SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR the quarter period ended March 31, 2004
Commission File No. 0-31080
NORTH BAY BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0434802
- ---------------------------------------- ------------------------------------
(State or Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
1190 Airport Road, Suite 101, Napa, California 94558
----------------------------------------------------------
(Address of principal executive office including Zip Code)
Registrant's telephone number, including area code: (707) 252-5026
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
Preferred Share Purchase Rights
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the North Bay Bancorp's Common
Stock outstanding as of May 10, 2004: 2,404,171
Part 1.
FINANCIAL INFORMATION
FORWARD LOOKING STATEMENTS
- --------------------------
In addition to the historical information, this Quarterly Report contains
certain forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 321E of the Securities Exchange
Act of 1934, as amended, and are subject to the "Safe Harbor" created by those
Sections. The reader of this Quarterly Report should understand that all such
forward-looking statements are subject to various uncertainties and risks that
could affect their outcome. The Company's actual results could differ materially
from those suggested by such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, (i)
variances in the actual versus projected growth in assets, return on assets,
loan losses, expenses, rates charged on loans and earned on securities
investments, rates paid on deposits, and fee and other noninterest income
earned; (ii) competitive pressures among depository and other financial
institutions may increase significantly and have an effect on pricing, spending,
third-party relationships and revenues; (iii) enactment of adverse government
regulations; (iv) adverse conditions and volatility, as a result of recent
economic uncertainty created by the United States' war on terrorism, the war in
Iraq, in the stock market, the public debt market and other capital markets and
the impact of such conditions of the Company; (v) continued changes in the
interest rate environment may reduce interest margins and adversely impact net
interest income; (vi) as well as other factors. This entire Quarterly Report
should be read to put such forward-looking statements in context and to gain a
more complete understanding of the uncertainties and risks involved in the
Company's business.
Moreover, wherever phrases such as or similar to "In Management's opinion", or
"Management considers" are used, such statements are as of and based upon the
knowledge of Management at the time made and are subject to change by the
passage of time and/or subsequent events, and accordingly such statements are
subject to the same risks and uncertainties noted above with respect to
forward-looking statements.
FINANCIAL INFORMATION
- ---------------------
The information for the three months ended March 31, 2004 is unaudited, but in
the opinion of management reflects all adjustments which are necessary to
present fairly the financial condition of North Bay Bancorp (Company) at March
31, 2004 and the results of operations and cash flows for the three months then
ended. Results for interim periods should not be considered as indicative of
results for a full year.
2
Item 1.
FINANCIAL STATEMENTS
North Bay Bancorp
Consolidated Balance Sheets
Unaudited
(In 000's except share data)
March 31, March 31, December 31,
Assets 2004 2003 2003
-------- -------- --------
Cash and due from banks $ 36,772 $ 28,995 $ 28,756
Federal funds sold 27,000 14,729 9,195
-------- -------- --------
Total cash and cash equivalents 63,772 43,724 37,951
Time deposits with other financial institutions 100 100 100
Investment Securities:
Held-to-maturity 0 1,250 0
Available-for-sale 77,984 98,337 90,655
Equity securities 1,358 1,349 1,351
-------- -------- --------
Total investment securities 79,342 100,936 92,006
Loans, net of allowance for loan losses of $3,703 in March, 2004
$3,327 in March, 2003 and $3,524 in December, 2003 317,386 237,646 303,139
Loans held-for-sale 3,398 14,189 3,095
Investment in subsidiary 310 0 0
Bank premises and equipment, net 10,629 11,320 10,909
Accrued interest receivable and other assets 13,165 11,679 12,282
-------- -------- --------
Total assets $488,102 $419,594 $459,482
======== ======== ========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $111,632 $ 93,903 $103,401
Interest bearing 322,451 276,746 303,044
-------- -------- --------
Total deposits 434,083 370,649 406,445
Subordinated debentures 10,310 10,000 10,000
Accrued interest payable and other liabilities 3,170 3,083 3,596
-------- -------- --------
Total liabilities 447,563 383,732 420,041
Shareholders' equity:
Preferred stock - no par value:
Authorized, 500,000 shares;
Issued and outstanding - none
Common stock - no par value:
Authorized, 10,000,000 shares;
Issued and outstanding - 2,404,171 shares in March, 2004,
2,244,793 shares in March, 2003, and 2,285,646 in December, 2003 33,023 28,460 29,210
Retained earnings 6,477 6,148 9,623
Accumulated other comprehensive income 1,039 1,254 608
-------- -------- --------
Total shareholders' equity 40,539 35,862 39,441
Total liabilities and shareholders' equity $488,102 $419,594 $459,482
======== ======== ========
The accompanying notes are an integral part of these statements
3
North Bay Bancorp
Consolidated Income Statements
Unaudited
(In 000's except share data)
