SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 (I.R.S. Employer
of incorporation Identification No.)
or organization)
801 Fourth Street, Santa Rosa, California 95404
---------------------------------------------------------
(Address of principal executive offices) (Zip code)
707-579-2265
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(Registrant's telephone number, including area code)
NONE
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(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 Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of class: Common Stock, no par value. Outstanding shares as of
April 15, 2000: 3,586,286*
*Prior to 5% stock dividend to shareholders of record on May 3, 2000.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)
ASSETS March 31, 2000 December 31, 1999
Cash and equivalents:
Cash and due from banks $ 12,851 $ 11,030
Federal funds sold 48,866 17,029
-------- --------
Total cash and equivalents 61,717 28,059
Investment securities
Available-for-sale 2,974 2,970
Restricted 1,310 1,294
Loans receivable, net 363,882 357,225
Leasehold improvements and equipment, net 834 792
Accrued interest receivable and other assets 7,540 7,588
-------- --------
Total assets $438,257 $397,928
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 398,135 $ 357,867
Accrued interest payable and
other liabilities 2,502 1,949
FHLB Advances 6,844 9,050
-------- --------
Total liabilities 407,481 368,866
-------- --------
Shareholders' equity:
Common stock, no par value;
authorized, 20,000,000 shares;
shares issued and outstanding,
3,765,600 in 2000 and 3,738,310 in 1999
(retroactively stated for 5% stock
dividend) 15,630 15,561
Additional paid-in-capital 742 646
Accumulated other comprehensive (loss) (16) (17)
Retained earnings 14,420 12,872
-------- --------
Total shareholders' equity 30,776 29,062
-------- --------
Total liabilities and
shareholders' equity $438,257 $397,928
======== ========
See Notes to Consolidated Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended March 31,
(dollars in thousands, except per share data)
2000 1999
Interest income:
Loans $8,339 $6,373
Federal funds sold and investment securities 513 386
------ ------
Total interest income 8,852 6,759
Interest expense 4,233 2,871
------ ------
Net interest income before provision
for loan losses 4,619 3,888
Provision for loan losses 240 120
------ ------
Net interest income after provision for
loan losses 4,379 3,768
------ ------
Other income:
Service charges on deposits 122 119
Gain on sale of loans 187 136
Other 118 175
------ ------
Total other income 427 430
------ ------
Other expenses:
Salaries and employee benefits 1,275 1,163
Occupancy 205 188
Equipment 123 113
Business development & advertising 102 85
Outside customer services 101 85
Shareholder & director expenses 76 71
Deposit and other insurance 56 52
Professional fees 46 24
Other 237 195
------ ------
Total other expenses 2,221 1,976
------ ------
Income before income taxes 2,585 2,222
Provision for income taxes 1,038 894
------ ------
Net income $1,547 $1,328
====== ======
Earnings per common share $ 0.41 $ 0.36
====== ======
Earnings per common share assuming dilution $ 0.40 $ 0.34
====== ======
See Notes to Consolidated Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 2000 and 1999
(Unaudited)
(dollars in thousands) 2000 1999
Cash flows from operating activities:
Net income $1,547 $ 1,328
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 240 120
Depreciation, amortization and accretion 89 89
FHLB Stock dividends (16) (22)
Net increase in deferred loan fees and discounts 42 10
Change in deferred income taxes (58) 5
Tax benefit from stock options exercised 96 0
Decrease/(Increase) in interest receivable
and other assets 106 (190)
Increase in accrued interest payable
and other liabilities 553 447
------ ------
Net cash provided by operating activities 2,599 1,787
------ ------
Cash flows from investing activities:
Purchase of available for sale securities (4) 0
Maturities of available for sale securities 0 4,006
Net increase in loans receivable (6,938) (12,668)
Purchase of leasehold improvements and
equipment, net (130) (41)
------ ------
Net cash used by investing activities (7,072) (8,703)
------ ------
Cash flows from financing activities:
Net increase in deposits 40,268 10,209
Net increase in FHLB advances (2,206) (6)
Proceeds from exercise of stock options 69 85
------ ------
Net cash provided by financing activities 38,131 10,288
------ ------
Net increase in cash and cash equivalents 33,658 3,372
Cash and cash equivalents, at beginning of year 28,059 39,333
------ ------
Cash and cash equivalents, at end of period $61,717 $42,705
====== ======
Supplemental cash-flow information:
Interest paid $ 4,139 $ 3,285
====== ======
Income taxes paid $ 3 $ 186
====== ======
See Notes to Consolidated Financial Statements
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
March 31, 2000
Note 1 - Basis of Presentation
The unaudited financial information contained in this report reflects
all adjustments which, in the opinion of Management, are necessary to
present fairly the financial condition of Northern Empire Bancshares and
Subsidiary at March 31, 2000 and the results of operations for the three
months then ended. The results of operations for the three months ended
March 31, 2000 are not necessarily indicative of the operating results
through December 31, 2000.
