Registration Statement No. 33-60566
As filed with the Securities and Exchange Commission on March 21, 1995
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
(Exact name of registrant as specified in its charter)
NORTHERN EMPIRE BANCSHARES
(State or other jurisdiction of incorporation or organization)
California
(I.R.S. Employer Identification Number)
94-2830529
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
801 Fourth Street
Santa Rosa, California 95404
(707) 579-2265
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Deborah A. Meekins
President and Chief Executive Officer
Sonoma National Bank
801 Fourth Street
Santa Rosa, California 95404
(707) 579-2265
with copies to:
Lyman G. Lea
Joan L. Grant
c/o Haines & Lea
44 Montgomery Street, Suite 3600
San Francisco, California 94104
Telephone: (415) 981-1050
Approximate date of commencement of the proposed sale to the public:
N/A-Offering has commenced.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box. [x]
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legible facsimile thereof,
pursuant to
Item 11(a)(1) of this Form, check the following box. [ ]
PROSPECTUS
NORTHERN EMPIRE BANCSHARES
801 Fourth Street
Santa Rosa, California 95404
(707) 579-2265
92,909 Shares (1) of Common Stock, no par value offered pursuant to
the NORTHERN EMPIRE BANCSHARES STOCK OPTION PLAN
This prospectus covers 92,909 shares of common stock, no par value, of
Northern Empire Bancshares (the "Corporation") which have been
offered, are being offered or may from time to time be offered
pursuant to the Northern Empire Bancshares Stock Option Plan, as
amended (the "Plan"). Each option is subject to the terms, conditions
and restrictions set forth in the Plan and the option agreement
between the individual optionee and the Corporation. Options have
been granted to directors and employees of Northern Empire Bancshares
and/or its subsidiary, Sonoma National Bank of Santa Rosa, California
(the "Bank").
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS MAY NOT BE USED IN CONNECTION WITH THE RESALE BY
OPTIONEES OF COMMON STOCK OF THE CORPORATION ACQUIRED PURSUANT TO THE
PLAN.
THE SECURITIES OFFERED HEREBY INVOLVE CERTAIN RISKS. SEE "RISK
FACTORS".
No person has been authorized to give any information or to make any
representations in connection with the offer contained in this
Prospectus which are not expressed herein, and, if given or made, such
other information or representations must not be relied upon as having
been authorized. This Prospectus does not constitute an offer of any
securities other than those to which it relates or an offer in any
jurisdiction where such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that the information herein is
correct as of any time subsequent to its date.
<TABLE>
<CAPTION>
Underwriting Proceeds to
discounts and issuer or
Price to public(2) commissions(3) other persons
<S> <C> <C> <C>
Per share $6.87 -0- $6.87
Total $638,285 -0- $638,285
<F1>
(1) Options to purchase 92,909 shares are outstanding under the Plan.
<F2>
(2) Under the Plan, the exercise price of each option equals the fair
market value of the Corporation's common stock on the date the option
is granted. The exercise price for each option is specified in the
Option Agreement for such option. The actual exercise prices range
from $4.76 to $7.98 per share, with $6.87 per share being the average
exercise price.
<F3>
(3) This offering is being made pursuant to the Plan and is not
underwritten. However, the Corporation is bearing certain expenses in
connection with this registration, which are currently estimated to be
$6,000 per year, consisting of legal, accounting and registration
fees.
(End of Footnotes)
</TABLE>
The Date of this Prospectus is April, 1995.
AVAILABLE INFORMATION
The Corporation is subject to some of the informational requirements
of the Securities Exchange Act of 1934 and, in accordance therewith,
files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can
be inspected and copied at the public reference facilities of the
Commission at Room 1024 of the Commission's Office at 450 5th Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at 10960 Wilshire Boulevard, Los Angeles, California 90024,
Everett McKinley Dirksen Building, 219 South Dearborn Street, Room
1204, Chicago, Illinois 60604, and 26 Federal Plaza, New York, New
York 10278. Copies of such materials can be obtained from the Public
Reference Section of the Commission, 450 5th Street, N.W., Washington,
D.C. 20549, at prescribed rates.
The Corporation has filed with the Commission a Registration Statement
under the Securities Act of 1933 with respect to the securities being
offered by this Prospectus. This Prospectus does not contain all the
information set forth in the Registration Statement, certain portions
of which have been omitted as permitted by the rules and regulations
of the Commission. In addition, certain documents filed by the
Corporation with the Commission have been incorporated in this
Prospectus by reference. For further information with respect to the
Corporation and the securities offered hereby, reference is made to
the Registration Statement, including the exhibits thereto.
INCORPORATION BY REFERENCE
The Corporation's Annual Report on Form 10-KSB filed pursuant to
Section 13 of the Securities Exchange Act of 1934, for the fiscal year
ended December 31, 1994 is hereby incorporated by reference into this
Prospectus.
Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein, or in any amendment or
supplement hereto, modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
On request the Corporation will furnish, without charge, to each
person to whom this Prospectus is delivered, copies of any document
incorporated by reference in this Prospectus (not including exhibits,
unless such exhibits are specifically incorporated by reference into
the information that the Prospectus incorporates). Oral or written
requests for copies should be directed to Deborah A. Meekins,
President and Chief Executive Officer, Sonoma National Bank, 801
Fourth Street, Santa Rosa, California 95404, Telephone: (707)
579-2265.
ANNUAL REPORTS TO SECURITY HOLDERS
The Corporation provides and will continue to provide its shareholders
with an annual report not later than 120 days after the close of its
fiscal year. Such report contains a consolidated balance sheet as of
the end of the fiscal year and an income statement and statement of
cash flow for such fiscal year. The annual report contains financial
information that has been examined and reported upon,
with an opinion expressed by, independent certified public
accountants. The Corporation also provides its shareholders with
other periodic reports containing unaudited financial information.
The Form 10-KSB annual report of the Corporation will be available to
shareholders within 90 days after the end of its fiscal year.
TABLE OF CONTENTS
PROSPECTUS SUMMARY
RISK FACTORS
COMMON STOCK PRICE RANGE AND DIVIDENDS
DESCRIPTION OF THE PLAN
FEDERAL TAX CONSEQUENCES
RESALE OF COMMON STOCK
USE OF PROCEEDS
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE CORPORATION
DESCRIPTION OF COMMON STOCK
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
LEGAL MATTERS
EXPERTS
FINANCIAL STATEMENTS
PROSPECTUS SUMMARY
The following summary sets forth, in an abbreviated manner,
information selected from this Prospectus and is qualified in its
entirety by the information in the remainder of this prospectus.
Optionees are urged to read the entire Prospectus carefully before
deciding to exercise a stock option.
The Corporation
Northern Empire Bancshares is a bank holding company headquartered in
Santa Rosa, California and parent of Sonoma National Bank (the "Bank")
of Santa Rosa, California. The Bank was organized as a national
banking association on March 27, 1984 and commenced operations on
January 25, 1985. It currently has three banking offices; the main
office is located at 801 Fourth Street, in the central business
district of Santa Rosa, a branch office is located in the Oakmont area
of Santa Rosa, approximately 5 miles east of the main office, and a
branch office is located in the Windsor Safeway Supermarket,
approximately 5 miles north of the main office. The Bank engages in
the general commercial banking business. It accepts checking and
savings deposits, offers money market deposit accounts and
certificates of deposit, makes secured and unsecured commercial and
other installment and term loans, real estate loans and SBA loans and
offers other customary banking services. See, "The Corporation,
Business of the Bank."
The Bank's primary market area and the source of most of its loan and
deposit business is Sonoma County, California.
The Corporation had total assets of $121,776,000 as of December 31,
1994, including net loans of $86,285,000. Total deposits at December
31, 1994 were $111,083,000 and shareholders' equity was $10,199,000.
The Corporation reported net income of $1,346,000 for the year ended
December 31, 1994, as compared to income of $1,299,000 for the year
ended December 31, 1993.
See, "Management's Discussion and Analysis of Financial Condition or
Plan of Operation."
The Offering
Northern Empire Bancshares Stock Option Plan
Securities Offered Pursuant to Plan
92,909 shares of common stock, no par value
Eligible Participants
Directors and employees of the Corporation and/or any of its
subsidiaries
Exercise Price
The exercise price of an option is specified in the optionee's Option
Agreement. Under the Plan, the exercise price may not be less than
the fair market value of the Corporation's common stock on the date
the option was granted.
Exercise of Options
Written notice must be given to the Corporation stating the number of
shares with respect to which the option is being exercised, and the
date the shares should be delivered (which must be at least 15, but
not more than 30, days from the date of the notice).
RISK FACTORS
Lack of Dividends.
In the eight years since it commenced business, the Corporation has
paid cash dividends to its shareholders in 1994, 1993, 1992, and 1991,
paid a 5% stock dividend in 1994, and has had one stock split in 1989.
There can be no assurance that dividends will be declared in the
foreseeable future. The Corporation's ability to pay dividends is
subject to the limitations of the California General Corporation Law.
At present, the Corporation's primary source of income is dividends
from its subsidiary, the Bank, and the ability of the Bank to pay
dividends to the Corporation is subject to legal limitations.
Competition, Economic Conditions and Government Regulation.
The Corporation and the Bank operate in an increasingly competitive
financial and banking environment and compete with a number of other
commercial banks, savings and loan associations, money market funds,
credit unions and other financial institutions, many of which have
substantially greater financial resources. There is no assurance that
the Corporation will continue to be able to compete successfully.
The Bank is significantly affected by general economic and political
conditions, and by governmental monetary and fiscal policies.
Conditions such as inflation, recession, unemployment, interest rates,
short money supply, scarce natural resources, and other factors are
beyond the Corporation's control and may adversely affect its
profitability. During 1994, rising interest rates caused by the
Federal Reserve increasing the Discount Rate, dramatically reduced the
volume of the Bank's mortgage loan business, which had a negative
impact on the profits of the Bank. Substantial declines in real
estate prices in the Bank's market could affect the value of the
security for many of the loans held by the Bank. The Bank also
engages in lending under the Small Business Administration's (SBA)
lending programs. These programs are subject to revisions based upon
political conditions. Changes could negatively impact the Bank's
profitability and growth of its loan portfolio.
The Corporation is subject to extensive governmental supervision,
regulation and control, and there can be no assurance that future
legislation or government policy will not adversely affect the banking
industry or the operations of the Corporation in particular.
Lack of Trading Market.
There is currently a limited trading market for the Corporation's
common stock. The number of shares traded in the months of October,
November and December 1994 was 8,000, 9,000 and 12,000 shares,
respectively, equaling 0.6%, 0.7% and 1.0% of the Corporation's
outstanding common stock. It is not possible to predict the trading
volume that will occur at any time in the future.
COMMON STOCK PRICE RANGE AND DIVIDENDS
On February 28, 1995, the Corporation had 1,320,117 shares of common
stock outstanding, held by approximately 342 shareholders ofrecord.
The directors and officers of the Corporation and the Bank hold 27.8%
and beneficially owned 38.4% of the outstanding shares. Under SEC
rules, the directors and officers are restricted in the amount of
securities they may sell without registration under the Securities Act
of 1933, as amended. In general, directors and officers each may
offer up to 13,201 shares in any three month period without such
registration.
As of February 28, 1995, the directors and officers also have the
right to acquire 92,909 additional shares upon the exercise of options
granted pursuant to the Corporation's Stock Option Plan. Should
several directors and officers choose to exercise options and sell
their shares on the market, such that a large number of shares are
offered at one time, the price of the common stock could be
adversely affected.
The firms Kemper Securities, Bateman Eichler Hill Richards Division
and First Associated Securities Group, Inc., located in Santa Rosa,
are presently making a market in the stock.
<TABLE>
The following chart shows the high and low bid quotations and the
volume of transactions in Corporation's stock for the periods
indicated, as reported by First Associated Securities, one of the
Bank's market makers, and does not include privately negotiated
transactions that were not conducted through First Associated
Securities. The prices indicated below do not necessarily represent
actual transactions and do not include retail mark-ups, mark-downs or
commissions.
<CAPTION>
Bid Quotations for the Corporation's Common Stock
Quarter Ended High Low Approximate Trading
Volume
<S> <C> <C> <C>
March 31, 1993 $8.75 $8.00 14,500
June 30, 1993 9.00 8.00 11,000
September 30, 1993 8.75 8.00 13,000
December 31, 1993 9.00 8.00 13,300
March 31, 1994 9.00 8.00 35,000
June 30, 1994 9.50 8.25 59,000
September 30, 1994 9.50 8.50 13,500
December 31, 1994 9.75 8.75 29,000
</TABLE>
Due to the lack of any significant trading and no established public
market, this information should not be considered an indication of
themarket value of the shares. There is no assurance that any
significant trading market for the shares will develop in the future
and there are no assurances as to the price at which shares may be
traded in the future. The bid and asked prices of the Corporation's
common stock was $9.00 and $9.25, respectively, on February 28, 1995.
Dividends
On March 1, 1994 the Corporation declared and paid two cash dividends
totalling $0.36 per share of stock. The Corporation declared a 5%
stock dividend to shareholders of record as of July 29, 1994.
On April 30, 1993, the Corporation declared a cash dividend in the
amount of $0.30 per share of stock. A second dividend of $0.35 per
share of stock was declared on September 14, 1993. Both dividends
were paid in 1993 for a total of $0.65 per share.
There is no assurance that dividends will be paid again, or, if paid,
what the amount of any such dividends will be. The future dividend
policy of the Corporation is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including
earnings, financial condition, cash needs and general business
conditions.
In addition, the Board of Directors may declare dividends only out of
funds legally available therefor. The Corporation's primary source of
income (other than interest income earned on the Corporation's other
investments) is the receipt of dividends from the Bank. The Bank's
ability to pay dividends is subject to the restrictions of the
national banking laws and, under certain circumstances, the approval
of the Comptroller of the Currency.
A national bank may not pay dividends from its capital. All dividends
must be paid out of net profits then on hand, after deducting for
expenses, including losses and bad debts. A national bank is also
prohibited from declaring a dividend until its surplus fund equals the
amount of its capital stock or, if the surplus fund does not equal the
amount of its capital stock, until one-tenth of the bank's net profits
for the preceding half year, in the case of quarterly or semiannual
dividends, or the preceding two consecutive half-year periods, in the
case of an annual dividend, are transferred to the surplus fund each
time dividends are declared.
The approval of the Comptroller is required if the total of all
dividends declared by a bank in any calendar year will exceed the
total of its net profits of that year combined with its retained net
profits of the two preceding years, less any required transfers to
surplus or a fund for the retirement of any preferred stock which may
be outstanding. Moreover, the Comptroller may prohibit the payment of
dividends which would constitute an unsafe and unsound banking
practice. As of December 31, 1994, $3,334,000 of retained earnings of
the Bank was available for the payment of dividends.
DESCRIPTION OF THE PLAN
General Plan Information
The Northern Empire Bancshares Stock Option Plan (the "Plan") was
adopted by the Board of Directors of the Corporation on February 26,
1984, and approved by the shareholders at the 1985 annual
shareholders' meeting. Amendment No. 1 to the Plan, which increased
the number of shares for which options could be granted to 311,380
from 244,014 and amended other restrictions and provisions in the Plan
to comply with the requirement for "incentive stock options" under the
Tax Reform Act of 1986, was adopted by the Board of Directors on May
16, 1989 and approved by the shareholders at the 1989 annual
shareholders' meeting. Amendment No. 2 to the Plan, which permits the
Board of Directors to extend the options of employees or directors
upon termination of employment or service as a directors for up to six
(6) months following such termination, was approved by the Board on
October 16, 1990. The approval of the shareholders was not required
for Amendment No. 2.
The purpose of the Plan is to provide a means whereby directors and
employees of the Corporation and/or the Bank may be given an
opportunity to purchase shares of the Corporation's common stock. The
Plan is intended to advance the interests of the Corporation and the
Bank by encouraging stock ownership on the part of key employees, by
enabling the Corporation and the Bank to secure and retain the
services of highly qualified persons as directors and employees, by
providing such directors and employees with an additional incentive to
make every effort to enhance the success of the Corporation and the
Bank and by providing a means whereby directors may be compensated for
significant contributions to the success of the Corporation and the
Bank.
The Plan provides for the grant of both nonqualified options and
options which are intended to qualify as "incentive stock options" as
defined in Section 422 of the Internal Revenue Code (the "Code").
See, "Federal Tax Consequences."
Term of the Plan and Amendments
Options could be granted under the Plan until February 26, 1994. The
Plan may be modified, amended or terminated earlier by the vote of the
holders of a majority of the Corporation's outstanding common shares
or by the Corporation's Board of Directors. However, without the
approval of the shareholders as provided above, the Board may not (a)
increase (other than pursuant to the adjustment provisions referred to
below) the maximum number of shares as to which options may be granted
under the Plan; (b) decrease the minimum exercise price provided by
the Plan; (c) extend the term of the Plan or the maximum term of the
options granted under it; (d) decrease, directly or indirectly (by
cancellation and substitution of options or otherwise), the exercise
price applicable to any option granted under the Plan; or (e) withdraw
the administration of the Plan from the Board or a committee of the
Board.
Administration
The Plan is administered by the Corporation's Board of Directors. The
Board had the authority to determine the individual employees and
directors who will receive options, the number of shares to be covered
by such options and the timing of the grants, and to interpret the
Plan. In making any determination as to participants to whom options
may be granted and the number of shares to be covered by such options,
the Board took into account the duties of the respective participants,
their present and potential contributions to the success of the
Corporation and the Bank, and such other factors as the Board deemed
relevant in connection with accomplishing the purposes of the Plan.
The individual directors are elected by the shareholders of the
Corporation at each annual shareholders' meeting. At each such
meeting the directors are elected for the following year and until
their successors are elected and qualified. A director of a
California corporation may be removed by the vote of the shareholders,
by the Board if the director is declared of unsound mind by a court or
convicted of a felony or by a Superior Court action requested in a
suit brought by shareholders holding at least 10% of the outstanding
stock, in the case of fraudulent or dishonest acts or gross abuse of
authority or discretion. Also, because the Corporation is a bank
holding company, directors may be removed by the Federal Reserve Board
in the event of certain misconduct.
Eligibility
Options may be granted under the Plan to any director and/or employee
of the Corporation or its subsidiaries. As to options granted as
"incentive stock options", the aggregate fair market value (determined
as of the date an option is granted) of the shares as to which such
options first become exercisable by an optionee may not exceed
$100,000 during any calendar year.
At February 26, 1994, approximately 70 directors and employees were
eligible to receive options under the Plan, and 23 such eligible
individuals had been granted options.
Nothing in the Plan confers on any director or employee any right to
continue in the employment of the Corporation or affects the terms and
provisions of any agreement between an employee and the Corporation.
Furthermore, options granted under the Plan confer no rights as a
shareholder of the Corporation until validly exercised.
Number of Shares Available
Subject to certain adjustment provisions described below, the Plan
provided that options may be granted to participants by the
Corporation from time to time for an aggregate of 319,808 shares of
the Corporation's common stock (as adjusted for stock dividends and
the like). Certain information regarding the common stock is provided
below under "Description of Common Stock."
