10-Q 1 p19562_10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR the quarter period ended September 30, 2005 Commission File No. 0-31080 NORTH BAY BANCORP ----------------- (Exact name of registrant as specified in its charter) California 68-0434802 ---------- ---------- (State or Jurisdiction of incorporation) (I.R.S. Employer Identification No.) 1190 Airport Road, Suite 101, Napa, California 94558 ---------------------------------------------------- (Address of principal executive office including Zip Code) Registrant's telephone number, including area code: (707) 252-5026 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value -------------------------- Preferred Share Purchase Rights ------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No_____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes _____ No __X__ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes _____ No __X__ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of North Bay Bancorp's Common Stock outstanding as of November 10, 2005: 3,897,504 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 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 Quarterly Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company's business. Moreover, wherever phrases such as or similar to "In Management's opinion", or "Management considers" are used, such statements are as of and based upon the knowledge of Management at the time made and are subject to change by the passage of time and/or subsequent events, and accordingly such statements are subject to the same risks and uncertainties noted above with respect to forward-looking statements. FINANCIAL INFORMATION --------------------- The information for the three months and nine months ended September 30, 2005 and September 30, 2004 is unaudited, but in the opinion of management reflects all adjustments which are necessary to present fairly the financial condition of North Bay Bancorp (Company) at September 30, 2005 and September 30, 2004 and the results of operations and cash flows for the three and nine months then ended. Results for interim periods should not be considered as indicative of results for a full year. 2 Item 1. FINANCIAL STATEMENTS
North Bay Bancorp Consolidated Balance Sheets (In 000's except share data) (Unaudited) September 30, December 31, Assets 2005 2004 --------- --------- Cash and due from banks $ 31,148 $ 27,442 Federal funds sold 70,745 32,865 --------- --------- Total cash and cash equivalents 101,893 60,307 Investment Securities: Available-for-sale 104,741 94,788 Equity securities 4,662 4,595 --------- --------- Total investment securities 109,403 99,383 Loans, net of allowance for loan losses of $4,832 at September, 2005 and $4,136 at December, 2004 392,877 373,629 Loans held-for-sale 0 4,604 Investment in subsidiary 310 310 Bank premises and equipment, net 9,542 10,336 Accrued interest receivable and other assets 16,018 13,494 --------- --------- Total assets $ 630,043 $ 562,063 ========= ========= Liabilities and Shareholders' Equity Deposits: Non-interest bearing $ 166,239 $ 127,250 Interest bearing 380,611 357,243 --------- --------- Total deposits 546,850 484,493 Subordinated debentures 10,310 10,310 Long Term Borrowings 19,000 19,000 Accrued interest payable and other liabilities 4,763 4,126 --------- --------- Total liabilities 580,923 517,929 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 - 3,897,504 shares at September, 2005 and 3,641,289 at December, 2004 39,816 33,473 Retained earnings 9,799 10,500 Accumulated other comprehensive income (495) 161 --------- --------- Total shareholders' equity 49,120 44,134 --------- --------- Total liabilities and shareholders' equity $ 630,043 $ 562,063 ========= =========
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 Nine months Ended September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ------- ------- ------- ------- Interest Income Loans (including fees) $ 7,340 $ 5,865 $20,918 $16,515 Federal funds sold 465 39 805 139 Investment securities - taxable 921 805 2,604 2,117 Investment securities - tax exempt 121 113 341 409 ------- ------- ------- ------- Total interest income 8,847 6,822 24,668 19,180 Interest Expense Deposits 1,081 677 2,680 1,845 Short term borrowings 0 0 0 1 Long term debt 334 284 958 662 ------- ------- ------- ------- Total interest expense 1,415 961 3,638 2,508 ------- ------- ------- ------- Net interest income 7,432 5,861 21,030 16,672 Provision for loan losses 300 180 715 540 ------- ------- ------- ------- Net interest income after provision for loan losses 7,132 5,681 20,315 16,132 Non interest income 1,027 986 3,005 2,967 Gains on securities transactions, net 0 0 0 262 ------- ------- ------- ------- Total non interest income 1,027 986 3,005 3,229 Non interest expense Salaries and employee benefits 2,763 2,566 8,221 7,633 Occupancy 477 369 1,317 1,080 Equipment 487 502 1,566 1,509 Other 1,484 1,230 4,315 3,613 ------- ------- ------- ------- Total non interest expense 5,211 4,667 15,419 13,835 ------- ------- ------- ------- Income before provision for Income taxes 2,948 2,000 7,901 5,526 Provision for income taxes 1,131 750 3,036 2,034 ------- ------- ------- ------- Net income $ 1,817 $ 1,250 $ 4,865 $ 3,492 ======= ======= ======= ======= Basic earnings per common share: $ 0.47 $ 0.33 $ 1.26 $ 0.92 ======= ======= ======= ======= Diluted earnings per common share: $ 0.45 $ 0.32 $ 1.20 $ 0.89 ======= ======= ======= ======= Dividends paid: $ 0.00 $ 0.00 $ 0.15 $ 0.13 ======= ======= ======= =======
The accompanying notes are an integral part of these statements 4
North Bay Bancorp Consolidated Statements of Comprehensive Income (Unaudited) (In 000's) Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ---------------------------------------------------------------- Net income $1,817 $1,250 $4,865 $3,492 Other comprehensive income (loss), net of tax: Change in net unrealized losses on available-for sale securities, during the period, net of deferred income tax (benefit) of ($188), $641, ($466), and $193, respectively. (266) 901 (656) (271) ----------------------------------------------------------------- Total other comprehensive income (loss) $1,151 $2,151 $4,209 $3,221 ====== ====== ====== ======
