UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number: 0-31080
NORTH BAY BANCORP
(Exact name of registrant as specified in its charter)
California 68-0434802
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1190 Airport Road, Suite 101, Napa, California 94558
----------------------------------------------------
(Address of principal executive offices)
(707) 252-5026
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of June 30, 2005, the aggregate market value of the registrant's common stock
held by non-affiliates of the registrant was $78,883,000 based on the closing
sale price as reported on the National Association of Securities Dealers
Automated Quotation System National Market System.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 13, 2006
Common Stock, No Par Value 3,925,194
DOCUMENTS INCORPORATED BY REFERENCE
Document Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Part III
Shareholders to be held May 17, 2006
TABLE OF CONTENTS
PART I
Page
Item 1 - Business 4
Item 1(a) Risk Factors 17
Item 1(b) Unresolved Staff Comments 19
Item 2 - Properties 19
Item 3 - Legal Proceedings 19
Item 4 - Submission of Matters to a Vote of Security Holders 19
PART II
Item 5 - Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Repurchases of Equity Securities 20
Item 6 - Selected Financial Data 22
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
Item 7A - Quantitative and Qualitative Disclosure about Market Risk 36
Item 8 - Financial Statements and Supplementary Data 38
Item 9 - Changes in and Disagreements with Accountants on A
ccounting and Financial Disclosure 72
Item 9A - Controls and Procedures 72
Item 9B - Other Information 72
PART III
Item 10 - Directors and Executive Officers of the Registrant 73
Item 11 - Executive Compensation 73
Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 73
Item 13 - Certain Relationships and Related Transactions 73
Item 14 - Principal Accountant Fees and Services 73
PART IV
Item 15 - Exhibits and Financial Statement Schedules 74
FORWARD LOOKING STATEMENTS
In addition to the historical information, this Annual Report contains certain
forward-looking information within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the "Safe Harbor" created by those Sections. The
reader of this Annual 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 regulation; (iv) adverse
conditions and volatility, including 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 on 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 Annual 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.
PART I
Item 1 - BUSINESS
North Bay Bancorp
- -----------------
North Bay Bancorp (Bancorp), headquartered in Napa, California, is a California
corporation incorporated in 1999. During 2005, Bancorp was the Holding Company
for The Vintage Bank (Bank) and North Bay Statutory Trust I, which are wholly
owned subsidiaries, collectively (the Company). North Bay Statutory Trust I was
formed in June 2002 for the purpose of issuing trust preferred securities. In
January 2005, Solano Bank, previously a wholly owned subsidiary of Bancorp, was
merged with and into the Bank to simplify the Company's corporate structure.
Solano Bank is now a division of the Bank. Bancorp is a registered bank holding
company under the Bank Holding Company Act of 1956, as amended, and is subject
to the regulations of, and examination by, the Board of Governors of the Federal
Reserve System. At present, Bancorp does not engage in any material business
activities other than the ownership of the Bank.
The Vintage Bank
- ----------------
General
- -------
The Bank is a California corporation organized as a state chartered bank in
1984. The Bank engages in commercial banking business in Napa County from its
main banking office located at 1500 Soscol Avenue in Napa, California. The Bank
established a Real Estate Investment Trust (REIT) subsidiary in February 2003.
The Bank has nine other banking offices including the Solano Bank division
offices. The Bank is a member of the Federal Reserve System. The deposits of
each depositor of the Bank are insured by the Federal Deposit Insurance
Corporation up to the maximum allowed by law.
The Bank offers a full range of commercial banking services to individuals and
the business and agricultural communities in Napa and Solano Counties. The Bank
emphasizes retail commercial banking operations and accepts checking and savings
deposits, makes consumer, commercial, construction and real estate loans, and
4
provides other customary banking services. The Bank does not offer trust
services and does not plan to do so in the near future. There have been no
material changes in services offered by The Bank. The Bank makes annuities and
mutual funds available to its customers through Linsco Private Ledger.
Website Access to Reports
- -------------------------
The Company maintains the following websites, www.northbaybancorp.com,
www.vintagebank.com and www.solanobank.com. The Company makes available, free of
charge, on its www.northbaybancorp.com website the annual report on Form 10-K,
the quarterly reports on Form 10-Q and current reports on Form 8-K as soon as
reasonably practical after we file such reports with the Securities & Exchange
Commission. The Vintage Bank and Solano Bank websites have an investor relations
page that hyperlinks to the Bancorp website.
Consolidated Lending Activities
- -------------------------------
The Bank concentrates its lending activities in commercial, installment,
construction, and real estate loans made primarily to businesses and individuals
located in Napa and Solano Counties. At December 31, 2005, total loans
outstanding were $414,428,000 resulting in a loan-to-deposit ratio of 80%. At
December 31, 2004, total loans outstanding were $377,765,000 resulting in a
loan-to-deposit ratio of 78.0%.
As of December 31, 2005, the Bank's lending limit to individual customers was
$15,336,000 for secured loans and $9,201,000 for unsecured loans. As of December
31, 2004, The Vintage Bank's lending limit was $6,163,000 for unsecured loans
and $16,435,000 for unsecured and secured loans combined. Solano Bank's lending
limits were $1,797,000 for unsecured loans and $4,791,000 for unsecured and
secured loans combined. For customers desiring loans in excess of the Bank's
lending limits, the Bank may loan on a participation basis with another bank
taking the amount of the loan in excess of Bank's lending limits.
At December 31, 2005, the Bank's commercial loans outstanding totaled
$85,979,000 (20.75% of total loans), commercial loans secured by real estate
totaled $23,477,000 (5.66% of total loans), construction loans totaled
$32,393,000 (7.82% of total loans), real estate loans totaled $233,723,000
(56.40% of total loans), and installment loans totaled $38,856,000 (9.38% of
total loans). At December 31, 2004, commercial loans outstanding totaled
$67,068,000 (17.8% of total loans), commercial loans secured by real estate
totaled $26,447,000 (7.0% of total loans), construction loans totaled
$27,595,000 (7.3% of total loans), real estate loans totaled $220,316,000 (58.3%
of total loans) and installment loans totaled $36,339,000 (9.62% of total
loans).
As of December 31, 2005, the total of undisbursed loans and similar commitments
was $143,147,000, as contrasted with $109,275,000 as of December 31, 2004. The
Bank takes real estate, listed securities, savings and time deposits,
automobiles, machinery and equipment, inventory and accounts receivable as
collateral for loans.
The interest rates charged for the various loans made by the Bank vary with the
degree of risk and the size and maturity of the loans involved and are generally
affected by competition and by current money market rates.
Commercial Loans
The Bank makes commercial loans primarily to professionals, individuals and
businesses in the counties of Napa and Solano. The Bank offers a variety of
commercial lending products, including revolving lines of credit, working
capital loans, equipment financing and issuances of letters of credit.
Typically, lines of credit have a floating rate of interest based on the Bank's
Base Rate and are for a term of one year or less. Working capital and equipment
loans have a floating or a fixed rate typically with a term of five years or
less. Approximately 79% of the Bank's commercial loans are unsecured or secured
by personal property and, therefore, represent a higher risk of ultimate loss
than loans secured by real estate. However, as a result of the lending policies
and procedures implemented by the Company, management believes it has adequate
commercial loan underwriting and review procedures in place to manage the risks
inherent in commercial lending. In addition, commercial loans not secured by
real estate typically require higher quality credit characteristics to meet
underwriting requirements. The remaining 21% of the Bank's commercial loans are
secured by real estate. See Item 1A. - Risk Factors.
Real Estate Loans
Real estate loans consist of loans secured by deeds of trust on residential and
commercial properties. The purpose of these loans is to purchase real estate or
refinance an existing real estate loan, as compared with real estate secured
commercial loans, which have a commercial purpose unrelated to the purchase or
refinance of the real estate taken as collateral.
5
The Bank originates residential mortgage loans. Most of the residential mortgage
loans originated by the Bank are sold to institutional investors according to
their guidelines. The Bank does not retain servicing of these loans, however the
Bank does receive a loan fee.
Real Estate Construction Loans
The Bank makes loans to finance the construction of commercial, industrial and
residential projects and to finance land development. The Bank's portfolio is
diversified between the categories of residential and commercial construction.
This segment of the portfolio represents less than 100% of combined capital and
does not require extra monitoring. Construction loans typically have maturities
of less than one year, have a floating rate of interest based on Bank's base
rate and are secured by first deeds of trust. Generally, the Bank does not
extend credit in an amount greater than 50% of the appraised value of the real
estate securing land and land development loans, or in an amount greater than
70% of the appraised value of the real estate securing non-owner occupied
residential construction loans and commercial constructions, or 80% of the
appraised value in the case of owner occupied residential construction loans.
Commercial loans secured by real estate are generally granted in an amount no
greater than 75% of the appraised value.
Installment Loans
Installment loans are made to individuals for household, family and other
personal expenditures. These loans typically have fixed rates and have
maturities of five years or less.
Lending Policies and Procedures
The Bank's lending policies and procedures are established by senior management
of the Company and are approved by the Boards of Directors of the Bancorp and
the Bank. The Boards of Directors have established internal procedures, which
limit loan approval authority of the Bank's loan officers. The Board of
Directors of the Bank has delegated lending authority to executive officers who
in turn have delegated lending authority to selected loan officers.
The Directors' Loan Committee of the Bank must approve all new loans and loan
renewals in excess of specified amounts (excluding savings secured, which is
unlimited in amount). As of December 31, 2005, this included any loan in excess
of $6,000,000 if secured and $3,000,000 if unsecured.
Loans to directors and executive officers of the Bank or its affiliates must be
approved in all instances by a majority of the Board of Directors. In accordance
with law, directors and officers are not permitted to participate in the
discussion of or to vote on loans made to them or their related interests. In
addition, loans to directors and officers must be made on substantially the same
terms, including interest rates and collateral requirements, as those prevailing
for comparable transactions with other nonaffiliated persons at the time each
loan was made, subject to the limitations and other provisions in California and
Federal law. These loans also must not involve more than the normal risk of
collectibility or present other unfavorable terms. See Supervision and
Regulation - Extension of Credit to Insiders.
Consolidated Deposits
- ---------------------
Napa County and Solano County currently constitute the Company's primary service
areas and most of the Bank's deposits are attracted from these areas. No
material portion of the Bank's deposits have been obtained from a single person
or a few persons, the loss of any one or more of which would have a material
adverse effect on the business of the Bank. Total deposits as of December 31,
2005 were $516,393,000. Total deposits as of December 31, 2004 were
$484,493,000.
Employees
- ---------
At December 31, 2005, the Company employed 181 persons, 30 of whom are part-time
employees, including 7 executive officers and 40 other officers. At December 31,
2004 the Company employed 172 persons, 34 of whom are part-time employees,
including 6 executive officers 43 other officers. None of the Company's
employees are presently represented by a union or covered under a collective
bargaining agreement. Management of the Company believes its employee relations
are excellent.
6
The Competition
- ---------------
The banking business in California, generally and in the service areas served by
the Bank, specifically, is highly competitive with respect to both loans and
deposits and is dominated by a few major banks which have many offices operating
over wide geographic areas. The Bank competes for deposits and loans principally
with these major banks, savings and loan associations, finance companies, credit
unions and other financial institutions located in the Bank's market areas.
Among the advantages the major banks have over the Bank are their ability to
finance extensive advertising campaigns and to allocate their investment assets
to regions of highest yield and demand. Many of the major commercial banks
operating in the Bank's service areas offer certain services (such as trust and
international banking services) which are not offered directly by the Bank and,
by virtue of their greater total capitalization, such banks have substantially
higher lending limits than the Bank.
Moreover, banks generally, and the Bank in particular, face increasing
competition for loans and deposits from non-bank financial intermediaries such
as thrift and loan associations, mortgage companies, insurance companies and
other lending institutions. Further, the recent trend has been for other
institutions, such as brokerage firms, credit card companies, and even retail
establishments, to offer alternative investment vehicles, such as money market
funds, as well as offering traditional banking services such as check access to
money market funds and cash advances on credit card accounts. In addition, the
other entities (both public and private) seeking to raise capital through the
issuance and sale of debt or equity securities also compete with the Bank in the
acquisition of deposits.
In order to compete with the other financial institutions in their market areas,
the Bank relies principally upon local promotional activity, personal contacts
by its officers, directors, employees and Company shareholders, and specialized
services. In conjunction with the Bank's business plan to serve the financial
needs of local residents and small-to medium-sized businesses, it also relies on
officer calling programs to existing and prospective customers, focusing its
overall marketing efforts towards its local communities. The Bank's promotional
activities emphasize the advantages of dealing with a locally owned and
headquartered institution sensitive to the particular needs of its local
communities. For customers whose loan demands exceed the Bank's lending limit,
the Bank attempts to arrange for such loans on a participation basis with other
financial institutions.
The Bank's strategy for meeting the competition has been to maintain a sound
capital base and liquidity position, employ experienced management, concentrate
on particular segments of the market and offer customers a degree of personal
attention that, in the opinion of management, is not generally available through
the Bank's larger competitors.
7
Supervision And Regulation
- --------------------------
A. General
North Bay
North Bay, as a bank holding company, is subject to regulation under the Bank
Holding Company Act of 1956, as amended, and is registered with and subject to
the supervision of the Board of Governors of the Federal Reserve System ("the
Federal Reserve"). It is the policy of the Federal Reserve that each bank
holding company serve as a source of financial and managerial strength to its
subsidiary banks. The Federal Reserve has the authority to examine North Bay.
The Bank Holding Company Act requires North Bay to obtain the prior approval of
the Federal Reserve before acquisition of all or substantially all of the assets
of any bank or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition, North Bay would own or control, directly or
indirectly, more than 5% of the voting shares of such bank. Amendments to the
Bank Holding Company Act expand the circumstances under which a bank holding
company may acquire control of or all or substantially all of the assets of a
bank located outside the State of California.
North Bay may not engage in any business other than managing or controlling
banks or furnishing services to its subsidiaries, with the exception of certain
activities which, in the opinion of the Federal Reserve, are so closely related
to banking or to managing or controlling banks as to be incidental to banking.
The Gramm-Leach-Bliley Act, federal legislation enacted in 2000, offers bank
holding companies an opportunity to broaden the scope of activities engaged in
by electing to be treated as a financial holding company. A financial holding
company enjoys broader powers than a bank holding company, specifically
including the ability to own securities and insurance companies in addition to
financial institutions. North Bay became a financial Holding Company on August
23, 2000. In a letter to the Federal Reserve Bank of San Francisco dated October
14, 2004, North Bay suspended its financial holding company status and will
operate instead as a bank holding company. The change in status will not affect
any non-financial subsidiaries or activities currently being conducted by North
Bay, although it will mean that, future acquisitions or expansions of
non-financial activities may require prior Federal Reserve Board approval and
will be limited to those that are permissible for bank holding companies. North
Bay is generally prohibited from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company unless that company
is engaged in such authorized activities and the Federal Reserve approves the
acquisition.
North Bay and its subsidiaries are prohibited from engaging in certain tie in
arrangements in connection with any extension of credit, sale or lease of
property or provision of services. For example, with certain exceptions The
Vintage Bank may not condition an extension of credit on a customer obtaining
other services provided by it, North Bay or any other subsidiary, or on a
promise by the customer not to obtain other services from a competitor. In
addition, federal law imposes certain restrictions on transactions between The
Vintage Bank and its affiliates. As affiliates, The Vintage Bank and North Bay
are subject with certain exceptions, to the provisions of federal law imposing
limitations on and requiring collateral for extensions of credit by The Vintage
Bank to any affiliate.
The Bank
As a California state chartered bank , The Vintage Bank is subject to
regulation, supervision and periodic examination by the California Department of
Financial Institutions. As a member of the Federal Reserve System, The Vintage
Bank is also subject to regulation, supervision and periodic examination by the
Federal Reserve Bank of San Francisco. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation to the maximum amount permitted by law,
which is currently $100,000 per depositor in most cases. Insured banks are
subject to FDIC regulations applicable to all insured institutions.
The regulations of these state and federal bank regulatory agencies govern, or
will govern, most aspects of the Bank's businesses and operations, including but
not limited to, the scope of their business, its investments, its reserves
against deposits, the nature and amount of any collateral for loans, the timing
of availability of deposited funds, the issuance of securities, the payment of
dividends, bank expansion and bank activities, including real estate development
and insurance activities, and the payment of interest on certain deposits. The
Vintage Bank is also subject to the requirements and restrictions of various
consumer laws, regulations and the Community Reinvestment Act.
8
B. Payment of Dividends
North Bay Bancorp
The shareholders of North Bay are entitled to receive dividends when and as
declared by its Board of Directors, out of funds legally available, subject to
the dividends preference, if any, on preferred shares that may be outstanding
and also subject to the restrictions of the California Corporations Code. At
December 31, 2005, North Bay had no outstanding shares of preferred stock.
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 Trust Preferred 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.
The principal sources of cash revenue to North Bay are dividends and management
fees received from The Vintage Bank. The Bank's ability to make dividend
payments to North Bay is subject to state and federal regulatory restrictions.
The Bank
Under state law, the Board of Directors of a California state chartered bank may
declare a cash dividend, subject to the restriction that the amount available
for the payment of cash dividends is limited to the lesser of the bank's
retained earnings, or the bank's net income for the latest three fiscal years,
less dividends previously declared during that period, or, with the approval of
the Commissioner of Financial Institutions, to the greater of the retained
earnings of the bank, the net income of the bank for its last fiscal year or the
net income of the bank for its current fiscal year.
Federal Reserve regulations also govern the payment of dividends by a state
member bank. Under Federal Reserve regulations, dividends may not be paid unless
both capital and earnings limitations have been met. First, no dividend may be
paid if it would result in a withdrawal of capital or exceed the member bank's
net profits then on hand, after deducting its losses and bad debts. Exceptions
to this limitation are available only upon the prior approval of the Federal
Reserve and the approval of two-thirds of the member bank's shareholders.
Second, a state member bank may not pay a dividend without the prior written
approval of the Federal Reserve if the total of all dividends declared in one
year exceeds the total of net profits for that year plus the preceding two
calendar years, less any required transfers to surplus under state or federal
law.
The Federal Reserve has broad authority to prohibit a bank from engaging in
banking practices which it considers to be unsafe or unsound. It is possible,
depending upon the financial condition of the bank in question and other
factors, that the Federal Reserve may assert that the payment of dividends or
other payments by a member bank is considered an unsafe or unsound banking
practice and therefore, implement corrective action to address such a practice.
Accordingly, the future payment of cash dividends by The Vintage Bank to North
Bay will generally depend not only on the Bank's earnings during any fiscal
period but also on the Bank's meeting certain capital requirements and the
maintenance of adequate allowances for loan and lease losses.
C. Change in Control
The Bank Holding Company Act of 1956, as amended and the Change in Bank Control
Act of 1978, as amended, together with regulations of the Federal Reserve,
require that, depending on the particular circumstances, either Federal Reserve
approval must be obtained or notice must be furnished to the Federal Reserve and
not disapproved prior to any person or company acquiring "control" of a state
member bank, such as the Bank, subject to exemptions for some transactions.
Control is conclusively presumed to exist if an individual or company acquires
25% or more of any class of voting securities of the bank. Control is rebuttably
presumed to exist if a person acquires 10% or more but less than 25% of any
class of voting securities and either the company has registered securities
under Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or no other person will own a greater percentage of that class
of voting securities immediately after the transaction.
D. Capital Standards
The Federal Reserve and other federal banking agencies have risk-based capital
adequacy guidelines intended to provide a measure of capital adequacy that
reflects the degree of risk associated with a banking organization's operations
for both transactions reported on the balance sheet as assets, and transactions,
such as letters of credit and recourse arrangements, which are reported as
9
off-balance-sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off-balance-sheet items are multiplied
by one of several risk adjustment percentages, which range from 0% for assets
with low credit risk, such as certain U.S. government securities, to 100% for
assets with relatively higher credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off-balance-sheet
items. The regulators measure risk-adjusted assets and off-balance-sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock and minority
interests in certain subsidiaries, less most other intangible assets. Trust
preferred securities are also considered Tier 1 capital for regulatory purposes
up to 25% of capital. Tier 2 capital may consist of a limited amount of the
allowance for possible loan and lease losses and certain other instruments with
some characteristics of equity. The inclusion of elements of Tier 2 capital is
subject to certain other requirements and limitations of the federal banking
agencies. Since December 31, 1992, the federal banking agencies have required a
minimum ratio of qualifying total capital to risk-adjusted assets and
off-balance-sheet items of 8%, and a minimum ratio of Tier 1 capital to
risk-adjusted assets and off-balance-sheet items of 4%.
In addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to average
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio is
at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
A member bank that does not achieve and maintain the required capital levels may
be issued a capital directive by the Federal Reserve to ensure the maintenance
of required capital levels. As discussed above, the Company and the Bank are
required to maintain certain levels of capital. The regulatory capital
guidelines as well as the actual capitalization for the Bank and the Company on
a consolidated basis as of December 31, 2005 follow:
(In 000's)
To Be Well Capitalized
Under Prompt
Corrective Action
Actual For Capital Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2005:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Consolidated $ 66,599 13.01% $ 40,801 >8.00% $ 51,001 >10.00%
The Vintage Bank 61,342 11.99% 40,794 >8.00% 50,992 >10.00%
TIER 1 (TO RISK WEIGHTED ASSETS)
Consolidated $ 61,532 12.02% $ 20,401 >4.00% $ 30,601 >6.00%
The Vintage Bank 56,275 11.00% 20,397 >4.00% 30,595 >6.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS)
Consolidated $ 61,532 9.87% $ 24,929 >4.00% $ 31,162 >5.00%
The Vintage Bank 56,275 9.11% 24,702 >4.00% 30,878 >5.00%
Imposition of Liability for Undercapitalized Subsidiaries.
