FORM 10-QSB
U.S. 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, 1999
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 small business issuer 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)
(707)579-2265
---------------
(Issuer's telephone number)
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Check 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 past 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
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Title of class: Common Stock, no par value Outstanding shares as of
July 31, 1999: 3,559,763
Transitional Small Business Disclosure Format (check one):
Yes No X
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
ASSETS June 30, December 31,
1999 1998
Cash and equivalents:
Cash and due from banks $ 12,031 $ 9,613
Federal funds sold 21,165 29,720
Total cash and equivalents 33,196 39,333
Investment securities
Held-to-maturity 0 0
Available-for-sale 2,981 7,005
Restricted 1,261 1,731
Loans receivable, net 302,648 267,029
Leasehold improvements and equipment, net 775 859
Accrued interest receivable and other assets 6,853 6,167
-------- --------
Total assets $347,714 $322,124
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $318,731 $295,969
Accrued interest payable and
other liabilities 1,516 1,675
FHLB Advances 1,861 1,872
-------- --------
Total liabilities 322,108 299,516
-------- --------
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,
3,559,763 in 1999
and 3,468,049 in 1998 15,559 12,365
Unrealized gain (loss) on available
for sale securities (11) 4
Retained earnings 10,058 10,239
-------- --------
Total shareholders' equity 25,606 22,608
-------- --------
Total liabilities and shareholders' equity $347,714 $322,124
======== ========
See Notes to Consolidated Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the three and six months ended June 30, 1999 and 1998
(Unaudited)
(dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Interest income:
Loans $6,820 $5,724 $13,193 $11,087
Federal funds sold and
investment securities 306 389 692 772
------ ------- ------- -------
Total interest income 7,126 6,113 13,885 11,859
Interest expense 2,946 2,683 5,817 5,238
------ ------- ------- -------
Net interest income before
provision for loan losses 4,180 3,430 8,068 6,621
Provision for loan losses 200 120 320 240
------ ------ ------- --------
Net interest income after
provision for loan losses 3,980 3,310 7,748 6,381
------ ------ ------- --------
Other income:
Service charges on deposits 116 87 235 176
Gain on sale of loans 184 134 320 332
Other 176 190 351 359
------ ------ ------- -------
Total other income 476 411 906 867
------ ------ ------- -------
Other expenses:
Salaries and employee
benefits 1,114 1,046 2,277 2,043
Occupancy 195 186 383 365
Equipment 133 115 246 228
Advertising and business
development 108 89 193 164
Outside customer services 89 59 174 123
Director and shareholder
expenses 79 80 150 131
Deposit and other insurance 53 48 105 94
Professional fees 41 32 65 79
Other 232 185 427 369
------ ------ ------- -------
Total other expenses 2,044 1,840 4,020 3,596
------ ------ ------- -------
Income before income taxes 2,412 1,881 4,634 3,652
Provision for income taxes 976 741 1,870 1,466
------ ------ ------- -------
Net income $1,436 $1,140 $2,764 $2,186
====== ====== ======= =======
Earnings per common share $0.41 $0.33 $0.79 $0.63
====== ====== ======= =======
Earnings per common share
assuming dilution $ 0.38 $ 0.32 $ 0.75 $0.61
====== ====== ======= =======
See notes to Consolidated Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1999 and 1998
(Unaudited)
(dollars in thousands) 1999 1998
Cash flows from operating activities:
Net income $ 2,764 $ 2,186
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses and OREO losses 320 240
Depreciation, amortization and accretion 178 178
Net increase (decrease) in deferred loan
fees and discounts 385 173
Decrease (increase) in interest receivable
and other assets (403) (368)
Increase (decrease) in accrued interest
payable and other liabilities ( 170) (79)
------- -------
Net cash provided by in
operating activities 3,074 2,330
------- -------
Cash flows from investing activities:
Purchase of: Available for sale securities 0 (2,018)
Restricted securities (43) (45)
Maturities of: Held to maturity securities 0 1,500
Available for sale securities 4,010 2,474
Restricted securities 512 0
Net decrease (increase) in loans receivable (36,607) (30,154)
Purchase of leasehold improvements and
equipment, net (94) (313)
------- -------
Net cash used in investing activities (32,222) (28,556)
------- -------
Cash flows from financing activities:
Net increase (decrease) in deposits 22,762 46,253
Payment of cash dividends (4) (5)
Stock options exercised 253 114
------- -------
Net cash provided by financing activities 23,011 46,362
------- -------
Net increase (decrease) in cash and
cash equivalents (6,137) 20,136
Cash and cash equivalents at beginning of year 39,333 16,182
------- -------
Cash and cash equivalents at end of period $33,196 $36,318
======= =======
Other cash flow information
Interest paid $ 5,834 $ 5,176
Income taxes paid $ 2,042 $ 1,725
Additions to other real estate owned $ 238 $ 0
See notes to Consolidated Financial Statements
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
June 30, 1999
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, 1999 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 1998 Annual Report on Form 10-KSB. The
results of operations for the three and six months ended June 30, 1999
are not necessarily indicative of the operating results through December
31, 1999.