At February 28, 1995, 223,399 shares of common stock had been
purchased pursuant to the exercise of options granted under the Plan,
and 92,909 shares were subject to options granted under the Plan.
When the Plan expired on February 26, 1994, there were 200 shares
available under the Plan for options that had not been granted.
Options may no longer be granted under the Plan. The 5% stock
dividend distributed in 1994 resulted in 8,428 additional shares
subject to option.
Term of Options and Determination of Exercise Price
The option price to be paid upon exercise of an option may not be less
than the fair market value of the shares of the Corporation's common
stock on the date the option is granted. The fair market value of the
Corporation's common stock may be established by the Board by use of
any reasonable valuation method, taking into consideration prices at
which shares of the Corporation have recently traded, the number of
shares traded and other relevant factors as determined by the Board.
The Plan also provides that no option may be granted to any
participant who owns stock possessing more than 10% of the total
combined voting power of the Corporation, unless the exercise price of
such option is at least 110% of the fair market value of the
Corporation's common stock on the date the option is granted, and no
"incentive stock option" may be granted to any such participant unless
the exercise term of such option does not exceed five years.
Each option granted under the Plan must expire not more than 10 years
from the date the option is granted.
Assignment of Option Rights
No incentive stock option is assignable or transferable except by will
or the laws of descent and distribution. Options that are not
incentive stock options may be assigned by the optionee to a member of
the optionee's immediate family and may thereafter be exercised by
such transferee or assignee to the extent exercisable by the optionee
immediately prior to such transfer or assignment. During the lifetime
of an optionee, an option is exercisable only by him or her, except in
the case of a non-incentive stock option, which can be exercised by
such transferees as are permitted above. In the event of any
attachment, execution or similar process on an option, the Corporation
will notify the optionee and allow the optionee a reasonable time (but
not to exceed 60 days) to obtain a release of the option from such
process. If the optionee does not obtain a release, the Corporation
may terminate the option.
Exercise Of Options
Each option may be exercised upon such terms and conditions as the
Board shall determine.
Options may be exercised by written notice to the Corporation stating
the number of shares with respect to which the option is being
exercised, and the time of delivery thereof, which shall be not less
than 15 and not more than 30 days after the notice is given. At the
time specified in the notice, the Corporation shall deliver to the
optionee a certificate for such shares and the optionee shall deliver
payment in full, in cash or by certified or official bank check, for
the shares. The Corporation may delay the time of delivery as
required for it with reasonable diligence to comply with any
applicable legal requirements. If the optionee fails to accept
delivery of or pay for all or part of the number of shares for which
the option is being exercised, the right to exercise the option shall
be terminated.
Termination of Employment or Service as a Director
Except as stated below with respect to termination of employment or
service as a director "for cause," in the event that an optionee's
employment or service as a director is terminated, by failure to be
re-elected or otherwise, his or her option shall terminate
immediately; provided, however, that the optionee shall have the right
to exercise the option within three months from the date of such
termination to the extent he or she was entitled to exercise the same
immediately prior to termination, with certain exceptions in the case
of disability or death. The Board of Directors may extend the three
month exercise period for up to three additional months, such that an
optionee may have up to six months following termination to exercise
an option.
If an employee-optionee's employment is terminated for cause,
including willful breach of duty by the employee or habitual neglect
of duty, the right to exercise any option shall immediately and
automatically terminate; provided, however, that the Board may, in its
sole and absolute discretion, prior to the expiration of thirty days
after the date of said termination, reinstate the option as set forth
below.
If a director-optionee's service as a director is terminated pursuant
to Section 302 of the California General Corporation Law (with respect
to removal for cause), pursuant to Section 304 of the California
General Corporation Law (with respect to removal by shareholders' suit
in case of fraudulent or dishonest acts or gross abuse of authority or
discretion with reference to the Corporation), or if the Comptroller
of the Currency or other supervisory authority shall exercise its
cease and desist power to remove a director from office, the right to
exercise any option shall immediately and automatically terminate;
provided, however, that the Board may, in its sole and absolute
discretion, prior to the expiration of thirty days after the date of
said termination, reinstate such option as set forth below.
If the Board determines that an optionee's option is to be reinstated
as provided above, written notice of such determination shall be sent
to the optionee, at his or her last known address. Upon receipt of
such written notice, the optionee shall have the right to exercise the
option, to the extent that he or she was entitled to exercise the same
immediately prior to termination, at any time during the period from
receipt of such written notice to a day three months from the date of
termination.
Additional Terms
In the event that the outstanding shares of common stock of the
Corporation are increased or decreased or changed into or exchanged
for a different number or kind of shares or other securities of the
Corporation or of another corporation, by reason of reorganization,
merger, consolidation, recapitalization, reclassification, stock
split, combination of shares, dividend payable in common stock,
acquisition, or the like, appropriate adjustment will be made by the
Board in the number and kind of shares for the purchase of which
options may be granted under the Plan. In these cases, the Board will
also make appropriate adjustment in the number and kind of shares as
to which outstanding options will be exercisable, so that any
participant's proportionate interest in the Corporation by reason of
rights under any unexercised portions of such option shall be
maintained. Such adjustment in outstanding options will be made
without change in the total price applicable to the unexercised
portion of the option and with a corresponding adjustment in the
option price per share.
In the event of a dissolution or liquidation of the Corporation or a
merger, consolidation, acquisition or other reorganization in which
the Corporation is not the surviving or resulting corporation, the
Board of Directors has the power to cause the termination of every
outstanding option; provided, however, that in all events the optionee
will have the right, immediately prior to such dissolution,
liquidation, merger, consolidation, acquisition or other
reorganization in which the Corporation is not the surviving or
resulting corporation, to exercise his or her option and purchase
shares subject thereto, to the extent of any unexercised portion of
the option, without regard to any installment provision in the option
agreement, provided that in all events the option is otherwise
exercisable in accordance with the terms and conditions of the Plan.
Additional Information
For additional information about the Plan and the administrators of
the Plan, participants should contact Deborah A. Meekins, President
and Chief Executive Officer, Sonoma National Bank, 801 Fourth Street,
Santa Rosa, California, 95404, telephone: (707) 579-2265
Miscellaneous
The Plan is not subject to the provisions of the Employee Retirement
Income Security Act of 1974 or qualified under Section 401(a) of the
Code.
FEDERAL TAX CONSEQUENCES
The Plan provides for the grant of both non-qualified options and
options which are intended to qualify as "incentive stock options" as
defined in Section 422 of the Code. The Code provides that no income
is recognized from the grant of an incentive stock option or, as long
as certain requirements are met, from the exercise of an incentive
stock option by the optionee. If the requirements are not met,
ordinary income will be recognized at the time of exercise. On the
sale of stock acquired through the exercise of an option, long-term or
short-term capital gain will be recognized, depending upon how long
the stock was held. Under the current tax laws, capital gains are
presently taxed at rates that are slightly less than ordinary income
rates. The employer is not allowed a business expense deduction with
respect to an incentive stock option unless income is recognized by
the optionee.
Generally, the grant of an option which does not qualify as an
incentive stock option (a "non-qualified option") does not constitute
ordinary income to the optionee, unless the option has a readily
ascertainable fair market value. When a non-qualified option is
exercised, the optionee recognizes income in an amount equal to the
difference between the option price and the value of the stock at the
time of exercise. The employer is allowed a business expense
deduction equal to the amount included in the optionee's income in the
employer's corresponding tax year.
In the event of a merger or acquisition involving the Corporation or
the Bank in which the Corporation or the Bank is not the surviving
corporation, the vesting of outstanding options is accelerated under
the Plan. The acceleration of vesting may be considered a "parachute
payment" to the participant by the Corporation. If the value of a
participant's options to which the acceleration applies exceeds three
times that participant's annual base salary, as determined under the
Code, that participant will be subject to an excise tax on the amount
that is considered an "excess parachute payment."
Because of the complexities of the Internal Revenue Code, it is
recommended that an optionee obtain tax counseling from his or her tax
advisor in connection with the exercise of an option granted under the
Plan and the sale of any common stock acquired upon the exercise of an
option. In particular, an optionee who has substantial income is
advised to obtain tax counseling, since the exercise of an incentive
stock option may constitute a tax preference item for purposes of
computing the alternative minimum tax.
RESALE OF COMMON STOCK
Each option agreement contains an agreement by the optionee that he or
she will promptly notify the Corporation in writing of any sale,
transfer, or other disposition of any shares acquired upon the
exercise of an option, if the sale, transfer or other disposition
occurs within two years from the date the option was granted or within
one year from the date of exercise.
Resale of shares acquired on the exercise of a stock options must be
made in compliance with applicable Federal and state securities laws,
including the antifraud provisions and the prohibitions against
trading on inside information. Employees who are not "affiliates" of
the Corporation, as defined in the Securities and Exchange
Commission's Rule 405 under the Securities Act of 1933 (the "1933
Act") and who acquire shares of common stock through the exercise of
options granted under the Plan, may reoffer and resell such shares
without further registration and without limitation as to holding
period or number of shares to be sold.
Affiliates of the Corporation, as defined in Rule 405, are limited in
their ability to sell stock of the Corporation. Affiliates are
generally defined to be persons who, directly or indirectly, control
the management and policies of the Corporation or are controlled or
under common control with the Corporation or other affiliates. Such
persons generally include all executive officers, directors, holders
of 10% or more of the Corporation's common stock, and those persons'
affiliates, as defined by law or regulations. Affiliates may reoffer
or resell shares of the Corporation's common stock acquired by them
through the exercise of options granted under the Plan pursuant to
either Rule 144 promulgated under the 1933 Act or an effective reoffer
prospectus in accordance with the rules and regulations of the 1933
Act.
There are a number of requirements applicable to resales by affiliates
under Rule 144. Sales must be conducted through a broker or market
maker and a report of sale must be filed with the Securities and
Exchange Commission ("SEC"). The number of shares that an affiliate
may sell under Rule 144, plus all other sales within the last three
months, is limited to the greater of (i) one percent of the
Corporation's outstanding shares or (ii) the average weekly volume of
trading in the Corporation's stock during the four weeks immediately
preceding the sale, as reported on NASDAQ.
The alternative to Rule 144 is to register the offer with the SEC,
pursuant to a reoffer prospectus. The SEC's rules and regulations
require that the affiliate desiring to reoffer or resell such
securities be named in the reoffer prospectus and state the number of
shares he or she desires to have registered.
USE OF PROCEEDS
This offering was made for the purpose of providing incentive
compensation to directors and officers of the Corporation and the
Bank. The Corporation intends to use the proceeds from the offering,
if any, for general corporate purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Corporation's sole subsidiary is Sonoma National Bank ("Bank"),
and its primary activities are the
commercial banking activities engaged in through the Bank. The
following discussion of financial condition and results of operations
focuses primarily on the Bank, for the years ended December 31, 1993
and 1994.
During 1994, total consolidated assets grew 14.3% to $121,776,000 at
December 31, 1994. Total consolidated assets grew 10.6% during 1993
to $106,560,000 at December 31, 1993.
Total deposits increased 14.1% to $111,083,000 when comparing December
31, 1994 to December 31, 1993. For the year ended December 31, 1993,
total deposits increased 10.9% to $97,332,000.
Results of Operations
The Corporation's consolidated net income for the year ended December
31, 1994 was $1,346,000 as compared to $1,299,000 for the year ended
December 31, 1993, an increase of 3.6%. The Corporation's
consolidated net income for the year ended December 31, 1993,
increased 18.2% over the year ended December 31, 1992. Net interest
income before provision for loan losses increased 18.1%, or $936,000,
when comparing the year of 1994 to 1993. This is largely due to the
increase in loan volume, which added $1,418,000 to interest income.
The Bank's interest margin for 1994 was 5.70%, which was slightly
lower than the 1993 margin of 5.74%. During 1994, loan and deposit
rates were increasing; however, the net effect to the interest margin
of the rate change was a slight increase of $37,000.
Net interest income after provision for loan loss increased $830,000
in 1994 over 1993, other income increased $248,000 and operating
expenses increased by $809,000. The large increase in other income
was due to the increased volume of SBA loan sales and servicing income
and the gain reported on the OREO sale. See, "Non-Interest Income"
and "Other Real Estate Owned." Operating expenses increased due to
expansion of the SBA department and the full year of operation at the
Windsor branch. Income tax expense rose $171,000 in 1994 as compared
to 1993 as a result of increased income and the slightly higher
effective tax rate.
Net Interest Income
The primary source of the Bank's income is the difference between (1)
the interest earned on its loan and investment portfolio, interest
bearing deposits with other banks, and federal funds sold, and (2)
the interest paid on deposits and other borrowed funds. This
difference is referred to as net interest income, and it is one of the
primary factors that affect the Corporation's profitability. Interest
income earned on loans, which includes loan fee income, is primarily a
function of the amount of loans outstanding and the rates prevailing
on these loans. Interest paid on deposits depends on the composition
of the deposit base and the rates paid to attract deposits. See,
"Deposits."
For the year ended December 31, 1994, net interest income before the
provision for loan losses totalled $6,119,000 as compared to
$5,183,000 for the year ended December 31, 1993 representing an
increase of 18.1%. The majority of this increase results from growth
in the loan portfolio, largely from the increase in SBA loans held in
the portfolio. The Bank's net interest margin was also affected by
the increase in the prime rate from 6% to 8.5% during 1994. The prime
rate had remained at 6% from July 1992 until March 1994. The net
effect of the change in interest rates in 1994 was a $37,000 increase
in the Bank's net interest income.
Interest expense increased 24.5% when comparing 1993 to 1994, due to
increases in interest bearing deposits and the increasing interest
rate environment. The average cost of interest paid on interest
bearing deposits for the year ended December 31, 1994 was 3.6% versus
3.5% for the year ended December 31, 1993. Non-interest bearing
deposits increased slightly in 1994, but most of the Bank's growth was
funded by money market deposits. In addition, deposits shifted from
time deposits to money market and savings accounts, which had rates
equal to or higher than rates offered on time certificates.
The Federal Reserve Board increased the discount rate several times in
1994 in an effort to control growth and inflation during this period
of economic recovery. Commercial banks immediately adjusted their
prime lending rates each time, going from 6% at the beginning of the
year to 8.5% at year end. During 1993, the prime rate was 6% during
the entire year. Since the Bank is asset sensitive, meaning more
asset are immediately adjustable than liabilities, the net interest
margin increases immediately when rates increase. The full impact of
rate changes on the Bank's assets are not realized for several months,
since not all loans reprice immediately. The Bank has fixed rate
loans and loans that are tied to indexes which adjust at a slower
pace, such as the Eleventh District Cost of Funds. The Bank's
deposits reprice at a slower pace than loans, primarily since
certificates of deposits do not reprice until their maturity dates.
Overall loan portfolio yields are affected by deferred loan fees and
discounts on loans. These fees and discounts are amortized to income
over the life of the loan with which they are associated and serve to
increase loan portfolio yields. Interest income on loans includes
amortization of loan fee income of $492,000 for the year ended
December 31, 1994 and $464,000 for the year ended December 31, 1993.
Deferred loan fees are a product of origination and commitment fees
and certain direct loan origination costs. These fees are amortized
as an adjustment of the related loan's yield over the contractual life
of the loan. The deferred fee balances are as follows: $820,000 as of
December 31, 1994, and $878,000 as of December 31, 1993. These fees
are netted out of total loans for each of the above periods.
Construction loans are generally short term loans and fees associated
with them amortize to income over a much shorter term. In 1993, the
volume of construction loans was higher than in 1994 which resulted in
fees on construction loans totalling $166,000 versus $60,000 in 1994.
This decline in fee income explains the drop on the yields of
construction loans from 14.2% in 1993 to 11.1% in 1994.
The allowance for loan losses has no direct effect on yield. Loans
carried as non-accrual reduce the portfolio yield, since the balance
of a non-accrual loan is maintained in the loan total but no interest
is accrued.
During 1993, net interest income increased 4.8% from $4,945,000 to
$5,183,000. This increase resulted from growth in the loan portfolio,
largely from the increase in SBA loans held in the portfolio. Average
interest rates on loans and deposits declined during 1993; however,
because of changes in the mix of assets and deposits, the net margin
increased by $25,000.
<TABLE>
The tables on the following pages (i) summarize the distribution, by
amount, of the average assets, liabilities and shareholders' equity of
the Corporation for the periods indicated and (ii) set forth the
yields on earning assets and the rates paid for interest bearing
liabilities during the periods indicated. Averages are computed
primarily from daily balances.
<CAPTION>
Average Balance Sheet
Year Ended December 31, 1994
Average Interest Average
Balance Income/Expense Yield/Rate
<S> <C> <C> <C>
Certificates of deposit in
other financial insitutions $ 4,342,000 $ 187,000 4.31%
Investments 1,518,000 78,000 5.14%
Federal Funds Sold 9,805,000 392,000 4.00%
Bankers Acceptances 1,375,000 63,000 4.58%
Loans:
Mortgage Loans
held for sale 171,000 18,000 10.53%
Commercial 39,207,000 3,776,000 9.63%
Installment loans
to individuals 3,049,000 313,000 10.27%
Real estate - construction 2,552,000 282,000 11.05%
Real estate - other 45,362,000 4,111,000 9.06%
Total Loans: 90,341,000 8,500,000 9.41
Total earning assets 107,381,000 9,220,000 8.59%
Non-earning assets:
Allowance for loan losses (1,292,000)
Deferred loan fees (1,048,000)
Cash and due from banks 6,174,000
Other assets 4,056,000
TOTAL ASSETS $115,271,000
Deposits:
Demand - interest bearing 9,101,000 99,000 1.09%
Savings & money market 43,363,000 1,638,000 3.78%
Time certificates 32,990,000 1,364,000 4.13%
Total interest bearing
deposits 85,454,000 3,101,000 3.63%
Demand -
non-interest bearing 19,801,000
Other liabilities:
Other liabilities 501,000
Shareholders' equity 9,506,000
TOTAL LIABILITIES $115,271,000 $3,101,000
Net interest income $6,119,000
Net interest margin 5.70%
</TABLE>
<TABLE>
<CAPTION>
Average Balance Sheet
Year Ended December 31, 1993
Average Interest Average
Balance Income/Expense Yield/Rate
<S> <C> <C> <C>
Certificates of deposit in
other financial insitutions $ 3,500,000 $ 140,000 4.00%
Investments 1,390,000 50,000 3.60%
Federal Funds Sold 8,108,000 223,000 2.75%
Bankers Acceptances 483,000 16,000 3.31%
Loans:
Mortgage Loans
held for sale 563,000 54,000 9.59%
Commercial 29,934,000 2,709,000 9.05%
Installment loans
to individuals 2,595,000 259,000 9.98%
Real estate - construction 3,210,000 455,000 14.17%
Real estate - other 40,410,000 3,768,000 9.30%
Total Loans 76,812,000 7,245,000 9.43%
Total earning assets 90,293,000 7,674,000 8.50%
Non-earning assets:
Allowance for loan losses (1,196,000)
Deferred loan fees (755,000)
Cash and due from banks 6,292,000
Other assets 3,413,000
TOTAL ASSETS $ 98,047,000
Deposits:
Demand - interest bearing 7,805,000 155,000 1.99%
Savings & money market 28,144,000 831,000 2.95%
Time certificates 34,682,000 1,505,000 4.34%
Total interest bearing
deposits 70,631,000 2,491,000 3.53%
Demand -
non-interest bearing 18,971,000
Other liabilities:
Other liabilities 327,000
Shareholders' equity 8,118,000
TOTAL LIABILITIES $ 98,047,000 $2,491,000
Net interest income $5,183,000
Net interest margin 5.74%
</TABLE>
<TABLE>
The following table sets forth the changes in net interest income due
to changes in interest rates and the volume of assets and liabilities
from the year ended December 31, 1994 as compared to the year ended
December 31, 1993.
