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 March 31, 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 April 30,
1996: 1,389,079
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)
March 31, December 31,
1996 1995
----------------------- ------------
<S> <C> <C>
ASSETS
Cash and equivalents:
Cash and due from banks $10,026,000 $11,288,000
Federal funds sold 14,537,000 5,000,000
------------- --------------
Total cash and equivalents 24,563,000 16,288,000
Certificates of deposits in other financial institutions 5,346,000 5,139,000
Investment securities - held to maturity (market
value: 1996 - $5,867,000; 1995 - $10,882,000) 5,868,000 10,879,000
Loans available for sale 18,429,000 14,324,000
Loans receivable, net 114,184,000 115,263,000
Leasehold improvements and equipment, net 776,000 747,000
Other real estate owned 77,000 -
Accrued interest receivable and other assets 4,444,000 4,322,000
--------------- -------------
Total assets $173,687,000 $166,962,000
--------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $160,368,000 $154,221,000
Accrued interest payable and other liabilities 835,000 759,000
---------------- -------------
Total liabilities 161,203,000 154,980,000
---------------- -------------
Shareholders' equity:
Common stock, no par value; authorized, 20,000,000 shares;
shares issued and outstanding, 1,388,579 in 1996 and
1,388,355 in 1995 7,434,000 7,433,000
Retained earnings 5,050,000 4,549,000
-------------- ---------------
Total shareholders' equity 12,484,000 11,982,000
-------------- ---------------
Total liabilities and shareholders' equity $173,687,000 $166,962,000
------------ ---------------
</TABLE>
See accompanying notes
2
<PAGE>
<TABLE>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
------------- ---------
<S> <C> <C>
Interest Income:
Loans $3,476,000 $2,457,000
Certificates of deposits in other financial institutions 80,000 78,000
Federal funds sold and investment securities 280,000 127,000
------------ ------------
Total interest income 3,836,000 2,662,000
Interest expense 1,675,000 1,037,000
---------- -----------
Net interest income before provision for loan losses 2,161,000 1,625,000
Provision for loan losses 90,000 60,000
------------- -------------
Net interest income after provision for loan losses 2,071,000 1,565,000
------------- -------------
Other income:
Service charges on deposits 114,000 90,000
Gain on sale of loans 13,000 261,000
Other 144,000 119,000
------------ ------------
Total other income 271,000 470,000
------------ ------------
Other expenses:
Salaries and employee benefits 789,000 758,000
Occupancy 179,000 181,000
Furniture & equipment 76,000 73,000
Outside customer services 61,000 68,000
Deposit and other insurance 32,000 87,000
Professional fees 50,000 32,000
Advertising & business development 60,000 82,000
Other 213,000 218,000
------------ ------------
Total other expenses 1,460,000 1,499,000
------------ ------------
Income before income taxes 882,000 536,000
Provision for income taxes 381,000 227,000
------------ ------------
Net income $ 501,000 $ 309,000
----------- -----------
Common stock earnings per share data:
Net income $ 0.35 $ 0.23
Average common shares outstanding for
net income per share calculation 1,417,533 1,352,812
</TABLE>
See accompanying notes
3
<PAGE>
<TABLE>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended March 31,
1996 1995
------------ --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 501,000 $ 309,000
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for loan losses 90,000 60,000
Depreciation, amortization and accretion 40,000 25,000
Net (decrease) increase in deferred loan fees and discounts (38,000) 157,000
Loans originated for sale (4,235,000) (8,416,000)
Cost of loans sold 130,000 3,241,000
(Increase) in interest receivable and other assets (122,000) (302,000)
Increase (decrease) in accrued interest payable and
other liabilities 76,000 (124,000)
------------- --------------
Net cash used in operating activities (3,558,000) (5,050,000)
------------- --------------
Cash flows from investing activities:
Purchases of investment securities (4,959,000) (996,000)
Maturities of investment securities 10,000,000 1,000,000
Net (increase) decrease in deposits in other financial
institutions (207,000) 1,191,000
Net decrease (increase) in loans receivable 1,027,000 (4,693,000)
Purchases of leasehold improvements and equipment, net (99,000) (8,000)