Note 2 - Net Income per Common and Common Equivalent Share
Earnings per share (EPS) are shown in accordance with SFAS No. 128
"Earnings per Share" which was effective for fiscal years ended after
December 15, 1998 and requires restatement of prior period EPS. Basic
EPS is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding during the
period. Diluted EPS is computed by dividing diluted income available to
shareholders by the weighted average number of common shares and common
equivalent shares outstanding which include dilutive stock options. The
computation of common stock equivalent shares is based on the weighted
average market price of the Bank's common stock throughout the period.
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding - Basic 3,543,604 3,467,402 3,503,297 3,458,633
Effect of dilutive securities:
Stock options 217,038 115,114 203,356 114,947
Weighted average number of common
shares outstanding - diluted 3,760,722 3,582,516 3,706,653 3,573,580
Net income $1,436,000 $1,140,000 $2,764,000 $2,186,000
Basic earnings per share $0.41 $0.33 $0.79 $0.63
Diluted earnings per share $0.38 $0.32 $0.75 $0.61
</TABLE>
Note 3 - New and Pending Accounting Standards
See the Corporation's 1998 Annual Report on Form 10-KSB for a discussion
of new and pending accounting standards.
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 1933, 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 $347,714,000 at June 30, 1999 compared
to $322,124,000 at December 31, 1998. Cash and cash equivalents
decreased $6.1 million since year end. Net loans increased $35.6 million
since year end with $23.1 million occurring in the second quarter.
Net income for the first six months of 1999 equaled $2,764,000 compared
to $2,186,000 for the comparable period last year, an increase of 26.4%.
The second quarter's net income of $1,436,000 increased 26.0% over the
second quarter of 1998 when net income equaled $1,140,000. The higher
profit resulted from increases in net interest income due to loan
growth (a larger volume of higher yielding earning assets).
Net Interest Income
Net interest income of $4,180,000 for the second quarter of 1999
increased 21.9% from $3,430,000 for the comparable period last year.
This increase in net interest income resulted from volume increases of
$64.4 million in average earning assets for the second quarter of
1999 compared to the second quarter of 1998. Average loans outstanding
increased $66.7 million over the second quarter of 1998 while
investments and fed funds sold declined $2.3 million. Average interest
bearing deposits for the second quarter increased $45.0 million over the
same period last year.
The net interest margin equaled 5.18% during the second quarter of 1999
compared to an average margin for the year of 1998 of 5.23%. The yield
on average loans equaled 9.19% in the second quarter compared to 9.85%
for the year of 1998. This decline was caused by the reduction in prime
rates during September, October and November of 1998. The Bank's cost
of funds decreased from 4.89% for 1998 to 4.49% during the second
quarter of 1999.
Several factors impact the Bank's interest margin. The mix of loans
influences the overall yield on loans. During the second quarter of
1999, there was significant growth in all loan categories. The increase
of $9.4 in average construction loan balances had a more favorable
effect since that loan category has the highest loan yield. 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 91.8% in 1998 to 96.9% during the second quarter of 1999
which had 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 was 8.5% from March 26, 1997 where it remained until
September 30, 1998 when rates started to decline, falling to 7.75%
on November 18, 1998. On July 1, 1999 the prime lending rate was
increased to 8.00%. Of the Bank's loan portfolio totaling $308.4 million
at June 30, 1999, $217.1 million or 70.4% of the loans are adjustable
rate loans which have not reached a floor or ceiling rate. Approximately
$114.3 million are prime-based loans, of which $20.7 million reprice
immediately and $92.3 million reprice on a quarterly basis.
Approximately $122.2 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 4.48% in
June 1999 and equaled 4.88% in June 1998.