<CAPTION>
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME AND EXPENSE
1994 over 1993
Volume Yield/Rate Total
<S> <C> <C> <C>
Increase (decrease)
in interest income:
Certificates of deposit in
other financial securities $ 36,150 $10,850 $ 47,000
Investments 6,594 21,406 28,000
Federal Funds Sold 67,650 101,350 169,000
Bankers Acceptances 40,866 6,134 47,000
Loans:
Mortgage Loans
held for sale (41,236) 5,236 (36,000)
Commercial 893,383 173,617 1,067,000
Installment 46,734 7,266 54,000
Real estate - construction (72,848) (100,152) (173,000)
Real estate - other 440,224 (97,224) 343,000
Total Loans $1,417,517 $128,483 $1,546,000
Increase (decrease)
in interest expense:
Deposits:
Demand - interest bearing $14,245 ($70,245) ($56,000)
Savings & money market 576,219 230,781 807,000
Time certificates 71,636 (69,364) (141,000)
Total $518,828 $91,172 $610,000
Increase (decrease) in
net interest income $898,689 $37,311 $936,000
<F1>
Note: Variances attributable to simultaneous rate and colume changes
are all allocated to volume change amount.
</TABLE>
<TABLE>
The following table sets forth the changes in net interest income due
to changes in interest rates and the volume of assets and liabilities
from the year ended December 31, 1993 as compared to the year ended
December 31, 1992.
<CAPTION>
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME AND EXPENSE
1993 over 1992
Volume Yield/Rate Total
<S> <C> <C> <C>
Increase (decrease)
in interest income:
Certificates of deposit in
other financial securities $ 39,672 ($21,343) $ 18,329
Investments 38,253 ($9,696) 28,557
Federal Funds Sold 2,558 ($42,406) (39,848)
Bankers Acceptances (81,911) ($12,124) (94,035)
Loans:
Mortgage Loans
held for sale (94,855) 24,363 (70,492)
Commercial 195,211 (227,818) (32,607)
Installment 64,517 (16,759) 47,758
Real estate - construction (16,404) 27,276 10,872
Real estate - other 230,280 (327,006) (96,726)
Total Loans $ 377,321 ($605,513) ($228,192)
Increase (decrease)
in interest expense:
Deposits:
Demand - interest bearing ($170,763) ($183,951) ($354,714)
Savings & money market 279,233 (135,640) 161,593
Time certificates 39,029 (310,970) (271,941)
Total $165,499 ($630,561) ($465,062)
Increase (decrease) in
net interest income $211,822 $25,048 $236,870
<F1>
Note: Variances attributable to simultaneous rate and colume changes
are all allocated to volume change amount.
</TABLE>
Non-Interest Income
Non-interest income is derived primarily from service charges on
deposit accounts, loan servicing fees and the sale of loans.
When comparing the year ended December 31, 1994 to December 31, 1993,
other non-interest income totalled $2,146,000, increasing 13.1% over
the 1993 total of $1,898,000. This increase was largely due to gains
on the sale of the guaranteed portion of SBA (Small Business
Administration) loans, which totalled $1,287,000 in 1994 versus
$1,064,000 in 1993, or an increase of 21.0%. SBA servicing fees
increased during 1994 to $260,000 for the year compared to $120,000
for 1993. Servicing revenues will continue to grow as the SBA
servicing portfolio increases. The Bank increased the SBA staffing
levels and concentrated on increasing volume in this department in
1994. The Bank received formal designation as a "Preferred Lender" in
January 1994.
There can be no assurance that the SBA program will continue to
generate significant amounts of other non-interest income in the
future. During 1993 and 1994 the Bank experienced additional
competition with more financial institutions making SBA loans. The
SBA program, being a government program, is also subject to revision
by the government which could have a negative impact on the Bank's
profit. See, "Item 1, The Corporation, Business of the Bank."
1994 non-interest income also includes $98,000 of gain on the sale of
real estate owned. At this time, it is not expected that the
Corporation will have any significant gains from the sale of OREO
during 1995. See, "Other Real Estate Owned."
Other non-interest income for 1993 totalled $1,898,000, increasing
53.06% over the 1992 total of $1,240,000. This increase was due to
gains on the sale of the guaranteed portion of SBA loans which
totalled $1,064,000 in 1993, an increase of 107.0% when compared to
$514,000 in 1992. SBA servicing fees also doubled during 1993 to
$120,000 for the year and will continue to grow as the servicing
portfolio increases. The Bank increased the SBA staffing levels and
concentrated on increasing volume in this department in 1993.
Approximately $56,000 in mortgage loan sale income was recognized in
1994, versus $167,000 in 1993 and $226,000 in 1992. The decline in
income during 1994 and 1993 was attributable to the decline in
residential mortgage loan refinance activity, caused by an increase in
mortgage loan interest rates. During 1992, mortgage rates dropped to
20-year lows, which caused the increase in the volume of mortgage
refinancing. The mortgage refinance activity remained strong during
1993 with volume fluctuating with changes or perceived trends in
mortgage rates. When mortgage rates started to increase in late 1993,
there was a large volume of mortgage activity to lock in rates. With
the continuing higher mortgage rates, mortgage activity has dropped to
a low level. Management of the Bank expects that there will not be
significant income from mortgage loan sales so long as rates are level
or rising, as the volume of mortgage loans generated is highly
sensitive to mortgage rates.
Non-Interest Expense
Non-interest expenses include salaries and employee benefits,
occupancy, equipment and the general expenses required for the
operation of the Corporation and the Bank. For the year ended
December 31, 1994, non-interest expenses totalled $5,666,000, an
increase of 16.7% over the year ended December 31,1993. Non-interest
expenses increased 22.7% from $3,959,000 in 1992 to $4,857,000 in
1993.
The increase in non-interest expenses during 1994 and 1993 were due
primarily to the operation of the Windsor branch office, which opened
in July, 1993 and the continued expansion of the SBA department. The
SBA department's direct operating expenses equalled $1,156,000 in 1994
compared to $573,000 in 1993 and $200,000 in 1992. Total direct
operating expenses associated with the Windsor office were $217,000
for the year 1994 versus $139,000 in 1993.
The increase in non-interest expense includes an increase of 23.5% in
salaries and benefits, due to the addition of 8 employees during 1994
as well as annual salary increases, increased benefit costs and higher
workers compensation insurance costs.
Occupancy costs increased 6.5% from $598,000 in 1993 to $637,000 in
1994. The increase in occupancy costs was due to the opening of the
Windsor branch, which added $18,000, and the leasing of additional
space for the expansion of the SBA department, which added $24,000.
The other expense categories increased 12.0% mainly due to increases
in regulatory assessments, business development expenses, advertising
costs, telephone, postage, and loan expenses. These increases were
caused mainly by growth in the SBA department. Advertising and
business development expenses were $382,000 in 1994, increasing 42%
from 1993 because of increased SBA expenditures of $153,000 during
1994.
Non-interest expenses are expected to continue to increase in 1995 due
to the planned growth in the Bank.
Analysis charges are customer account expenses for title and escrow
services, check charges, as well as courier and payroll services on
behalf of customers who maintain deposit balances sufficient to
compensate for these costs. See, "Deposits." While some non-interest
expense is incurred, management feels the contribution of the non-
interest bearing demand accounts toward lowering overall cost of funds
more than offsets this cost.
Deposit and other insurance premiums increased 6.3% from $315,000 in
1993 to $335,000 in 1994. The Bank's deposit insurance premium is
currently in the lowest cost category of $.23 per $100 of deposits.
The adequacy of the Bank Insurance Fund is currently being evaluated
by the FDIC. Based upon the results of its review, deposit insurance
premiums may be reduced during 1995.
For the year ended December 31, 1993, non-interest expense increased
22.68% compared to 1992. This increase represents an increase of
27.89% in salaries and benefits due to the hiring of 10 additional
employees during 1993. Occupancy increased due to the opening of a
new branch in Windsor in July 1993 which added $13,000, and the
leasing of additional space for the expansion of the SBA department
which added $79,000. The other expense categories increased 16.10%
mainly due to increases in regulatory assessments, legal fees, and
advertising costs due to the Bank's expansion in 1993.
<TABLE>
The following table outlines the components of non-interest expense
for the periods indicated:
<CAPTION>
Year Ended December 31,
Expense Item 1994 1993
<S> <C> <C>
Salaries & Employee Benefits $2,776,000 $2,247,000
Occupancy 637,000 598,000
Equipment 375,000 323,000
Advertising/Business Development 382,000 269,000
Outside Customer Services 208,000 207,000
Professional Fees 163,000 203,000
Stationery & Supplies 125,000 121,000
Deposit and Other Insurance 335,000 315,000
Other 665,000 574,000
TOTAL $5,666,000 $4,857,000
</TABLE>
Loan Portfolio
<TABLE>
The following table shows the composition of the Corporation's loan
portfolio, by type of loan, as of the dates indicated. Loans held for
sale are excluded:
<CAPTION>
December 31,
Type of Loan 1994 1993
<S> <C> <C>
Commercial $34,857,000 $29,955,000
Real Estate Construction 1,701,000 5,113,000
Real Estate Other 49,601,000 44,048,000
Installment Loans to Individuals 2,965,000 3,147,000
TOTAL $89,124,000 $82,263,000
</TABLE>
The above table illustrates the Bank's emphasis on commercial and real
estate lending. At December 31, 1994 and 1993 commercial loans
comprised 39.1% and 36.4%, respectively, of the Bank's total loan
portfolio. Real estate other and construction loans (combined)
comprised 57.6% and 59.8% on those same dates. Management is aware
of the risk factors in making commercial and real estate loans and is
continuously monitoring the local marketplace as well as performing
annual reviews of this portfolio.
The Bank makes commercial loans primarily to small and medium sized
businesses and to professionals generally located within Sonoma
County. While the Bank emphasizes commercial lending, management does
not believe that there is any significant concentration of commercial
loans to any specific type of business or industry.
The Bank originates loans guaranteed by the U.S. Small Business
Administration ("SBA"). The guaranteed portion of each loan,
typically ranging from 70% to 90%, is sold to outside investors,
usually at a price in excess of par. The remaining unguaranteed
portion is retained in the Bank's loan portfolio. The Bank follows
the same internal credit approval process when approving an SBA loan.
The majority of the SBA loans are secured by real estate.
While SBA loans generally have the same underwriting requirements as
the Bank's other loans, they sometimes are for longer terms (7 to 25
years) and have a higher loan-to-value ratio than the Bank typically
accepts. This risk is mitigated by the majority of the loans being
secured by real estate. If a default on a loan were to occur, the
Bank would share proportionally in the collateral supporting the loan.
At December 31, 1994, the Bank held $16,459,000 in SBA loans of which
$12,620,000 represented the unguaranteed portion of the SBA loans and
$3,831,000 (available for sale) was guaranteed by SBA. There were no
SBA loans more than 90 days past due as of December 31, 1994. The
unguaranteed portions are analyzed separately when reviewing the
adequacy of the allowance for loan losses.
Real estate construction loans are primarily for single family
residences and commercial properties valued at under $1,500,000
located within Sonoma County. Construction loans are made to
"owner/occupied" and "owner/users" of the properties and occasionally
to developers with a successful history of developing projects in the
Bank's market area. Loan-to-value ratios on construction loans depend
upon the nature of the property. The Banks's policy is to require
that the loan-to-value ratio ranges from 65% to 75% and that the
borrower have a cash equity interest in the land ranging from 25%-50%.
The construction lending business is subject to, among other things,
the volatility of interest rates, real estate prices in the area and
market availability of conventional real estate financing to repay
such construction loans. The Bank mitigates much of this risk by
requiring the borrower to procure take-out financing prior to loan
fundings. A decline in real estate values and/or demand could
potentially have an adverse impact on this portion of the loan
portfolio, and on the earnings and financial condition of the Bank.
The Bank originates residential mortgage loans with the intent to sell
them to the Federal Home Loan Mortgage Corporation (FHLMC) or outside
investors at a price approximating par value. These loans are sold
without recourse to the Bank. The Bank either sells these loans on a
servicing released basis or retains the servicing function. The Bank
sold approximately $6,389,000 in real estate mortgages during 1994.
The Bank also originated $2,244,000 in mortgage loans in 1994 which it
held at December 31, 1994, as portfolio loans (Real Estate - Other).
Home equity lines of credit, included in real estate - other,
equalled 7.3% of the total loan portfolio at December 31, 1994. These
loans are secured primarily by second trust deeds on single family
residences. The Bank typically requires a loan-to-value ratio of no
more than 80% for home equity loans. The rates are adjustable monthly
based on the Bank's internal reference rate, and terms do not exceed
ten years.
The Bank has a small portfolio of consumer loans, equaling 3.3% of the
total loan portfolio at December 31, 1994. Personal lines of credit,
credit cards and overdraft protection are offered to customers.
Regular underwriting procedures are followed depending upon the type
of loans. Revolving lines are reviewed every two years.
It is the Bank's policy to collateralize all loans unless, in
management's estimation, the credit worthiness, cash flow and
character of the borrower justify extension of credit on an unsecured
basis. Management recognizes the inherent risk in making unsecured
loans but, in management's judgement, such unsecured loans are
justified based on the credit worthiness and financial strength of the
borrowers.
Management believes that its secured loans are adequately
collateralized to minimize loss in the event of default in payment of
interest or principal or decline in collateral values. In making
secured loans, the Bank's policy establishes a maximum loan to
collateral value ratio of from 50% to 100%, depending on the type of
collateral and the other factors supporting the loan.
Interest Rate Sensitivity
The Bank attempts to lend at competitive interest rates and to reduce
exposure to interest rate fluctuations by making most of its loans at
adjustable interest rates.
<TABLE>
The following table summarizes the Bank's loan maturities, by loan
type, at December 31, 1994. The loans, which includes loans held for
sale, are categorized by the maturity of the final installment.
<CAPTION>
1 Year Over 1 through Over
or Less 5 Years 5 Years Total
<S> <C> <C> <C> <C>
Commercial $10,076,000 $ 6,160,000 $22,452,000 $38,688,000
Real Estate -Construction 1,357,000 344,000 0 1,701,000
Real Estate -Other 2,143,000 6,171,000 41,287,000 49,601,000
Installment Loans 1,300,000 584,000 1,081,000 2,965,000
TOTAL $14,876,000 $13,259,000 $64,820,000 $92,955,000
</TABLE>
Of the total loans due in more than one year, $8,560,000 were at fixed
interest rates and $69,519,000 were at adjustable interest rates at
December 31, 1994.
Interest rate risk is reduced through the practice of making variable
interest rate loans which are tied to some outside rate index. These
loans "float", or adjust their rate as the interest rate environment
changes. As of December 31, 1994 approximately 87.2% of the Bank's
loan portfolio was comprised of loans with adjustable rates.
Allowance for Loan Losses
In accordance with its policy, the Bank maintains an allowance for
loan losses to provide for losses in the loan portfolio. The
allowance for loan losses is reviewed on a monthly basis and is based
on an allocation for each loan category (eg. Real Estate, Commercial,
etc.), an allocation of undisbursed commitments, plus an allocation
for any outstanding loans which have been classified by regulators or
internally for the "Watch List." Each loan that has been classified
is individually analyzed for the risk involved and an allowance
provided for according to the risk assessment. In addition,
management considers such factors as known loan problems, historical
loan loss experience, loan concentrations, loan loss experience in the
banking industry, evaluations made by bank regulatory agencies,
assessment of economic conditions and other appropriate data to
identify risks in the loan portfolio. Based upon the analysis of the
allowance for loan losses, the Bank has increased the allowance by
27.7% to $1,421,000 at December 31, 1994 compared to $1,113,000 in
1993. The provision for loan losses for the year ended December 31,
1994 was $280,000 as compared to $174,000 in 1993.
Bankers' acceptances in the loan portfolio are considered investments
and are not taken into account internally when assessing the monthly
loan loss provision. These are short term instruments purchased
through correspondent banks and the rates are typically higher than
federal funds rates. Maturities vary from one to six months. For
regulatory purposes, bankers' acceptances are classified in the loan
portfolio. As of December 31, 1994 and 1993, the Bank had no
balances in bankers' acceptances.
Depending on future evaluations of the allowance in connection with
regulatory examinations, any changes in the factors management reviews
as described above, and the amount of any loan losses that may be
incurred, further increases may be made in accordance with the Bank's
policy, and such increases will have an adverse effect on earnings.
Management attempts to reduce exposure to loss from adverse economic
conditions through portfolio diversification among businesses and
types of borrowers. During 1994 the Bank charged-off seven consumer
loans totalling $16,000. In 1993 the Bank charged-off five loans
totalling $212,000, including three commercial loans aggregating
$204,000.
<TABLE>
The following table sets forth the changes in the allowance for loan
losses and their relationship to loans outstanding at the end of those
periods.
<CAPTION>
Year Ended December 31
1994 1993
ALLOWANCE FOR LOAN LOSSES:
<S> <C> <C>
Balance at beginning of Period $ 1,113,000 $ 1,144,000
Provision for Loan Losses Charged to Operating Expense 280,000 174,000
Less Charge-Offs
Commercial loans 0 204,000
Consumer loans 16,000 8,000
Total Charge-offs 16,000 212,000
Recoveries
Commercial 20,000 5,000
Real Estate - Other 24,000 1,000
Consumer 0 1,000
Total Recoveries 44,000 7,000
Net Charge-offs (28,000) 205,000
Balance at the End of the Period $ 1,421,000 $ 1,113,000
Total Loans Outstanding at End of Period $89,124,000 $82,263,000
Ratio of Ending Allowance to Ending Loans Outstanding 1.6% 1.4%
AVERAGE TOTAL LOANS $90,341,000 $76,812,000
Ratio of Net Charge-offs to Average Loans Outstanding
During the Period (0.00031) 0.00267
</TABLE>
<TABLE>
The following table sets forth the allocation of the allowance for
loan losses by loan type as of December 31, 1994 and 1993. The
allocation of the allowance will necessarily change whenever
management determines that the risk characteristics of the loan
portfolio have changed. It should not be construed that the amount
allocated to a particular segment is the only amount available for
future charge-offs that might occur within that segment, since the
allowance is a general reserve. In addition, the amounts allocated by
segment may not be indicative of future charge-off trends.