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 1999 Annual Report on Form 10-KSB.
Note 2 - Net Income per Common and Common Equivalent Share
Basic earnings per share (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
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
Corporation's common stock throughout the period adjusted for the impact
of the 5% stock dividend declared in March 2000. The Corporation's
pertinent EPS data is as follows:
<TABLE>
<CAPTION>
For the three months ended
March 31, 2000 March 31, 1999
Per Per
Income/ Shares/ Share Income/ Shares/ Share
Numerator Denominator Amount Numerator Denominator Amount
<S> <C> <C> <C> <C> <C> <C>
Net Income $1,547,000 $1,328,000
========== ==========
EPS - Income available to
common stockholders $1,547,000 3,742,179 $0.41 $1,328,000 3,676,168 $0.36
========== ===== ========== =====
Effect of Dilutive Securities-
Stock Options 163,608 182,500
--------- ---------
EPS assuming dilution-
Income available to
common stockholders
plus assumed conversion $1,547,000 3,905,787 $0.40 $1,328,000 3,858,668 $0.34
========== ========= ===== ========== ========= =====
</TABLE>
Note 3 - Comprehensive Income
The Corporation's total comprehensive earnings presentation is as
follows:
For the three months ended March 31,
(In thousands) 2000 1999
------ ------
Net Income $1,547 $1,328
Other Comprehensive income (loss):
Change in unrealized holding gain
(losses) arising during the period 4 (9)
Reclassification adjustment for
gains included in net income - (4)
------ ------
4 (13)
Income tax benefit (expense) (2) 5
------ ------
2 (8)
Comprehensive income $1,549 $1,320
====== ======
Note 4 - Common Stock Dividend
On March 21, 2000 the Board of Directors declared a 5% stock dividend
payable on May 17, 2000 to shareholders of record on May 3, 2000.
Retained earnings and common stock have not been adjusted for the impact
of the stock dividend.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Northern Empire Bancshares (the "Corporation") is the bank holding
company of Sonoma National Bank (the "Bank"). Since the principal
business of the Corporation is the Bank, the following discussion
pertains mainly to the Bank.
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.
Summary of Financial Results
Total consolidated assets of $438,257,000 at March 31, 2000 grew $40.3
million compared to $397,928,000 at December 31, 1999. Net loans
increased $6.7 million. Cash and equivalents increased $33.7 million
during the first quarter.
The net income after tax for the first three months of 2000 equaled
$1,547,000 compared to $1,328,000 for the comparable period of 1999, an
increase of 16.5%. Increased profit resulted from growth in net
interest income due to loan growth.
Net Interest Income
Net interest income (before the provision for loan losses) of $4,619,000
for the first quarter of 2000 increased 18.8% from $3,888,000 for the
comparable period last year. This increase in net interest income
resulted from volume increases of $95.7 million in average earning
assets for the current quarter compared to the first quarter of 1999.
The Bank experienced a $91.3 million increase in average loans
outstanding, which have the highest yields, while investments and Fed
Funds investments increased $4.4 million. Average interest bearing
deposits for the first quarter increased $85.5 million over the same
period last year.
The net interest margin equaled 4.62% during the first quarter of 2000
compared to an average margin during 1999 of 5.14%. The yield on
average loans equaled 9.18% in the first quarter compared to 9.43%
during 1999, while the Bank's cost of funds increased from 4.63% for
1999 to 5.05% for the first quarter of 2000.
Several factors impact the Bank's interest margin. The mix of loans
influences the overall yield on loans. The largest loan growth occurred
in commercial real estate loans growing from $140.1 million at March 31,
1999 to $209.8 million at this quarter end. This category has a lower
yield than other types of loans and had a negative impact on the Bank's
margin. Net interest margin is also affected by the level of loans
relative to deposits. The Bank's ratio of loans-to-deposits increased
to an average of 97.5% in first quarter of 2000 compared to 94.3% for
the same period last year.