The accompanying notes are an integral part of these statements
North Bay Bancorp Consolidated Statement of Change in Shareholders' Equity For the Nine months Ended September 30, 2005 (Unaudited) (In 000's except share data) . Accumulated Other Total Common Shares Common Retained Comprehensive Shareholders' Comprehensive Outstanding Stock Earnings Income (loss) Equity Income ----------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2004 3,641,289 $33,473 $10,500 $ 161 $44,134 Stock dividend 184,353 4,996 (5,011) (15) Cash dividend (555) (555) Comprehensive income: Net income 4,865 4,865 $4,865 Other comprehensive loss, net of tax: Change in net unrealized losses on available-for-sale securities, net of tax of $466 (656) (656) (656) ------- Comprehensive income $4,209 ======= Stock options exercised, including tax benefit of $373 71,862 1,347 1,347 --------- ------- ------- ------ ------- BALANCE, SEPTEMBER 30, 2005 3,897,504 $39,816 $ 9,799 $ (495) $49,120 ========= ======= ======= ====== =======
The accompanying notes are an integral part of these statements 5 North Bay Bancorp Consolidated Statement of Cash Flows (Unaudited ) (In 000's)
Nine months Ended September 30, 2005 2004 --------- --------- Cash Flows From Operating Activities: Net income $ 4,865 $ 3,492 Adjustment to reconcile net income to net cash provided by (used by) operating activities: Depreciation and amortization 1,153 1,212 Provision for loan losses 715 540 Amortization of deferred loan fees (622) (442) Proceeds from sale of loans held-for-sale 75,886 182,777 Purchase of loans held-for-sale (71,282) (199,914) Premium amortization (discount accretion), net 41 199 Cash benefit from the exercise of stock options (373) (65) Gain on securities transactions 0 (262) Changes in: Interest receivable and other assets (2,058) (940) Interest payable and other liabilities 1,009 136 --------- --------- Net cash provided by (used by) operating activities 9,334 (13,267) Cash Flows From Investing Activities: Investment securities available-for-sale: Proceeds from maturities and principal payments 9,756 30,226 Proceeds from sale of securities 0 4,322 Purchases (20,871) (36,911) Equity securities: Purchases (67) (1,203) Net increase in loans (19,341) (51,362) Capital expenditures (359) (960) --------- --------- Net cash used in investing activities (30,882) (55,888) Cash Flows From Financing Activities: Net increase in deposits 62,357 70,347 Increase in long-term borrowings 0 19,000 Stock options exercised 1,347 543 Dividends paid (570) (475) --------- --------- Net cash provided by financing activities 63,134 89,415 --------- --------- Net increase in cash and cash equivalents 41,586 20,260 Cash and cash equivalents at beginning of year 60,307 37,951 --------- --------- Cash and cash equivalents at end of period $ 101,893 $ 58,211 ========= ========= Supplemental Disclosures of Cash Flow Information: Interest paid $ 3,308 $ 2,299 Taxes paid $ 3,145 $ 2,860
The accompanying notes are an integral part of these statements 6 NORTH BAY BANCORP Notes to the Consolidated Financial Statements ---------------------------------------------- (Unaudited) September 30, 2005 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 The Vintage Bank, established in 1985, and Vintage Capital Trust, a subsidiary of The Vintage Bank, which was established in February 2003. Solano Bank, formerly a subsidiary of the Company, was merged into The Vintage Bank in the first quarter of 2005 and now operates as a division of The Vintage Bank. All significant intercompany transactions and balances have been eliminated. The Company de-consolidated its subsidiary, North Bay Statutory Trust 1, effective March 31, 2004. The Trust has no independent assets or operations and exists solely for the purpose of issuing and selling trust preferred securities. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to SEC rules or regulations; however, the Company believes that the disclosures made are adequate to make the information presented not misleading. The interim results for the three months and nine months ended September 30, 2005 and 2004, are not necessarily indicative of results for the full year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Company's Annual Report for the year ended December 31, 2004. NOTE 2 - Commitments -------------------- The Company has outstanding standby Letters of Credit of approximately $8,832,000, undisbursed real estate and construction loans of approximately $21,043,000, and undisbursed commercial and consumer lines of credit of approximately $97,364,000, as of September 30, 2005. The Company had outstanding standby Letters of Credit of approximately $2,221,000, undisbursed real estate and construction loans of approximately $24,123,000, and undisbursed commercial and consumer lines of credit of approximately $82,961,000, as of September 30, 2004. NOTE 3 - Earnings Per Common Share ---------------------------------- The Company declared 5% stock dividends on January 26, 2004 and January 26, 2005 as well as a 3-for-2 stock split on November 22, 2004. As a result of the stock dividends and stock split the number of common shares outstanding and earnings per share data were adjusted retroactively for all periods presented. The following table reconciles the numerator and denominator of the Basic and Diluted earnings per share computations:
Weighted Average Per-Share Net Income Shares Amount ---------- ------ ------ (Dollars in 000's except share data) For the three months ended September 30, 2005 --------------------------------------------- Basic earnings per share $1,817 3,888,998 $0.47 Dilutive effect of stock options 171,598 --------- Diluted earnings per share 4,060,596 $0.45 For the three months ended September 30, 2004 --------------------------------------------- Basic earnings per share $1,250 3,820,591 $0.33 Dilutive effect of stock options 103,462 --------- Diluted earnings per share 3,924,053 $0.32 For the nine months ended September 30, 2005 -------------------------------------------- Basic earnings per share $4,865 3,874,118 $1.26 Dilutive effect of stock options 171,689 --------- Diluted earnings per share 4,045,807 $1.20 For the nine months ended September 30, 2004 -------------------------------------------- Basic earnings per share $3,492 3,796,906 $.92 Dilutive effect of stock options 118,498 --------- Diluted earnings per share 3,915,404 $.89
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 123R), "Accounting for Stock-Based Compensation", permits companies to continue using the intrinsic-value method to account for stock option plans or adopt a fair value based method. The fair value based method results in recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Company has elected to continue to use the intrinsic value method and the pro forma disclosures required by SFAS 123. Using the fair value method the Company's net income and earnings per share amounts would have been reduced to the pro forma amounts as indicated below: (In 000's except share data) For the three months ended September 30, 2005 2004 ------ ------ Net income as reported $1,817 $1,250 Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects 61 83 ------ ------ Net income pro forma $1,756 $1,167 ====== ====== Earnings per share: As reported: Basic $ .47 $ .33 Diluted $ .45 $ .32 Pro forma: Basic $ .45 $ .31 Diluted $ .43 $ .30 (In 000's except share data) For the nine months ended September 30, 2005 2004 ------ ------ Net income as reported $4,865 $3,492 Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects 299 249 ------ ------ Net income pro forma $4,566 $3,243 ====== ====== Earnings per share: As reported: Basic $ 1.26 $ .92 Diluted $ 1.20 $ .89 Pro forma: Basic $ 1.18 $ .85 Diluted $ 1.13 $ .83 NOTE 5 - Impact of Recently Issued Accounting Standards ------------------------------------------------------- In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" (FIN 46). FIN 46 provides a new framework for identifying variable interest entities (VIEs) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. Prior to the implementation of FIN 46, VIEs were generally consolidated by the company when the company had a controlling financial interest through ownership of the majority of the voting interest in the company. 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. On March 1, 2005, the Federal Reserve adopted a final rule that allows the continued inclusion of Trust Preferred securities in the Tier 1 capital of Bank Holding Companies, subject to certain quantitative limits. 8 The Company adopted FIN 46R effective March 31, 2004, and the effect was to de-consolidate the subsidiary trust, North Bay Statutory Trust 1, and move the mandatory redeemable preferred securities directly to the parent company balance sheet under the caption "subordinated debentures". The Company prospectively applied this ruling in the accompanying financial information. In December 2004, the FASB issued FASB Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim reporting period of the Company's fiscal year beginning after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R on January 1, 2006. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R will not have a material impact on the Company's consolidated results of operations and earnings per share. The Company has not yet determined the method of adoption or the effect of adopting SFAS 123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123. In May 2005, the FASB issued FASB Statement of Financial Accounting Standard 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 principles 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. The Company does not expect SFAS 154 will significantly impact its financial statements upon its adoption on January 1, 2006. NOTE 6 - Borrowings ------------------- Total borrowings were $19 million at September 30, 2005 and 2004. The following table summarizes the borrowings:
Fixed Rate Borrowings at September 30, 2005 and 2004 ($ in 000's) Amount Maturity Date Interest Rate ------ ------------- ------------- Federal Home Loan Bank Advance $5,000 4-17-2006 2.24% Federal Home Loan Bank Advance 5,000 4-16-2007 2.83% Federal Home Loan Bank Advance 9,000 4-14-2008 3.23% -------- Total $19,000 Weighted average interest rate 2.86%
9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS -------------------------- In addition to the historical information this Quarterly Report contains certain forward-looking statements. The reader of this Quarterly Report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Company's actual results could differ materially from those suggested by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments, rates paid on deposits, competition effects, fee and other noninterest income earned, the economic uncertainty created by the United States' war on terrorism and the war in Iraq, as well as other factors. This entire Quarterly Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company's business. Moreover, wherever phrases such as or similar to "In Management's opinion" "Management considers" are used, such statements are as of and based upon the knowledge of Management at the time made and are subject to change by the passage of time and/or subsequent events, and accordingly such statements are subject to the same risks and uncertainties noted above with respect to forward-looking statements. CRITICAL ACCOUNTING POLICIES ---------------------------- The Company's accounting policies are integral to understanding the results reported. The most complex accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. The Company has