Bank regulators are required to take "prompt corrective action" to resolve
problems associated with insured depository institutions whose capital declines
below certain levels. In the event an institution becomes "undercapitalized," it
must submit a capital restoration plan. The capital restoration plan will not be
10
accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiary's compliance with the
capital restoration plan up to a certain specified amount. Any such guarantee
from a depository institutions holding company is entitled to a priority of
payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is
limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Federal Reserve
approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.
E. Impact of Monetary Policies
The earnings and growth of the Bank are subject to the influence of domestic and
foreign economic conditions, including inflation, recession and unemployment.
The earnings of the Bank are affected not only by general economic conditions
but also by the monetary and fiscal policies of the United States and federal
agencies, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United States Government securities
and by its control of the discount rates applicable to borrowings by banks from
the Federal Reserve System. The actions of the Federal Reserve in these areas
influence the growth of bank loans, investments and deposits and affect the
interest rates charged on loans and paid on deposits. The Federal Reserve's
policies have had a significant effect on the operating results of commercial
banks and are expected to continue to do so in the future. The nature and timing
of any future changes in monetary policies are not predictable.
F. Extensions of Credit to Insiders and Transactions with Affiliates
Extensions of Credit to Insiders
The Federal Reserve Act and Federal Reserve Regulation O place limitations and
conditions on loans or extensions of credit to a bank's or bank holding
company's executive officers, directors and principal shareholders (i.e., in
most cases, those persons who own, control or have power to vote more than 10%
of any class of voting securities); any company controlled by any such executive
officer, director or shareholder; or any political or campaign committee
controlled by such executive officer, director or principal shareholder.
Loans extended to any of the above persons must comply with loan-to-one-borrower
limits, require prior full board approval when aggregate extensions of credit to
such person exceed specified amounts, must be made on substantially the same
terms (including interest rates and collateral) as, and follow
credit-underwriting procedures that are not less stringent than, those
prevailing at the time for comparable transactions with non-insiders, and must
not involve more than the normal risk of repayment or present other unfavorable
features. Regulation O also prohibits a bank from paying an overdraft on an
account of an executive officer or director, except pursuant to a written
pre-authorized interest-bearing extension of credit plan that specifies a method
of repayment or a written pre-authorized transfer of funds from another account
of the officer or director at the bank.
Restrictions on Transactions with Affiliates and Insiders.
Transactions between the holding company and its subsidiaries, including the
Bank, are subject to Section 23A of the Federal Reserve Act, and to the
requirements of Regulation W. In general, Section 23A imposes limits on the
amount of such transactions, and also requires certain levels of collateral for
loans to affiliated parties. It also limits the amount of advances to third
parties, which are collateralized by the securities, or obligations of the
Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal Reserve
Act, and to the requirements of Regulation W which generally requires that
certain transactions between the holding company and its affiliates be on terms
substantially the same, or at least as favorable to the Bank, as those
prevailing at the time for comparable transactions with or involving other
nonaffiliated persons.
G. Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act. This legislation eliminates many of the barriers that have separated the
insurance, securities and banking industries since the Great Depression. The
federal banking agencies (the Federal Reserve, FDIC and the Office of the
Comptroller of the Currency) among others, continue to draft regulations to
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implement the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act is the result
of a decade of debate in the Congress regarding a fundamental reformation of the
nation's financial system. The law is subdivided into seven titles, by
functional area.
The major provisions of the Gramm-Leach-Bliley Act are:
Financial Holding Companies and Financial Activities
Title I establishes a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other financial
service providers by revising and expanding the BHC Act framework to permit a
holding company system to engage in a full range of financial activities through
qualification as a new entity known as a financial holding company.
Activities permissible for financial subsidiaries of state member banks,
include, but are not limited to, the following: (a) Lending, exchanging,
transferring, investing for others, or safeguarding money or securities; (b)
Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness,
disability, or death, or providing and issuing annuities, and acting as
principal, agent, or broker for purposes of the foregoing, in any State; (c)
Providing financial, investment, or economic advisory services, including
advising an investment company; (d) Issuing or selling instruments representing
interests in pools of assets permissible for a bank to hold directly; and (e)
Underwriting, dealing in, or making a market in securities.
Securities Activities
Title II narrows the exemptions from the securities laws previously enjoyed by
banks, requires the Federal Reserve and the SEC to continue to work together to
draft rules governing certain securities activities of banks, and creates a new,
voluntary investment bank holding company.
Insurance Activities
Title III restates the proposition that the states are the functional regulators
for all insurance activities, including the insurance activities of
federally-chartered banks, and bars the states from prohibiting insurance
activities by depository institutions. The law encourages states to develop
uniform or reciprocal rules for the licensing of insurance agents.
Privacy.
Title V of the Gramm-Leach-Bliley Act requires federal banking regulators to
implement the privacy provisions of Title V. Pursuant to the rules, financial
institutions must provide
o initial notices to customers about their privacy policies, describing
the conditions under which they may disclose nonpublic personal
information to nonaffiliated third parties and affiliates;
o annual notices of their privacy policies to current customers; and
o a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
As of December 31, 2005, the Bank was in compliance with the privacy provisions
of the Gramm-Leach-Bliley Act and the implementing regulations promulgated by
the Federal Reserve, and subsequently, as necessary, has updated and enhanced
its procedure and practice in this critical area.
Safeguarding Confidential Customer Information.
Under Title V of the Gramm-Leach-Bliley Act, financial institutions are required
to establish an information security program to:
o identify and assess the risks that may threaten customer information;
o develop a written plan containing policies and procedures to manage
and control these risks;
o implement and test the plan; and
o adjust the plan on a continuing basis to account for changes in
technology, the sensitivity of customer information and internal or
external threats to information security.
The Bank has implemented a security program appropriate to its size and
complexity and the nature and scope of its operations.
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H. Bank Secrecy Act
The Bank Secrecy Act ("BSA") was enacted by Congress to combat money
laundering, the process of converting cash proceeds from illegal activities,
primarily drug dealing and international terrorism, into financial assets that
appear legitimate. The purpose of the BSA is to "require certain reports and
records where they have a high degree of usefulness in criminal, tax, or
regulatory proceedings". The BSA has recently been enhanced by the provisions of
the USA PATRIOT Act, which is discussed below.
Under the BSA, a financial institution must have a written BSA compliance
program and policies. The major provisions of the BSA, applicable to the Bank,
require banks to:
o Report any transaction which results in cash into or out of the
financial institution in an amount over $10,000 to the Internal
Revenue Service ("IRS");
o Obtain and maintain certain identifying information about any
purchaser of a bank check or draft, cashier's check, money order, or
traveler's check for $3,000 or more;
o Retain all records required by the BSA for five years in such a way as
to be accessible within a reasonable period of time;
o Establish a Customer Identification Program; and
o Report certain suspicious activities related to the BSA to the
Financial Crimes Enforcement Network ("FinCen").
The Bank has adopted a BSA compliance program and policies that comply with
the provisions of the BSA.
I. Community Reinvestment Act Sunshine Requirements.
CRA Sunshine regulations require nongovernmental entities or persons and insured
depository institutions and affiliates that are parties to written agreements
made in connection with the fulfillment of the institution's CRA obligations to
make available to the public and the federal banking agencies a copy of each
such agreement. The regulations impose annual reporting requirements concerning
the disbursement, receipt and use of funds or other resources under each such
agreement.
The Bank is not a party to any agreement that would be the subject of reporting
pursuant to the CRA Sunshine Requirements.
The Bank intends to comply with all provisions of the Gramm-Leach-Bliley Act and
all implementing regulations.
J. Consumer Protection Laws and Regulations
The bank regulatory agencies are focusing greater attention on compliance with
consumer protection laws and their implementing regulations. Examination and
enforcement have become more intense in nature, and insured institutions have
been advised to monitor carefully compliance with such laws and regulations. The
Bank is subject to many federal consumer protection statutes and regulations,
some of which are discussed below.
The Community Reinvestment Act ("CRA") is intended to encourage insured
depository institutions, while operating safely and soundly, to help meet the
credit needs of their communities. The CRA specifically directs the federal
regulatory agencies, in examining insured depository institutions, to assess a
bank's record of helping meet the credit needs of its entire community,
including low- and moderate-income neighborhoods, consistent with safe and sound
banking practices. The CRA further requires the agencies to take a financial
institution's record of meeting its community credit needs into account when
evaluating applications for, among other things, domestic branches, mergers or
acquisitions, or holding company formations. The agencies use the CRA assessment
factors in order to provide a rating to the financial institution. The ratings
range from a high of "outstanding" to a low of "substantial noncompliance." The
Vintage Bank was examined as of July 11, 2005 and was rated satisfactory.
The Equal Credit Opportunity Act ("ECOA") generally prohibits discrimination in
any credit transaction, whether for consumer or business purposes, on the basis
of race, color, religion, national origin, sex, marital status, age (except in
limited circumstances), receipt of income from public assistance programs, or
good faith exercise of any rights under the Consumer Credit Protection Act.
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The Truth in Lending Act ("TILA") is designed to ensure that credit terms are
disclosed in a meaningful way so that consumers may compare credit terms more
readily and knowledgeably. As a result of the TILA, all creditors must use the
same credit terminology to express rates and payments, including the annual
percentage rate, the finance charge, the amount financed, the total of payments
and the payment schedule, among other things.
The Fair Housing Act ("FH Act") regulates many practices, including making it
unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin,
sex, handicap or familial status. A number of lending practices have been found
by the courts to be, or may be considered, illegal under the FH Act, including
some that are not specifically mentioned in the FH Act itself.
The Home Mortgage Disclosure Act ("HMDA") grew out of public concern over credit
shortages in certain urban neighborhoods and provides public information that
will help show whether financial institutions are serving the housing credit
needs of the neighborhoods and communities in which they are located. The HMDA
also includes a "fair lending" aspect that requires the collection and
disclosure of data about applicant and borrower characteristics as a way of
identifying possible discriminatory lending patterns and enforcing
anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act ("RESPA") requires lenders to
provide borrowers with disclosures regarding the nature and cost of real estate
settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks,
and places limitations on the amount of escrow accounts. Penalties under the
above laws may include fines, reimbursements and other penalties.
Due to heightened regulatory concern related to compliance with the CRA, TILA,
FH Act, ECOA, HMDA and RESPA generally, the Bank may incur additional compliance
costs or be required to expend additional funds for investments in its local
community.
K. Recent and Proposed Legislation
The operations of North Bay and the Bank are subject to extensive regulation by
federal, state, and local governmental authorities and are subject to various
laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of their respective operations. North Bay believes
that it is in substantial compliance in all material respects with applicable
federal, state, and local laws, rules and regulations. Because the business of
North Bay and the Bank is highly regulated, the laws, rules and regulations
applicable to each of them are subject to regular modification and change.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are frequently
made in Congress, in the California legislature and before various bank
regulatory agencies.
Sarbanes-Oxley Act
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002
("SOX") implementing legislative reforms intended to address corporate and
accounting fraud. In addition to the establishment of a new accounting oversight
board which will enforce auditing, quality control and independence standards
and will be funded by fees from all publicly traded companies, the bill
restricts provision of both auditing and consulting services by accounting
firms. To ensure auditor independence, any non-audit services being provided to
an audit client will require pre-approval by the company's audit committee
members. In addition, the audit partners must be rotated. The Act requires chief
executive officers and chief financial officers, or their equivalent, to certify
to the accuracy of periodic reports filed with the SEC, subject to civil and
criminal penalties if they knowingly or willfully violate this certification
requirement. In addition, under the Act, legal counsel will be required to
report evidence of a material violation of the securities laws or a breach of
fiduciary duty by a company to its chief executive officer or its chief legal
officer, and, if such officer does not appropriately respond, to report such
evidence to the audit committee or other similar committee of the board of
directors or the board itself.
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Longer prison terms and increased penalties will also be applied to corporate
executives who violate federal securities laws, the period during which certain
types of suits can be brought against a company or its officers has been
extended, and bonuses issued to top executives prior to restatement of a
company's financial statements are now subject to disgorgement if such
restatement was due to corporate misconduct. Executives are also prohibited from
insider trading during retirement plan "blackout" periods, and loans to company
executives are restricted. SOX accelerates the time frame for disclosures by
public companies, as they must immediately disclose any material changes in
their financial condition or operations. Directors and executive officers must
also provide information for most changes in ownership in a company's securities
within two business days of the change.
SOX also prohibits any officer or director of a company or any other person
acting under their direction from taking any action to fraudulently influence,
coerce, manipulate or mislead any independent public or certified accountant
engaged in the audit of the company's financial statements for the purpose of
rendering the financial statement's materially misleading. SOX also requires the
SEC to prescribe rules requiring inclusion of an internal control report and
assessment by management in the annual report to stockholders. In addition, SOX
requires that each financial report required to be prepared in accordance with
(or reconciled to) accounting principles generally accepted in the United States
of America and filed with the SEC reflect all material correcting adjustments
that are identified by a "registered public accounting firm" in accordance with
accounting principles generally accepted in the United States of America and the
rules and regulations of the SEC.
As directed by Section 302(a) of SOX, the Company's chief executive officer and
chief financial officer were each required to certify that the Company's
Quarterly and Annual Reports do not contain any untrue statement of a material
fact. The rules have several requirements, including having these officers
certify that: they are responsible for establishing, maintaining and regularly
evaluating the effectiveness of Company's disclosure and internal controls; they
have made certain disclosures to North Bay's auditors and the audit committee of
the Board of Directors about the Company's disclosure and internal controls; and
they have included information in the Company's Quarterly and Annual Reports
about their evaluation and whether there have been significant changes in the
Company's disclosure and internal controls or in other factors that could
significantly affect internal controls subsequent to the evaluation. North Bay
is subject to the requirements with respect to internal control, beginning with
this 2005 Annual report on Form 10-K.
USA PATRIOT Act
In the wake of the tragic events of September 11th, on October 26, 2001, the
President signed the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001.
Under the USA PATRIOT Act, financial institutions are subject to prohibitions
against specified financial transactions and account relationships as well as
enhanced due diligence and "know your customer" standards in their dealings with
foreign financial institutions and foreign customers. For example, the enhanced
due diligence policies, procedures, and controls generally require financial
institutions to take reasonable steps:
o To conduct enhanced scrutiny of account relationships to guard against
money laundering and report any suspicious transaction;
o To ascertain the identity of the nominal and beneficial owners of, and
the source of funds deposited into, each account as needed to guard
against money laundering and report any suspicious transactions;
o To ascertain for any foreign bank, the shares of which are not
publicly traded, the identity of the owners of the foreign bank, and
the nature and extent of the ownership interest of each such owner;
and
o To ascertain whether any foreign bank provides correspondent accounts
to other foreign banks and, if so, the identity of those foreign banks
and related due diligence information.
Under the USA PATRIOT Act, financial institutions must establish anti-money
laundering programs. The USA PATRIOT Act sets forth minimum standards for these
programs, including:
o The development of internal policies, procedures, and controls;
o The designation of a compliance officer;
o An ongoing employee training program; and
o An independent audit function to test the programs.
On June 20, 2002, the Board of Directors of the Bank adopted comprehensive
policies and procedures to address the requirements of the USA PATRIOT Act, and
management believes that the Bank is currently in full compliance with the Act.
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California Financial Information Privacy Act/Fair Credit Reporting Act
In 1970, the federal Fair Credit Reporting Act (the "FCRA") was enacted to
insure the confidentiality, accuracy, relevancy and proper utilization of
consumer credit report information. Under the framework of the FCRA, the United
States has developed a highly advanced and efficient credit reporting system.
The information contained in that broad system is used by financial
institutions, retailers and other creditors of every size in making a wide
variety of decisions regarding financial transactions. Employers and law
enforcement agencies have also made wide use of the information collected and
maintained in databases made possible by the FCRA. The FCRA affirmatively
preempts state law in a number of areas, including the ability of entities
affiliated by common ownership to share and exchange information freely, and the
requirements on credit bureaus to reinvestigate the contents of reports in
response to consumer complaints, among others.
The California Financial Information Privacy Act ("CFIPA"), which was enacted in
2003, requires a financial institution to provide specific information to a
consumer related to the sharing of that consumer's nonpublic personal
information. The Act would allow a consumer to direct the financial institution
not to share his or her nonpublic personal information with affiliated or
nonaffiliated companies with which a financial institution has contracted to
provide financial products and services, and would require that permission from
each such consumer be acquired by a financial institution prior to sharing such
information. These provisions are much more restrictive than the privacy
provisions of the Financial Services Modernization Act. Provisions of the CFIPA
are currently subject to litigation.
Congress enacted the FACT Act, ("Fair and Accurate Credit Transaction Act") of
2003, which has the effect of avoiding the sunset preemption provision of the
Fair Credit Reporting Act (FCRA) that were due to expire on December 31, 2003.
The President signed the FACT Act into law on December 4, 2003. In general, the
FACT Act amends the FCRA and, in addition, provides that, when the implementing
regulations have been issued and become effective, the FACT Act preempts
elements of the California Financial Information Privacy Act. A series of
regulations and announcements were promulgated during 2004, including a joint
FTC/Federal Reserve announcement of effective dates for FCRA amendments, the
FTC's "Free Credit Report" rule, revisions to the FTC's FACT Act Rules, the
FTC's final rules on identity theft and proof of identity, the FTC's final
regulation on consumer information and records disposal, and the FTC's final
summaries and notices. On January 24, 2005, the FTC issued a final rule on
prescreen notices.
Check 21 Act
The Check Clearing for the 21st Century Act ("Check 21 Act" or "the Act"),
enacted in late 2003, became effective on October 28, 2004. The Act creates a
new negotiable instrument, called a "substitute check", which banks are required
to accept as the legal equivalent of a paper check if it meets the requirements
of the Act. The Act is designed to facilitate check truncation, to foster
innovation in the check payment system, and to improve the payment system by
shortening processing times and reducing the volume of paper checks.
Federal Reserve Board Final Rule on Trust Preferred Securities
On March 1 the Federal Reserve Board issued a final rule that allows the
continued inclusion of trust preferred securities in the tier 1 capital of bank
holding companies. Trust preferred securities, however, will be subject to
stricter quantitative limits. Key components of the final rule are:
o Trust preferred securities, together with other "restricted core
capital elements", can be included in a bank holding company's tier 1
capital up to 25% of the sum of core capital elements, including
"restricted core capital elements";
o Restricted core capital elements are defined to include:
o qualifying trust preferred securities;
o qualifying cumulative perpetual preferred stock (and related surplus);
o minority interest related to qualifying cumulative perpetual preferred
stock directly issued by a consolidated U.S. depository institution or
foreign bank subsidiary; and
o minority interest related to qualifying common or qualifying perpetual
preferred stock issued by a consolidated subsidiary that is neither a
U.S. depository institution or foreign bank subsidiary
o The sum of core capital elements will be calculated net of goodwill,
less any associated deferred tax liability;
o Internationally active bank holding companies are further limited, and
must limit restricted core capital elements to 15% of the sum of core
capital elements, including restricted core capital elements, net of
goodwill, although they may include qualifying mandatory convertible
preferred securities up to the 25% limit;
o A five-year transition period for application of quantitative limits,
ending March 31, 2009.
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L. Other
Various other legislation, including proposals to overhaul the bank regulatory
system and to limit the investments that a depository institution may make with
insured funds, is introduced into Congress or the California Legislature from
time to time. North Bay and the Bank cannot determine the ultimate effect that
any potential legislation, if enacted, or regulations promulgated thereunder,
would have upon the financial condition or operations of the North Bay or the
Bank.
Item 1(a) RISK FACTORS
Our financial results are subject to a number of risks. The factors discussed
below are intended to highlight risks that management believes are most relevant
to our current operating environment. This listing is not intended to capture
all risks associated with our business. Additional risks, including those
generally affecting the industry in which we operate, risks that we currently
deem immaterial and risks generally applicable to companies that have recently
undertaken similar transactions, may also negatively impact our consolidated
financial position, consolidated results of operations, or liquidity.
We depend on cash dividends from our subsidiary bank to meet our cash
obligations. As a holding company, dividends from our subsidiary bank provide a
substantial portion of our cash flow used to service the interest payments on
our trust preferred securities and our other obligations, including cash
dividends. Various statutory provisions restrict the amount of dividends our
subsidiary bank can pay to us without regulatory approval.
Anti-Takeover Provisions may hinder a non-negotiated merger or other business
combination, which, in turn, could adversely affect the market price of our
common stock. Provisions of our articles of incorporation, bylaws and federal
banking laws, including regulatory approval requirements, could make it more
difficult for a third party to acquire us, even if doing so would be perceived
to be beneficial to our shareholders. The combination of these provisions may
hinder a non-negotiated merger or other business combination, which, in turn,
could adversely affect the market price of our common stock.
Ability of North Bay to execute its business strategy may effect the financial
performance and profitability of North Bay and the Bank. The financial
performance and profitability of North Bay will depend on its ability to execute
its strategic plan and manage its future growth. Moreover, North Bay's future
performance is subject to a number of factors beyond its control, including
pending and future federal and state banking legislation, regulatory changes,
unforeseen litigation outcomes, inflation, lending and deposit rate changes,
interest rate fluctuations, increased competition and economic conditions.