<CAPTION>
December 31, 1994 December 31, 1993
% of Loans % of Loans
in each Category in each Category
Category Amount to Total Amount to Total
<S> <C> <C> <C> <C>
Commercial $ 524,000 39.1% $ 385,000 36.4%
Real Estate -Construction 117,000 1.9 189,000 6.2
Real Estate -Other 683,000 55.7 449,000 53.6
Installment Loans 97,000 3.3 90,000 3.8
TOTAL $1,421,000 100.0% $1,113,000 100.0%
</TABLE>
Non-Performing Loans
Loans are generally placed on nonaccrual status when the borrowers are
past due 90 days and when payment in full of principal or interest is
not expected. At the time a loan is placed on nonaccrual status, any
interest income previously accrued but not collected is reversed.
Interest accruals are resumed on such loans only when they are brought
fully current with respect to interest and principal and when, in the
judgement of management, the loans are estimated to be fully
collectible as to both principal and interest.
<TABLE>
The following table sets forth loans past due 90 days or more and
non-accrual loans as of the dates indicated.
<CAPTION>
December 31,
Days Past Due 1994 1993
<S> <C> <C>
90 and over $ 0 $ 0
Non-accrual 201,000 438,000
Total $201,000 $438,000
Percent of Total Loans 0.2% 0.5%
</TABLE>
The amount of interest that would have been recorded for the loans on
non-accrual at December 31 of the year totaled approximately $21,000
for 1994 and $27,000 for 1993. There was $1,000 in interest income
recorded during 1994 on the loans on nonaccrual as of December 31,
1994.
As of December 31, 1994, the $201,000 of non-accrual loans consisted
of one commercial loan totalling $31,000 and four real estate-other
loans totalling $170,000. As of December 31, 1993, there was one
commercial loan for $43,000 and two real estate-other loans totalling
$395,000 on non-accrual status.
Potential non-performing loans are identified by management as part of
its ongoing evaluation and review of the loan portfolio. Based on
such reviews as of December 31, 1994, management identified one SBA
loan totalling approximately $308,000, of which the Bank's
unguaranteed portion equalled $77,000, with respect to which known
information causes management to have doubts about the borrowers'
ability to comply with present repayment terms, such that the loan
might subsequently be classified as non-performing.
Other Real Estate Owned
The Corporation and Bank acquired title to approximately 42 acres of
land in March of 1992 through foreclosure proceedings on one loan.
The Corporation had participated with the Bank in the original loan.
The amount of the loan at the time of foreclosure was $780,000, of
which the Corporation had a $200,000 interest. After taking title
through foreclosure the Bank proceeded to re-map the property to
reduce lot sizes and increase the marketability of the property. The
Bank participated in the creation of an assessment district.
Improvement costs, net of reimbursement, totalling $64,000 were
capitalized. In 1994, this property was sold resulting in a gain of
$98,000, which was recorded as other income in the financial
statements.
During 1993 the Bank foreclosed on one parcel of residential property
and a small parcel of business property. Both properties were sold in
1993 at a small profit to the Bank.
Deposits
The Bank obtains deposits primarily from shareholders, local
businesses, loan customers and personal contacts by its business
development staff, officers and directors. The Bank does not have any
brokered deposits.
At December 31, 1994, deposits totalled $111,083,000, which was an
increase of 14.1% from December 31, 1993. Included in deposits at
December 31, 1994 are non-interest bearing demand deposits totalling
$21,197,000. Although these deposits do not bear interest, some of
the account holders utilize the Bank's analysis system which gives
earnings credits for their collected average balances based on 100% of
the 91-Day T-Bill rate. The customer may then use those earnings
credits towards various account services such as escrow accounting
fees, courier services, payroll, and check printing paid to third
party vendors. Two title companies maintain deposits at the Bank
representing $3,349,000 in average balances during the fourth quarter
in accounts utilizing the analysis system. For these title companies,
the Bank paid out $24,000 to third party vendors for escrow, courier
and related services during the fourth quarter of 1994. See, "Non-
Interest Expense." This equates to a 2.9% annual cost of funds, which
can be compared to the Bank's overall annual cost of funds of 3.6% for
1994.
During 1994, average deposits increased 17.5%. The balances held by
type of deposit also changed during the year with depositors moving
their funds from time deposits to market rate accounts. This was a
result of the low rates offered on time deposits and the public
perception of increasing rates during this period. Average balances
held in savings and money market rate accounts increased from
$28,144,000 to $43,363,000. The Bank's Sonoma Investor Reserve
account was very popular during this period, since it was tied to the
90-day Treasury Bill and repriced on a weekly basis. When the rate on
the Sonoma Investor Reserve exceeded the rates offered on certificates
of deposits, depositors moved funds to this account. It provided
immediate access to their funds and yielded a higher return. This
shift in deposit categories during 1994 increased the Bank's overall
cost of funds.
<TABLE>
Management attempts to reduce risks from fluctuating interest rates by
limiting the maturities on certificates of deposit. The following
table sets forth, by time remaining to maturity, the Bank's time
certificates of deposit as of December 31, 1994:
<CAPTION>
$100,000 and Over Less than $100,000
Amount Pct Amount Pct
<S> <C> <C> <C> <C>
Three Months or Less $2,291,000 26.6 $ 2,904,000 14.7
3 to 6 months 2,303,000 26.7 7,276,000 36.9
6 months to 1 year 3,710,000 43.1 8,498,000 43.1
Over 1 year 312,000 3.6 1,054,000 5.3
Total $8,616,000 100.0 $19,732,000 100.0
</TABLE>
At December 31, 1994, certificates of deposit of $100,000 or more and
maturing within three months constituted approximately 26.6% of total
certificates of deposits of $100,000 or more, and 2.1% of total
deposits. The holders of these deposits are primarily local customers
of the Bank. While these deposits are rate sensitive, the Bank
believes they are stable deposits, as they are obtained primarily from
customers with other banking relationships with the Bank.
Investment Portfolio
<TABLE>
At December 31, 1994 and 1993 the Bank held the following investments:
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
U.S. Treasury Securities $1,970,000 $493,000
Fannie Mae Discount Note 985,000 0
Federal Reserve Stock 117,000 117,000
Total $3,072,000 $610,000
Securities Pledged $ 500,000 $493,000
</TABLE>
Federal Reserve Bank stock has a yield of 6.0%. There are two U.S.
Treasury Securities, each with a par value of $1,000,000. One with a
yield of 5.5% will mature in May 1995, the other with a yield of 5.4%
in June 1995. The Fannie Mae Discount Note has a par value of
$1,000,000, yielding 6.1% and matures in April 1995. The yield on
Investments equalled 5.1% during 1994 compared to 3.6% in 1993.
Investments are carried at amortized cost. All investments are to be
held to maturity. The market value of securities equalled $3,060,000
at December 31, 1994 and $610,000 at December 31, 1993.
Liquidity - Consolidated
Liquidity is a bank's ability to meet possible deposit withdrawals, to
meet loan commitments and increased loan demand, and to take advantage
of other investment opportunities as they arise. The Bank's liquidity
practices are defined in both the Asset and Liability Policy and the
Investment Policy. These policies define acceptable liquidity
measures in terms of ratios to total assets, deposits, liabilities and
capital. In addition, these policies includes acceptable ranges for
the bank's loans-to-deposits ratio. The Bank also compares its
liquidity position and ratios to its peer group.
The Bank is required to maintain specific reserve balances with the
Federal Reserve Bank. This is monitored on a daily basis to assure
compliance with regulatory requirements. The Office of the
Comptroller of the Currency ("OCC") also requires the Bank to
establish adequate liquidity policies and practices. Although defined
liquidity percentages are not specified in the OCC's regulations, they
have been incorporated in the Bank's policies and procedures.
Cash and due from banks, federal funds sold and time certificates of
deposit totalled $24,197,000 or 19.9% of total assets at December 31,
1994. This level of liquidity is similar to the Bank's liquidity
position over the last several years, and comparable to other
financial institutions in its asset size range.
The Bank has three federal funds lines of credit totalling $8,000,000
with three institutions, one line for $2,000,000 and two lines for
$3,000,000. These lines are available on a short term basis to meet
any cash demands that may arise.
In comparing the change in cash flows during 1994 with 1993, the Bank
has funded loan growth through increased deposits. The rate of
deposit growth has been negatively impacted by economic factors in
both 1994 and 1993, with historically low rates offered on deposits.
Depositors looked for investment alternatives to increase yields.
Deposits increased during both years largely due to deposit campaigns
which offered higher rates, and the opening of the Windsor branch.
During 1994, the deposit growth occurred in money market accounts
which had a higher yield than time certificates and the funds were
also readily assessable to the depositor. As rates on time deposits
increase, it is expected that a portion of the money market accounts
will move into certificates of deposits.
At December 31, 1993, cash and due from banks, interest bearing
deposits in other banks and federal funds sold totaled $20,152,000,
constituting 18.9% of the total assets at that date. At December 31,
1994 and 1993 the Bank's ratio of loans-to-deposits was 81.1% and
83.9% respectively.
<TABLE>
The following table represents the Corporation's interest rate
sensitivity profile as of December 31, 1994. Assets, liabilities and
shareholders' equity are classified by the earliest possible repricing
opportunity or maturity date, whichever first occurs.
<CAPTION>
Over 1 year Non-rate
Balance Sheet Over 3 months through 5 sensitive or
(In 000's) Through 3 months though 1 year years over 5 years Total
Assets
<S> <C> <C> <C>
Time Deposits-other financial institutions $1,380 $4,851 $6,231
Fed funds sold 11,924 11,924
Investment securities 2,955 $ 117 3,072
Loans and loans held for sale 50,210 32,049 $6,720 3,976 92,955
Non-interest-earning assets
(net of allowance for loan losses) 7,594 7,594
$63,514 $39,855 $6,720 $11,687 $121,776
Liabilities & Shareholders Equity
Time Deposits $100,000 and over $2,291 $6,013 $312 $8,616
All other interest-bearing deposits 64,442 15,774 1,054 81,270
Non-interest bearing liabilities $21,691 21,691
Shareholders' Equity 10,199 10,199
$66,733 $21,787 $ 1,366 $31,890 $121,776
Interest Rate Sensitivity (1) ($3,219) $18,068 $ 5,354 ($20,203)
Cumulative Interest Rate Sensitivity ($3,219) $14,849 $20,203 $0
<F1>
(1) Interest rate sensitivity is the difference between interest rate
sensitive assets and interest rate sensitive liabilities within the
above time frames.
</TABLE>
The Bank is asset sensitive. In a declining interest rate environment
there is an immediate negative impact on the Bank's net interest
margin, since assets reprice to lower rates more quickly than
liabilities. In a raising interest rate environment, the Bank's
earnings are positively affected immediately. The Bank continually
monitors its interest rate sensitivity as part of the Bank's planning
process.
The Corporation and the Bank do not at this time engage in hedging
transactions (interest rate futures, caps, swap agreements, etc.).
Liquidity - Parent Company
At present, the Corporation's primary sources of liquidity are from
short term investments on its capital, proceeds from exercise of stock
options, and dividends from the Bank. The Bank's ability to pay
dividends to the Corporation is subject to the restrictions of the
national banking laws and, under certain circumstances, the approval
of the OCC. Under such restrictions, the Bank may not presently pay
dividends to the Corporation without notification to the OCC. In
addition, the Federal Reserve Act prohibits the Bank from making loans
to its "affiliates", including the Corporation, unless certain
collateral requirements are met.
At December 31, 1994, the Corporation had non-interest and interest
bearing cash balances of $223,000 which management believes is
adequate to meet the Corporation's foreseeable operational expenses.
Return on Equity and Assets
<TABLE>
The following table shows key financial ratios for the years ended
December 31, 1994 and 1993:
<CAPTION>
Year Ended December 31,
1994 1993
<S> <C> <C>
Return on Average Assets 1.2% 1.3%
Return on Average
Shareholders' Equity 14.2% 16.0%
Average Shareholders' Equity
as a Percent of Average Assets 8.2% 8.3%
Dividend Payout Ratio 72.1% 56.7%
</TABLE>
Effects of Inflation
Inflation affects the Bank and the banking business generally because
of its effect on interest rates and loan demand. To offset inflation
and the resulting changes in interest rates and market demands, the
Bank attempts to maintain liquid interest bearing assets and to manage
its assets and liabilities such that they can be repriced within a
short period of time. In addition to its effect on market conditions
and interest rates, inflation increases the Corporation's cost of
operations. The rate of inflation fell dramatically during 1991 and
has maintained a very low annual rate through 1994.
Capital
The Corporation and the Bank are required by the Federal Reserve Board
and the Comptroller of the Currency to maintain adequate capital. The
Board of Governors of the Federal Reserve Bank has adopted risk-based
capital guidelines for member banks and bank holding companies which
provide minimum uniform capital adequacy requirements for bank holding
companies. The OCC has also adopted additional capital requirements
which are applicable to national banks, such as the Bank. See
"Description of Business, Supervision and Regulation-Capital
Regulations."
The Bank's leverage capital ratio was 8.2% of its total assets,
exceeding the amount of capital required under the minimum capital
requirements. Under the "risk-based" capital methodology, the Bank's
total risk-based capital ratio was 10.9% at December 31, 1994. The
minimum acceptable level at December 31, 1994 was 8.0%.
Income Taxes
The 1994 provision for income tax equalled $973,000, which included a
state tax provision of $271,000 or 11.7% of net income before income
taxes. The overall effective tax rate was 42.0% during 1994. See,
"Consolidated Financial Statements, Note 6." The provision
for federal income taxes for 1993 was $586,000, and the state
provision was $216,000. The overall effective tax rate for 1993 was
39.1%.
Income taxes are provided based on income reported in the financial
statements at current tax rates. Deferred income taxes are provided
for timing differences in the recognition of items for tax and
financial reporting purposes. The Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes." Statement No. 109 supersedes FASB
Statement No. 96 and Accounting Principles Board No. 11. As with
Statement No. 96, Statement No. 109 requires an asset and liability
approach to calculating income taxes. The Corporation adopted
Statement No. 109 as of January 1, 1993. The cumulative effect of
this change in accounting principle increased 1993 net income by
$51,000.
THE CORPORATION
Northern Empire Bancshares (the "Corporation") was incorporated as a
California corporation on June 8, 1982 for the purpose of becoming a
bank holding company of Sonoma National Bank (the "Bank"). The
Corporation's executive offices are at 801 Fourth Street, Santa Rosa,
California, and its telephone number is (707) 579-2265.
The Corporation's sole subsidiary is the Bank and its activities are
the commercial banking activities engaged in through the Bank and some
lending. As a bank holding company, the Corporation may in the future
invest in additional banking subsidiaries or in those non-banking
subsidiaries which are permissible for a bank holding company, subject
to the required approvals of the Federal Reserve Board. See,
"Supervision and Regulation." However, the Corporation has no present
plans to make any such additional investments and there can be no
assurance that it will do so in the future.
Business of the Bank
The Bank was organized as a national banking association on March 27,
1984 and commenced operations on January 25, 1985. It currently has
three banking offices; the main office located at 801 Fourth Street,
in the central business district of Santa Rosa, California, a branch
office located in the Oakmont area of Santa Rosa, approximately 5
miles east of the main office, and a branch in Windsor, approximately
5 miles north of the main office.
As a national bank, the Bank is subject to supervision, regulation and
regular examination by the Comptroller of the Currency
("Comptroller"). The deposits of the Bank are insured by the Bank
Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation. The Bank is a member of the Federal Reserve System and,
as such, is subject to applicable provisions of the Federal Reserve
Act and the regulations thereunder. See, "Supervision and
Regulation."
Description of Business
The Bank engages in the general commercial banking business. It
accepts checking and savings deposits, offers money market deposit
accounts and certificates of deposit, makes secured and unsecured
commercial and other installment and term loans, and offers other
customary banking services. The Bank makes mortgage loans and
commercial loans guaranteed by the SBA which may be sold in the
secondary market. The Bank does not offer trust services directly,
and does not presently intend to do so, but offers such services,
where requested, through its correspondent banks.
The Bank devotes several individuals in the Loan Department to the
origination of SBA guaranteed loans and to the origination of mortgage
loans. The vast majority of mortgage loans are interim funded and
sold in their entirety within 30 days. SBA loans are funded by the
Bank and then the Bank may, at its option, sell the portion of the
loan guaranteed by the SBA (70% to 90% of the total loan amount,
depending on the purpose and term of the loan). The Bank retains the
unguaranteed portion of the loan and the right to service the loan.
Income from loan sales is an important portion of the Bank's non-
interest income. See, "Management's Discussion and Analysis or Plan
of Operations, Non-Interest Income."
The Bank is designated as a "Preferred Lender" by the SBA. This means
that it may fund a loan without the prior approval of the SBA for that
loan. Previously the Bank could only fund an SBA loan after the loan
was approved by the SBA. Certification as a Preferred Lender gives
the Bank a competitive advantage, as it is able to provide a quick
response to loan applications.
Market Area
The Bank's primary market area and the source of most of its loan and
deposit business is Sonoma County. The Bank has increased its lending
territory for loans made under the programs of the Small Business
Administration ("SBA"). The geographic area serviced by the Santa
Rosa office was expanded in 1993 to include the greater San Francisco
Bay Area. The Bank also opened an SBA loan production facility in
Phoenix and Tucson, Arizona.
Competition
The banking business in California generally, and specifically in the
market area served by the Bank, is highly competitive with respect to
both loans and deposits, and is dominated by major banks which have
offices operating throughout California. Among the advantages such
major banks have over the Bank are their ability to finance wide-
ranging advertising campaigns and to allocate their investment assets
to regions of highest yield and demand. In addition, many of the
major banks operating in the Bank's service area offer specialized
services, such as trust and international banking services, which the
Bank does not offer directly. By virtue of their greater total
capitalization, the major banks also have substantially higher lending
limits than the Bank has. The Bank competes for loans and deposits
with these major banks, as well as with other independent banks,
savings and loan associations, credit unions, mortgage companies,
insurance companies and other lending institutions. The entry of
other independent banks in the Bank's service area may adversely
affect the Bank's ability to compete. The Bank also competes with
savings and loans, credit unions and money market funds, which have
provided significant competition for banks with respect to deposits.
Other entities, both governmental and private, seeking to raise
capital through the issuance and sale of debt or equity securities,
also provide competition for the Bank in the acquisition of deposits.
The trend of federal and state legislation has significantly increased
competition between banks and other financial institutions for both
loans and deposits and is expected to continue to do so in the future.
At present, there are approximately 66 banking offices in the Bank's
primary market area, including offices of major chain banks and of
smaller independent banks. There are also approximately 35 offices of
savings and loan associations. The Bank attempts to compete by
offering personalized and specialized services to its customers. The
Bank's promotional activities emphasize the advantages of doing
business with a locally owned, independent institution attuned to the
particular needs of the community.