Interest expense increased from $2,683,000 in the second quarter of 1998
to $2,946,000 in 1999. The major factor was the increase of $45.0
million in average interest bearing deposits when comparing the second
quarter of 1998 to 1999. The average cost of interest bearing deposits
decreased from 4.98% to 4.49% when comparing the second quarter of last
year to the second quarter of this year.
Other Income
Other income is derived primarily from service charges on deposit
accounts, earnings on life insurance, SBA loan servicing, SBA loan sales
and sales of other real estate owned. Other income increased to
$476,000 from $411,000 when comparing the second quarter of 1999 to the
same period last year.
Service charges on deposit accounts increased from $87,000 during the
second quarter of last year to $116,000 during the second quarter of
this year. This fluctuation is not unusual since service charges vary
depending on the services to customer and earnings credits provided from
balances maintained by analysis customers.
In the second quarter of this year, the Bank sold the guaranteed portion
of SBA loans totaling $3.8 million and recognized gains on those sales
of $184,000. During the second quarter of last year, the Bank sold the
guaranteed portion of SBA loans totaling $1.5 million and the Bank
recognized gains on those sales of $134,000. 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 servicing fees. Management considers the Bank's liquidity
needs and anticipates loan and deposit growth as a part of the decision
to hold SBA guaranteed loans versus selling them.
SBA servicing fees, which totaled $70,000 during the second quarter of
1999, decreasing from $83,000 for the same period of 1998. This change
reflects the decrease in the pool of loans serviced, on which the Bank
receives a servicing fee. The serviced portfolio equaled $26.7 at June
30, 1999 compared to $30.9 million at the end of the second quarter of
1998.
There were no sales of other real estate owned (OREO) during the first
six months of 1999 or 1998.
Non-Interest Expenses
The Bank's non-interest expenses increased from $1,840,000 in the second
quarter of last year to $2,044,000 for the second quarter of 1999. This
increase was anticipated since the Bank has continued to grow at a rapid
rate.
The Bank's largest expense category is salaries and benefits which
increased 6.5% from $1,046,000 to $1,114,000. A new branch location was
opened in October 1998 which added five new staff positions. Loan and
deposit growth has resulted in higher incentive payments over the second
quarter of 1998. Personnel costs were also affected by annual salary
increases and changes in benefit costs.
Occupancy expenses increased 4.8%, mainly due to the new branch and to
the loan department's move to larger facilities in June 1998. Equipment
costs increased 15.6% over the comparable quarter last year due. The
Bank continues to upgrade computer equipment and operations. The
use of personal computers continues to expand as the network has been
implemented throughout the Bank. In addition, the Bank has incurred
additional costs associated with the Bank's Year 2000 preparation.
Equipment costs are expected to continue to increase during 1999.
Deposit and other insurance of $53,000 includes an increase of $5,000
over the second quarter of last year. Regulatory assessments and FDIC
insurance cost grew due to the increase in deposit assessment base for
Financing Corporation (FICO) assessment which became effective
January 1, 1997. There is no assurance that the current FDIC assessment
will continue at such a low level. Other insurance costs increased due
to Bank growth and additions to the Bank's insurance coverage which
resulted in higher premiums.
Advertising and business development costs, which vary depending on loan
and deposit promotions, increased to $108,000 from $89,000 in the second
quarter of 1998. Professional fees increased by $9,000 from the second
quarter of 1998 to $41,000. Both of these expense categories vary
significantly based on activity throughout the year. Outside customer
services increased due to new customers using the Bank's analysis system
which added expense charges. Other expenses, which includes stationery
& supplies, telephone, postage, loan expenses, dues and subscriptions
and automobile costs, have increased due to Bank growth.
Total non-interest expenses for the SBA lending department for the
second quarter was approximately $412,000 ($224,000 in personnel costs,
$61,000 in occupancy and equipment expenses, $25,000 in
marketing/business development) compared to $442,000 for the second
quarter of 1998. At June 30, 1999, the SBA loan portfolio (serviced
portion and Bank's portion) equaled $143.1 million, of which $26.7
million has been sold and is being serviced.