Investment in other real estate owned (77,000) -
------------- -------------
Net cash provided by (used in) investing activities 5,685,000 (3,506,000)
------------- -------------
Cash flows from financing activities:
Net increase in deposits 6,147,000 11,970,000
Stock options exercised 1,000 318,000
------------- ------------
Net cash provided by financing activities 6,148,000 12,288,000
---------- -----------
Net increase in cash and cash equivalents 8,275,000 3,732,000
Cash and cash equivalents at beginning of year 16,288,000 17,966,000
------------ ----------
Cash and cash equivalents at beginning of year $24,563,000 $21,698,000
----------- -----------
Other cash flow information:
Interest paid $ 1,714,000 $ 1,027,000
----------- -----------
Income taxes paid $ 190,000 $ 127,000
------------ ------------
See accompanying notes
</TABLE>
4
<PAGE>
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
March 31, 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 March 31, 1996 and the results of operations for
the three 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 months ended March 31, 1996 are not necessarily indicative of the
operating results through December 31, 1996.
Note 2 - Net Income per Common and Common Equivalent Share
Net income per common and common equivalent share is calculated by using the
weighted average number of common shares outstanding 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 $173,687,000 at March 31, 1996 compared to
$166,962,000 at December 31, 1995. Loans available for sale increased $4.1
million while loans held for investment declined one million due to loan
payoffs. Cash and equivalents increased $8.3 million which primarily results
from the maturity of investments which were reinvested in Fed Funds Sold. The
asset growth was funded through an increase in deposits of approximately $6.1
million.
The net income after tax for the first three months of 1996 equalled $501,000
compared to $309,000 for the comparable period of 1995, an increase of 62%. The
increase in net income is directly related to the increased interest margin due
to the growth in average earning assets to $160.1 million for the first quarter
of 1996 from $113.7 million for the first quarter last year.
Net Interest Income
Net interest income of $2,161,000 for the first quarter of 1996 increased 33%
from $1,625,000 for the comparable period last year. The increase in net
interest income resulted from volume increases of $46.4 million in average
earning assets ($34.4 million in average loans outstanding). The net interest
margin equalled 5.47% during the first quarter of 1996. The decline from 5.77%
in the first quarter of 1995 was caused by the higher cost of deposits which
rose from 4.56% to 5.02% while the yield on earning assets increased a lessor
amount to 9.71% in the first quarter of 1996 from 9.49% for the same period last
year.
The Bank is considered asset sensitive and benefits from rate increases since
more of its assets reprice at a faster rate than deposits. The Prime lending
rate was 9% at March 31, 1995 and has declined to 8.25% at March 31,1996. Of the
Bank's loan portfolio (including loans held for sale) totalling $136.1 million
at March 31, 1991, $103.7 million or 76% of the loans are adjustable rate loans
which have not reached a floor or ceiling rate. Approximately $68 million are
prime-based loans, of which $19 million reprice immediately and $45 million
reprice on a quarterly basis. Approximately $52 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 4.93% in March 1995 and
equalled 5.03% in March 1996.
5
<PAGE>
The increase in interest income was partially offset by an increase in interest
expense ($1,037,000 in the first quarter of 1995 versus $1,675,000 in the first
quarter of 1996). The major factor was the increase of $42.4 million in average
interest bearing deposits when comparing the first quarter of 1995 to 1996. The
average cost of interest bearing deposits increased from 4.56% in the first
quarter last year to 5.02% for the same period in 1996. The increase in cost of
deposits was caused by the increase of $34.5 million in average time
certificates in the first quarter over the comparable period last year which
bear higher interest rates (see "Deposits"). The interest rate environment and
competition for deposits have resulted in higher deposit costs.
