FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 2-91196
NORTHERN EMPIRE BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2830529
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 Fourth Street, Santa Rosa, California 95404
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 707-579-2265
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of class: Common Stock, no par value Outstanding shares as of July 31,
1996: 1,461,355 Transitional Small Business Disclosure Format (check one): Yes
No X
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1996 1995
<S> <C> <C>
ASSETS
Cash and equivalents:
Cash and due from banks $7,199,000 $11,288,000
Federal funds sold 7,451,000 5,000,000
----------- -----------
Total cash and equivalents 14,650,000 16,288,000
Certificates of deposits in other financial institutions 5,249,000 5,139,000
Investment securities:
Held to maturity (Market value: 1996 -$6,686,000;
1995 - $10,882,000) 6,791,000 10,879,000
Available for sale 1,121,000 0
Loans held for sale 20,701,000 14,324,000
Loans receivable, net 119,393,000 115,263,000
Other real estate owned, net 97,000 0
Leasehold improvements and equipment, net 719,000 747,000
Accrued interest receivable and other assets 4,653,000 4,322,000
----------- --------------
Total assets $173,374,000 $166,962,000
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $159,603,000 $154,221,000
Accrued interest payable and other liabilities 656,000 759,000
---------------- ----------------
Total liabilities 160,259,000 154,980,000
------------ -------------
Shareholders' equity:
Common stock, no par value; authorized, 20,000,000 shares;
shares issued and outstanding, 1,391,879 in 1996 and
1,322,299 in 1995 7,485,000 7,433,000
Retained earnings 5,628,000 4,549,000
Unrealized gain on investment securities available for sale,
net of tax 2,000 0
------------- -----------------
Total shareholders' equity 13,115,000 11,982,000
----------- --------------
Total liabilities and shareholders' equity $173,374,000 $166,962,000
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------
1996 1995 1996 1995
-------------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans $3,550,000 $2,838,000 $7,026,000 $5,295,000
Certificates of deposits
in other financial institutions 80,000 82,000 159,000 160,000
Federal funds sold and
investment securities 248,000 260,000 528,000 387,000
----------- ------------ ------------ ------------
Total interest income 3,878,000 3,180,000 7,713,000 5,842,000
Interest expense 1,673,000 1,369,000 3,348,000 2,406,000
---------- ----------- ----------- -----------
Net interest income before
provision for loan losses 2,205,000 1,811,000 4,365,000 3,436,000
Provision for loan losses 90,000 40,000 180,000 100,000
---------- ------------- ------------ ------------
Net interest income after
provision for loan losses 2,115,000 1,771,000 4,185,000 3,336,000
----------- ----------- ----------- -----------
Other income:
Service charges on deposits 87,000 73,000 174,000 142,000
Gain on sale of loans 253,000 112,000 267,000 373,000
Other 176,000 137,000 347,000 277,000
----------- ------------ ------------ ------------
Total other income 516,000 322,000 788,000 792,000
------------ ------------ ------------ -----------
Other expenses:
Salaries and employee benefits 850,000 755,000 1,639,000 1,512,000
Occupancy 174,000 171,000 353,000 352,000
Furniture & equipment 78,000 71,000 154,000 145,000
Outside customer services 66,000 48,000 127,000 116,000
Deposit and other insurance 38,000 88,000 70,000 175,000
Professional fees 58,000 38,000 108,000 70,000
Advertising & business development 99,000 72,000 159,000 154,000
Other 266,000 185,000 479,000 403,000
-------- ------------ ------------ ------------
Total other expenses 1,629,000 1,428,000 3,089,000 2,927,000
----------- ----------- ----------- -----------
Income before income taxes 1,002,000 665,000 1,884,000 1,201,000
Provision for income taxes 424,000 293,000 805,000 520,000
------------ ------------ ------------ ------------
Net income $578,000 $372,000 $1,079,000 $681,000
----------- ------------- ---------- -----------
Common stock earnings per share $0.39 $0.26 $0.72 $0.47
Average common shares outstanding
for net income per share calculation 1,499,365 1,450,769 1,498,732 1,459,224
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $1,079,000 $681,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses and OREO losses 210,000 100,000
Depreciation and amortization 142,000 114,000
(Increase) decrease in loans held for sale (6,377,000) (6,670,000)
Increase in interest receivable and other assets (331,000) (398,000)
Increase in accrued interest payable and
other liabilities (103,000) (116,000)
------------ ------------
Net cash (used in) provided by operating activities (5,380,000) (6,289,000)
----------- -----------
Cash flows from investing activities:
(Purchases) of investment securities
Held to maturity (11,041,000) (6,785,000)
Available-for-sale (994,000)
Maturities of investment securities
Held-to-maturity 15,000,000 3,000,000
Net decrease in deposits in other financial institutions (110,000) (393,000)
Net (increase) in loans receivable (4,437,000) (16,562,000)
Purchase of leasehold improvements and equipment, net (114,000) (23,000)
------------ --------------
Net cash used in investing activities (1,696,000) (20,763,000)
-------------------------------
Cash flows from financing activities:
Net increase in deposits 5,382,000 22,621,000
Payment of cash dividend 0 (265,000)
Stock options exercised 56,000 328,000
----------- ------------
Net cash provided by financing activities 5,438,000 22,684,000
--------- ----------
Net increase in cash and cash equivalents (1,638,000) (4,368,000)
Cash and cash equivalents at beginning of year 16,288,000 17,966,000
---------- ----------
Cash and cash equivalents at end of period $14,650,000 $13,598,000
----------- -----------
Cash Flows - Supplemental Disclosures:
Cash paid during the period for:
Interest on deposits and other borrowings $3,396,000 $2,386,000
Income taxes 657,000 558,000
Non-cash transactions:
Additions to other real estate owned 97,000
</TABLE>
<PAGE>
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
June 30, 1996
Note 1 - Basis of Presentation
In the opinion of Management, the unaudited interim consolidated financial
statements contain all adjustments of a normal recurring nature, which are
necessary to present fairly the financial condition of Northern Empire
Bancshares and Subsidiary at June 30, 1996 and the results of operations for the
three and six months then ended.
