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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from___________to__________
Commission File Number 2-91196(1)
NORTHERN EMPIRE BANCSHARES
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(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2830529
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
801 Fourth Street
Santa Rosa, California 95404
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(Address of principal executive offices)
(707) 579-2265
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
NONE
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_____.
Indicate by check mark if disclosure of delinquent filers pursant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold,
or the average bid and asked prices of such common equity, as of a
specified date within 60 days prior to the date of filing. $81,467,316,
as of February 15, 2001.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 3,768,146
shares of common stock as of February 15, 2001.
DOCUMENTS INCORPORATED BY REFERENCE:
Not Applicable.
(1) Registrant filed a registration statement, on Form S-1, under File
Number 2-91196, and the Post Effective Amendment No. 8 to the
registration statement was declared effective on November 23, 1988.
TABLE OF CONTENTS
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
PART 1
Forward-Looking Statements
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.
ITEM 1. Business
General
Northern Empire Bancshares (the "Corporation") was incorporated as a
California corporation on June 8, 1982 for the purpose of becoming a
bank holding company of Sonoma National Bank (the "Bank"). On April 27,
2000, the Corporation made an election to become a financial holding
company pursuant to the Gramm-Leach-Bliley Act of 1999. The
Corporation's executive offices are located at 801 Fourth Street, Santa
Rosa, California, and its telephone number is (707) 579-2265.
The Corporation's sole subsidiary is the Bank and its activities are the
commercial banking activities engaged in through the Bank and some
lending. As a financial holding company, the Corporation may in the
future invest in subsidiaries which are permissible for a financial
holding company, subject to the required approvals of the Federal
Reserve Board. See, "Financial Services Modernization, below."
However, the Corporation has no present plans to make any such
additional investments and there can be no assurance that it will do so
in the future.
The Bank was organized as a national banking association on March 27,
1984 and commenced operations on January 25, 1985. It currently has six
banking offices:
Main Office located at 801 Fourth Street, in the central
business district of Santa Rosa, California,
Oakmont Branch located in the Oakmont area of Santa Rosa,
approximately 5 miles east of the main office,
West College Branch office in west Santa Rosa,
Windsor Branch located in Windsor, approximately 5 miles north
of the main office,
Sebastopol Branch office located in Sebastopol, approximately
5 miles west of the main office, and
Petaluma Branch located in Petaluma, approximately 15 miles
south of the main office.
As a national bank, the Bank is subject to supervision, regulation and
regular examination by the Comptroller of the Currency ("Comptroller").
The deposits of the Bank are insured by the Bank Insurance Fund, which
is administered by the Federal Deposit Insurance Corporation. The Bank
is a member of the Federal Reserve System and, as such, is subject to
applicable provisions of the Federal Reserve Act and the regulations
thereunder. See, "Supervision and Regulation."
The Bank engages in the general commercial banking business. It accepts
checking and savings deposits, offers money market deposit accounts and
certificates of deposit, makes secured and unsecured commercial,
construction, other installment and term loans, and offers other
customary banking services. The Bank makes commercial loans guaranteed
by the Small Business Administration (SBA), which may be sold in the
secondary market. The Bank does not offer trust services directly, and
does not presently intend to do so, but offers such services, when
requested, through its correspondent banks.
Within the Loan Department are groups of lenders which specialize in
commercial, construction and SBA lending. SBA loans are funded by the
Bank and then the Bank may, at its option, sell the portion of the loan
guaranteed by the SBA (generally 70% to 90% of the total loan amount,
depending on the purpose and term of the loan). When a SBA loan is
sold, the Bank retains the unguaranteed portion of that loan and the
right to service the loan. Income from loan sales is recorded in
non-interest income. See, "Management's Discussion and Analysis of
Financial Condition and results of Operations, Non-Interest Income." The
Bank is designated as a "Preferred Lender" by the SBA. This means that
it may fund a loan without the prior approval of the SBA. Certification
as a Preferred Lender gives the Bank a competitive advantage, as it is
able to provide a quick response to loan applications.
Market Area
The Bank's primary market area and source of most of its loan business,
except for SBA lending, is Sonoma County and the greater Bay Area.
During 2000, SBA loans were generated throughout California and in
Arizona and New Mexico. The Bank has expanded its lending territory for
construction loans, commercial real estate loans and loans made under
the programs of the SBA. The Bank has SBA loan production facilities in
Phoenix, Arizona and San Francisco, Sacramento, and Walnut Creek,
California. The Albuquerque, New Mexico office was closed on December
31, 2000 due to slow growth in that market. The primary market area for
deposit business is Sonoma County.
Competition
The banking business in California generally, and specifically in the
market area served by the Bank, is highly competitive with respect to
both loans and deposits, and is dominated by major banks which have
offices operating throughout California. Among the advantages such
major banks have over the Bank are their ability to finance wide-ranging
advertising campaigns and to allocate their investment assets to regions
of highest yield and demand. In addition, many of the major banks
operating in the Bank's service area offer specialized services, such as
trust and international banking services, which the Bank does not offer
directly. By virtue of their greater total capitalization, the major
banks also have substantially higher lending limits than the Bank has.
The Bank competes for loans and deposits with these major banks, as well
as with other independent banks, savings and loan associations, credit
unions, mortgage companies, insurance companies and other lending
institutions. The entry of other independent banks in the Bank's
service area may adversely affect the Bank's ability to compete.
Savings and loans, credit unions and money market funds have provided
significant competition for banks with respect to deposits. Other
entities, both governmental and private, seeking to raise capital
through the issuance and sale of debt or equity securities, also provide
competition for the Bank in the acquisition of deposits. The trend of
federal and state legislation has significantly increased competition
between banks and other financial institutions for both loans and
deposits and is expected to continue to do so in the future. In
particular, the Gramm-Leach-Bliley Act enacted in November, 1999
authorizes affiliations among banks, insurance companies and securities
firms and is expected to significantly increase competition among
financial institutions with respect to all types of financial products
and services.
The earnings and growth of the Bank are affected not only by local
market conditions and general economic conditions, but also by
government monetary and fiscal policies. Such policies influence the
growth of loans, investments and deposits and also affect interest rates
charged on loans and paid on deposits. The nature and impact of future
changes in such policies on the business and earnings of the Bank cannot
be predicted.
At present, there are approximately 115 banking offices and offices of
savings and loan associations in the Sonoma County market area and a
substantially greater number of such offices in the greater Bay Area,
including offices of major chain banks, of smaller independent banks and
savings and loan associations. The Bank attempts to compete by offering
personalized and specialized services to its customers. In the Sonoma
County market area, the Bank's promotional activities emphasize the
advantages of doing business with a locally owned, independent
institution attuned to the particular needs of the community.
The Bank has experienced increased competition from major banks and
local community banks in making SBA loans, especially in California.
Most of our local SBA competitors also have Preferred Lender status from
the SBA, and they often offer more attractive rates on SBA loans than
the Bank can. We expect this trend to continue. There can be no
assurance that the Bank will continue to increase its SBA loan portfolio
or continue to make a significant number of SBA loans.
Certain statistical information concerning the Bank and the Corporation
is provided at "Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operation".
Employees
At December 31, 2000 the Bank had 89 full-time and 21 part-time
employees.
Supervision and Regulation
The Corporation
The Corporation is a bank holding company registered under the Bank
Holding Company Act of 1956 and is subject to the supervision of the
Board of Governors of the Federal Reserve System ("Board"). As a bank
holding company, the Corporation must obtain the approval of the Board
before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition of shares, the Corporation would own
or control more than 5% of the voting shares of such bank. Prior
approval of the Board is also required for the merger or consolidation
of the Corporation and another bank holding company. Effective April
27, 2000, the Corporation made an election to become a "financial
holding company" pursuant to the Gramm-Leach-Bliley Act. See Financial
Services Modernization," below.
The Board has the authority to examine the Corporation periodically.
The Board has a policy for risk-focused supervision of small bank
holding companies that do not engage in significant non-banking
activities. The focus of examinations under the policy is on whether
the Corporation has in place systems to manage the risks it takes on in
its business. In analyzing risk, the Board looks at the financial
condition of the Corporation and the Bank, management, compliance with
laws and regulations, inter-company transactions and any new or
contemplated activities.
The Corporation and any subsidiary which it may acquire or organize in
the future are deemed to be affiliates of the Bank within the meaning
set forth in the Federal Reserve Act and are subject to that Act. This
means, for example, that there are limitations on loans by the Bank to
affiliates, on investments by the Bank in any affiliate's stock and on
the Bank's taking any affiliate's stock as collateral for loans to any
borrower. All affiliate transactions must satisfy certain limitations
and otherwise be on terms and conditions that are consistent with safe
and sound banking practices. In this regard, the Bank generally may not
purchase from any affiliate a low-quality asset (as that term is
defined in the Federal Reserve Act). Also, transactions by the Bank
with an affiliate must be on substantially the same terms as would be
available for non-affiliates.
The Corporation and the Bank are prohibited from engaging in certain
tie-in arrangements in connection with the extension of credit. For
example, the Bank generally may not extend credit on the condition that
the customer obtain some additional service from the Bank or the
Corporation, or refrain from obtaining such service from a competitor.
(a) Financial Services Modernization. Major financial services
modernization legislation was enacted in November 1999, known as the
Gramm-Leach-Bliley Act ("1999 Act"). This legislation has removed
barriers that have heretofore separated banks, securities firms and
other types of financial institutions. Effective March 11, 2000, the
1999 Act establishes a new type of holding company, a "financial holding
company," that may engage in "financial activities" not permitted to
bank holding companies and that have the authority to affiliate with
companies engaged in such activities. "Financial activities" are to be
determined by the Board in coordination with the Secretary of the
Treasury, and may include activities that are financial in nature,
incidental to an activity that is financial in nature, or complimentary
to a financial activity and that do not pose a safety and soundness
risk. The 1999 Act enumerates activities considered financial in nature
(in addition to those already permitted to bank holding companies),
including underwriting insurance or annuities, or acting as an insurance
or annuity principal, agent or broker; providing investment or financial
advice; underwriting, dealing in or making markets in securities; and
merchant banking (subject to certain limitations).
A holding company may elect to be treated as a financial holding
company, and engage in these activities, provided that its subsidiary
depository institutions are well-capitalized, well-managed and have
received at least a satisfactory rating in the last Community
Reinvestment Act examination. National banks may also engage in many of
these activities through a new structure, the "financial subsidiary,"
subject to substantially the same capital, management and CRA
requirements, and state-chartered banks are given similar authority.
The Act also provides for functional regulation of financial services
firms, which means that securities activities are to be regulated by the
Securities and Exchange Commission, insurance activities by state
insurance regulators, and banking activities by the appropriate bank
regulatory agencies.
The 1999 Act has resulted or is expected to result in new or revised
regulations for such matters as (1) newly authorized activities for bank
holding companies and financial holding companies, (2) financial
privacy, (3) customer protections for bank insurance sales, (4) the
Community Reinvestment Act, (5) overseas activities of bank holding
companies, (6) bank derivatives transactions and intra-day credit, (7)
activities allowed in national bank operating subsidiaries, and (8)
broker-dealer registration requirements for bank sales of "new hybrid
products.
(b) Dividends Payable by the Corporation Holders of Common Stock of
the Corporation are entitled to receive dividends as and when declared
by the Board of Directors out of funds legally available therefor under
the laws of the State of California. Under California law, the
Corporation is prohibited from paying dividends unless: (a) the amount
of its retained earnings immediately prior to the dividend payment
equals or exceeds the amount of the dividend; or (b) immediately after
giving effect to the dividend (i) the sum of its assets would be at
least equal to 125 percent of its liabilities and (ii) its current
assets would be at least equal to its current liabilities, or, if the
average of its earnings before taxes on income and before interest
expense for the two preceding fiscal years was less than the average of
its interest expense for the two preceding fiscal years, at least equal
to 125 percent of its current liabilities.
The Board of Governors has advised bank holding companies that it
believes that payment of cash dividends in excess of current earnings
from operations is inappropriate and may be cause for supervisory
action. As a result of this policy, banks and their holding companies
may find it difficult to pay dividends out of retained earnings from
historical periods prior to the most recent fiscal year or to take
advantage of earnings generated by extraordinary items such as sales of
buildings or other large assets in order to generate profits to enable
payment of future dividends. Further, the Board of Governors' position
that holding companies are expected to provide a source of managerial
and financial strength to their subsidiary banks potentially restricts a
bank holding company's ability to pay dividends.
The Corporation's ability to pay dividends on its Common Stock is
subject to the rights of senior security holders and lenders, which will
include the holders of preferred stock in the future if preferred stock
is issued. Dividend payments will also be dependent upon its separate
liquidity needs. See Item 7, "Management's Discussion and Analysis of
Financial Condition." In that regard, Federal and state statutes,
regulations and policies impose restrictions on the payment of
management fees and cash dividends by the Bank to the Corporation.
Information regarding the Company's cash dividend payment history can be
found in Item 5, "Market for Common Equity and Related Stockholder
Matters."