Other Income
Other income decreased 42% when comparing the first quarter of 1996 to the same
period last year. Gains on sale of Small Business Administration (SBA) loans
equalled $261,000 in the first quarter of 1995 compared to $13,000 in the first
quarter of 1996. During the first quarter of 1996, management decided to retain
SBA guaranteed loans and realize the interest yield rather than sell them for a
one time gain ($3.2 million in guaranteed loan balances sold in the first
quarter of 1995 compared to $130,000 in 1996). Management considered the Bank's
liquidity needs and the anticipated loans and deposit growth during the quarter
as a part of the decision to hold SBA guaranteed loans versus selling them.
While this decision had a negative impact on other income, it had a positive
impact on net interest margin. The SBA guaranteed loans have an established
market and can be converted to a liquid asset quickly. The SBA servicing fees
have increased due to the growth in the portfolio of SBA loans serviced and
equalled $100,000 in the first quarter this year compared to $87,000 for the
same period of 1995.
Service charges during the quarter increased to $114,000 from $90,000 during the
first quarter last year. The increase results from an increase in deposit
customers and revisions to the deposit fees which went into effect during mid
February 1996.
Non-Interest Expenses
During a period of high growth in deposits and loans, the Bank's non-interest
expenses decreased by 2.6% from the first quarter of 1995 to $1,460,000 in the
first quarter of 1996. The Bank's largest expense category (salaries and
benefits) increased 4.1%. The Bank has managed to grow total asset by 30% over
March 31, 1995 without increasing overall staff levels. The increase in
personnel costs resulted from annual salary increases and slightly higher
incentives. Employee benefits costs declined slightly. Occupancy expenses
decreased 1.1%, mainly due to the reduction in SBA loan production offices.
Equipment costs increased 2.7% due to additional computer equipment purchases.
Advertising and marketing declined 27% from last year's level, and varies
significantly based upon the marketing activities (ie: deposit promotions, ten
year anniversary celebration). Professional expenses increased from $32,000 in
the first quarter last year to $50,000 this year. This increase resulted from
legal costs associated with problem loans and the new Other Real Estate Owned in
1996 which has increased from the last year's level (See Allowance for Loan
Losses and Other Real Estate Owned). Other expenses (which includes: stationery
& supplies, telephone, postage, loan expenses, director fees, dues and
subscriptions and automobile costs) decreased 2%. Deposit and other insurance
decreased $55,000 due reduced assessment by the FDIC. The FDIC charged the
minimum fee of $500 during the first quarter of 1996 compared to $60,000 during
the first quarter of last year when the assessment rate was $0.23 per $100 of
insurable deposits. There is no assurance that the current FDIC assessment will
continue at such a low level.
6
<PAGE>
The total non-interest expenses for the SBA lending department for the first
quarter was approximately $273,000 ($143,000 in personnel costs, $36,000 in
occupancy and equipment expenses, $18,000 in marketing/business development)
compared to $327,000 for the first quarter of 1995. The decrease results from
closing two SBA loan production offices and reducing SBA staff levels by 4
positions. Since March 31, 1995, the SBA loan portfolio (serviced portion and
Bank's portion) has increased 33% to $94 million, of which $43 million has been
sold and is being serviced.
Income Taxes
The effective tax rate of 43% for the first quarter of 1996 approximated last
year's rate. The provision for the first quarter of 1996 was $381,000 versus
$227,000 for the same period last year. The increase resulted from the increase
in pre-tax income during the comparable quarters.
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
acceptable liquidity measures in terms of ratios to total assets, deposits,
liabilities and capital.