Accordingly, these issues could have a material adverse effect on North Bay's
business, financial condition, results of operations or liquidity.
North Bay's and the Bank's success depends on key personnel. North Bay's and the
Bank's success depends to a significant extent on the management skills of its
existing executive officers and directors, many of whom have held officer and
director positions with North Bay or the Bank for many years. The loss or
unavailability of any of their key executives or directors could have a material
adverse effect on North Bay's and the Bank's business, financial condition,
results of operations or liquidity. See also Part III, Item 10, "Directors and
Executive Officers of Registrant".
Deterioration of local economic conditions could hurt profitability of North Bay
and the Bank. The operations of the Bank are primarily located in Napa County
and surrounding areas. The operations of Solano Bank, a Division of the Bank are
primarily located in Solano County. As a result of this geographic
concentration, the Bank's results depend largely upon economic conditions in
these areas. Adverse local economic conditions in Napa and Solano counties may
have a material adverse effect on the financial condition and results of
operations of North Bay and the Bank.
Financial services business is highly competitive which could adversely affect
the North Bay's and the Bank's earnings and profitability. The banking and
financial services business in California, and in the Bank's market area, is
highly competitive. These banks compete, or will compete, for loans, deposits
and customers for financial services with other commercial banks, savings and
loan associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions and
other nonbank financial service providers. Many of these competitors are much
17
larger in total assets and capitalization, have greater access to capital
markets and offer a broader array of financial services than the Bank. There can
be no assurance that the Bank will be able to compete effectively in its
markets, and the results of operations of North Bay and the Bank could be
materially and adversely affected if the nature or level of competition changes.
See Item 1, Business - Competition."
Loan and lease losses could hurt North Bay's and the Bank's operating results. A
significant source of risk for financial institutions like North Bay and the
Bank arises from the possibility that losses will be sustained because
borrowers, guarantors and related parties fail to perform in accordance with the
terms of their loans. North Bay and the Bank have adopted underwriting and
credit monitoring procedures and credit policies, including establishment and
review of the allowance for credit losses; tracking loan performance; and
diversifying their credit portfolios. These policies and procedures, however,
may not prevent unexpected losses which could materially adversely affect their
results of operations.
Deterioration of real estate market could hurt North Bay's and the Bank's
performance. At December 31, 2005, approximately 78% of the Bank's loans were
secured by real estate. The ability of the Bank to continue to originate real
estate secured loans may be impaired by adverse changes in local and regional
economic conditions in the real estate market, increasing interest rates, or by
acts of nature, including earthquakes and flooding. Due to the concentration of
real estate collateral, these events could have a material adverse impact on the
value of the collateral resulting in losses to the Bank.
We also have a concentration in higher risk commercial real estate loans. We
also have a high concentration in commercial real estate or CRE loans.
Approximately 54% of our lending portfolio can be classified as CRE lending. CRE
loans generally involve a higher degree of credit risk than residential mortgage
lending due, among other things, to the large amounts loaned to individual
borrowers. Losses incurred on loans to a small number of borrowers could have a
material adverse impact on our income and financial condition. In addition,
unlike residential mortgage loans, commercial real estate loans generally depend
on the cash flow from the property to service the debt. Cash flow may be
significantly affected by general economic conditions.
Banking regulators have recently issued proposed guidance regarding institutions
that have particularly high concentrations of CRE within their lending
portfolios. This guidance suggests that institutions that exceed certain levels
of CRE lending may be required, in the future, to maintain higher capital ratios
than institutions with lower concentrations in CRE lending. At December 31,
2005, the Bank's CRE level exceeded the threshold for such concentrations. If
and when this proposed guidance becomes final, we may be subject to enhanced
regulatory scrutiny and subject to higher capital requirements.
Interest rate fluctuations could hurt operating results. The income of North Bay
and the Bank depends to a great extent on "interest rate differentials" and the
resulting net interest margins; that is, the difference between the interest
rates earned on their interest-earning assets such as loans and investment
securities, and the interest rates paid on their interest-bearing liabilities
such as deposits and borrowings. These rates are highly sensitive to many
factors which are beyond the Bank's control, including general economic
conditions and the policies of various government and regulatory agencies, in
particular, the Federal Reserve. In addition, changes in monetary policy,
including changes in interest rates, influence the origination of loans, the
purchase of investments and the generation of deposits and affect the rates
received on loans and investment securities and paid on deposits, which could
have a material adverse effect on business, financial condition and results of
operations.
Government regulation and legislation could hurt business and prospects of North
Bay and the Bank. North Bay and the Bank are subject to extensive state and
federal regulation, supervision and legislation which govern almost all aspects
of their respective operations. Their businesses are particularly susceptible to
the enactment of federal and state legislation which may have the effect of
increasing or decreasing the cost of doing business, modifying permissible
activities or enhancing the competitive position of other financial
institutions. These laws are subject to change from time to time and are
primarily intended for the protection of consumers, depositors and the deposit
insurance funds and not for the protection of shareholders of bank holding
companies or banks. North Bay cannot predict what effect any presently
contemplated or future changes in the laws or regulations or their
interpretations would have on its business and prospects, but it could be
material and adverse
Environmental liability associated with commercial lending could result in
losses. In the course of business, the Bank has acquired, and the Bank may in
the future acquire, through foreclosure, properties securing loans they have
originated or purchased which are in default. In commercial real estate lending,
there is a risk that hazardous substances could be discovered on these
properties. In this event, an affected bank might be required to remove these
substances from the affected properties at its sole cost and expense. The cost
of this removal could substantially exceed the value of affected properties.
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North Bay or the Bank, as the case may be, may not have adequate remedies
against the prior owner or other responsible parties or could find it difficult
or impossible to sell the affected properties. This could have a material
adverse effect on North Bay's and the Bank's business, financial condition and
operating results.
North Bay and the Bank rely heavily on technology and computer systems and
computer failure could result in loss of business and adversely affect the
business and operations of North Bay and the Bank . Advances and changes in
technology can significantly impact the business and operations of North Bay and
the Bank. They may face many challenges including the increased demand for
providing computer access to bank accounts and the systems to perform banking
transactions electronically. North Bay's and the Bank's ability to compete
depends on their ability to continue to adapt technology on a timely and
cost-effective basis to meet these demands. In addition, the businesses and
operations of North Bay and the Bank are susceptible to negative impacts from
computer system failures, communication and energy disruption, and unethical
individuals with the technological ability to cause disruptions or failures of
their respective data processing systems.
Breach of information security and technology dependence could have a material
adverse effect on the North Bay's and the Bank's business, financial condition,
results of operations or liquidity. Despite instituted safeguards, North Bay and
the Bank cannot be certain that all of its systems are entirely free from
vulnerability to attack or other technological difficulties or failures. North
Bay and the Bank rely on the services of a variety of vendors to meet its data
processing and communication needs. If information security is breached or other
technology difficulties or failures occur, information may be lost or
misappropriated, services and operations may be interrupted and North Bay and
the Bank could be exposed to claims from customers. Any of these results could
have a material adverse effect on North Bay's and the Bank's business, financial
condition, results of operations or liquidity.
Item 1(b). UNRESOLVED STAFF COMMENTS
None.
Item 2 - PROPERTIES
The Company is engaged in the banking business through thirteen (13) offices in
Napa County and Solano County in Northern California. All offices are
constructed and equipped to meet prescribed security requirements.
The Company owns three branch office locations and leases seven branch office
locations and three administrative facilities. Most of the leases contain
multiple renewal options and provisions for rental increases, principally for
changes in the cost of living index, property taxes and maintenance.
Item 3 - LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are party to any material pending legal
proceeding, nor is their property the subject of any material pending legal
proceeding, except routine legal proceedings arising in the ordinary course of
their business. None of these proceedings is expected to have a material adverse
impact upon the Company's business, consolidated financial position or results
of operations.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders during the fourth
quarter of 2005.
19
PART II
Item 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER'S PURCHASES OF EQUITY SECURITIES
(a) The Company's common stock is traded on the Nasdaq National Market System
under the symbol NBAN effective September 3, 2002.
The following table (adjusted for the 2006, 2005 and 2004 stock dividends and
stock splits) summarizes the common stock high and low prices based upon
transactions of which the Company is aware:
Quarter ended High Low
------------- ---- ---
March 31, 2004 $ 20.41 $ 18.08
June 30, 2004 $ 21.30 $ 18.74
September 30, 2004 $ 19.80 $ 16.95
December 31, 2004 $ 27.44 $ 18.02
March 31, 2005 $ 31.30 $ 24.88
June 30, 2005 $ 28.81 $ 22.88
September 30, 2005 $ 29.98 $ 23.81
December 31, 2005 $ 28.76 $ 24.86
There may be other transactions of which the Company is not aware and,
accordingly, they are not reflected in the range of actual sales prices stated.
Further, quotations reflect inter-dealer prices without retail mark-up, markdown
or commission and may not represent actual transactions. Additionally, since
trading in the Company's common stock is limited, the range of prices stated are
not necessarily representative of prices that would result from a more active
market.
On October 28, 2002, the Board of Directors of North Bay Bancorp declared a
dividend of one share purchase right (a "Right") for each outstanding share of
common stock, no par value of the Company, payable on December 6, 2002 to
shareholders of record as of November 15, 2002. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share (a
"Unit") of Series A Preferred Stock (the "Preferred Stock") of the Company, at a
price of $90.00 per Unit, subject to adjustment. The Rights are only exercisable
in the event of certain changes in control. The Description and terms of the
Rights are set forth in a Rights Agreement between the Company and Registrar and
Transfer Company, as Rights Agent.
The Company paid cash dividends of $0.14 per share in 2005 and $0.11 per share
in 2004. The holders of common stock of Bancorp are entitled to receive cash
dividends when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends. The Company had a 3-for-2 stock split on
December 16, 2004.
On February 27, 2006, the Board of Directors of Bancorp declared a $0.15 per
share cash dividend and a 5% stock dividend payable April 12, 2006 to
shareholders of record on March 22, 2006.
North Bay Bancorp is restricted in its ability to pay dividends to its
shareholders. For a discussion of restrictions imposed, see "SUPERVISION and
REGULATION - Payment of Dividends."
As of March 13, 2006, there were 912 holders of record of North Bay Bancorp's
common stock.
(b) Inapplicable
(c) Inapplicable
20
The following chart provides information as of December 31, 2005 concerning the
Company's Stock Option Plan, the Company's only equity compensation plan:
Number of securities remainging
Number of Securities Weighted avearage available for future issuance
to be issued exercise exercise price of under equity compensation
of outstanding options, outstanding options, plans (excluding secutities
warrants, and rights warrants and rights reflecting in column(a)
Plan Category a b c
- -------------------- -------------------- ------------------- -----------------------
Equity compensation plan
approved by security holder 534,419 $ 15.47 234,486
Equity compensation plans not
approved by security holders- -- -- --
Total 534,419 $ 15.47 234,486
21
Item 6 - SELECTED FINANCIAL DATA
The following table presents a summary of selected consolidated data for North
Bay Bancorp and subsidiaries (the Company) for the five years ended December 31,
2005. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto appearing elsewhere in the
annual report:
(In 000's except share and per share data)
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
Interest income $ 33,865 $ 26,585 $ 22,251 $ 21,179 $ 20,307
Interest expense 5,082 3,543 2,995 3,691 5,887
---------- ---------- ---------- ---------- ----------
Net interest income 28,783 23,042 19,256 17,488 14,420
Provision for loan losses 815 620 238 576 447
---------- ---------- ---------- ---------- ----------
Net interest income after
provision loan losses 27,968 22,422 19,018 16,912 13,973
Noninterest income 3,941 4,198 3,847 3,111 2,691
Noninterest expense 21,171 18,536 16,315 14,316 11,955
Provision for income taxes 4,105 3,020 2,179 1,999 1,687
---------- ---------- ---------- ---------- ----------
Net income $ 6,633 $ 5,064 $ 4,371 $ 3,708 $ 3,022
========== ========== ========== ========== ==========
BASIC PER SHARE DATA: (1)
Earnings per share $ 1.63 $ 1.26 $ 1.11 $ 0.97 $ 0.81
Average shares outstanding 4,074,163 4,011,405 3,939,386 3,825,886 3,744,370
DILUTED PER SHARE DATA: (1)
Earnings per share $ 1.56 $ 1.23 $ 1.08 $ 0.95 $ 0.80
Average shares outstanding 4,254,100 4,116,168 4,034,495 3,921,395 3,785,347
BALANCE SHEET DATA:
Total assets $ 602,697 $ 562,063 $ 459,482 $ 416,458 $ 326,806
Net loans 409,504 373,629 303,139 234,337 183,548
Total deposits 516,393 484,493 406,445 367,803 292,441
Shareholders' equity 50,053 44,134 39,441 35,343 29,980
_________________
(1) All per share amounts have been adjusted to reflect the 5% stock dividends
declared January 29, 2001, January 28, 2002, January 27, 2003, January 26,
2004, January 24, 2005 and February 27, 2006 as well as a 3-for-2 stock
split declared November 22, 2004.
22
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENT
This Annual Report contains statements relating to future results of the Company
that are considered to be "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to,
among other things, loan loss reserve adequacy, accounting for
available-for-sale securities and deferred assets, simulation of changes in
interest rates and litigation results. Actual results may differ materially from
those expressed or implied as a result of certain risks and uncertainties
including, but not limited to, changes in political and economic conditions,
interest rate fluctuations, competitive product and pricing pressures within the
Company's markets, equity and fixed income market fluctuations, personal and
corporate customers' bankruptcies, inflation, acquisitions and integrations of
acquired businesses, technological change, changes in law, changes in fiscal,
monetary, regulatory and tax policies, monetary fluctuations, success in gaining
regulatory approvals when required as well as other risks and uncertainties.
These forward looking statements speak only as of the date on which these
statements are made, and the Company undertakes no obligation to update any
forward looking statement to reflect events or circumstances after the date on
which these statements are made or to reflect the occurrence of unanticipated
events.
Moreover, wherever phrases such as or similar to "in Management's opinion", or
"Management considers" are used, these statements are as of and based upon
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 risk and uncertainties noted above with respect to forward
looking statements.
This discussion should be read in conjunction with the financial statements and
the notes included herein.
OVERVIEW
Bancorp, organized November 1, 1999, is the holding company for the Bank, which
is a wholly owned subsidiary. Effective January 15, 2005, the Company merged
Solano Bank, previously a wholly owned subsidiary of Bancorp, into the Bank. The
Company reported net income of $6,633,000, or $1.56 per diluted share, in 2005
compared with $5,064,000, or $1.23 per diluted share, in 2004 and $4,371,000, or
$1.08 per diluted share, in 2003, equating to a return on average assets of
1.11%, .97% and 1.00% for years 2005, 2004 and 2003, respectively. The return on
average equity was 13.94% in 2005 compared with 12.34% and 11.70% in 2004 and
2003, respectively.
As of December 31, 2005, total assets were $602,697,000 compared with total
assets of $562,063,000 at year end 2004, representing a 7% increase in 2005.
Deposits increased 7% in 2005 and loans, net of the allowance for loan losses,
increased 10%.
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 quarterly 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, using 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, with each component having 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 consider them in determining the adequacy of 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 allowance
23
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 reserved, 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.
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
reporting purposes and such amounts as measured by tax laws and regulations. We
use an estimate of future earnings to support our position that the benefit of
our deferred tax assets will be realized. If future income should prove
non-existent or less than the amount of the deferred tax assets within the tax
years to which they may be applied, the asset may not be realized and our net
income will be reduced.
SUMMARY OF EARNINGS
Return on Equity and Assets
The following sets forth key ratios for the periods ending December 31, 2005,
2004 and 2003.
2005 2004 2003
---- ---- ----
Net income as a percentage of average assets 1.11% 0.97% 1.00%
Net income as a percentage of average equity 13.94% 12.34% 11.70%
Average equity as a percentage of average assets 7.99% 7.84% 8.50%
Dividends declared per share as a percentage of
net income per share 9.15% 11.27% 11.17%
Net Interest Income
Net interest income before provision for loan losses was $28,783,000,
$23,042,000 and $19,256,000 in 2005, 2004 and 2003, respectively, representing
increases of 25% in 2005 and 20% in 2004.
24
The following table sets forth average daily balances of assets, liabilities,
and shareholders' equity during 2005, 2004 and 2003, along with total interest
income earned and expense paid, and the average yields earned or rates paid
thereon and the net interest margin for the years ended December 31, 2005, 2004
and 2003.
($ In 000's)
December 31, 2005 December 31, 2004 December 31, 2003
----------------- ----------------- -----------------
Average Income/ Rate/ Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- ----- ------- ------- -----
ASSETS
Loans (1) $ 402,770 $ 28,516 7.08% $ 352,863 $ 22,828 6.47% $ 277,220 $ 18,782 6.78%
Investment securities:
Taxable 90,039 3,621 4.02% 78,007 2,945 3.78% 78,457 2,535 3.23%
Non-taxable (2) 14,874 541 5.51% 13,719 522 5.04% 16,948 725 5.65%
--------- ------- ---- --------- ------- ---- --------- ----- ----
Total loans and
investment securities 507,683 32,678 6.49% 444,589 26,295 5.95% 372,625 22,042 5.98%
Due from banks, time 100 3 3.00% 100 3 3.00% 100 2 2.00%
Federal funds sold 32,861 1,184 3.60% 19,710 287 1.46% 18,104 207 1.14%
--------- ------- ---- --------- ------- ---- --------- ----- ----
Total earning assets 540,644 33,865 6.32% 464,399 26,585 5.76% 390,829 22,251 5.75%
Cash and due from banks 34,664 38,602 28,216
Allowance for loan losses (4,535) (3,814) (3,403)
Premises and equipment, net 9,847 10,724 11,125
Accrued interest receivable
and ossets 15,285 13,417 12,157
--------- --------- ---------
Total assets $ 595,905 $ 523,328 $ 438,924
========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Interest bearing demand $ 238,681 $ 1,947 0.82% $ 215,854 $ 1,201 0.56% $ 176,724 $ 916 0.52%
Savings 42,157 91 0.22% 41,858 97 0.23% 32,678 107 0.33%
Time 79,384 1,752 2.21% 76,114 1,290 1.69% 77,198 1,430 1.85%
--------- ------- ---- --------- ------- ---- --------- ----- ----
Total deposits 360,222 3,790 1.05% 333,826 2,588 0.78% 286,600 2,453 0.86%
Borrowings 29,310 1,292 4.41% 23,325 955 4.09% 10,750 542 5.04%
--------- ------- ---- --------- ------- ---- --------- ----- ----
Total interest bearing
liabilities 389,532 5,082 1.30% 357,151 3,543 0.99% 297,350 2,995 1.01%
------- ---- ------- ---- ----- ----
Noninterest bearing demand 154,232 120,777 100,342
Accrued interest payable
and other liabilities 4,547 4,347 3,876
Shareholders' equity 47,594 41,053 37,356
--------- --------- ---------
Total liabilities and
shareholders equity $595,905 $ 523,328 $ 438,924
========= ========= =========
Net interest income $ 28,783 $ 23,042 $ 19,256
======== ======== ========
Net interest income to
average earning assets
Net interest margin (3) 5.38% 5.00% 4.99%
==== ==== ====
(1) Loan interest income includes loan fee income of $1,310 in 2005, $1,054 in
2004 and $1,119 in 2003.
(2) Average yields shown on non-taxable investment securities are presented on a
fully taxable-equivalent basis using the federal statutory tax rate of 34% for
all years presented. On a non-taxable - equivalent basis, the 2005 average yield
was 3.64%, 3.80% in 2004, and 4.28% in 2003.
25
(3) Net interest margin is calculated by dividing net interest income (as
adjusted for the non-taxable investment securities) by the average balance of
total earning assets for the applicable year.
The following table sets forth a summary of the changes in interest earned and
interest paid in 2005 over 2004 and 2004 over 2003 resulting from changes in
assets and liabilities volumes and rates. The change in interest due to both
rate and volume has been included in the rate variance.
(In 000's)
2005 over 2004 2004 over 2003
-------------- --------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
INCREASE (DECREASE) IN INTEREST AND FEE INCOME
Loans $ 3,231 $ 2,457 $ 5,688 $ 5,141 $ (1,095) $ 4,046
Time deposits with other
Financial institutions -- -- -- -- 1 1
Investment securities:
Taxable 458 218 676 (15) 425 410
Non-taxable (1) 44 (25) 19 (138) (65) (203)
Federal funds sold 193 704 897 18 62 80
------- ------- ------- ------- ------ ------
Total interest and fee income 3,926 3,354 7,280 5,006 (672) 4,334
INCREASE (DECREASE) IN INTEREST EXPENSE
Deposits:
Interest bearing Transaction accounts 136 610 746 205 80 285
Savings (1) (5) (6) 31 (41) (10)
Time deposits 52 410 462 (22) (118) (140)
------- ------- ------- ------- ------ ------
Total deposits 187 1,015 1,202 214 (79) 135
Borrowings 244 93 337 698 (285) 413
------- ------- ------- ------- ------ ------
Total interest expense 431 1,108 1,539 912 (364) 548
------- ------- ------- ------- ------ ------
Net Interest income $ 3,495 $ 2,246 $ 5,741 $ 4,094 $ (308) $3,786
======= ======= ======= ======= ====== ======
(1) The interest earned is presented on a non taxable-equivalent basis.