The Bank
As a national banking association, the Bank is subject to the National
Bank Act and to supervision, regulation and regular examination by the
Comptroller of the Currency ("Comptroller"). It is also a member of the
Federal Reserve System and, as such, is subject to applicable provisions
of the Federal Reserve Act and regulations issued pursuant thereto. The
deposits of the Bank are insured up to the maximum legal limits by the
Bank Insurance Fund ("BIF"), which is managed by the Federal Deposit
Insurance Corporation ("FDIC"), and the Bank is therefore subject to
applicable provisions of the Federal Deposit Insurance Act and
regulations of the FDIC. The statutes and regulations administered by
these agencies govern most aspects of the Bank's business, including
required reserves against deposits, loans, investments, dividends, and
the establishment of new branches and other banking facilities.
(a) Supervision and Examinations. Federal law mandates frequent
examinations of all banks, with the costs of examinations to be assessed
against the bank being examined. In the case of the Bank, its primary
regulator is the Comptroller.
The Comptroller has a community bank risk-assessment system, which
consists of examination procedures that focus on the various types of
risks that national banks face. The Comptroller measures each
individual bank's exposure to certain risks, assesses the controls the
bank has adopted in response to the risks it faces and the measures it
takes to monitor those risks. The Comptroller evaluates nine categories
of risk: credit, interest rate, liquidity, price, foreign exchange,
transaction, compliance, strategic and reputation. These nine risks are
measured and the direction of the risk is also analyzed.
The FDIC has "back up" enforcement power over the Bank under Federal
law. The FDIC may recommend and, in the absence of response by an
institution's primary regulator, undertake enforcement action against
any insured financial institution. Such "back up" enforcement action is
permissible if ordered by the Board of Directors of the FDIC only upon a
showing that an insured financial institution's conduct poses a risk to
its insurance fund.
The Federal banking regulatory agencies have substantial enforcement
powers over the depository institutions that they regulate. Civil and
criminal penalties may be imposed on such institutions and persons
associated with those institutions for violations of any law or
regulation. The penalties can be up to $ 5,000 per day that a violation
continues when the violation is unintentional, or up to $1 million per
day that a violation continues when the violation is willful. The amount
of the penalty also depends on whether the violation is part of a
pattern or causes a loss to the financial institution.
(b) Prompt Corrective Action. The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") requires the banking
agencies to take corrective action against certain financial
institutions, based upon the financial institutions' compliance with the
various capital measurements. The capital requirements and the
definitions of the various measures of capital are described below under
the heading "Capital Regulations and Dividends." The following chart
sets forth the various categories of capital compliance. In order to be
considered in the well or adequately capitalized categories, a financial
institution must meet all the requirements for that category. An
institution will be considered undercapitalized or significantly or
critically undercapitalized if it meets any of the requirements for that
category.
Ratio Category Total Risk-Based Tier 1 Risk-Based Leverage
- ---------------- ---------------- ----------------- ----------
Well Capitalized* 10% or above 6% or above 5% or above
Adequately
Capitalized 8% or above 4% or above 4% or above**
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly
Undercapitalized Less than 6% Less than 3% Less than 3%
Critically
Undercapitalized - - 2% or less
* In addition, the institution must not be subject to any written
capital order or directive to meet and maintain a specific capital
level.
** 3% instead of 4% if the institution has the highest rating under
the CAMEL rating system.
FDICIA also permits the banking agencies essentially to downgrade an
institution to the next lower category (but not into the category of
critically undercapitalized) if it determines that the institution is in
an unsafe or unsound condition, or is engaging in an unsafe or unsound
practice. An institution that has received a less-than-satisfactory
rating in its most recent examination report for assets, management,
earnings or liquidity may be deemed to be engaged in an unsafe and
unsound practice. Except for a finding based on a
less-than-satisfactory rating, the institution is entitled to prior
written notice and an opportunity to respond to its regulator's finding
that it is in an unsafe or unsound condition or is engaging in such
practices.
Based on its capital position at December 31, 2000, the Bank is
considered well capitalized.
As noted above, an undercapitalized financial institution is subject to
certain corrective action by the appropriate agency, depending on the
category it falls into. All undercapitalized institutions are required
to submit a capital plan within 45 days after the institution becomes
undercapitalized. Also, such an institution's asset growth is
restricted and it must obtain the prior approval of its federal
regulator before it acquires any company, sets up any new branch or
engages in any new line of business. The banking agency is required to
monitor closely the condition of the bank and its compliance with its
plan, and to review periodically the plan and the supervisory
restrictions on the bank to assure they are appropriate. In addition,
the regulator is authorized by statute to take the certain corrective
actions and order certain limitations on the bank's activities if
necessary to carry out the purposes of the statute.
If an institution is categorized as being significantly
undercapitalized, or is undercapitalized and fails to submit a capital
plan, its banking regulator is required to take increasingly severe
enforcement actions against such institution. The regulator must
require recapitalization through a sale of stock or a merger, restrict
affiliate transactions and restrict the interest rates the bank may
offer on deposits, (unless it finds that doing so would not further the
purpose of the section). In addition, such an institution may not pay a
bonus to a senior executive officer or increase the pay of any executive
officer without the prior written approval of its federal regulator.
An institution that is critically undercapitalized is subject to
mandatory restrictions that are even more severe, and seizure within
time limits designated by statute. In general, the federal regulator is
required to seize an institution within 90 days of its becoming
critically undercapitalized, unless the regulator can document that
another course of action will better achieve the purposes of this
section. The FDIC is required to restrict the activities of a
critically undercapitalized institution, beyond the degree of
limitations specified above for institutions that are significantly
undercapitalized.
(c) Brokered Deposits. FDICIA places limits on brokered deposits and
extends the limits to any bank that is not "well capitalized" or is
notified that it is in "troubled condition." Previously, the
limitations applied only to troubled banks. A well capitalized
institution (which generally includes an institution that is considered
well capitalized for purposes of the prompt corrective action
regulations discussed above) may still accept brokered deposits without
restriction, unless it has been informed by its appropriate Federal
regulatory agency that it is in "troubled condition." All other insured
depository institutions are prohibited from accepting brokered deposits
unless a waiver is obtained from the FDIC. If a waiver is obtained, the
interest paid on such deposits may not exceed the rate paid for deposits
in its normal market area, or the national rate as determined in the
FDIC's regulation.
If a depository institution solicits deposits by offering interest rates
significantly higher than rates being offered in its market area, it is
deemed under FDICIA to be a deposit broker. Therefore, depending on its
capital category, it may be prohibited from such practice, or need a
prior waiver from the FDIC in order to offer such rates. The FDIC's
regulations specify that an institution that is not well capitalized may
offer rates that exceed the prevailing effective rates offered in the
normal market area only if the institution obtains a waiver, but the
institution may not offer rates more than 75 basis points above such
prevailing rates.
The Bank is at this time considered well capitalized and not in a
"troubled condition," and it is not, therefore, subject to the brokered
deposit limitations.
(d) Risk-Based Deposit Insurance Assessments. In addition, FDICIA
required the FDIC to develop and implement a system to account for risks
attributable to different categories and concentrations of assets and
liabilities in assessing deposit insurance premiums. Under this system,
each bank's deposit insurance premium assessment is calculated based on
the level of risk that the Bank Insurance Fund will incur a loss if that
bank fails and the amount of the loss if such failure occurs. This
requirement, along with the increased emphasis on exceeding capital
measures, may cause banks such as the Bank to adjust their asset mix in
order to affect their deposit insurance premium and their ability to
engage in activities.
Capital Regulations and Dividends
The Board requires member banks and bank holding companies to maintain
adequate capital and has adopted capital leverage guidelines for
evaluating the capital adequacy of bank holding companies. The
Comptroller has also adopted a similar minimum leverage regulation,
requiring national banks to maintain at least a minimum capital to asset
ratio. The Board's guidelines and the Comptroller's regulations require
the banks and bank holding companies subject to them to achieve and
maintain a Tier 1 capital to total asset ratio of at least three percent
(3.0%) to five percent (5.0%), depending on the condition and rate of
growth of the bank or holding company. Tier 1 or core capital is
defined to consist primarily of common equity, retained earnings, and
certain qualified perpetual preferred stock. These minimum leverage
ratio requirements limit the ability of the banking industry, including
the Corporation and the Bank, to leverage assets.
The Federal Reserve Board also uses risk-based capital guidelines to
evaluate the capital adequacy of member banks and bank holding
companies. Under these guidelines, assets are categorized according to
risk and the various categories are assigned risk weightings. Assets
considered to present less risk than others require allocation of less
capital. In addition, off-balance sheet and contingent liabilities and
commitments must be categorized and included as assets for this purpose.
Under these guidelines, the Corporation is required to maintain total
capital of at least 8.00% of risk-adjusted assets, and half of that
minimum total capital must consist of Tier 1 capital as defined above.
The Comptroller has also adopted risk-based capital guidelines
applicable to national banks, such as the Bank, that are similar to the
Federal Reserve's risk-based capital guidelines. At this time, the Bank
is required to maintain total capital of at least 8.00% of risk-adjusted
assets.
The capital totals of the Corporation and the Bank, as of December 31,
2000, exceeded the amounts of capital required under the regulatory
guidelines. The following table shows the capital of the Corporation
and the Bank, as a percentage of assets, and the capital which they are
required to maintain under the capital regulations, as of December 31,
2000:
Corporation Bank
Leverage capital ratio 7.5% 7.4%
Required leverage capital ratio 3.0% - 5.0%* 3.0% - 5%*
Total risk-based capital ratio 10.7% 10.6%
Required total risk-based capital ratio 8.0% 8.0%
Tier 1 risk-based capital ratio 9.5% 9.4%
Required tier 1 risk-based capital ratio 4.0% 4.0%
* Determined based on the regulators' evaluations.
Under the risk-based capital rules, when the agencies assess the capital
adequacy of a bank, they must take into account the effect on that
bank's capital that would occur if interest rates moved up or down. The
purpose of this requirement is to ensure that banks with high levels of
interest rate risk have enough capital to cover the loss exposure.
The risk-based guidelines and the leverage ratio do not have a
significant effect on the Corporation and the Bank at this time because
both the Corporation and the Bank meet their respective required ratios.
The effect the requirements may have in the future is uncertain, but
management does not believe they will have an adverse effect on the
Corporation or the Bank. The risk-based capital guidelines may affect
the allocation of the Bank's assets between various types of loans and
investments. If the Bank continues to grow with its present asset
composition, it may be required to raise additional capital.
The required capital ratios have increased in significance under FDICIA,
as described above. The ratios now affect the Bank's ability to utilize
brokered deposits and its deposit insurance premium rates, and they can
result in regulatory enforcement action. See, above, "The Bank."
As required by FDICIA, the Federal banking agencies now take credit risk
concentrations and an individual institution's ability to manage such
concentrations into account when they assess a bank's capital adequacy.
Non-traditional investments and activities, such as the use of
derivatives, are also taken into account in assessing capital
requirements. The agencies can adjust the standards for risk-based
capital on a case by case basis to take such risks into account, but
there is no formula that a bank can use prior to evaluation by the
agency to determine how credit concentration or nontraditional
activities will affect its capital requirements.
Regulatory restrictions and other information guidelines with respect to
the payment of dividends by the Bank are contained in Item 5, "Market
for Common Equity and Related Stockholder Matters.", below.
Impact of Monetary Policies
Banking is a business in which profitability depends on rate
differentials. In general, the difference between the interest rate
received by the Bank on loans extended to its customers and securities
held in the Bank's investment portfolio and the interest rate paid by
the Bank on its deposits and its other borrowings comprise the major
portion of the Bank's earnings. To the extent that the Bank is not able
to compensate for increases in the cost of deposits and other borrowings
with greater income from loans, securities and fees, the net earnings of
the Bank will be reduced. The interest rates paid and received by the
Bank are highly sensitive to many factors which are beyond the control
of the Bank, including the influence of domestic and foreign economic
conditions.
The earnings and growth of the Bank are also affected by the monetary
and fiscal policy of the United States government and its agencies,
particularly the Board. These agencies can and do implement national
monetary policy, which is used in part to curb inflation and combat
recession. Among the instruments of monetary policy used by these
agencies are open market transactions in United States Government
securities, changes in the discount rates of member bank borrowings and
changes in reserve requirements. The actions of the Board have had a
significant effect on lending by banks, investments and deposits, and
such actions are expected to continue to have a substantial effect in
the future. However, the nature and timing of any further changes in
such polices and their impact on the Bank cannot be predicted.
Public Interest Laws, Consumer and Lending Laws
In addition to the other laws and regulations discussed herein, the Bank
is subject to certain consumer and public interest laws and regulations
that are designed to protect customers in transactions with banks.
While the list set forth below is not exhaustive, these laws and
regulations include the Community Reinvestment Act, Truth in Lending
Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the
Expedited Funds Availability Act, the Equal Credit Opportunity Act, the
Fair Housing Act, the Real Estate Settlement Procedures Act, the Home
Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt
Collection Practices Act, the Bank Secrecy Act and the Right to
Financial Privacy Act.