Statistical Information
Certain statistical information concerning the Bank and the
Corporation is provided at "Management's Discussion and Analysis or
Plan of Operation".
Employees
At December 31, 1994 the Bank had 64 full-time and 9 part-time
employees.
Supervision and Regulation
The Corporation
The Corporation is a bank holding company registered under the Bank
Holding Company Act of 1956 and is subject to the supervision of the
Board of Governors of the Federal Reserve System ("Board"). As a bank
holding company, the Corporation must obtain the approval of the Board
before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if,
after giving effect to such acquisition of shares, the Corporation
would own or control more than 5% of the voting shares of such bank.
With certain limited exceptions, the Corporation is prohibited from
engaging in or acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any company engaged in non-
banking activities, unless the Federal Reserve Board determines that
such activities are so closely related to banking as to be a proper
incident thereof.
The Corporation and any subsidiary which it may acquire or organize in
the future are deemed to be affiliates of the Bank within the meaning
set forth in the Federal Reserve Act. This means, for example, that
there are limitations on loans by the Bank to affiliates, on
investments by the Bank in any affiliate's stock and on the Bank's
taking any affiliate's stock as collateral for loans to any borrower.
All affiliate transactions must satisfy certain limitations and
otherwise be on terms and conditions that are consistent with safe and
sound banking practices. In this regard, the Bank generally may not
purchase from any affiliate a low-quality asset (as that term is
defined in the Federal Reserve Act). Also, transactions by the Bank
with an affiliate must be on substantially the same terms as would be
available for non-affiliates.
The Corporation and its subsidiary are also subject to certain
restrictions with respect to engaging in the underwriting, public sale
and distribution of securities.
The Corporation and the Bank are prohibited from engaging in certain
tie-in arrangements in connection with the extension of credit. For
example, the Bank generally may not extend credit on the condition
that the customer obtain some additional service from the Bank or the
Corporation, or refrain from obtaining such service from a competitor.
The Bank
As a national banking association, the Bank is subject to the National
Bank Act and to supervision, regulation and regular examination by the
Comptroller of the Currency ("Comptroller"). It is also a member of
the Federal Reserve System and, as such, is subject to applicable
provisions of the Federal Reserve Act and regulations issued pursuant
thereto. The deposits of the Bank are insured up to the maximum legal
limits by the Bank Insurance Fund, which is managed by the Federal
Deposit Insurance Corporation ("FDIC"), and the Bank is therefore
subject to applicable provisions of the Federal Deposit Insurance Act
and regulations of the FDIC. The statutes and regulations
administered by these agencies govern most aspects of the Bank's
business, including required reserves against deposits, loans,
investments, dividends, and the establishment of new branches and
other banking facilities.
(a) Supervision and Examinations.
Federal law mandates frequent examinations of all banks, with the
costs of examinations to be assessed against the bank being examined.
In the case of the Bank, its primary regulator is the Comptroller. In
1994, the Comptroller started using streamlined examination procedures
for small community banks that are considered by the regulators to be
"non-complex." The Comptroller has indicated that it expects most
banks with under $100 million in assets to qualify, and that some
banks having between $100 million to $1 billion in assets will also be
considered small and non-complex. The Bank was considered non-complex
by the OCC and was examined using the new guidelines in January, 1995.
The FDIC has "back up" enforcement power over the Bank under Federal
law. The FDIC may recommend and, in the absence of response by an
institution's primary regulator, undertake enforcement action against
any insured financial institution. Such "back up" enforcement action
is permissible if ordered by the Board of Directors of the FDIC only
upon a showing that an insured financial institution's conduct poses a
risk to its insurance fund.
The Federal banking regulatory agencies have substantial enforcement
powers over the depository institutions that they regulate. Civil and
criminal penalties may be imposed on such institutions and persons
associated with those institutions for violations of any law or
regulation. The penalties can be up to $ 5,000 per day that a
violation continues when the violation is unintentional, or up to $1
million per day that a violation continues when the violation is
willful. The amount of the penalty also depends on whether the
violation is part of a pattern or causes a loss to the financial
institution.
(b) Prompt Corrective Action.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires the banking agencies to take corrective action
against certain financial institutions, based upon the financial
institutions' compliance with the various capital measurements. The
capital requirements are described below under the heading "Capital
Requirements." The following chart sets forth the various categories
of capital compliance. In order to be considered in the well or
adequately capitalized categories, a financial institution must meet
all the requirements for that category. An institution will be
considered undercapitalized or significantly or critically
undercapitalized if it meets any of the requirements for that
category.
<TABLE>
<CAPTION>
Tier 1
Ratio Category Total Risk-Based Risk-Based Leverage
<S> <C> <C> <C>
Well Capitalized* 10% or above 6% or above 5% or above
Adequately Capitalized 8% or above 4% or above 4% or above**
Undercapitalized Less than 8% Less than 4% Less than 4%**
Significantly
Undercapitalized Less than 6% Less than 3% Less than 3%
Critically
Undercapitalized 2% or less
<F1>
* In addition, the institution must not be subject to any written
capital order or directive to meet and maintain a specific
capital level.
<F2>
** 3% instead of 4% if the institution has the highest rating under
the CAMEL rating system.
</TABLE>
FDICIA also permits the banking agencies essentially to downgrade an
institution to the next lower category (but not into the category of
critically undercapitalized) if it determines that the institution is
in an unsafe or unsound condition, or is engaging in an unsafe or
unsound practice. An institution that has received a less-than-
satisfactory rating in its most recent examination report for assets,
management, earnings or liquidity may be deemed to be engaged in an
unsafe and unsound practice. Except for a finding based on a less-
than-satisfactory rating, the institution is entitled to prior written
notice and an opportunity to respond to its regulator's finding that
it is in an unsafe or unsound condition or is engaging in such
practices.
Based on its capital position at December 31, 1994, the Bank is
considered well capitalized.
As noted above, an undercapitalized financial institution is subject
to certain corrective action by the appropriate agency, depending on
the category it falls into. All undercapitalized institutions are
required to submit a capital plan within 45 days after the institution
becomes undercapitalized. Also, such an institution's asset growth is
restricted and it must obtain the prior approval of its federal
regulator before it acquires any company, sets up any new branch or
engages in any new line of business. The banking agency is required
to monitor closely the condition of the bank and its compliance with
its plan, and to review periodically the plan and the supervisory
restrictions on the bank to assure they are appropriate. In addition,
the regulator is authorized by statute to take the certain corrective
actions and order certain limitations on the bank's activities if
necessary to carry out the purposes of the statute.
If an institution is categorized as being significantly
undercapitalized, or is undercapitalized and fails to submit a capital
plan, its banking regulator is required to take increasingly severe
enforcement actions against such institution. The regulator must
require recapitalization through a sale of stock or a merger, restrict
affiliate transactions and restrict the interest rates the bank may
offer on deposits, (unless it finds that doing so would not further
the purpose of the section). In addition, such an institution may not
pay a bonus to a senior executive officer or increase the pay of any
executive officer without the prior written approval of its federal
regulator.
An institution that is critically undercapitalized is subject to
mandatory restrictions that are even more severe, and seizure within
time limits designated by statute. In general, the federal regulator
is required to seize an institution within 90 days of its becoming
critically undercapitalized, unless the regulator can document that
another course of action will better achieve the purposes of this
section. The FDIC is required to restrict the activities of a
critically undercapitalized institution, beyond the degree of
limitations specified above for institutions that are significantly
undercapitalized.
(c) Brokered Deposits.
FDICIA also places limits on brokered deposits and extends the limits
to any bank that is not "well capitalized" or is notified that it is
in "troubled condition." Previously, the limitations applied only to
troubled banks. A well-capitalized institution (which generally
includes an institution that is considered well capitalized for
purposes of the prompt corrective action regulations discussed below)
may still accept brokered deposits without restriction, unless it has
been informed by its appropriate Federal regulatory agency that it is
in "troubled condition." All other insured depository institutions
are prohibited from accepting brokered deposits unless a waiver is
obtained from the FDIC. If a waiver is obtained, the interest paid on
such deposits may not exceed the rate paid for deposits in its normal
market area, or the national rate as determined in the FDIC's
regulation.
If a depository institution solicits deposits by offering interest
rates significantly higher than rates being offered in its market
area, it is deemed under FDICIA to be a deposit broker. Therefore,
depending on its capital category, it may be prohibited from such
practice, or need a prior waiver from the FDIC in order to offer such
rates. The FDIC's regulations specify that an undercapitalized
institution may not offer rates that exceed the prevailing effective
rates offered in the normal market area by more than 75 basis points.
The Bank is at this time considered well capitalized and not in a
"troubled condition," and it is not, therefore, subject to the
brokered-deposit limitations. If the Bank's status changes in the
future, these regulations could restrict the ability to attract such
deposits.
(d) Risk-Based Deposit Insurance Assessments.
In addition, FDICIA required the FDIC to develop and implement a
system to account for risks attributable to different categories and
concentrations of assets and liabilities in assessing deposit
insurance premiums. The FDIC adopted a risk-assessment system
effective January 1, 1994. Under this system, each bank's deposit
insurance premium assessment is calculated based on the level of risk
that the Bank Insurance Fund will incur a loss if that bank fails and
the amount of the loss if such failure occurs. Currently, the Bank's
deposit insurance assessment is $0.23 per $100 of deposits. This
requirement, along with the increased emphasis on exceeding capital
measures, may cause banks such as Sonoma National Bank to adjust their
asset mix in order to affect their deposit insurance premium and their
ability to engage in activities.
Capital Regulations
The Board requires member banks and bank holding companies to maintain
adequate capital and has adopted capital leverage guidelines for
evaluating the capital adequacy of bank holding companies. The
Comptroller has also adopted a similar minimum leverage regulation,
requiring national banks to maintain at least a minimum capital to
asset ratio. The Board's guidelines and the Comptroller's regulations
require the banks and bank holding companies subject to them to
achieve and maintain a Tier 1 capital to total asset ratio of at least
three percent (3.0%) to five percent (5.0%), depending on the
condition and rate of growth of the bank or holding company. Tier 1
or core capital is defined to consist primarily of common equity,
retained earnings, and certain qualified perpetual preferred stock.
These minimum leverage ratio requirements limit the ability of the
banking industry, including the Corporation and the Bank, to leverage
assets.
The Federal Reserve Board also uses risk-based capital guidelines to
evaluate the capital adequacy of member banks and bank holding
companies. Under these guidelines, assets are categorized according
to risk and the various categories are assigned risk weightings.
Assets considered to present less risk than others require allocation
of less capital. In addition, off-balance sheet and contingent
liabilities and commitments must be categorized and included as assets
for this purpose. Under these guidelines, when the Corporation's total
assets equal or exceed $150 million it will be required to maintain
total capital of at least 8.00% of risk-adjusted assets, and half of
that minimum total capital must consist of Tier 1 capital as defined
above.
The Comptroller has also adopted risk-based capital guidelines
applicable to national banks, such as the Bank, that are similar to
the Federal Reserve's risk-based capital guidelines. At this time,
the Bank is required to maintain total capital of at least 8.00% of
risk-adjusted assets.
<TABLE>
The capital totals of the Bank as of December 31, 1994, exceeded the
amounts of capital required under the regulatory guidelines. The
following table shows the capital of the Bank, as a percentage of
assets, and the capital which it is required to maintain under the
capital regulations, as of December 31, 1994:
<CAPTION>
<S> <C>
Leverage capital ratio 8.2%
Required leverage capital ratio 3.0 - 5.0*%
Total risk-based capital ratio 10.9%
Required total risk-based capital ratio 8.0%
Tier 1 risk-based capital ratio 9.7%
Required tier 1 risk-based capital ratio 4.0%
<F1>
* Determined based on OCC's evaluation.
</TABLE>
The risk-based guidelines and the leverage ratio do not have a
significant effect on the Corporation and the Bank at this time
because both the Corporation and the Bank meet their respective
required ratios. The effect the requirements may have in the future
is uncertain, but management does not believe they will have an
adverse effect on the Corporation or the Bank. The risk-based capital
guidelines may affect the allocation of the Bank's assets between
various types of loans and investments. If the Bank continues to grow
with its present asset composition, it may be required to raise
additional capital.
The Bank's capital ratios have increased in significance under the
Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), as described above. The ratios now affect the Bank's
ability to utilize brokered deposits and its deposit insurance premium
rates, and they can result in regulatory enforcement action. See,
above, "The Bank."
As required by FDICIA, the Federal banking agencies revised the
capital adequacy standards in 1994 to take credit risk concentrations
and an individual institution's ability to manage concentration into
account when they assess a bank's capital adequacy. Non-traditional
investments and activities, such as the use of derivatives, are also
taken into account in assessing capital requirements. The agencies
can adjust the standards for risk-based capital on a case-by-case
basis to take such risks into account, but there is no formula that a
bank can use prior to evaluation by the agency to determine how credit
concentration or nontraditional activities will affect its capital
requirements.
In late 1994, the agencies announced that they will release a revised
proposal on interest rate risk amendments to risk based capital rules.
Under the initial proposal, any interest rate risk that exceeds 1% of
a bank's assets will require additional capital. The purpose of the
revision is to ensure that banks with high levels of interest-rate
risk have enough capital to cover the loss exposure.
Impact of Monetary Policies
Banking is a business in which profitability depends on rate
differentials. In general, the difference between the interest rate
received by the Bank on loans extended to its customers and securities
held in the Bank's investment portfolio and the interest rate paid by
the Bank on its deposits and its other borrowings comprise the major
portion of the Bank's earnings. To the extent that the Bank is not
able to compensate for increases in the cost of deposits and other
borrowings with greater income from loans, securities and fees, the
net earnings of the Bank will be reduced. The interest rates paid and
received by the Bank are highly sensitive to many factors which are
beyond the control of the Bank, including the influence of domestic
and foreign economic conditions.
The earnings and growth of the Bank are also affected by the monetary
and fiscal policy of the United States government and its agencies,
particularly the Board. These agencies can and do implement national
monetary policy, which is used in part to curb inflation and combat
recession. Among the instruments of monetary policy used by these
agencies are open market transactions in United States Government
securities, changes in the discount rates of member bank borrowings
and changes in reserve requirements. The actions of the Board have
had a significant effect on lending by banks, investments and
deposits, and such actions are expected to continue to have a
substantial effect in the future. However, the nature and timing of
any further changes in such polices and their impact on the Bank
cannot be predicted.
Environmental Regulation
Federal, state and local regulations regarding the discharge of
materials into the environment may have an impact on the Corporation
and the Bank. Under Federal law, liability for environmental damage
and the cost of cleanup may be imposed upon any person or entity who
is an owner or operator of contaminated property. State law
provisions, which were modeled after Federal law, impose substantially
similar requirements. A resulting risk to the Corporation and the
Bank is the possibility that property securing a loan made by the Bank
may be environmentally impaired and not provide adequate security for
the Bank. In addition, these statutes subject the Bank to a risk that
it might be considered to be an owner or operator of such property and
therefore liable for the costs associated with cleaning up the
environmental damage.
Legislation enacted in California in 1991 provides some protection
against the first risk, by establishing certain additional,
alternative remedies for a lender in the situation where the property
securing a loan is later found to be environmentally impaired.
Primarily, the legislation amends state law to permit the lender in
such a case to pursue remedies against the borrower other than
foreclosure under the deed of trust.
The Environmental Protection Agency had adopted a rule that limited
the environmental clean-up liability of a lender with limited interest
in and control over contaminated property. In 1994, however, that
rule was struck down by the Federal courts, on the ground that the
rule was not authorized by the statutory law. Although legislation to
give lenders similar protection is pending in Congress, there can be
no assurance that it will pass or that it will provide similar
protection to lenders if it is enacted.
Americans With Disabilities Act
The Americans With Disabilities Act ("ADA") enacted by Congress, in
conjunction with recently adopted California legislation, is having an
impact on banks and their cost of doing business. The legislation
requires employers with 15 of more employees and all businesses
operating "commercial facilities" or "public accommodations" to
accommodate disabled employees and customers. The ADA has two major
objectives (1) to prevent discrimination against disabled job
applicants, job candidates and employees and (2) to provide disabled
persons with ready access to commercial facilities and public
accommodations. Commercial facilities, such as the Bank, must ensure
all new facilities are accessible to disabled persons, and in some
instances may be required to adapt existing facilities to make them
accessible, such as ATM's and bank premises.
New and Pending Legislation
(a) New Federal Legislation.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("Interstate Banking Act") was signed into law on September 29,
1994. Under the Interstate Banking Act, banks and bank holding
companies may acquire out of state banks starting September 29, 1995,
subject to certain limitations on concentrations of deposits
nationwide and statewide. States may also impose deposit
concentration limitations and they may require that an acquiring bank
have been in existence up to five years prior to the acquisition.
Some states already permit out-of-state acquisitions, but this
legislation will enable banks and bank holding companies in all states
to acquire out-of-state banks.
Beginning June 1, 1997, banks will be permitted to merge with banks in
another state and operate the offices in the other state as branches,
so long as either state has not opted out of interstate branching by
new state legislation before June 1, 1997. The state in which the
branches will be held may impose filing requirements on the
acquisition, so long as they do not discriminate against out-of-state
acquirors. Both banks must be adequately capitalized. In addition,
beginning June 1, 1997, there will be no Federal prohibition against
states passing legislation to permit banks to establish new branches
across states lines.
The Interstate Banking Act also provides that Federal law will not
preempt state law on a variety of consumer protection laws. This may
affect the Bank, since California law provides especially strict
consumer protection. For example, the conference report on the
Interstate Banking Act suggests that national banks might be subject
to state laws limiting charges on deposit accounts. If the
Comptroller or the courts agree with this interpretation, the Bank
could become subject to various California laws currently considered
to be inapplicable to the Bank.
The Community Development Banking and Financial Institutions Act of
1994 ("Community Development Act"), which became effective on January
1, 1995, establishes the "Community Development Financial Institutions
Fund." The fund will provide basic assistance and support to
qualifying Community Development Financial Institutions ("CDFIs") for
projects that meet the criteria for areas of "economic distress" and
"unmet needs for loans and equity investments."
Traditional financial institutions are not generally eligible to act
as CDFIs, but they may receive deposit insurance credits for certain
activities covered by the Community Development Act. Deposit
insurance assessment credits reduce the bank's base upon which the
deposit assessment is based, and this reduces the bank's deposit
insurance premiums. Credits equal up to 5% of new loans to CDFIs,
technical assistance projects and lifeline deposits. Equity
investments in CDFIs earn deposit insurance assessment credits of 15%
of the investment.
The Community Development Act also regulates closed end home equity
loans for which the annual interest rate exceeds certain rates, or
where the points and fees charged at the funding of the loan exceed
certain amounts. New regulations to implement these requirements are
to be promulgated by the Federal Reserve Board. Loans that are
considered to have high interest rates or high fees are subject to
additional disclosure requirements and prohibitions on certain terms
that are considered unfair or deceptive to borrowers. Although the
Bank expects its home equity loans will not be covered by the new
requirements, this regulation will increase its cost of business by
requiring it to establish in each case that compliance is not
required. If the disclosures are not made for a loan that is subject
to the Community Development Act, the borrower has the right to
rescind the loan for up to three years.