Certain information and footnote disclosures presented in the Corporation's
annual consolidated financial statements are not included in these interim
financial statements. Accordingly, the accompanying unaudited interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Corporation's 1995 Annual Report on Form 10-KSB. The results of operations for
the three and six months ended June 30, 1996 are not necessarily indicative of
the operating results through December 31, 1996.
Note 2 - Net Income per Common Share
Net income per common and common equivalent share is calculated by using the
weighted average number of common shares outstanding, adjusted for stock
dividends, during the period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Northern Empire Bancshares (the "Corporation") is the bank holding company of
Sonoma National Bank (the "Bank"). Since the principal business of the
Corporation is the Bank, the following discussion pertains mainly to the Bank.
Total consolidated assets equalled $173,374,000 at June 30, 1996 compared to
$166,962,000 at December 31, 1995. Total loans, including loans held for sale,
increased $10.5 million since year-end with $6.3 million of that growth
occurring in the second quarter. This rapid growth was funded by new deposits,
mainly time deposits, which have grown $5.4 million, and from liquid assets.
The net income after tax for the first six months of 1996 equalled $1,079,000
compared to $681,000 for the comparable period of 1995, an increase of 58%. The
second quarter's net income after tax of $578,000 increased 55% over the second
quarter of 1995 when net income equalled $372,000. The higher profits result
from increases in net interest income due to loan growth (higher yielding
earning assets) while controlling the Bank's operating costs.
Net Interest Income
Net interest income of $2,205,000 for the second quarter of 1996 increased 22%
from $1,811,000 for the comparable period last year. This increase in net
interest income during the second quarter of 1996 compared to 1995 resulted from
volume increases of $32.3 million in average earning assets during the current
quarter compared to the second quarter of 1995. $29.6 million of that increase
was in average loans outstanding which have the highest yields. Average interest
bearing deposits for the second quarter increased $26.1 million over the same
period last year.
The net interest margin for the Bank equalled 5.37% for the second quarter of
1996 compared to 5.49% for the comparable period of 1995. The net interest
margin was negatively impacted by a new fee imposed by the Small Business
Administration (SBA) of 50 basis points on the guaranteed balance of SBA loans
booked since October 12, 1995. This fee which equalled $12,000 during the second
quarter was deducted from SBA loan
<PAGE>
yields. As of June 30, 1996 the Bank had $12.2 million in SBA guaranteed loans
subject to this new fee. The prime rate has also dropped from 9% in the second
quarter of 1995 to 8.25% in the second quarter of 1996. At June 30, 1996, the
Bank had $15.3 million in prime based loans which reprice immediately with prime
rate changes. The SBA loan portfolio, totalling $45.5 million, is tied to prime
and reprices on a quarterly basis. The Bank has also experienced additional
competition which has resulted in lower loan pricing in some situations.
The Bank is considered asset sensitive which means that rate increases benefit
the Bank since more of its assets reprice at a faster rate than deposits. Of the
Bank's loan portfolio totalling $142 million at June 30, 1996, 75% are floating
rate loans which have not reached rate ceilings or floors. Approximately $70
million are prime-based loans, of which $15.3 million reprice immediately and
$45.5 million reprice on a quarterly basis. Approximately $36 million of the
Bank's loan portfolio is periodically adjustable (generally every six months)
based upon the Eleventh District's cost of funds index. This index was 5.2% in
June 1995 and has declined to 4.8% as of June 1996. The overall impact of
declining rates has resulted in a decline in loan yields from 10.4% for the
second quarter of 1995 to 10.2% in 1996.
The increase in interest income was partially offset by an increase in interest
expense, which rose from $1,369,000 in the second quarter of 1995 to $1,673,000
in the second quarter of 1996. The major factor was the increase of $26.1
million in average interest bearing deposits when comparing the second quarter
of 1996 to 1995. The cost of interest bearing deposits has remained fairly
consistent during the last twelve months and equalled 4.94% for the second
quarter of 1996 (4.99% for the same period last year). The Bank's growth has
been funded by offering time certificates at competitive rates (see "Deposits").