These laws and regulations mandate certain disclosure requirements and
regulate the manner in which financial institutions must deal with
customers when taking deposits, making loans, collecting loans and
providing other services. The Bank must comply with the applicable
provisions of these laws and regulations as part of its ongoing customer
relations. Failure to comply with these laws and regulations can
subject the Bank to various penalties, including but not limited to
enforcement actions, injunctions, fines or criminal penalties, punitive
damages to consumers and the loss of certain contractual rights.
Environmental Regulation
Federal, state and local regulations regarding the discharge of
materials into the environment may have an impact on the Corporation and
the Bank. Under Federal law, liability for environmental damage and the
cost of cleanup may be imposed upon any person or entity who is an owner
or operator of contaminated property. State law provisions, which were
modeled after Federal law, impose substantially similar requirements.
Both Federal and state laws were amended in 1996 to provide generally
that a lender who is not actively involved in operating the contaminated
property will not be liable to clean up the property, even if the lender
has a security interest in the property or becomes an owner of the
property through foreclosure.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"Economic Growth Act"), discussed in more detail below, includes
protection for lenders from liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980
("CERCLA"). The Economic Growth Act adds a new section to CERCLA to
specify the actions a lender may take with respect to lending and
foreclosure activities without incurring environmental clean-up
liability or responsibility. Typical contractual provisions regarding
environmental issues in the loan documentation and due diligence
inspections will not lead to lender liability for clean-up, and a lender
may foreclose on contaminated property, so long as it merely maintains
the property and moves to divest it at the earliest possible time.
Under California law, a lender generally will not be liable to the State
Attorney General for the cost associated with cleaning up contaminated
property unless the lender realized some benefit from the property,
failed to divest the property promptly, caused or contributed to the
release of the hazardous materials or made the loan primarily for
investment purposes. This amendment to California law became effective
with respect to judicial proceedings filed and orders issued after
January 1, 1997.
The extent of the protection provided by both the Federal and state
lender protection statutes will depend on their interpretation by the
administrative agencies and courts, and the Corporation cannot predict
whether it will be adequately protected for the types of loans made by
the Bank.
In addition, the Corporation and the Bank are still subject to the risks
that a borrower's financial position will be impaired by liability under
the environmental laws and that property securing a loan made by the
Bank may be environmentally impaired and not provide adequate security
for the Bank. California law provides some protection against the
second risk, by establishing certain additional, alternative remedies
for a lender in the situation where the property securing a loan is
later found to be environmentally impaired. Primarily, the law permits
the lender in such a case to pursue remedies against the borrower other
than foreclosure under the deed of trust.
The Bank attempts to protect its position against the remaining
environmental risks by performing prudent due diligence. Environmental
questionnaires and information on use of toxic substances are requested
as part of its underwriting procedures. The Bank lends based upon its
evaluation of the collateral, net worth of the borrower and the
borrower's capacity for unforeseen business interruptions or risks.
Americans With Disabilities Act
The Americans With Disabilities Act ("ADA") enacted by Congress, in
conjunction with similar California legislation, is having an impact on
banks and their cost of doing business. The legislation requires
employers with 15 of more employees and all businesses operating
"commercial facilities" or "public accommodations" to accommodate
disabled employees and customers. The ADA has two major objectives (1)
to prevent discrimination against disabled job applicants, job
candidates and employees and (2) to provide disabled persons with ready
access to commercial facilities and public accommodations. Commercial
facilities, such as the Bank, must ensure all new facilities are
accessible to disabled persons, and in some instances may be required to
adapt existing facilities to make them accessible, such as ATM's and
bank premises.
New and Pending Legislation
Certain legislative and regulatory proposals that could affect the
Corporation, the Bank and the banking business in general are pending or
have been introduced, before the United States Congress, the California
State Legislature, and Federal, state and local government agencies.
(a) ATM Fees. Legislation has been proposed in the past in the
Congress and the California legislature and measures are currently being
proposed in local jurisdictions to regulate the amount of ATM fees that
operators of ATMs may charge, and to further regulate the disclosure of
such fees. The Gramm-Leach-Bliley Act of 1999 also requires ATM
operators who impose a fee for use of an ATM by a non-customer to
disclose such fees. The Bank does not own or operate ATM machines.
(b) Expansion in Credit Union Membership. A broad rule adopted by the
National Credit Union Administration ('NCUA'), relaxes limits of credit
union membership. The new rule took effect January 1, 1999. The NCUA
will now approve credit unions with membership of more than 300,000
residents with proof that they function as a community. The effect is
to substantially expand credit union membership and make credit unions
as tax exempt entities, serving credit needs of large communities, more
competitive to banks. Litigation attacking the new rule is pending.
(c) Privacy. The 1996 Amendments to the Fair Credit Reporting Act
allow a bank to share customer information with its affiliates providing
the bank's customers are given the opportunity to 'opt out' by way of
language contained in a bank's loan applications, loan agreements and
other forms. The Gramm-Leach-Bliley Act of 1999 requires financial
institutions to provide further customer protections regarding the
sharing or selling of nonpublic personal information, including
disclosure by an institution of its policies regarding confidentiality
and security of such personal information and further requirements
regarding notices to customers and the customer's opportunity to
exercise a non-disclosure option. Regulations to implement these
requirements were adopted by the regulatory agencies in May, 2000 for
which compliance is optional until July 2001. California state law
provides protection against furnishing customer information to third
parties (other than law enforcement officials).
It is not known to what extent, if any, these proposals will be enacted
or remain in force or what effect such legislation would have on the
structure, regulation and competitive relationship of financial
institutions. It is likely, however, that many of these proposals would
subject the Corporation and the Bank to increased regulation, disclosure
and reporting requirements and would increase competition to the Bank
and its cost of doing business.
In addition to pending legislative changes, the various banking
regulatory agencies frequently propose rules and regulations to
implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such legislation or regulations
will be enacted or the effect that such legislation or regulations may
have on the Bank's business. It is likely, however, that many of these
proposals would subject the Corporation and the Bank to increased
regulation, disclosure and reporting requirements and would increase
competition to the Bank and its cost of doing business.
ITEM 2. Properties
The Corporation and the Bank share common quarters at 801 Fourth Street,
in the central business district of Santa Rosa. The Corporation leases
a total of approximately 9,335 square feet of ground floor and second
floor office space at that location and sublets this area to the Bank.
The SBA and Commercial Lending and Loan Administration offices are
located less than a block away from the main office at 815 Fifth Street,
Santa Rosa. The Bank leases 8,047 square feet from Mr. James Ratto, a
major shareholder of the Corporation.
The Corporation leases facilities for its five branch offices in Sonoma
County under various leases which expire under various dates, including
options to renew through the year 2025.
The Bank also leases other property for its supermarket branches in
Sonoma County and loan production offices in California and Arizona.
The Bank has signed a lease to be used as an operation center. The data
processing, bookkeeping, personnel and finance departments will be
relocating to the new facility during the third quarter of 2001. By
relocating these functions the Bank will have adequate facilities at the
Main Branch and the Lending and Loan Administration facilities to meet
present needs. Additional, facilities may be needed based upon the
expansion of the Bank.
The Bank has invested in loans secured by real property collateral. The
Bank's policies with respect to such loans are described under the
caption "Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operation - Loan Portfolio."
ITEM 3. Legal Proceedings
Neither the Corporation nor the Bank is a party to any material pending
legal proceedings, other than proceedings arising in the ordinary course
of the Bank's business. None of these are expected to have a material
adverse impact on the financial position or results of operations of the
Corporation or Bank.
ITEM 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of shareholders during the
fourth quarter of 2000.
Part II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
On February 15, 2001, the Corporation had 3,768,146 shares of common
stock outstanding, held by approximately 301 shareholders of record.
At February 15, 2001, the directors and officers of the Corporation and
the Bank hold 11.2% and beneficially own 35.6% of the outstanding
shares. See "Item 12, Security Ownership of Certain Beneficial Owners
and Management," herein. Under SEC rules, the directors and officers
are restricted in the amount of securities they may sell without
registration under the Securities Act of 1933, as amended. In general,
directors and officers each may offer up to 37,681 shares in any three
month period without such registration.
As of February 15, 2001, the directors, officers and staff also have the
right to acquire 1,097,003 additional shares upon the exercise of
options granted pursuant to the Corporation's Stock Option Plans.
Should several directors and officers choose to exercise options and
sell their shares on the market, such that a large number of shares are
offered at one time, the price of the common stock could be adversely
affected.
The Corporation's common stock is not listed on any securities exchange
or on the National Association of Securities Dealers Automated
Quotations (NASDAQ) System. The firms First Union Securities, Inc. and
Mutual Securities, located in Santa Rosa, and Hoefer & Arnett and First
Security Van Kasper, located in San Francisco, are presently making a
market in the stock. The Corporation's trading symbol is NREB. The
following chart shows the high and low bid quotations and the volume of
transactions in the Corporation's stock for the periods indicated. The
volume information has been provided to the Corporation by Hoefer &
Arnett of transactions reported to NASDAQ and does not include privately
negotiated transactions. After September 30, 2000, the trading volume
was obtained from the OTC bulletin board web site. The prices provided
by Mutual Securities are inter-dealer prices, do not necessarily
represent actual transactions and do not include retail mark-ups,
mark-downs or commissions. After September 30, 2000, the prices were
obtained the from the business section of the Press Democrat. The bid
prices and numbers of shares in this table have been adjusted for the
impact of the stock dividends issued during 1999 and 2000.
Bid Quotations for the Corporation's Common Stock
Approximate
High Low Trading Volume
---- ---- --------------
Quarter Ended
March 31, 1999 18.08 12.48 440,228
June 30, 1999 17.38 16.19 125,265
September 30, 1999 17.03 16.31 81,900
December 31, 1999 18.70 15.83 289,275
March 31, 2000 18.57 13.81 196,245
June 30, 2000 15.63 13.88 135,250
September 30, 2000 16.75 14.50 242,500
December 31, 2000 18.75 16.50 130,930
Due to the lack of any significant trading and no established public
market, the prices indicated above should not be considered an
indication of the market value of the shares. There is no assurance
that any significant trading market for the shares will develop in the
future and there are no assurances as to the price at which shares may
be traded in the future. The bid and asked prices of the Corporation's
common stock were $21.62 and $22.12, respectively, on February 15, 2001.
Dividends
On March 21, 2000, the Corporation declared a 5% stock dividend to
shareholders of record on May 3, 2000. On April 6, 1999, the
Corporation declared a 5% stock dividend to shareholders of record on
May 18, 1999.
The Corporation has not paid any cash dividends since 1995. There is no
assurance that dividends will be paid, or, if paid, what the amount of
any such dividends will be. The future dividend policy of the
Corporation is subject to the discretion of the Board of Directors and
will depend upon a number of factors, including earnings, financial
condition, cash needs and general business conditions. In addition, the
Board of Directors may declare dividends only out of funds legally
available therefor. See "Supervision and Regulation - Dividends Payable
by the Corporation."
The Corporation's primary source of income (other than interest income
earned on the Corporation's other investments) is the receipt of
dividends from the Bank. The Bank's ability to pay dividends is subject
to the restrictions of the national banking laws and, under certain
circumstances, the approval of the Comptroller of the Currency. A
national bank may not pay dividends from its capital. All dividends
must be paid out of net profits then on hand, after deducting for
expenses, including losses and bad debts. A national bank is also
prohibited from declaring a dividend until its surplus fund equals the
amount of its capital stock or, if the surplus fund does not equal the
amount of its capital stock, until one-tenth of the bank's net profits
for the preceding half year, in the case of quarterly or semiannual
dividends, or the preceding two consecutive half-year periods, in the
case of an annual dividend, are transferred to the surplus fund each
time dividends are declared.
The approval of the Comptroller is required if the total of all
dividends declared by a bank in any calendar year will exceed the total
of its net profits of that year combined with its retained net profits
of the two preceding years, less any required transfers to surplus or a
fund for the retirement of any preferred stock which may be outstanding.
Moreover, the Comptroller may prohibit the payment of dividends which
would constitute an unsafe and unsound banking practice. As of December
31, 2000, $11,621,000 of retained earnings of the Bank was available for
the payment of dividends under this requirement.