The Community Development Act also includes provisions that are
intended to create a new market in debt obligations of small
businesses, or pools of such debt. In addition, the Community
Development Act includes substantial provisions regarding the
requirement for banks to detect and report suspected money laundering.
Civil monetary penalties may now be imposed on banks for failure to
file currency transaction reports for transactions involving $10,000
or more of currency.
The Community Development Act includes various provisions intended to
reduce the regulatory burdens to which banks are subject. The Federal
banking agencies are required to streamline their regulations and
eliminate duplicate filings. Call reports and the instructions
relating to the reports are to be simplified.
(b) Proposed Legislation and Regulation.
Certain legislative and regulatory proposals that could affect the
Corporation, the Bank and the banking business in general are pending
or may be introduced before the United States Congress, the California
State Legislature, and Federal and state government agencies. The
United States Congress is considering numerous bills that could reform
the banking laws substantially and several bills that would provide
some relief to banks from certain provisions of FDICIA. A bill is
pending that would require banks to offer low cost deposit accounts to
consumers and basic check cashing services. Also, legislation is
being considered that will, if enacted, consolidate the Federal
banking agencies into one or two agencies.
The Federal banking agencies issued a revised Community Reinvestment
Act ("CRA") reform proposal on October 7, 1994. CRA requires banks to
help meet the credit needs of their entire communities, including
minorities and low- and moderate-income groups. Existing regulations
require banks to adopt a CRA statement and prove to the regulators
that the bank has engaged in activities to determine and meet the
credit needs of minority and low- and moderate-income groups. The
existing regulations have been criticized on the ground that
regulatory examinations to determine compliance have focused on the
processes the bank goes through rather than the results of the effort
r actual performance.
The FDIC is in the process of reviewing the adequacy of the Bank
Insurance Fund and determining whether to reduce assessments for
deposit insurance premiums. Based upon their findings, it is possible
that the Bank's deposit insurance assessment may be lowered in 1995
from 23 cents per $100 in deposits to as low as 4 cents per $100 in deposits.
This would have a positive effect on the Bank's earnings.
If the reform proposal is adopted, the agencies will determine a
bank's rating under the CRA by evaluating its performance on lending,
service and investment tests. The lending test would be the most
important. The tests would be applied in an "assessment context" that
is developed by the agency for the particular institution. The
assessment context would take into account demographic data about the
community, the community's characteristics and needs, the
institution's capacities and constraints, the institution's product
offerings and business strategy, the institution's prior performance,
and data on similarly situated lenders.
Larger institutions would be required under the revised proposal to
compile certain data in order to measure performance. Some of this
data is already required under other laws, such as the Equal Credit
Opportunity Act. However, the proposal would also require banks to
collect data on the race and gender of small business loan applicants,
which data is not now required to be collected. If this proposal is
adopted and the Bank becomes subject to it, it will increase the
Bank's cost of doing business.
Small institutions (with less than $250 million in assets) would be
examined on a "streamlined assessment method" if the CRA reform
proposal is adopted. The streamlined method would focus on the
institution's loan to deposit ratio, degree of local lending, record
of lending to borrowers and neighborhoods of differing income levels,
and record of responding to complaints.
Large and small institutions would have the option of being evaluated
for CRA purposes in relation to their own pre-approved strategic plan.
Such a strategic plan would have to be submitted to the institution's
regulator three months before its effective date and must be published
for public comment.
The impact of this proposal on the business of the Bank will depend on
the extent to which the proposal is adopted by the regulatory agencies
and whether the Bank has more than $250 million in assets when the
revised regulations are adopted. The CRA reform is not proposed to
become fully effective until 1996. It could cause the Bank to change
its asset mix, increase the Bank's cost of doing business by
increasing reporting requirements, in order to meet the performance
standards, and increase the uncertainty of the Bank's business as the
rating procedure changes.
The Comptroller has recently proposed to revise how the lending limits
applicable to national banks are calculated and applied. In general,
a national bank may lend up to 15% of its capital to one borrower as
an unsecured loan, plus up to 10% of its capital to the same borrower
for certain types of secured loans. If adopted, the proposal would
revise the regulations to specify that the limits can be calculated
quarterly, rather than recalculated on a daily basis, and that the
definitions of capital used in calculating capital adequacy can be
used to calculate the lending limit. Also, the rules for determining
when loans to various borrowers are combined would be simplified, and
an exception for funding a loan pursuant to a prior commitment would
be added.
It is not known to what extent, if any, these proposals will be
enacted and what effect such legislation would have on the structure,
regulation and competitive relationship of financial institutions. It
is likely, however, that many of these proposals would subject the
Corporation and the Bank to increased regulation, disclosure and
reporting requirements and would increase competition to the Bank and
its cost of doing business.
In addition to pending legislative changes, the various banking
regulatory agencies frequently propose rules and regulations to
implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such legislation or regulations
will be enacted or the effect that such legislation may have on the
Bank's business.
DESCRIPTION OF COMMON STOCK
Authorized Shares - General
The authorized capital stock of the Corporation consists of 20,000,000
shares of common stock, no par value, and 10,000,000 shares of
preferred stock, no par value. Each share of common stock has the
same rights, preferences and privileges as every other share of common
stock. The common stock has no conversion or redemption rights or
sinking funds provisions. Subject to the preferences of any shares of
preferred stock that may be issued in the future, holders of the
common stock are entitled to participate in such dividends as may be
declared by the Board out of funds legally available therefor and, in
the event of liquidation, dissolution or winding up of the
Corporation, are entitled to share ratably in all assets remaining
after the payment of liabilities. Shares of the common stock are not
subject to assessment under the applicable law.
The transfer agent and registrar for the common stock is First
Interstate Bank, Ltd., San Francisco.
Voting Rights
Each share of common stock is entitled to one vote on any issue
requiring a vote and holders of the common stock have the right to
cumulate votes in elections of directors, as described below.
California law provides that a shareholder of a California
corporation, or his proxy, may cumulate votes in elections for
directors, that is, each shareholder has a number of votes equal to
the number of shares owned by him, multiplied by the number of
directors to be elected, and he may cumulate such votes for a single
candidate or distribute such votes among as many candidates as he
deems appropriate. However, a shareholder may cumulate votes only for
a candidate or candidates whose names have been properly placed in
nomination prior to the voting and only if the shareholder has given
notice at the meeting, prior to the voting, of his intention to
cumulate his votes. If any one shareholder has given such notice, all
shareholders may cumulate votes for candidates in nomination.
The Corporation's Articles of Incorporation generally may be amended
at any regular or special meeting of the shareholders by the
affirmative vote of the holders of a majority of the stock of the
Corporation, unless the vote of the holders of a greater amount of
stock is required by law.
Nominations of Directors
The Corporation's Bylaws provide that nominations for directors by
shareholders may be made, provided that certain informational
requirements concerning the identities of the nominating shareholder
and the nominee are complied with in advance of the meeting. The
written nomination must include the following information: (a) the
name and address of each proposed nominee, (b) the principal
occupation of each proposed nominee, (c) the total number of voting
shares that will be voted for each proposed nominee, (d) the name and
residence address of the nominating shareholder, and (e) the number of
shares of voting stock of the corporation owned by the nominating
shareholder. This provision is intended to provide advance notice to
management of any effort to effect an election contest or a change in
control of the Board of Directors.
Directors' Duty of Care and Liability
The Corporation's Articles of Incorporation eliminate the personal
liability of directors to the Corporation and its stockholders for
monetary damages to the extent permitted by California law. The
articles do not eliminate the duty of care; only liability for
monetary damage awards based upon a breach of that duty. Under the
articles, a director is not personally liable for monetary damages for
an action based on a claim that he did not meet this standard of care.
A director does remain personally liable for: (i) intentional
misconduct or culpable violation of law; (ii) acts or omissions
believed by the director to be contrary to the best interests of the
Corporation or its shareholders, or that involve the absence of good
faith on the part of the director; (iii) any transaction from which a
director derived improper personal benefit; (iv) acts or omissions
that show reckless disregard for the director's duty to the
Corporation or its shareholders where the director, in the ordinary
course of performing a director's duties, should be aware of a risk of
serious injury to the Corporation; (v) acts or omissions that
constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Corporation or its
shareholders; (vi) transactions between the Corporation and a director
in which a director has a material financial interest; and (vii)
liability for improper dividends or other distributions, loans, or
guarantees. The Corporation may limit a director's liability only
with regard to derivative actions, i.e., actions brought by
shareholders on behalf of the Corporation, and not to claims brought
by outside parties or to claims by shareholders that are not on behalf
of the Corporation. The articles do not interfere with a sharehold-
er's ability to pursue other remedies, such as those provided by
federal securities laws, or equitable remedies, such as injunctive
relief.
Dividends
The dividend policy of the Corporation is subject to the discretion of
the Board of Directors and depends upon a number of factors, including
earnings, financial condition, cash needs and general business
conditions. In addition, the Board of Directors may declare dividends
only out of funds legally available therefor.
California General Corporation Law provides that a corporation may
make a distribution if its retained earnings at least equal the amount
of the proposed distribution. In the event that sufficient retained
earnings are not available for the proposed distribution, a
corporation may nevertheless make a distribution if, immediately after
giving effect to the proposed distribution, it meets both the
"quantitative solvency" and the "liquidity" tests, as set forth in the
law. In general, the quantitative solvency test requires that the sum
of the assets of the corporation equal at least 1-1/4 times its
liabilities. The liquidity test generally requires that a corporation
have current assets at least equal to current liabilities or, if the
average of earnings of the corporation before taxes on income and
before interest expense for the two preceding fiscal years was less
than the average of the interest expense of the corporation for such
fiscal years, current assets must equal at least 1-1/4 times current
liabilities.
The Corporation's primary source of income is the receipt of dividends
from its subsidiary bank. The Bank's ability to pay dividends is
subject to the restrictions of the national banking laws and, under
certain circumstances, the approval of the Comptroller of the
Currency.
A national bank may not pay dividends from its capital. All dividends
must be paid out of net profits then on hand, after deducting for
expenses, including losses and bad debts. A national bank is also
prohibited from declaring a dividend until its surplus fund equals the
amount of capital stock or, if the surplus fund does not equal the
amount of capital stock, until one-tenth of the bank's net profits for
the preceding half year, in the case of quarterly or semiannual
dividends, or the preceding two consecutive half-year periods, in the
case of an annual dividend, are transferred to the surplus fund each
time dividends are declared.
The approval of the Comptroller is required if the total of all
dividends declared by a bank in any calendar year will exceed the
total of its net profits of that year combined with its retained net
profits of the two preceding years, less any required transfers to
surplus or a fund for the retirement of any
preferred stock which may be outstanding. Moreover, the Comptroller
may prohibit the payment of dividends which would constitute an unsafe
and unsound banking practice.
Issuance of Additional Shares
The Corporation has authorized capital stock consisting of 20,000,000
common shares and 10,000,000 shares of preferred stock. Such shares
have been authorized in order that the Corporation may, in the future,
raise additional capital for growth purposes or to respond to
regulatory capital requirements. While the Corporation has no present
plans to do so, such shares may be offered without the approval of the
then shareholders of the Corporation. Authorized but unissued shares
are sometimes used in connection with responses to attempts to acquire
control of a corporation. Although the Board of Directors is not
aware of and does not anticipate any attempt to acquire control of the
Corporation, authorized but unissued shares can be used to respond to
such attempts by selling shares to a party who supports existing
management or in order to increase the number of shares outstanding,
which would both increase the amount of consideration necessary to
effect a change in control of the Corporation and dilute the
percentage ownership and voting rights of an acquire that had already
acquired some portion of the Corporation's outstanding stock.
Serial Preferred Shares
The Corporation's Articles of Incorporation authorize its Board of
Directors to fix one or more series of preferred stock and to
determine the dividend rights (including sinking fund provisions for
the purchase or redemption of such shares), conversion rights, voting
rights, if any, preferences upon liquidation, dissolution or winding
up, and the number and designation of shares constituting any such
series. If and when shares of serial preferred stock are issued, such
stock may or may not have voting or conversion rights, and the holders
of such stock may have dividend, liquidation, redemption or other
rights that are senior to those of the holders of the Corporation's
Common Stock. While the Corporation has no present plans to issue any
preferred shares, such shares may be issued in the future without
obtaining the approval of the holders of the Common Stock.
Preemptive Rights
Holders of the common stock of the Corporation do not have preemptive
rights, that is, any rights to subscribe for additional shares or
other securities which the Corporation may issue in the future.
Therefore, future shares of the Corporation's common stock or other
securities may be offered to the investing public or to shareholders,
at the discretion of the Corporation's Board of Directors, and such
securities may have rights that are senior to those of the holders of
Common Stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The State of California adopted legislation, effective September 27,
1987, (the "Legislation"), which amended the California General
Corporation Law to permit limitation of liability of directors and
indemnification of directors, officers and other agents to a greater
extent than permitted under prior California law. The Legislation
permits a California corporation to include a provision in its
articles of incorporation allowing the corporation to include in its
bylaws, and in agreements between the corporation and its directors,
officers and other agents, provisions expanding the scope of
indemnification beyond that specifically provided under California
law.
In response to the Legislation, the Board of Directors and
shareholders previously approved amendments to the Corporation's
Articles of Incorporation and the Board of Directors approved
amendments to the Corporation's Bylaws, which limit the personal
liability of directors for monetary damages for a breach of such
directors' fiduciary duty of care and allow the Corporation to expand
the scope of its indemnification of directors, officers and other
agents to the fullest extent permitted by California law. The
Corporation and the Bank have entered into Indemnification Agreements
with the directors of the Corporation and the Bank (the
"Indemnification Agreements").
Indemnification Under State Statutes and Bylaws
The Corporation is subject to the California General Corporation Law,
which provides a detailed statutory framework covering indemnification
of any officer, director or other agent of a corporation who is made
or threatened to be made a party to any legal proceeding by reason of
his or her service on behalf of the corporation. Such law provides
that indemnification against expenses actually and reasonably incurred
in connection with any such proceeding shall be made to any such
person who has been successful "on the merits" in the defense of any
such proceeding, but does not require indemnification in any other
circumstance. The law provides that a corporation may indemnify any
agent of the corporation, including officers and directors, against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in a third party proceeding against such person by
reason of his or her services on behalf of the corporation, provided
the person acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the corporation. The law
further provides that in derivative suits a corporation may indemnify
such a person against expenses incurred in such a proceeding, provided
such person acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the corporation and its
shareholders. Indemnification is not available in derivative actions
(i) for amounts paid or expenses incurred in connection with a matter
that is settled or otherwise disposed of without court approval or
(ii) with respect to matters for which the agent shall have been
adjudged to be liable to the corporation unless the court shall
determine that such person is entitled to indemnification.
The law permits the advancing of expenses incurred in defending any
proceeding against a corporate agent by reason of his or her service
on behalf of the corporation upon the giving of a promise to repay any
such sums in the event it is later determined that such person is not
entitled to be indemnified. Finally, the California General
Corporation Law, as amended by the Legislation, provides that the
indemnification provided by the statute is not exclusive of other
rights to which those seeking indemnification may be entitled, by
bylaw, agreement or otherwise, to the extent additional rights are
authorized in a corporation's articles of incorporation. The law
further permits a corporation to procure insurance on behalf of its
directors, officers and agents against any liability incurred by any
such individual, even if a corporation would not otherwise have the
power under applicable law to indemnify the director, officer or agent
for such expenses. The Articles and Bylaws of the Corporation
implement the applicable statutory framework to provide for
indemnification of directors, officers and other corporate agents.
Indemnification Agreements
The Indemnification Agreements provide to the directors the maximum
indemnification allowed under applicable law and under the
Corporation's Articles of Incorporation and Bylaws. The
Indemnification Agreements provide indemnification which expands the
scope of indemnification provided by Section 317 of the California
General Corporation Law (the "Statute"). It has not yet been
determined, however, to what extent the indemnification expressly
permitted by Statute may be expanded, and therefore the validity and
scope of indemnification provided by the Indemnification Agreements
may be subject to future judicial interpretation.
The Indemnification Agreements set forth a number of procedural and
substantive matters which are not addressed or are addressed in less
detail in the Statute, including the following:
1. The Indemnification Agreements establish a standard of conduct
that the person to be indemnified must have acted "in a manner such
person did not believe to be contrary to the best interests of the
corporation."
2. The Indemnification Agreements establish the presumption that the
indemnified party has met the applicable standard of conduct required
for indemnification. In addition, an arbitrator may make the
determination that indemnification is proper in any arbitration
proceeding in which such determination is pending.
3. The Indemnification Agreements provide that litigation expenses
shall be advanced to an indemnified party at his request provided that
he undertakes to repay the amount advanced if it is ultimately
determined that he is not entitled to indemnification for such
expenses.
4. The Indemnification Agreements explicitly provide that in a
derivative suit the indemnified party will be entitled to
indemnification against amounts paid in settlement, to the fullest
extent permitted by law, where the indemnified party meets the
applicable standard of conduct. The enforceability of the provisions
in the Indemnification Agreements providing for settlement payments in
derivative suits has not been judicially interpreted by the courts and
may be subject to public policy limitations. The Board of Directors
has not sought a legal opinion as to the enforceability of these
provisions because of the lack of judicial interpretation of the
Legislation to date.
5. In the event the Corporation does not pay a requested
indemnification amount, the Indemnification Agreements allow the
indemnified party to contest this determination by petitioning a court
to make an independent determination of whether such party is entitled
to indemnification under the Indemnification Agreements. In the event
of such a contest, the burden of providing that the indemnified party
did not meet the applicable standard of conduct will be on the
Corporation. If the Corporation fails to establish that the
applicable standard of conduct has not been met, the indemnified party
will be entitled to indemnification, which will include reimbursement
for expenses incurred by the indemnified party in such contest in
establishing the right to indemnification.
6. The Indemnification Agreements explicitly provide for partial
indemnification of costs and expenses in the event that an indemnified
party is not entitled to full indemnification under the terms of the
Indemnification Agreements.
7. The Indemnification Agreements automatically incorporate future
changes in the laws which increase the protection available to the
indemnitee. Such changes will apply to the Corporation without
further shareholder approval and may further impair shareholders'
rights or subject the corporation's assets to risk of loss in the
event of large indemnification claims. Each Indemnification Agreement
constitutes a binding, legal obligation of the Corporation, and may
not be amended without the consent of the individual who is protected
by such indemnification Agreement.
8. The Indemnification Agreements explicitly provide that actions by
an indemnified party serving at the request of the Corporation as a
director, officer or agent of an employee benefit plan, corporation,
partnership, joint venture or other enterprise, owned or controlled by
the Corporation, shall be covered by the indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1993 (the "Act") may be permitted to directors,
officers and controlling persons of the Corporation pursuant to the
foregoing provisions, or otherwise, the Corporation has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable.