Net interest income is impacted by changes in the volume and mix of earning
assets and interest-bearing liabilities and changes in interest rates. The
increase in net interest income in 2005 compared with 2004 was primarily due to
both the volume and rate increase in loans. The net interest margin increased in
2005 compared with 2004, equating to 5.38% in 2005 compared with 5.00% in 2004.
The Company continues to enjoy a net interest margin higher than peer
institutions of comparable size due to its low cost of funds.
Interest income increased $7,280,000, or 27%, in 2005 compared with 2004.
Increases in the volume of earning assets accounted for increasing interest
income by $3,926,000, and an increase of $3,354,000 was attributable to higher
rates. The increase in interest income of $4,334,000 or 20% in 2004 compared
with 2003 was primarily due to the growth in average total earning assets.
Total interest expense increased $1,539,000, or 43%, in 2005 compared with 2004.
Increases in the volume of deposits and other borrowings increased interest
expense by $431,000 and an increase of $1,108,000 was attributable to an
increase in rates. Interest expense increased $548,000 in 2004 compared with
2003; the effect of volume increases accounted for $912,000 that was offset by a
decrease of $364,000, or 20%, attributable to lower rates.
26
Provision and Allowance for Loan Losses
Credit risk is inherent in the business of lending. As a result, the Company
maintains an Allowance for Loan Losses to absorb probable losses inherent in the
Company's loan portfolio. This is maintained through periodic charges to
earnings. These charges are shown in the Consolidated Statements of Operations
as provision for loan losses. All specifically identifiable and quantifiable
losses are immediately charged off against the allowance. However, for a variety
of reasons, not all losses are immediately known to the Company and, of those
that are known, the full extent of the loss may not be quantifiable at that
point in time. The balance of the Company's Allowance for Loan Losses is meant
to be an estimate of the probable losses inherent in the portfolio.
The Company's written lending policies, along with applicable laws and
regulations governing the extension of credit, require risk analysis as well as
ongoing portfolio and credit management through loan product diversification,
lending limits, ongoing credit reviews, both internal and external, along with
approval policies prior to funding of any loan. The Company manages and controls
credit risk through diversification, close monitoring of any portfolio
concentrations, loan limits to individuals and reviewing historical losses
incurred by the Company. Loans that are performing but have shown some signs of
weakness are subjected to more stringent reporting and oversight. Management has
established a monitoring system for any concentration within the portfolio.
The existing portfolio consists of commercial loans to businesses, commercial
and residential real estate loans and consumer products. The portfolio contains
variable rate loans as well as loans with rates fixed for up to ten years. Fixed
rate loans are primarily associated with real estate lending.
Assessment of the Adequacy of the Allowance for Loan Losses and the Allocation
Process
The Company formally assesses the adequacy of the allowance on a quarterly
basis. Determination of the adequacy is based on ongoing assessments of the
probable risk in the outstanding loan portfolio. These assessments include
periodic re-grading of credits based on changes in their individual credit
characteristics including delinquency, seasoning, recent financial performance
of the borrower, economic factors, changes in the interest rate environment,
growth of the portfolio as a whole or by segment and other factors as warranted.
Loans are initially graded when originated. They are re-graded as they are
renewed, when there is a new loan to the same borrower, when identified facts
demonstrate heightened risk of nonpayment or if they become delinquent on a
frequent basis. Re-grading of classified loans will occur at least monthly.
Confirmation of the quality of the grading process is obtained by independent
credit reviews conducted by consultants specifically hired for this purpose and
by regulatory examiners.
The Company evaluates individual loans that meet its criteria (loans over
$100,000 and graded substandard or lower) to determine if impaired and to
establish a specific allowance as necessary. The Company establishes percentages
for the general allowance requirements for other loans according to their
classification as determined by the Company's internal grading system. These
loans are identified through the following categories:
Pass - These loans consist of the those graded as excellent, good and
satisfactory.
Watch - These loans are not classified, but they contain potentially
unsatisfactory characteristics.
Special Mention - These assets constitute an undue and unwarranted credit risk,
but not to the point of justifying a classification to substandard.
Substandard - These are loans inadequately protected by current sound worth,
paying capacity of the borrower or pledged collateral. Substandard loans
normally have one or more well-defined weaknesses that could jeopardize the
repayment of the debt.
Doubtful - The possibility of loss is extremely high, but because of certain
important and reasonably specific pending factors which may work to the
advantage and strengthening of the asset, writing down the loan and recognizing
the loss is deferred until its more exact status may be determined.
Loss - Loans classified as loss are considered uncollectible and of such little
value that their continuance as bankable assets is not warranted.
The above, along with specific allocations for concentrations in real estate,
SBA 7A program and leases, are taken into consideration when evaluating the
Company's allowance for loan losses.
As of December 31, 2005, the allowance for loan losses was $4,924,000,
representing 1.19% of loans outstanding, as compared with an allowance for loan
losses balance of $4,136,000 at December 31, 2004, representing 1.10% of loans
outstanding. During 2005, 2004 and 2003, $815,000, $620,000 and $238,000,
respectively, was charged to expense for the provision for loan losses.
27
Non-performing Loans
The Company's policy is to place loans on nonaccrual status when, for any
reason, principal or interest is past due for ninety days or more unless they
are both well secured and in the process of collection. Any interest accrued,
but unpaid, is reversed against current income. Thereafter, interest is
recognized as income only as it is collected in cash. As of December 31, 2005
and 2004, there were no nonaccrual loans, loans that were past due ninety days
or more, or troubled debt restructurings.
Historical Loan Loss & Recovery Experience
The following table provides a summary of the Bank's loan loss experience for
the years ended December 31, 2005, 2004, 2003, 2002 and 2001.
($ in 000's)
December 31
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
Average loans for the period $ 402,770 $ 352,863 $ 277,220 $ 212,735 $ 174,050
Loans outstanding at end of period 414,428 377,765 306,663 237,627 186,265
Allowance for loan losses
Balance, beginning of period 4,136 3,524 3,290 2,717 2,268
Less loans charged off:
Real estate loans -- 74 -- --
Commercial loans -- 15 -- --
Installment loans 33 11 12 10 4
--------- --------- --------- --------- ---------
Total loans charged off 33 100 12 10 4
Recoveries:
Real estate loans -- 78 -- --
Commercial loans -- 3 -- --
Installment loans 6 11 8 7 6
--------- --------- --------- --------- ---------
Total recoveries 6 92 8 7 6
Net loans charged off (recovered) 27 8 4 3 (2)
Provision for loan losses 815 620 238 576 447
--------- --------- --------- --------- ---------
Balance, end of period $ 4,924 $ 4,136 $ 3,524 $ 3,290 $ 2,717
========= ========= ========= ========= =========
Net loans charged off (recovered)
to average loans by types:
Real estate loans 0.000% -0.001% 0.000% 0.000% 0.000%
Commercial loans 0.000% 0.003% 0.000% 0.000% 0.000%
Installment loans 0.007% 0.000% 0.001% 0.001% -0.001%
Net losses (recoveries) to average
loans outstanding 0.007% 0.002% 0.001% 0.001% -0.001%
28
The following tables, in thousands, summarize the allocation of the allowance
for loan losses among loan types at December 31, 2005, 2004, 2003, 2002 and
2001.
December 31, 2005
Percentage of Loans
(in thousands) Composition Amount Allocated for in Each Category
of Loans Loan Losses to Total Loans
-------- ----------- --------------
Commercial loans $ 85,979 $ 1,367 20.75%
Commercial loans secured by real estate 23,477 138 5.66%
Installment loans 38,856 219 9.38%
Real estate loans 233,723 2,774 56.40%
Construction loans 32,393 426 7.82%
-------- -------- -----
Total loans outstanding 414,428 100.00%
Less allowance for loan losses 4,924 $ 4,924
--------
Total loans, net $409,504
========
December 31, 2004
Percentage of Loans
(in thousands) Composition Amount Allocated for in Each Category
of Loans Loan Losses to Total Loans
-------- ----------- --------------
Commercial loans $ 67,068 $ 926 17.80%
Commercial loans secured by real estate 26,447 278 7.00%
Installment loans 36,339 221 9.60%
Real estate loans 220,316 2,397 58.30%
Construction loans 27,595 314 7.30%
-------- -------- -----
Total loans outstanding 377,765 100.00%
Less allowance for loan losses 4,136 $ 4,136
--------
Total loans, net $373,629
========
December 31, 2003
Percentage of Loans
(in thousands) Composition Amount Allocated for in Each Category
of Loans Loan Losses to Total Loans
-------- ----------- --------------
Commercial loans $ 45,991 $ 801 15.00%
Commercial loans secured
by real estate 33,519 186 10.90%
Installment loans 28,860 158 9.40%
Real estate loans 163,088 2,018 53.20%
Construction loans 35,205 361 11.50%
-------- -------- -----
Total loans outstanding 306,663 100.00%
Less allowance for loan losses 3,524 $ 3,524
--------
Total loans, net $303,139
========
December 31, 2002
Percentage of Loans
(in thousands) Composition Amount Allocated for in Each Category
of Loans Loan Losses to Total Loans
-------- ----------- --------------
Commercial loans $ 46,061 $ 587 19.40%
Commercial loans secured by real estate 16,991 294 7.20%
Installment loans 24,102 272 10.10%
Real estate loans 131,167 1,688 55.20%
Construction loans 19,306 449 8.10%
-------- -------- -----
Total loans outstanding 237,627 100.00%
Less allowance for loan losses 3,290 $ 3,290
--------
Total loans, net $234,337
========
December 31, 2001
Percentage of Loans
(in thousands) Composition Amount Allocated for in Each Category
of Loans Loan Losses to Total Loans
-------- ----------- --------------
Commercial loans $ 29,730 $ 632 16.00%
Commercial loans secured by real estate 7,930 71 4.30%
Installment loans 20,301 259 10.90%
Real estate loans 106,851 1,588 57.30%
Construction loans 21,453 167 11.50%
-------- -------- -----
Total loans outstanding 186,265 100.00%
Less allowance for loan losses 2,717 $ 2,717
--------
Total loans, net $183,548
========
29
The increase in the allowance for loan losses was due primarily to overall
growth in the loan portfolio and related inherent risk of loss. Net loans
charged off were $27,000 in 2005 compared with net charge offs of $8,000 in
2004.
Management recognizes that the estimation of probable losses in the portfolio is
not a science and therefore the current Allowance for Loan Losses is not
expected to be equal to the result of the assessment. It is expected, however,
that the assessment will demonstrate that the actual reserve is adequate for
coverage of probable loan losses in the existing portfolio. To the extent that
the current allowance is deemed insufficient to cover the estimate of
unidentified losses, management will record an additional provision for loan
loss. If the allowance is greater than appears to be required at that point in
time, the provision expense may be adjusted accordingly.
Based on the current conditions of the loan portfolio, management believes that
the $4,924,000 allowance for loan losses at December 31, 2005 is adequate to
absorb potential losses inherent in the loan portfolio. No assurance can be
given, however, that adverse economic conditions or other circumstances will not
result in increased losses in the portfolio.
In the course of examination, regulators may require the Company to increase its
amount in its allowance for loan losses based on information available to them
at the time of their evaluation.
Noninterest Income
Details of noninterest income are as follows:
(In 000's)
2005 2004 2003
Service charges and other fees $ 2,073 $ 2,249 $ 1,645
Gain on sale of investment
securities, net -- 262 637
Other income 1,868 1,687 1,565
------- ------- -------
Total $ 3,941 $ 4,198 $ 3,847
======= ======= =======
Noninterest income for year 2005 decreased $257,000, or 6%, compared with 2004.
The decline reflects a decrease in service charge income resulting from reduced
non-sufficient funds (NSF) check activity. In addition, no securities gains were
recorded in 2005 compared with the securities gains of $262,000 in 2004.
Increases during 2004 compared with 2003 were $351,000, or 9%. Gains on
securities transactions in 2004 and 2003 were primarily due to selling
securities with less than one year remaining to maturity to provide funding for
loans or to reinvest in securities with a longer duration and higher effective
yield to maturity.
Noninterest Expense
Details of noninterest expense are as follows:
(In 000's)
2005 2004 2003
Salaries and related benefits $ 11,171 $ 9,993 $ 8,795
Occupancy 1,787 1,487 1,289
Equipment 2,037 2,018 1,703
Other 6,176 5,038 4,528
-------- -------- --------
Total $ 21,171 $ 18,536 $ 16,315
======== ======== ========
Salaries and benefits expense increased 12% and 14% in 2005 and 2004,
respectively, from the previous year. The increases were primarily due to
increases in the number of full-time equivalent employees, which has increased
from approximately 131 at year-end 2001 to 167 at year-end 2005 as the Company
has continued to grow its operations.
The 20% increase in occupancy expense during 2005 compared with 2004 was
primarily due to having vacant space in the Vacaville office building owned by
the Company and to opening a branch office in American Canyon in August 2004.
The 15% increase in occupancy expense in 2004 compared with 2003 was primarily
in rent and depreciation associated with opening a new branch in American
Canyon.
30
Equipment expense increased 1% in 2005 compared with 2004. The 18% increase in
2004 compared to 2003 was primarily due to the Company reversing approximately
$168,000 in accrued maintenance fees during 2003 as the result of settling
litigation with a former software supplier and additional costs associated with
maintaining ATMs.
The key components of other expenses are as follows:
(In 000's)
2005 2004 2003
Professional services $ 2,558 $ 1,240 $ 1,387
Business promotion 561 658 554
Stationery & supplies 499 393 380
Insurance 269 320 224
Other 2,289 2,427 1,983
------- ------- -------
Total $ 6,176 $ 5,038 $ 4,528
======= ======= =======
Professional services increased $1,318,000, or 106%, in 2005 compared with the
prior year primarily due to increases in consulting and audit costs associated
with Sarbanes-Oxley compliance work. The 11% decrease in 2004 was primarily due
to lower legal fees, offset by increased audit expense. Business promotion
expense decreased 15% in 2005 compared with 2004. This decrease was primarily
due to a decrease in advertising costs. The 19% increase in 2004 compared with
2003 was primarily the result of increased marketing expenditures. Stationery
and supplies expense increased 27% and 3% in 2005 and 2004 respectively,
reflecting overall volume increases and increased costs associated with the
opening of a branch office in American Canyon in August 2004. Insurance expenses
decreased 16% in 2005 compared to a 43% increase in 2004. The decrease in 2005
was due to a decrease in workers compensation insurance costs. The increase in
2004 was due to increases in volumes and number of locations, as well as
increases in workers' compensation costs. Other expenses decreased 6% in 2005
compared to an increase of 22% in 2004. The decrease in 2005 was primarily due
to decreases in postage and dues and subscription expenses. The increase in 2004
was primarily due to increased expenses for loans, postage, courier services,
conferences and other miscellaneous expenses.
Provision for Income Taxes
The Company reported a provision for income taxes of $4,105,000, $3,020,000 and
$2,179,000 for years 2005, 2004 and 2003, respectively. These provisions reflect
accrual for taxes at the applicable rates for Federal and California state
income taxes based upon reported pre-tax income and adjusted for the beneficial
effect of the Company's investment in qualified municipal securities and life
insurance products. The Company has not been subject to an alternative minimum
tax (AMT).
BALANCE SHEET
Total assets as of December 31, 2005 were $602,697,000 compared with
$562,063,000 as of year-end 2004, representing a 7% increase in 2005 and a 22%
increase in 2004. Total deposits grew from $484,493,000 in 2004 to $516,393,000
in 2005, representing a 7% increase, compared with an 19% increase in 2004.
Total loans, net of allowance for loan losses, grew to $409,504,000 in 2005
compared to $373,629,000 in 2004, representing a 10% increase compared with a
23% increase in 2004. Investment securities increased from $99,383,000 at
December 31, 2004 to $129,278,000 at December 31, 2005, a 30% increase, compared
with an increase of 8% during 2004.
31
The following table provides a summary of the maturities and weighted average
yields of debt securities as of December 31, 2005.
December 31, 2005
After One Year Afters Five Years
One Year or Less to Five to Ten Years After Ten Years Total
---------------- ------- ------------ --------------- -----
Weighted- Weighted- Weighted- Weighted- Weighted-
(Dollars in Thousands) Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Securities of the U.S. Treasury
and other government
agencies $ 14,106 3.02% $ 12,567 3.38% $ -- 0.00% $ -- 0.00% $ 26,673 3.19%
Mortgage-backed securities(1) -- -- 1,278 5.20% 6,093 5.22% 59,611 4.72% 66,982 4.78%
Municipal securities (2) 3,566 3.19% 13,438 5.04% 11,851 4.93% -- 0.00% 28,855 4.77%
Equity securities -- -- -- -- -- -- 6,768 3.03% 6,768 3.03%
--------- ------ -------- ----- -------- ------ -------- ----- --------- -----
Total $ 17,672 3.06% $ 27,283 4.28% $ 17,944 5.03% $ 66,379 4.24% $ 129,278 4.20%
========= ====== ======== ===== ======== ====== ======== ===== ========= =====
(1) The maturity of mortgage-backed securities is based on contractual maturity.
The average expected life is approximately five years.
(2) Yields shown are taxable-equivalent.
Loans
As of December 31, 2005, net loans increased $35.9 million from year-end 2004, a
10% increase. On an average balance basis, the Company's loan portfolio
increased $49.9 million, or 14% over the average balance in 2004. In 2004,
average net loan balances increased from the prior year by $75.6 million, or
27%. The increases in 2005 and 2004 were due to strong loan demand and an
aggressive calling program.
Composition of Loans
LOAN PORTFOLIO
The following table shows the composition of loans as of December 31, 2005,
2004, 2003, 2002 and 2001.
(In 000's)
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Commercial Loans $ 85,979 $ 67,068 $ 45,991 $ 46,061 $ 29,730
Commercial Loans
Secured by Real 23,477 26,447 33,519 16,991 7,930
Installment Loans 38,856 36,339 28,860 24,102 20,301
Real Estate Loans 233,723 220,316 163,088 131,167 106,851
Construction Loans 32,393 27,595 35,205 19,306 21,453
------ ------ ------ ------ ------
414,428 377,765 306,663 237,627 186,265
Less - Allowance
for Loan Losses 4,924 4,136 3,524 3,290 2,717
------ ------ ------ ------ ------
$409,504 $373,629 $303,139 $234,337 $183,548
======== ======== ======== ======== ========
32
The following table shows the maturity distribution of loans as of December 31,
2005.
(In 000's)
IN ONE YEAR AFTER ONE THROUGH
OR LESS FIVE YEARS AFTER FIVE YEARS TOTAL
-------- -------- --------- ---------
Commercial (Including Real Estate Secured) $ 21,899 $ 42,014 $ 45,543 $ 109,456
Installment 2,664 4,021 32,171 38,856
Real Estate 13,366 42,691 177,666 233,723
Construction 29,588 1,635 1,170 32,393
-------- -------- --------- ---------
Total $ 67,517 $ 90,361 $ 256,550 $ 414,428
======== ======== ========= =========
The following table shows maturity sensitivity to changes in interest rates as
of December 31, 2005.
(In 000's)
IN ONE YEAR AFTER ONE THROUGH
OR LESS FIVE YEARS AFTER FIVE YEARS TOTAL
-------------------------------------------------------------------------------
Loans With Fixed Interest Rates $ 2,934 $ 53,264 $ 39,177 $ 95,375
Loans With Floating Interest Rates 64,583 37,097 217,373 $ 319,053
-------- -------- --------- ---------
$ 67,517 $ 90,361 $ 256,550 $ 414,428
======== ======== ========= =========
Nonaccrual, Past Due and Restructured Loans
There were no nonaccrual loans as of December 31, 2005, 2004, 2003, 2002 or
2001. The Company held no OREO at December 31, 2005, 2004, 2003, 2002 or 2001.
There were no loans accruing interest that were 90 days or more past due as of
December 31, 2005, 2004, 2003, 2002, or 2001. There were no loans upon which
principal and interest payments were 90 days past due at December 31, 2005 and
with respect to which serious doubt existed as to the ability of the borrower to
comply with the present loan payment terms. There were no restructured loans at
December 31, 2005. See Note 1 - Loans, in the Company's Notes to Consolidated
Financial Statements, for policies as it relates to nonaccrual loans.
The table summarizing the allocation of the allowance for loan losses between
loan types at December 31, 2005, 2004, 2003, 2002 and 2001 is included in the
Management's Discussion and Analysis - Assessment of the Adequacy of the
Allowance for Loan Losses and the Allocation Process section of this 2005 Annual
Report.
Summary of Loan Loss Experience
A table providing a summary of the Bank's loan loss experience as of December
31, 2005, 2004, 2003, 2002 and 2001 is included in the Management's Discussion
and Analysis section of this 2005 Annual Report.
Intangible Assets
At December 31, 2005 and 2004, the Company had intangible assets totaling
$734,000 and $0, respectively. The intangible assets resulted from additional
minimum pension liabilities recorded by the Company in 2005 related to the
Company's supplemental retirement plans. These intangible assets are amortized
on a straight-line basis over eight years.
33
Time Deposits
The following table sets forth the maturity of time certificates of deposit of
$100,000 or more at December 31, 2005 and 2004.
(In 000's)
2005 2004
----------------------------------------------
3 months or less $ 15,995 29.0% $ 18,557 42.6%
Over 3 months through 6 months 18,791 34.0% 8,624 19.8%
Over 6 months through 12 months 14,060 25.5% 4,793 11.0%
Over 12 months 6,381 11.6% 11,620 26.7%
- - -------- ---- -------- ----
Total $ 55,227 100% $ 43,594 100%
======== ==== ======== ====
Borrowings
Total long-term borrowings were $19 million at December 31, 2005. The following
table summarizes the borrowings:
($ In 000's)
Fixed Rate Borrowings
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%
There were no short-term borrowings at December 31, 2005 or December 31, 2004.