Three Months Ended
---------------------
March 31, March 31,
2004 2003
------ ------
Interest Income
Loans (including fees) $5,256 $4,356
Federal funds sold 41 63
Investment securities - taxable 607 782
Investment securities - tax exempt 160 160
------ ------
Total interest income 6,064 5,361
Interest Expense
Deposits 557 687
Long term debt 131 141
------ ------
Total interest expense 688 828
Net interest income 5,376 4,533
Provision for loan losses 186 45
------ ------
Net interest income after
provision for loan losses 5,190 4,488
Non interest income 986 709
Gains on securities transactions, net 0 99
------ ------
Total non interest income 986 808
Non interest expenses
Salaries and employee benefits 2,504 2,306
Occupancy 367 257
Equipment 492 450
Other 1,234 1,002
------ ------
Total non interest expense 4,597 4,015
------ ------
Income before provision for
income taxes 1,579 1,281
Provision for income taxes 544 386
------ ------
Net income $1,035 $ 895
====== ======
Basic earnings per common share: $ 0.43 $ 0.38
====== ======
Diluted earnings per common share: $ 0.42 $ 0.37
====== ======
Dividends Paid: $ 0.20 $ 0.20
====== ======
The accompanying notes are an integral part of these statements
4
North Bay Bancorp
Consolidated Statement of Change in Shareholders' Equity
For the Three Months Ended
March 31, 2004
(Unaudited)
(In 000's except share data)
Accumulated
Other Total
Common Shares Common Retained Comprehensive Shareholders' Comprehensive
Outstanding Stock Earnings Income Equity Income
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 2,285,646 $29,210 $9,623 $ 608 $39,441
Stock dividend 113,997 3,706 (3,723) (17)
Cash dividend (458) (458)
Comprehensive income:
Net income 1,035 1,035 $1,035
Other comprehensive loss, net of tax:
Change in net unrealized
losses on available-for-sale
securities, net of tax of $306 431 431 431
Comprehensive income $1,466
======
Stock options exercised, net of tax of $20 4,528 107 107
--------- ------- -------
BALANCE, MARCH 31, 2004 2,404,171 $33,023 $6,477 $1,039 $40,539
========= ======= ====== ====== =======
The accompanying notes are an integral part of these statements
5
North Bay Bancorp
Consolidated Statement of Cash Flows
Unaudited
(In 000's)
Three Months Ended March 31,
----------------------------
2004 2003
-------- --------
Cash Flows From Operating Activities:
Net income $ 1,035 $ 895
Adjustment to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 397 376
Provision for loan losses 186 45
Amortization of deferred loan fees (171) (141)
Proceeds from sale of loans held-for-sale 10,204 11,991
Purchase of loans held-for-sale (10,507) (26,180)
Premium amortization (discount accretion), net 112 294
Gain on securities transactions 0 (99)
Changes in:
Interest receivable and other assets (1,189) 200
Interest payable and other liabilities (406) (188)
-------- --------
Net cash used by operating activities (339) (12,807)
-------- --------
Cash Flows From Investing Activities:
Investment securities held-to-maturity:
Proceeds from maturities and principal payments 0 22
Investment securities available-for-sale:
Proceeds from maturities and principal payments 13,296 9,922
Proceeds from sale of securities 0 10,241
Purchases 0 (14,374)
Equity securities:
Purchases (7) 0
Net increase in loans (14,262) (3,213)
Capital expenditures (117) (896)
-------- --------
Net cash (used) provided in investing activities (1,090) 1,702
-------- --------
Cash Flows From Financing Activities:
Net increase in deposits 27,638 2,846
Stock options exercised 87 114
Dividends paid (475) (441)
-------- --------
Net cash provided by financing activities 27,250 2,519
-------- --------
Net increase (decrease) in cash and cash equivalents 25,821 (8,586)
Cash and cash equivalents at beginning of year 37,951 52,310
-------- --------
Cash and cash equivalents at end of period $ 63,772 $ 43,724
======== ========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 777 $ 809
Taxes paid $ 880 $ 135
The accompanying notes are an integral part of these statements
6
NORTH BAY BANCORP
Notes to the Consolidated Financial Statements
(Unaudited)
March 31, 2004
NOTE 1 - Basis of Presentation
- ------------------------------
The accompanying consolidated financial statements, which include the accounts
of North Bay Bancorp and its subsidiaries together the "Company", have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and in Management's opinion, include all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of results
for such interim periods. The subsidiaries consist of two community banks, The
Vintage Bank, established in 1985, and Solano Bank, which opened in 2000 and
Vintage Capital Trust, a subsidiary of The Vintage Bank, which was established
in February 2003. North Bay has announced its intension, subject to regulatory
approval, to consolidate its subsidiary banks to simplify the Company's
corporate structure. All significant intercompany transactions and balances have
been eliminated. The Company de-consolidated its subsidiary, North Bay Statutory
Trust 1, effective March 31, 2004. The Trust has no independent assets or
operations and exists solely for the purpose of issuing and selling trust
preferred securities.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to SEC rules or regulations; however, the Company
believes that the disclosures made are adequate to make the information
presented not misleading. The interim results for the three months ended March
31, 2004 and 2003, are not necessarily indicative of results for the full year.