The Bank is considered asset sensitive and benefits from rate increases
since more of its assets reprice at a faster rate than deposits. The
Prime lending rate was 9% on March 31, 2000 compared to 7.75% a year
ago. Prime rate started to increase in July 1999 and raised 75 basis
points by the end of last year. This year, prime rate has increased 50
basis points. The Bank experiences a delay in the benefit of prime rate
changes, since SBA guaranteed loans reprice on a calendar quarter basis.
The majority of the benefit of prime rate changes during this year will
occur on April 1 when the SBA loan portfolio will reprice. Of the
Bank's loan portfolio totaling $370.6 million at March 31, 2000, $241.5
million or 65% of total loans are adjustable rate loans which have not
reached a floor or ceiling rate. Approximately $127.4 million are
prime-based loans, of which $39.6 million reprice immediately and $87.8
million reprice on a quarterly basis. Approximately $174.8 million of
the Bank's loan portfolio is periodically adjustable (generally every
six months using the preceding month value) based upon the Eleventh
District's cost of funds index. This index was 4.56% in March 1999 and
equaled 4.97% in March 2000.
Loans which have been placed on non-accrual status also impact the net
interest margin. At the time a loan is placed on non-accrual, the
unpaid interest is reversed and interest accruals are discontinued until
the credit quality of the loan justifies returning it to accrual status.
As of March 31, 1999 the Bank had $137,000 in non-accrual loans compared
to $1.8 million at the end of this quarter. This increase has
negatively impacted the Bank's interest margin. The current level of
non-accrual loans is considered by management to be a low level of non-
accrual loans based upon comparisons to our peer group (other banks of
comparable asset size). See Allowance for Loan Losses for additional
information.
Interest expense increased from $2,871,000 in the first quarter of 1999
to $4,233,000 in 2000. The major factor was the increase of $85.5
million in average interest bearing deposits when comparing the first
quarter of 1999 to 2000. The average cost of interest bearing deposits
increased from 4.63% to 5.05% when comparing the first quarter of last
year to the first quarter of this year. The Bank has a money market rate
deposit account which is tied to the 13 week U. S. Treasury bill which
approximates 25% of total deposits. The rate on this account increased
from an average of 3.89% in the first quarter of 1999 to 4.97% this
quarter which was a major factor in the increase of overall deposit
costs. The Bank's rapid growth and local competition for deposits has
had a negative impact on the interest margin as reflected in the
increase in the cost of deposits.
The following is an analysis of the net interest margin:
Three months ended
March 31, 2000 March 31, 1999
------------------------- ----------------------
Average Average
(dollars in thousands) Balance Interest Yield Balance Interest Yield
-------- -------- ----- ------- -------- -----
Earning assets (1) $402,327 $8,852 8.85% $306,630 $6,759 8.94%
Interest bearing
liabilities 337,255 4,233 5.05% 252,121 2,871 4.63%
------ ------
Net interest income $4,619 $3,888
====== ======
Net Interest income
to earning assets 4.62% 5.14%
====== ======
(1) Non-accrual loans are included in the calculation of average
balance of earning assets, and interest not accrued is excluded.
The following table sets forth changes in interest income and interest
expense for each major category of interest-earning asset and interest-
bearing liability, and the amount of change attributable to volume and
rate changes for the three months ended March 31, 2000 and 1999.
Changes not solely attributable to rate or volume have been allocated to
rate.
For the three months ended March 31, 2000
over March 31, 1999
(dollars in thousands) Volume Yield/Rate Total
------ ---------- -----
Increase (decrease) in
interest income:
Portfolio loans $2,124 $(158) $1,965
Investment securities (46) (1) (47)
Federal funds sold 88 87 175
------ ----- ------
Total increase (decrease) 2,109 (16) 2,093
------ ----- ------
Increase in interest expense:
Interest-bearing
transaction accounts 187 281 468
Time deposits 781 36 817
Other borrowings 70 6 76
------ ----- ------
Total increase 975 386 1,362
------ ----- ------
Increase (decrease)in
net interest income $1,134 $(402) $731
====== ===== ======
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2000
amounted to $240,000 as compared to $120,000 in the same quarter in the
previous year. The increase in the provision reflects the overall
growth in loans and the increase in non-accrual loans at the end of the
current quarter. For further discussion see Allowance for Loan Losses
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 decreased from
$430,000 to $427,000 when comparing the first quarter of 1999 to the
same period this year.