Short-term borrowings consist primarily of federal funds purchased and
borrowings from the Federal Home Loan Bank of San Francisco (FHLB). The Bank
maintains collateralized lines of credit with the FHLB. Based on the FHLB stock
requirements at December 31, 2005, the lines provided for maximum borrowings of
approximately $161.7 million; the Company also has available unused lines of
credit totaling $17.5 million for federal funds transactions at December 31,
2005.
Junior Subordinated Debentures
On June 26, 2002, the Company formed North Bay Statutory Trust I (Trust), a
Connecticut statutory business trust, for the purpose of issuing 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
December 31, 2005, the interest rate was 7.97%. 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 a result of the adoption of FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities (FIN 46R), 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,
Junior Subordinated Debentures. The Company also recognized its $310,000
investment in the Trust, which is recorded in Interest Receivable and Other
Assets. 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 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, up to 25% of Tier 1 Capital. 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 the junior 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 junior subordinated debentures.
34
Off Balance Sheet Arrangement
The Company does not have off-balance sheet arrangements, as defined by
Regulation S-K. The Company does have loan commitments and letters of credit.
For additional information, please see Note 15 to the Consolidated Financial
Statements at Item 8 of this report.
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as
of December 31, 2005:
(In 000's)
Less than One to Four to
Total one year three years five years Thereafter
----- -------- ----------- ---------- ----------
FHLB loan, fixed rate of 2.24% $ 5,000 $5,000 $ -- $ -- $ --
payable on April 17, 2006
FHLB loan, fixed rate of 2.83% 5,000 -- 5,000 -- --
payable on April 16, 2007
FHLB loan, fixed rate of 3.23% 9,000 -- 9,000 -- --
payable on April 14, 2008
Junior subordinated debt, adjustable rate
of three-month LIBOR plus 3.45%,
callable in whole or in part by the
Company on a quarterly basis beginning
June 26, 2007, matures June 26, 2032. 10,310 -- -- -- 10,310
Operating lease obligations 3,690 925 1,309 782 674
Other obligations 353 33 320 -- --
-------- ----- ------- ----- --------
Total contractual obligations $ 33,353 $5,958 $15,629 $ 782 $ 10,984
======== ====== ======= ===== ========
(1) These amounts represent known certain payments to participants under the
Company's deferred compensation and supplemental retirement plans. See Note 13
to the consolidated financial statements at Item 8 of this report for additional
information related to the Company's deferred compensation and supplemental
retirement plan liabilities.
Liquidity and Capital Adequacy
The Company's liquidity is determined by the level of assets (such as cash,
federal funds sold and unpledged marketable securities together with other
funding sources) that are readily convertible to cash and cash equivalents and
other funding sources to meet customer withdrawal and borrowing needs. The
Company's liquidity position is reviewed by management on a regular basis to
verify that it is adequate to meet projected loan funding and potential
withdrawal of deposits.
In addition to investment secutities classified as available for sale, the
Company also has available funding from other sources such as the Federal Home
Loan Bank and federal fund lines of credit. As of December 31, 2005, the Company
had approximately $179.2 million available from these sources for borrowing. The
Company relies on these funding sources to assist in funding loans when loan
demand outpaces deposit growth.
35
At year-end 2005, liquid assets (defined as cash, Federal funds sold, deposits
in other financial institutions and securities categorized as
available-for-sale) represented 26% of total assets, as compared with 28% as of
year-end 2004. The level of liquid assets at December 31, 2005 exceeds the
liquidity required by the Company's liquidity policy. Management expects to be
able to meet the liquidity needs of the Company during 2006 primarily through
balancing loan growth with corresponding increases in deposits. The Company did
not need to rely on borrowings from FHLB or resort to the federal funds lines
during 2005. For additional information please see Note 7 to the Consolidated
Financial Statements.
The Company's capital ratios remained relatively steady during 2005 compared
with 2004 levels. As of December 31, 2005, the Company's total risk-based
capital ratio, Tier I risk-based capital ratio and leverage ratio were 13.0%,
12.0% and 9.9%, respectively. These compare with ratios of 12.5%, 11.6% and 9.4%
as of December 31, 2004.
In February 2006, the Company declared a 5% stock dividend and a $0.15 per share
cash dividend for shareholders of record as of March 22, 2006. The stock
dividend will affect the Company's capital and its capital ratios only to the
extent that cash is distributed in lieu of fractional shares. Accordingly, the
stock dividend will not materially impact the Company's overall capital. The
cash dividend will total approximately $590,000, equating to a reduction in the
Company's leverage ratio of approximately 0.10%.
Item 7 A - QUANTITATIVE AND QUALITATIVE DISCLOUSURE ABOUT MARKET RISK
The Company's exposure to market risk exists primarily in interest rate risk in
the balance sheet. The objective of market risk management is to mitigate an
undue adverse impact on earnings and capital arising from changes in interest
rates and other market variables. This risk management objective supports the
Company's broad objective of enhancing shareholder value, which encompasses
stable earnings growth over time.
The Board of Directors, through its Asset & Liability Management Committee
(ALCO), approves the ALM Policy, which governs the management of market risk and
liquidity. ALCO is responsible for ongoing management of interest rate risk as
well as liquidity risk, including formulation of risk management strategies. The
Chief Financial Officer is primarily responsible for the implementation of risk
management strategies approved by ALCO and for operating management of market
risk through the funding and investment activities of the Company.
The Company manages the market risk associated with our asset and liability
management activities as described below.
Interest Rate Risk Management
ALCO monitors interest rate risk quarterly through a variety of modeling
techniques that are used to quantify the sensitivity of Net Interest Income
(NII) and Economic Value of Equity (EVE) to changes in interest rates. In
managing interest rate risk, ALCO monitors NII sensitivity over a twelve-month
time horizon and in response to a variety of interest rate changes. The
Company's NII policy measure involves a simulation of NII in which the Company
estimates the impact that proportional shifts in the yield curve would have on
earnings over a twelve-month horizon, given the projected balance sheet profile.
Simulation of NII is the primary tool used to measure the Company's interest
rate risk. The NII simulations use a twelve-month projected balance sheet in
order to model the impact of interest rate changes. Assumptions are made to
model the future behavior of deposit rates and loan spreads based on
management's outlook and historical experience.
At December 31, 2005, the NII simulation showed modest asset-sensitivity to
proportional rate shifts. A +200 basis point proportional shift would raise
twelve-month NII by 2.03 percent, while a similar downward shift would reduce it
by 2.17 percent. Continued enhancements to the Company's interest rate risk
modeling may make prior-year comparisons of NII less meaningful.
36
NII Simulation
Estimated Change in
NII
Change in Interest Rates (Basis Points) (as a % of "flat" NII)
- --------------------------------------- ----------------------
+ 300 3.00%
+ 200 2.03%
+ 100 1.03%
+ 0 (flat) 0.00%
- 100 (1.07%)
- 200 (2.17%)
- 300 (3.30%)
In addition to NII, the Company measures the sensitivity of EVE to interest rate
shocks. EVE is reviewed and monitored for its compliance with ALCO limits.
Consistent with the projected asset-sensitivity of earnings over time, the
Company's EVE shows asset-sensitivity as well.
Management believes that, together, our NII and EVE simulations provide
management with a reasonably comprehensive view of the sensitivity of our
operating results and value profile to changes in interest rates, at least over
the measurement horizon. However, as with any financial model, the underlying
assumptions are inherently uncertain and subject to refinement as modeling
techniques and theory improve and historical data becomes more readily
accessible. Consequently, the simulation models cannot predict with certainty
how rising or falling interest rates might impact net interest income. Actual
and simulated results will differ to the extent there are differences between
actual and assumed interest rate changes, balance sheet volumes, and management
strategies, among other factors.
In general, the core balance sheet is relatively asset sensitive, meaning that
investments and loans generally re-price more quickly than core deposits. In
managing the interest sensitivity of the balance sheet, the Company uses the
investment securities portfolio as the primary tool to adjust the risk profile.
At December 31, 2005 and December 31, 2004, the securities available for sale
portfolio totaled $122.5 million and $94.8 million, respectively. The estimated
effective duration of the available for sale portfolio was 3.0 at December 31,
2005, compared to 2.8 at December 31, 2004.
Effective duration is a measure of price sensitivity of a bond portfolio to
immediate parallel shifts in interest rates. An effective duration of 3.0
suggests an expected price decline of approximately 3.0 percent for an immediate
one percent increase in interest rates.
GAP Analysis
Interest rate sensitivity is a function of the repricing characteristics of our
portfolio of assets and liabilities. One aspect of these repricing
characteristics is the time frame within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity. An analysis of the repricing time frames of
interest-bearing assets and liabilities is sometimes called a "gap" analysis
because it shows the gap between assets and liabilities repricing or maturing in
each of a number of periods. Another aspect of these repricing characteristics
is the relative magnitude of the repricing for each category of interest earning
asset and interest-bearing liability given various changes in market interest
rates. Gap analysis gives no indication of the relative magnitude of repricing
given various changes in interest rates. Interest rate sensitivity management
focuses on the maturity of assets and liabilities and their repricing during
periods of changes in market interest rates. Interest rate sensitivity gaps are
measured as the difference between the volumes of assets and liabilities in our
current portfolio that are subject to repricing at various time horizons.
The following interest rate sensitivity table shows our repricing gaps as of
December 31, 2005. In this table transaction deposits, which may be repriced at
will by us, have been included in the less than 3-month category. The inclusion
of all of the transaction deposits in the less than 3-month repricing category
causes us to appear liability sensitive. Because we may reprice our transaction
deposits at will, transaction deposits may or may not reprice immediately with
changes in interest rates. In recent years of moderate interest rate changes,
our earnings have reacted as though the gap position is slightly asset sensitive
mainly because the magnitude of interest-bearing liability repricing has been
less than the magnitude of interest-earning asset repricing. This difference in
the magnitude of asset and liability repricing is mainly due to our strong core
deposit base, which although they may be repriced within three months,
historically, the timing of their repricing has been longer than three months
and the magnitude of their repricing has been minimal.
37
Due to the limitations of gap analysis, as described above, we do not actively
use gap analysis in managing interest rate risk. Instead, we rely on the more
sophisticated interest rate risk simulation model described above as our primary
tool in measuring and managing interest rate risk.
The following table sets forth the repricing opportunities for rate-sensitive
assets and rate-sensitive liabilities at December 31, 2005. Rate sensitivity
analysis usually excludes noninterest-bearing demand deposits, which totaled
$155,320,000. Rate-sensitive assets and rate-sensitive liabilities are
classified by the earliest possible repricing date or maturity, whichever comes
first.
(In 000's)
Over 3
3 Months Months to 1 Over 1 Year Over 5
or Less Year To To 5 Years Years Total
------- ------- ---------- ----- -----
INTEREST RATE-SENSITIVE ASSETS
Loans, gross $ 152,635 $ 23,258 $ 129,022 $ 109,513 $ 414,428
Interest-bearing deposits in other banks -- 100 -- -- 100
Investment securities -- 17,672 27,283 84,323 129,278
Federal funds sold 7,170 -- -- -- 7,170
--------- --------- --------- --------- ---------
Total $ 159,805 $ 41,030 $ 156,305 $ 193,836 $ 550,976
INTEREST RATE-SENSITIVE LIABILITIES
Interest-bearing demand Deposits $ 277,020 $ -- $ -- $ -- $ 277,020
Time deposits >$100,000 15,995 32,851 6,381 -- 55,227
Other time deposits 13,231 10,637 4,948 10 28,826
Other borrowings -- 5,000 14,000 -- 19,000
Junior subordinated debentures 10,310 -- -- -- 10,310
--------- --------- --------- --------- ---------
Total $ 316,556 $ 48,488 $ 25,329 $ 10 $ 390,383
Interest sensitivity gap $(156,751) $ (7,458) $ 130,976 $ 193,826 $ 160,593
========= ========= ========= ========= =========
Cumulative sensitivity gap $(156,751) $(164,209) $ (33,233) $ 160,593
========= ========= ========= =========
As a percentage of earning assets:
Interest sensitivity gap -28.45% -1.35% 23.77% 35.18%
Cumulative sensitivity gap -28.45% -29.80% -6.03% 29.15%
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets as of December 31, 2005 and 2004 39
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003 40
Consolidated Statements of Comprehensive Income for the years
ended December 31, 2005, 2004 and 2003 41
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2005, 2004 and 2003 42
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003 43
Notes to Consolidated Financial Statements 44
Management's Report on Internal Control over Financial Reporting 69
Independent Registered Public Accounting Firm's Reports 70
38
NORTH BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
2005 2004
---- ----
(Dollars in thousands)
ASSETS
Cash and due from banks $ 28,174 $ 27,342
Federal funds sold 7,170 32,865
--------- ---------
Cash and cash equivalents 35,344 60,207
Time deposits with other financial institutions 100 100
Investment securities 129,278 99,383
Loans, net of allowance for loan losses of $4,924 in 2005 and $4,136 in 2004 409,504 373,629
Loans held for sale -- 4,604
Premises and equipment, net 9,475 10,336
Interest receivable and other assets 18,996 13,804
--------- ---------
Total assets $ 602,697 $ 562,063
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 155,320 $ 127,250
Interest-bearing 361,073 357,243
--------- ---------
Total deposits 516,393 484,493
Interest payable and other liabilities 6,941 4,126
Other borrowings 19,000 19,000
Junior subordinated debentures 10,310 10,310
--------- ---------
Total liabilities 552,644 517,929
Commitments and contingencies (Notes 8, 13 and 15)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: 500,000 shares authorized; none issued and outstanding -- --
Common stock, no par value: 15,000,000 shares authorized; 4,099,883 and 3,823,353 shares
issued and outstanding at December 31, 2005 and 2004, respectively 39,965 33,473
Accumulated other comprehensive (loss)/income (1,478) 161
Retained earnings 11,566 10,500
--------- ---------
Total shareholders' equity 50,053 44,134
--------- ---------
Total liabilities and shareholders' equity $ 602,697 $ 562,063
========= =========
Share data for all periods have been adjusted to reflect the 5% stock dividend
declared on February 27, 2006.
The accompanying notes are an integral part of these consolidated financial
statements.
39
NORTH BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
-------------------------------
2005 2004 2003
---- ---- ----
(Dollars in thousands, except per
share amounts)
Interest Income
Loans, including fees $28,516 $22,828 $18,782
Investment securities:
Taxable 3,621 2,945 2,535
Tax exempt 541 522 725
Federal funds sold 1,184 287 207
Time deposits with other financial institutions 3 3 2
------- ------- -------
Total interest income 33,865 26,585 22,251
------- ------- -------
Interest Expense
Deposits 3,790 2,588 2,453
Other borrowings 552 396 11
Junior subordinated debentures 740 559 531
------- ------- -------
Total interest expense 5,082 3,543 2,995
------- ------- -------
Net interest income 28,783 23,042 19,256
Provision for loan losses 815 620 238
------- ------- -------
Net interest income after provision for loan losses 27,968 22,422 19,018
------- ------- -------
Noninterest Income
Service charges and other fees 2,073 2,249 1,645
Gain on sale of investment securities, net 0 262 637
Other income 1,868 1,687 1,565
------- ------- -------
Total noninterest income 3,941 4,198 3,847
------- ------- -------
Operating Expenses
Salaries and related benefits 11,171 9,993 8,795
Occupancy 1,787 1,487 1,289
Equipment 2,037 2,018 1,703
Other 6,176 5,038 4,528
------- ------- -------
Total operating expenses 21,171 18,536 16,315
------- ------- -------
Income before provision for income taxes 10,738 8,084 6,550
Provision for income taxes 4,105 3,020 2,179
------- ------- -------
Net income $ 6,633 $ 5,064 $ 4,371
======= ======= =======
Net income per common share - basic $ 1.63 $ 1.26 $ 1.11
Net income per common share - diluted $ 1.56 $ 1.23 $ 1.08
Share data for all periods have been adjusted to reflect the 5% stock dividend
declared on February 27, 2006.
The accompanying notes are an integral part of these consolidated financial
statements.
40
NORTH BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
---------------------------------
2005 2004 2003
(In thousands)
Net Income $ 6,633 $ 5,064 $ 4,371
Other comprehensive loss:
Unrealized holding losses on available-for-sale securities (2,233) (498) (615)
Tax effect 929 204 252
------- ------- -------
Unrealized holding losses on available-for-sale securities, net of tax (1,304) (294) (363)
Less: reclassification adjustment for realized gains included in net income -- (262) (637)
Tax effect -- 109 264
------- ------- -------
Reclassification adjustment for realized gains included in net income, net of tax -- (153) (373)
------- ------- -------
Net change (1,304) (447) (736)
Additional minimum pension liability adjustments (573) -- --
Tax effect 238 -- --
------- ------- -------
Additional minimum pension liability adjustments, net of tax (335) -- --
------- ------- -------
Other comprehensive loss (1,639) (447) (736)
------- ------- -------
Comprehensive income $ 4,994 $ 4,617 $ 3,635
======= ======= =======
See notes to consolidated financial statements
41
NORTH BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three years ended December 31, 2005, 2004 and 2003
Accumulated
Common Stock Other Total
-------------------------- Comprehensive Retained Shareholders'
Shares Amount Income (Loss) Earnings Equity
------ ------ ------------- -------- ------
(Dollars in thousands, except share amounts)
BALANCE, DECEMBER 31, 2002 3,355,204 $ 25,387 $ 1,344 $ 8,612 $35,343
Net income 4,371 4,371
Other comprehensive income, net of taxes:
Unrealized net losses on investment securities (736) (736) (436)
Stock dividend 167,414 2,918 (2,933) (15)
Cash dividend $0.11 per share of common stock (427) (427)
Stock options exercised, including related tax benefits 77,274 905 905
--------- -------- -------- -------- -------
BALANCE, DECEMBER 31, 2003 3,599,892 $ 29,210 $ 608 $ 9,623 $39,441
Net income 5,064 5,064
Other comprehensive income, net of taxes:
Unrealized net losses on investment securities (447) (447)
Stock dividend 179,291 3,706 (3,729) (23)
Cash dividend $0.11 per share of common stock (458) (458)
Stock options exercised, including related tax benefits 44,170 557 557
--------- -------- -------- -------- -------
BALANCE, DECEMBER 31, 2004 3,823,353 $ 33,473 $ 161 $ 10,500 $44,134
Net income 6,633 6,633
Other comprehensive income, net of taxes:
Unrealized net losses on investment securities (1,304) (1,304)
Minimum pension liability adjustment, net (335) (335)
Stock dividend 193,571 4,996 (5,012) (16)
Cash dividend $0.14 per share of common stock (555) (555)
Stock options exercised, including related tax benefits 82,959 1,496 1,496
--------- -------- -------- -------- -------
BALANCE, DECEMBER 31, 2005 4,099,883 $ 39,965 $ (1,478) $ 11,566 $50,053
========= ======== ======== ======== =======
Share data for all periods have been adjusted to reflect the 5% stock dividend
declared on February 27, 2006.
The accompanying notes are an integral part of these consolidated financial
statements.
42
NORTH BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2005 2004 2003
---- ---- ----
(Dollars in thousands)
Cash flows - operating activities
Net income $ 6,633 $ 5,064 $ 4,371
Reconcilement of net income to net cash from operations:
Depreciation and amortization 1,466 1,628 1,569
Provision for loan losses 815 620 238
Proceeds from sale of loans held for sale 95,863 293,296 280,225
Purchase of loans held for sale (91,259) (294,805) (283,320)
Amortization of deferred loan fees (865) (631) (665)
Amortization of investment securities premiums, net 36 208 1,079
Provision for deferred income taxes (869) (177) 56
Increase in cash value of bank-owned life insurance (298) (357) (338)
Gain on sale of investment securities, net 0 (262) (637)
Changes in:
Interest receivable and other assets (874) (359) 340
Interest payable and other liabilities 1,508 595 543
--------- --------- ---------
Operating cash flows, net 12,156 4,820 3,461
--------- --------- ---------
Cash flows - investing activities
Maturities and partial paydowns on investment securities:
Available for sale 13,577 35,672 36,783
Held to maturity 0 0 1,272
Purchases of investment securities:
Available for sale (43,568) (44,839) (59,290)
Equity securities (2,173) (3,244) (58)
Proceeds from sale of investment securities:
Available for sale 0 4,322 34,626
Equity securities 0 0 56
Loans, net (35,825) (70,479) (68,375)
Purchases of premises and equipment (605) (1,055) (1,678)
Purchase of bank-owned life insurance (1,250) 0 0
--------- --------- ---------
Investing cash flows, net (69,844) (79,623) (56,664)
--------- --------- ---------
Cash flows -financing activities
Net increase in deposits 31,900 78,048 38,642
Proceeds from other borrowings 0 19,000 0
Proceeds from exercise of stock options 1,496 492 644
Cash dividends on common stock (571) (481) (442)
--------- --------- ---------
Financing cash flows, net 32,825 97,059 38,844
--------- --------- ---------
Net change in cash and cash equivalents (24,863) 22,256 (14,359)
Cash and cash equivalents at beginning of period 60,207 37,951 52,310
--------- --------- ---------
Cash and cash equivalents at end of period $ 35,344 $ 60,207 $ 37,951
========= ========= =========
Supplemental disclosure of cash flow activity:
Cash paid for interest expense $ 4,749 $ 3,376 $ 3,084
Cash paid for income taxes $ 4,465 $ 3,777 $ 1,345
Income tax benefit from exercise of stock options $ 382 $ 65 $ 261
Supplemental disclosure of noncash activities:
Unrealized loss on investment securities available for sale $ (2,233) $ (766) $ (1,257)
Stock dividends $ 4,996 $ 3,706 $ 2,918
The accompanying notes are an integral part of these consolidated financial
statements.