Cash and due from banks, federal funds sold and certificates of deposit totalled
$29.9 million or 17.2% of total assets at March 31, 1996, compared to $21.4
million or 12.8% of total assets at December 31, 1995. This increase results
from a reduction of 1995 of $5 million in U.S. Treasury investments which was
placed in fed funds sold. Due to the flat yield curve during the first quarter
of 1996 the Bank earned a higher rate in fed funds than it could have on a short
term U.S. Treasury or Agency investment. The Bank pledges $500,000 of its
investment as required for Federal Tax Deposits. The quarter-end level of
liquidity approximates the Bank's liquidity position over the last several
years.
The Bank has several ways of providing additional liquidity. Special deposit
campaigns, which offer slightly higher than market rates, have been successful
in attracting new deposits to the Bank. The Bank also has the option of selling
SBA guaranteed loans. As of March 31, 1996, the Bank held $18.4 million in SBA
guaranteed loans which could be sold if liquidity was needed. Due to the high
yield on loans, management prefers to provide liquidity through increases in
deposits. During the first quarter of 1995, when the Bank experienced high loan
growth in a short period of time, the Bank sold $3.2 million in SBA guaranteed
loans to provide additional liquidity. This compares to $130,000 million in SBA
loan sales for the same period this year when the Bank's liquidity was provided
through deposit growth and loan payoffs.
At March 31, 1996, the Bank had three unused federal funds lines of credit
totalling $9,000,000. The level of fed funds lines may be reduced as a result of
the mergers of our correspondent banks (Bank of California, Union Bank and First
Interstate Bank). We have been informed by our correspondent banks that they
intend to continue the Fed Funds lines. Management believes this amount of
secondary liquidity is adequate to meet any cash demands that may arise.
7
<PAGE>
At present, the Corporation's primary sources of liquidity are from interest on
deposits, 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
Comptroller of the Currency. At March 31, 1996, the Corporation had non-interest
and interest bearing cash balances of $184,000, 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
During the first quarter of 1996, deposits increased 4% to $160.4 million. Both
money market rate deposits and certificates deposits increased during the first
quarter. Certificates of deposits increased from $66.5 million at December 31,
1995 to $68.5 million as of March 31, 1996. Many deposit customers prefer to
hold balances in money market rate accounts which bear rates slightly below one
year certificate of deposits' rates; however, the funds are available for their
use at any time. Deposit rates declined slightly in the first quarter, compared
to year-end, in reaction to rate reductions by the Federal Reserve Bank.
Deposits include $52.9 million in the "Sonoma Investors Reserve" account. The
balances maintained in these accounts have grown slightly in the first quarter.
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. Bank customers
have found that the rate offered on this account has been very attractive and
have maintained funds in this account rather than locking in a specific
maturity. New customers have also found this type of deposit preferable due to
the immediate availability of the funds versus a time certificate bearing a
future maturity. There has been some movement to time deposits; however, the
"Sonoma Investors Reserve" account continues to be a very popular deposit
option.
At the end of March 1996, non-interest bearing deposits equalled $24 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 and $3 million.
At March 31, 1996, certificates of deposits of $100,000 or more equalled $19.2
million or 12.0% of total deposits compared $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 a period of high
loan growth.
8
<PAGE>
Loans
Loans held for investment plus loans available for sale equalled of $136.1
million increased 2% from $133.0 at December 31, 1995. The Bank experienced a
high volume of loan payoff during the first quarter, which offset a portion of
the growth in the loan portfolio. The SBA department continued to experience
strong loan demand, especially in the Arizona market. SBA loans available for
sale increased 29% from $14.3 million to $18.4 million during the first quarter
of 1996.
The Bank continues to emphasize commercial and real estate lending. At March 31,
1996, 41% of the loans held for investment were commercial loans and 57% 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 March 31, 1996, the
Bank had $3,858,000 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 March 31, 1996.
Allowance for Loan Losses
The allowance for loan losses equalled $1,767,000 at March 31, 1996, compared to
$1,676,000 at December 31, 1995. At March 31, 1996, the allowance for loan
losses equalled 1.55% of loans (net of loans available for sale) compared to
1.4% at December 31, 1995. The allowance for loan losses is reviewed on a
monthly basis, based upon 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 with a specific reserve allocation
assigned according to the risk assessment.