It is suggested that these financial statements be read in conjunction with the
financial statements and the notes included in the Company's Annual Report for
the year ended December 31, 2003.
NOTE 2 - Commitments
- --------------------
The Company has outstanding standby Letters of Credit of approximately
$1,359,000, undisbursed real estate and construction loans of approximately
$13,340,000, and undisbursed commercial and consumer lines of credit of
approximately $75,262,000, as of March 31, 2004. The Company had outstanding
standby Letters of Credit of approximately $658,000, undisbursed real estate and
construction loans of approximately $25,209,000, and undisbursed commercial and
consumer lines of credit of approximately $58,560,000, as of March 31, 2003.
NOTE 3 - Earnings Per Common Share
- ----------------------------------
The Company declared a 5% stock dividend on January 26, 2004. As a result of the
stock dividend the number of common shares outstanding and earnings per share
data was adjusted retroactively for all periods presented.
The following table reconciles the numerator and denominator of the Basic and
Diluted earnings per share computations:
Weighted Average Per-Share
Net Income Shares Amount
---------- ------ ------
(In 000's except share data)
For the three months ended March 31, 2004
Basic earnings per share $1,035 2,401,352 $0.43
Dilutive effect of stock options 81,876
Diluted earnings per share 2,483,228 $0.42
For the three months ended March 31, 2003
Basic earnings per share $895 2,351,509 $0.38
Dilutive effect of stock options 75,670
Diluted earnings per share 2,427,179 $0.37
7
NOTE 4- Stock-Based Compensation
- --------------------------------
The Company uses the intrinsic value method to account for its stock option
plans (in accordance with the provisions of Accounting Principles Board Opinion
No. 25 and related interpretations). Under this method, compensation expense is
recognized for awards of options to purchase shares of common stock to employees
under compensatory plans only if the fair market value of the stock at the
option grant date (or other measurement date, if later) is greater than the
amount the employee must pay to acquire the stock. Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation", permits companies to continue using the intrinsic-value method to
account for stock option plans or adopt a fair value based method. The fair
value based method results in recognizing as expense over the vesting period the
fair value of all stock-based awards on the date of grant. The Company has
elected to continue to use the intrinsic value method and the pro forma
disclosures required by SFAS 123. Using the fair value method the Company's net
income and earnings per share amounts would have been reduced to the pro forma
amounts as indicated below:
(In 000's except share data)
For the three months
ended March 31,
------------------------
2004 2003
--------- --------
Net income as reported $ 1,035 $ 895
Total stock-based employee
compensation
expense determined under
the fair value based method
for all awards, net of related
tax effects 83 61
--------- --------
Net income pro forma $ 952 $ 834
Earnings per share:
As reported:
Basic $ .43 $ .38
Diluted $ .42 $ .37
Pro forma:
Basic $ .40 $ .35
Diluted $ .38 $ .34
NOTE 5 - Impact of Recently Issued Accounting Standards
- -------------------------------------------------------
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51" (FIN 46). FIN 46 provides a new framework for
identifying variable interest entities (VIEs) and determining when a company
should include the assets, liabilities, noncontrolling interests and results of
activities of a VIE in its consolidated financial statements. Prior to the
implementation of FIN 46, VIEs were generally consolidated by the company when
the company had a controlling financial interest through ownership of the
majority of the voting inertest in the company. The provisions of FIN 46 were
effective immediately. In October 2003, the FASB agreed to defer the effective
date of FIN 46 for VIEs to allow time for certain implementation issues to be
addressed. On December 24, 2003, the FASB released its latest interpretation
(FIN 46R) of the appropriate accounting treatment for VIEs, which in part,
specifically addresses limited purpose trusts formed to issue trust preferred
securities. In July 2003, the Board of Governors of the Federal Reserve issued a
supervisory letter instructing bank holding companies to continue to include the
trust preferred securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of any accounting treatment changes and, if
necessary or warranted, provide further appropriate guidance. There can be no
assurance that the Federal Reserve will continue to allow institutions to
include trust preferred securities in Tier 1 capital for regulatory purposes. If
the trust preferred securities were no longer allowed to be included in Tier 1
capital, the Company would also be permitted to redeem the capital securities
without penalty.
