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 September 30, 1997
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
October 31, 1997: 1,553,069
Transitional Small Business Disclosure Format (check one): Yes No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1997 1996
---- ----
ASSETS
(dollars in thousands)
Cash and equivalents:
Cash and due from banks $ 9,602 $ 11,066
Federal funds sold 26,126 22,724
-------- --------
Total cash and equivalents 35,728 33,790
Certificates of deposits in other
financial institutions 99 3,368
Investment securities 6,252 16,132
Loans receivable, net 195,499 165,681
Leasehold improvements and
equipment, net 598 620
Accrued interest receivable
and other assets 4,908 5,202
-------- --------
Total assets $243,084 $224,793
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $224,852 $209,235
Accrued interest payable
and other liabilities 1,359 1,220
-------- --------
Total liabilities 226,211 210,455
-------- --------
Shareholders' equity:
Preferred stock, no par value;
authorized, 10,000,000 shares;
none issued or outstanding
Common stock, no par value; authorized,
20,000,000 shares; shares issued
and outstanding, 1,553,069 in 1997
and 1,534,470 in 1996 9,766 9,676
Unrealized gain/(loss) on available
for sale securities (1) 0
Retained earnings 7,108 4,662
------- -------
Total shareholders' equity 16,873 14,338
------- -------
Total liabilities and
shareholders' equity $243,084 $224,793
======== ========
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the three and nine months ended September 30, 1997 and 1996
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(dollars in thousands, except
per share data)
Interest income:
Loans $4,981 $3,784 $13,968 $10,810
Certificates of deposits in
other financial institutions 6 64 74 223
Federal funds sold and
investment securities 430 306 1,101 834
------ ------ ------ ------
Total interest income 5,417 4,154 15,143 11,867
Interest expense 2,417 1,862 6,788 5,210
------ ------ ------ ------
Net interest income before
provision for loan losses 3,000 2,292 8,355 6,657
Provision for loan losses 120 90 360 270
------ ------ ------ ------
Net interest income after
provision for loan losses 2,880 2,202 7,995 6,387
Other income:
Service charges on deposits 80 85 260 259
Gain on sale of loans 0 132 130 399
Other 214 169 602 516
------ ------ ------ ------
Total other income 294 386 992 1,174
------ ------ ------ ------
Other expenses:
Salaries and employee benefits 961 833 2,702 2,472
Occupancy 179 178 523 531
Equipment 94 79 261 233
Outside customer services 65 64 188 191
Deposit and other insurance 45 35 131 105
Professional fees 27 31 105 139
Advertising 94 71 268 230
Other 226 225 723 704
------ ------ ------ ------
Total other expenses 1,691 1,516 4,901 4,605
------ ------ ------ ------
Income before income taxes 1,483 1,072 4,086 2,956
Provision for income taxes 580 455 1,636 1,260
------ ------ ------ ------
Net income $ 903 $ 617 $2,450 $1,696
====== ====== ====== ======
Common stock earnings per share $0.56 $0.37 $1.53 $1.08
====== ====== ====== ======
Average common shares outstanding
for net income per share calculation 1,616,106 1,577,455 1,606,420 1,573,668
========= ========= ========= =========
<F/N>
See notes to Consolidated Financial Statements
</TABLE>
<PAGE>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1997 and 1996
(Unaudited)
(dollars in thousands)
1997 1996
Cash flows from operating activities:
Net income $ 2,450 $ 1,079
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses and OREO losses 360 210
Depreciation, amortization and accretion 228 142
Net increase (decrease) in deferred loan
fees and discounts (264) 30
Decrease (increase) in interest
receivable and other assets 294 (331)
Increase (decrease) in accrued interest
payable and other liabilities 139 (103)
------- -------
Net cash provided by in operating activities 3,207 1,027
------- -------
Cash flows from investing activities:
Purchase of investment securities (19,462) (12,035)
Maturities of investment securities 29,341 15,000
Net decrease in deposits in other
financial institutions 3,269 (110)
Net decrease (increase) in loans receivable (29,914) (10,844)
Purchase of leasehold improvements and
equipment, net (206) (114)
------- ------
Net cash used in investing activities (16,972) (8,103)
------- ------
Cash flows from financing activities:
Net increase (decrease) in deposits 15,617 5,382
Payment of cash dividends (3) -
Stock options exercised 89 56
------- -------
Net cash provided by financing activities 15,703 5,438
------- -------
Net increase (decrease) in cash and cash equivalents 1,938 (1,638)
Cash and cash equivalents at beginning of year 33,790 16,288
------- -------
Cash and cash equivalents at end of year $35,728 $14,650
======= =======
Cash Flows- Supplemental Disclosures:
Cash paid during the period for:
Interest on deposits and borrowings $ 6,790 $ 3,396
======= =======
Income taxes $ 1,685 $ 657
======= =======
Non-cash transactions:
Additions to Other Real Estate Owned $ 227 $ 97
======= =======
See notes to Consolidated Financial Statements
<PAGE>
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997
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 (the "Corporation") and Subsidiary at
September 30, 1997 and the results of operations for the three and nine
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 1996 Annual Report on Form 10-KSB. The
results of operations for the three and nine months ended September 30,
1997 are not necessarily indicative of the operating results through
December 31, 1997.