Other Income
Other income increased 61% when comparing the second quarter of 1996 to the same
period last year. The income generated from gains on sale of Small Business
Administration (SBA) loans can vary significantly based upon the timing of SBA
loan sales. Gains on SBA loan sales equalled $253,000 in the second quarter of
1996 compared to $112,000 in the second quarter of 1995; however, the year to
date income equalled $267,000 which was below last year's level of $373,000.
Included in other income are SBA servicing fees, which equalled $66,000, and
fees for investment services provided through PrimeVest (new product in last
quarter of 1995) which added $10,000 during the second quarter of 1996. Service
charges on deposit accounts increased due to the implementation of a new service
charge schedule in February of 1996.
Non-Interest Expenses
The Bank's operating expenses increased by 14% over the second quarter of 1995
to $1,629,000 in the second quarter of 1996. Salaries and benefits increased 13%
due to incentives on Commercial and SBA loan production and annual salary
increases. Occupancy expenses increased 2% mainly due to increases in lease
rates tied to indexes. Equipment costs increased 10% due to depreciation on new
data processing equipment and increased usage of personal computers. Deposit and
other insurance has decreased 57% due to the lower assessment rate charged for
FDIC insurance. There is no assurance that the currently low FDIC assessment
rate will not be increased in the future. Advertising and marketing costs vary
significantly based upon marketing activities. Professional expenses have
increased due to the higher level of legal activity on problem loans and OREO
properties during the second quarter of 1996. Other expenses include: stationery
& supplies, telephone, postage, loan expenses, director fees, dues and
subscriptions and automobile expenses. Many of these other expense categories
have increased due to growth within the Bank; however, the majority of the
increases relate to costs associated with problem loans, foreclosure expenses
and Other Real Estate Owned (OREO) costs. During the second quarter of 1996, a
$30,000 valuation reserve for potential losses on OREO properties was recorded
and included in other expenses.
The total non-interest expenses for the SBA lending department for the second
quarter was approximately $384,000 ($229,000 in personnel costs, $36,000 in
occupancy and equipment expenses, $42,000 in marketing/business development)
which equalled their costs for the second quarter of 1995. The Bank has
increased its SBA loan portfolio without increasing the costs due to operating
efficiencies.
<PAGE>
Income Taxes
The effective tax rate approximated 42% for the second quarter of 1996. The
provision for the second quarter of 1995 was $424,000 versus $293,000 for the
same period last year. The increase resulted from the increase in pre-tax income
during the second quarter of 1996 compared to 1995.
Liquidity and Investment Portfolio
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
internal guidelines for acceptable liquidity measures in terms of ratios to
total assets, deposits, liabilities and capital with exceptions being reported
to ALCO committee and the Board. As of June 30, 1996, the Bank's liquidity ratio
of liquid assets to total assets equalled 14.8%, which was slightly below the
policy's minimum level of 15%. This resulted from unanticipated high loan growth
late in the second quarter. The Bank is currently running a certificate of
deposit campaign offering a very competitive rate which is expected to raise the
liquidity ratio to within the established guidelines. The Bank has been holding
the guaranteed portion of SBA loans rather than selling them to enjoy the higher
yield on loans versus other investments. These loans are not included in the
liquidity calculation; however, they could be sold and converted to cash within
a few weeks. At June 30, 1996 the Bank had $20,701,000 in SBA loans which could
be sold. If these loans were included in the liquidity calculation the ratio
would equal 26.7%.
Cash and due from banks, federal funds sold and certificates of deposit totalled
$19,899,000 or 11.5% of total assets at June 30, 1996, compared to $21,427,000
or 12.8% of total assets at December 31, 1995. The Bank held an unusually high
balance of $11,288,000 in cash and due from banks at 1995 which have now
declined to a more normal level. At June 30, 1996 the Bank held a total of $7.9
million in U.S. Treasuries compared to $10.9 at year end. The Bank is required
to pledge $500,000 of its U.S. Treasury investment for Federal Tax Deposits.
This current level of liquidity is slightly below the Bank's liquidity position
over the last several years. The current deposit campaign is expected to restore
the Bank's liquidity position to more typical levels.
Liquidity is also provided through the sale or participation of loans. During
the second quarter of 1996 the Bank sold $702,000 in SBA loans (guaranteed
portion) compared to $1,603,000 for the same period last year.
The Bank currently has approximately $1 million in loan sales in process.
The Bank also has unused federal funds lines of credit totalling $9,000,000. The
Bank feels this amount of liquidity is adequate to meet any cash demands that
may arise.
At present, the Corporation's primary sources of liquidity are from short term
investments on its capital, exercises 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 Comptroller of the Currency.
At June 30, 1996, the Corporation had non-interest and interest bearing cash
balances of $198,000 which management believes is adequate to meet the
Corporation's operational expenses.
The Corporation and the Bank do not engage in hedging transactions (interest
rate futures, caps, swap agreements, etc.).
Deposits
Deposits grew 3.5% since the end of 1995 to $159.6 million at June 30, 1996.
