITIES 501,966 7,969 6.35% 432,930 6,273 5.80%
Due from banks, time 100 1 4.00% 100 1 4.00%
Federal funds sold 26,074 211 3.24% 23,322 58 .99%
--------- --------- --------- ---------
TOTAL EARNING ASSETS 528,140 $ 8,181 6.20% 456,352 $ 6,332 5.55%
--------- --------- --------- ---------
Cash and due from banks 35,373 35,247
Allowance for loan losses (4,388) (3,700)
Premises and equipment, net 9,928 10,737
Accrued interest receivable
and other assets 14,258 13,558
--------- ---------
TOTAL ASSETS $ 581,311 $ 512,194
========= =========
11
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing demand $ 235,613 $ 446 0.76% $ 210,836 $ 270 0.51%
Savings 41,489 22 0.21% 40,434 23 0.23%
Time 73,351 380 2.07% 75,461 318 1.69%
--------- --------- --------- ---------
350,453 848 .97% 326,731 611 .75%
Short-term debt 0 0 0.00% 0 0 0.00%
Long-term debt 29,310 323 4.41% 25,267 248 3.93%
--------- --------- --------- ---------
29,310 323 25,267 248
TOTAL INTEREST BEARING
LIABILITIES 379,763 $ 1,171 1.23% 351,998 $ 859 .98%
--------- --------- --------- ---------
Noninterest bearing DDA 151,084 116,108
Accrued interest payable
and other liabilities 3,880 3,788
Shareholders' equity 46,584 40,300
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 581,311 $ 512,194
========= =========
NET INTEREST INCOME $ 7,010 $ 5,473
========= =========
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin (4)) 5.31% 4.80%
<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 $267 and $221 for the
three months ended June 30, 2005 and June 30, 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 $109 with an
average yield of 3.68%; in 2004, on a non-taxable basis, interest income on
tax exempt securities was $136 with an average yield of 3.86%.
(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 six months ended June 30, 2005
and June 30, 2004:
(In 000's)
2005 2004
--------- ---------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
--------------------------------------------------------------------------
Loans (1) (2) $ 397,081 $ 13,578 6.84% $ 329,081 $ 10,650 6.47%
Investment securities:
Taxable 85,198 1,682 3.95% 71,351 1,310 3.67%
Non-taxable (3) 11,869 290 4.89% 15,271 392 5.13%
--------- --------- --------- ---------
TOTAL LOANS AND INVESTMENT
SECURITIES 494,148 15,550 6.29% 415,703 12,352 5.94%
Due from banks, time 100 1 2.00% 100 2 4.00%
Federal funds sold 21,860 340 3.11% 19,910 100 1.00%
--------- --------- --------- ---------
TOTAL EARNING ASSETS 516,108 $ 15,891 6.16% 435,713 $ 12,454 5.72%
--------- --------- --------- ---------
Cash and due from banks 34,470 33,110
Allowance for loan losses (4,297) (3,648)
Premises and equipment, net 10,074 10,781
Accrued interest receivable
and other assets 14,115 13,281
--------- ---------
TOTAL ASSETS $ 570,470 $ 489,237
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Interest bearing demand $ 229,647 $ 833 0.73% $ 205,849 $ 517 0.50%
Savings 41,970 47 0.22% 39,206 44 0.22%
Time 74,868 720 1.92% 73,786 607 1.65%
--------- --------- --------- ---------
346,485 1,600 .92% 318,841 1,168 .73%
12
Short-term debt 0 0 0.00% 0 1 0.00%
Long-term debt 29,310 623 4.25% 17,633 378 4.29%
--------- --------- --------- ---------
29,310 623 17,633 379
TOTAL INTEREST BEARING
LIABILITIES 375,795 $ 2,223 1.18% 336,474 $ 1,547 .92%
--------- --------- --------- ---------
Noninterest bearing DDA 144,358 108,837
Accrued interest payable
and other liabilities 4,263 4,477
Shareholders' equity 46,054 39,449
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 570,470 $ 489,237
========= =========
NET INTEREST INCOME $ 13,668 $ 10,907
========= ========
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin (4)) 5.30% 5.01%
<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 $642 and $577 for the six
months ended June 30, 2005 and June 30, 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 $220 with an
average yield of 3.71%; in 2004, on a non-taxable basis, interest income on
tax exempt securities was $296 with an average yield of 3.88%.
