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, 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 July 31,
1997: 1,553,069
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)
(dollars in thousands)
June 30, December 31,
1997 1996
<S> <C> <C>
ASSETS
Cash and equivalents:
Cash and due from banks $ 9,352 $ 11,066
Federal funds sold 2,486 22,724
----------------- ------------------
Total cash and equivalents 11,838 33,790
Certificates of deposits in other financial institutions 495 3,368
Investment securities 16,819 16,132
Loans receivable, net 189,772 165,681
Leasehold improvements and equipment, net 607 620
Accrued interest receivable and other assets 4,764 5,202
----------------- ------------------
Total assets $ 224,295 $ 224,793
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 207,550 $ 209,235
Accrued interest payable and other liabilities 777 1,220
------------------ -------------------
Total liabilities 208,327 210,455
------------------ --------------------
Commitments and contingencies
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,
1,550,239 in 1997 and 1,534,470 in 1996 9,754 9,676
Unrealized gain on available for sale securities 8 0
Retained earnings 6,206 4,662
------------------ --------------------
Total shareholders' equity 15,968 14,338
------------------ --------------------
Total liabilities and shareholders' equity $ 224,295 $ 224,793
================== ====================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the three and six months ended June 30, 1997 and 1996
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands, except per share data) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest income:
Loans $ 4,668 $ 3,550 $ 8,987 $ 7,026
Certificates of deposits in other financial institutions 27 80 68 159
Federal funds sold and investment securities 319 248 671 528
------------- ------------ ------------ ------------
Total interest income 5,014 3,878 9,726 7,713
Interest expense 2,237 1,673 4,371 3,348
------------- ------------ ------------ ------------
Net interest income before provision for loan losses 2,777 2,205 5,355 4,365
Provision for loan losses 120 90 240 180
------------- ------------ ------------ ------------
Net interest income after provision for loan losses 2,657 2,115 5,115 4,185
------------- ------------ ------------ ------------
Other income:
Service charges on deposits 91 87 180 174
Gain on sale of loans 130 253 130 267
Other 203 176 388 347
------------- ------------ ------------ ------------
Total other income 424 516 698 788
------------- ------------ ------------ ------------
Other expenses:
Salaries and employee benefits 879 850 1,741 1,639
Occupancy 178 174 344 353
Equipment 84 78 167 154
Outside customer services 63 66 123 127
Deposit and other insurance 44 38 86 70
Professional fees 38 58 78 108
Advertising 101 99 174 159
Other 261 266 497 479
------------- ------------ ------------ ------------
Total other expenses 1,648 1,629 3,210 3,089
------------- ------------ ------------ ------------
Income before income taxes 1,433 1,002 2,603 1,884
Provision for income taxes 560 424 1,056 805
------------- ------------ ------------ ------------
Net income $ 873 $ 578 $ 1,547 $1,079
============= ============ ============ ============
Common stock earnings per share $ 0.55 $ 0.37 $ 0.97 $ 0.69
============= ============ ============ ============
Average common shares outstanding for net income per share 1,600,525 1,574,333 1,599,808 1,573,668
calculation
</TABLE>
See notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1997 and 1996
(Unaudited)
(dollars in thousands) 1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,547 $ 1,079
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses and OREO losses 240 210
Depreciation, amortization and accretion 150 142
Net increase (decrease) in deferred loan fees and discounts (112) 30
Decrease (increase) in interest receivable and other assets 438 (331)
Increase (decrease) in accrued interest payable and other liabilities (443) (103)
--------------- --------------
Net cash provided by in operating activities 1,820 1,027
--------------- --------------
Cash flows from investing activities:
Purchase of investment securities (18,375) (12,035)
Maturities of investment securities 17,696 15,000
Net decrease in deposits in other financial institutions 2,873 (110)
Net decrease (increase) in loans receivable (24,219) (10,844)
Purchase of leasehold improvements and equipment, net (137) (114)
--------------- --------------
Net cash used in investing activities (22,162) (8,103)
--------------- --------------
Cash flows from financing activities:
Net increase (decrease) in deposits (1,685) 5,382
Payment of cash dividends (2) -
Stock options exercised 77 56
--------------- --------------
Net cash provided by financing activities (1,610) 5,438
--------------- --------------
Net increase (decrease) in cash and cash equivalents (21,952) (1,638)
Cash and cash equivalents at beginning of year 33,790 16,288
--------------- --------------
Cash and cash equivalents at end of year $ 11,838 $ 14,650
=============== ==============
Cash Flows- Suppliemental Disclosures:
Cash paid during the period for:
Interest on deposits and borrowings $ 4,389 $ 3,396
=============== ==============
Income taxes $ 944 $ 657
=============== ==============
Non-cash transactions:
Additions to Other Real Estate Owned $ 97 $ 97
=============== ==============
</TABLE>
See notes to Consolidated Financial Statements
<PAGE>
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
June 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 June 30, 1997 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 1996 Annual Report on Form 10-KSB. The results of operations for
the three and six months ended June 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
<PAGE>
of primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the 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.