ITEM 6. Selected Financial Data
(Dollars in thousands)
Year ended December 31, 2000 1999 1998 1997 1996
--------- -------- --------- --------- ---------
Interest income $39,894 $29,824 $25,399 $20,645 $16,423
Interest expense 19,495 12,836 11,103 9,191 7,191
Net interest income 20,399 16,988 14,296 11,454 9,232
Provision for loan losses 960 800 480 650 420
Non-interest income 1,456 1,572 1,702 1,403 1,620
Non-interest expense 9,530 8,428 7,582 6,716 6,407
Income before income taxes 11,365 9,332 7,936 5,491 4,025
Provision for income taxes 4,513 3,754 3,171 2,218 1,719
Net Income 6,852 5,578 4,765 3,273 2,306
Earnings per share:
Basic* $1.82 $1.50 $1.31 $0.91 $0.63
Diluted* $1.75 $1.41 $1.26 $0.90 $0.62
Per Share:
Cash Dividends paid $0.00 $0.00 $0.00 $0.00 $0.00
Book value at December 31* $9.59 $7.77 $6.20 $4.92 $4.04
Average common shares outstanding* 3,760,230 3,719,153 3,639,856 3,578,749 3,655,219
Average diluted common shares outstanding* 3,915,841 3,951,941 3,770,284 3,644,465 3,698,864
Shares outstanding at December 31 (Actual) 3,766,382 3,560,296 3,309,712 1,555,069 1,461,400
At December 31
Loans, net 432,446 357,225 267,029 204,408 165,681
Total assets 494,390 397,928 322,253 233,737 224,793
Total deposits 453,437 357,867 295,969 214,747 209,235
Borrowed funds 1,828 9,050 1,872 0 0
Shareholders equity 36,103 29,062 22,810 17,709 14,338
Financial Ratios:
For the year:
Return on average assets 1.54% 1.59% 1.69% 1.43% 1.26%
Return on average equity 20.87% 21.62% 23.39% 20.30% 17.57%
Net interest margin 4.71% 5.03% 5.23% 5.22% 5.31%
Net loan losses to average loans 0.01% 0.01% 0.00% 0.08% -0.04%
Efficiency ratio 43.60% 45.41% 47.39% 52.24% 59.04%
At December 31
Equity to assets 7.30% 7.30% 7.08% 7.58% 6.38%
Total capital to risk adjusted assets 10.69% 10.54% 10.63% 10.95% 10.44%
Nonperforming assets to total loans & OREO 0.51% 0.52% 0.02% 0.29% 0.47%
Nonperforming assets to total assets 0.46% 0.47% 0.02% 0.26% 0.35%
Allowance for loan losses to total loans 1.06% 1.04% 1.11% 1.22% 1.20%
Allowance for loan losses to non-performing
assets 207.58% 200.58% 4869.35% 542.52% 466.21%
* Prior years have been adjusted for stock dividends and stock split
during 1997, 1998, 1999, and 2000.
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Corporation's sole subsidiary is Sonoma National Bank ("Bank"), and
its primary activities are the
commercial banking activities engaged in through the Bank. The
following discussion of financial condition and results of operations
focuses primarily on the Bank, for the years ended December 31, 1999 and
2000.
During 2000, total consolidated assets grew 24.2% to $494,390,000 at
December 31, 2000. Total consolidated assets grew 23.5% during 1999 to
$397,928,000 at December 31, 1999. The growth in both years results
from strong loan demand. See discussion on Loan Portfolio.
Total deposits increased 26.7% to $453,437,000 when comparing December
31, 2000 to December 31, 1999. For the year ended December 31, 1999,
total deposits increased 20.9% to $357,867,000. Deposits increased to
fund the loan growth mentioned above. See discussion on Deposits.
Results of Operations Summary
The Corporation's consolidated net income for the year ended December
31, 2000 was $6,852,000 as compared to $5,578,000 for the year ended
December 31, 1999, an increase of 22.8%. The Corporation's consolidated
net income for the year ended December 31, 1999, increased 17.1% over
the year ended December 31, 1998.
Net interest income before provision for loan losses increased
$3,411,000, or 20.1%, when comparing the year of 2000 to 1999. This
increase results from the growth in the volume of loans on which the
Bank earns a net interest margin. The Bank's interest margin for 2000
equaled 4.71% compared to 5.03% in 1999 and 5.23% in 1998. See, "Net
Interest Income."
The provision for loan losses increased $160,000 in 2000 over 1999.
See, "Allowance for Loan Losses." Non-interest income decreased
$116,000 primarily due to a decrease in the amount of $112,000 in
service charges on deposits. See, "Non-Interest Income." Operating
expenses increased by $1,102,000 primarily because of growth of the
Bank. A new branch office was opened in Petaluma, California in
November 2000 and 2000 was the first full year of operation of the
Sebastopol branch which opened in December 1999.
When comparing 1999 to 1998 the provision for loan losses increased
$320,000 from $480,000 in 1998 to $800,000 in 1999 and other income
decreased $130,000 from $1,702,000 in 1998 to $1,572,000 in 1998.
Operating expenses increased $846,000 during 1999 primarily due to
increases in personnel costs, a new branch office and the relocation of
the lending staff to larger space.
Net Interest Income
The primary source of the Bank's income is the difference between (1)
the interest earned on its loan and investment portfolios, interest
bearing deposits with other banks, and federal funds sold, and (2) the
interest paid on deposits and other borrowed funds. This difference is
referred to as net interest income, and it is one of the primary factors
that affect the Corporation's profitability. Interest income earned on
loans, which includes loan fee income, is primarily a function of the
amount of loans outstanding and the rates prevailing on these loans.
Interest paid on deposits depends on the composition of the deposit base
and the rates paid to attract deposits. See, "Deposits."
For the year ended December 31, 2000, net interest income before the
provision for loan losses totaled $20,399,000 as compared to $16,988,000
for the year ended December 31, 1999, representing an increase of 20.1%.
The majority of this increase results from the net margin earned on
growth in the loan portfolio, largely from the increase in commercial
real estate and construction loans. See, "Loan Portfolio." During
1999, net interest income before the provision for loan losses increased
$2,692,000 or 18.8%, from $14,296,000 in 1998 to $16,988,000, primarily
due to the net margin earned on growth in the loan portfolio.
The Bank's net interest margin (expressed as a percentage, the yield on
average interest earning assets less the rate paid on average interest
bearing liabilities) moved from 5.23% in 1998 to 5.03% in 1999 to 4.71%
in 2000. Several factors impact the Bank's net interest margin. These
include changes in market interest rates, level of loans relative to
deposits, mix of loan and earning assets, non-accrual loan balances and
mix of deposits and other funding sources.
Changes in Market Interest Rates
Changes in economic condition and actions of Federal Reserve Board to
the Fed Funds and Discount rates have a direct impact on the Bank's net
interest margin since prime rate generally moves with Federal Reserve
Board changes. During 2000 prime rate increased from 8.5% at December
31, 1999 to 9.5% at year end. During January 2001, the Federal Reserve
Board dropped the Fed Funds rate by 100 basis points which resulted in
the prime rate declining to 8.5%. There are no assurances that earnings
will not be adversely impacted by future actions of the Federal Reserve
Board and changes in market interest rates.
Since the Bank is asset sensitive, meaning more assets are immediately
adjustable than liabilities, the net interest margin tends to increase
when rates increase and tends to decrease in a declining rate
environment.
The full impact of rate changes on the Bank's earnings are not realized
for several months, since not all loans or deposits reprice immediately.
The majority of SBA loans are tied to the prime rate and reprice on a
calendar quarter basis. The Bank has adjustable rate loans, mainly
commercial real estate loans, that are tied to indexes which adjust at a
slower pace, such as the Eleventh District Cost of Funds Index (COFI).
The COFI index moved from 4.66% for December 1998 to 4.85% for December
1999 to 5.62% for December 2000. The Bank also has a fixed rate loan
portfolio which generally reduces net interest margin as interest rates
rise.
Level of Loans Relative to Deposits
The net interest margin is also affected by the level of loans relative
to deposits. The Bank's ratio of loans-to-deposits increased during
2000, when it averaged 98.2%, as compared to 96.1% in 1999 and 94.9% in
1998. An increase in the loan-to-deposit ratio generally results in
increased net interest margin.
Mix of Loan and Earning Assets
Changes in the mix of loans also impact the Bank's interest margin. The
Bank grew average loans by $91.2 million in 2000 and $68.5 million in
1999. In both those years the majority of the growth occurred in
commercial real estate loans. Increases of $80.5 and $49.4 million,
respectively which bear the lowest average interest yield of 8.93% in
2000 and 8.90% in 1999. The majority of commercial real estate loan
rates are tied to COFI and generally adjust every six months which is a
major factor in explaining why the yield moved up only 3 basis points.
Late in 1999, the Bank made a group of apartment loans (approximately
$20 million) which were tied to COFI with a lower interest margins than
other commercial real estate loans. The impact of these lower rates and
the slower repricing schedule of COFI loans negatively impacted the
Bank's interest margin.
Average SBA loans yields for 2000 increased 95 basis points over last
year. The majority of these loans reprice to prime rate on a quarterly
repricing schedule.
Construction loans grew $8.2 million during 2000. The average yield was
10.35% during 2000 compared to 10.41% in 1999. These loans have short
maturity dates (approximately one year). Rates competition for
construction loans has been strong within our market area.
Interest income increased from $25.4 million in 1998 to $29.8 million in
1999 to $39.9 million in 2000. This is a direct result of growth in
loans. Average loans increased from $239.5 million in 1998 to $308.0
million in 1999 to $399.2 million in 2000. The yield on loans fluctuated
from 9.85% in 1998 to 9.20% in 1999 to 9.47% in 2000. The 65 basis
point decline during 1999 resulted primarily from the mix in loans and
the lag in repricing COFI loans. In 2000 the Bank experienced the
benefit of increasing rates on prime based loans with the repricing
benefit of COFI loans still to be realized. The Bank continues to
experience increased competition for loans, which has resulted in lower
loan pricing in the market place, and may impact the Bank's offering
rates on new loans in the future.
Overall loan portfolio yields are affected by deferred loan fees and
discounts on loans. These fees and discounts are amortized to income
over the life, or estimated life, of the loan with which they are
associated and serve to increase loan portfolio yields. Interest income
on loans includes loan fee income of $1,403,000 for the year ended
December 31, 2000, $1,246,000 for the year ended December 31, 1999 and
$1,095,000 for the year ended December 31, 1998. This fee income
increased yields on average loans by 35 basis points in 2000, as
compared to 40 basis points in 1999. Deferred loan fees are a product
of origination and commitment fees net of certain direct loan
origination costs. The deferred fee amounts equaled $2,366,000 at
December 31, 2000, and $2,122,000 at December 31, 1999. Deferred fees
are netted against total loans in the balance sheet.
Discounts on the unguaranteed portion of SBA loans are recorded as an
asset when the guaranteed portion of the SBA loan is sold. These
discounts are amortized as an adjustment to the loan yields over the
estimated life of the SBA loan. As of December 31, 2000, $594,000 was
recorded as discounts compared to $568,000 at December 31, 1999. These
discounts are netted against total loans in the balance sheet.
Non-Accrual Loan Balances
Loans carried as non-accrual reduce the portfolio yield, since the
balance of a non-accrual loan is maintained in the loan total but no
interest is accrued. Non-accrual loans are included in the loan amounts
in the average balance sheets below. Interest foregone on non-accrual
loans equaled $186,000 during 2000 compared to $60,000 during 1999 and
$12,000 in 1998 which had a negative impact on the net interest margin.
The allowance for loan losses has no direct effect on yield. For further
discussion see "Allowance for Loan Losses."
Mix of Deposits and Other Funding Sources
Interest expense increased 51.9% when comparing 1999 to 2000, due to
increases in interest bearing deposits, particularly in time deposits
which bear the highest cost. The average cost of interest paid on
interest bearing deposits for the year ended December 31, 2000 was 5.39%
versus 4.62% for the year ended December 31, 1999. Deposit costs
increased at a significantly faster rate than loan yields during 2000.
Deposit costs rose 77 basis points with loan yield increasing only 27
basis points which had a major impact on the net interest margin for
2000.
The Bank's money market rate account, the Sonoma Investors Reserve
Account remained competitive and grew $28.9 million during 2000.
Balances held in Sonoma Investors Reserve accounts increased from $87.0
million December 31, 1998 to $97.5 million at December 31, 1999 and
$126.4 million at year end 2000. Average balances for all money market
accounts at the Bank were $77.5 million for 1998, $87.9 million for 1999
and $118.9 million for 2000. The rate offered on the Sonoma Investors
Reserve account is repriced on a weekly basis. The cost of these funds
had been tied to the 90 day U.S. Treasury Bill. The U.S. Treasury Bill
was very volatile during 2000 which led to the rapid increase in the
interest paid on this account. In November 2000, the Bank changed from
this volatile index to a discretionary rate which will allow the Bank to
manage the cost more effectively and remain competitive in our market
area. Due to the weekly repricing, changes in rates on the Sonoma
Investors Reserve Account had a more immediate impact on the Bank's cost
of funds than changes in rates on time certificates. The cost of funds
on savings and money market accounts equaled 4.06% in 1999 compared to
5.03% in 2000.
The time deposits reprice at a slower pace, since certificates of
deposits usually do not reprice until their maturity dates, which
generally range from six months to eighteen months. Time deposits have
fluctuated from $146.6 million at December 31, 1998 to $132.9 million at
December 31, 1999 to $254.0 million at December 31, 2000. During both
1999 and 2000, the Bank ran several time deposit campaigns at rates
slightly higher than its local competitors. These higher priced
deposits were used to fund the rapid growth in loans. The cost of time
deposits averaged 5.91% in 2000 and 5.26% in 1999 compared to savings
and money market rate accounts which averaged 5.03%in 2000 and 4.06% in
1999. Growth in time deposits which bear the highest cost, has a
negative impact on the Bank's cost of funds and net interest margin.