(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 June 30, 2005 and June 30, 2004 was $7,010,000
and $5,473,000, respectively. These results equate to a 28% increase in net
interest income for the second quarter of 2005 compared to the second quarter of
2004. Loan fee income, which is included in interest income from loans, was
$267,000 for the three months ended June 30, 2005, compared with $221,000 for
the three months ended June 30, 2004. Net interest income before the provision
for loan losses on a taxable-equivalent basis for the six months ended June 30,
2005 and June 30, 2004 was $13,668,000 and $10,907,000, respectively. These
results equate to a 25% increase in net interest income for the first six months
of 2005 compared to the same period of 2004. Loan fee income, which is included
in interest income from loans, was $642,000 for the six months ended June 30,
2005, compared with $577,000 for the six months ended June 30, 2004.
Taxable-equivalent interest income increased $1,849,000 or 29% in the second
quarter of 2005 compared with the same period of 2004. The net increase of
$1,849,000 was attributable to an increase in the volume of earning assets
accounting for $1,037,000 of this increase, and $812,000 attributable to higher
rates. Interest paid on interest-bearing liabilities increased $312,000 or 36%
in the second quarter of 2005 compared with the second quarter of 2004. The
increase of $312,000 was attributable to an increase in the volume of deposits
and other borrowings accounting for $64,000 of this increase, and $248,000 was
attributable to higher rates.
Taxable-equivalent interest income increased $3,437,000 or 28% in the first six
months of 2005 compared with the same period of 2004. The net increase of
$3,437,000 was attributable to an increase in the volume of earning assets
accounting for $2,378,000 of this increase, and $1,059,000 attributable to
higher rates. Interest paid on interest-bearing liabilities increased $676,000
in the first half of 2005 compared with the first half of 2004. The increase in
the volume of deposits and other borrowings accounted for an increase of
$321,000, and $355,000 was attributable to higher rates.
The average balance of earning assets for the six month period increased
$80,395,000 or 18% when compared with June 30, 2004 and the average balance of
interest-bearing liabilities increased $39,321,000 or 12% 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.
13
The following table sets forth a summary of the changes in interest earned and
interest paid for the three months ended June 30, 2005 over the same period of
2004 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)
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 90 51 141
Non-taxable (1) (27) (2) (29)
Federal funds sold 7 146 153
Loans 967 617 1,584
-----------------------------------
Total interest and fee income 1,037 812 1,849
-----------------------------------
Increase (Decrease) in Interest Expense
Deposits:
Interest bearing
Transaction accounts 32 144 176
Savings 1 (2) (1)
Time deposits (9) 71 62
-----------------------------------
Total deposits 24 213 237
Short-term borrowings 0 0 0
Long-term debt 40 35 75
-----------------------------------
Total Interest Expense 64 248 312
-----------------------------------
Net Interest Income $ 973 $ 564 $1,537
===================================
<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 six months ended June 30, 2005 over the same period of
2004 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)
2005 Over 2004
--------------
Volume Rate Total
-----------------------------------
Increase (Decrease) in Interest and Fee Income
Time deposits with other
Financial institutions $ 0 $ (1) $ (1)
Investment securities:
Taxable 254 118 372
Non-taxable (1) (87) (15) (102)
Federal funds sold 10 230 240
Loans 2,201 727 2,928
-----------------------------------
Total interest and fee income 2,378 1,059 3,437
-----------------------------------
Increase (Decrease) in Interest Expense
Deposits:
Interest bearing
Transaction accounts 60 256 316
Savings 3 0 3
Time deposits 9 104 113
-----------------------------------
Total deposits 72 360 432
Short-term borrowings (1) 0 (1)
Long-term debt 250 (5) 245
-----------------------------------
Total Interest Expense 321 355 676
-----------------------------------
Net Interest Income $2,057 $ 704 $2,761
===================================
<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 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 June 30, 2005 the allowance for loan losses of
$4,541,000 represented 1.13% of loans outstanding. As of June 30, 2004, the
allowance represented 1.12% of loans outstanding. During the three months ended
June 30, 2005 $230,000 was charged to expense for the loan loss provision,
compared with $174,000 for the same period in 2004. During the six months ended
June 30, 2005 $415,000 was charged to expense for the loan loss provision,
compared with $360,000 for the same period in 2004. 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 $10,000 during the first six months of
2005 compared with $102,000 of net charge-offs during the first six months of
2004.