The Company adopted FIN 46R effective March 31, 2004, and the effect was to
de-consolidate the subsidiary trust North Bay Statutory Trust I, and move the
mandatory redeemable preferred securities directly to the parent company balance
sheet under the caption "subordinated debentures." The Company prospectively
applied this ruling in the accompanying financial information.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
- --------------------------
In addition to the historical information this Quarterly Report contains certain
forward-looking statements. The reader of this Quarterly Report should
understand that all such forward-looking statements are subject to various
uncertainties and risks that could affect their outcome. The Company's actual
results could differ materially from those suggested by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, variances in the actual versus projected growth in
assets, return on assets, loan losses, expenses, rates charged on loans and
earned on securities investments, rates paid on deposits, competition effects,
fee and other noninterest income earned, the economic uncertainty created by the
United States' war on terrorism and the war in Iraq, as well as other factors.
This entire Quarterly Report should be read to put such forward-looking
statements in context and to gain a more complete understanding of the
uncertainties and risks involved in the Company's business.
Moreover, wherever phrases such as or similar to "In Management's opinion"
"Management considers" are used, such statements are as of and based upon the
knowledge of Management at the time made and are subject to change by the
passage of time and/or subsequent events, and accordingly such statements are
subject to the same risks and uncertainties noted above with respect to
forward-looking statements.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's accounting policies are integral to understanding the results
reported. The most complex accounting policies require management's judgment to
ascertain the valuation of assets, liabilities, commitments and contingencies.
The Company has established detailed policies and control procedures that are
intended to ensure valuation methods are well controlled and applied
consistently from period to period. In addition, the policies and procedures are
intended to ensure that the process for changing methodologies occurs in an
appropriate manner. The following is a brief description of our current
accounting policies involving significant management valuation judgments.
Allowance for Loan Losses.
The allowance for loan losses represents management's best estimate of losses
inherent in the existing loan portfolio. The allowance for loan losses is
increased by the provision for loan losses charged to expense and reduced by
loans charged-off, net of recoveries.
We evaluate our allowance for loan loss on a monthly basis. We believe that the
allowance for loan loss is a "critical accounting estimate" because it is based
upon management's assessment of various factors affecting the collectibility of
the loans, including current and projected economic conditions, past credit
experience, delinquency status, the value of the underlying collateral, if any,
and a continuing review of the portfolio of loans and commitments.
We determine the appropriate level of the allowance for loan losses, primarily
on an analysis of the various components of the loan portfolio, including all
significant credits on an individual basis. We segment the loan portfolios into
as many components as practical. Each component would normally have similar
characteristics, such as risk classification, past due status, type of loan,
industry or collateral.
Management has an established methodology for calculating the level of the
allowance for loan losses. We analyze the following components of the portfolio
and provide for them in the allowance for loan losses:
Specific allowances defined as:
o Management assessment of all loans classified as substandard or worse,
with an outstanding balance of $100,000
o A specific allowance is provided for any amount by which the loan's
collateral fair value is insufficient to cover the loan; or
discounting estimated further cash flows, or by observing the loan's
market price if it is of a kind for which there is a secondary market
General allowance defined as:
o An allowance for all loans outstanding within the portfolio and not
contained in the specific allowances
Judgmental allowance defined as:
o National and local economic trends and conditions
o Trends in volume of loans
o Changes in underwriting standards and/or lending personnel
o Concentrations of credit within the portfolio
No assurance can be given that the Company will not sustain loan losses that are
sizable in relation to the amount provided, or that subsequent evaluations of
the loan portfolio will not require an increase in the allowance. Prevailing
factors in association with the methodology may include improvement or
deterioration of individual commitments or pools of similar loans, or loan
concentrations.
Available for Sale Securities.
SFAS 115 requires that Available for Sale securities be carried at fair value.
We believe this is a "critical accounting estimate" in that the fair value of a
security is based on quoted market prices or if quoted market prices are not
available, fair values are extrapolated from the quoted prices of similar
9
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
purposes and such amounts as measured by tax laws and regulations. We consider
the scheduled reversal of deferred tax liabilities, projected future taxable
income, amounts available in the carryback periods, and tax planning strategies
to support our position that it is more likely than not the benefit of our
deferred tax assets will be realized.
10
OVERVIEW
- --------
Net income was $1,035,000 or $.42 per diluted share for the three months ended
March 31, 2004, compared with $895,000 or $.37 per diluted share for the three
months ended March 31, 2003, an increase of 16%. Total assets were $488,102,000
as of March 31, 2004; equating to a 16% growth in assets during the twelve
months ended March 31, 2004.