LEGAL MATTERS
Certain legal matters in connection with the shares of common stock
offered pursuant to the Plan have been passed upon for the Corporation
by Haines & Lea, A Law Corporation, 44 Montgomery Street, Suite 3600,
San Francisco, California 94104.
EXPERTS
The consolidated financial statements for the fiscal year ended
December 31, 1994 and 1993, included in this registration statement,
have been included herein in reliance on Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of such firm as
experts in accounting and auditing. The report of Coopers & Lybrand
L.L.P. covering the December 31, 1993 consolidated financial
statements refers to a change in accounting for income taxes.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Northern Empire
Bancshares and Subsidiary:
We have audited the consolidated balance sheets of Northern Empire
Bancshares and Subsidiary (the Company) as of December 31, 1994 and
1993, and the related consolidated statements of income, shareholders'
equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of the Company at December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993.
San Francisco, California
January 27, 1995
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
as of December 31, 1994 and 1993
ASSETS 1994 1993
<S> <C> <C>
Cash and equivalents:
Cash and due from banks $ 6,042,000 $ 8,159,000
Federal funds sold 11,924,000 8,248,000
Total cash and equivalents 17,966,000 16,407,000
Certificates of deposits in other
financial institutions
(at cost which approximates market) 6,231,000 3,745,000
Investment securities
(market value: 1994 - $3,060,000; 1993 - $610,000) 3,072,000 610,000
Loans held for sale 3,831,000 1,360,000
Loans receivable, net 86,285,000 80,272,000
Other real estate owned - 882,000
Leasehold improvements and equipment, net 677,000 870,000
Accrued interest receivable and other assets 3,714,000 2,414,000
Total assets $121,776,000 $106,560,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $111,083,000 $ 97,332,000
Accrued interest payable and other liabilities 494,000 331,000
Total liabilities 111,577,000 97,663,000
Commitments and contingencies (Note 10).
Shareholders' equity:
Preferred stock, no par value; authorized,
10,000,000 shares; none issued or outstanding - -
Common stock, no par value; authorized, in 1994
20,000,000 shares; shares issued and outstanding,
1,253,350 in 1994 and 1,136,108 in 1993 6,489,000 5,563,000
Retained earnings 3,710,000 3,334,000
Total shareholders' equity 10,199,000 8,897,000
Total liabilities and shareholders' equity $121,776,000 $106,560,000
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1994 and 1993
1994 1993
<S> <C> <C>
Interest income:
Loans $8,500,000 $7,245,000
Certificates of deposits in other
financial institutions 187,000 140,000
Federal funds sold and investment securities 533,000 289,000
Total interest income 9,220,000 7,674,000
Interest expense 3,101,000 2,491,000
Net interest income
before provision for loan losses 6,119,000 5,183,000
Provision for loan losses 280,000 174,000
Net interest income after provision
for loan losses 5,839,000 5,009,000
Other income:
Service charges on deposits 296,000 311,000
Gain on sale of loans 1,287,000 1,194,000
Other 563,000 393,000
Total other income 2,146,000 1,898,000
Other expenses:
Salaries and employee benefits 2,776,000 2,247,000
Occupancy 637,000 598,000
Equipment 375,000 323,000
Outside customer services 208,000 207,000
Deposit and other insurance 335,000 315,000
Professional fees 163,000 203,000
Advertising 235,000 173,000
Other 937,000 791,000
Total other expenses 5,666,000 4,857,000
Income before income taxes and cumulative
effect of accounting changes 2,319,000 2,050,000
Provision for income taxes 973,000 802,000
Net income before cumulative effect of
accounting change 1,346,000 1,248,000
Cumulative effect of accounting change
(Note 6) - 51,000
Net income $1,346,000 $1,299,000
Common stock earnings per share data:
Net income before cumulative effect of
accounting change $1.08 $1.00
Cumulative effect of accounting change - .04
Net income $1.08 $1.04
Average common shares outstanding for net
income per share calculation 1,245,735 1,245,875
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1994 and 1993
Common Stock Retained
Shares Amount Earnings Total
<S> <C> <C> <C> <C>
Balance, December 31, 1992 1,131,108 $5,538,000 $2,771,000 $ 8,309,000
Cash dividend paid ($.65
per share) - - 736,000 736,000
Stock options exercised 5,000 25,000 - 25,000
Net income - - 1,299,000 1,299,000
Balance, December 31, 1993 1,136,108 5,563,000 3,334,000 8,897,000
Cash dividend paid ($.36
per share) - - (430,000) (430,000)
Stock options exercised 58,260 386,000 - 386,000
Stock divided 58,982 540,000 (540,000) -
Net income 1,346,000 1,346,000
Balance, December 31, 1994 1,253,350 $6,489,000 $3,710,000 $10,199,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1994 and 1993
1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,346,000 $ 1,299,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change - (51,000)
Gain on sale of other real estate owned (98,000) (39,000)
Provision for loan losses 280,000 174,000
Depreciation, amortization and accretion 228,000 269,000
Net increase in deferred loan fees and discounts 540,000 159,000
Deferred income taxes 28,000 (228,000)
Loans originated for sale (28,759,000) (22,577,000)
Cost of loans sold 26,288,000 24,598,000
Increase in interest receivable
and other assets (1,328,000) (851,000)
Increase in accrued interest payable
and other liabilities 163,000 105,000
Net cash (used in) provided
by operating activities (1,312,000) 2,858,000
Cash flows from investing activities:
Purchase of investment securities (2,854,000) (483,000)
Maturities of investment securities 500,000 2,700,000
Net increase in deposits
in other financial institutions (2,486,000) (682,000)
Net increase in loans receivable (6,833,000) (11,259,000)
Purchase of leasehold improvements and
equipment, net (143,000) (244,000)
Proceeds on sale of other real estate owned 1,001,000 415,000
Investment in other real estate owned (21,000) (70,000)
Net cash used in investing activities (10,836,000) (9,623,000)
Cash flows from financing activities:
Net increase in deposits 13,751,000 9,548,000
Payment of cash dividend (430,000) (736,000)
Stock options exercised 386,000 25,000
Net cash provided by financing activities 13,707,000 8,837,000
Net increase in cash and cash equivalents 1,559,000 2,072,000
Cash and cash equivalents at beginning of year 16,407,000 14,335,000
Cash and cash equivalents at end of year $17,966,000 $ 16,407,000
Other cash flow information:
Interest paid $ 3,093,000 $ 2,496,000
Income taxes paid $ 1,074,000 $ 1,018,000
Noncash investing activity - other real
estate owned acquired through foreclosure - $ 395,000
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Organization:
Northern Empire Bancshares (the Company) is a bank holding company
which conducts its primary business through its wholly owned
subsidiary, Sonoma National Bank (the Bank), a commercial bank located
in Sonoma County, California. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Cash and Equivalents:
For the purposes of reporting cash flows, cash and equivalents include
cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are sold overnight. Substantially all cash
and cash equivalents held in other financial institutions exceed
existing deposit insurance coverage.
Investment Securities:
In accordance with Statement of Financial Accounting Standard ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" which was adopted by the Company on January 1, 1994. All
investment securities are classified as held-to-maturity because
management has the positive intent and ability to hold all of the debt
securities until maturity. Accordingly, these securities are carried
at their remaining unpaid principal balances, net of unamortized
premiums or unaccreted discounts. Premiums are amortized and
discounts are accreted using the level yield method over the estimated
remaining term of the underlying security.
Prior to the adoption of SFAS No. 115, all investment securities were
considered held for investment because the Company had the ability and
management had the intent to hold these securities to maturity.
Accordingly, these securities were carried at amortized cost.
Loans Receivable:
Loans held for investment are carried at amortized cost. The
Company's loan portfolio consists primarily of commercial and
installment loans generally collateralized by first and second deeds
of trust on real estate as well as business assets and personal
property. Interest income is accrued daily on the outstanding loan
balances using the simple interest method. Loans are generally placed
on nonaccrual status when the borrowers are past due 90 days and when
payment in full of principal or interest is not expected. At the time
a loan is placed on nonaccrual status, any interest income previously
accrued but not collected is reversed. Interest accruals are resumed
on such loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the
loans are estimated to be fully collectible as to both principal and
interest.
The Company charges loan origination and commitment fees. Net loan
origination fees are deferred and amortized to interest income over
the life of the loan. Loan commitment fees are amortized to interest
income over the commitment period.
Sales and Servicing of Small Business Administration (SBA) Loans:
The Company originates loans to customers under SBA programs that
generally provide for SBA guarantees of 70% to 90% of each loan. The
Company generally sells the guaranteed portion of each loan to an
investor and retains the unguaranteed portion in its own portfolio.
Gains on these sales are earned through the sale of the guaranteed
portion of the loan for an amount in excess of the adjusted carrying
value of the portion of the loan sold. The Company allocates the
carrying value of such loans between the portion sold, the portion
retained and a value assigned to the right to service the loan. The
difference between the adjusted carrying value of the portion retained
and the face amount of the portion retained is amortized to interest
income over the life of the related loan using a method which
approximates the interest method.
1. Summary of Significant Accounting Policies, continued:
Allowance for Loan Losses:
An allowance for possible loan losses is maintained at a level deemed
appropriate by management to provide for known losses as well as
unidentified losses in the loan portfolio. The allowance 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 continuing review of the
portfolio of loans and commitments. The allowance is increased by
provisions charged to operations and reduced by net charge-offs.
The allowance for possible loan losses is based on estimates, and
ultimate losses may vary from the 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.
In May 1993, the FASB issued SFAS No. 114 (Accounting by Creditors for
Impairment of a Loan) which was subsequently amended by SFAS No. 118
in October 1994. The provisions of the statement are effective for
fiscal years beginning after December 15, 1994 and are applicable to
all creditors and to all loans that are individually and specifically
evaluated for impairment, uncollateralized as well as collateralized.
It requires that impaired loans be measured at either, (1) the present
value of expected future cash flows by discounting those cash flow at
the loan's effective rate, (2) the loan's observable market price or
(3) the fair market value of the collateral of the loan. In general,
this statement is not applicable to large groups of smaller-balance
loans that are collectively evaluated for impairment such as credit
card, residential mortgage and/or consumer installment loans. At this
time, management does not expect that adoption of SFAS No. 114 and 118
will have a material effect on the financial statements of the
Company.
1. Summary of Significant Accounting Policies, continued:
Loan Sales:
In addition to SBA loans, the Company originates real estate loans for
sale and sells participations in other commercial loans. All loans
held for sale are carried at the lower of cost or market. The Company
recognizes gain or loss upon the sale of loans and participating
interest in loans. The gain or loss is based on consideration
received, unpaid loan balances, contractual interest rates, imputed
loan servicing fees, estimated remaining life of the loans and
stipulated interest to be paid to the purchaser. Any resulting
deferred premium or discount is included in other assets and amortized
into operations over the estimated remaining life of the loans sold
using a method which approximates the interest method.
Other Real Estate Owned:
Other real estate owned (OREO) consists of properties acquired through
foreclosure and is stated at the lower of cost or fair market value
less estimated costs to sell. Development and improvement costs
relating to the property are capitalized. Estimated losses that
result from the ongoing periodic valuation of these properties are
charged to current earnings with a provision for losses on foreclosed
property in the period in which they are identified. Operating
expenses of such properties, net of related income, are included in
other expenses. Gains on disposition of OREO are included in other
income.
Leasehold Improvements and Equipment:
Leasehold improvements and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are computed on the straight-line basis over the shorter
of the estimated useful lives of the assets or the term of the lease.
1. Summary of Significant Accounting Policies, continued:
Income Taxes:
The Company and the Bank file consolidated federal income tax returns
and combined state tax returns for California and Arizona. Deferred
income taxes reflect the estimated future tax effects of temporary
differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and
regulations. As of January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting
for Income Taxes" (see Note 6).
Net Income Per Common and Common Equivalent Share:
Net income per common and common equivalent share, adjusted for stock
dividends, is calculated using the weighted average number of shares
outstanding during the period, (1,245,735 and 1,245,875 shares in 1994
and 1993, respectively).
Reclassifications:
Certain amounts in the 1993 financial statements have been
reclassified to conform with 1994 classifications.
2. Investment Securities:
The amortized cost and estimated market values of investment
securities at December 31, 1994 were as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held-to-maturity -
U.S. Government Agency
Securities $ 985,000 - $ 1,000 $ 984,000
U.S. treasury securities 1,970,000 - 11,000 1,959,000
Other securities -
Federal reserve stock 117,000 - - 117,000
$3,072,000 - $12,000 $3,060,000
</TABLE>
<TABLE>
The amortized cost and estimated market values of investment securities at December 31, 1993 were as follows:
<CAPTION>
Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. treasury securities $493,000 - - $ 493,000
Federal reserve stock 117,000 - - 117,000
$610,000 - - $ 610,000
</TABLE>
Investment securities totalling $500,000 and $493,000 at December 31, 1994
and 1993, respectively, were pledged to secure certain deposits.
All investment securities held at December 31, 1994 have a contractual
maturity of one year or less.
There were no sales of investment securities in 1994 or 1993.
3. Loans and Allowance for Loan Losses:
<TABLE>
Loans at December 31, 1994 and 1993 consisted of the following:
<CAPTION>
1994 1993
<S> <C> <C>
Commercial loans $34,857,000 $29,955,000
Consumer installment loans 2,965,000 3,147,000
Real estate loans:
Construction 1,701,000 5,113,000
Other 49,601,000 44,048,000
89,124,000 82,263,000
Deferred loan fees and discounts (1,418,000) (878,000)
Allowance for loan losses (1,421,000) (1,113,000)
$86,285,000 $80,272,000
</TABLE>
The Company's lending activities are concentrated primarily in Sonoma
County. There were no industry or borrower group concentrations at
December 31, 1994.
3. Loans and Allowance for Loan Losses, continued:
<TABLE>
A summary of activity in the allowance for loan losses is as follows:
<CAPTION>
1994 1993
<S> <C> <C>
Balance, beginning of year $ 1,113,000 $ 1,144,000
Provision for loan losses 280,000 174,000
Charge-offs (16,000) (212,000)
Recoveries 44,000 7,000
Balance, end of year $ 1,421,000 $ 1,113,000
</TABLE>
There were five loans totaling $201,000 and three loans totaling
$438,000 on nonaccrual status as of December 31, 1994 and 1993,
respectively. Interest foregone on such loans totaled $21,000 in 1994
and $27,000 in 1993.
As discussed in Note 1, the Company originates loans guaranteed by the
U.S. Small Business Administration (SBA). The Company sells to
outside investors, usually at a price in excess of par, the guaranteed
portion of these loans and retains the remaining unguaranteed portion
in its loan portfolio. When the Company sells the guaranteed portion
of such loans, it transfers the SBA guarantee to the buyer and retains
the servicing function. At December 31, 1994 and 1993, the Company
serviced $38,967,418 and $25,439,000 in loans guaranteed by the SBA of
which the Company's retained interest in these loans was $16,459,334
and $6,679,000, respectively. The Company and the SBA share losses on
these loans on a pro rata basis.
At December 31, 1994 and 1993, the Company serviced additional loans
for others totaling $11,290,244 and $16,879,000, respectively.
4. Leasehold Improvements and Equipment:
<TABLE>
Leasehold improvements and equipment consisted of the following at
December 31, 1994 and 1993:
<CAPTION>
1994 1993
<S> <C> <C>
Leasehold improvements $ 938,000 $ 933,000
Furniture and equipment 1,638,000 1,545,000
Total 2,576,000 2,478,000
Less accumulated depreciation
and amortization (1,899,000) (1,608,000)
Total $ 677,000 $ 870,000
</TABLE>
Depreciation and amortization of approximately $336,000 and $310,000
were charged to expense for the years ended December 31, 1994 and
1993, respectively.
5. Deposits:
<TABLE>
Deposits consisted of the following at December 31, 1994 and 1993:
<CAPTION>
1994 1993
<S> <C> <C>
Deposits:
Noninterest-bearing $ 21,197,000 $ 19,594,000
Interest-bearing:
Money market rate 44,005,000 18,747,000
Savings 8,614,000 13,819,000
Demand 8,919,000 9,057,000
Certificates of deposit 28,348,000 36,115,000
$111,083,000 $ 97,332,000
</TABLE>
Certificates of deposits with balances of $100,000 or more totaled
$8,616,000 and $11,633,000 at December 31, 1994 and 1993,
respectively.
<TABLE>
Certificates of deposit have remaining maturities at December 31, 1994
and 1993 as follows:
<CAPTION>
1994 1993
<S> <C> <C>
Three months or less $ 5,189,000 $ 8,593,000
Over three through six months 9,579,000 14,079,000
Over six through twelve months 12,209,000 13,003,000
Over twelve months 1,371,000 440,000
Total certificates of deposit $ 28,348,000 $ 36,115,000
</TABLE>
6. Income Taxes:
The Company adopted Statement of Financial Accounting Standards No.
109 ("SFAS No. 109"), "Accounting for Income Taxes," as of January 1,
1993. The cumulative effect of this change in accounting principle
increased 1994 net income by $51,000. The adoption of SFAS No. 109
changes the Company's method of accounting for income taxes from the
deferred method using Accounting Principles Board Opinion No. 11 ("APB
No. 11") to an asset and liability approach.
<TABLE>
The components of the provision for federal and state income taxes are
as follows:
<CAPTION>
1994 1993
<S> <C> <C>
Currently payable:
Federal $ 698,000 $ 772,000
State 247,000 258,000
Total 945,000 1,030,000
Deferred:
Federal 4,000 (186,000)
State 24,000 (42,000)
Total 28,000 (228,000)
Total $ 973,000 $ 802,000
</TABLE>
6. Income Taxes, continued:
<TABLE>
A reconciliation of the statutory tax rates to the effective tax rates
is as follows:
<CAPTION>
1994 1993
<S> <C> <C>
Statutory federal tax rate 34.0% 34.0%
State tax, net of federal income tax effect 8.3 7.4
Other,net (0.3) (2.3)
42.0% 39.1%
</TABLE>
<TABLE>
The components of deferred income tax assets net of liabilities as of
December 31, 1994 are as follows:
<CAPTION>
1994 1993
Deferred Deferred
Tax Assets Tax Assets
<S> <C> <C>
Loan loss reserves $423,000 $330,000
Deferred loan fees 105,000 308,000
State taxes, net of federal effect 138,000 158,000
All others 184,000 82,000
Total $850,000 $878,000
</TABLE>
7. Stock Option Plan:
The Company's nonqualifying stock option plan provides for granting of
stock options (up to 311,380 shares) to directors and officers to
purchase shares of the Company's stock at a price not less than the
fair market value on the date the option is granted. Options to
outside directors vest at the time of grant. Options to officers and
directors who are also officers vest over five years from the date of
grant. All options expire ten years from the date of grant.