NOTE 2 - NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share, adjusted for stock
dividends, is calculated by using the weighted average number of common
shares outstanding during the period.
NOTE 3 - NEW AND PENDING ACCOUNTING STANDARDS
Effective January 1, 1997, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities". SFAS No. 125 provides guidance for distinguishing
transfers of financial assets that are "sales" from transfers that are
"secured borrowings." This Statement supersedes or amends numerous
existing guidelines and earlier adoptions was not permitted.
Under SFAS No. 125, a transfer of financial assets in which control is
surrendered over those assets is accounted for as a sale to the extent
that consideration other than beneficial interests in the transferred
assets is received in the exchange. Liabilities and derivatives
incurred or obtained by the transfer of financial assets are required to
be measured at fair value, if practicable. Also, any servicing assets
and other retained interests in the transferred assets must be measured
by allocating the previous carrying value between the asset sold and the
interest retained, if any, based on their relative fair values at the
date of transfer. For each servicing contract in existence before
January 1, 1997, previously recognized servicing rights and excess
servicing receivables that do not exceed contractually specified
servicing are required to be combined, net of any previously recognized
servicing obligations under that contract, as a servicing asset or
liability. Previously recognized servicing receivables that exceed
contractually specified servicing fees are required to be reclassified
as interest-only strips receivable.
The Statement also requires an assessment of interest-only strips,
loans, other receivables or retained interests in securitizations. If
these assets can be contractually prepaid or otherwise settled such that
the holder would not recover substantially all of its recorded
investment, the asset will be measured like available-for-sale
securities or trading securities, under SFAS No.115.
The adoption of SFAS No. 125 did not have a material affect on the
Corporation's financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earning per Share."
This statement establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held
common stock. This statement simplifies the standards for computing EPS
previously found in APB Opinion No. 15, "Earnings per Share", and makes
them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
<PAGE>
income statements for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation. This statement is effective for financial statements
issued for periods ending after December 15, 1997; earlier application
is not permitted. Management does not believe that the application of
this statement will have a material impact on the Corporation's
financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components. SFAS
No. 131 specifies revised guideline for determining an entity's
operating segments and the type and level of financial information to be
disclosed. SFAS No. 130 and 131 are effective for financial statements
issued for periods beginning after December 15, 1997. Management does
not believe that the application of these statements will have a
material impact on the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Northern Empire Bancshares 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.
This report contains "forward-looking statements" as defined in section
27A of the Securities Act of 1993, as amended, and section 21E of the
Securities Exchange Act of 1934, as amended, which includes statements
such as projections, plans and objectives and assumptions about the
future, and such forward looking statements are subject to the safe
harbor created by these sections. Many factors could cause the actual
results, amounts or events to differ materially from those the
Corporation expects to achieve or occur, such as changes in competition,
market interest rates, economic conditions and regulations. Although the
Corporation has based its plans and projections on certain assumptions,
there can be no assurances that its assumptions will be correct, or that
its plans and projections can be achieved.
Total consolidated assets equaled $243.1 million at September 30, 1997
compared to $224.8 million at December 31, 1996. At year end, the
Bank's assets had temporarily increased by a large short-term deposit
of $16 million which were invested in liquid assets (Fed Funds and
short-term investments). The majority of this deposit was withdrawn by
January 31, 1997. Without this large deposit the Bank would have grown
$34.3 million since year end, with $18.8 million occurring during the
third quarter. Net loans increased $29.8 million since year end with
$5.7 million occurring in the third quarter. The loan growth was funded
by new deposits, after adjusting for the temporary deposit at year end,
and from liquid assets.