43
NORTH BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
North Bay Bancorp (Bancorp), established on November 1, 1999, is a registered
bank holding company headquartered in Napa, California. Bancorp's principal line
of business is serving as a holding company for The Vintage Bank (the Bank), a
California state chartered bank. Effective January 15, 2005, Solano Bank, which
had previously been a separate subsidiary of Bancorp, was merged into the Bank
and is now an operating division. The Bank operates six offices in the
California county of Napa and four offices in the California county of Solano.
The Bank offers a full range of commercial banking services to individuals and
the business and agricultural communities. Most of the Bank's customers are
retail customers and small to medium-sized businesses.
The consolidated financial statements of Bancorp and subsidiaries (collectively,
the Company) are prepared in conformity with accounting principles generally
accepted in the United States of America. The more significant accounting and
reporting policies are discussed below.
Principles of Consolidation
The consolidated financial statements include the accounts of Bancorp and the
Bank. All material intercompany transactions and accounts have been eliminated
in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company defines cash, due from banks, and federal funds sold as cash and
cash equivalents for the statements of cash flows.
Investment Securities
Investments in debt and equity securities are classified as "held to maturity"
or "available for sale". Investments classified as held to maturity are those
that the Company has the ability and intent to hold until maturity and are
reported at cost, adjusted for the amortization or accretion of premiums or
discounts. 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 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 is recognized when
earned. Realized gains and losses for investment securities are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
The Bank invests in a qualified affordable housing project which provides
benefits in the form of tax credits. The Company accounts for this investment
under the equity method.
The Bank is a member of the Federal Home Loan Bank of San Francisco (FHLB) and,
as a condition of membership, the Bank is required to purchase stock. The amount
of FHLB stock required to be purchased is based on the borrowing capacity
desired by the Bank. No ready market exists for the stock and it has no quoted
market value. The stock is redeemable at par and is valued at cost.
44
Loans
Loans are stated at the principal amount outstanding net of unearned income.
Nonrefundable loan origination fees and loan origination costs are deferred and
amortized into income over the estimated life of the loan. The majority of the
Company's interest income is accrued on a simple interest basis.
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full and timely collection of interest or
principal or when a loan becomes contractually past due by ninety days or more
with respect to interest or principal. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period interest income. Interest accruals are resumed on such loans only
when they are brought fully current with respect to interest and principal and
when, in the judgment of management, the loans are estimated to be fully
collectible as to both principal and interest. Restructured loans are loans on
which concessions in terms have been granted because of the borrowers' financial
difficulties. Interest is generally accrued on such loans in accordance with the
new terms. The Bank defines a loan as impaired when it is probable the Bank will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's original effective interest
rate or based on the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of the impaired
loan is less than the recorded investment in the loan, the impairment is
recorded through a valuation allowance.
Allowance for Loan Losses
The Bank maintains an allowance for loan losses at a level considered adequate
to provide for probable losses inherent in the existing loan portfolio. The
allowance is increased by provisions for loan losses and reduced by net
charge-offs. The allowance for loan losses is based on estimates, and actual
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 Bank performs 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.
Loans Held for Sale
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.
Other Real Estate Owned
Other real estate owned represents real estate acquired through foreclosure and
is carried at the lower of cost or fair value less estimated selling costs.
Premises and Equipment
Premises, leasehold improvements, furniture, fixtures and equipment are carried
at cost net of accumulated depreciation and amortization, which are calculated
on a straight-line basis over the estimated useful life of the property or the
term of the lease (if less). Premises are depreciated over 40 years, furniture
and fixtures are depreciated over five to 15 years, and equipment is generally
depreciated over three to five years.
Bank-Owned Life Insurance
The Company owns bank-owned life insurance policies (BOLI) on certain
executives. Typically, the Company purcheses single premium BOLI policies and
those premiums are recorded at their cash surrender values. The cash surrender
values are included in other assets. Changes in cash surrender values are
included in noninterest income.
Intangible Assets
Goodwill and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but instead
tested for impairment at least annually. Intangible assets with estimable useful
lives are amortized over their respective estimated useful lives to their
estimated residual values, and periodically reviewed for impairment.
As of December 31, 2005, the Company had identifiable intangible assets
consisting of unrecognized prior service costs of the Company's supplemental
retirement plan (minimum pension liabilities). These intangible assets are
amortized on a straight-line basis over eight years.
45
The following table summarizes the Company's minimum pension liability
intangible as of December 31, 2005 and 2004.
December 31, December 31,
(Dollars in thousands) 2004 Additions Reductions 2005
------ --------- ---------- -------
Minimum pension liability intangible $ -- $ 734 $ -- $ 734
====== ======= ====== =======
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
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 (FAS 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 are:
(In 000's except share data)
2005 2004 2003
---- ---- ----
NET INCOME AS REPORTED $ 6,633 $ 5,064 $ 4,371
Total stock-based employee compensation
expense determined under the fair value
based method for all awardss, net of
related tax effects 381 380 268
------- ------- --------
Net income pro forma $ 6,252 $ 4,684 $ 4,103
======= ======= ========
EARNINGS PER SHARE
Reported:
Basic $ 1.63 $ 1.26 $ 1.11
Diluted $ 1.56 $ 1.23 $ 1.08
Pro forma:
Basic $ 1.53 $ 1.17 $ 1.04
Diluted $ 1.47 $ 1.13 $ 1.02
46
The fair value of the stock option grants used in determining the pro forma net
income and the basic and diluted earnings per share amounts were estimated using
the Black-Scholes option pricing model with the following average assumptions
for the years ended December 31, 2005, 2004 and 2003:
Years Ended December 31,
------------------------
2005 2004 2003
---- ---- ----
Expected term of options in years 5.0 5.0 5.0
Volatility of the Company's
underlying common stock 33.6% 18.2% 16.1%
Risk-free interest rate 4.10% 3.35% 3.09%
Dividend yield 0.54% 0.60% 0.73%
Weighted average fair value $8.97 $6.94 $5.87
The Company adopted SFAS 123R on January 1, 2006 using the modified prospective
method that requires compensation expense be recorded for all unvested stock
options at January 1, 2006. The adoption of SFAS 123R impacted the Company's
consolidated results of operations and earnings per share similarly to the
current pro forma disclosures under SFAS 123.
Earnings Per Common Share
Basic Earnings per Share (EPS) is computed by dividing net income by the
weighted average common shares outstanding. Diluted EPS is computed by dividing
net income by weighted average common shares outstanding including the dilutive
effects of potential common shares (e.g. stock options).
The following table reconciles the numerator and denominator of the Basic and
Diluted earnings per share computations:
(In 000's except share data)
----------------------------
Net Income Weighted Average Shares Per-Share Amount
---------- ----------------------- ----------------
For the year ended 2005
Basic earnings per share $ 6,633 4,074,163 $ 1.63
Stock options 179,937
Diluted earnings per share 4,254,100 $ 1.56
For the year ended 2004
Basic earnings per share $ 5,064 4,011,405 $ 1.26
Stock options 104,763
Diluted earnings per share 4,116,168 $ 1.23
For the year ended 2003
Basic earnings per share $ 4,371 3,939,386 $ 1.11
Stock options 95,109
Diluted earnings per share 4,034,495 $ 1.08
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December
2005 2004 2003
------- ------ -------
(in 000's)
Unrealized holding losses on available-for-sale securities $(2,233) $ (498) $ (615)
Tax effect 929 204 252
------- ------ -------
Unrealized holding losses on available-for-sale
securities, net of tax (1,304) (294) (363)
Less: reclassification adjustment for realized gains
included in net income -- (262) (637)
Tax effect -- 109 264
------- ------ -------
Reclassification adjustment for realized gains included
in net income, net of tax -- (153) (373)
Net change (1,304) (447) (736)
Change in minimum pension liability (573) -- --
Tax effect 238 -- --
------- ------ -------
Change in minimum pension liability, net of tax (335) -- --
------- ------ -------
$(1,639) $ (447) $ (736)
======= ====== =======
The components of accumulated other comprehensive (loss) / income included in
shareholders' equity, are as follows:
2005 2004
-------- ------
(in 000's)
Net unrealized (loss) gain on
available-for-sale securities $ (1,956) $ 274
Tax effect 813 (113)
-------- ------
Unrealized holding (losses) gains on
available-for-sale securities, net of tax (1,143) 161
Minimum pension liability (573) --
Tax effect 238 --
-------- ------
Minimum pension liability, net of tax (335) --
-------- ------
Accumulated other comprehensive (loss) / income $ (1,478) $ 161
======== ======
Derivative instruments
Derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities, are required to be recognized as
either assets or liabilities in the statements of financial position and
recorded at fair value. The Company does not currently utilize derivative
instruments in its operations and does not engage in hedging activities.
47
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS 123R requires all share-based payments to employees,
including grants of employee stock 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
SFAS123 no longer will be an alternative to financial statement recognition. The
Company adopted SFAS 123R on January 1, 2006 using the modified prospective
method ("modified prospective application"). Under modified prospective
application, as it is applicable to the Company, SFAS 123R applies to new grants
and to grants modified, repurchased, or cancelled after January 1, 2006.
Additionally, compensation cost for the portion of grants for which the
requisite service has not been rendered (generally referring to non-vested
grants) that are outstanding as of January 1, 2006 must be recognized as the
remaining requisite service is rendered during the period of and/or the periods
after the adoption of SFAS 123R. The attribution of compensation cost for those
earlier grants will be based on the same method and on the same grant-date fair
values previously determined for the pro forma disclosures required for
companies that did not adopt the fair value accounting method for stock-based
employee compensation.
During 2005, the Board of Directors approved the grant of 25,200 stock options
to certain employees that provided for immediate vesting. The Board of Directors
believed it was in the best interest of the shareholders to provide for
immediate vesting, as it will have a positive impact on future earnings of the
Company by reducing the impact of recording compensation expense upon the
implementation of SFAS 123R. At December 31, 2005, the 25,200 stock options
granted in 2005 had a weighted-average exercise price of $25.81 and represented
approximately 0.62% of common shares outstanding.
Based on the stock-based compensation awards outstanding as of December 31, 2005
for which the requisite service was not fully rendered prior to January 1, 2006,
the Company expects to recognize total pre-tax compensation cost of
approximately $563,000, related to outstanding stock option grants, during 2006
- - 2008 of which approximately $85,000 is expected to be recognized in the first
quarter of 2006, in accordance with the accounting requirements of SFAS 123R.
Future levels of compensation cost recognized related to stock-based
compensation awards (including the aforementioned expected costs during the
period of adoption) maybe impacted by new awards and/or modifications,
repurchases and cancellations of existing awards before and after the adoption
SFAS 123R.
In May 2005, the FASB issued FASB Statement of Financial Accounting Standards
No. 154, Accounting Changes and Error Corrections, (SFAS 154) a Replacement of
APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 establishes, unless
impracticable, retrospective application as the required method for reporting a
change in accounting principle in the absence of explicit transition
requirements specific to a newly adopted accounting principle. Previously, most
changes in accounting principle were recognized by including the cumulative
effect of changing to the new accounting principle in net income of the period
of the change. Under SFAS 154, retrospective application requires (i) the
cumulative effect of the change to the new accounting principle on periods prior
to those presented to be reflected in the carrying amounts of assets and
liabilities as of the beginning of the first period presented, (ii) an
offsetting adjustment, if any, to be made to the opening balance of retained
earnings (or other appropriate components of equity) for that period, and
(iii)financial statements for each individual prior period presented to be
adjusted to reflect the direct period-specific effects of applying the new
accounting principle. Special retroactive application rules apply in situations
where it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. Indirect effects of a change in accounting
principle are required to be reported in the period in which the accounting
change is made. SFAS 154 carries forward the guidance in APB Opinion 20
"Accounting Changes," requiring justification of a change in accounting
principle on the basis of preferability. SFAS 154 also carries forward without
change the guidance contained in APB Opinion 20, for reporting the correction of
an error in previously issued financial statements and for a change in
accounting estimate. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Reclassifications
Certain amounts previously reported in the 2004 and 2003 financial statements
have been reclassified to conform to the 2005 presentation. These
reclassifications did not affect previously reported net income or total
shareholders' equity.
48
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and carrying value of investments in debt and equity
securities at December 31, 2005 and 2004 are summarized in the following tables:
December 31, 2005
-----------------------------------------------
Amortized Unrealized Unrealized Carrying
(Dollars in thousands) Cost Gains Losses Value
-------- -------- -------- --------
Available-for-sale securities:
Securities of the U.S. Treasury
and other government agencies $ 27,231 $ -- $ 558 $ 26,673
Mortgage-backed securities 68,238 48 1,304 66,982
Municipal securities 28,997 159 301 28,855
-------- -------- -------- --------
Total available-for-sale securities $124,466 $ 207 $ 2,163 122,510
======== ======== ======== ========
Equity securities:
Federal Home Loan Bank stock 2,021
Federal Reserve Bank stock 747
CRA mutual fund 2,000
Low income housing tax credit fund 2,000
--------
Total investment securities $129,278
========
December 31, 2004
-----------------------------------------------
Amortized Unrealized Unrealized Carrying
(Dollars in thousands) Cost Gains Losses Value
-------- -------- -------- --------
Available-for-sale securities:
Securities of the U.S. Treasury
and other government agencies $ 39,335 $ 61 $ 255 $ 39,141
Mortgage-backed securities 40,289 203 116 40,376
Municipal securities 14,890 435 54 15,271
--------- -------- -------- --------
Total available-for-sale $ 94,514 $ 699 $ 425 94,788
========= ======== ======== ========
Equity securities:
Federal Home Loan Bank stock 1,932
Federal Reserve Bank stock 663
CRA mutual fund 2,000
--------
Total investment securities $ 99,383
========
49
The following table shows fair values and unrealized losses of securities in the
available-for-sale portfolio at December 31, 2005, by length of time that
individual securities in each category have been in a continuous loss position:
December 31, 2005
--------------------------------------------------------------------------
Less than twelve months Twelve months or longer Total
----------------------- ----------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(Dollars in thousands) Value Losses Value(1) Losses Value Losses
-------- -------- ------- -------- --------- --------
U.S. Government and agency
obligations $ 6,704 $ 64 $ 19,969 $ 494 $ 26,673 $ 558
Mortgage-backed securities
and collateralize 44,600 650 20,966 654 65,566 1,304
Municipal obligations 14,866 135 6,575 166 21,441 301
-------- -------- -------- -------- -------- --------
Totals $ 66,170 $ 849 $ 47,510 $ 1,314 $113,680 $ 2,163
======== ======== ======== ======== ======== ========
(1) As of December 31, 2005, the Company identified twenty-four investments
totaling $47.5 million that had unrealized losses of $1.3 million for a period
of greater than twelve months. Of the twenty-four investments, $20.0 million
related to seven securities classified as U.S. Government and agency
obligations, $21 million related to six securities classified as mortgage-backed
securities and collateralized mortgage obligations and $6.6 million related to
eleven securities classified as municipal obligations. The unrealized losses
associated with these securities were due solely to market interest rate
movements and the Company has the ability and intent to hold these investmetns
until a market recovery or maturity, thus, the impairment was deemed to be
temporary. Market valuations and impairment analysis on assets in the investment
portfolio are reviewed and monitored on an ongoing basis.
The amortized cost and estimated carrying value of debt securities at December
31,2005 by contractual maturity are shown below. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. At December 31,
2005, the Company had investments in mortgage-backed securities with an
amortized cost basis totaling $68,238,000. The contractual maturities, or
principal repayments, of these securities will follow the repayment of the
underlying mortgages. For purposes of the following table, the entire
outstanding balance of these mortgage-backed securities is categorized based on
final maturity date. At December 31, 2005, the Company estimates the average
life of these mortgage-backed securities to be approximately 4.8 years. Average
life is defined as the weighted average time span to principal repayment, with
the amount of the principal paydowns (both scheduled and unscheduled) as the
weights.
Available-for-sale
------------------------------
(Dollars in thousands) Amortized Cost Carrying Value
-------------- --------------
Within one year $ 17,828 $ 17,672
After one but within five years 27,731 27,283
After five but within ten years 18,061 17,944
Over ten years 60,846 59,611
--------- ---------
Total $ 124,466 $122,510
========= =========
As of December 31, 2005 and 2004, securities carried at $4,719,000 and
$5,763,000, respectively, were pledged to secure public deposits as required by
law.
There were no sales of available-for-sale securities during 2005. Total proceeds
from the sale of securities available-for-sale during 2004 and 2003 were
$4,322,000 and $34,626,000, respectively. Gross gains of $262,000 and $637,000
were realized on those sales in 2004 and 2003, respectively.
50
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
At December 31, 2005 and 2004, the loan portfolio consisted of the following;
net of deferred loan fees of $1,448,000, and $1,485,000, respectively:
(In 000's)
(Dollars in thousands) 2005 2004
---- ----
Real estate loans $ 233,723 $ 220,316
Installment loans 38,856 36,339
Construction loans 32,393 27,595
Commercial loans secured by real estate 23,477 26,447
Commercial loans 85,979 67,068
--------- ---------
Total Outstanding Loans 414,428 377,765
Less allowance for loan losses 4,924 4,136
--------- ---------
Total $ 409,504 $ 373,629
========= =========
There were no loans on nonaccrual status at December 31, 2005 or December 31,
2004. There was no interest foregone during 2005, 2004 or 2003. As of December
31, 2005 and 2004, there were no loans 90 days or more past due but still
accruing interest. There were no restructured loans during 2005 or 2004.
Changes in the allowance for loan losses are as follows:
(In 000's)
(Dollars in thousands) 2005 2004 2003
------- ------- -------
Balance, beginning of year $ 4,136 $ 3,524 $ 3,290
Provision for loan losses 815 620 238
Loans charged off (33) (100) (12)
Recoveries of loans previously charged off 6 92 8
------- ------- -------
Balance, end of year $ 4,924 $ 4,136 $ 3,524
======= ======= =======
As of December 31, 2005, 2004 and 2003 there were no impaired loans.
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining recorded investment is doubtful, in which
case payments received are recorded as reductions of principal.
51
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2005 and 2004 consisted of the following:
(In 000's)
Accumulated Net
Depreciation & Book
Cost Amortization Value
---- ------------ -----
2005
Land $ 2,800 $ -- $ 2,800
Premises 5,241 1,298 3,943
Furniture, fixtures and equipment 9,084 7,056 2,028
Leasehold improvements 1,677 973 704
------- ------- -------
Total $18,802 $ 9,327 $ 9,475
======= ======= =======
2004
Land $ 2,800 $ -- $ 2,800
Premises 5,223 1,119 4,104
Furniture, fixtures and equipment 8,537 6,102 2,435
Leasehold improvements 1,869 872 997
------- ------- -------
Total $18,429 $ 8,093 $10,336
======= ======= =======
Depreciation and amortization expense, included in occupancy expense and
equipment expense, was $1,466,000, $1,628,000 and $1,569,000 in 2005, 2004 and
2003, respectively.
NOTE 5 - DEPOSITS
Following is a summary of deposits at December 31, 2005 and 2004:
(In 000's)
2005 2004
-------- --------
Non-interest bearing demand $155,320 $127,250
NOW and savings 148,336 151,053
Money market 128,684 128,884
Time certificates of deposit:
Denominations of less than $100,000 28,826 33,712
Denominations of $100,000 or more 55,227 43,594
-------- --------
Total $516,393 $484,493
======== ========
Interest expense on time certificates of deposits greater than $100,000 was
$1,194,000, $785,000 and $757,000 for 2005, 2004 and 2003, respectively.
52
At December 31, 2005, the scheduled maturities of total time deposits were as
follows:
(In 000's)
Year Total
---- -----
2006 $ 72,714
2007 5,546
2008 2,402
2009 1,373
2010 2,008
2011 --
2012 10
--------
Total $ 84,053
========
NOTE 6 - OTHER BORROWINGS
Total other borrowings were $19 million at December 31, 2005. The following
table summarizes the borrowings:
Fixed Rate Borrowings at December 31, 2005
($ 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%
There were no short-term borrowings at December 31, 2005 or December 31, 2004.
Short-term borrowings consist primarily of federal funds purchased and
borrowings from the FHLB. The Company maintains collateralized lines of credit
with the FHLB. The Company pledges both loans and investment securities to the
FHLB as needed to secure borrowings. At December 31, 2005 $18,079,000 in
investment securities were pledged to the FHLB. There were no loans pledged to
secure the other borrowings at December 31, 2005 or 2004. Based on the FHLB
stock requirements at December 31, 2005, these lines provided for maximum
borrowings of approximately $161.7 million; the Company also has available
unused unsecured lines of credit totaling $17.5 million for federal funds
transactions at December 31, 2005.
NOTE 7 - JUNIOR SUBORDINATED DEBENTURES
On June 26, 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 $10,310,000 in
floating rate Cumulative Trust Preferred Securities (Securities). The Securities
bear interest at a rate of 3-month Libor plus 3.45% and had an initial interest
rate of 5.34%; as of December 31, 2005 the interest rate was 7.97%. 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.