established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments. Allowance for Loan Losses. The allowance for loan losses represents management's best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged-off, net of recoveries. We evaluate our allowance for loan loss on a monthly basis. We believe that the allowance for loan loss is a "critical accounting estimate" because it is based upon management's assessment of various factors affecting the collectibility of the loans, including current and projected economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans and commitments. We determine the appropriate level of the allowance for loan losses, primarily on an analysis of the various components of the loan portfolio, including all significant credits on an individual basis. We segment the loan portfolios into as many components as practical. Each component would normally have similar characteristics, such as risk classification, past due status, type of loan, industry or collateral. Management has an established methodology for calculating the level of the allowance for loan losses. We analyze the following components of the portfolio and provide for them in the allowance for loan losses: Specific allowances defined as: o Management assessment of all loans classified as substandard or worse, with an outstanding balance of $100,000 or more o A specific allowance is provided for any amount by which the loan's collateral fair value is insufficient to cover the loan; or discounting estimated future cash flows, or by observing the loan's market price if it is of a kind for which there is a secondary market General allowance defined as: o An allowance for all loans outstanding within the portfolio and not contained in the specific allowances Judgmental allowance associated with: 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. The fair value of most securities classified as Available for Sale is based on quoted market prices. If quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments. Adjustments to the 10 Available for Sale securities fair value impact the consolidated financial statements by increasing or decreasing assets and shareholders' equity. A decline in the market value of investments classified as available-for-sale are reported at fair value with unrealized gains and losses net of related tax, if any, reported as other comprehensive income and are included in shareholders' equity. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Deferred Tax Assets. Deferred income taxes reflect the estimated future tax effects of temporary differences between the reported amount of assets and liabilities for financial purposes and such amounts as measured by tax laws and regulations. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and amounts available in the carryback periods, and tax planning strategies to support our position that it is more likely than not the benefit of our deferred tax assets will be realized. OVERVIEW -------- Net income was $1,817,000 or $.45 per diluted share for the three months ended September 30, 2005, compared with $1,250,000 or $.32 per diluted share for the three months ended September 30, 2004, an increase of 45%. Net income was $4,865,000 or $1.20 per diluted share for the nine months ended September 30, 2005, compared with $3,492,000 or $.89 per diluted share for the nine months ended September 30, 2004, an increase of 39%. Total assets were $630,043,000 as of September 30, 2005; equating to a 14% growth in assets during the twelve months ended September 30, 2005. SUMMARY OF EARNINGS NET INTEREST INCOME ------------------- The following table provides a summary of the components of interest income, interest expense and net interest margins for the three months ended September 30, 2005 and September 30, 2004:
(In 000's) 2005 2004 ---- ---- Average Income/ Average Average Income/ Average Balance Expense Yield/Rate Balance Expense Yield/Rate ---------------------------------------------------------------------------- ASSETS Loans (1) (2) $407,741 $7,340 7.20% $369,384 $5,865 6.35% Investment securities: Taxable 92,297 921 3.99% 84,778 805 3.79% Non-taxable (3) 13,200 162 4.91% 12,241 150 4.90% -------- ------ -------- ------ TOTAL LOANS AND INVESTMENT SECURITIES 513,238 8,423 6.56% 466,403 6,819 5.85% Federal funds sold 52,223 465 3.56% 10,551 39 1.48% -------- ------ -------- ------ TOTAL EARNING ASSETS 565,461 $8,888 6.29% 476,954 $6,859 5.75% -------- ------ -------- ------ Cash and due from banks 32,858 41,786 Allowance for loan losses (4,647) (3,863) Premises and equipment, net 9,704 10,791 Accrued interest receivable and other assets 16,066 13,910 -------- -------- TOTAL ASSETS $619,442 $539,578 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing demand $247,613 $ 564 0.91% $216,747 $ 312 0.58% Savings 41,444 22 0.21% 44,638 27 0.24% Time 83,337 495 2.38% 78,006 338 1.73% -------- ------ -------- ------ 372,394 1,081 1.16% 339,391 677 .80% Long-term debt 29,310 334 4.56% 29,000 284 3.92% -------- ------ -------- ------ 11 TOTAL INTEREST BEARING LIABILITIES 401,704 $1,415 1.41% 368,391 $ 961 1.04% -------- ------ -------- ------ Noninterest bearing DDA 165,145 125,238 Accrued interest payable and other liabilities 4,274 4,013 Shareholders' equity 48,319 41,936 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $619,442 $539,578 ======== ======== NET INTEREST INCOME $7,473 $5,898 ====== ====== NET INTEREST SPREAD 4.88% 4.71% CONTRIBUTION OF INTEREST FREE FUNDS 0.41% 0.24% ------ ------ NET INTEREST MARGIN (4) 5.29% 4.95% ====== ====== (1) Average loans include nonaccrual loans. There were no nonaccrual loans for the three month periods ending 2005 and 2004. (2) Loan interest income includes loan fee income of $303 and $237 for the three months ended September 30, 2005 and September 30, 2004, respectfully. (3) Average yields shown are on a taxable-equivalent basis. On a non-taxable basis, 2005 interest income on tax exempt securities was $121 with an average yield of 3.67%; in 2004, on a non-taxable basis, interest income on tax exempt securities was $113 with an average yield of 3.69%. (4) Net interest margin is calculated by dividing net interest income by the average balance of total earning assets for the applicable period. The following table provides a summary of the components of interest income, interest expense and net interest margins for the nine months ended September 30, 2005 and September 30, 2004:
(In 000's) 2005 2004 Average Income/ Average Average Income/ Average Balance Expense Yield/Rate Balance Expense Yield/Rate ---------------------------------------------------------------------------- ASSETS Loans (1) (2) $400,634 $20,918 6.96% $342,515 $16,515 6.43% Investment securities: Taxable 87,565 2,604 3.96% 75,831 2,117 3.72% Non-taxable (3) 12,313 452 4.89% 14,261 542 5.07% -------- ------- -------- ------- TOTAL LOANS AND INVESTMENT SECURITIES 500,512 23,974 6.39% 432,607 19,174 5.91% Federal funds sold 31,981 805 3.36% 16,788 139 1.10% -------- ------- -------- ------- TOTAL EARNING ASSETS 532,393 $24,779 6.20% 449,295 $19,313 5.73% -------- ------- -------- ------- Cash and due from banks 34,099 36,169 Allowance for loan losses (4,413) (3,720) Premises and equipment, net 9,951 10,784 Accrued interest receivable and other assets 14,764 13,490 -------- -------- TOTAL ASSETS $586,794 $506,018 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing demand $235,636 $ 1,397 0.79% $209,482 $ 830 0.53% Savings 41,795 69 0.22% 41,016 71 0.23% Time 77,691 1,214 2.08% 75,193 944 1.67% -------- ------- -------- ------- 355,122 2,680 1.01% 325,691 1,845 .76% -------- ------- -------- ------- Short-term debt 0 0 0.00% 0 1 0.00% Long-term debt 29,310 958 4.36% 21,422 662 4.12% -------- ------- -------- ------- 29,310 958 21,422 663 -------- ------- -------- ------- 12 TOTAL INTEREST BEARING LIABILITIES 384,432 $ 3,638 1.26% 347,113 $ 2,508 .96% -------- ------- -------- ------- Noninterest bearing DDA 151,287 114,304 Accrued interest payable and other liabilities 4,267 4,323 Shareholders' equity 46,808 40,278 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $586,794 $506,018 ======== ======== NET INTEREST INCOME $21,141 $16,805 ======= ======= NET INTEREST SPREAD 4.94% 4.77% CONTRIBUTION OF INTEREST FREE FUNDS 0.35% 0.21% ---- ---- NET INTEREST MARGIN (4) 5.29% 4.98% ==== ==== (1) Average loans include nonaccrual loans. There were no nonaccrual loans for the nine month periods ending 2005 and 2004. (2) Loan interest income includes loan fee income of $945 and $814 for the nine months ended September 30, 2005 and September 30, 2004, respectfully. (3) Average yields shown are on a taxable-equivalent basis. On a non-taxable basis, 2005 interest income on tax exempt securities was $341 with an average yield of 3.68%; in 2004, on a non-taxable basis, interest income on tax exempt securities was $409 with an average yield of 3.82%. (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 September 30, 2005 and September 30, 2004 was $7,473,000 and $5,898,000, respectively. These results equate to a 27% increase in net interest income for the third quarter of 2005 compared to the third quarter of 2004. Loan fee income, which is included in interest income from loans, was $303,000 for the three months ended September 30, 2005, compared with $237,000 for the three months ended September 30, 2004. Net interest income before the provision for loan losses on a taxable-equivalent basis for the nine months ended September 30, 2005 and September 30, 2004 was $21,141,000 and $16,805,000, respectively. These results equate to an 26% increase in net interest income for the first nine months of 2004 compared to the same period of 2004. Loan fee income, which is included in interest income from loans, was $945,000 for the nine months ended September 30, 2005, compared with $814,000 for the nine months ended September 30, 2004. Taxable-equivalent interest income increased $2,029,000 or 30% in the third quarter of 2005 compared with the same period of 2004. The net increase of $2,029,000 was attributable to an increase in the volume of earning assets accounting for $846,000 of this increase, and an increase of $1,183,000 attributable to higher rates. Interest paid on interest-bearing liabilities increased $454,000 or 47% in the third quarter of 2005 compared with the third quarter of 2004. The increase of $454,000 was attributable to an increase in the volume of deposits and other borrowings accounting for $68,000 of this increase, and $386,000 was attributable to higher rates. Taxable-equivalent interest income increased $5,466,000 or 28% in the first nine months of 2005 compared with the same period of 2004. The net increase of $5,466,000 was attributable to an increase in the volume of earning assets accounting for $3,181,000 of this increase and an increase of $2,285,000 attributable to higher rates. Interest paid on interest-bearing liabilities increased $1,130,000 in the first nine months of 2005 compared with the same period of 2004. The increase of $1,130,000 was attributable to an increase in the volume of deposits and other borrowings accounting for $379,000 of this increase, and $751,000 was attributable to higher rates. The average balance of earning assets for the nine month period increased $83,098,000 or 18% when compared with September 30, 2004 and the average balance of interest-bearing liabilities increased $37,319,000 or 11% compared with the same period in 2004. Management does not expect a material change in the Company's net interest margin during the next twelve months as the result of a modest increase or decrease in general interest rates. 13 The following table sets forth a summary of the changes in interest earned and interest paid for the three months ended September 30, 2005 over the same period of 2004 resulting from changes in assets and liabilities volumes and rates. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.