Net income for the first nine months of 1997 equaled $2,450,000 compared
to $1,696,000 for the comparable period last year, an increase of 44%.
The 1997 third quarter's net income after tax of $903,000 increased
46% over the third quarter of 1996 when net income equaled $617,000.
The higher profit resulted from increases in net interest income due to
loan growth (a larger volume of high-yielding earning assets) while
controlling the Bank's operating costs.
Net Interest Income
Net interest income of $3,000,000 for the third quarter of 1997
increased 31% from $2,292,000 for the comparable period last year. This
increase in net interest income resulted from volume increases of $49.8
million in average earning assets for the third quarter of 1997 compared
to the third quarter of 1996. $45.5 million of that increase was in
average loans outstanding, which have the highest yields of interest
earning assets. Average interest bearing deposits for the third quarter
increased $42.4 million over the same period last year.
The net interest margin equaled 5.22% during the third quarter of 1997
compared to an average margin during the third quarter of 1996 of 5.21%
and 5.30% for the year ended December 31, 1996. The yield on average
loans equaled 10.04% in the third quarter of 1997 compared to 9.92%
during the comparable period last year, while the Bank's cost of funds
was 5.02% compared to 4.99% in 1996.
<PAGE>
Yields on SBA loans have been negatively impacted by a 50 basis point
charge applied to the guaranteed portion of Small Business
Administration (SBA) loans booked since October 1995. Since the
guaranteed portion of SBA loans subject to this fee has increased from
$15 million at September 30, 1996 to $33 million as of September 30,
1997, it continues to have a larger impact on interest income. The
mix of loans also impacts the overall yield on loans.
Net interest margin is also affected by the level of loans relative to
deposits. The Bank's ratio of loans-to-deposits increased from an
average of 87.9% in 1996 to 89.9% for the year-to-date and 89.8% during
the third quarter of 1997. The Bank has been experiencing a higher
loan-to-deposit ratio than in the past which has a positive impact on
net interest margin.
The Bank is considered asset sensitive and benefits from rate increases,
since its assets reprice at a faster rate than deposits. The Prime
lending rate increased on March 26,1997 from 8.25% to 8.5% which had a
positive impact on the Bank's interest margin. Of the Bank's loan
portfolio totaling $199.5 million at September 30, 1997, $ 134.1 million
or 67.2% of the loans are adjustable rate loans which have not reached a
floor or ceiling rate. Approximately $89.5 million are prime-based
loans, of which $18.0 million reprice immediately and $71.5
million reprice on a quarterly basis. Approximately $32.7 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 4.84% in September 1996 and equaled 4.90% in September
1997.
Interest expense increased from $1,862,000 in the third quarter of 1996
to $2,417,000 in 1997. The major factor was the increase of $42.4
million in average interest bearing deposits when comparing the third
quarter of 1996 to 1997. The average cost of interest bearing deposits
was 5.02% during the third quarter of 1997 compared to 4.99% in the
third quarter of 1996.
Other Income
Other income is derived primarily from service charges on deposit
accounts, discount brokerage income, earnings on life insurance, SBA
loan servicing, SBA loan sales and sales of other real estate owned.
Other income decreased to $294,000 from $386,000 when comparing the
third quarter of 1997 to the same period last year. There were no sales
of SBA loans during the third quarter of 1997, compared to sales of
$1,626,000 for the third quarter of 1996 which resulted in gains of
$130,000 during the third quarter of 1996. The Bank has been retaining
the majority of the guaranteed portion of SBA loans to realize the
interest yield, rather than selling the guaranteed portion for a one
time gain and then servicing the loan for a fee. Management considers
the Bank's liquidity needs and the estimated loan and deposit growth as
a part of the decision to hold SBA guaranteed loans versus selling them.
There is an established market for SBA guaranteed loans, into which
the Bank can sell qualifying SBA guaranteed loans.
SBA servicing fees, which totaled $102,000 during the quarter,
approximating the third quarter of last year servicing fees of $101,000.
The pool of loans serviced, on which the Bank receives a servicing fee,
equaled $35 million at September 30, 1997. Service fee income has been
averaging $33,000 per month during 1997.
Service charges during the quarter declined to $80,000 from $85,000
during the third quarter last year. Service charges on deposits accounts
include: overdraft charges and fees on analysis customer which both vary
depending upon activity.