SUMMARY OF EARNINGS
NET INTEREST INCOME
The following table provides a summary of the components of interest income,
interest expense and net interest margins for the three months ended March 31,
2004 and March 31, 2003:
(In 000's)
2004 2003
------------------------------------------ --------------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
-------------------------------------------------------------------------------------
Loans (1)(2) $ 313,742 $ 5,256 6.70% $ 246,273 $ 4,356 7.08%
Investment securities:
Taxable 68,275 606 3.55% 88,757 781 3.52%
Non-taxable (3) 16,464 218 5.30% 13,595 242 7.12%
--------- --------- --------- ---------
TOTAL LOANS AND INVESTMENT
SECURITIES 398,481 6,080 6.10% 348,625 5,379 6.17%
Due from banks, time 100 1 4.00% 100 1 4.00%
Federal funds sold 16,492 41 .99% 22,243 63 1.13%
--------- --------- --------- ---------
TOTAL EARNING ASSETS 415,073 $ 6,122 5.90% 370,968 $ 5,443 5.87%
--------- --------- --------- ---------
Cash and due from banks 30,973 23,121
Allowance for loan losses (3,596) (3,348)
Premises and equipment, net 10,824 11,110
Investment in subsidiary 310 0
Accrued interest receivable
and other assets 13,007 11,654
--------- ---------
TOTAL ASSETS $ 466,591 $ 413,505
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Interest bearing demand $ 200,863 $ 247 0.49% $ 155,564 $ 229 0.59%
Savings 37,978 21 0.22% 29,643 34 0.46%
Time 72,111 289 1.60% 83,044 424 2.04%
--------- --------- ---- --------- --------- ----
310,952 557 .72% 268,251 687 1.02%
Long-term debt 10,310 131 5.08% 10,000 141 5.64%
TOTAL INTEREST BEARING
LIABILITIES 321,262 $ 688 .86% 278,251 $ 828 1.19%
--------- --------- --------- ---------
Noninterest bearing DDA 101,567 95,441
Accrued interest payable
and other liabilities 5,164 3,966
Shareholders' equity 38,598 35,847
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 466,591 $ 413,505
========= =========
NET INTEREST INCOME $ 5,434 $ 4,615
========= =========
NET INTEREST INCOME TO
AVERAGE EARNING ASSETS
(Net Interest Margin (4)) 5.24% 4.98%
11
(1) Average loans would include nonaccrual loans. The Company had no nonaccrual
loans during 2004 or 2003.
(2) Loan interest income includes loan fee income of $356 and $258 for the three
months ended March 31, 2004 and March 31, 2003, respectfully.
(3) Average yields shown are on a taxable-equivalent basis. On a non-taxable
basis, 2004 interest income on tax exempt securities was $160 with an average
yield of 3.89%; in 2003, on a non-taxable basis, interest income on tax exempt
securities was $160 with an average yield of 4.71%.
(4) Net interest margin is calculated by dividing net interest income by the
average balance of total earning assets for the applicable period
Net interest income represents the amount by which interest earned on earning
assets (primarily loans and investments) exceeds the amount of interest paid on
deposits. Net interest income is a function of volume, interest rates and level
of non-accrual loans. Non-refundable loan origination fees are deferred and
amortized into income over the life of the loan.
Net interest income before the provision for loan losses on a taxable-equivalent
basis for the three months ended March 31, 2004 and March 31, 2003 was
$5,434,000 and $4,615,000, respectively. These results equate to an 18% increase
in net interest income for the first quarter of 2004 compared to the first
quarter of 2003. Loan fee income, which is included in interest income from
loans, was $356,000 for the three months ended March 31, 2004, compared with
$258,000 for the three months ended March 31, 2003.
Taxable-equivalent interest income increased $679,000 or 12% in the first
quarter of 2004 compared with the same period of 2003. The net increase of
$679,000 was attributable to an increase in the volume of earning assets
accounting for $1,048,000 of this increase, offset by a decrease of $369,000
attributable to lower rates. Interest paid on interest-bearing liabilities
decreased $140,000 in the first quarter of 2004 compared with the first quarter
of 2003. Although increases in the volume of deposits and other borrowings
accounted for an increase of $21,000 it was offset by $161,000 attributable to
lower rates.
The average balance of earning assets increased $44,105,000 or 12% when compared
with March 31, 2003 and the average balance of interest-bearing liabilities
increased $42,701,000 or 15% compared with the same period in 2003. Management
does not expect a material change in the Company's net interest margin during
the next twelve months as the result of a modest increase or decrease in general
interest rates.
12
The following table sets forth a summary of the changes in interest earned and
interest paid for the three months ended March 31, 2004 over the same period of
2003 resulting from changes in assets and liabilities volumes and rates. The
change in interest due to both rate and volume has been allocated in proportion
to the relationship of absolute dollar amounts of change in each.