Income Taxes
The effective tax rate was 40.5% for the second quarter of 1999. The
provision for the second quarter of 1999 was $976,000 versus $741,000
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 and federal funds sold totaled $33.2 million or
9.5% of total assets at June 30, 1998, compared to $39.3 million or
12.2% of total assets at December 31, 1998. Liquid assets were lower
than normal at June 30, 1999 due to the rapid growth in loans during
the second quarter. The Bank has been and continues to offer special
time deposits at slightly higher than market rates to attract new
deposits. The Bank also sold SBA loans during the second quarter. In
addition, the Bank is in the process of participating approximately $3
million in commercial loans with another financial institution.
The Bank has several ways of providing additional liquidity. Special
deposit campaigns, which offer slightly higher than market rates,
continue 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, 1999, the Bank held $57.9 million in the guaranteed portion of SBA
loans which could be sold if liquidity was needed.
At June 30, 1999, the Bank had unused federal funds lines of credit
totaling $9,000,000. The Bank also has a credit line with the Federal
Home Loan Bank which is based upon the value of collateral (investments
and loans). Management believes this amount of secondary liquidity
is adequate to meet any cash demands that may arise.
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, 1999, the Corporation had non-interest and interest bearing
cash balances of $412,000, 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 second quarter of 1999 total deposits increased by $12.5
million to $318.7 million at June 30, 1999.
Money market rate deposits equaled $82.2 million at June 30, 1999. 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 $146.6 million at December 31,
1998 to $167.7 million as of June 30, 1999. The Bank has increased
certificates of deposit by offering attractive rates on certificates for
specific terms. The Bank has been successful in retaining the majority
of funds received through certificate campaigns.
As of June 30, 1999, non-interest bearing deposits equaled $48.7 million
compared to $42.4 million at December 31, 1998 and $36.0 million on June
30, 1998. 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.
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 $302.6 million at June 30,
1999 compared to $267.0 million at December 31, 1998, increasing 13.3%.
The SBA department continues to grow. SBA loans (gross loan which
includes the portions which is guaranteed), net of loans sold and
payoffs, increased $2.2 million during the second quarter to $89.7
million on June 30, 1999. 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. The guaranteed portion of SBA
loans currently held by the Bank but which could be sold in the
secondary market increased from $54.2 million to $57.9 million when
comparing June 30, 1998 to June 30, 1999.
The Bank continues to emphasize commercial and real estate lending. At
June 30, 1999, 39.4% of the loans held for investment were commercial
loans and 60.1% were real estate and construction loans, compared to
43.5% and 55.9% respectively at December 31, 1998. 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 quarter of 1997, the Bank added a residential
construction loan group. As a result, construction loan balances have
increased from $6.1 million at June 30, 1997 to $17.8 million at June
30, 1998 to $26.3 million at June 30, 1999. Due to the shorter life of
construction loans, the Bank does not expect this rate of growth to
continue. The Bank offers residential mortgages on a limited basis.
The Bank has a small portfolio of consumer loans which equaled 0.6% of
the total loan portfolio at June 30, 1999.
Allowance for Loan Losses
The allowance for loan losses equaled $3.3 million at June 30, 1999,
compared to $3.0 million at December 31, 1998. At June 30, 1999, the
allowance for loan losses equaled 1.3% of loans, net of the guaranteed
portion of SBA loans . 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, 1999, there was one loan on non-accrual for $24,000 which
was collateralized by real estate and $22,000 of which was guaranteed by
the SBA. There was one loan totaling $74,000 which was past due 90 days
or more and still accruing interest. That loan was secured by a time
deposit for $74,000. Loans past due 30 to 89 days totaled $4,202,000 of
which $1,907,000 was secured by real estate and $919,000 was guaranteed
by the SBA. On December 31, 1998, the Bank had $62,000 in non-accrual
loans, and no loans past due 90 or more days and still accruing
interest.
During the second quarter there were $4,000 in loan charge offs and a
total of $19,000 in charge offs for the year to date. There were no
loans charged off and no loan recoveries during 1998. The Bank continues
to have a low charge off experience compared to industry standards.
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,
1999, the Bank was considered "well capitalized." The total risk-
based capital ratios were 10.6% for the Bank and 10.8% for the
Corporation.
The Corporation declared a 5% stock dividend on April 6, 1999 with a
record date of May 18, 1999. The financial statements have been
adjusted to reflect the impact of this stock dividend.