In 1997, the Bank owned seven properties which were recorded as other
real estate owned (OREO). During 1997, the Bank has sold six of these
properties realizing book gains totaling $42,000. While the Bank
recorded gains on these sales, there were costs associated with
perfecting title to these properties which were included in loan
expenses in accordance with generally accepted accounting procedures.
The remaining OREO property has a book value of $130,000 which
approximates its market value.
Non-Interest Expenses
Deposits and loans have grown 23% and 26.7% respectively from September
30, 1996 to September 30, 1997; however, the Bank has controlled the
growth of non-interest expenses to 6.4% when comparing 1997 to 1996.
The Bank's largest expense category is salaries and benefits which has
increased 9.3%. The majority of this increase relates to staff additions
in construction lending and annual salary increases.
<PAGE>
Occupancy expenses were relatively unchanged. Equipment costs increased
to $94,000 over $79,000 for the comparable quarter last year. This
increase was due to additional computer equipment and associated
maintenance.
Deposit and other insurance of $45,000 increased $10,000 over the third
quarter of last year. Regulatory assessments and FDIC insurance cost
have increased due to the new Financing Corporation (FICO) assessment
which became effective January 1, 1997 and the increase in total assets
which is the basis of the Office of the Comptroller of the Currency's
assessment. The third quarter assessment equaled $6,000. The FDIC
charged the minimum fee of $500 during the third quarter of 1997. There
is no assurance that the current FDIC assessment will continue at such a
low level. The Bank has also experienced an increase in the cost of in
its business insurance which is related to growth of the Bank and to
additional insurance coverage in specific risk areas.
Advertising and business development costs increased to $94,000 up from
$71,000 the third quarter of 1996. Professional fees declined by $4,000
from the third quarter of 1996 to $27,000. Both of these expense
categories vary significantly based on activity throughout the year.
Other expenses, which includes stationery & supplies, telephone,
postage, loan expenses, director fees, dues and subscriptions
and automobile costs, approximated the third quarter of 1996's expense
level.
Total non-interest expenses for the SBA lending department for the third
quarter were approximately $372,000 ($198,000 in personnel costs,
$44,000 in occupancy and equipment expenses, $20,000 in
marketing/business development) compared to $347,000 for the third
quarter of 1996. Since September 30, 1996, the SBA loan portfolio
(serviced portion and Bank's portion) has increased 20.6% to $123.2
million, of which $35 million has been sold and is being serviced.
Income Taxes
The effective tax rate was 39.1% for the third quarter of 1997. The
provision for the third quarter of 1997 was $580,000 versus $455,000 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.
Cash and due from banks, federal funds sold and certificates of deposit
totaled $35.8 million or 14.7% of total assets at September 30, 1997,
compared to $37.2 million or 16.5% of total assets at December 31, 1996.
The Bank has several ways of providing additional liquidity. Special
deposit campaigns, which offer slightly higher than market rates,
continues to attract new deposits to the Bank. The Bank also has the
option of selling SBA guaranteed loans to provide liquidity. As of
September 30, 1997, the Bank held $41.8 million in SBA guaranteed loans
which could be sold if liquidity was needed.
At September 30, 1997, the Bank had unused federal funds lines of credit
totaling $9,000,000. Management believes this amount of secondary
liquidity is adequate to meet any cash demands that may arise. The
Bank's application to join the Federal Home Loan Bank (FHLB) was
approved on July 25, 1997. FHLB membership permits the Bank to borrow
from the FHLB, holding loans as security. This credit facility is an
additional source of liquidity and also provides a source of lower cost
funding for longer term loans.
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.
<PAGE>
At September 30, 1997, the Corporation had non-interest and interest
bearing cash balances of $149,000, 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 1997, deposits have increased 7.5% to $224.9 million. Deposits at
December 31, 1996 included a large deposit of $16 million which was
placed for approximately 30 days in money market rate accounts. During
1997, deposits would have grown approximately 16.4% if the Bank's
deposits had not included this short term deposit at year end.
Money market rate deposits, excluding the large deposit, grew from $55.1
million at 1996 year end to $66.8 million at September 30, 1997. This
is a limited transaction account which pays a floating rate equal 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 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.
Certificates of deposits increased from $94 million at December 31, 1996
to $113.0 million as of September 30, 1997. The majority of the deposit
growth occurred during the first and third quarters of 1997 when the
Bank offered attractive rates on certificate of deposits. The Bank has
been successful in retaining the majority of funds received through
certificate campaigns.