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 $224,295,000 at June 30, 1997 compared to
$224,793,000 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 $15.5 million since year end, with $2.1 million
occurring during the second quarter. Net loans, including loans held for sale
and bankers acceptances, increased $24.1 million since year end with $14 million
occurring in the second 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 six months of 1997 equaled $1,547,000 compared to
$1,079,000 for the comparable period last year, an increase of 43%. The second
quarter's net income after tax of $873,000 increased 51% over the second quarter
of 1996 when net income equaled $578,000. 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 $2,777,000 for the second quarter of 1997 increased 26%
from $2,205,000 for the comparable period last year. This increase in net
interest income resulted from volume increases of $48.9 million in average
earning assets for the second quarter of 1997 compared to the second quarter of
1996. $47.8 million of that increase was in average loans outstanding, which
have the highest yields of interest earning assets. Average interest bearing
deposits for the second quarter increased $44.4 million over the same period
last year.
The net interest margin equaled 5.21% during the second quarter of 1997 compared
to an average margin during 1996 of 5.30%. The yield on average loans equaled
9.93% in the second quarter compared to 10.14% during 1996, while the Bank's
cost of funds was 4.97% compared to 4.96% during 1996. The yield on loans has
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
$16.4 million at June 30, 1996 to $43.6 million as of June 30, 1997, it
continues to have a larger impact on interest income. The mix of loans also
impacts the overall yield on loans. During the second quarter of 1997, there was
significant growth in real estate loans, which have a lower yield than other
types of loans. In addition, the Bank invested excess liquidity in Bankers
Acceptances which had an average yield of 5.64% during the second quarter of
1997. Bankers Acceptances are classified as loans; and therefore, affect the
yield calculation. There were no Banker Acceptances held during the second
quarter of 1996.
<PAGE>
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 90.0% for the year to date and 91.4% during the second quarter of 1997. The
Bank has been experiencing a higher loan-to-deposit ratio than in the past which
has a positive impact on profits.
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 has a positive impact on the
Bank's interest margin. Of the Bank's loan portfolio totaling $193.8 million at
June 30, 1997, $ 127.8 million or 65.9% of the loans are adjustable rate loans
which have not reached a floor or ceiling rate. Approximately $94.9 million are
prime-based loans, of which $22.0 million reprice immediately and $68.9 million
reprice on a quarterly basis. Approximately $31.2 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 4.82% in June 1996 and
equaled 4.86% in June 1997.
Interest expense increased from $1,673,000 in the second quarter of 1996 to
$2,237,000 in 1997. The major factor was the increase of $44.4 million in
average interest bearing deposits when comparing the second quarter of 1996 to
1997. The average cost of interest bearing deposits was 4.97% during the second
quarter of 1997 compared to 4.92% in the second 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
$424,000 from $516,000 when comparing the second quarter of 1997 to the same
period last year. This decline resulted from fewer SBA loan sales occurring in
1997 compared to the second quarter of 1996.
Service charges during the quarter increased to $91,000 from $87,000 during the
second quarter last year. This increase results primarily from growth in
transaction accounts and deposit customers on analysis.
There were $1,454,000 in sales of SBA loans during the second quarter of 1997,
compared to sales of $2,540,000 for the second quarter of 1996. These sales
resulted in gains of $130,000 during the second quarter of 1997 compared to
$253,000 for the same period last year. 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 loans 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 which the Bank can access to sell qualifying SBA guaranteed
loans.
SBA servicing fees, which totaled $103,000 during the quarter, increasing from
$65,000 for the same period of 1996. The pool of loans serviced, on which the
Bank receives a servicing fee, equaled $38.9 million.
Service fee income has been averaging $35,000 per month during 1997.
In 1997, the Bank owned six properties which were recorded as other real estate
owned (OREO). During 1997, the Bank has sold four of these properties realizing
book gains totaling $23,000. While the Bank recorded gains on these sales, there
were cost associated with perfecting title to these properties which were
included in loan expenses in accordance with generally accepted accounting
procedures. There were no sales of OREO in the first half of 1996.
Non-Interest Expenses
Deposits and loans have grown 30% and 35% respectively from June 30, 1996 to
June 30, 1997; however, the Bank has controlled the growth of non-interest
expenses to 1.2% when comparing the second quarter of 1997 to the second quarter
of 1996. The Bank's largest expense category is salaries and benefits. This
category increased 3.4% due to annual salary increases and four staff additions
since June 30, 1996.