The junior subordinated debenture issued by the Trust is 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 the junior 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 junior subordinated debentures.
53
NOTE 8 - COMMITMENTS AND CONTINGENCIES (See also NOTE 15)
The Company leases premises for its various offices. Total rent on such leases
was $923,000, $833,000 and $662,000 in 2005, 2004 and 2003, respectively, and is
included in occupancy and equipment expenses. The total commitments at December
31, 2005 under non-cancelable operating leases are as follows:
(In 000's)
Year Total
---- -----
2006 $ 925
2007 737
2008 572
2009 418
2010 364
Thereafter 674
-------
Future minimum lease payments $ 3,690
=======
The Company has entered into employment agreements with certain officers of the
Company providing severance to the officers in the event of a change in control
of the Company and termination for other than cause. Other employees losing
their job on account of a reduction in force, branch closing, position
elimination or displacement by reason of a business combination or sale may be
eligible to receive severance pursuant to the Company's employee handbook.
NOTE 9 - SHAREHOLDERS' EQUITY
The Company declared 5% stock dividends on January 27, 2003, January 26, 2004,
January 24, 2005 and February 27, 2006 as well as a 3-for-2 stock split November
22, 2004. All prior periods have been restated to reflect the stock split.
NOTE 10 - STOCK OPTIONS
The Company has a stock option plan under which it may grant up to 1,441,724
options. The Company has granted 1,374,691 options through December 31, 2005.
The option exercise price equals the stock's market price on the date of grant.
The options vest over various periods not in excess of five years from the date
of grant and expire five to ten years from the date of grant. The security
holders have approved the equity compensation plan.
A summary of the status of the Company's stock option plan at December 31, 2005,
2004 and 2003 and stock option activity during the years then ended is presented
in the table below:
2005 2004 2003
---- ---- ----
Weighted Weighted Weighted
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------- ------- ------- ------- ------
Outstanding at beginning of year 617,408 $ 14.74 526,676 $ 12.58 499,332 $10.58
Granted 25,200 25.81 146,605 21.10 143,447 15.14
Exercised (85,985) 12.96 (46,753) 6.64 (85,878) 7.10
Cancelled (22,205) 16.71 (9,119) 8.60 (30,224) 9.59
------- ------- ------- ------- ------- ------
Outstanding at end of year 534,419 $ 15.47 617,408 $ 14.74 526,676 $12.58
======= ======= ======= ======= ======= ======
Exercisable at end of year 354,837 $ 14.58 283,907 $ 12.89 199,075 $11.14
======= ======= ======= ======= ======= ======
54
The following table summarizes information about stock options outstanding at
December 31, 2005:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-/Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Life Exercise Exercise at Exercise
Exercise at 12/21/05 (In years) Price 12/31/2005 Price
-------- ----------- ---------- ----- ---------- -----
$ 9.92 - $14.09 260,803 5.11 $ 11.46 223,495 $ 11.30
$14.83 - $19.03 121,308 6.07 $ 16.06 45,720 $ 15.97
$20.79 - $27.87 152,308 6.29 $ 21.88 85,622 $ 22.36
------- ---- ------- ------- -------
534,419 6.74 $ 15.47 354,837 $ 14.58
======= ==== ======= ======= =======
NOTE 11 - OTHER NONINTEREST INCOME AND EXPENSE
The components of Other Noninterest Income for the years ended December 31,
2005, 2004 and 2003 were as follows:
(In 000's)
2005 2004 2003
------- ------- --------
ATM surcharge $ 439 $ 371 $ 279
Increase of cash value on insurance policies 298 357 338
Merchant services income 512 433 293
Commission on sale of non- deposit products 283 247 214
Commission on sale of mortgage products 31 45 232
Other 305 234 209
------- ------- --------
Total $ 1,868 $ 1,687 $ 1,565
======= ======= ========
The components of Other Noninterest Expense for the years ended December 31,
2005, 2004 and 2003 were as follows:
(In 000's)
2005 2004 2003
------- ------- --------
Professional services $ 2,558 $ 1,240 $ 1,387
Business promotions 561 658 554
Stationary & supplies 499 393 380
Insurance 269 320 224
Other 2,289 $ 2,427 1,983
------- ------- --------
Total $ 6,176 $ 5,038 $ 4,528
55
NOTE 12 - INCOME TAXES
The provision (benefit) for federal and state income taxes for the years ended
December 31, 2005, 2004 and 2003 consisted of:
(In 000's)
2005 2004 2003
---- ---- ----
CURRENT
Federal $ 3,692 $ 2,186 $ 1,521
State 1,282 1,011 602
------- ------- -------
4,974 3,197 2,123
DEFERRED
Federal (720) (13) 70
State (149) (164) (14)
------- ------- -------
(869) (177) 56
------- ------- -------
Total $ 4,105 $ 3,020 $ 2,179
======= ======= =======
Deferred tax assets and liabilities result from differences in the timing of the
recognition of certain income and expense items for tax and financial accounting
purposes. The sources of these differences and the amount of each are as follows
as of December 31, 2005 and 2004:
(In 000's)
2005 2004
------------------------
DEFERRED TAX ASSETS
Allowance for loan losses $ 1,989 $ 1,690
Deferred compensation 850 658
Unrealized loss on securities 813 --
State income tax 397 301
Additional minimum pension liability 238 --
Depreciation 85 --
Other 59
------------------------
$ 4,431 $ 2,649
DEFERRED TAX LIABILITIES
Unrealized gain on securities $ -- $ 113
FHLB Stock Dividend 122 88
Accumulated accretion on
investment securities 185 189
Depreciation -- 147
Leases 296 287
Other -- 1
------- --------
$ 603 $ 825
------- --------
Net deferred tax asset $ 3,828 $ 1,824
======= ========
The Company believes that a valuation allowance is not needed to reduce the
deferred tax assets as it is more likely than not that the deferred tax assets
will be realized through recovery of taxes previously paid and/or future taxable
income.
56
The total tax differs from the federal statutory rate of 34% because of the
following:
(In 000's)
2005 2004 2003
---- ---- ----
Amount Rate Amount Rate Amount Rate
Tax provision at statutory rate $ 3,651 34.00% $ 2,748 34.00% $ 2,227 34.00%
Interest on obligations of states and
political subdivisions exempt from federal taxation (194) -1.81% (192) -2.40% (233) -3.50%
State franchise taxes 751 6.99% 559 6.90% 382 5.80%
Life insurance policies (101) -0.94% (121) -1.50% (115) -1.80%
Other, net (2) -0.02% 26 0.40% (82) -1.20%
------- ----- ------- ----- ------- ------
Total $ 4,105 38.23% $ 3,020 37.40% $ 2,179 33.30%
======= ====== ======= ====== ======= ======
NOTE 13 - RETIREMENT PLANS
401(k) and Profit Sharing Plan
The Company offers a 401(k) and profit sharing plan into which eligible
employees may elect to defer a portion of their eligible compensation, not to
exceed Internal Revenue Service limitations. The Company matches the employees'
contributions at a rate set by the Board of Directors (currently 50% of the
first 5% of deferral of an individual's eligible compensation). The matching
contributions are made in cash and vest over the first six years of employment.
The Company makes discretionary contributions to the profit sharing plan that
are set by the Board of Directors each year. Amounts charged to operating
expenses under these plans representing the Company's contributions were
$460,000, $301,000 and $415,000 for the years ended December 31, 2005, 2004 and
2003, respectively.
Deferred Compensation Plan
The Company has a deferred compensation plan for directors that allows directors
of the Company to defer all or a portion of their compensation. The Company has
purchased insurance on the lives of some of the participants and intends to hold
these policies until death as a cost recovery of the Company's deferred
compensation obligations of $723,000 and $601,000 at December 31, 2005 and 2004,
respectively. Earnings credits on the deferred balances totaling $38,000 in
2005, $33,000 in 2004 and $26,000 in 2003 are included in noninterest expense.
Supplemental Retirement Plan
The Company has a supplemental retirement plan covering key executives and
directors ("Plan"). The Plan is a nonqualified defined benefit plan and is
unsecured and unfunded and there are no Plan assets. The deferred benefit
represents a stated amount for key executives and directors that generally vests
over a stated service period and is reduced for early retirement. The Company
has purchased insurance on the lives of the directors and executive officers in
the plan and intends to use the cash values of these policies ($10,053,000 and
$8,505,000 at December 31, 2005 and 2004 respectively) to pay the retirement and
death benefit obligations. If the life insurance contract is terminated by the
Company, the Company will have the obligation to pay the retirement and death
benefits. The accrued pension obligation was $1,337,000 and $922,000 at December
31, 2005 and 2004, respectively, and is included in "Interest Payable and Other
Liabilities". Accordingly, the plan had additional minimum liabilities of
$1,307,000 as of December 31, 2005 and $0 at December 31, 2004. Due to these
additional minimum liabilities, the plan also had accumulated other
comprehensive expense before taxes of $573,000 at December 31, 2005 and $0 at
December 31, 2004. The measurement date of the plan is December 31.
On October 1, 2005, the Company established the 2005 North Bay Bancorp
Supplemental Executive Retirement Plan ("2005 SERP"). The 2005 SERP is designed
to memorialize the Company's supplemental executive retirement plan pursuant to
which the Company entered into Executive Supplemental Compensation Agreements
("Prior Agreements"). Participants who were eligible to receive benefits
pursuant to the Prior Agreements will have their benefits provided by the 2005
SERP.
57
The following table sets forth the supplemental retirement plan's status:
December 31, December 31,
------------ ------------
2005 2004
------- -----
(Dollars in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $ 922 $ 700
Service cost 135 187
Interest cost 130 49
Actuarial (gain)/loss 619 (14)
Plan amendment 838 -
Benefits paid - -
------- -----
Projected benefit obligation at end of year $ 2,644 $ 922
======= =====
December 31, December 31,
2005 2004
------- ------
(Dollars in thousands)
Change in Plan assets:
Fair value of Plan assets at beginning of year $ -- $ --
------- -------
Fair value of Plan assets at end of year $ -- $ --
======= =======
Unfunded status $(2,644) $ (922)
Unrecognized prior service cost 734 --
Unrecognized net actuarial loss/(gain) 573 --
------- -------
Net amount recognized $(1,337) $ (922)
======= =======
Accrued benefit liability $(2,644) $ (922)
Intangible asset 734 --
Accumulated other comprehensive expense 573 --
------- -------
Net amount recognized $(1,337) $ (922)
======= =======
Weighted-average assumptions at December 31:
Discount rate 5.40% 7.00%
Rate of compensation increase N/A N/A
Expected return on Plan assets N/A N/A
58
The following benefit payments, which reflect anticipated future events, as
appropriate, are expected to be paid over the following years:
Benefit
Year Payments
---- --------
(Dollars in
thousands)
2006 $ 30
2007 83
2008 93
2009 95
2010 105
2011-2015 1,076
The elements of pension costs for the supplemental retirement plan were as
follows:
December 31, December 31,
2005 2004
---- ----
(Dollars in thousands)
Components of net periodic benefits cost:
Service cost $135 $187
Interest cost 130 49
Prior service cost 104 --
Amortization of loss/(gain) 46 --
---- ----
Net periodic benefit cost 415 236
Expense due to special termination benefits -- --
---- ----
Total expense $415 $236
==== ====
The net periodic pension cost was determined using the following assumptions:
Year ended Year ended
December 31, December 31,
2005 2004
---- ----
(Dollars in thousands)
Discount rate in determining expense 5.50% 7.00%
Discount rate in determining benefit obligation at year end 5.40% 7.00%
Rate of increase in future compensation levels for
determining expense N/A N/A
Rate of increase in future compensation levels for
determining benefit obligation at year end N/A N/A
Expected return on Plan assets N/A N/A
The unrecognized prior service costs are amortized on a straight-line basis over
eight years and the ten percent corridor method is used to amortize the
cumulative unrecognized net gain or loss over the average expected future
service of those expected to receive benefits under the plan. The average
projected future service is 5.62 years.
NOTE 14 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank makes loans to directors, officers
and principal shareholders on substantially the same terms, including interest
rates and collateral, as those for comparable transactions with unaffiliated
persons. An analysis of net loans to related parties for the year ended December
31, 2005 is as follows:
(In 000's)
Balance at beginning of year $ 14,418
Additions 7,979
Repayments 11,168
---------
Balance at end of year $ 11,229
=========
Total undisbursed commitments as of December 31, 2005 were $7,953,000.
A law firm in which one of the Company's directors and one of its officers are
principals serves as the Company's general counsel. During 2005, 2004 and 2003
fees of $137,000, $195,000 and $196,000 respectively, were paid to this firm.
59
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank makes commitments to extend credit in the normal course of business to
meet the financing needs of their customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements.
The Bank is exposed to credit loss, in the event of non-performance by the
borrower, in the contract amount of the commitment. The Bank uses the same
credit policies in making commitments as they do for on-balance-sheet
instruments and evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank, is
based on management's credit evaluation of the borrower. Collateral held varies,
but may include accounts receivable, inventory, plant and equipment and real
property.
The Bank also issues standby letters of credit, which are conditional
commitments to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support construction bonds, private borrowing
arrangements and similar transactions. Most of these guarantees are short-term
commitments expiring in decreasing amounts through 2009 and are not expected to
be drawn upon. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds collateral as deemed necessary, as described above.
The contract amounts of commitments not reflected on the Balance Sheet at
December 31, 2005 and 2004 were:
(In 000's)
Contractual Amounts
2005 2004
---- ----
Loan commitments $ 128,183 $ 106,883
Standby letters of credit $ 7,917 $ 2,391
The Bank issues both financial and performance standby letters of credit. The
financial standby letters of credit are primarily to guarantee payment to third
parties. At December 31, 2005 there was $1,508,000 issued in financial standby
letters of credit and the Bank carried no liability. The performance standby
letters of credit are typically issued to municipalities as specific performance
bonds. At December 31, 2005 there was $6,409,000 issued in performance standby
letters of credit and the Bank carried no liability. The terms of the guarantees
will expire primarily in 2006 with 15% expiring in 2007, 6% expiring in 2008,
and 3% expiring in 2009. The Bank has experienced no draws on these letters of
credit, and do not expect to in the future; however, should a triggering event
occur, the Bank either has collateral in excess of the letter of credit or
imbedded agreements of recourse from the customer.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2005 and 2004:
(In 000's)
2005 2004
Carrying Fair Carrying Fair
Amounts Value Amounts Value
------- ----- ------- -----
FINANCIAL ASSETS
Cash and cash equivalents $ 35,344 $ 35,344 $ 60,207 $ 60,207
Time deposits with other financial institutions 100 100 100 100
Investment securities 129,278 129,278 99,383 99,383
Loans, net 409,504 404,763 373,629 373,264
Cash value life insurance 10,053 10,053 8,505 8,505
Accrued interest receivable 2,862 2,862 2,244 2,244
FINANCIAL LIABILITIES
Deposits $ 516,393 $ 516,829 $ 484,493 $ 484,277
Borrowings 19,000 18,404 19,000 19,889
Junior subordinate debentures 10,310 10,310 10,310 10,310
Accrued interest payable 737 737 404 404
60
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents - Cash and cash equivalents are valued at their
carrying amounts because of the short-term nature of these instruments.
Investment securities - Investment securities are valued at quoted market
prices. See Note 2 for further analysis.
Loans - The fair value of loans is estimated by discounting the future cash
flows using current rates at which similar loans would be made to borrowers with
similar credit ratings for the same remaining maturities. The fair value of
impaired loans is stated net of the related valuation allowance, if any.
Accrued interest receivable and payable - The balance approximates its fair
value as these instruments have short-term maturities
Deposits, time deposits with other banks - The fair value of demand deposits,
savings accounts and interest-bearing transaction accounts is the amount payable
on demand at the reporting date. The fair value of time deposits is estimated by
discounting the contractual cash flows at current rates offered for similar
instruments with the same remaining maturities.
Borrowings - The fair value of borrowings is estimated by discounting the
contractual cash flows at current rates offered for similar instruments with the
same remaining maturities.
Junior subordinated debentures - The balance approximates its fair value due to
the structure having frequent repricing interest rates.
Off balance sheet items - The estimated fair value of the Company's off balance
sheet items are not material to the fair value of financial instruments included
in the consolidated balance sheets.
NOTE 17 - CONCENTRATIONS OF CREDIT RISKS
The majority of the Bank's loan activity is with customers located in
California, primarily in the counties of Napa and Solano. Although the Bank has
a diversified loan portfolio, large portions of its loans are for commercial
property, and many of the Bank's loans are secured by real estate in Napa and
Solano County. Approximately 78% of the loans are secured by real estate. This
concentration is presented below:
(In 000's)
December 31, 2005
-----------------
Construction/land development:
Land development $ 5,154
Residential 7,878
Commercial 19,361
Real estate 233,723
Commercial loans secured by real estate 23,477
Installment loans secured by real estate 35,501
---------
Total $ 325,094
=========
NOTE 18 - DIVIDEND RESTRICTIONS
The Company is regulated by the Board of Governors of the Federal Reserve
System. Federal Reserve Board regulations prohibit cash dividends, except under
limited circumstances, if the distribution would result in a withdrawal of
capital or exceed the Bancorp's net profits then on hand after deducting its
losses and bad debts. Furthermore, cash dividends cannot be paid without the
prior written approval of the Federal Reserve Board if the total of all
dividends declared in one year exceeds the total of net profits for that year,
plus the preceding two calendar years, and less any required transfers to
surplus under state or federal law.
61
The shareholders of North Bay Bancorp are entitled to receive dividends when and
as declared by its Board of Directors out of funds legally available, subject to
the restrictions set forth in the California General Corporation Law. The
Corporation Law provides that a corporation may make a distribution to its
shareholders if the corporation's retained earnings equal at least the amount of
the proposed distribution. The Corporation Law further provides that, in the
event that sufficient retained earnings are not available for the proposed
distribution, a corporation may nevertheless make a distribution to its
shareholders if it meets two conditions, which generally stated are as follows:
1) the corporation's assets equal at least 1.25 times its liabilities; and 2)
the corporation's current assets equal at least its current liabilities or, if
the average of the corporation's earnings before taxes on income and before
interest expense for the two preceding fiscal years was less than the average of
the corporation's interest expense for such fiscal years, then the corporation's
current assets must equal at least 1.25 times its current liabilities. The
Company could also be restricted from declaring or paying cash dividends if it
elected to defer interest payments on the subordinated debenture.
One of the primary sources of income for the Company, on a stand-alone basis, is
the dividends from the Bank. The availability of dividends from the Bank is
limited by various statutes and regulations. California law restricts the amount
available for cash dividends by state-chartered banks to the lesser of retained
earnings or the bank's net income for its last three fiscal years (less any
distributions to shareholders made during such period). In the event a bank is
unable to pay cash dividends due to insufficient retained earnings or net income
for its last three fiscal years, cash dividends may be paid under certain
circumstances with the prior approval of the California Department of Financial
Institutions (the "DFI"). At December 31, 2005, $19.9 million of the Bank's
retained earnings were available for dividend declaration to the Company without
prior regulatory approval.
NOTE 19 - RESTRICTIONS
The Bank is required to maintain reserves with the Federal Reserve Bank of San
Francisco equal to a percentage of its reservable deposits. Reserve balances
that were required by the Federal Reserve Bank were $0 and $25,000 for December
31, 2005 and 2004, respectively, and are reported in cash and due from banks on
the balance sheet.
NOTE 20 - REGULATORY MATTERS
The Company is subject to various regulatory capital requirements. Failure to
meet minimum capital requirements can initiate certain mandatory--and possible
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 2005, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2005, the Company and Bank were well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company and Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table. There are no
conditions or events since December 31, 2005 that management believes have
changed the institution's category.