These deposits were used to fund loan growth. The Bank is currently offering a
time certificate at a very competitive rate, which is expected to increase
deposits by approximately $10 million during the third quarter. These deposits
are necessary to maintain adequate liquidity, as discussed above, and to fund
new loan growth projected for the third quarter.
<PAGE>
The overall cost of funds of 4.92% has remained at approximately the same level
during the second quarter of 1996 when comparing to the second quarter of last
year. Rates on the various deposit products had been compressed to a very narrow
margin; however, over the last year, rates offered on certificates of deposit
have increased making them more attractive to depositors while money market
account rates have declined. The Bank's time deposits have grown 7% over
December 31, 1995 balances.
Deposits include $51.3 million in the "Sonoma Investors Reserve" account. This
account is a limited transaction account with a floating rate which is tied to
the 13 week treasury bill less a margin of 50 basis points. The rate offered on
this account has been very attractive and many of the Bank's customers have held
their funds in this deposit product rather than locking in a specific maturity.
New customers continue to find this deposit account attractive due to the
immediate availability of the funds versus a time certificate bearing a future
maturity.
At the end of June 1996, non-interest bearing deposits equalled $23.6 million
compared to $23 million at December 31, 1995. Transaction accounts include
balances with title companies. This type of deposit account has greater balance
fluctuations than other types of deposits based upon their business activity;
however, they carry average balances of between $2 to $3 million.
At June 30, 1996, certificates of deposits of $100,000 or more equalled $20
million or 12.5% of total deposits versus $19.3 million or 12.5% of total
deposits at December 31, 1995. The holders of these deposits are primarily local
customers of the Bank. While these deposits are considered to be rate sensitive,
the Bank believes they are stable deposits, as they are obtained primarily from
customers with other banking relationships with the Bank.
The lower interest rate environment over the past few years and the increased
competition from the financial services industry has made it more difficult to
attract new deposits at favorable rates. The Bank continually monitors
competitors rates, strives to be competitive in pricing deposits, and has
offered attractive time deposit rates to raise funds during periods of high loan
growth.
Loans
Loans held for investment plus loans available for sale equalled $140.1 million,
at June 30, 1996, increasing 8.1% from $129.6 at December 31, 1995. The loan
demand continued strong in the second quarter with net loan growth of $6.3
million. The SBA department experienced strong loan demand, especially in the
Arizona market. SBA loans available for sale increased $2.3 million to $20.7
million at June 30, 1996.
The Bank continues to emphasize commercial and real estate lending. At June 30,
1996, 39% of the loans held for investment were commercial loans and 59% were
real estate and construction loans, compared to 40% and 58% respectively at
December 31, 1995. Management is aware of the risk factors in making commercial
and real estate loans and is continually monitoring the local market place. Real
estate construction loans are primarily for single family residences and
commercial properties under $2 million 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 Corporation's market area. 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. As of June 30, 1996, the Bank
had $2.4 million outstanding in construction loan financing. A decline in real
estate values and/or demand could potentially have an adverse impact on the loan
portfolio, and on the financial condition of the Bank. The Bank offers
residential mortgage services on a limited basis.
The Bank has a small portfolio of consumer loans, which equaled 2% of the total
loan portfolio at June 30, 1996.
Allowance for Loan Losses
The allowance for loan losses equalled $1,858,000 at June 30, 1996 as compared
to $1,676,000 at December
<PAGE>
31, 1995. At June 30, 1996, the allowance for loan losses equalled 1.6% of total
loans (net of loans held for sale) compared to 1.4% at December 31, 1995. The
allowance for loan loss is reviewed on a monthly basis and is based on an
allocation for each loan category, 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 reserved for according to the risk assessment.
At June 30, 1996 there were six loans on non-accrual which totalled $848,000.
There were three loans totalling $175,000 past due 90 days or more and still
accruing interest. Of the nonaccrual loans $806,000 are secured by real estate.
On December 31, 1995, there were six loans on non-accrual totalling $398,000,
there were no loans past due 90 or more days and still accruing interest. At the
end of the second quarter, loans past due 30-89 days totalled $2.6 million,
which is a higher than normal level for the Bank; however, the Bank has real
estate collateral supporting $2.5 million of that total.
Other Real Estate Owned
As of June 30, 1996, the Bank owned two commercial buildings, one located in
Moraga, California and the other in San Francisco, California. Title was
transferred through foreclosure actions on SBA guaranteed loans in which the
Bank had previously sold a 75% interest to investors. Based upon recent
appraisals, a valuation reserve for $30,000 was recorded in the second quarter
to lower the book value to approximate market value. The Bank basis, after the
valuation reserve, for the two properties totalled $97,000 at June 30, 1996. The
Bank held no other real estate owned during 1995.
Capital Resources
Pursuant to regulations under the FDIC Improvement Act of 1991 (FDICIA), five
capital levels were prescribed as applicable for banks, ranging from
well-capitalized to critically under-capitalized. At June 30, 1996, the Bank's
was considered " well capitalized." The Bank's total risk-based capital ratio
was 10.5% and leverage capital ratio was 7.4%. Northern Empire Bancshares' (on a
consolidated basis) total risk-based capital ratio was 10.8% and leverage
capital ratio was 7.6%.