Average non-interest bearing deposits increased 7.4% in 2000. In 2000
and 1999, the majority of the Bank's growth was funded by time
certificates and money market accounts. The Bank has the ability to
borrow from the Federal Home Loan Bank (FHLB) at cost which is lower
than market rates on deposits. The Bank's borrowing capacity has been
increased to approximately $100 million, based on collateral, as a
result of the restructuring of the FHLB. The Bank has borrowed from the
FHLB to match fund two long term loans ($1.8 million) and has also
borrowed on a short term basis during times of reduced liquidity.
Currently, the Bank uses this line as a contingency source of funds. The
Bank plans to pledge additional collateral which will increase our
borrowing capacity to a level which would allow the Bank to use the FHLB
as a source of funds for loan growth.
The Bank's margin had been relatively stable during 1998 and then
declined in 1999 and 2000. Changes in the mix of loans and deposits,
changes in the ratio of loans-to-deposits, pricing competition and
market rates all impact the Bank's margin. During 1999, the Bank's cost
of funds decreased 5.8%, while the rate earned on loans decreased 7.1%
which negatively impacted income. The Bank's average loans-to-deposits
ratio increased from 94.9% in 1998 to 96.1% in 1999, and this had a
positive impact on net interest margin.
The tables on the following pages (i) summarize the distribution, by
amount, of the average assets, liabilities and shareholders' equity of
the Corporation for the periods indicated and (ii) set forth the yields
on earning assets and the rates paid for interest bearing liabilities
during the periods indicated. Averages are computed primarily from
daily balances.
AVERAGE BALANCE SHEET
Year Ended
December 31, 2000
(dollars in thousands)
Interest Average
Average Income Yield
Balance /Expense /Rate
------- -------- -------
Certificates of deposit
with other banks $498 $35 6.95%
Investments 3,908 229 5.85%
Federal funds sold 29,382 1,814 6.18%
Loans:
Commercial (including SBA loans) 124,131 12,694 10.23%
Installment loans to individuals 1,701 178 10.45%
Real estate - Construction 37,215 3,850 10.35%
Real estate - Other 236,123 21,094 8.93%
------- -------- -------
Total Loans 399,170 37,816 9.47%
------- -------- -------
Total earning assets 432,958 39,894 9.21%
--------
Non-earning assets:
Allowance for loan losses (4,227)
Deferred Loan Fees & Discounts (2,780)
Cash and due from banks 11,322
Other assets 8,466
-------
TOTAL ASSETS $445,739
=======
Deposits:
Demand - interest bearing $17,012 178 1.04%
Savings & money market 118,942 5,981 5.03%
Time certificates 221,797 13,116 5.91%
------- -------- -------
Total interest bearing deposits 357,751 19,275 5.39%
Other Interest bearing liabilities 3,736 220 5.88%
------- -------- -------
Total Interest bearing deposits &
liabilities 361,487 19,495 5.39%
--------
Non-interest bearing liabilities:
Non-interest bearing deposits 48,655
Other liabilities 2,758
Shareholders' equity 32,839
-------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $445,739
=======
Net interest income $20,399
========
Net interest margin 4.71%
========
AVERAGE BALANCE SHEET
Year Ended
December 31, 1999
(dollars in thousands)
Interest Average
Average Income Yield
Balance /Expense /Rate
------- -------- -------
Certificates of deposit
with other banks $0 $0
Investments 5,170 275 5.31%
Federal funds sold 24,772 1,203 4.86%
Loans:
Commercial (including SBA loans) 121,650 11,292 9.28%
Installment loans to individuals 1,738 186 10.68%
Real estate - Construction 29,020 3,022 10.41%
Real estate - Other 155,605 13,846 8.90%
------- -------- -------
Total Loans 308,013 28,346 9.20%
------- -------- -------
Total earning assets 337,955 29,824 8.82%
-------
Non-earning assets:
Allowance for loan losses (3,328)
Deferred Loan Fees & Discounts (2,286)
Cash and due from banks 10,550
Other assets 7,105
-------
TOTAL ASSETS $349,996
=======
Deposits:
Demand - interest bearing $15,833 $176 1.11%
Savings & money market 92,468 3,750 4.06%
Time certificates 167,224 8,794 5.26%
------- ------- -------
Total interest bearing deposits 275,525 12,720 4.62%
Other Interest bearing liabilities 2,132 116 5.44%
------- -------- -------
Total Interest bearing deposits
& liabilities 277,657 12,836 4.62%
--------
Non-interest bearing liabilities:
Non-interest bearing deposits 44,656
Other liabilities 1,882
Shareholders' equity 25,801
-------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $349,996
=======
Net interest income $16,988
=======
Net interest margin 5.03%
=======
AVERAGE BALANCE SHEET
Year Ended
December 31, 1998
(dollars in thousands)
Interest Average
Average Income Yield
Balance /Expense /Rate
------- -------- -------
Certificates of deposit
with other banks $ 0 $ 0
Investments 5,660 332 5.87%
Federal funds sold 28,047 1,466 5.23%
Loans:
Commercial (including SBA loans) 113,108 11,357 10.04%
Installment loans to individuals 1,761 193 10.99%
Real estate - Construction 18,473 2,142 11.59%
Real estate - Other 106,207 9,909 9.32%
------- -------- -------
Total Loans 239,549 23,601 9.85%
------- -------- -------
Total earning assets 273,256 25,399 9.29%
--------
Non-earning assets:
Allowance for loan losses (2,765)
Deferred Loan Fees & Discounts (1,992)
Cash and due from banks 8,072
Other assets 6,181
-------
TOTAL ASSETS $282,752
=======
Deposits:
Demand - interest bearing $12,608 $134 1.06%
Savings & money market 81,359 3,395 4.17%
Time certificates 132,938 7,568 5.69%
------- -------- -------
Total interest bearing deposits 226,905 11,097 4.89%
Other Interest bearing liabilities 130 6 4.61%
------- -------- -------
Total Interest bearing deposits &
liabilities 227,035 11,103 4.89%
--------
Non-interest bearing liabilities:
Non-interest bearing deposits 33,917
Other liabilities 1,426
Shareholders' equity 20,374
-------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $282,752
=======
Net interest income $14,296
========
Net interest margin 5.23%
========
The following tables set forth the changes in net interest income due to
changes in interest rates and the volume of assets and liabilities
between years. Variances attributable to simultaneous rate and volume
changes are all allocated to volume change amount.
ANALYSIS OF VOLUME AND RATE CHANGES
ON NET INTEREST INCOME AND EXPENSE
2000 OVER 1999
(dollars in thousands)
Volume Yield/Rate Total
------ ------ -------
Increase/(decrease) in interest income:
Certificates of deposit with other banks $35 $ - $35
Investments (67) 21 (46)
Federal funds sold 223 388 611
Loans:
Commercial (incl. SBA loans) 223 1,179 1,402
Installment loans to individuals (4) (4) (8)
Real estate - Construction 850 (22) 828
Real estate - Other 7,177 71 7,248
------ ------ -------
Total 8,437 1,633 10,070
------ ------ -------
Increase/(decrease) in interest expense:
Deposits & other interest bearing
liabilities:
Demand - interest bearing 14 (12) 2
Savings & money market 1,077 1,154 2,231
Time certificates 2,880 1,442 4,322
Other interest bearing liabilities 88 16 104
------ ------ -------
Total 4,059 2,600 6,659
------ ------ -------
Increase/(decrease) in net interest income $4,378 $(967) $3,411
====== ====== ======
ANALYSIS OF VOLUME AND RATE CHANGES
ON NET INTEREST INCOME AND EXPENSE
1999 OVER 1998
(dollars in thousands)
Volume Yield/Rate Total
------ ------ -------
Increase/(decrease) in interest income:
Certificates of deposit with other banks $0 $0 $0
Investments (28) (29) (57)
Federal funds sold (171) (92) (263)
Loans:
Commercial (incl. SBA loans) 860 (925) (65)
Installment loans to individuals (2) (5) (7)
Real estate - Construction 1,222 (342) 880
Real estate - Other 4,591 (654) 3,937
------ ------ -------
Total 6,472 (2,047) 4,425
------ ------ -------
Increase/(decrease) in interest expense:
Deposits & other interest bearing
liabilities:
Demand - interest bearing 34 8 42
Savings & money market 457 (102) 355
Time certificates 1,945 (719) 1,226
Other interest bearing liabilities 92 18 110
------ ------ -------
Total 2,528 (795) 1,733
------ ------ -------
Increase/(decrease) in net interest income $3,944 ($1,252) $2,692
====== ====== ======
Provision for Loan Losses
The provision for loan losses was $960,000 for 2000, compared to
$800,000 in 1999 and $480,000 in 1998. The increase in the provision
reflects the overall growth in loans and the increase in non-accrual
loans during this year. For further discussion see "Allowance for Loan
Losses."
Non-Interest Income
Non-interest income equaled $1,456,000 in 2000 compared to $1,572,000 in
1999 and $1,702,000 in 1998. The following table sets forth income by
category for the years indicated.
Years ended December 31,
(Dollars in thousands) 2000 1999 1998
------- ------- -------
Gain on SBA loan sales $451 $475 $619
Service charges on deposits 332 444 367
Loan servicing fees 285 301 347
Merchant and other service fees 137 152 117
Income on insurance policies 128 105 105
Discount brokerage 8 19 72
Gain on OREO sales 39 (2) 1
Other 76 78 74
------- ------- -------
Total Other Income $1,456 $1,572 $1,702
======= ======= =======
Non-interest income is derived primarily from gains on sales of SBA
loans, service charges on deposit accounts, earnings on life insurance
and SBA loan servicing fees. When comparing the year ended December 31,
2000 to December 31, 1999, non-interest income decreased 7.9% to
$1,456,000, compared to $1,572,000 in 1999. This decline results
primarily from lower service charges on deposit accounts see discussion
below under "Service Charges on Deposits." When comparing the year
ended December 31, 1999 to December 31, 1998, non-interest income
decrease 7.6% to $1,572,000, compared to $1,702,000 in 1998. This
decline results primarily from lower income on SBA loan sales.
Gains on SBA Loan Sales
Gains on the sale of the guaranteed portion of SBA loans decreased to
$451,000 in 2000 versus $475,000 in 1999. This decrease in gains on
sales resulted from a decline in the premium offered by the secondary
market. Due to the general strength of the economy and low interest
rate environment over the last few years, SBA borrowers had been
refinancing in order to take advantage of lower rates and increased
equity of their collateral. Due to these prepayments the yields to
investors had declined and premiums were reduced. The Bank's premiums
averaged 4.10% in 2000 compared to 5.40% in 1999 and 9.4% during 1998.
During 2000, the Bank sold SBA loans totaling $11,004,000, compared to
$10,017,000 in 1999 and $7,144,000 in 1998.
Service Charges on Deposits
Non-interest income includes service charges on deposit accounts.
During 2000, service charges totaled $332,000 versus $444,000 in 1999.
Service charges vary depending upon the customers' uses of various Bank
services. During 1999, the Bank had a customer who typically had high
service charges based upon the account balances and the services
provided. That customer moved their banking relationship to another
financial institution which resulted in a noticeable decline in service
charge income. In addition, the earnings credit rate during 1999 was
lower than it was during 2000 which meant that account holders' earnings
were lower to cover the cost of services. This resulted in higher
services charges during 1999. Additionally, our business account
holders have learned to manage their accounts activity to minimize their
service charges, resulting lower service charges on business accounts.
Loan Servicing Fees
SBA servicing fees decreased to $285,000 for 2000 compared to $295,000
for 1999 and $339,000 for 1998. Service fee income is based on loan
payments and loan payoffs received, and therefore, varies from year to
year. During 2000, the Bank's average SBA loan portfolio serviced was
$30.3 million versus $25.3 million for 1999 and $28.7 million in 1998.
The fluctuation in the serviced portfolio is caused by timing of SBA
loan payoffs and sales.
There can be no assurance that the SBA program will continue to generate
significant amounts of other non-interest income in the future. The
Bank continues to experience additional competition with more financial
institutions making SBA loans. The government may also revise the SBA
program at any time, which could have a negative impact on the Bank's
profit. See, "Item 1, The Corporation, Business of the Bank."
Income on Insurance Policies
Non-interest income also includes earnings on life insurance held for
certain directors and senior officers which totaled $128,000 in 2000
versus $105,000 in 1999.
Discount Brokerage
Discount brokerage services generated $8,000 in 2000 compared to $19,000
in 1999 and $72,000 in 1998. This service was well received by Bank
customers; however, due to the risk associated with discount brokerage
services it was determined that the Bank would no longer offer this
service effective January 1999 which accounts for the decline in income
from this source. The Bank continues to receive a monthly fee on the
open accounts which had been created during the time this service was
offered.
Gain on OREO Sales
During 2000, $39,000 in gain on sale of other real estate owned (OREO)
was recorded compared to a $2,000 loss in 1999 and $1,000 gain in 1998.
See, "Other Real Estate Owned."