62
The Company's actual capital amounts and ratios are also presented in thousands
in the following tables:
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------ ----------------- ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2005:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Consolidated $ 66,599 13.01% $40,801 >8.00% $ 51,001 >10.00%
The Vintage Bank 61,342 11.99% 40,794 >8.00% 50,992 >10.00%
TIER 1 (TO RISK WEIGHTED ASSETS)
Consolidated $ 61,532 12.02% $20,401 >4.00% $ 30,601 >6.00%
The Vintage Bank 56,275 11.00% 20,397 >4.00% 30,595 >6.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS)
Consolidated $ 61,532 9.87% $24,929 >4.00% $ 31,162 >5.00%
The Vintage Bank 56,275 9.11% 24,702 >4.00% 30,878 >5.00%
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------ ----------------- ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2004:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Consolidated $ 58,216 12.49% $37,280 >8.00% $ 46,600 >10.00%
The Vintage Bank 41,169 11.57% 28,458 >8.00% 35,573 >10.00%
Solano Bank 12,004 10.93% 8,785 >8.00% 10,981 >10.00%
TEIR 1 (TO RISK WEIGHTED ASSETS)
Consolidated $ 53,973 11.58% $18,640 >4.00% $ 27,960 >6.00%
The Vintage Bank 37,949 10.67% 14,229 >4.00% 21,344 >6.00%
Solano Bank 10,981 10.00% 4,392 >4.00% 6,589 >6.00%
TEIR 1 CAPITAL (TO RISK WEIGHTED ASSETS)
Consolidated $ 53,973 9.38% $23,010 >4.00% $ 28,763 >5.00%
The Vintage Bank 37,949 8.43% 18,004 >4.00% 22,506 >5.00%
Solano Bank 10,981 9.31% 4,716 >4.00% 5,895 >5.00%
63
NOTE 21 - FINANCIAL STATEMENTS OF NORTH BAY BANCORP (Parent Company Only)
For the years ended December 31, 2005, 2004 and 2003
CONDENSED BALANCE SHEETS
(In 000's except share data)
Assets 2005 2004
- ------ ---- ----
Cash and due from banks $ 4,582 $ 5,167
Investment in The Vintage Bank 54,797 38,122
Investment in Solano Bank -- 10,969
Investment in North Bay Statutory Trust 1 310 310
Other assets 681 150
-------- --------
Total assets $ 60,370 $ 54,718
======== ========
Liabilities and shareholders' equity
Floating rate subordinated
debenture (trust preferred securities) $ 10,310 $ 10,310
Other liabilities 7 274
-------- --------
Total liabilities 10,317 10,584
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 - 4,099,884 shares in 2005 and
3,823,353 shares in 2004 39,965 33,473
Accumulated other comprehensive income (1,478) 161
Retained earnings 11,566 10,500
-------- --------
Total shareholders' equity 50,053 44,134
-------- --------
Total liabilities and shareholders' equity $ 60,370 $ 54,718
======== ========
64
CONDENSED INCOME STATEMENTS
(In 000's)
2005 2004 2003
------- ------- -------
Income
Interest on investment securities $ -- $ 74 $ 123
Service fees from subsidiaries -- 5,231 6,177
------- ------- -------
Total income -- 5,305 6,300
Expenses
Interest on borrowings 740 559 531
Salaries and related benefits -- 4,441 4,104
Other expenses 469 3,760 3,342
------- ------- -------
Total expenses 1,209 8,760 7,977
Net (loss) income before tax benefit and equity in
net income of subsidiaries (1,209) (3,455) (1,677)
Tax benefit 498 1,415 642
------- ------- -------
Net (loss) income before equity in undistributed net income of subsidiaries (711) (2,040) (1,035)
Equity in undistributed net income of subsidiaries 7,344 7,104 5,406
-------
Net income $ 6,633 $ 5,064 $ 4,371
======= ======= =======
65
CONDENSED STATEMENTS OF CASH FLOWS
(In 000's)
2005 2004 2003
------- ------- -------
Cash Flows From Operating Activities:
Net income $ 6,633 $ 5,064 $ 4,371
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 0 823 812
Amortization of investment securities
premiums, net 0 71 117
Equity in undistributed net income of subsidiaries (7,344) (7,104) (5,406)
Changes in:
Interest receivable and other assets (531) 326 (35)
Interest payable and other liabilities (268) (1,311) 533
------- ------- -------
Net cash provided by operating activities (1,510) (2,131) 392
------- ------- -------
Cash Flows From Investing Activities:
Investment in Solano Bank 0 (3,000) 0
Investment securities available for sale:
Proceeds from maturities and principal payments 0 6,400 785
Purchases 0 0 (4,573)
Sale and disposition of capital assets 0 1,335 0
Capital expenditures 0 (397) (779)
------- ------- -------
Net cash used in investing activities 0 4,338 (4,567)
------- ------- -------
Cash Flows From Financing Activities:
Stock options exercised 1,496 492 644
Dividends (571) (481) (441)
------- ------- -------
Net cash provided by (used in) financing activities 925 11 203
Net (decrease) increase in cash and cash equivalents (585) 2,218 (3,972)
Cash and cash equivalents at beginning of year 5,167 2,949 6,921
------- ------- -------
Cash and cash equivalents at end of year $ 4,582 $ 5,167 $ 2,949
======= ======= =======
66
NOTE 22 - SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth the results of operation for the four quarters
unaudited of 2005, 2004 and 2003. All per share amounts have been adjusted for
the 2003, 2004, 2005 and 2006 stock dividends, as well as the 3-for-2 stock
split in 2004.
67
(In 000's except share data)
2005 Quarters Ended
DEC 31 SEPT 30 JUN 30 MAR 31
------ ------ ------ ------
Interest income $9,197 $8,847 $8,145 $7,676
Interest expense 1,444 1,415 1,171 1,052
------ ------ ------ ------
Net interest income 7,753 7,432 6,974 6,624
Provision for loan losses 100 300 230 185
------ ------ ------ ------
Net Interest Income after provision for loan losses 7,653 7,132 6,744 6,439
Noninterest income 937 1,027 1,021 956
Noninterest expense 5,752 5,211 5,173 5,035
------ ------ ------ ------
Income before provision for income taxes 2,838 2,948 2,592 2,360
Provision for income taxes 1,069 1,131 1,007 898
------ ------ ------ ------
Net income $1,769 $1,817 $1,585 $1,462
====== ====== ====== ======
Basic earnings per share: $ 0.43 $ 0.45 $ 0.39 $ 0.36
Diluted earnings per share: $ 0.42 $ 0.43 $ 0.37 $ 0.34
2004 Quarters Ended
DEC 31 SEPT 30 JUN 30 MAR 31
------ ------ ------ ------
Interest income $7,405 $6,822 $6,294 $6,064
Interest expense 1,035 961 859 688
------ ------ ------ ------
Net interest income 6,370 5,861 5,435 5,376
Provision for loan losses 80 180 174 186
------ ------ ------ ------
Net Interest Income after provision for loan losses 6,290 5,681 5,261 5,190
Noninterest income 969 986 1,257 986
Noninterest expense 4,701 4,667 4,571 4,597
------ ------ ------ ------
Income before provision for income taxes 2,558 2,000 1,947 1,579
Provision for income taxes 986 750 740 544
------ ------ ------ ------
Net income $1,572 $1,250 $1,207 $1,035
====== ====== ====== ======
Basic earnings per share: $ 0.39 $ 0.31 $ 0.30 $ 0.26
Diluted earnings per share: $ 0.37 $ 0.30 $ 0.30 $ 0.26
2003 Quarters Ended
DEC 31 SEPT 30 JUN 30 MAR 31
------ ------ ------ ------
Interest income $5,842 $5,554 $5,494 $5,361
Interest expense 667 681 819 828
------ ------ ------ ------
Net interest income 5,175 4,873 4,675 4,533
Provision for loan losses 103 45 45 45
------ ------ ------ ------
Net Interest Income after provision for loan losses 5,072 4,828 4,630 4,488
Noninterest income 925 1,055 1,059 808
Noninterest expense 3,722 4,267 4,311 4,015
------ ------ ------ ------
Income before provision for income taxes 2,275 1,616 1,378 1,281
Provision for income taxes 975 452 366 386
------ ------ ------ ------
Net income $1,300 $1,164 $1,012 $ 895
====== ====== ====== ======
Basic earnings per share: $ 0.32 $ 0.29 $ 0.26 $ 0.23
Diluted earnings per share: $ 0.32 $ 0.29 $ 0.26 $ 0.22
68
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of North Bay Bancorp is responsible for establishing and maintaining
effective internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
Under the supervision and with the participation of management, including the
principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation under the framework in Internal Control - Integrated
Framework, management of the Company has concluded the Company maintained
effective internal control over financial reporting, as such term is defined in
Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2005.
Internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting can
also be circumvented by collusion or improper management override. Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
Management is also responsible for the preparation and fair presentation of the
consolidated financial statements and other financial information contained in
this report. The accompanying consolidated financial statements were prepared in
conformity with U.S. generally accepted accounting principles and include, as
necessary, best estimates and judgments by management.
KPMG LLP, an independent registered public accounting firm, has audited the
Company's consolidated financial statements as of and for the year ended
December 31, 2005, and the Company's assertion as to the effectiveness of
internal control over financial reporting as of December 31, 2005, as stated in
its reports, which are included herein.
/s/ Terry L. Robinson
- -------------------------------------
Terry L. Robinson
President and Chief Executive Officer
/s/ Patrick E. Phelan
- -------------------------------------
Patrick E. Phelan
Executive Vice President and
Chief Financial Officer
March 15, 2006
69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
North Bay Bancorp:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that North Bay
Bancorp and subsidiaries (the Company) maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that North Bay Bancorp and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, North Bay Bancorp and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
North Bay Bancorp and subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations, comprehensive income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31,2005, and our report dated March 15, 2006, expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
San Francisco, California
March 15, 2006
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
North Bay Bancorp:
We have audited the accompanying consolidated balance sheets of North Bay
Bancorp and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, comprehensive income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of North Bay Bancorp
and subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of North Bay
Bancorp and subsidiaries internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 15, 2006 expressed an unqualified
opinion on management's assessment of, and the effective operation of, internal
control over financial reporting.
/s/ KPMG LLP
San Francisco, California
March 15, 2006
71
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
N/A
Item 9A - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of December 31, 2005, the end of the period covered by this Annual Report on
Form 10-K, the Company's Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based
upon that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer each concluded that as of December 31, 2005, the Company's disclosure
controls and procedures were effective to ensure that the information required
to be disclosed by the Company in this Annual Report on Form 10-K was recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and instructions for Form 10-K.
(b) Management's Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining
effective internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934 as amended). The Company's
internal control over financial reporting is under the general oversight of the
Board of Directors acting through the Audit Committee, which is composed
entirely of independent directors. KPMG LLP, the Company's independent
registered public accounting firm, has direct and unrestricted access to the
Audit Committee at all times, with no members of management present, to discuss
its audit and any other matters that have come to its attention that may affect
the Company's accounting, financial reporting or internal controls. The Audit
Committee meets periodically with management, internal auditors and KPMG LLP to
determine that each is fulfilling its responsibilities and to support actions to
identify, measure and control risk and augment internal control over financial
reporting. Internal control over financial reporting, however, cannot provide
absolute assurance of achieving financial reporting objectives because of its
inherent limitations.
Under the supervision and with the participation of management, including the
Company's Chief Executive Officer and Chief Financial Officer, the Company
conducted an evaluation of the effectiveness of internal control over financial
reporting as of December 31, 2005 based on the framework in "Internal Control
- -Integrated Framework" issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based upon that evaluation, management concluded that
the Company's internal control over financial reporting was effective as of
December 31, 2005. Management's report on internal control over financial
reporting is set forth on page 69 of this Annual Report on Form 10-K, and is
incorporated herein by reference. Management's assessment of the effectiveness
of the Company's internal control over financial reporting has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in its
report, which is set forth on page 70 of this Annual Report of Form 10-K, and is
incorporated herein by reference.
(c) Changes in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting occurred
during the fourth quarter of the year ended December 31, 2005, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
All information required to be disclosed in a current report on Form 8-K during
the fourth quarter of 2005 was so disclosed.
72
PART III
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding the directors and executive officers of the
registrant, see "ELECTION OF DIRECTORS" and "REPORTS OF CHANGES IN BENEFICIAL
OWNERSHIP" in the Company's definitive proxy statement for the 2005 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A (the "Proxy
Statement"), which is incorporated herein by reference.
Code of Ethics
North Bay Bancorp has adopted a Code of Ethics that applies to all its
directors, officers and employees, a current copy of which is available to
shareholders on the Company's web-sit. The Company's web-site is located at
www.northbaybancorp.com.
Item 11 - EXECUTIVE COMPENSATION
For information concerning compensation of the executive officers of Bancorp,
see "EXECUTIVE COMPENSATION" in the Proxy Statement, which is incorporated
herein by reference.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
For information concerning the security ownership of certain beneficial owners
and management of Bancorp, see "SECURITY OWNERSHIP OF MANAGEMENT" in the Proxy
Statement, which is incorporated herein by reference.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related transactions, see
"OTHER INFORMATION REGARDING MANAGEMENT" in the Proxy Statement, which is
incorporated herein by reference.
Item 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
For information concerning amounts paid for audit and related fees see "PROPOSAL
NO. 3" in the Proxy Statement, which is incorporated herein by reference.
73
Part IV
Item 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
(i) Consolidated Balance Sheets, December 31, 2005 and 2004
(ii) Consolidated Statements of Operations for the years ended December
2005, 2004, and 2003
(iii) Consolidated Statements of Comprehensive Income for the years ended
December 2005, 2004, and 2003
(iv) Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2005, 2004, and 2003
(v) Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004, and 2003
(vi) Consolidated Notes to Financial Statements
(vii) Report of Independent Registered Public Accounting Firm
Schedules have been omitted as inapplicable or because the information required
is included in the financial statements or notes thereto.
3. Exhibits
See Exhibit Index on page 77 of this Report.
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NORTH BAY BANCORP
By: /s/Terry L. Robinson
--------------------------
Terry L. Robinson, President
& Chief Executive Officer
Dated: March 15, 2006
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
- ------------------------- Director
Lauren A. Ackerman
Director
- -------------------------
John B. Anthony, III
/s/Thomas N. Gavin Director March 15, 2006
- -------------------------
Thomas N. Gavin
/s/David B. Gaw Director and March 15, 2006
- ------------------------- Chairman of the Board
David B. Gaw
/s/Fred J. Hearn Jr. Director March 15, 2006
- -------------------------
Fred J. Hearn Jr.
/s/Conrad W. Hewitt Director March 15, 2006
- -------------------------
Conrad W. Hewitt
Director
- -------------------------
Connie L. Klimisch
/s/Richard S. Long Director and March 15, 2006
- ------------------------- Vice Chairman of the Board
Richard S. Long
Director
- -------------------------
Thomas H. Lowenstein
/s/Thomas F. Malloy Director March 15, 2006
- -------------------------
Thomas F. Malloy
75
Director
- -------------------------
Andrew J. Nicks M.D.
/s/Terry L. Robinson President, Chief March 15, 2006
- ------------------------- Executive Officer and Director
Terry L. Robinson (Principal Executive Officer)
/s/ Thomas H. Shelton Director March 15, 2006
- -------------------------
Thomas H. Shelton .
/s/ Stephen C. Spencer Director March 15, 2006
- -------------------------
Stephen C. Spencer
/s/ Denise C. Suihkonen Director March 15, 2006
- -------------------------
Denise C. Suihkonen
/s/ James E. Tidgewell Director March 15, 2006
- -------------------------
James E. Tidgewell
/s/ Patrick E. Phelan Executive Vice President March 15, 2006
- ------------------------- Chief Financial Officer
Patrick E. Phelan (Principal Financial Officer)
76
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Plan of Reorganization and Merger Agreement entered into as of July 30,
1999 by and among The Vintage Bank, Vintage Merger Co. and North Bay
Bancorp. (1)
3.1 Restated Articles of Incorporation of Registrant. (11)
3.2 Amended and Restated Bylaws. (12)
4.1 Certificate Evidencing Floating Rate Capital Securities. (6)
4.2 Floating Rate Junior Subordinated Deferrable Interest Debenture. (6)
4.3 Certificate Evidencing Floating Rate Common Securities. (6)
4.4 Guarantee Agreement. (6)
4.5 Indenture dated June 26, 2002 , North Bay Bancorp Issuer, State Street
Bank and Trust Company of Connecticut, N.A., as Trustee for Floating
Rate Junior Subordinated Deferrable Interest Debenture. (6)
4.6 Rights Agreement, dated as of October 24, 2002, between the Company and
Registrar and Transfer Company, as Rights Agent. (7)
4.7 Certificate of Determination for the Series A Preferred Stock (attached
as Exhibit A to Rights Agreement). (7)
4.8 Rights Certificate (attached as Exhibit B to Rights Agreement.).
Printed Rights Agreement will not be mailed until the Distribution Date
as defined therein. (7)
4.9 Summary of Rights to Purchase Preferred Shares (attached as Exhibit C
to Rights Agreement). (7)
10.1 Amended North Bay Bancorp Stock Option Plan. (6) *
10.2 North Bay Bancorp 2002 Stock Option Plan and Related Agreement (8)*
10.3 Sublease by and between The Vintage Bank, as Lessor, and North Bay
Bancorp, as Lessee, with respect to premises at 1190 Airport Road, Napa
California. (10)
10.4 Lease entered into May 9, 2003 by Solano Bank and Fairfield West
Partners, LLC for premises at 1411 Oliver Road, Fairfield California.
(2)
10.5 North Bay Bancorp Directors Deferred Fee Plan* (11)
10.6 Employment Agreement entered into as of May 1, 2004 by and between
North Bay Bancorp and Terry L. Robinson.* (11)
10.6(a) First Amendment to Employment Agreement dated as of March 28, 2005 by
and between North Bay Bancorp and Terry L. Robinson. * (11)
10.7 Employment Agreement entered into as of May 1, 2001 by and between
Solano Bank and Glen C. Terry. (5) *
10.7(a) First Amendment to Employment Agreement dated as of March 28, 2005 by
and between The Vintage Bank and Glen C. Terry. * (11)
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10.8 Employment Agreement entered into as of May 1, 2001 by and between
North Bay Bancorp and Kathi Metro. (5) *
10.9 North Bay Bancorp 401K and Profit Sharing Plan.* (11)
10.10 Life Insurance Endorsement Method Split Dollar Plan Agreement for Terry
L. Robinson (9). *
10.11 Lease entered into January 5, 2004 by North Bay Bancorp and James N.
Ditmer, dba Cordelia Edison Partners for a central warehousing facility
located at 499 Edison Court Suite A-1, Cordelia California. (2)
10.12 Life Insurance Endorsement Method Split Dollar Plan Agreement for
Lee-Ann Cimino. (9). *
10.13 Life Insurance Endorsement Method Split Dollar Plan Agreement for Kathi
Metro. (9)*
10.14 Life Insurance Endorsement Method Split Dollar Plan Agreement for Glen
C. Terry. (9)*
10.15 Employment Agreement effective as of June 1, 2005 by and between The
Vintage Bank and John A. Nerland. (13) *
10.16 Form of Amended and Restated Executive Supplemental Compensation
Agreement* (11)
10.17 Amended and Restated Declaration of Trust by and Among State Street
Bank and Trust Company of Connecticut, N.A, as Institutional Trustee,
North Bay Bancorp as Sponsor, and Administrators, Dated as of June 26,
2002. (6)
10.18 2005 Executive Bonuses*
10.19 2006 Executive Officer Base Salaries*
10.20 [Intentionally Left Blank]
10.21 Form of Indemnity Agreement for directors and officers (11)
10.22 Summary of Principal Terms of Employment for Stephanie Rode (12) *
10.23 North Bay Bancorp Supplemental Executive Retirement Plan (13) *
10.24 Summary of Principal Terms of Employment for Patrick E. Phelan *
10.25 Summary of Principal Terms of Employment for Virginia Robbins *
10.26 John A. Nerland Supplemental Executive Retirement Agreement *
10.27 John A. Nerland Split Dollar Life Plan Agreement *
11. Statement re: computation of per share earnings is included in Note 1
to the financial statements to the prospectus included in Part I of
this Registration Statement.
21. Subsidiaries of Registrant are: The Vintage Bank, a California banking
corporation and North Bay Bancorp Statutory Trust I, a Connecticut
trust.
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23. Consent of KPMG LLP as independent public accountants for North Bay
Bancorp, The Vintage Bank and Solano Bank.
25. Power of Attorney.
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.
* Employment Contracts and Compensation Plans.
(1) Attached as Exhibit 7(c)(2) to North Bay Bancorp's Current Report on
Form 8-K filed with the Securities and Exchange Commission on November
29, 1999, and incorporated herein by reference.
(2) Attached as Exhibits 3.2, 10.4, 10.6, and 10.11 respectively, 5 to
North Bay Bancorp's Annual Report as Form 10-K for the year ended
December 31, 2003 filed with the Securities and Exchange Commission,
and incorporated herein by reference.
(3) Intentionally left blank.
(4) Intentionally left blank
(5) Attached as Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to North
Bay Bancorp's Quarterly Report as Form 10-Q for the quarter ended June
30, 2001 filed with the Securities and Exchange Commission, and
incorporated herein by reference.
(6) Attached as Exhibits 4.1, 4.2, 4.3, 4.4, 4.5, 10.1, 10.15, and 10.17,
respectively, to North Bay Bancorp's Quarterly Report as Form 10-Q for
the quarter ended June 30, 2002 filed with the Securities and Exchange
Commission, and incorporated herein by reference.
(7) Attached as Exhibits 4.1, 4.2, 4.3, and 4.4, respectively, to the Form
8-A Registration Statement filed by North Bay Bancorp with the
Securities and Exchange Commission on October 31, 2002 and incorporated
herein by reference.
(8) Attached as Exhibit 99.1 to Registration Statement No. 333-90006 on
Form S-8 filed by North Bay Bancorp with the Securities and Exchange
Commission on June 7, 2002 and incorporated herein by reference.
(9) Attached as Exhibits 10.10, 10.11, 10.12, 10.13, and 10.14,
respectively, to North Bay Bancorp's Annual Report on Form 10-K for the
year ended December 31, 2001 filed with the Securities and Exchange
Commission and incorporated herein by reference.
(10) Attached as Exhibits 10.3 to North Bay Bancorp's Annual Report as Form
10-K for the year ended December 31, 2002 filed with the Securities and
Exchange Commission and incorporated herein by reference.
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(11) Attached as Exhibits 3.1, 10.5, 10.6, 10.6(a)., 10.7(a).,10.9, 10.16
and 10.21, respectively, to North Bay Bancorp's Annual Report on Form
10-K for the year ended December 31, 2004 filed with the Securities and
Exchange Commission and incorporated herein by reference.
(12) Attached as Exhibits 3.2 and 10.1, respectively, to North Bay Bancorp's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 filed
with the Securities and Exchange Commission and incorporated herein by
reference.
(13) Attached as Exhibits 10.1 and 10.2, respectively, to North Bay
Bancorp's Quarterly Report on Form 10-Q for the quarter ended September
30, 2005 filed with the Securities and Exchange Commission and
incorporated herein by reference.
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