(In 000's) 2005 Over 2004 -------------- Volume Rate Total ------- ------- ------- Increase (Decrease) in Interest and Fee Income Investment securities: Taxable $ 71 $ 45 $ 116 Non-taxable (1) 12 0 12 Federal funds sold 154 272 426 Loans 609 866 1,475 ------- ------- ------- Total interest and fee income 846 1,183 2,029 ------- ------- ------- Increase (Decrease) in Interest Expense Deposits: Interest bearing demand accounts 44 208 252 Savings (2) (3) (5) Time deposits 23 134 157 ------- ------- ------- Total deposits 65 339 404 Long-term debt 3 47 50 ------- ------- ------- Total Interest Expense 68 386 454 ------- ------- ------- Net Interest Income $ 778 $ 797 $ 1,575 ======= ======= ======= (1) The interest earned is taxable-equivalent.
The following table sets forth a summary of the changes in interest earned and interest paid for the nine months ended September 30, 2005 over the same period of 2004 resulting from changes in assets and liabilities volumes and rates. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.
(In 000's) 2005 Over 2004 -------------- Volume Rate Total ------- ------- ------- Increase (Decrease) in Interest and Fee Income Investment securities: Taxable $ 327 $ 160 $ 487 Non-taxable (1) (74) (16) (90) Federal funds sold 126 540 666 Loans 2,802 1,601 4,403 ------- ------- ------- Total interest and fee income 3,181 2,285 5,466 ------- ------- ------- Increase (Decrease) in Interest Expense Deposits: 14 Interest bearing demand accounts 104 463 567 Savings 1 (3) (2) Time deposits 31 239 270 ------- ------- ------- Total deposits 136 699 835 Short-term borrowings (1) 0 (1) Long-term debt 244 52 296 ------- ------- ------- Total Interest Expense 379 751 1,130 ------- ------- ------- Net Interest Income $ 2,802 $ 1,534 $ 4,336 ======= ======= ======= (2) The interest earned is taxable-equivalent.
PROVISION AND ALLOWANCE FOR LOAN LOSSES --------------------------------------- The Company maintains an allowance for loan losses inherent in the portfolio at a level considered adequate as of the balance sheet date. The allowance is increased by the provision for loan losses and reduced by net charge offs. The allowance for loan losses is based on estimates, and ultimate losses may vary from current estimates. These estimates are reviewed periodically. As adjustments become necessary, they are reported in earnings during the periods they become known. The Company conducts credit reviews of the loan portfolio and considers current economic conditions, historical loan loss experience and other factors in determining the adequacy of the allowance balance. This evaluation establishes a specific allowance for all classified loans over $100,000 and establishes percentage allowance requirements for all other loans, according to the classification as determined by the Company's internal grading system. As of September 30, 2005 the allowance for loan losses of $4,832,000 represented 1.21% of loans outstanding. As of September 30, 2004 the allowance for loan loss of $4,040,000, represented 1.12% of loans outstanding. During the three months ended September 30, 2005, $300,000 was charged to expense for the loan loss provision, compared with $180,000 for the same period in 2004. During the nine months ended September 30, 2005 $715,000 was charged to expense for the loan loss provision, compared with $540,000 for the same period in 2004. The increase in the expense for the loan loss provision was to provide for growth in the overall loan portfolio. There were net charge-offs of $19,000 during the first nine months of 2005 compared with $24,000 of net charge-offs during the first nine months of 2004. The following table summarizes changes in the allowance for loan losses: (In 000's) For the Nine months ended September 30, September 30, 2005 2004 ---- ---- Balance, beginning of period $4,136 $3,524 Provision for loan losses 715 540 Loans charged off (24) (109) Recoveries of loans previously charged off 5 85 ------ ------ Balance, end of period $4,832 $4,040 ====== ====== Allowance for loan losses to total outstanding loans 1.21% 1.12% There were no loans on non-accrual status as of September 30, 2005, September 30, 2004 or December 31, 2004. There were no loans 90 days or more past due and still accruing interest or restructured loans at September 30, 2005, September 30, 2004 or December 31, 2004. NON-INTEREST INCOME ------------------- Non-interest income, other than gains on the sale of securities, was $1,027,000 for the three months ended September 30, 2005 compared with $986,000 for the same period in 2004, a 4.2% increase. Non-interest income, excluding gains on the sale of securities, was $3,005,000 for the nine months ended September 30, 2005 compared with $2,967,000 for the same period in 2004, a 1.3% increase. Non-interest income primarily consists of service charges and other fees related to deposit accounts. For the three-month period, the increase in non-interest income resulted primarily from an increase in the number of deposit accounts, transaction volumes and directly related service charges. GAINS ON SECURITIES ------------------- There were no gains or losses for the three and nine months ended September 30, 2005. Net gains of $262,000 for the nine months ended September 30, 2004 resulted from the sale of several available-for-sale securities. NON-INTEREST EXPENSE -------------------- Non-interest expense for the three months ended September 30, 2005 and September 30, 2004 were $5,211,000 and $4,667,000, respectively, a 12% increase. Non-interest expense for the nine months ended September 30, 2005 and September 30, 2004 were $15,419,000 and $13,835,000, respectively, an 11% increase. 