1999 compared to 1998
Non-interest income for 1999 totaled $1,572,000, compared to $1,702,000
in 1998. The decrease in gains on the sale of the guaranteed portions
of SBA loans, which totaled $475,000 in 1999 compared to $619,000 in
1998 negatively impacted non-interest income. SBA servicing fees
decreased during 1999 to $295,000 compared to $339,000 in 1998. During
1999, discount brokerage services added $19,000, before expenses.
Service charges also increased $77,000 during 1999.
Non-Interest Expense
Non-interest expenses include salaries and employee benefits, occupancy,
equipment and the general expenses required for the operation of the
Corporation and the Bank. For the year ended December 31, 2000,
non-interest expenses totaled $9,530,000, an increase of 13.1% over the
previous year. The following table outlines the components of
non-interest expense for the periods indicated:
(In thousands)
Year Ended December 31,
2000 1999 1998
Expense Item ------- ------- -------
Salaries & Employee Benefits $5,468 $4,820 $4,284
Occupancy 855 789 747
Equipment 535 468 521
Advertising/Business
Development/Donations 493 441 365
Outside Customer Services 420 347 278
Director & Shareholder expenses 296 311 296
Deposit and Other Insurance 270 211 198
Postage & courier expenses 222 209 179
Professional Fees 245 165 151
Stationery & Supplies 193 173 148
Telephone expense 163 146 117
Loan expenses 82 135 128
Other 288 213 170
------ ------ ------
TOTAL $9,530 $8,428 $7,582
====== ====== ======
Salaries and Employee Benefits
A portion of the 13.4% increase in salaries and benefits resulted from
staff increases associated with the first full year of operation of the
Sebastopol Branch which opened in December 1999 and the new branch in
Petaluma which opened in November 2000. During 2000 incentive
compensation increased due to increased loan production and deposit
growth. Salaries also included increases for performance and promotions
during the year. The Bank's full time equivalent (FTE) staff positions
equaled 96 in 2000 compared to 83 in 1999 and 76 in 1998.
Occupancy
Occupancy costs increased 12.2% due to the two new branch locations and
annual increases in the rents charged on most facilities.
Equipment
Equipment expenses increased 14.3% to $535,000 in 2000 as our use of
technology continued to expand. In 2000, the Bank implemented a new
teller system which required that each teller have a personal computer
and printer. Our internet banking project commenced mid year and will
be available to our customers in 2001. Equipment costs are expected to
continue to increase during 2001 as the Bank grows and expands it usage
of technology.
Advertising/Business Development/Donations
Advertising and business development costs vary from year to year
depending on the various promotions that have occurred during the year.
These costs include promotion of various Bank services (Telebanc, SBA,
commercial and construction lending and deposit campaigns) and promoting
new locations. The Bank has continued its strong support of the local
community through contributions.
Outside Customer Services
Outside customer services increased from $347,000 in 1999 to $420,000 in
2000. Analysis charges are a major expense included in this category.
Analysis charges are customer expenses for title and escrow services,
check charges, courier and payroll services incurred on behalf of
customers who maintain non-interest bearing deposit balances sufficient
to compensate for these costs. See, "Deposits." While some
non-interest expense is incurred, management feels the contribution of
the non-interest bearing demand accounts toward lowering the overall
cost of funds more than offsets this cost.
Director and Shareholder Expenses
Director and shareholder expenses decreased from $311,000 in 1999 to
$296,000 in 2000. See "Compensation of Directors." Director fees vary
depending upon the number of meetings during the year and director
attendance at those meetings.
Deposit and Other Insurance
Included in Deposit and Other Insurance are Regulatory assessments which
have been increasing over the last several years to $117,000 in 1999 and
to $174,000 in 2000. The Bank's deposit insurance premium is currently
based upon the lowest cost category of zero cents per $100 of insured
deposits. There can be no assurance that the deposit insurance rates
will remain at this low level. Effective in 1997, the Bank was charged
a "Financing Corporation" (FICO) assessment. The annual rate varies
($0.0202 for second half of 2000) and is calculated per $100 of insured
deposits. This cost equaled $35,000 in 1999 and $76,000 in 2000. Also
included is the fee (based upon total assets) assessed by the Office of
the Comptroller of the Currency which equaled $82,000 in 1999 and
$98,000 in 2000 See, "Description of Business-Supervision and
Regulation."
Professional Fees
Professional fees increased from $165,000 in 1999 to $245,000 in 2000.
The Bank's legal costs increased $62,000 during 2000, due to the higher
volume of past due and non-accrual loans and OREO which required legal
assistance. Other professional fees include accounting services,
outside data processing review, loan review services, SBA audit fees and
computer training.
Loan Expenses
Loan expenses vary between years based upon many factors. The Bank
generally charges for direct costs associated with loan originations;
however, broker fees on SBA 7a loans are paid by the Bank. During 2000,
broker fees were included in cost recovery and recorded as part of
deferred fees on loans and amortized as an adjustment to interest income
in accordance with generally accepted accounting principles. Prior to
this year these costs were recorded as a loan expense ($91,000 in 1999
compared to $1,000 in 2000). During 2000, foreclosure costs increased
to $17,000 from $11,000 last year. During 1999, the Bank recovered the
SBA's share of costs associated with managing SBA problem loans. The
Bank had recorded the full amount as expense as the cost was paid. The
net recovery was $30,000 as income during 1999 compared to $4,000 in
2000. Other expenses increased based upon growth in loans.
The other expense categories increased due to growth of the Bank.
Non-interest expenses are expected to increase in 2001 due to the
anticipated growth in the Bank.
The increase in non-interest expenses of 11.1% from the 1998 total of
$7,582,000 to $8,428,000 in 1999 was due primarily to staff incentives
associated with increased volume of loan and deposit activity. The
growth of the Bank with the new branch in Sebastopol and new loan
production office in Walnut Creek resulted in higher costs.
Loan Portfolio
The following table shows the composition of the loan portfolio, by type
of loan, as of the dates indicated.
(In thousands)
December 31,
2000 1999 1998 1997 1996
-------- --------- --------- -------- ---------
Type of Loan
Commercial $118,134 $112,277 $110,468 $91,860 $74,630
Real Estate Construction 46,244 39,523 28,177 10,982 1,533
Real Estate Other 273,298 210,119 131,661 103,936 91,347
Installment Loans to
Individuals 2,412 1,783 1,749 2,012 2,218
-------- --------- --------- -------- ---------
Total, gross 440,088 363,702 272,055 208,790 169,728
-------- --------- --------- -------- ---------
Deferred fees and
discounts, net (2,961) (2,690) (2,007) (1,843) (2,005)
-------- --------- --------- -------- ---------
Total loans net of deferred
fees and discounts 437,126 361,012 270,048 206,947 167,723
Allowance for loan losses (4,681) (3,787) (3,019) (2,539) (2,042)
-------- --------- --------- -------- ---------
TOTAL LOANS, NET $432,446 $357,225 $267,029 $204,408 $165,681
======== ========= ========= ======== =========
The table above illustrates the Bank's emphasis on commercial and real
estate lending. At December 31, 2000 and 1999 commercial loans
comprised 26.8% and 30.9%, respectively, of the Bank's total loan
portfolio. Construction and other real estate loans (combined)
comprised 72.6% and 68.7% on those same dates. Management is aware of
the risk factors in making commercial and real estate loans and is
continuously monitoring the local marketplace as well as performing
annual reviews of this portfolio.
The Bank makes commercial loans primarily to small and medium sized
businesses and to professionals located within Sonoma County with SBA
loans also being generated in California and Arizona. While the Bank
emphasizes commercial lending, management does not believe that there is
any significant concentration of commercial loans to any specific type
of business or industry.
At December 31, 2000, 95% or $416 million of the Bank's loans were
secured by real estate as the principal source of collateral. A
worsening of economic conditions, a decline of real estate values and/or
rising interest rates could have an effect on the value of real estate
securing these loans.
Most of the security for the Bank's loans is located in the area where
the loan is generated. A significant natural disaster impacting those
locations, such as a severe earthquake or widespread flooding, could
disrupt the business of these borrowers and impair the security for the
Bank's loans. Although some of the Bank's borrowers carry insurance to
cover some of the losses that might arise from such an event, the Bank
does not require all its borrowers to carry earthquake insurance
coverage since such insurance typically provides a large deductible
amount. If a large earthquake occurs in the Bank's market area, the
Bank would probably have to restructure some of its loans and may suffer
loan losses related to the earthquake.
The Bank originates loans guaranteed by the U.S. Small Business
Administration ("SBA"). The guaranteed portion of each loan, typically
ranging from 70% to 90%, may be sold to outside investors, usually at a
price in excess of par. Under the new rules the 7(a) guarantees range
from 75% to 85% with a maximum of $1,000,000. The unguaranteed portion
on sold loans is generally retained in the Bank's loan portfolio. The
Bank follows the same internal credit approval process when approving an
SBA loan as when approving other loans. The majority of the Bank's SBA
loans are secured by real estate. All SBA loans are reported in the
chart above as Commercial Loans.
While SBA loans generally have the same underwriting requirements as the
Bank's other loans, they are sometimes for longer terms (7 to 25 years)
and have a higher loan-to-value ratio than the Bank typically accepts.
This risk is mitigated by the majority of the loans being secured by
real estate. If a default on a SBA loan occurs the Bank shares
proportionally in the collateral supporting the loan with the SBA which
guarantees the loan. The SBA department also generates commercial and
construction loans which are not SBA loans. At December 31, 2000, the
Bank held $203,073,000 in loans generated by the SBA department, of
which $93,889,000 were 7(a) loans of which $61,946,000 was guaranteed by
the SBA. At December 31, 1999, the Bank held $165,019,000 in loans
generated by the SBA department, of which $91,838,000 were 7(a) loans of
which $60,948,000 was guaranteed by the SBA. There were no SBA
guaranteed loans more than 90 days past due and still accruing interest:
there were three SBA guaranteed loans totaling $1,791,000, of which
$1,292,000 was guaranteed by the SBA, on non-accrual status, as of
December 31, 2000. There were charge-offs totaling $36,000 on loans with
SBA guarantees during 2000 and no charge offs on SBA guaranteed loans
during 1999 and 1998.
The category entitled "Real Estate-Other" includes loans which are
secured by real estate and not classified as a construction or
commercial loan. The majority of these loans are secured by commercial
real estate. The Bank offers residential mortgage loans on a limited
basis. Home equity lines of credit, included in Real Estate - Other,
equaled 1.1% of the total loan portfolio at December 31, 2000 compared
to 0.7% at December 31, 1999. These loans are secured primarily by
second trust deeds on single family residences. The Bank typically
requires a loan-to-value ratio of no more than 80% for home equity
loans. The rates are adjustable monthly based on the Bank's internal
reference rate, and terms do not exceed ten years.
Real estate construction loans grew from $39,523,000 in 1999 to
$46,244,000 in 2000. The Bank created a construction loan group during
1997 to focus on construction loans primarily for single family
residences valued at under $4,000,000 located in Northern California.
Construction loans are made to "owner/occupied" and "owner/users" of the
properties and occasionally to developers with a successful history of
developing projects in the Bank's market area. Loan-to-value ratios on
construction loans depend upon the nature of the property. The Bank's
policy is to require that the loan-to-value ratio ranges from 65% to 80%
and that the borrower have a cash equity interest in the land ranging
from 25%-50% or alternative collateral. The construction lending
business is subject to, among other things, the volatility of interest
rates, real estate prices in the area and the market availability of
conventional real estate financing to repay such construction loans. A
decline in real estate values and/or demand could potentially have an
adverse impact on this portion of the loan portfolio, and on the
earnings and financial condition of the Bank.
The Bank has a small portfolio of consumer loans, equaling 0.6% of the
total loan portfolio at December 31, 2000. Personal lines of credit and
overdraft protection are offered to customers. Regular underwriting
procedures are followed depending upon the type of loans. Revolving
lines are reviewed every two years.
It is the Bank's policy to collateralize all loans unless, in
management's estimation, the credit worthiness, cash flow and character
of the borrower justify extension of credit on an unsecured basis.
Management recognizes the inherent risk in making unsecured loans, but
in management's judgement, such unsecured loans are justified based on
the credit worthiness and financial strength of the borrowers.
Management believes that its secured loans are adequately collateralized
to minimize loss in the event of default in payment of interest or
principal or decline in collateral values. In making collateralized
loans, the Bank's policy establishes a maximum loan-to-collateral value
ratio of from 50% to 100%, depending on the type of collateral and the
other factors supporting the loan.
The following table summarizes the Bank's loan maturities, by loan type,
at December 31, 2000. Loans are categorized by the maturity of the
final installment.
(In thousands)
Real Estate- Other Real
Commercial Construction Estate Installment Total
---------- ------------ ---------- ----------- -------
Loans Maturing in:
One year or less:
Fixed rate $809 $24,343 $18,707 $80 $43,939
Variable rate 11,916 12,218 2,959 - 27,093
One to five years
Fixed rate 3,035 514 7,340 1,512 12,401
Variable rate 6,812 3,386 20,365 56 30,619
After five years
Fixed rate 1,721 115 19,273 248 21,357
Variable rate 93,841 5,668 204,653 516 304,678
---------- ------------ ---------- ----------- -------
TOTAL $118,134 $46,244 $273,297 $2,412 $440,087
========== ============ ========== =========== ========
Of the total loans due in more than one year at December 31, 2000,
$33,758,000 were at fixed interest rates, which includes loans currently
at their floor rate, and $335,297,000 were at adjustable interest rates.