In May 1996, the Corporation declared a 5% stock dividend to shareholders of
record on June 14, 1996, new stock certificates representing the stock dividend
were issued on July 1, 1996.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULES
LOANS HELD FOR INVESTMENT
June 30, 1996 December 31, 1995
<S> <C> <C>
Commercial Loans $48,370,000 $47,745,000
Real Estate Loans-Construction 2,366,000 3,556,000
Real Estate Loans-Other 70,072,000 64,713,000
Installment Loans 2,252,000 2,702,000
--------- ---------
Total $123,060,000 $118,716,000
------------ ------------
</TABLE>
Of the total loans due in more than one year, $33,003,000 were at fixed interest
rates or had reached the loan's floor or ceiling rates. $106,686,000 were at
adjustable interest rates at June 30, 1996. The loan portfolio has no foreign
balances.
<TABLE>
<CAPTION>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Quarter Ended Six Months Ended
June 30, 1996 June 30, 1996
<S> <C> <C>
Balance - Beginning of Period $1,767,000 $1,676,000
Provision for Loan Losses 90,000 180,000
Charge Offs 0 0
Recoveries 1,000 2,000
------------- -------------
Balance - End of the Period $1,858,000 $1,858,000
------------- -------------
</TABLE>
There were six loans on non-accrual at June 30, 1996, amounting to $848,000, of
which $806,000 were secured by real estate collateral.
<PAGE>
<TABLE>
<CAPTION>
GAP ANALYSIS
The following schedule represents interest rate sensitivity profile of assets,
liabilities and shareholder's equity classified by earliest possible repricing
opportunity or maturity date.
Over Over Non-rate
Balance Sheet - June 30, 1996 3 Months 1 Year Sensitive
Through through through or Over
($000) 3 Months 1 Year 5 Years 5 Years Total
<S> <C> <C> <C> <C> <C>
Deposits-other financial
institutions $1,089 $4,160 $5,249
Fed funds sold 7,451 7,451
Investment securities 6,792 $997 $123 7,912
Loans and loans held for sale 85,507 43,375 9,761 5,117 143,760
Non-interest-earning assets (net) 9,002 9,002
------------ ------------ ----------- ------- -------
Total Assets $94,047 $54,327 $10,758 $14,242 $173,374
------- ------- -------- -------- --------
Liabilities & Shareholders Equity
Time Deposits $100,000 and over $4,920 $12,081 $2,835 $19,836
All other interest-bearing deposits 77,991 28,311 9,857 4 116,163
Non-interest bearing liabilities $24,260 24,260
Shareholders' Equity 13,115 13,115
------------ ----------- ----------- ---------- ------
Total Liabilities & Shareholders' Equity $82,911 $40,392 $12,692 $37,379 $173,374
-------- ------- ------- --------- --------
Interest Rate Sensitivity GAP (1) $11,136 $13,935 ($1,934) ($23,137)
------- ------- -------- ----------
Cumulative Int. Rate Sensitivity GAP $11,136 $25,071 $23,137 $0
------- ------- ------- -------------
<FN>
(1) Interest rate sensitivity gap is the difference between interest rate
sensitive assets and interest rate sensitive liabilities within the above time
frames.
</FN>
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None other than in the ordinary course of business.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Corporation was held on May 21, 1996.
The following directors were re-elected.
<TABLE>
<CAPTION>
For Against Withheld
<S> <C> <C> <C>
Clement C. Carinalli 1,090,202 0 4,093
Patrick R. Gallaher 1,090,202 0 4,093
William P. Gallaher 1,090,202 0 4,093
William E. Geary 1,090,202 0 4,093
James B. Keegan, Jr. 1,090,202 0 4,093
Dennis R. Hunter 1,090,202 0 4,093
Robert V. Pauley 1,090,202 0 4,093
</TABLE>
All Board members from the previous year were re-elected. No other matters were
voted on at this meeting.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
(3) (a) Articles of Incorporation of the Corporation (filed as Exhibit 3.1 to
the Corporation's S-1 Registration Statement, filed May 18, 1984 and
incorporated herein by this reference).
(b) Certificate of Amendment to Articles of Incorporation, filed January 17,
1989 (filed as exhibit (3)(b) to the Corporation's Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1988 and incorporated herein by this
reference).
(c) Bylaws of the Corporation, as amended (filed as Exhibit 3.2 to the
Corporation's S-2 Registration Statement, File No. 33-51906 filed September 11,
1992 and incorporated herein by this reference).
(d) Amendment to the Bylaws of the Corporation and revised Bylaws (filed as
Exhibit (3)(d) to the Corporation's Annual Report on Form 10-KSB for the Fiscal
Year Ended December 31, 1994 and incorporated herein by this reference).
(10)(v)* Director's Deferred Compensation Plan between William P. Gallaher and
Sonoma National Bank
*Management contract or compensation plan or arrangement.