15 Salaries and employee benefits expense for the three months ended September 30, 2005 and 2004 were $2,763,000 and $2,566,000, respectively, a 7.7% increase. Salaries and employee benefits expense for the nine months ended September 30, 2005 and 2004 were $8,221,000 and $7,633,000, respectively, an 7.7% increase. The increase in 2005 resulted from increased salaries paid to Company officers and employees, and an increase of approximately two full-time equivalent (FTE) employees from 165 at September 30, 2004 to 167 at September 30, 2005. The increases in FTE were related to increasing sales activity and staffing new offices. Occupancy expense for the three months ended September 30, 2005 and 2004 were $477,000 and $369,000, respectively, a 29.3% increase. Occupancy expense for the nine months ended September 30, 2005 and 2004 were $1,317,000 and $1,080,000, respectively, representing a 21.9% increase. The increase in occupancy expense in 2005 is attributed 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. Equipment expense for the three months ended September 30, 2005 and 2004 were $487,000 and $502,000, respectively, representing a decrease of 3%. Equipment expense for the nine months ended September 30, 2005 and 2004 were $1,566,000 and $1,509,000, respectively, an increase of 3.8%. The increase in equipment expenses is primarly attributable to opening a branch office in American Canyon. Other expenses for the three months ended September 30, 2005 and September 30, 2004 were $1,484,000 and $1,230,000, respectively, a 20.7% increase. Other expenses for the nine months ended September 30, 2005 and September 30, 2004 were $4,315,000 and $3,613,000, respectively, a 19.4% increase. The increase in other expenses in 2005 compared with 2004 were primarily in consulting and audit expenses associated with Sarbanes-Oxley compliance work. INCOME TAXES ------------ The Company reported a provision for income tax for the three months ended September 30, 2005 and 2004 of $1,131,000 and $750,000, or 38% of pretax income. The Company reported a provision for income tax for the nine months ended September 30, 2005 and 2004 of $3,036,000 and $2,034,000, or 38% and 37% of pretax income, respectively. Both the 2005 and 2004 provisions reflect tax accruals at statutory rates for federal income taxes, adjusted primarily for the effect of the Company's investments in tax-exempt municipal securities, bank owned life insurance policies and state taxes. Comparison with the first nine months of 2004 were impacted by the Vintage Capital Trust real estate investment trust ("REIT") state tax benefits which were reflected in net income in the first three quarters of 2004 and were reversed in the fourth quarter of 2004. BALANCE SHEET ------------- Total assets as of September 30, 2005 were $630,043,000 compared with $562,063,000 at December 30, 2004 equating to a 12% increase for the nine months ended September 30, 2005. Total deposits as of September 30, 2005 were $546,850,000 compared with $484,493,000 at December 30, 2004 representing a 13% increase for the nine months ended September 30, 2005. Gross loans outstanding as of September 30, 2005 were $397,709,000 compared with $377,765,000 at December 30, 2004 equating to a 5% increase for the nine months ended September 30, 2005. LOANS HELD FOR SALE ------------------- The Company had $0 and $4,604,000 in purchased participations in mortgage loans as of September 30, 2005 and December 31, 2004, respectively. Loans originated or purchased and considered held for sale are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. There were no gains or losses recognized during 2004 or 2005. SUBORDINATED DEBENTURES ----------------------- During September 2002, the Company formed North Bay Statutory Trust I (Trust), a Connecticut statutory business trust, for the purpose of issuing guaranteed undivided beneficial interests in junior subordinated debentures (trust preferred securities). During September 2002, the Trust issued $10 million in floating rate Cumulative Trust Preferred Securities (Securities). The Securities bear interest at a rate of Libor plus 3.45% and had an initial interest rate of 5.34%; as of September 30, 2005 the interest rate was 7.41%; the Securities will mature on September 26, 2032, but earlier redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. As previously discussed the Company de-consolidated the Trust as of March 31, 2004. As a result, the junior subordinated debentures issued by the Company to the Trust, totaling $10,310,000 are reflected on the Company's consolidated balance sheet, under the caption Subordinated Debentures. The Company also recognized its $310,000 investment in the Trust, which is recorded in Investment in Subsidiary. The Trust has no independent assets or operations and exists for the sole purpose of issuing trust preferred securities and investing the proceeds thereof in an equivalent amount of subordinated debentures issued by the Company. The Securities and the subordinated debenture issued by the Trust are redeemable in whole or in part on or after September 26, 2007, or at any time in whole, but not in part, upon the occurrence of certain events. The Securities are included in Tier 1 capital for regulatory capital adequacy determination purposes, subject to certain limitations. The Company fully and unconditionally guarantees the obligations of the Trust with respect to the issuance of the Securities. Subject to certain exceptions and limitations, the Company may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the Securities and, with certain exceptions, prevent the Company from declaring or paying cash distributions on the Company's common stock or debt securities that rank junior to the subordinated debentures. 16 BORROWINGS ---------- Total borrowings were $19 million at September 30, 2005 and December 31, 2004. The following table summarizes the borrowings:
Fixed Rate Borrowings at September 30, 2005 ($ in 000's) Amount Maturity Date Interest Rate ------ ------------- ------------- Federal Home Loan Bank Advance $ 5,000 4-17-2006 2.24% Federal Home Loan Bank Advance 5,000 4-16-2007 2.83% Federal Home Loan Bank Advance 9,000 4-14-2008 3.23% ------- Total $19,000 Weighted average interest rate 2.86%