As of September 30, 1997, non-interest bearing deposits equaled $30.4
million compared to $28.6 million at December 31, 1996 and $30.2 million
on September 30, 1996. The Bank's transaction accounts have significant
changes in daily balances, mainly due to deposits held by title
companies. This type of deposit account has greater balance
fluctuations than other types of deposits based upon their business
activity; however, during the first nine months of 1997 these accounts
have carried average balances in excess of $3 million.
The low interest rate environment over the past few years and the
increased competition in 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, net of discounts and reserves, equaled $195.5 million at
September 30, 1997 compared to $165.7 million at December 31, 1996.
There were no Bankers Acceptances (BA) at September 30, 1997 and
December 31, 1996. The Bank places its excess liquidity in BAs only when
their yields exceed Fed Funds rates. BAs have short maturities and are
viewed as a short term investment by the Bank; however, they are
classified as loans for accounting purposes and by Bank regulators. Net
loans increased $5.6 million in the third quarter of 1997.
The SBA department continued to experience strong loan demand with SBA
loans growing to $88.2 million on September 30, 1997. The Bank has
experienced higher than expected SBA loan payoffs. Many of these
loan payoffs were by borrowers in Arizona, where property values have
been increasing, enabling borrowers to refinance for additional loan
proceeds. In California, the Bank is competing with bank and non-bank
lenders in a mature market. However, the improving California economy
has increased local SBA production. The majority of the Bank's SBA loans
are secured by real estate; however, these loans are reported as
commercial loans. SBA loans have the same underwriting requirements as
the Bank's other loans, they are sometimes for longer terms (7 to 25
years) and have higher loan-to-value ratios than the Bank typically
accepts. The SBA loan program remains subject to budget considerations
at the Federal government level. Major changes to the program could
affect profitability and future SBA loan growth. SBA loans available for
sale increased 78.6% from $23.4 million to $41.8 million when comparing
September 30, 1996 to September 30, 1997.
The Bank continues to emphasize commercial and real estate lending. At
September 30, 1997, 48.6% of the total loans were commercial loans and
50.5% were real estate and construction loans, compared to 50.1%
and 46.6% respectively at December 31, 1996. The Bank has increased the
commercial and commercial real estate portfolio through its reputation,
in Sonoma and Marin Counties, as an experienced business and real
estate lender that facilitates the successful negotiation of complex
commercial loans. The Bank maintains high credit qualifications with
most real estate loans having 60-70% loan to value ratios.
Management is aware of the risk factors in making commercial and real
estate loans and is continually monitoring the local market place. 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.
During the second and third quarters, the Bank expanded its construction
loan programs by promoting residential construction loans primarily in
Sonoma and Marin Counties. Additional staff was added to oversee
this area and construction loan commitments. Construction loan balances
have increased from $1.5 million at December 31, 1996 to $7.7 million at
September 30, 1997. Construction loans equaled 3.9% of the total loan
portfolio at September 30, 1997.
<PAGE>
The Bank has a small portfolio of consumer loans and real estate
construction loans which equaled 0.9% of the total loan portfolio at
September 30, 1997. The Bank offers residential mortgage services on a
limited basis.
Allowance for Loan Losses
The allowance for loan losses equaled $2.2 million at September 30,
1997, compared to $2.0 million at December 31, 1996. At September 30,
1997, the allowance for loan losses equaled 1.45% of loans (net of
guarantees on SBA loans) compared to 1.49% at December 31, 1996. 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 September 30, 1997, there were three loans on non-accrual totaling
$503,000, of which $477,000 was collateralized by real estate and
$344,000 was guaranteed by the SBA. There was one loan for $5,000 past
due 90 days or more and still accruing interest which was secured by
real estate. Loans past due 30 to 89 days totaled $1,490,000 of which
$1,303,000 was secured by real estate. On December 31, 1996, the Bank
had $438,000 in non-accrual loans, and there were no loans past due 90
or more days and still accruing interest.
During the third quarter of 1997, the Bank charged-off loans totaling
$40,000. The Bank has experienced very low credit losses.
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 September 30,
1997, the Bank was considered "well capitalized." However, capital
categories are determined solely for the purpose of applying the capital
regulations of the Federal banking regulators and may not constitute an
accurate representation of the Bank's overall financial condition or
prospects. The Bank's total risk-based capital ratio was 10.65%.
The Corporation declared a 5% stock dividend during the first quarter of
1997 with a record date of March 31, 1997. In May 1996, the Corporation
declared a 5% stock dividend to shareholders of record on June 14, 1996.