Year 2000
The Bank has an ongoing program designed to ensure that its operational
and financial systems will not be adversely affected by year 2000
computer programming problems. The Bank performs no in-house computer
programming and its computer systems and programs are designed and
supported by companies specifically in the business of providing
such products and services. The Bank's plan includes: evaluating
existing hardware, software, vaults, alarm systems, communication
systems and other electrical devices; testing critical application
programs and systems, both internally and externally; establishing a
contingency plan and upgrading hardware and software as necessary. The
Bank has developed a Customer Awareness Plan to monitor and guide
relationships with depositors and borrowers. A Material Customer plan
has been implemented to assess the Y2K readiness among larger depositors
and borrowers.
The initial phase was to assess and identify all internal business
processes requiring modification and to develop renovation plans as
needed. This phase was largely completed in mid-1998. The second phase
was to begin testing critical systems by simulating year 2000 data
conditions. The Bank implemented a formal testing plan, which set
forth the specific testing methodology guidelines and types of testing
to be used, and set dates for which accuracy testing is to be conducted.
This phase has been completed and reviewed by an independent third
party. Testing will continue due to upgrades, program patches to
correct problems detected during testing and other system changes
during the year.
The Bank's primary focus had been to become Y2K ready in the following
areas: deposit data processing, wire transfer processing, loan data
processing and documentation, ACH and ATM processing, network
communications, accounting and various internal systems (voicemail,
electronic mail, HVAC and office equipment).
The Bank's Year 2000 strategy contains detailed steps for assessment of
the complexity of becoming Y2K compliant, including determining (1) the
effect of Y2K on the Bank's main computer system and on each sub-product
used by each department that interfaces with the main computer system,
(2) hardware requirements for all significant applications and whether
new hardware needs to be purchased, (3) whether the internal
environmental systems are Y2K ready and (4) whether the services
provided by outside vendors with respect to the payment system functions
are Y2K compliant.
The Bank's primary data processing system (which consists of software
that manages loans, deposits and accounting) is provided to the Bank by
ITI, a third party vendor specializing in bank software. ITI
continually upgrades their software with the most recent upgrade
occurring in December 1998. The Bank utilizes Unisys equipment which
has proprietary software which has been upgraded to be Y2K ready. The
Bank upgraded its central processor, which was Y2K compliant, in 1997 to
prepare for the implementation of a computer network which was installed
in June 1998.
The Bank will incur certain costs associated with the testing and deemed
necessary to address Y2K compliance. These costs include the cost of
the internal testing that is being done, and the costs of any outside
auditors or other personnel that will be necessary to evaluate the
results of the tests as well as hardware and software replacement.
The Bank currently estimates that the cost of its Y2K compliance program
will be approximately $75,000. The expenditures are not expected to
have a material impact on the Bank's results of operations.
The Bank has developed contingency plans for year 2000 readiness. The
contingency plan addresses business resumption plans which respond to
any failures of core business processes at critical dates due to the Y2K
problem.
This plan also included liquidity contingency planning during the turn
of the century. The purpose of the plan is to establish a course of
action to help it resume core business processes in an orderly way in
the event of a system failure. This business resumption contingency
planning is necessary because, notwithstanding successful efforts to
thoroughly implement Y2K ready systems, the potential exists that
systems will not operate as expected. The plan has been developed in
order to be implemented in a timely manner; however, there can be no
assurance that such contingency plans will be successful.
Based on the due diligence that the Bank has conducted to date, the Bank
does not expect that any of its major corporate customers will have Y2K
problems that will result in significant loan losses or a material
reduction in deposits to the Bank from those customers. The Bank will
continue to monitor whether any of its customers may encounter
problems from the century date change. Despite the Company's activities
regarding the Y2K issue, there can be no assurances that partial or
total system interruptions and costs to update the necessary hardware
and software would not have a material adverse effect on the Company.
SCHEDULES
LOANS HELD FOR INVESTMENT
(In thousands)
June 30, 1999 December 31, 1998
Commercial Loans $121,373 $118,395
Real Estate Loans:
Construction 26,316 28,177
Other 158,790 123,839
Installment Loans 1,730 1,644
-------- --------
Total $308,209 $272,055
======== ========
Of the total loans due in more than one year, $60.5 million were at
fixed interest rates or had reached the loan's floor or ceiling rates
and $202.5 million were at adjustable interest rates at June 30, 1999.