(In 000's)
2004 Over 2003
---------------------------------
Volume Rate Total
---------------------------------
Increase (Decrease) In
Interest and Fee Income
Time Deposits With Other
Financial Institutions $ 0 $ 0 $ 0
Investment Securities:
Taxable (180) 5 (175)
Non-Taxable (1) 51 (75) (24)
Federal Funds Sold (16) (6) (22)
Loans 1,193 (293) 900
---------------------------------
Total Interest and Fee Income 1,048 (369) 679
---------------------------------
Increase (Decrease) In
Interest Expense
Deposits:
Interest Bearing
Transaction Accounts 67 (49) 18
Savings 10 (23) (13)
Time Deposits (56) (79) (135)
---------------------------------
Total Deposits 21 (151) (130)
Long-term Debt 0 (10) (10)
---------------------------------
Total Interest Expense 21 (161) (140)
---------------------------------
Net Interest Income $ 1,027 ($ 208) $ 819
=================================
(1) The interest earned is taxable-equivalent.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------
The Company maintains an allowance for loan losses at a level considered
adequate to provide for losses that can be reasonably anticipated. The allowance
is increased by the provision for loan losses and reduced by net charge offs.
The allowance for loan losses is based on estimates, and ultimate losses may
vary from current estimates. These estimates are reviewed periodically and as
adjustments become necessary they are reported in earnings in the periods in
which they become known. The Company conducts credit reviews of the loan
portfolio and considers current economic conditions, historical loan loss
experience and other factors in determining the adequacy of the allowance
balance. This evaluation establishes a specific allowance for all classified
loans over $100,000 and establishes percentage allowance requirements for all
other loans, according to the classification as determined by the Company's
internal grading system. As of March 31, 2004 the allowance for loan losses of
$3,703,000 represented 1.15% of loans outstanding. As of March 31, 2003, the
allowance represented 1.38% of loans outstanding. During the three months ended
March 31, 2004 $186,000 was charged to expense for the loan loss provision,
compared with $45,000 for the same period in 2003. The increase in the expense
for the loan loss provision was to provide for growth in the overall loan
13
portfolio. There were net charge-offs of $7,000 during the first three months of
2004 compared with $8,000 net charge-offs during the first three months of 2003.
The following table summarizes changes in the allowance for loan losses:
(In 000's)
For the three months ended
--------------------------------
March 31, 2004 March 31, 2003
-------------- --------------
Balance, beginning of period $ 3,524 $ 3,290
Provision for loan losses 186 45
Loans charged off (8) (11)
Recoveries of loans previously charged off 1 3
------- -------
Balance, end of period $ 3,703 $ 3,327
======= =======
Allowance for loan losses to total outstanding loans 1.15% 1.38%
There were no loans on non-accrual status as of March 31, 2004, March 31, 2003
or December 31, 2003. There were no loans 90 days or more past due and still
accruing interest or restructured loans at March 31, 2004, March 31, 2003 or
December 31, 2003.
NON-INTEREST INCOME
- -------------------
Non-interest income, excluding gains on the sale of securities, was $986,000 for
the three months ended March 31, 2004 compared with $709,000 for the same period
in 2003, a 39% increase. Non-interest income primarily consists of service
charges and other fees related to deposit accounts. The increase in non-interest
income resulted primarily from an increase in the number of deposit accounts,
transaction volumes and directly related service charges. Service charges on
deposit accounts increased proportionately more than deposits because of
improved collection efforts and implementation of an overdraft privilege program
that commenced in the fourth quarter of 2003.
GAINS ON SECURITIES
- -------------------
Net gains of $99,000 as of March 31, 2003 resulted from the sale of several
available-for-sale securities. There were no gains or losses for the three
months ended March 31, 2004.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense for the three months ended March 31, 2004 and March 31,
2003 was $4,597,000 and $4,015,000, respectively, a 14% increase. Salaries and
employee benefits expense for the three months ended March 31, 2004 and 2003
were $2,504,000 and $2,306,000, respectively, a 9% increase. The increase in
2004 resulted from increased salaries paid to Company officers and employees,
and an increase of approximately twenty-one full-time equivalent (FTE) employees
from 139 at March 31, 2003 to 160 at March 31, 2004. The increases in FTE were
related to increasing sales activity and lending staff to support the loan
growth. Occupancy expense for the three months ended March 31, 2004 and 2003
were $367,000 and $257,000, respectively, a 43% increase. The increase in 2004
is attributable to opening a branch office and relocated Executive and
Administration offices to new leased offices in March 2003. Equipment expenses
for the three months ended March 31, 2004 and 2003 was $492,000 and $450,000,
respectively, representing an increase of 9%, Other expenses for the three
months ended March 31, 2004 and March 31, 200 were $1,234,000 and $1,002,000,
respectively, a 23% increase. Components of other non-interest expenses that
increased materially were insurance expenses, donations and general supplies.
INCOME TAXES
- ------------
The Company reported a provision for income tax for the three months ended March
31, 2004 and 2003 of $544,000 and $386,000, respectively. Both the 2004 and 2003
provisions reflect tax accruals at statutory rates for federal income taxes,
adjusted primarily for the effect of the Company's investments in tax-exempt
municipal securities, bank owned life insurance policies and state taxes.