<PAGE>
Occupancy expenses increased 2.2%, which resulted from rent adjustment and
increasing cost of building maintenance. Equipment costs increased to $84,000
over $78,000 for the comparable quarter last year. This increase was due to
additional computer equipment and associated maintenance.
Deposit and other insurance of $44,000 increased $6,000 over the second quarter
of last year. Regulatory assessments and FDIC insurance cost grew $9,000 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 FDIC charged the minimum fee of
$500 during the second quarter of 1997. There is no assurance that the current
FDIC assessment will continue at such a low level.
Advertising and business development costs increased to $101,000 up from $99,000
the second quarter of 1996. Professional fees declined by $20,000 from the
second quarter of 1996 to $38,000. 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 second
quarter of 1996's expense level.
Total non-interest expenses for the SBA lending department for the second
quarter was approximately $380,000 ($221,000 in personnel costs, $43,000 in
occupancy and equipment expenses, $30,000 in marketing/business development)
compared to $384,000 for the second quarter of 1996. Since June 30, 1996, the
SBA loan portfolio (serviced portion and Bank's portion) has increased 23.9% to
$120.9 million, of which $38.9 million has been sold and is being serviced.
Income Taxes
The effective tax rate was 39.1% for the second quarter of 1997. The provision
for the second quarter of 1996 was $560,000 versus $424,000 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
$12.3 million or 5.5% of total assets at June 30, 1997, compared to $37.2
million or 16.5% of total assets at December 31, 1996. Liquid assets were higher
than normal at year end due to a large short-term deposit which was received at
the end of the year.
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 June 30, 1997, the Bank held $38.9 million in
SBA guaranteed loans which could be sold if liquidity was needed.
At June 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. This will allow the
Bank to borrow funds from the FHLB as a source of additional liquidity and to
provide 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.
At June 30, 1997, the Corporation had non-interest and interest bearing cash
balances of $71,000, which management believes is adequate to meet the
Corporation's operational expenses.
<PAGE>
The Corporation and the Bank do not engage in hedging transactions (interest
rate futures, caps, swap agreements, etc.).
Deposits
During the first two quarters of 1997, deposits decreased 0.8% to $207.5
million. Deposits at December 31,1996 included a large deposit of $16 million
which was on deposit for approximately 30 days in money market rate accounts.
During 1997, deposits would have grown approximately 7.4% 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 year end to $60.4 million at June 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
$105.1 million as of June 30, 1997. The majority of the deposit growth occurred
during the first quarter of 1997 when the Bank offered an attractive rate on a
nine month certificate. The Bank has been successful in retaining the majority
of funds received through certificate campaigns.
As of June 30, 1997, non-interest bearing deposits equaled $26.7 million
compared to $28.6 million at December 31, 1996 and $23.6 million on June 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, they carry average balances in excess of $3
million.
The low 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, net of discounts and reserves, equaled $189.8 million at June 30, 1997
compared to $165.7 million at December 31, 1996. $2 million in Bankers
Acceptances (BA) at June 30, 1997, compared to no investment in BAs at 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. Excluding the BAs, net loans increased $18
million in the second quarter of 1997.
The SBA department continued to experience strong loan demand, especially in the
Arizona market, with SBA loans growing to $82.1 million on June 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
87% from $20.7 million to $38.7 million when comparing June 30, 1996 to June 30,
1997.
The Bank continues to emphasize commercial and real estate lending. At June 30,
1997, 49.3% of the loans held for investment were commercial loans and 49.8%
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
<PAGE>
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 quarter, the Bank expanded its construction loan programs by
promoting residential construction loans primarily in Sonoma and Marin Counties.
Additional staff has been added to oversee this area and construction loan
commitments and outstanding loan balances have increased from $2.1 million at
March 31, 1997 to $4.5 million at June 30, 1997. Construction loans equaled 2.3%
of the total loan portfolio at June 30, 1997.
The Bank has a small portfolio of consumer loans and real estate construction
loans which equaled 0.8% of the total loan portfolio at June 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 June 30, 1997, compared to
$2.0 million at December 31, 1996. At June 30, 1997, the allowance for loan
losses equaled 1.4% of loans (net of loans available for sale and bankers
acceptances) compared to 1.5% 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 June 30, 1997, there were two loans on non-accrual totaling $117,000 with
both nonaccrual loans collateralized by real estate and $105,000 was guaranteed
by the SBA. There was one loan for $123,000 past due 90 days or more and still
accruing interest which was secured by real estate. Loans past due 30 to 89 days
totaled $1,290,000 of which $1,219,00 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 second quarter of 1997, the Bank charged-off loans totaling $9,000
and received $69,000 in recoveries on previous charge-offs. 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 June 30, 1997, the Bank was
considered "well capitalized." The Bank's total risk-based capital ratio was
10.4%.