Interest Rate Sensitivity
The Bank attempts to lend at competitive interest rates and to reduce
exposure to interest rate fluctuations by making most of its loans at
adjustable interest rates.
The following table summarizes the Bank's loan portfolio by contractual
repricing frequency and by loan type, at December 31, 2000. SBA loans
are considered commercial loans for this analysis. Most of the SBA
loans are secured by real estate. The Bank has approximately $16.1
million in adjustable loans which are priced at floor rate and are
considered fixed rate loans, deemed to reprice at their maturity date
for the purpose of this analysis.
(In thousands)
Over 3 Over
3 Months Months 1 Year
or through through Over 5
Less 1 Year 5 Years Years Total
-------- ------- ------- ------ --------
Commercial $110,413 $1,190 $4,809 $1,722 $118,134
Real Estate -Construction 30,353 13,417 2,318 156 46,244
Real Estate -Other 44,754 153,217 55,139 20,187 273,297
Installment Loans 753 22 1,390 247 2,412
-------- -------- ------- ------- --------
TOTAL $183,273 $167,846 $63,656 $22,312 $440,087
======== ======== ======= ======= ========
Interest rate risk is reduced through the practice of making variable
interest rate loans which are tied to an outside rate index. These
loans "float", or adjust their rate as the interest rate environment
changes. As of December 31, 2000 and 1999 approximately 82% and 73%,
respectively, of the Bank's loan portfolio was comprised of loans with
adjustable rates (excluding those which had reached their floors).
Allowance for Loan Losses
In accordance with its policy, the Bank maintains an allowance for loan
losses to provide for losses in the loan portfolio. The allowance for
loan losses is reviewed monthly and is based on an allocation for each
loan category (e.g. Real Estate, Commercial), an allocation for
undisbursed commitments, 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 and an allowance provided according to the risk
assessment. In addition, management considers such factors as known
loan problems, historical loan loss experience, loan concentrations,
loan loss experience in the banking industry, evaluations made by bank
regulatory agencies, assessment of economic conditions and other
appropriate data to identify risks in the loan portfolio. Based upon
this analysis of the allowance for loan losses (which incorporates the
growth in the loan portfolio during the year), the Bank has increased
the allowance by 23.6% to $4,680,000 at December 31, 2000 compared to
$3,787,000 in 1999. The provision for loan losses for the year ended
December 31, 2000 was $960,000 as compared to $800,000 for the year
ended December 31, 1999. The increase in the allowance was based upon
the growth in the loan portfolio during the year. The ratio of
allowance to total loans outstanding (net of SBA loan guarantees)
equaled 1.2% at December 31, 2000 and 1.3% at December 31, 1999.
Depending on future evaluations of the allowance in connection with
regulatory examinations, any changes in the factors management reviews
as described above, and the amount of any loan losses that may be
incurred, further increases may be made in accordance with the Bank's
policy, and such increases will have an adverse effect on earnings.
Management attempts to reduce exposure to loss from adverse economic
conditions through portfolio diversification among businesses and types
of borrowers.
The following table sets forth the changes in the allowance for loan
losses over the last five years and the relationship to loans
outstanding, net of the SBA guaranteed portion, at the end of those
periods.
(dollars in thousands)
Year Ended December 31,
ALLOWANCE FOR LOAN LOSSES: 2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Balance at Beginning of Period $3,787 $3,019 $2,539 $2,042 $1,676
Provision for Loan Losses
Charged to Expense 960 800 480 650 420
Less Charge-Offs:
Commercial 0 13 0 48 38
Real Estate-Other 66 0 0 140 0
Consumer loans 0 19 0 34 24
------ ------ ------ ------ ------
Total Charge-offs 66 32 0 222 62
------ ------ ------ ------ ------
Recoveries:
Commercial 0 0 0 69 8
Real Estate - Other 0 0 0 0 0
Consumer 0 0 0 0 0
------ ------ ------ ------ ------
Total Recoveries 0 0 0 69 8
------ ------ ------ ------ ------
Net Charge-offs/(Recoveries) 66 32 0 153 54
------ ------ ------ ------ ------
Balance at the End of the Period $4,681 $3,787 $3,019 $2,539 $2,042
====== ====== ====== ====== ======
Total Loans Outstanding at End of
Period-Net of SBA Guarantees $378,141 $302,665 $213,034 $162,077 $141,472
Ratio of Ending Allowance to
Ending Loans Outstanding-Net
of SBA Loan Guarantees 1.2% 1.3% 1.4% 1.6% 1.4%
AVERAGE TOTAL LOANS $399,170 $308,013 $239,549 $191,292 $148,025
Ratio of Net Charge-offs to
Average Loans Outstanding
During the Period 0.012% 0.010% 0.0% 0.079% 0.036%
During 2000 there were charged-offs on three real estate loans totaling
$66,000 and no loan recoveries.
The following tables set forth the allocation of the allowance for loan
losses by loan type at the end of those periods indicated. The
allocation of the allowance will necessarily change whenever management
determines that the risk characteristics of the loan portfolio have
changed. It should not be construed that the amount allocated to a
particular segment is the only amount available for future charge-offs
that might occur within that segment, since the allowance is a general
reserve. In addition, the amounts allocated by segment may not be
indicative of future charge-off trends. The percentage of loans shown
in these schedules represent the percentage of loans in each loan
category to total loans.
(dollars in thousands)
December 31, December 31, December 31,
2000 1999 1998
% of % of % of
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
Category
Commercial $1,194 26.8% $1,269 30.8% $1,565 40.6%
Real Estate -
Construction 1,057 10.5 776 10.9 444 10.4
Real Estate -Other 2,383 62.1 1,700 57.8 959 48.4
Installment Loans 47 0.6 42 0.5 51 0.6
------ ----- ------ ----- ------ -----
TOTAL $4,681 100.0% $3,787 100.0% $3,019 100.0%
====== ===== ====== ===== ====== =====
(dollars in thousands)
December 31, December 31,
1997 1996
% of % of
Amount Loans Amount Loans
------ ----- ------ -----
Category
Commercial $1,312 44.0% $1,081 44.0%
Real Estate -
Construction 133 5.2 66 .9
Real Estate -Other 1,021 49.8 744 53.8
Installment Loans 73 1.0 151 1.3
------ ----- ----- -----
TOTAL $2,539 100.0% $2,042 100.0%
====== ===== ====== =====
Non-Performing and Impaired Loans
Loans are generally placed on non-accrual status when the borrowers are
past due 90 days or when payment in full of principal or interest is not
expected. At the time a loan is placed on non-accrual status, any
interest income previously accrued but not collected is reversed.
Interest accruals are resumed on such loans only when they are brought
fully current with respect to interest and principal and when, in the
judgement of management, the loans are estimated to be fully collectible
as to both principal and interest. The Bank considers a loan impaired
when, based upon current information and events, it is probable that the
Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement.
The following table sets forth information regarding nonperforming
assets at the dates indicated.
(In thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Nonperforming loans:
Non-accrual loans 2,097 1,888 62 318 438
Accruing loans past due 90 days 158 0 0 150 0
Restructured loans 0 0 0 0 0
Total nonperforming loans 2,255 1,888 62 468 438
Other real estate owed 0 0 0 130 359
----- ----- ---- ---- ----
Total nonperforming/
impaired assets 2,255 1,888 62 598 797
----- ----- ---- ---- ----
Nonperforming assets to total loans
and other real estate owned 0.51% 0.52% 0.02% 0.29% 0.47%
Nonperforming assets to
total assets 0.46% 0.47% 0.02 % 0.26% 0.35%
The following table sets forth the classified loans at the end of the
last five years.
(In thousands)
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Substandard $3,071 $3,607 $2,679 $1,602 $1,383
Doubtful 0 2 18 25 179
Loss 0 0 0 0 0
Other real estate owned 0 0 0 130 359
------ ------ ------ ------ ------
Total classified assets $3,071 $3,609 $2,697 $1,757 $1,921
====== ====== ====== ====== ======
Classified to total loans
and other real estate owned 0.70% 0.99% 0.99% 0.84% 1.12%
Allowance for loan losses
to total classified 152.43% 119.54% 106.22% 86.04% 114.62%
The amount of interest foregone on the loans on non-accrual at December
31, 2000 totaled approximately $186,000 for 2000 and $105,000 in
interest was earned on those loans (prior to those loans being placed on
non-accrual) during the year.
On December 31, 2000, the Bank had $2,097,000 in non-accrual loans, of
which the total amount was collateralized by real estate and $1,292,000
was guaranteed by the SBA. As of December 31, 1999, the Bank had
$1,888,000 in non-accrual loans, of which $959,000 was collateralized by
real estate and $908,000 was guaranteed by the SBA.
Potential non-performing loans are identified by management as part of
its ongoing evaluation and review of the loan portfolio. Based on such
reviews as of December 31, 2000, management has no knowledge of
information about any loan which causes management to have doubts about
the borrowers' ability to comply with present repayment terms, such that
the loan might subsequently be classified as non-performing.
Other Real Estate Owned
During 2000, the Bank sold one building acquired by the Bank through a
foreclosure sale at a gain of $39,000. In 1999, there was one
foreclosure which was sold at a loss of $2,000.
Deposits
The Bank obtains deposits primarily from shareholders, local businesses,
loan customers and personal contacts by its business development staff,
officers and directors. The Bank does not have any brokered deposits.
At December 31, 2000, deposits totaled $453,437,000, which was an
increase of 26.7% from $357,867,000 at December 31, 1999.
Non-interest bearing demand deposits totaled $51,017,000 at December 31,
2000 as compared to $40,358,000 at December 31, 1999. Although these
deposits do not bear interest, some of the account holders utilize the
Bank's analysis system which gives earnings credits for their collected
average balances based on an internal index. The customer may then use
those earnings credits towards various account services such as escrow
accounting fees, courier services, payroll, and check printing paid to
third party vendors. The balances in this type of account tend to vary
and were lower than normal at the end of the year. The average balance
for demand deposits grew to $48,655,000 during 2000 from $44,656,000
during 1999.
Time deposits increased $56.5 million or 28.6% in 2000. During both
1999 and 2000, the Bank offered highly competitive rates on time
deposits in order to fund growth in loans. Time deposits increased from
$146,584,000 at December 31, 1998 to $197,416,000 at December 31, 1999
to $253,959,000 at December 31, 2000. This shift to time deposits which
bear a higher rate than other types of deposits, increased the Bank's
overall cost of funds. See, "Net Interest Income."
Money market deposits increased $28.9 million or 29.7% from December 31,
1999 to December 31, 2000. The Bank's Sonoma Investor Reserve account,
which was previously tied to the 90-day Treasury Bill and is now tied to
a discretionary index, reprices on a weekly basis. During 1999 and 2000
the Sonoma Investors Reserve accounts offered rates which were
competitive with rates offered on 30 to 90 day time certificates, and
therefore, this account has been very popular with depositors.
Management attempts to reduce risks from fluctuating interest rates by
limiting the maturities on certificates of deposit. The following table
sets forth, by time remaining to maturity, the Bank's time certificates
of deposit as of December 31, 2000.
$100,000 and Over Less than $100,000
Amount Amount
(in 000's) Pct (in 000's) Pct
------- ----- -------- -----
Three Months or Less $12,904 15.0% $28,674 17.1%
3 to 6 months 10,999 12.8 19,997 11.9
6 months to 1 year 48,518 56.4 88,534 52.7
Over 1 year 13,645 15.8 30,689 18.3
------- ----- -------- -----
Total $86,066 100.0% $167,894 100.0%
======= ===== ======== =====
At December 31, 2000, certificates of deposit of $100,000 or more
constituted approximately 19.0% of total deposits. The holders of these
deposits are primarily local customers of the Bank. While these
deposits are rate sensitive, the Bank believes they are stable deposits,
as they are obtained primarily from customers with other banking
relationships with the Bank.
Investment Portfolio
The following table shows the fair market value of the Bank's investment
portfolio at December 31, 2000, 1999 and 1998.
December 31,
(in thousands) 2000 1999 1998
----- ----- -----
U.S. Treasury Securities $0 $0 $0
U.S. Government-Sponsored Agencies 1,985 2,970 7,005
Federal Home Loan Bank Stock 561 1,165 1,602
Federal Reserve Stock 161 129 129
------ ------ ------
Total $2,707 $4,264 $8,736
====== ====== ======
Securities Pledged $625 $625 $625
====== ====== ======
The following table shows the yield of investments (at amortized cost)
by maturity ranges as of December 31, 2000. Federal Home Loan Bank and
Federal Reserve stock are excluded from this table.