In the first quarter of this year, the Bank sold the guaranteed portion
of SBA loans totaling $5.1 million and recognized gains on those sales
of $187,000. During the first quarter of last year, the Bank sold the
guaranteed portion of SBA loans totaling $1.7 million and recognized
gains on those sales of $136,000. The Bank continues to retain the
majority of the SBA loans it makes, in order 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. The premiums on loan sales has
significantly decreased with the average premium on sales in the first
quarter of 1999 equaling 7.8% compared to 3.6% in the first quarter of
2000. This decline was caused by the increased rate of prepayment of
SBA loans experienced throughout the country during the last few years.
SBA servicing fees totaled $67,000 during the first quarter of 2000,
compared to fees of $86,000 recorded for the same period last year. The
income varies depending on the fee income calculated based upon the
payments received during the period. The serviced portfolio equaled
$29.5 million at March 31, 2000 compared to $27.4 million at the end the
first quarter of last year.
There were no sales of other real estate owned (OREO) during the first
quarter of 2000 or 1999.
Non-Interest Expenses
The Bank's non-interest expenses increased from $1,976,000 for the first
quarter of last year to $2,221,000 for the first quarter of 2000. 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 9.6% from $1,163,000 to $1,275,000. A new branch office was
opened in December 1999 which added four new staff positions and a new
loan production office was opened in Albuquerque, New Mexico staffed
with a senior lender during June 1999. Incentive payments continue at a
high level due to growth in the loan portfolio and deposit base.
Personnel costs are also affected by annual salary increases, and
changes in benefit costs.
Occupancy expenses increased 9%, mainly due to the new branch and rent
increases on existing facilities. Equipment costs increased to $123,000
up from $113,000 for the first quarter last year. The Bank continues to
upgrade computer equipment and operations. The Bank is currently
installing a new automated teller system which will improve customer
service and internal operations. The use of personal computers continues
to expand and the terminals previously used have all been replaced with
personal computers. It is expected that equipment costs will continue
to increase.
Deposit and other insurance of $56,000 increased $4,000 over the first
quarter of last year. Regulatory assessments and FDIC insurance cost
grew due to the increase in deposit assessment base for the Financing
Corporation (FICO) assessment which became effective January 1, 1997 and
is based on deposit levels. There is no assurance that regulatory
assessments will continue at the current low level. The cost of other
insurance increased due to 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 $102,000 from $85,000 the first
quarter of 1999. Professional fees increased by $22,000 from the first
quarter of 1999 to $46,000 in this quarter. Legal expenses were higher
which reflects the increase in problem loans requiring outside counsel
(See discussion on Allowance for Loan Losses). Outside customer
services increased due to new analysis customers which added expense
charges. The Bank pays for certain direct costs (ie: payroll services,
escrow fees, etc.) which are expensed. The analysis customer received
earning credits based upon their deposit account balances which can be
used to offset these charges. The customer is charged a bank service fee
if their earnings credits do not cover the costs. Shareholder and
director expenses depend upon the meeting attendance and costs
associated with the annual report. Other expenses, which includes
stationery and supplies, telephone, postage, loan expenses, dues and
subscriptions and automobile costs have increased due to growth and the
volume of activity.
Total non-interest expenses for the SBA lending department for the first
quarter of 2000 was approximately $434,000 ($228,000 in personnel costs,
$65,000 in occupancy and equipment expenses, $50,000 in
marketing/business development and $91,000 in other expenses) compared
to $419,000 for the first quarter of 1999. Since March 31, 1999, the
SBA loan portfolio (serviced portion and Bank's portion) has increased
31.1% to $202.3 million, of which $29.5 million has been sold and is
being serviced.
Income Taxes
The effective tax rate of 40.2% for the first quarter of 2000 the same
as last year's rate. The provision for the first quarter of 2000 was
$1,038,000 versus $894,000 for the same period last year. The increase
resulted from the increase in pre-tax income during the comparable
quarters.