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
<TABLE>
<CAPTION>
LOANS HELD FOR INVESTMENT
(In thousands)
June 30, 1997 December 31, 1996
<S> <C> <C>
Commercial Loans $ 95,654 $ 84,969
Real Estate Loans-Construction 4,525 1,533
Real Estate Loans-Other 92,039 81,008
Installment Loans 1,616 2,218
Total $193,834 $169,728
</TABLE>
Of the total loans due in more than one year, $66.0 million were at fixed
interest rates or had reached the loan's floor or ceiling rates. $127.8 million
were at adjustable interest rates at June 30, 1997. The loan portfolio has no
foreign balances.
<TABLE>
<CAPTION>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(In thousands)
Quarter Ended Six Months Ended
June 30, 1997 June 30, 1997
<S> <C> <C>
Balance - Beginning of Period $1,989 $2,042
Provision for Loan Losses 120 240
Charge Offs 9 182
Recoveries 69 69
Balance - End of the Period $2,169 $2,169
</TABLE>
There were two loans on non-accrual at June 30, 1997, amounting to $117,000, of
which $117,000 were secured by real estate collateral.
<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 - June 30, 1997 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 $ 396 $ 99 $ 495
Fed funds sold 2,486 2,486
Investment securities 11,969 2,933 $ 777 $ 1,140 16,819
Loans and loans held for sale 96,508 41,753 16,389 39,184 193,834
Non-interest-earning assets (net) 10,661 10,661
Total Assets $111,359 $ 44,785 $17,166 $ 50,985 $224,295
Liabilities & Shareholders Equity
Time Deposits $100,000 and over $ 6,892 $ 18,967 $ 2,258 $ 28,117
All other interest-bearing deposits 91,795 53,914 6,976 152,685
Non-interest bearing liabilities $ 27,525 27,525
Shareholders' Equity 15,968 15,968
Total Liabilities & Shareholders'
Equity $ 98,687 $ 72,881 $ 9,234 $ 43,493 $224,295
Interest Rate Sensitivity GAP (1) $ 12,672 ($28,096) $ 7,932 $ 7,492
Cumulative Int. Rate Sensitivity
GAP $ 12,672 ($15,424) $ 7,492 $ 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 20, 1997.
The following candiates received the votes indicated.
<TABLE>
<CAPTION>
For Against Withheld
<S> <C> <C> <C>
Clement C. Carinalli 988,636 0 4,937
Patrick R. Gallaher 988,636 0 4,937
William P. Gallaher 988,636 0 4,937
William E. Geary 988,636 0 4,937
James B. Keegan, Jr. 988,636 0 4,937
Dennis R. Hunter 988,636 0 4,937
Robert V. Pauley 988,058 0 5,515
</TABLE>
All candidates were re-elected. No other matters were voted on at the 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).
(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: August 5, 1997
/s/Dennis R. Hunter /s/Patrick R. Gallaher
Dennis R. Hunter Patrick R. Gallaher
Chairman of the Board Director & Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,352
<INT-BEARING-DEPOSITS> 49
<FED-FUNDS-SOLD> 2,486
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,911
<INVESTMENTS-CARRYING> 16,819
<INVESTMENTS-MARKET> 16,824
<LOANS> 191,942
<ALLOWANCE> 2,169
<TOTAL-ASSETS> 224,295
<DEPOSITS> 207,550
<SHORT-TERM> 0
<LIABILITIES-OTHER> 777
<LONG-TERM> 0
0
0
<COMMON> 9,754
<OTHER-SE> 6,214
<TOTAL-LIABILITIES-AND-EQUITY> 224,295
<INTEREST-LOAN> 8,987
<INTEREST-INVEST> 671
<INTEREST-OTHER> 68
<INTEREST-TOTAL> 9,726
<INTEREST-DEPOSIT> 4,371
<INTEREST-EXPENSE> 4,371
<INTEREST-INCOME-NET> 5,355
<LOAN-LOSSES> 240
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,210
<INCOME-PRETAX> 2,603
<INCOME-PRE-EXTRAORDINARY> 2,603
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,547
<EPS-PRIMARY> .97
<EPS-DILUTED> .95
<YIELD-ACTUAL> 9.37
<LOANS-NON> 117
<LOANS-PAST> 1,418
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,535
<ALLOWANCE-OPEN> 2,042
<CHARGE-OFFS> 182
<RECOVERIES> 69
<ALLOWANCE-CLOSE> 2,169
<ALLOWANCE-DOMESTIC> 2,169
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 424
</TABLE>