At March 31, 1996, there were six loans on non-accrual totalling $378,000. There
was one loan of $4,000 past due 90 days or more and still accruing interest.
Many of these nonaccrual loans are secured by real estate or other property. On
December 31, 1995, there were six loans on non-accrual totalling $398,000, and
there were no loans past due 90 or more days and still accruing interest. At the
end of the first 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 $2.0 million of that total. Additionally, $695,000 of the
total past due 30-89 days is guaranteed by the U.S. Government. The past due
loans in this category with larger balances ($400k-700k) are secured by real
estate.
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 March 31, 1996, the Bank
was considered " well capitalized." The Bank's total risk-based capital ratio
was 10.4%.
The Corporation did not declare or pay a dividend during the first quarter of
1996. In March 1995, the Corporation declared a $0.20 cash dividend to
shareholders of record on April 28, 1995. In September 1995, the Corporation
declared a 5% stock dividend to shareholders of record on October 31, 1995.
9
<PAGE>
SCHEDULES
<TABLE>
LOANS HELD FOR INVESTMENT
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Commercial Loans $48,054,000 $ 47,745,000
Real Estate Loans-Construction 3,858,000 3,556,000
Real Estate Loans-Other 63,522,000 64,713,000
Installment Loans 2,257,000 2,702,000
--------------- ---------------
Total $117,691,000 $118,716,000
---------------- ---------------
</TABLE>
Of the total loans held for investment maturing in more than one year, $28.2
million were at fixed interest rates or had reached the loans' floor or ceiling
rates and $85.2 million were at adjustable interest rates at March 31, 1996. The
loan portfolio has no foreign balances.
<TABLE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<CAPTION>
Quarter Ended
March 31, 1996
<S> <C>
Balance - Beginning of Period $1,676,000
Provision for Loan Losses 90,000
Charge Offs 0
Recoveries 1, 000
--------------
Balance - End of the Period $1,767,000
----------
</TABLE>
There were six loans on non-accrual at March 31, 1996, amounting to $378,000, of
which $140,000 were secured by real estate collateral, and $62,000 was
guaranteed by the U.S. Government.
10
<PAGE>
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.
<TABLE>
<CAPTION>
Over Over Non-rate
Balance Sheet - March 31, 1996 3 Months 1 Year Sensitive
(in thousands) Through through through or Over
3 Months 1 Year 5 Years 5 Years Total
<S> <C> <C> <C> <C> <C>
Assets
Time Deposits-other financial
institutions $2,475 $2,871 $5,346
Fed funds sold 14,537 14,537
Investment securities 5,000 745 $123 5,868
Loans and loans held for sale (gross) 74,364 51,857 $9,397 502 136,120
Non-interest-earning assets (net) 11,816 11,816
------------ ------------ ----------- ------ --------
Total Assets $96,376 $55,473 $9,397 $12,441 $173,687
------- ------- ------- ------- --------
Liabilities & Shareholders Equity
Time Deposits $100,000 and over $4,769 $11,213 $3,228 $19,210
All other interest-bearing deposits 76,364 32,478 7,776 $259 116,877
Non-interest bearing liabilities 25,116 25,116
Shareholders' Equity 12,484 12,484
------------ ----------- ----------- ------- --------
Total Liabilities & Shareholders' Equity $81,133 $43,691 $11,004 $37,859 $173,687
-------- ------- ------- ------- --------
Interest Rate Sensitivity GAP (1) $15,243 $11,782 ($1,607) ($25,418)
------- ------- -------- ---------
Cumulative Interest
Rate Sensitivity GAP $15,243 $27,025 $25,418 $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>
11
<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
None
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)(a) Lease for Bank Premises at 801 Fourth Street, Santa Rosa, California
(filed as Exhibit 10.1 to Amendment No. 1 to the Corporation's S-1 Registration
Statement, filed June 23, 1984, and incorporated herein by this reference).