<PAGE>
(27)(a) Financial Data Schedule
b. Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NORTHERN EMPIRE BANCSHARES
Date: August 14, 1996
/s/Dennis R. Hunter /s/Patrick R. Gallaher
- ------------------------------- -----------------------------------
Dennis R. Hunter Patrick R. Gallaher
Chairman of the Board Director & Chief Accounting Officer
SONOMA NATIONAL BANK
DEFERRED FEE AGREEMENT
THIS AGREEMENT is made this day of April 18, 1996 by and between Sonoma
National Bank (the "Company"), and William P. Gallaher (the "Director").
INTRODUCTION
To encourage the Director to remain a member of the Company's Board of
Directors, the Company is willing to provide to the Director a deferred fee
opportunity. The Company will pay the benefits from its general assets.
AGREEMENT
The Director and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words
and phrases shall ave the meanings specified:
1.1.1 "Change of control" means the transfer of shares of the Company's
voting common stock such that one person acquires (or is deemed to acquire under
Section 318 of the Code) 51% or more of the Company's outstanding voting common
stock followed within twelve (12) months by termination of the Director's status
as a member of the Company's Board of Directors.
1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
References to a Code section shall be deemed to be to that section as it now
exists and to any successor provision.
1.1.3 "Disability" means, if the Director is covered by a
Company-sponsored disability insurance policy, total disability as defined in
such policy without regard to any waiting period. If the Director is not covered
by such a policy, Disability means the Director suffering a sickness, accident
or injury which, in the judgment of a physician satisfactory to the Company,
prevents the Director from performing substantially all of the normal duties of
a director. As a condition to any benefits, the Company may require the Director
to submit to such physical or mental evaluations and tests as the Company's
Board of Directors deems appropriate.
1.1.4 "Distribution Date" means 15 years after the date of this
Agreement.
1.1.5 "Election Form" means the Form attached as Exhibit 1.
1.1.6 "Fees" means the total directors fees payable to the Director.
1.1.7 "Normal Termination Date" means the Director attaining age 60.
1.1.8 "Termination of Service" means the Director's ceasing to be a
member of the Company's Board of Directors for any reason whatsoever.
<PAGE>
1.1.9 "Years of Service" means the total number of twelve-month
periods during which the Director serves as a member of the Company's Board of
Directors.
Article 2
Deferral Election
2.1 Initial Election. The Director shall make an initial deferral
election under this Agreement by filing with the Company a signed Election Form
within 30 days after the date of this Agreement. The Election Form shall set
forth the amount of Fees to be deferred. The Election Form shall be effective to
defer only Fees earned after the date the Election Form is received by the
Company.
2.2 Election Changes
2.2.1 Generally. The Director may modify the amount of Fees to
be deferred by filing a subsequent signed Election Form with the
company. The modified deferral shall not be effective until the
calendar year following the year in which the subsequent Election Form
is received by the Company. The Director may not change the form of
benefit payment initially elected under Section 2.1.
2.2.2 Hardship. If an unforeseeable financial emergency
arising from the death of a family member, divorce, sickness, injury,
catastrophe or similar event outside the control of the Director
occurs, the Director, by written instructions to the Company may reduce
future deferrals under this Agreement.
Article 3
Deferral Account
3.1 Establishing and Crediting. The Company shall establish a Deferral
Account on its books for the Director, and shall credit to the Deferral Account
the following amounts:
3.1.1 Deferrals. The Fees deferred by the Director as of the
time the Fees would have otherwise been paid to the Director.
3.1.2 Interest. On Each anniversary of the date of this
Agreement and immediately prior to the payment of any benefits,
interest on the account balance since the preceding credit under this
Section 2.1.2, if any, at an annual rate, compounded monthly, equal to
8%.
3.2 Statement of Accounts. The Company shall provide to the Director,
within one hundred twenty (120) days after each anniversary of this Agreement, a
statement setting forth the Deferral Account balance.
3.3 Accounting Device Only. The Deferral Account is solely a device for
measuring amounts to be paid under this Agreement. The Deferral Account is not a
trust fund of any kind. The Director is a general unsecured creditor of the
Company for the payment of benefits. The benefits represent the mere Company
promise to pay such benefits. The Director's rights are not subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment, or garnishment by the Director's creditors.
<PAGE>
Article 4
Lifetime Benefits
4.1 Normal Termination Benefit. Upon the earlier of the Director's
Termination of Service or the Distribution Date, the Company shall pay to the
Director the benefit described in this Section 4.1. 4.1.1 Amount of Benefit. The
benefit under this Section 4.1 is the Deferral Account balance at the Director's
Termination of Service. 4.1.2 Payment of Benefit. The Company shall pay the
benefit to the Director in the form elected by the Director on the Election
Form.
4.2 Early Termination Benefit. If the Director terminates service as a
director before the Normal Termination Date, and for reasons other than death or
Disability, the Company shall pay to the Director the benefit described in this
Section 4.2.