BALANCE SHEET
- -------------
Total assets as of March 31, 2004 were $488,102,000 compared with $419,594,000
as of March 31, 2003, and $459,482,000 at December 30, 2003 equating to a 16%
increase during the twelve months ended March 31, 2004, and a 6% increase for
the three months ended March 31, 2004. Total deposits as of March 31, 2004 were
$434,083,000 compared with $370,649,000 as of March 31, 2003, and $406,445,000
at December 30, 2003 representing a 17% increase during the twelve months then
ended, and a 7% increase for the three months ended March 31, 2004. Gross loans
outstanding as of March 31, 2004 were $321,089,000 compared with $240,973,000 as
of March 31, 2003, and $306,663,000 at December 30, 2003 equating to a 33%
increase during the twelve months then ended and a 5% increase for the three
months ended March 31, 2004.
LOANS HELD FOR SALE
- -------------------
The Company had $3,398,000, $14,189,000 and $3,095,000 in purchased
participations in mortgage loans as of March 31, 2004, March 31, 2003 and
December 31, 2003, respectively. Loans originated or purchased and considered
held for sale are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized through a valuation allowance by
charges to income.
SUBORDINATED DEBENTURES
- -----------------------
During June 2002, the Company formed North Bay Statutory Trust I (Trust), a
Connecticut statutory business trust, for the purpose of issuing guaranteed
14
undivided beneficial interest in junior subordinated debentures (trust preferred
securities). During June 2002, the Trust issued $10 million in floating rate
Cumulative Trust Preferred Securities (Securities). The Securities bear interest
at a rate of Libor plus 3.45% and had an initial interest rate of 5.34%; as of
March 31, 2004 the interest rate was 4.56%; the Securities will mature on June
26, 2032, but earlier redemption is permitted under certain circumstances, such
as changes in tax or regulatory capital rules.
As previously discussed the Company de-consolidated the Trust as of March 31,
2004. As a result, the junior subordinated debentures issued by the Company to
the issuer trust, totaling $10,310,000 are reflected on the Company's
consolidated balance sheet, under the caption Subordinated Debentures. The
Company also recognized its $310,000 investment in the trust, which is recorded
in Investment in Subsidiary. The Trust has no independent assets or operations
and exist for the sole purpose of issuing trust preferred securities and
investing the proceeds thereof in an equivalent amount of subordinated
debentures issued by the Company.
The Securities, the subordinated debentures, and the common securities issued by
the Trust are redeemable in whole or in part on or after June 26, 2007, or at
any time in whole, but not in part, upon the occurrence of certain events. The
Securities are included in Tier 1 capital for regulatory capital adequacy
determination purposes, subject to certain limitations. The Company fully and
unconditionally guarantees the obligations of the Trust with respect to the
issuance of the Securities.
Subject to certain exceptions and limitations, the Company may, from time to
time, defer subordinated debenture interest payments, which would result in a
deferral of distribution payments on the Securities and, with certain
exceptions, prevent the Company from declaring or paying cash distributions on
the Company's common stock or debt securities that rank junior to the
subordinated debentures.
LIQUIDITY AND CAPITAL ADEQUACY
- ------------------------------
The Company's liquidity is determined by the level of assets (such as cash,
Federal Funds, and investment in unpledged marketable securities) that are
readily convertible to cash to meet customer withdrawals and borrowings.
Management reviews the Company's liquidity position on a regular basis to ensure
that it is adequate to meet projected loan funding and potential withdrawal of
deposits. The Company has a comprehensive Asset/Liability Management and
Liquidity Policy, which it uses to determine adequate liquidity. As of March 31,
2004 liquid assets were 29% of total assets, compared with 35% as of March 31,
2003.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) established
ratios used to determine whether a Company is "Well Capitalized," "Adequately
Capitalized," "Undercapitalized," "Significantly Undercapitalized," or
"Critically Undercapitalized." A Well Capitalized Company has risk-based capital
of at least 10%, tier 1 risked-based capital of at least 6%, and a leverage
ratio of at least 5%. As of March 31, 2004, the Company's risk-based capital
ratio was 13.27%. The Company's tier 1 risk-based capital ratio and leverage
ratio were 12.34% and 10.61%, respectively.