<PAGE>
SCHEDULES
GROSS LOANS HELD FOR INVESTMENT
(In thousands)
September 30, 1997 December 31, 1996
Commercial Loans $97,005 $84,969
Real Estate Loans-Construction 7,727 1,533
Real Estate Loans-Other 92,981 81,008
Installment Loans 1,776 2,218
-------- --------
Total $199,489 $169,728
======== ========
Of the total loans due in more than one year, $55.1 million were at
fixed interest rates or had reached the loan's floor or ceiling rates.
$134.1 million were at adjustable interest rates at September 30, 1997.
The loan portfolio has no foreign balances.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(In thousands)
Quarter Ended Nine Months Ended
September 30, 1997 September 30, 1997
Balance - Beginning of Period $2,169 $2,042
Provision for Loan Losses 120 360
Charge Offs 40 222
Recoveries 0 69
------ ------
Balance - End of the Period $2,249 $2,249
====== ======
There were three loans on non-accrual at September 30, 1997, amounting
to $503,000, of which $477,000 were secured by real estate collateral
and $344,000 was guaranteed by the SBA.
<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 - September 30, 1997 3 Months 1 Year Sensitive
Through through through or Over
(in thousands) 3 Months 1 Year 5 Years 5 Years Total
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets
Time Deposits-other financial
institutions $99 $99
Fed funds sold 26,126 26,126
Investment securities 1,497 $1,477 $3,279 6,253
Loans and loans held for sale 102,974 41,991 $15,681 38,843 199,489
Non-interest-earning assets (net) 11,117 11,117
-------- ------- ------- ------- --------
Total Assets $130,696 $43,468 $15,681 $53,239 $243,084
-------- ------- ------- ------- --------
Liabilities & Shareholders Equity
Time Deposits $100,000 and over $15,731 $12,486 $2,440 $30,657
All other interest-bearing
deposits 107,771 43,482 8,295 $4,085 163,633
Non-interest bearing liabilities 31,921 31,921
Shareholders' Equity 16,873 16,873
-------- ------- ------- ------- --------
Total Liabilities &
Shareholders' Equity $123,502 $55,968 $10,735 $52,879 $243,084
-------- ------- ------- ------- --------
Interest Rate Sensitivity GAP (1) $7,194 $(12,500) $4,946 $360
-------- -------- ------- ------
Cumulative Int. Rate
Sensitivity GAP $7,194 $(5,306) $(360) $0
-------- -------- ------- ------
<F/N>
(1) Interest rate sensitivity gap is the difference between interest rate sensitive
assets and interest rate sensitive liabilities within the above time frames.
</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
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).
(27)(a) Financial Data Schedule
b. Reports on Form 8-K
None
<PAGE>
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: November 10, 1997
- -------------------------
/s/ James B. Keegan /s/ Patrick R. Galaher
- ----------------------------- -----------------------------
James B. Keegan Patrick R. Gallaher
President Director & Chief Accounting
Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000746253
<NAME> NORTHERN EMPIRE BANCSHARES
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 9602000
<INT-BEARING-DEPOSITS> 99000
<FED-FUNDS-SOLD> 26126000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3279000
<INVESTMENTS-CARRYING> 6251000
<INVESTMENTS-MARKET> 6253000
<LOANS> 197748000
<ALLOWANCE> 2249000
<TOTAL-ASSETS> 243084000
<DEPOSITS> 224852000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1359000
<LONG-TERM> 0
0
0
<COMMON> 9766000
<OTHER-SE> 7107000
<TOTAL-LIABILITIES-AND-EQUITY> 243084000
<INTEREST-LOAN> 13968000
<INTEREST-INVEST> 1101000
<INTEREST-OTHER> 74000
<INTEREST-TOTAL> 15143000
<INTEREST-DEPOSIT> 6788000
<INTEREST-EXPENSE> 6788000
<INTEREST-INCOME-NET> 8355000
<LOAN-LOSSES> 360000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4901000
<INCOME-PRETAX> 4086000
<INCOME-PRE-EXTRAORDINARY> 4086000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2450000
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.51
<YIELD-ACTUAL> 9.39
<LOANS-NON> 503000
<LOANS-PAST> 5000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2077000
<CHARGE-OFFS> 223000
<RECOVERIES> 69000
<ALLOWANCE-CLOSE> 2249000
<ALLOWANCE-DOMESTIC> 2249000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 481000
</TABLE>