<TABLE>
A summary of all stock option activity is as follows:
<CAPTION>
Option
Number of Price
Shares Per Share
<S> <C> <C>
Outstanding, December 31, 1991 215,008 $5.00 - $8.53
Exercised 5,000 5.00
Outstanding, December 31, 1993 210,008 5.00 - 8.53
Granted 3,000 $8.38
Effect of 5% stock dividend 8,428 $4.76 - $8.12
Expired (3,500) $7.00 - $7.38
Exercised (58,260) $4.76 - $7.75
Outstanding, December 31, 1994 159,676 $4.76 - $8.12
</TABLE>
In the aggregate, options to purchase 159,676 and 203,612 shares were
exercisable at December 31, 1994 and 1993, respectively. At
December 31, 1994 and 1993, options to purchase 0 and 3,000 shares
were available for future grants.
8. Deferred Compensation:
During 1994 and 1993, the Company entered into deferred compensation
agreements with two key officers and three board members. Under these
agreements, the Company is obligated to provide for each such
employee/director or their beneficiaries, during a period of 15 years
after the employee's/director's death, disability, or retirement,
annual benefits ranging from $75,000 to $100,000 for the employees and
$40,000 and $55,000 for the directors. The estimated present value of
future benefits to be paid is being accrued over the period from the
effective date of the agreements until the expected retirement dates
of the participants. The expense incurred and amount accrued for this
plan for the years ended December 31, 1994 and 1993 totaled $58,000
and $19,000, respectively. The Company is the beneficiary of life
insurance policies that have been purchased as a method of financing
the benefits under the agreements. At December 31, 1994, the cash
surrender value of these policies was $1,467,000, which is included in
other assets.
9. Related Party Transactions:
<TABLE>
The Company has and expects to have, in the future, banking
transactions in the ordinary course of business with directors,
officers and their associates. An analysis of the loans to related
parties is as follows:
<CAPTION>
1994 1993
<S> <C> <C>
Balance, beginning of year $ 2,968,000 $ 3,241,000
Additions 1,236,000 607,000
Principal reductions (1,714,000) (880,000)
Balance, end of year $ 2,490,000 $ 2,968,000
</TABLE>
9. Related Party Transactions, continued:
The Company has entered into three operating leases for branch and
office facilities with a shareholder or partnerships partially owned
by Directors of the Company. Rental payments made under these leases
were $287,000 and $262,000 for the years ended December 31, 1994 and
1993, respectively. Two of the leases require that rental payments
will increase each year based on the consumer price index, and under
certain circumstances, average deposits at the branch.
10. Commitments and Contingencies:
The Bank is required by federal regulations and its correspondent bank
to maintain certain minimum average balances with the Federal Reserve
and/or its correspondent bank, based primarily on the Bank's daily
demand deposit balances. Required deposits held with the federal
reserve and correspondent bank averaged approximately $1,231,000 in
1994.
<TABLE>
The future minimum noncancellable lease payments as of December 31,
1994 are as follows:
<CAPTION>
<S> <C>
1994 $ 325,000
1995 321,000
1996 316,000
1997 295,000
1998 202,000
Thereafter 945,000
Total $2,404,000
</TABLE>
Total rental expense for the years ended December 31, 1994 and 1993
was $447,000 and $391,000, respectively.
11. Regulatory Capital Requirements:
The Bank is required by Office of the Comptroller of the Currency
(OCC) and Federal Deposit Insurance Corporation (FDIC) guidelines to
maintain various minimum capital ratios. At December 31, 1994, the
Bank exceeded all applicable regulatory capital ratios.
The FDIC Improvement Act of 1991 (FDICIA) requires each federal
banking agency to implement regulations governing "prompt corrective"
actions for institutions that it regulates. In response to this
requirement, the FDIC adopted final rules, effective December 19,
1992, based upon FDICIA's five capital tiers: well capitalized,
adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under FDICIA, the
FDIC is required to take supervisory action against institutions that
are not deemed either "well capitalized" or "adequately capitalized."
At December 31, 1994, the Bank was considered "well capitalized."
Payment of dividends by the Bank is limited under regulations for
national banks. The amount that can be paid in any calendar year
without prior approval of the OCC cannot exceed the lesser of net
profits (as defined) for that year plus the net profits for the
preceding two calendar years, or undivided profits. Therefore, the
payment of dividends by the Company may also be limited.
<TABLE>
The Bank is required to report certain financial information to its
regulators. Differences can arise between the Bank's financial
statements and the regulatory financial information reported because
regulatory reporting requirements differ from generally accepted
accounting principals (GAAP). A reconciliation of the Bank's GAAP net
income and shareholder's equity to the amounts reported for regulatory
purposes as of December 31, 1994 is as follows:
<CAPTION>
Bank Only
Net Shareholder's
Income Equity
<S> <C> <C>
GAAP financial statement amounts $1,349,000 $9,837,000
Regulatory accounting adjustment,
net of income tax impact (23,000) (247,000)
Amounts reported for
regulatory purposes (unaudited) $1,326,000 $9,590,000
</TABLE>
12. Financial Instruments with Off-Balance Sheet Risk:
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers. To date, these financial instruments include
commitments to extend credit which involve elements of credit and
interest rate risk in excess of the amount recognized in the statement
of financial position.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The Company generally requires collateral or
other security to support commitments to extend credit. At
December 31, 1994 and 1993, loan commitments totaled $14,012,000 and
$13,735,000, respectively.
13. Parent Company Only Condensed Financial Information:
<TABLE>
The condensed financial statements of Northern Empire Bancshares
(parent company only) as of December 31, 1994 and 1993, and for
each of the two years in the period ended December 31, 1994, are
presented below:
<CAPTION>
1994 1993
<S> <C> <C>
Balance Sheets
Assets:
Cash and cash equivalents $ 223,000 $ 83,000
Other real estate owned 200,000
Investment in Sonoma National Bank 9,837,000 8,587,000
Other assets 143,000 51,000
Total assets $ 10,203,000 $ 8,921,000
Liabilities and shareholders' equity:
Other liabilities $ 4,000 $ 24,000
Preferred stock, no par value; authorized,
10,000,000 shares; none issued or outstanding
Common stock, no par value; authorized,
20,000,000 shares; issued and
outstanding 1,253,350 in 1994
and 1,136,108 in 1993 6,489,000 5,563,000
Retained earnings 3,710,000 3,334,000
Total shareholders' equity 10,199,000 8,897,000
Total liabilities and
shareholders' equity $ 10,203,000 $ 8,921,000
Statements of Income
Dividend income $ 100,000 $ 302,000
Interest and other income 9,000 14,000
Administrative expenses (15,000) (7,000)
Income taxes benefit (expense) 2,000 (3,000)
Equity in undistributed earnings
of Sonoma National Bank 1,250,000 993,000
Net income $ 1,346,000 $ 1,299,000
Statements of Cash Flows
Cash flows from operating activities:
Net income $ 1,346,000 $ 1,299,000
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities:
Increase in other assets (92,000) 1,000
Increase (decrease) in other
liabilities (20,000) 2,000
Total 1,234,000 1,302,000
Less equity in undistributed earnings
of Sonoma National Bank (1,250,000) (993,000)
Net cash provided by (used in)
operating activities (16,000) 309,000
Cash flows from investing activities:
Proceeds on sale of OREO 200,000 -
Net decrease in loans - 134,000
Net cash provided by
investing activities 200,000 134,000
Cash flows from financing activities:
Cash dividend paid (430,000) (736,000)
Stock options exercised 386,000 25,000
Net cash used in financing
activities (44,000) (711,000)
Net increase (decrease) in
cash and cash equivalents 140,000 (268,000)
Cash and cash equivalents:
Beginning of year 83,000 351,000
End of year $ 223,000 $ 83,000
</TABLE>
PART II
Item 14.
Other Expenses of Issuance and Distribution.
The SEC filing fee for filing this Registration Statement was
aproximately $570.00. Legal fees incurred in connection with this
offering are estimated to be $4,000.00, accounting fees are estimated
to be $2,000.00 and no transfer agent fees are expected.
Item 15.
Indemnification of Directors and Officers.
The statutory and other arrangements for indemnification of directors
of the Registrant are described in full in the prospectus under the
heading "Indemnification for Securities Act Liabilities."
Indemnification of officers and other controlling persons may be made
under the provisions of the Registrant's Articles and Bylaws or
pursuant to California law.
Article SEVEN of the Registrant's Articles of Incorporation provides
that the Registrant is authorized to indemnify its directors,
officers, employees and other agents as follows:
SEVEN: INDEMNIFICATION OF AGENTS
The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the Corporations Code) through bylaw
provisions, agreements with the agents, vote of shareholders or
disinterested directors, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the Corporations
Code, subject only to the applicable limits on such excess
indemnification set forth in Section 204 of the Corporations Code with
respect to breach of duty to the Corporation and its shareholders.
Article VI of the Registrant's Bylaws provides for indemnification of
directors, officers, employees and other "agents" of the corporation
as follows:
ARTICLE VI Indemnification
Section 1. Extent of Indemnification.
The Corporation shall have the power to indemnify agents (as defined
in Section 317 of the California Corporations Code), including
directors, officers and employees, in accordance with the provisions
of Section 317 or as otherwise permitted under the Corporation's
Articles of Incorporation.
Section 2. Expense Advancement.
Expenses incurred in defending any proceeding may be advanced by the
Corporation prior to the final disposition of such proceeding upon
receipt of an undertaking by or on behalf of the agent to repay such
amount unless it shall be determined ultimately that the agent is
entitled to be identified.
Section 3. Insurance
The Corporation may purchase and maintain insurance on behalf of any
agent of the Corporation against any liability asserted against or
incurred by the agent in such capacity or arising out of the agent's
status as such whether or not the Corporation would have the power to
indemnify the agent against such liability under the provisions of
Section 317 of the California Corporations Code.
The provisions of the California General Corporation Law relating to
indemnification of directors, officers, employees and other agents of
a corporation, as presently in effect, are set forth in Sections 204
and 317, copies of which are included in this Registration Statement
as Exhibit 28.1.
Item 16.
Exhibits.
3.1
Articles of Incorporation, as amended (incorporated by reference from
Exhibit 3.1 of the Registrant's Registration Statement of Form S-2,
SEC File No. 33-51906, on September 11, 1992)
3.2
Bylaws, as amended (incorporated by reference from Exhibit 3.2 of the
Registrant's Registration Statement of Form S-2, SEC File No. 33-
51906, on September 11, 1992)
3.3
Bylaws, as amended (incorporated by reference from Exhibit (3)(d) of
the Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 1994).
4
Stock Option Plan, including amendments to date, and forms of Stock
Option Agreements (incorporated by reference from Exhibit 10.1 of the
Registrant's Registration Statement of Form S-2, SEC File No. 33-
51906, on September 11, 1992)
5
Opinion of Holmes & Lea, (now Haines & Lea, a Law Corporation)
(previously filed)
10.1
Lease for premises at 801 Fourth Street, Santa Rosa, California, dated
July 25, 1984, including amendments to date (incorporated by reference
from Exhibit 10.2 of the Registrant's Registration Statement of Form
S-2, SEC File No. 33-51906, on September 11, 1992)
10.2
Lease for premises at 6641 Oakmont Drive, Santa Rosa, California,
dated February 1, 1989 (incorporated by reference from Exhibit 10.3 of
the Registrant's Registration Statement of Form S-2, SEC File No. 33-
51906, on September 11, 1992)
10.3
Lease for premises at 755 Fourth Street, Santa Rosa, California, dated
January 10, 1990 (incorporated by reference from Exhibit 10.4 of the
Registrant's Registration Statement of Form S-2, SEC File No. 33-
51906, on September 11, 1992)
10.4
Lease for second floor at 755 Fourth Street, Santa Rosa, California,
dated November 12, 1992 (incorporated by reference from Exhibit (10)
(g) of the Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1992)
10.5
*Stock Option Plan, including amendments to date, and forms of Stock
Option Agreements, see Exhibit 4
10.6
*Indemnification Agreements between James B. Keegan, Jr. and Northern
Empire Bancshares and Sonoma National Bank (incorporated by reference
from Exhibit (10) (h) of the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992)
10.7
*Indemnification Agreements between Dennis R. Hunter and Northern
Empire Bancshares and Sonoma National Bank (incorporated by reference
from Exhibit (10) (i) of the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992)
10.8
*Indemnification Agreements between Robert V. Pauley and Northern
Empire Bancshares and Sonoma National Bank (incorporated by reference
from Exhibit (10) (j) of the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992)
10.9
*Indemnification Agreements between William E. Geary and Northern
Empire Bancshares and Sonoma National Bank (incorporated by reference
from Exhibit (10) (k) of the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992)
10.10
*Indemnification Agreements between Patrick R. Gallaher and Northern
Empire Bancshares and Sonoma National Bank (incorporated by reference
from Exhibit (10) (l) of the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992)
10.11
*Indemnification Agreements between William P. Gallaher and Sonoma
National Bank (incorporated by reference from Exhibit (10) (m) of the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992)
10.12
*Indemnification Agreements between Deborah A. Meekins and Sonoma
National Bank (incorporated by reference from Exhibit (10) (p) of the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992)
10.13
Lease for branch premises in Lakeside Village Shopping Center,
Windsor, California, dated March 1, 1993 (previously filed)
10.14
*Executive Salary Continuation Agreement between Deborah A. Meekins
and Sonoma National Bank (incorporated by reference from Exhibit
(10)(q) of the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1993)
10.15
*Executive Salary Continuation Agreement between David F. Titus and
Sonoma National Bank. (incorporated by reference from Exhibit (10)(r)
of the Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1993)
10.16
*Director's Deferred Compensation Plan between Patrick R. Gallaher and
Sonoma National Bank. (incorporated by reference from Exhibit (10)(r)
of the Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994)
10.17
*Director's Deferred Compensation Plan between William P. Gallaher and
Sonoma National Bank. (incorporated by reference from Exhibit (10)(s)
of the Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994)
10.18
*Director's Deferred Compensation Plan between James B. Keegan, Jr.
and Sonoma National Bank. (incorporated by reference from Exhibit
(10)(t) of the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994)
10.19
*Director's Deferred Compensation Plan between William E. Geary and
Sonoma National Bank. (incorporated by reference from Exhibit (10)(u)
of the Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994)
23.1
Consent of Holmes & Lea, (now Haines & Lea, a Law Corporation)
(previously filed)
23.2
Consent of Coopers & Lybrand, L.L.P.
25
Power of Attorney (previously filed)
25.1
Supplemental Power of Attorney
28.1
Sections 204 and 317 of the California General Corporation Law, with
respect to indemnification (previously filed)
* Management contract or compensation plan or agreement
Item 17. Undertakings.
The undersigned Registrant hereby undertakes (1) to file, during any
period in which it offers or sells securities, a post-effective
amendment to this Registration Statement to (i) include any prospectus
required by section 10 (a) (3) of the Securities Act of 1933; (ii)
reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and (iii) include any additional or changed
material information on the plan of distribution (2) for determining
liability under the Securities Act of 1933, to treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the
initial bona fide offering; and (3) file a post-effective amendment to
remove from registration any of the securities that remain unsold at
the end of this offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on form S-2 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco,
State of California, on March 20, 1995.
NORTHERN EMPIRE BANCSHARES
/s/**
By James B. Keegan, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacity and on the dates indicated:
March 20, 1995 /s/**
Patrick R. Gallaher,
Director, Chief Accounting Officer
and Chief Financial Officer
March 14, 1995 /s/ William P. Gallaher
Director
March 20, 1995 /s/**
William E. Geary
Director
March 20, 1995 /s/**
Dennis R. Hunter
Chairman of the Board
March 20, 1995 /s/**
James B. Keegan, Jr.
Director, President and Chief
Executive Officer
March 20, 1995 /s/**
Robert V. Pauley
Director and Secretary/Treasurer
** By /s/ Joan L. Grant
Joan L. Grant, Attorney-in-Fact
Power of Attorney filed
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
POST-EFFECTIVE AMENDMENT NO. 2 to
FORM S-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
FILED MAY 21, 1993
NORTHER EMPIRE BANCSHARES
Registration No. 33-60566
EXHIBIT INDEX
3.1
Articles of Incorporation, as amended *
3.2
Bylaws, as amended *
4
Stock Option Plan, including amendments to date, and forms of
Stock Option Agreements *
5
Opinion of Holmes & Lea **
10.1
Lease for premises at 801 Fourth Street, Santa Rosa, California, dated
July 25, 1984, including amendments to date *
10.2
Lease for premises at 6641 Oakmont Drive, Santa Rosa, California,
dated February 1, 1989 *
10.3
Lease for premises at 755 Fourth Street, Santa Rosa, California,
dated January 10, 1990 *
10.4
Lease for second floor at 755 Fourth Street, Santa Rosa, California,
dated November 12, 1992 *
10.5
Stock Option Plan, including amendments to date, and forms of Stock
Option Agreements *
10.6
Indemnification Agreements between James B. Keegan, Jr. and Northern
Empire Bancshares and Sonoma National Bank *
10.7
Indemnification Agreements between Dennis R. Hunter and Northern
Empire Bancshares and Sonoma National Bank *
10.8
Indemnification Agreements between Robert V. Pauley and Northern
Empire Bancshares and Sonoma National Bank *
10.9
Indemnification Agreements between William E. Geary and Northern
Empire Bancshares and Sonoma National Bank *
10.10
Indemnification Agreements between Patrick R. Gallaher and Northern
Empire Bancshares and Sonoma National Bank *
10.11
Indemnification Agreements between William P. Gallaher and Sonoma
National Bank *
10.12
Indemnification Agreements between Deborah A. Meekins and Sonoma
National Bank*
10.13
Lease for branch premises in Lakeside Village shopping Center,
Windsor, California, dated March 1, 1993 **
10.14
Executive Salary Continuation Agreement between Deborah A. Meekins and
Sonoma National Bank *
10.15
Executive Salary Continuation Agreement between David F. Titus and
Sonoma National Bank *
10.16
Director's Deferred Compensation Plan between Patrick R. Gallaher and
Sonoma National Bank. *
10.17
Director's Deferred Compensation Plan between William P. Gallaher and
Sonoma National Bank. *
10.18
Director's Deferred Compensation Plan between James B. Keegan, Jr. and
Sonoma National Bank. *
23.1
Consent of Holmes & Lea (now Haines & Lea, a Law Corporation) **
23.2
Consent of Coopers & Lybrand L.L.P.
25
Power of Attorney **
25.1
Supplemental Power of Attorney
28.1
Sections 204 and 317 of the California General Corporation Law, with
respect to indemnification **
* Incorporated by reference
** Previously filed
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on
Form S-2 (File No. 33-60566) of our report dated January 27,
1995, on our audits of the consolidated financial statements of
Northern Empire Bancshares. We also consent to the reference to
our firm under the caption "Experts."
/s/ Coopers & Lybrand
San Francisco, California
March 15, 1995
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Lyman G. Lea and
Joan L. Grant, and each of them, his true and lawful attorney-in-
fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their
or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
SIGNATURE TITLE DATE
/s/ William P. Gallaher Director March 14, 1995
William P. Gallaher
EXHIBIT 25.1