Liquidity and Investment Portfolio
Liquidity is a bank's ability to meet possible deposit withdrawals, to
meet loan commitments and increased loan demand, and to take advantage
of other investment opportunities as they arise. The Bank's liquidity
practices are defined in both the Asset and Liability Policy and the
Investment Policy. These policies define acceptable liquidity measures
in terms of ratios to total assets, deposits, liabilities and capital.
Cash and due from banks, federal funds sold and certificates of deposit
totaled $61.7 million or 14.1% of total assets at March 31, 2000,
compared to $28.1 million or 7.1% of total assets at December 31, 1999.
At year end, the level of liquid assets was lower than normal due to a
large volume of loans recorded during the month of December. The Bank
sold $5 million in SBA loans and $1.2 in loan participations during
January 2000 to increase the Bank's liquidity. As of March 31, 2000,
the Bank held $56.5 million in SBA guaranteed loans which could be sold
if additional liquidity was needed.
At March 31, 2000, 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 and the Federal Reserve 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 March 31, 2000, the Corporation had non-interest and interest bearing
cash balances of $230,000, which management believes is adequate to meet
the Corporation's operational expenses.
The Corporation and the Bank do not engage in hedging transactions
(interest rate futures, caps, swap agreements, etc.).
Deposits
During the first quarter of 2000, deposits increased 11.3% to $398.1
million compared to $357.9 million at the end of the year.
Money market rate deposits grew from $97.5 million at year end to $106.7
million at the end of the quarter. This is a limited transaction
account with a floating rate which is tied to the 13 week treasury bill
less a margin of 50 basis points. The rate offered on this account has
been very attractive and many of the Bank's customers have held their
funds in this deposit product rather than locking into 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 $197.4 million at December 31,
1999 to $214.6 million as of March 31, 2000. During the first quarter,
the Bank offered attractive rates on ten and thirteen month
certificates, which account for the majority of the growth in time
deposits.
As of March 31, 2000, non-interest bearing deposits equaled $54.0
million compared to $40.4 million at December 31, 1999. The Bank's
transaction accounts have significant changes in daily balances, mainly
due to deposits held by businesses such as title and mortgage companies.
Title company accounts have greater balance fluctuations than other
types of accounts based upon their business activity with their balances
averaging approximately $13 million over the last twelve months. At the
end of the quarter title company balances were higher than normal at
$19.1 million.
The interest rate environment 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 $363.9 million at March
31, 2000 compared to $357.2 million at December 31, 1999, increasing
1.9%; however, loans increased 30.2% over March 31, 1999. The Bank loan
growth slowed this quarter following a high growth rate during the
fourth quarter of 1999. The following is an analysis of the loan
portfolio.
Type of Loan
(in thousands) March 31, 2000 December 31, 1999
-------------- -----------------
Commercial $124,960 $130,924
Real Estate Construction 34,267 39,523
Real Estate Other 209,775 191,472
Installment Loans to Individuals 1,640 1,783
-------- --------
370,640 363,702
Deferred loan fees and discount (2,731) (2,690)
Allowance for loan losses (4,027) (3,787)
-------- --------
TOTAL $363,882 $357,225
======== ========
The SBA loan program continued to be a popular program; however,
competition has increased. At March 31, 2000, total SBA loans equaled
$87.0 million, net of $29.5 in SBA loans sold and being serviced by the
Bank, at March 31, 2000. The majority of the Bank's SBA loans are
secured by real estate; however, they are reported as commercial loans.
SBA loans have the same underwriting requirements as the Bank's other
loans, except 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 federal government program could
affect the Bank's profitability and future SBA loan growth. The
guaranteed portion of SBA loans which could be sold in the secondary
market was $56.5 million at March 31, 2000.
The Bank continues to emphasize commercial and real estate lending. At
March 31, 2000, 33.7% of the loans held for investment were commercial
loans and 65.9% were real estate and construction loans, compared to
36.0% and 63.5% respectively at December 31, 1999. The Bank has
increased the commercial and commercial real estate portfolio through
its reputation as an experienced business and real estate lender which
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.
The Bank's residential construction loan group was expanded in mid 1997
and has continued to grow since then. Construction loan balances have
increased from to $14.3 million at March 31, 1998 to $25.2 million at
March 31, 1999 to its March 31, 2000 balance of $34.3 million. The Bank
offers residential mortgages on a limited basis.