The following table summarizes changes in the allowance for loan losses:
(In 000's)
For the Six months ended
June 30, 2005 June 30, 2004
Balance, beginning of period $4,136 $3,524
Provision for loan losses 415 360
Loans charged off (12) (107)
Recoveries of loans previously charged off 2 5
------ -------
Balance, end of period $4,541 $3,782
====== ======
Allowance for loan losses to total 1.13% 1.12%
outstanding loans
There were no loans on non-accrual status as of June 30, 2005, June 30, 2004 or
December 31, 2004. There were no loans 90 days or more past due and still
accruing interest or restructured loans at June 30, 2005, June 30, 2004 or
December 31, 2004.
NON-INTEREST INCOME
- -------------------
Non-interest income, excluding gains on the sale of securities, was $1,021,000
for the three months ended June 30, 2005 compared with $995,000 for the same
period in 2004, a 3% increase. Non-interest income, excluding gains on the sale
of securities, was $1,977,000 for the six months ended June 30, 2005 compared
with $1,981,000 for the same period in 2004, a slight decrease. Non-interest
income primarily consists of service charges and other fees related to deposit
accounts. The Company has had an increase in service charge income resulting
from an increase in the number of deposit accounts, offset by a decrease in
service charges related to the overdraft privilege program.
15
GAINS ON SECURITIES
- -------------------
There were no gains or losses for the three months and six months ended June 30,
2005. Net gains of $262,000 for the three and six months ended June 30, 2004,
resulted from the sale of several available-for-sale securities.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense for the three months ended June 30, 2005 and June 30, 2004
was $5,173,000 and $4,571,000, respectively, a 13% increase. Non-interest
expense for the six months ended June 30, 2005 and June 30, 2004 was $10,208,000
and $9,168,000, respectively, an 11% increase. Salaries and employee benefits
expense for the three months ended June 30, 2005 and 2004 were $2,735,000 and
$2,563,000, respectively, a 7% increase. Salaries and employee benefits expense
for the six months ended June 30, 2005 and 2004 were $5,459,000 and $5,067,000,
respectively, an 8% increase. The increase in 2005 resulted from increased
salaries paid to Company officers and employees. Full-time equivalent (FTE)
employees were 169 at June 30, 2004 compared with 165 at June 30, 2005. The
decreases in FTE was related to efficiencies gained with the consolidation of
our Solano Bank charter into The Vintage Bank Charter and outsourcing some
network technology services. Occupancy expense for the three months ended June
30, 2005 and 2004 was $446,000 and $344,000, respectively, a 30% increase.
Occupancy expense for the six months ended June 30, 2005 and 2004 was $840,000
and $711,000, respectively, representing an 18% increase. The increase in
Occupancy expense in 2005 is attributed to having vacancy in our Vacaville
building and to opening an American Canyon branch office in August 2004.
Equipment expense for the three months ended June 30, 2005 and 2004 was $532,000
and $515,000, respectively, representing an increase of 3%. Equipment expense
for the six months ended June 30, 2005 and 2004 was $1,079,000 and $1,007,000,
respectively, an increase of 7%. The increase in Equipment expense is primarily
attributable to opening a branch office in American Canyon. Other expenses for
the three months ended June 30, 2005 and June 30, 2004 were $1,460,000 and
$1,149,000, respectively, a 27% increase. Other expenses for the six months
ended June 30, 2005 and June 30, 2004 were $2,830,000 and $2,383,000,
respectively, a 19% increase. The increase in other expense in 2005 compared
with 2004 was primarily in consulting and audit expenses associated with
Sarbanes-Oxley compliance work.
INCOME TAXES
- ------------
The Company reported a provision for income tax for the three months ended June
30, 2005 and 2004 of $1,007,000, or 39% of pretax income and $740,000, or 38% of
pretax income respectively. The Company reported a provision for income tax for
the six months ended June 30, 2005 and 2004 of $1,905,000 or 38% of pretax
income and $1,284,000 or 36% 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 2005 was primarily due to a lower level of
tax-free municipal bonds in the Company's investment portfolio.