4.2.1 Amount of Benefit. The benefit under this Section 4.2 is
calculated by recomputing the Deferral Account balance from its
inception with the following modifications:
4.2.1.1 Interest Rate Reduction. The interest rate under Section 3.1.3
shall be 8%.
4.2.2 Payment of Benefit. The Company shall pay the benefit to the
Director in the form elected by the Director on the Election Form.
4.3 Disability Benefit. If the Director terminates service as a
director for Disability prior to the Normal Retirement Date, the Company shall
pay to the Director the benefit described in this Section 4.3.
4.3.1 Amount of Benefit. The benefit under this
Section 4.3 is the Deferral Account balance at the Director's Termination of
Service.
4.3.2 Payment of Benefit. The Company shall pay the benefit to the
Director in the form elected by the Director on the Election Form.
4.4 Change of Control Benefit. Upon a Change of Control while the
Director is in the active service of the Company, the Company shall pay to the
Director the benefit described in this Section 4.4 in lieu of any other benefit
under this Agreement.
4.4.1 Amount of Benefit. The benefit under this Section 4.4 is
the Deferral Account balance at the date of the Director's Termination
of Service.
4.4.2 Payment of Benefit. The Company shall pay the benefit to
the Director in a lump sum within days 30 days after the Director's
Termination of Service.
4.5 Hardship Distribution. Upon the Company's determination (following
petition by the Director) that the Director has suffered an unforeseeable
financial emergency as described in Section 2.2.2, the Company shall distribute
to the Director all or a portion of the Deferral Account balance as determined
by the Company, but in no event shall the distribution be greater than is
necessary to relieve the financial hardship.
<PAGE>
Article 5
Death Benefits
5.1 Death During Active Service. If the Director dies while in the
active service of the Company, the Company shall pay to the Director's
beneficiary the benefit described in this Section 5. 1.
5.1.1 Amount of Benefit. The benefit under Section 5.1 is $ 211,941.
------------
5.1.2 Payment of Benefit. The Company shall pay the benefit to the
beneficiary in 180 equal monthly installments commencing on the first day of the
month following the Director's Death.
5.2 Death During Benefit Period. If the Director dies after benefit
payments have commenced under this Agreement but before receiving all such
payments, the Company shall pay the remaining benefits to the Director's
beneficiary at the same time and in the same amounts they would have been paid
to the Director had the Director survived.
Article 6
Beneficiaries
6.1 Beneficiary Designations. The Director shall designate a
beneficiary by filing a written designation with the Company. The Director may
revoke or modify the designation at any time by filing a new designation.
However, designations will only be effective if signed by the Director and
accepted by the Company during the Director's lifetime. The Director's
beneficiary designation shall be deemed automatically revoked if the beneficiary
predeceases the Director, or if the Director names a spouse as beneficiary and
the marriage is subsequently dissolved. If the Director dies without a valid
beneficiary designation, all payments shall be made to the Director's surviving
spouse, if any, and if none, to the Director's surviving children and the
descendants of any debased child by right of representation, and if no children
or descendants survive, to the Director's estate.
6.2 Facility of Payment. If a benefit is payable to a minor, to a
person declared incompetent, or to a person incapable of handling the
disposition of his or her property, the Company may pay such benefit to the
guardian, legal representative or person having the care or custody of such
minor, incompetent person or incapable person. The Company may require proof of
incompetency, minority or guardianship as it may deem appropriate prior to
distribution of the benefit. Such distribution shall completely discharge the
Company from all liability with respect to such benefit.
Article 7
Claims and Review Procedures
7.1 Claims Procedure. The Company shall notify the Director's
beneficiary in writing, within ninety (90) days of his or her written
application for benefits, of his or her eligibility or non eligibility for
benefits under the Agreement. If the Company determines that the beneficiary is
not eligible for benefits or full benefits, the notice shall set forth (1) the
specific reasons for such denial, (2) a specific reference to the provisions of
the Agreement on which the denial is based, (3) a description of any additional
information or material necessary for the claimant to perfect his or her claim,
and a description of why it is needed, and (4) an explanation of the Agreement's
claims review procedure and other appropriate information as to the steps to be
taken if the beneficiary wishes to have the claim reviewed. If the Company
determines that there are special circumstances requiring additional time to
make a decision, the Company shall notify the beneficiary of the special
circumstances and
<PAGE>
the date by which a decision is expected to be made, and may extend the time for
up to an additional ninety-day period.
7.2 Review Procedure. If the beneficiary is determined by the Company
not to be eligible for benefits, or if the beneficiary believes that he or she
is entitled to greater or different benefits, the beneficiary shall have the
opportunity to have such claim reviewed by the Company by filing a petition for
review with the Company within sixty (60) days after receipt of the notice
issued by the Company. Said petition shall state the specific reasons which the
beneficiary believes entitle him or her to benefits or to greater or different
benefits.