The Bank has a small portfolio of consumer loans which equaled 0.4% of
the total loan portfolio at March 31, 2000 and 0.5% at December 31,1999.
Allowance for Loan Losses
The allowance for loan losses equaled $4,027,000 at March 31, 2000,
compared to $3,787,000 at December 31, 1999. At March 31, 2000, 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 March 31, 2000, there were six loans on non-accrual totaling
$1,798,000 with all of that amount collateralized by real estate and
$513,000 of it also guaranteed by the SBA. There were no loans past due
90 days or more and still accruing interest. Loans past due 30 to 89
days totaled $2,299,000, with $2,065,000 of that amount collateralized
by real estate. At December 31, 1999, the Bank had $1,888,000 in non-
accrual loans and no loans past due 90 or more days and still accruing
interest.
During the first quarter of 2000, there were no loans charged off and no
loan recoveries. The Bank continues to have a low charge off experience
compared to industry standards. The following is an analysis of the
activity in the allowance for loan losses during the quarter:
(In thousands)
March 31, 2000
Balance - Beginning of period $3,787
Provision for loan losses 240
Charge offs 0
Recoveries 0
------
Balance - End of period $4,027
======
Capital Resources
Pursuant to regulations under the FDIC Improvement Act of 1991 (FDICIA),
five capital levels were prescribed as applicable for banks, ranging
from well-capitalized to critically under-capitalized. At March 31,
2000, the Bank was considered " well capitalized." The total risk-based
capital ratios were 10.6% for the Bank and 10.7% for the Corporation.
The Corporation declared a 5% stock dividend on March 21,2000 with a
record date of May 3, 2000. The common stock and retained earnings in
the financial statements have not been adjusted to include the impact of
this stock dividend.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Bank's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Bank utilizes no derivatives to
mitigate its credit risk, relying instead on loan review and adequate
loan loss reserves. See Allowance for Loan Losses.
Interest rate risk is the risk of loss in value due to changes in
interest rates. Since virtually all of the Corporation's interest rate
risk exposure lies at the Bank level, this risk is addressed by the
Bank's Asset Liability Committee ("ALCO"), which includes members of the
Board of Directors and senior officers of the Bank. ALCO attempts to
manage the various components of the Corporation's balance sheet to
minimize the impact of sudden and sustained changes in interest rates on
portfolio values and net interest income.
A fundamental objective is to manage its assets and liabilities to
maximize the economic value of the Bank while maintaining adequate
liquidity and minimizing exposure to interest rate risk. Management
believes an acceptable degree of exposure to interest rate risk results
from the management of assets and liabilities through maturity, pricing
and mix with the goal of limiting its exposure to interest rate risk.
The Bank's profitability is dependent to a large extent upon its net
interest income. The Bank is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its interest-
bearing liabilities.
Interest rate sensitivity analysis is used to measure the Bank's
interest rate risk by computing estimated changes in the net present
value (NPV) of its cash flows from assets, liabilities and off-balance
sheet items in the event of a range of assumed changes in market
interest rates. NPV represents the market value of portfolio equity and
is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market rate sensitive instruments
in the event of sudden and sustained increases and decreases in market
interest rates of 100 basis points. The Bank has no trading securities.
Management expects that, in a declining rate environment, the Bank's net
interest margin would be expected to decline, and, in an increasing rate
environment, the Bank's net interest margin would tend to increase. On
a monthly basis, management prepares an analysis of interest rate risk
exposure. Such analysis calculates the change in net interest income
given a change in general interest rates of 200 basis points up or down.
All changes are measured in dollars and are compared to projected net
interest income and the value of the Bank's equity is calculated by
discounting cash flows associated with the Bank's assets and
liabilities. The following table summarizes the simulated change in Net
Interest Income based on the twelve months ending December 31, 2000,
given a change in general interest rates of 200 basis points up or down.
Change in Estimated Estimated Change in
Interest Rate Net Interest Income Net Interest Income
+200 $19,145 $914
+100 18,727 496
Base Scenario 18,231 -
-100 18,231 (373)
-200 17,639 (592)
The model utilized by management to create the report presented above
makes numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit runoff and should not be relied upon
as indicative of actual future results. Computations do not contemplate
any actions that ALCO could undertake in response to changes in interest
rates. Actual results could differ significantly from those estimates,
which would result in significant differences in the calculated
projected change.