BALANCE SHEET
- -------------
Total assets as of June 30, 2005 were $590,157,000 compared with $521,829,000 as
of June 30, 2004, and $562,063,000 at December 30, 2004 equating to a 13%
increase during the twelve months ended June 30, 2005, and a 5% increase for the
six months ended June 30, 2005. Total deposits as of June 30, 2005 were
$509,661,000 compared with $448,793,000 as of June 30, 2004, and $484,493,000 at
December 30, 2004 representing a 14% increase during the twelve months then
ended, and a 5% increase for the six months ended June 30, 2005. Gross loans
outstanding as of June 30, 2005 were $401,163,000 compared with $338,140,000 as
of June 30, 2004, and $377,765,000 at December 30, 2004 equating to a 19%
increase during the twelve months then ended and a 6% increase for the six
months ended June 30, 2005.
LOANS HELD FOR SALE
- -------------------
The Company had $9,707,000, $18,885,000 and $4,604,000 in purchased
participations in mortgage loans as of June 30, 2005, June 30, 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, if any, are recognized through a valuation
allowance by charges to income. There were no gains or losses recognized during
2004 or 2005.
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 interests 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 June 30, 2005 the interest rate was 6.92%; 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 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, 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
16
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 $19 million at June 30, 2005 and at June 30, 2004. The
following table summarizes the borrowings:
Fixed Rate Borrowings
($ 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 June 30,
2005 liquid assets were 27% of total assets, compared with 28% as of June 30,
2004. The Company is within its policy guidelines.
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 June 30, 2005, the Company's risk-based capital
ratio was 12.55%. The Company's tier 1 risk-based capital ratio and leverage
ratio were 11.61% and 9.88%, respectively as June 30, 2005.
17
As the following table indicates, the Company and the Bank currently exceeds the
regulatory capital minimum requirements. The Company and the Bank are considered
"Well Capitalized" according to regulatory guidelines.
To Be WellCapitalized
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 June 30, 2005:
Total Capital (to Risk
Weighted Assets)
Consolidated $62,119 12.55% $39,599 8.00% $49,499 10.00%
The Vintage Bank 56,996 11.52% 39,590 8.00% 49,487 10.00%
Tier I Capital (to Risk
Weighted Assets)
Consolidated 57,457 11.61% 19,800 4.00% 29,700 6.00%
The Vintage Bank 52,334 10.58% 19,795 4.00% 29,692 6.00%
Tier I Capital (to
Average Assets)
Consolidated 57,457 9.88% 23,252 4.00% 29,066 5.00%
The Vintage Bank 52,334 9.09% 23,017 4.00% 28,772 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 the Bank 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 June 30, 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.
18
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
Based on their evaluation as of June 30, 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 were no significant changes in our internal controls that occurred during
our last fiscal quarter that have materially affected, or are reasonably likely
to materially affect our disclosure controls.
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.
ITEM 2. UNREGISTERD SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Sixth Annual Meeting of the shareholders of the Company was held
on May 12, 2005.
(b) Proxies for the meeting were solicited pursuant to Regulation 14A
under the Act, there were no solicitations in opposition to
management's nominees as listed in the proxy statement, and all such
nominees were elected.
(c) The election of directors and to ratify the appointment of KPMG, LLP
as the Company's 2005 Independent Certified Public Accounts were the
only items voted upon at the annual shareholders' meeting. At the
Sixth Annual Meeting, the proposal to ratify the appointment of KPMG,
LLP as the Company's 2005 Independent Certified Public Accounts was
approved with 3,129,039 affirmative votes. There were, 5,914 negative
votes, and 19,420 abstaining votes.
(d) There was no settlement between the Company and any other person
terminating any solicitation subject to Rule 14a-11.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
An index of exhibits begins on page 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: August 11, 2005 BY: /s/ Terry L. Robinson
---------------------------------
Terry L. Robinson
President & CEO
Principal Executive Officer
Date: August 11, 2005 BY: /s/ Lee-Ann Cimino
---------------------------------
Lee-Ann Cimino
Senior Vice President
Principal Financial Officer
21
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.2 Amended and Restated Bylaws
10.1 Oral Employment Agreement with Suzette Junier
10.2 Oral Employment Agreement with Stephanie Rode
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