The loan portfolio has no foreign balances.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(In thousands)
Quarter Ended Six Months Ended
June 30, 1999 June 30, 1999
Balance - Beginning of Period $3,124 $3,019
Provision for Loan Losses 200 320
Charge Offs 4 19
Recoveries 0 0
------ ------
Balance - End of the Period $3,320 $3,320
====== ======
There was one loan on non-accrual at June 30, 1999, amounting to $24,000
which was secured by real estate collateral and $22,000 was guaranteed
by the U.S. Government. There was one loan for $74,000 (secured by a
time deposit for $74,000) which was past due 90 days or more and still
accruing interest.
GAP ANALYSIS
The following schedule represents the Bank's interest rate sensitivity
profile as of June 30,1999 of assets, liabilities and shareholder's
equity classified by earliest possible repricing opportunity or maturity
date.
<TABLE>
<CAPTION>
Over 3 Over 1 Non-rate
Months year Sensitive
Through 3 Through Through Or Over 5
Months 1 year 5 Years Years Total
<S> <C> <C> <C> <C> <C>
Balance Sheet
(in thousands)
Assets
Fed funds sold $21,165 $21,165
Investment securities $2,981 $1,261 4,242
Loans (net of discounts) 141,017 $120,050 17,972 26,928 305,967
Non-interest-earning assets
(net of allowance for loan
losses) 16,340 16,340
------------------------------------------------------------------
162,182 120,050 20,953 44,529 347,714
==================================================================
Liabilities & Shareholders
Equity
Time Deposits $100,000 and over $11,097 $30,903 $10,117 $1,800 $53,917
All other interest-bearing
deposits 113,689 60,654 28,532 13,129 216,004
Non-interest bearing deposits 48,810 48,810
Other Liabilities &
Shareholders' Equity 28,983 28,983
------------------------------------------------------------------
124,786 91,557 38,649 92,722 347,714
==================================================================
Interest Rate Sensitivity (1) 37,396 28,493 (17,696) (48,193)
--------------------------------------------------
Cumulative Interest Rate
Sensitivity 37,396 65,889 48,193 0
--------------------------------------------------
(1) Interest rate sensitivity is the difference between interest rate
sensitive assets and interest rate sensitive liabilities within the
above time frames.
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 18,1999. The following candidates received the votes
indicated.
Abstained/
Broker
For Withheld Non-votes
Clement C. Carinalli 2,648,683 1,020 0
Patrick R. Gallaher 2,648,683 1,020 0
William P. Gallaher 2,648,683 1,020 0
William E. Geary 2,648,683 1,020 0
James B. Keegan, Jr. 2,648,683 1,020 0
Dennis R. Hunter 2,648,683 1,020 0
Robert V. Pauley 2,648,683 1,020 0
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).
(e) Secretary's certificate of Amendment to the Bylaws of the
Corporation and revised Bylaws ((filed as Exhibit (3)(e) to
the Corporation's Annual Report on Form 10-KSB for the Fiscal
Year Ended December 31, 1997 and incorporated herein by this
reference).
(27)(a) Financial Data Schedule - see attached
b. Reports on Form 8-K - None
SIGNATURES
In accordance with the requirements of the 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 10, 1999
- ----------------------
/s/Dennis R. Hunter /s/ Patrick R. Gallaher
- ------------------- -----------------------
Dennis R. Hunter Patrick R. Gallaher
Chairman of the Board Director & Chief Accounting
Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 12031
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 21165
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4242
<INVESTMENTS-CARRYING> 4242
<INVESTMENTS-MARKET> 4242
<LOANS> 308209
<ALLOWANCE> 3320
<TOTAL-ASSETS> 347714
<DEPOSITS> 318731
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1516
<LONG-TERM> 1861
0
0
<COMMON> 15559
<OTHER-SE> 10047
<TOTAL-LIABILITIES-AND-EQUITY> 347714
<INTEREST-LOAN> 13193
<INTEREST-INVEST> 162
<INTEREST-OTHER> 530
<INTEREST-TOTAL> 13885
<INTEREST-DEPOSIT> 5817
<INTEREST-EXPENSE> 5817
<INTEREST-INCOME-NET> 8068
<LOAN-LOSSES> 320
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4634
<INCOME-PRETAX> 4634
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2764
<EPS-BASIC> .79
<EPS-DILUTED> .75
<YIELD-ACTUAL> 5.19
<LOANS-NON> 24
<LOANS-PAST> 4276
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4276
<ALLOWANCE-OPEN> 3019
<CHARGE-OFFS> 19
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3320
<ALLOWANCE-DOMESTIC> 3320
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 397
</TABLE>