Interest rate risk management is a function of the repricing
characteristics of the portfolio of assets and liabilities. Interest
rate risk management focuses on the maturity structure of assets and
liabilities and their repricing characteristics during periods of
changes in market interest rates. Effective interest rate risk
management seeks to ensure that both assets and liabilities respond to
changes in interest rates within an acceptable time frame, thereby
minimizing the effect of interest rate movements on net interest income.
Interest rate sensitivity is measured as the difference between the
volume of assets and liabilities in the current portfolio that are
subject to repricing at various time horizons. The differences are known
as interest rate sensitivity gaps.
The following schedule represents interest rate sensitivity profile as
of March 31, 2000 of assets, liabilities and shareholders' equity
classified by earliest possible repricing opportunity or maturity date.
<TABLE>
<CAPTION>
Over 3
Months Over 1 year Non-rate
Through 3 through through 5 Sensitive or
months 1 year Years Over 5 years Total
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet
(in thousands)
Assets
Fed funds sold &
certificates of deposit $48,965 $48,965
Investment securities $2,974 $1,310 4,284
Loans (net of discounts) 145,479 165,023 $47,490 12,648 370,640
Non-interest-earning assets (net
of allowance for loan losses) 14,368 14,368
------- -------- ------- -------- --------
94,444 167,997 47,490 28,326 438,257
------- -------- ------- -------- --------
Liabilities & Shareholders' Equity
Time Deposits $100,000 and over 18,617 $47,226 $3,534 $69,377
All other interest-bearing
liabilities 168,173 101,865 9,740 $1,844 281,622
Non-interest bearing liabilities 53,981 53,981
Other Liabilities &
Shareholders' Equity 33,277 33,277
-------- -------- ------- ------- --------
186,790 149,091 13,274 89,102 438,257
-------- ------- ------- ------- --------
Interest Rate Sensitivity(1) 7,654 18,906 34,216 (60,776)
-------- ------- ------- -------
Cumulative Interest Rate
Sensitivity 7,654 26,560 60,776
-------- ------- -------
</TABLE>
F/N
(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 and Use of Proceeds
On February 8, 2000 the Corporation issued 105 of its common shares in
connection with the exercise of a stock option by a former employee,
pursuant to the Corporation's 1997 Stock Option Plan for employees,
officers and directors. The shares were issued in reliance on Section
4(2) of the Securities Act of 1933 and SEC Regulation D, Rule 506. The
facts relied on in connection with the Section 4(2) and Regulation D
exemptions include the employee's investment intent, financial and
business experience, and the Corporation furnished the optionee with all
reports filed with the SEC since December 31, 1998.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On March 21,2000 a 5% stock dividend was declared which will be issued
to shareholders of record as of May 3, 2000. The stock will be
distributed on or about May 17, 2000.
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
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: May 08, 2000
- ---------------------------
/s Dennis R. Hunter /s/ Patrick R. Gallaher
- --------------------------------- ---------------------------
Dennis R. Hunter Patrick R. Gallaher
Chairman of the Board of Directors Director & Chief Accounting
Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 12752
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 48866
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2974
<INVESTMENTS-CARRYING> 3000
<INVESTMENTS-MARKET> 0
<LOANS> 367909
<ALLOWANCE> 4027
<TOTAL-ASSETS> 438257
<DEPOSITS> 398135
<SHORT-TERM> 5000
<LIABILITIES-OTHER> 2502
<LONG-TERM> 1844
0
0
<COMMON> 15630
<OTHER-SE> 15146
<TOTAL-LIABILITIES-AND-EQUITY> 438257
<INTEREST-LOAN> 8339
<INTEREST-INVEST> 58
<INTEREST-OTHER> 455
<INTEREST-TOTAL> 8852
<INTEREST-DEPOSIT> 4131
<INTEREST-EXPENSE> 4233
<INTEREST-INCOME-NET> 4619
<LOAN-LOSSES> 240
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2221
<INCOME-PRETAX> 2585
<INCOME-PRE-EXTRAORDINARY> 2585
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1547
<EPS-BASIC> .41
<EPS-DILUTED> .40
<YIELD-ACTUAL> 4.62
<LOANS-NON> 1798
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3787
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 4027
<ALLOWANCE-DOMESTIC> 4027
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 280
</TABLE>