LIQUIDITY AND CAPITAL ADEQUACY ------------------------------ The Company's liquidity is determined by the level of assets (such as cash, Federal Funds, and investment in unpledged marketable securities) that are readily convertible to cash to meet customer withdrawals and borrowings. Management reviews the Company's liquidity position on a regular basis to ensure that it is adequate to meet projected loan funding and potential withdrawal of deposits. The Company has a comprehensive Asset/Liability Management and Liquidity Policy, which it uses to determine adequate liquidity. As of September 30, 2005 liquid assets were 29% of total assets, compared with 28% as of September 30, 2004, which is within the Company's policy. The Federal Deposit Insurance Corporation Improvement Act (FDICIA) established ratios used to determine whether a Company is "Well Capitalized," "Adequately Capitalized," "Undercapitalized," "Significantly Undercapitalized," or "Critically Undercapitalized." A Well Capitalized Company has risk-based capital of at least 10%, tier 1 risked-based capital of at least 6%, and a leverage ratio of at least 5%. As of September 30, 2005, the Company's risk-based capital ratio was 12.87%. The Company's tier 1 risk-based capital ratio and leverage ratio were 11.88% and 9.63%, respectively as of September 30, 2005. As the following table indicates, the Company and the Bank currently exceed the regulatory capital minimum requirements. The Company and the Bank are considered "Well Capitalized" according to regulatory guidelines.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------- (In 000's) Minimum regulatory Minimum regulatory requirement requirement Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 2005: Total Capital (to Risk Weighted Assets) Consolidated $64,569 12.87% $40,130 8.00% $50,163 10.00% The Vintage Bank 59,271 11.82% 40,122 8.00% 50,152 10.00% Tier I Capital (to Risk Weighted Assets) Consolidated 59,614 11.88% 20,065 4.00% 30,098 6.00% The Vintage Bank 54,317 10.83% 20,061 4.00% 30,091 6.00% Tier I Capital (to Average Assets) Consolidated 59,614 9.63% 24,767 4.00% 30,959 5.00% The Vintage Bank 54,317 8.85% 24,548 4.00% 30,685 5.00%
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. Although the Company manages other risks, as in credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to principally be a market risk. Other types of market risks, such as foreign currency exchange rate risk, do not arise in the normal course of the Company's business activities. The majority of the Company's interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. They include loans, securities available-for-sale, deposit liabilities, short-term borrowings and long-term debt. Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. 17 The Company manages interest rate risk through the Asset Liability Committee (ALCO) of the Vintage Bank. The ALCO monitors exposure to interest rate risk on a quarterly basis using both a traditional gap analysis and simulation analysis. Traditional gap analysis identifies short and long-term interest rate positions or exposure. Simulation analysis uses an income simulation approach to measure the change in interest income and expense under rate shock conditions. The model considers the three major factors of (a) volume differences, (b) repricing differences and (c) timing in its income simulation. The model begins by disseminating data into appropriate repricing buckets based on internally supplied algorithms (or overridden by calibration). Next, each major asset and liability type is assigned a "multiplier" or beta to simulate how much that particular balance sheet category type will reprice when interest rates change. The model uses eight asset and liability multipliers consisting of bank-specific or default multipliers. The remaining step is to simulate the timing effect of assets and liabilities by modeling a month-by-month simulation to estimate the change in interest income and expense over the next 12-month period. The results are then expressed as the change in pre-tax net interest income over a 12-month period for +1%, and +2% shocks. Utilizing the simulation model to measure interest rate risk at September 30, 2005 and December 31, 2004 the Company is within the established exposure of a 4% change in "return on equity" tolerance limit set by the Company's risk policy. There were no significant changes in interest rate risk from the annual report on form 10-K for December 31, 2004. 18 Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures: Based on their evaluation as of September 30, 2005, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Changes in Internal Controls: There were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over disclosure. 19 PART 2 OTHER INFORMATION OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Other than ordinary routine litigation incidental to the business of the Company, there are no material pending legal proceedings. ITEM 2. 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 "Effective October 1, 2005, the North Bay Bancorp Board of Directors adopted The 2005 North Bay Bancorp Supplemental Executive Retirement Plan. The purpose of the plan was to conform the terms of the amended and restated executive supplemental compensation agreements previously entered into with various executive officers of the Company to the provisions of the Section 409A of the Internal Revenue Code as enacted by the American Jobs Creation Act. There were no material changes to terms of the existing agreements. The plan is attached as Exhibit 10.2 to this Report." ITEM 6. EXHIBITS An index of exhibits begins on page 22. 20 Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTH BAY BANCORP A California Corporation Date: November 14, 2005 BY: /s/ Terry L. Robinson ---------------------------------- Terry L. Robinson President & CEO Principal Executive Officer Date: November 14, 2005 BY: /s/ Terry L. Robinson ---------------------------------- Terry L. Robinson Interim Chief Financial Officer Principal Financial Officer 21 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 10.1 Employment Agreement by and between John A. Nerland and The Vintage Bank. 10.2 The North Bay Bancorp Supplemental Executive Retirement Plan. 11 Statement re: computation of per share earnings is included in Note 3 to the unaudited condensed consolidated financial statements of Registrant. 31.1 Certificate of Principal Executive Officer Pursuant to SEC Release 33-8238 31.2 Certificate of Principal Financial Officer Pursuant to SEC Release 33-8238 32.1 Certificate of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 32.2 Certificate of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 22