(b)* Stock Option Plan (filed as Exhibit 10.2 to the Corporation's S-1
Registration Statement, filed May 18, 1984, and incorporated herein by this
reference).
12
<PAGE>
(c) Lease for Bank Premises at 6641 Oakmont Drive, Santa Rosa, California, dated
February 1, 1989 (filed as Exhibit (10)(c) to the Corporation's Annual Report on
Form 10-K for the Fiscal Year ended December 31, 1988 and incorporated herein by
this reference).
(d)* Amendment No. 1 to Stock Option Plan (filed as Exhibit (10)(d) to the
Corporation's Annual Report on Form 10-K for the Fiscal Year ended December 31,
1989 and incorporated herein by this reference).
(e) Lease for Administrative Office at 755 Fourth Street, Santa Rosa,
California, dated January 10, 1990 (filed as Exhibit (10)(e) to the
Corporation's Annual Report on Form 10-K for the Fiscal Year ended December 31,
1989 and incorporated herein by this reference).
(f)* Amendment No. 2 to Stock Option Plan (filed as Exhibit (10)(f) to the
Corporation's Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1991 and incorporated herein by this reference).
(g) Lease for second floor at 755 Fourth Street, Santa Rosa, California, Dated
November 12, 1992 (filed as Exhibit (10)(g) to the Corporation's Annual Report
on Form 10-KSB for the Fiscal Year Ended December 31,1992 and incorporated
herein by this reference).
(h)* Indemnification Agreements between James B. Keegan, Jr. and Northern Empire
Bancshares and Sonoma National Bank (filed as Exhibit (10)(h) to the
Corporation's Annual Report on Form 10-KSB for the Fiscal Year Ended December
31,1992 and incorporated herein by this reference).
(i)* Indemnification Agreements between Dennis R. Hunter and Northern Empire
Bancshares and Sonoma National Bank (filed as Exhibit (10)(i) to the
Corporation's Annual Report on Form 10-KSB for the Fiscal Year Ended December
31,1992 and incorporated herein by this reference).
(j)* Indemnification Agreements between Robert V. Pauley and Northern Empire
Bancshares and Sonoma National Bank (filed as Exhibit (10)(j) to the
Corporation's Annual Report on Form 10-KSB for the Fiscal Year Ended December
31,1992 and incorporated herein by this reference).
(k)* Indemnification Agreements between William E. Geary and Northern Empire
Bancshares and Sonoma National Bank (filed as Exhibit (10)(k) to the
Corporation's Annual Report on Form 10-KSB for the Fiscal Year Ended December
31,1992 and incorporated herein by this reference).
(l)* Indemnification Agreements between Patrick R. Gallaher and Northern Empire
Bancshares and Sonoma National Bank (filed as Exhibit (10)(l) to the
Corporation's Annual Report on Form 10-KSB for the Fiscal Year Ended December
31,1992 and incorporated herein by this reference).
(m)* Indemnification Agreement between William P. Gallaher and Sonoma National
Bank (filed as Exhibit (10)(m) to the Corporation's Annual Report on Form 10-KSB
for the Fiscal Year Ended December 31,1992 and incorporated herein by this
reference).
13
<PAGE>
(n)* Indemnification Agreement between Deborah A. Meekins and Sonoma National
Bank (filed as Exhibit (10)(p) to the Corporation's Annual Report on Form 10-KSB
for the Fiscal Year Ended December 31,1992 and incorporated herein by this
reference).
(o)* Executive Salary Continuation Agreement between Deborah A. Meekins and
Sonoma National Bank (filed as Exhibit (10)(O) to the Corporation's Annual
Report on Form 10-KSB for the Fiscal Year Ended December 31,1993 and
incorporated herein by this reference).