Within sixty (60) days after receipt by the Company of the petition, the Company
shall afford the beneficiary (and counsel, if any) an opportunity to present his
or her position to the Company orally or in writing, and the beneficiary (or
counsel) shall have the right to review the pertinent documents. The Company
shall notify the beneficiary of its decision in writing within the sixty-day
period, stating specifically the basis of its decision, written in a manner
calculated to be understood by the beneficiary and the specific provisions of
the Agreement on which the decision is based. If, because of the need for a
hearing, the sixty-day period is not sufficient, the decision may be deferred
for up to another sixty-day period at the election of the Company, but notice of
this deferral shall be given to the beneficiary.
Article 8
Amendments and Termination
8.1 The Company may amend or terminate this Agreement at any time if,
pursuant to legislative, judicial or regulatory action, continuation of the
Agreement would (i) cause benefits to be taxable to the Director prior to actual
receipt, or (ii) result in significant financial penalties or other
significantly detrimental ramifications to the Company (other than the financial
impact of paying the benefits). In no event shall this Agreement be terminated
without payment to the Director of the Deferral Account balance attributable to
the Director's deferrals and interest credited on such amounts.
Article 9
Miscellaneous
9.1 Binding Effect. This Agreement shall bind the Director and the
Company, and their beneficiaries, survivors, executors, administrators and
transferees.
9.2 No Guaranty of Employment. This Agreement is not a contract for
services. It does not give the Director the right to remain a director of the
Company, nor does it interfere with the shareholders' rights to replace the
Director. It also does not require the Director to remain a director nor
interfere with the Director's right to terminate services at any time.
9.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
9.4 Tax Withholding. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
9.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of California, except to the extent preempted by the laws
of the United States of America.
9.6 Unfunded Arrangement. The Director and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay such
benefits. The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors. Any insurance on the Director's life is a general
asset of the Company to which the Director and beneficiary have no preferred or
secured claim.
IN WITNESS WHEREOF, the Director and a duly authorized Company officer
have signed this Agreement.
EXECUTIVE: COMPANY:
Sonoma National Bank
William P. Gallaher By Deborah A. Meekins
William P. Gallaher
Date April 23, 1996 Title President & CEO
------------------------------------------ ------------------
<PAGE>
EXHIBIT I
TO
DEFERRED FEE AGREEMENT
Deferral Election
I elect to defer fees under my Deferred Fee Agreement with the Company, as
follows:
<TABLE>
<CAPTION>
Amount of Deferral Frequency of Deferral Duration
========================================== ========================================= =========================================
<S> <C> <C>
(Initial and Complete one) (Initial One) (Initial One)
___I elect to defer ____% of ___Beginning of Year ___This Year only
Fees
X I elect to defer x Each fee payment x For (Insert Number of
--- ------ ------- ----------
$ 400 of Fees years
___I elect not to defer Fees
</TABLE>
I understand that I may change the amount, frequency and duration of my
deferrals by filing a new election form with the Company; provided, however,
that any subsequent election will not be effective until the calendar year
following the year in which the new election is received by the Company.
Form of Benefit
I elect to receive benefits under the Agreement in the following form:
_____ Lump sum
x Equal monthly installments for 180 months
I understand that I may not change the form of benefit elected, even if I later
change the amount of my deferrals under the Agreement.
<PAGE>
Beneficiary Designation
I designate the following as beneficiary of benefits under the Deferred Fee
Agreement payable following my death:
Primary: Cynthia Jean Gallaher
Contingent:
Note: To name a trust as beneficiary, please provide the name Or the trustee and
the exact date of the trust agreement.
I understand that I may change these beneficiary designations by filing a new
written designation with the Company. I further understand that the designations
will be automatically revoked if the beneficiary predeceases me, or, if I have
named my spouse as beneficiary, in the event of the dissolution of our marriage.
Signature William P. Gallaher
Date April 23, 1996
Accepted by the Company this 18 day of April, l996.
By Deborah A. Meekins
Title President & CEO
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedle contains summary financial information from the Balance
Sheet, and Statement of Income, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,199
<INT-BEARING-DEPOSITS> 5,249
<FED-FUNDS-SOLD> 7,451
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,121
<INVESTMENTS-CARRYING> 6,670
<INVESTMENTS-MARKET> 121
<LOANS> 141,952
<ALLOWANCE> (1,858)
<TOTAL-ASSETS> 173,374
<DEPOSITS> 159,603
<SHORT-TERM> 0
<LIABILITIES-OTHER> 656
<LONG-TERM> 0
0
0
<COMMON> 7,485
<OTHER-SE> 5,630
<TOTAL-LIABILITIES-AND-EQUITY> 173,374
<INTEREST-LOAN> 7,026
<INTEREST-INVEST> 528
<INTEREST-OTHER> 159
<INTEREST-TOTAL> 7,713
<INTEREST-DEPOSIT> 3,348
<INTEREST-EXPENSE> 3,348
<INTEREST-INCOME-NET> 4,365
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,089
<INCOME-PRETAX> 1,884
<INCOME-PRE-EXTRAORDINARY> 1,884
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,079
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 5.37
<LOANS-NON> 848
<LOANS-PAST> 2,775
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,775
<ALLOWANCE-OPEN> 1,676
<CHARGE-OFFS> 0
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,858
<ALLOWANCE-DOMESTIC> 1,858
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 124
</TABLE>