15
As the following table indicates, the Company and the Banks currently exceeds
the regulatory capital minimum requirements. The Company and the Banks are
considered "Well Capitalized" according to regulatory guidelines.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- --------------------------------------
(In 000's)
Mininum Regulatory Requirements
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, 2004:
Total Capital (to Risk
Weighted Assets)
Consolidated $53,203 13.27% $32,086 8.00% $40,108 less than or equal to 10.00%
The Vintage Bank 35,903 11.60% 24,767 8.00% 30,959 less than or equal to 10.00%
Solano Bank 9,138 10.40% 7,031 8.00% 8,789 less than or equal to 10.00%
Tier I Capital (to Risk
Weighted Assets)
Consolidated 49,500 12.34% 16,043 4.00% 24,064 less than or equal to 6.00%
The Vintage Bank 32,938 10.64% 12,383 4.00% 18,575 less than or equal to 6.00%
Solano Bank 8,400 9.56% 3,516 4.00% 5,274 less than or equal to 6.00%
Tier I Capital (to
Average Assets)
Consolidated 49,500 10.61% 18,657 4.00% 23,321 less than or equal to 5.00%
The Vintage Bank 32,938 9.11% 14,470 4.00% 18,088 less than or equal to 5.00%
Solano Bank 8,400 9.00% 3,734 4.00% 4,667 less than or equal to 5.00%
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. Although
the Company manages other risks, as in credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to be a
principal market risk. Other types of market risks, such as foreign currency
exchange rate risk, do not arise in the normal course of the Company's business
activities. The majority of the Company's interest rate risk arises from
instruments, positions and transactions entered into for purposes other than
trading. They include loans, securities available-for-sale, deposit liabilities,
short-term borrowings and long-term debt. Interest rate risk occurs when assets
and liabilities reprice at different times as interest rates change.
The Company manages interest rate risk through its Audit Committee, which serves
as the Asset Liability Committee (ALCO). The ALCO monitors exposure to interest
rate risk on a quarterly basis using both a traditional gap analysis and
simulation analysis. Traditional gap analysis identifies short and long-term
interest rate positions or exposure. Simulation analysis uses an income
simulation approach to measure the change in interest income and expense under
rate shock conditions. The model considers the three major factors of (a) volume
differences, (b) repricing differences and (c) timing in its income simulation.
The model begins by disseminating data into appropriate repricing buckets based
on internally supplied algorithms (or overridden by calibration). Next, each
major asset and liability type is assigned a "multiplier" or beta to simulate
how much that particular balance sheet category type will reprice when interest
rates change. The model uses eight asset and liability multipliers consisting of
bank-specific or default multipliers. The remaining step is to simulate the
timing effect of assets and liabilities by modeling a month-by-month simulation
to estimate the change in interest income and expense over the next 12-month
period. The results are then expressed as the change in pre-tax net interest
income over a 12-month period for +1%, and +2% shocks.
Utilizing the simulation model to measure interest rate risk at March 31, 2004
and December 31, 2003 the Company is within the established exposure of a 4%
change in "return on equity" tolerance limit. There were no significant changes
in interest rate risk from the annual report on form 10-K for December 31, 2003.
16
Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
Based on their evaluation as of March 31, 2004, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
Changes in Internal Controls:
There have not been any significant changes in our internal controls over
financial reporting or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
17
PART 2
OTHER INFORMATION
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to the business of the
Company, there are no material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) An index of exhibits begins on page 20.
(b) During the quarter ended March 31, 2004 the Company filed the
following Current Reports on Form 8-K:
Filed January 29, 2004, under Item 5 of Form 8-K, reported that
it will increase its provision for income taxes for 2003 due to a
recent announcement by the California Franchise Tax Board
regarding its position on the tax treatment of certain real
estate investment vehicles. As a result, the registrant's 2003
net income will be reduced by approximately $386,000 or 17 cents
per share.
Filed February 6, 2004, under Items 5 and 9 of Form 8-K,
declaring a 5% stock dividend and a 20-cents-per-share cash
dividend, payable March 29, 2004 to shareholders as of March 12,
2004.
Filed February 24, 2004, under Item 12 of Form 8-K, reporting net
income of $4.4 million for year ended December 31, 2003.
Filed March 4, 2004, under Item 5 of Form 8-K, announcing plans
to consolidate its bank subsidiary charters as part of a
corporate initiative to simplify and streamline its corporate
structure, increase efficiency and improve operating performance.
No financial statements were filed with the Current Reports on Form
8-K.
18
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this quarterly report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH BAY BANCORP
A California Corporation
Date: May 13 , 2004 BY: /s/ Terry L. Robinson
--------------------------------
Terry L. Robinson
President & CEO
Principal Executive Officer
Date: May 13, 2004 BY: /s/ Lee-Ann Cimino
--------------------------------
Lee-Ann Cimino
Senior Vice President
Principal Financial Officer
19
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Statement re: computation of per share earnings is included in
Note 3 to the unaudited condensed consolidated financial
statements of Registrant.
31.1 Certificate of Principal Executive Officer Pursuant to SEC
Release 33-8238
31.2 Certificate of Principal Financial Officer Pursuant to SEC
Release 33-8238
32.1 Certificate of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350
32.2 Certificate of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350
20