(p)* Executive Salary Continuation Agreement between David F. Titus and Sonoma
National Bank (filed as Exhibit (10)(p) to the Corporation's Annual Report on
Form 10-KSB for the Fiscal Year Ended December 31,1993 and incorporated herein
by this reference).
(q) Lease for premises in Lakeside Village Shopping Center, Windsor, California,
dated March 1,1993 (filed as Exhibit (10.15) to the Corporation's Amendment No.
1 to Form S-2 Registration Statement, File No. 33-60566, filed May 13, 1993 and
incorporated herein by this reference).
(r)* Director's Deferred Compensation Plan between Patrick R. Gallaher and
Sonoma National Bank (filed as Exhibit (10)(r) to the Corporation's Annual
Report on Form 10-KSB for the Fiscal Year Ended December 31, 1994 and
incorporated herein by this reference).
(s)* Director's Deferred Compensation Plan between William P. Gallaher and
Sonoma National Bank (filed as Exhibit (10)(s) to the Corporation's Annual
Report on Form 10-KSB for the Fiscal Year Ended December 31, 1994 and
incorporated herein by this reference).
(t)* Director's Deferred Compensation Plan between James B. Keegan, Jr. and
Sonoma National Bank (filed as Exhibit (10)(t) to the Corporation's Annual
Report on Form 10-KSB for the Fiscal Year Ended December 31, 1994 and
incorporated herein by this reference).
(u)* Director's Deferred Compensation Plan between William E. Geary and Sonoma
National Bank (filed as Exhibit (10)(u) to the Corporation's Annual Report on
Form 10-KSB for the Fiscal Year Ended December 31, 1994 and incorporated herein
by this reference).
(v)* Director's Deferred Compensation Plan between William P. Gallaher and
Sonoma National Bank.
*Management contract or compensation plan or arrangement.
(27)(a) Financial Data Schedule
14
<PAGE>
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: May 13, 1996
/s/James B. Keegan, Jr. /s/Patrick R. Gallaher
- ------------------------------- -----------------------------------
James B. Keegan, Jr. Patrick R. Gallaher
Director & President Director & Chief Accounting Officer
15
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 have 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.
1
<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.
2
<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.
3
<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 the date by which a decision is expected to be made, and may
extend the time for up to an additional ninety-day period.
4
<PAGE>
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.
5
<PAGE>
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 4/23/96 Title President & CEO
6
<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 Fees ___Beginning of Year ___This Year only
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 4/23/96
Accepted by the Company this 18th day of April, l996.
------- -------------
By Deborah A. Meekins
Title President & CEI
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted 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> MAR-31-1996
<CASH> 10,026
<INT-BEARING-DEPOSITS> 5,346
<FED-FUNDS-SOLD> 14,537
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 5,745
<INVESTMENTS-MARKET> 123
<LOANS> 134,380
<ALLOWANCE> 1,767
<TOTAL-ASSETS> 173,687
<DEPOSITS> 160,368
<SHORT-TERM> 0
<LIABILITIES-OTHER> 835
<LONG-TERM> 0
0
0
<COMMON> 7,434
<OTHER-SE> 5,050
<TOTAL-LIABILITIES-AND-EQUITY> 173,687
<INTEREST-LOAN> 3,476
<INTEREST-INVEST> 280
<INTEREST-OTHER> 80
<INTEREST-TOTAL> 3,836
<INTEREST-DEPOSIT> 1,675
<INTEREST-EXPENSE> 1,675
<INTEREST-INCOME-NET> 2,161
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,460
<INCOME-PRETAX> 882
<INCOME-PRE-EXTRAORDINARY> 882
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 501
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 5.47
<LOANS-NON> 378
<LOANS-PAST> 2,627
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,627
<ALLOWANCE-OPEN> 1,676
<CHARGE-OFFS> 0
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,767
<ALLOWANCE-DOMESTIC> 1,767
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 278
</TABLE>