(in thousands) Amount Yield
------ -----
One year or less $1,985 6.46 %
Over one year through 5 years 0 0.00
Over 5 years through 10 years 0 0.00
Over 10 years 0 0.00
------ ----
Total $1,985 6.46 %
The yield on average investments equaled 5.31% during 1999 compared to
5.85% in 2000. See, "Net Interest Income."
The Federal Home Loan Bank ("FHLB") stock was purchased during 1997.
Stock purchase is a requirement of establishing a borrowing
relationship. See, "Liquidity." The Bank receives stock dividends
quarterly based upon the earnings of the Federal Home Loan Bank Stock.
The Bank received an annualized yield of 5.8% during 1998, 5.4% during
1999 and 7.2% during 2000. The Federal Reserve Bank stock has a yield of
6.0%.
Investments are carried at amortized cost or market value, depending on
whether they are held to maturity or available for sale. At December
31, 2000, $1,985,000 was classified as available for sale per accounting
definitions. At December 31, 1999, $2,970,000 was classified as
available for sale. The market value of securities equaled $1,985,000
and 2,970,000 at December 31, 2000 and December 31, 1999, respectively.
Liquidity - Consolidated
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.
In addition, these policies include acceptable ranges for the Bank's
loans-to-deposits ratio. The Bank also compares its liquidity position
and ratios to its peer group.
The Bank is required to maintain specific reserve balances with the
Federal Reserve Bank. This is monitored on a daily basis to assure
compliance with regulatory requirements. The Office of the Comptroller
of the Currency ("OCC") also requires the Bank to establish adequate
liquidity policies and practices. Although defined liquidity
percentages are not specified in the OCC's regulations, they have been
incorporated in the Bank's policies and procedures.
Cash and due from banks and federal funds sold totaled $49,527,000 or
10.0% of total assets at December 31, 2000 compared to $28,059,000 or
7.1% of total assets at December 31, 1999. The liquidity level at
December 31, 2000 equaled the Bank's policy guideline of 10%.
At December 31, 2000 and 1999, the Bank's ratio of loans-to-deposits was
97.0% and 101.6% respectively. At year end the Bank was within its
internal guideline; however, at December 31, 1999 the Bank exceeded the
guideline due to the high loan growth during December 1999 and the
higher demand for cash related to Y2K preparations.
The Bank has two federal funds lines of credit totaling $9,000,000 with
two financial institutions. These lines are available on a short term
basis to meet cash demands that may arise. The Bank also has a
borrowing relationship with the Federal Home Loan Bank, which has
provided a new source of funds for loan growth and liquidity purposes.
Due to restructuring at the Federal Home Loan Bank, the Bank has the
ability to borrow at significantly higher levels depending upon the
collateral available for pledging. At this year end the Bank had
$25,153,000 in loans pledge which provided a borrowing capacity of
$15,521,000. As of December 31, 2000, the Bank had borrowed $1,828,000
compared to $9,050,000 at December 31, 1999.
The Bank funded loan growth during 2000 and 1999 through increased
interest-bearing deposits (mainly time deposits) and liquidity.
Deposits increased during 2000 and 1999 largely due to deposit campaigns
which offered higher rates to attract new time deposits. This trend is
expected to continue. The Bank expects to expand the use the Federal
Home Loan Bank lending program to fund loan growth in the future.
Liquidity - Parent Company Only
At present, the Corporation's primary sources of liquidity are from
short term investments on its capital, proceeds from 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 OCC. See Item 5, "Dividends." In addition, the Federal Reserve Act
prohibits the Bank from making loans to its "affiliates", including the
Corporation, unless certain collateral requirements are met.
At December 31, 2000, the Corporation had non-interest and interest
bearing cash balances of $213,000, which management believes is adequate
to meet the Corporation's foreseeable operational expenses.
Return on Equity and Assets
The following table shows key financial ratios for the years ended
December 31, 2000, 1999 and 1998:
Year Ended December 31,
2000 1999 1998
---- ---- ----
Return on Average Assets 1.5% 1.6% 1.7%
Return on Average
Shareholders' Equity 20.9% 21.6% 23.4%
Average Shareholders' Equity
as a Percent of Average Assets 7.4% 7.4% 7.2%
Dividend Payout Ratio N/A N/A N/A
Effects of Inflation
Inflation affects the Bank and the banking business generally because of
its effect on interest rates and loan demand. To offset inflation and
the resulting changes in interest rates and market demands, the Bank
attempts to maintain liquid interest bearing assets and to manage its
assets and liabilities such that they can be repriced within a short
period of time. In addition to its effect on market conditions and
interest rates, inflation increases the Corporation's cost of
operations. The rate of inflation has maintained a very low annual rate
during the last few years.
Capital
The Corporation and the Bank are required by the Federal Reserve Board
and the Comptroller of the Currency to maintain adequate capital. The
Board of Governors of the Federal Reserve Bank has adopted risk-based
capital guidelines for member banks and bank holding companies which
provide minimum uniform capital adequacy requirements for bank holding
companies. The OCC has also adopted additional capital requirements
which are applicable to national banks, such as the Bank. See "Item 1,
Description of Business, Supervision and Regulation-Capital Regulations
and Item 8, Consolidated Financial Statements, Note 12."
The Bank and the Corporation are considered "Well-Capitalized" under the
"risk-based" capital methodology. The Bank's leverage capital ratio was
7.4% of its total assets. The Bank's total risk-based capital ratio was
10.6% at December 31, 2000. The minimum acceptable level at December
31, 2000 was 8.0%. The Corporations leverage capital ratio was 7.5%,
with total risk-based capital equaling 10.7%, at December 31, 2000.
Income Taxes
The 2000 provision for income tax equaled $4,513,000. The overall
effective tax rate was 39.7% during 2000. See, "Item 7, Consolidated
Financial Statements, Note 6." The provision for federal income taxes
for 1999 was $3,754,000. The overall effective tax rate for 1999 and
1998 was 40.2% and 40.0% respectively.
Item 7A. 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 or sustained increases and decreases in market
interest rates of 100 basis points or more. 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 100 and 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 100 and 200 basis points up
or down.
Change in Estimated Estimated Change in
Interest Rate Net Interest Income Net Interest Income
(basis points) (000) (000)
+200 $25,775 $1,611
+100 24,971 806
Base Scenario 24,164 -
- -100 23,375 (789)
- -200 22,775 (1,390)
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 table represents the Corporation's interest rate
sensitivity profile as of December 31, 2000. Assets, liabilities and
shareholders' equity are classified by the earliest possible repricing
opportunity or maturity date, whichever first occurs.
Over 3 Non-rate
months Over 1 year Sensitive
Balance Sheet Through 3 through through 5 or Over
(in thousands) months 1 year years 5 years Total
-------- -------- --------- -------- --------
Assets
Fed funds sold and
Time Deposits $35,505 $693 $36,198
Investment securities - 1,985 $722 2,707
Loans 186,273 167,846 $63,656 22,312 440,087
Non-interest-earning assets
(net of allowance for
loan losses) 15,398 15,398
-------- -------- --------- -------- --------
$221,778 $170,524 $63,656 $38,432 $494,390
-------- -------- --------- -------- --------
Liabilities &
Shareholders Equity
Time Deposits $100,000
and over $12,904 $59,517 $13,645 $86,066
Other interest-bearing
deposits and liabilities 172,491 108,531 30,689 $6,471 318,182
Non-interest bearing
liabilities 51,017 51,017
Other Liabilities &
Shareholders' Equity 39,125 39,125
-------- -------- --------- -------- --------
$185,395 $168,048 $44,334 $96,613 $494,390
-------- -------- --------- -------- --------
Interest Rate Sensitivity (1) $36,383 $2,476 $19,322 $(58,181)
Cumulative Interest
Rate Sensitivity $36,383 $38,859 $58,181 -
(1) Interest rate sensitivity is the difference between interest rate
sensitive assets and interest rate sensitive liabilities within the
above time frames.
The Bank is fairly well balanced in terms of repricing schedule. Prime
based loans approximate money market accounts with both repricing
relatively quickly. Time deposits and loans tied to COFI reprice on a
similar schedule with approximately the same balances repricing. In the
past the Bank was more asset sensitive which meant that in a declining
interest rate environment there usually is an immediate negative impact
on the Bank's net interest margin, since assets reprice to lower rates
more quickly than liabilities. In a raising interest rate environment,
the Bank's earnings were positively affected immediately. The Bank
continually monitors its interest rate sensitivity as part of the Bank's
planning process.
The Corporation and the Bank do not at this time engage in hedging
transactions (interest rate futures, caps, swap agreements, etc.).
ITEM 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Northern Empire Bancshares
We have audited the accompanying consolidated balance sheets of Northern
Empire Bancshares and Subsidiary as of December 31, 2000 and 1999, and
the related consolidated statements of income, comprehensive income,
changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Northern Empire Bancshares and Subsidiary as of December 31, 2000 and
1999, and the results of their operations and cash flows for the years
then ended, in conformity with generally accepted accounting principles.
MOSS ADAMS LLP
Santa Rosa, California
January 26, 2001
Report of Independent Accountants
To the Board of Directors and Stockholders of Northern Empire Bancshares
and Subsidiary:
We have audited the consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows of Northern
Empire Bancshares and Subsidiary (the Company) for the year ended
December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and
cash flows of the Company for the year ended December 31, 1998, in
conformity with accounting principles generally accepted in the United
States of America. We have not audited the consolidated financial
statements of Northern Empire Bancshares and Subsidiary for any period
subsequent to December 31, 1998.
PricewaterhouseCoopers LLP
San Francisco, CA
February 11, 1999
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
ASSETS
2000 1999
------------ ------------
Cash and due from banks $13,329,000 $11,030,000
Federal funds sold 35,505,000 17,029,000
Interest bearing deposits in other banks 693,000 0
Investment securities available for sale 1,985,000 2,970,000
Federal Home Loan Bank (FHLB) stock, at cost 561,000 1,165,000
Federal Reserve Bank stock, at cost 161,000 129,000
Total investment securities 4,264,000 4,264,000
Loans, net 432,446,000 357,225,000
Premises and equipment 937,000 792,000
Accrued interest receivable and other assets 8,773,000 7,588,000
------------ ------------
Total assets $494,390,000 $397,928,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $453,437,000 $357,867,000
Accrued interest payable and other liabilities 3,022,000 1,949,000
FHLB advances 1,828,000 9,050,000
------------ ------------
Total liabilities 458,287,000 368,866,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, no par value;
20,000,000 shares authorized;
3,766,382 and 3,560,296 shares
issued and outstanding in 2000 and 1999
18,267,000 15,561,000
Additional paid-in capital 742,000 646,000
Accumulated other comprehensive income (loss) 4,000 (17,000)
Retained earnings 17,090,000 12,872,000
------------ ------------
Total stockholders' equity 36,103,000 29,062,000
------------ ------------
Total liabilities and stockholders' equity $494,390,000 $397,928,000
============ ============
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
INTEREST INCOME
Loans $37,816,000 $28,346,000 $23,601,000
Federal funds sold and investment securities 2,078,000 1,478,000 1,798,000
----------- ----------- -----------
Total interest income 39,894,000 29,824,000 25,399,000
INTEREST EXPENSE 19,495,000 12,836,000 11,103,000
----------- ----------- -----------
Net interest income before provision
for loan losses 20,399,000 16,988,000 14,296,000
PROVISION FOR LOAN LOSSES 960,000 800,000 480,000
----------- ----------- -----------
Net interest income after provision
for loan losses 19,439,000 16,188,000 13,816,000
----------- ----------- -----------
NONINTEREST INCOME
Service charge on deposits 332,000 444,000 367,000
Gain on sale of loans 451,000 475,000 619,000
Other 673,000 653,000 716,000
----------- ----------- -----------
Total noninterest income 1,456,000 1,572,000 1,702,000
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries and benefits 5,468,000 4,820,000 4,284,000
Occupancy 855,000 789,000 747,000
Equipment 535,000 468,000 521,000
Outside customer services 420,000 347,000 278,000
Deposit and other insurance 270,000 211,000 198,000
Professional fees 245,000 165,000 151,000
Advertising 248,000 213,000 187,000
Other administrative 1,489,000 1,415,000 1,216,000
----------- ----------- -----------
Total noninterest expenses 9,530,000 8,428,000 7,582,000
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 11,365,000 9,332,000 7,936,000
PROVISION FOR INCOME TAXES 4,513,000 3,754,000 3,171,000
----------- ----------- -----------
NET INCOME $6,852,000 $5,578,000 $4,765,000
=========== =========== ===========
EARNINGS PER COMMON SHARE $1.82 $1.50 $1.31
=========== =========== ===========
EARNINGS PER COMMON SHARE,
ASSUMING DILUTION $1.75 $1.41 $1.26
=========== =========== ===========
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
----------- ----------- -----------
NET INCOME $6,852,000 $5,578,000 $4,765,000
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses)
arising during period 7,000 (30,000) 8,000
Reclassification adjustment for
(gains) losses included in net income 30,000 (4,000) 0
----------- ----------- -----------
37,000 (34,000) 8,000
Income tax benefit (expense) (16,000) 13,000 (3,000)
----------- ----------- -----------
21,000 (21,000) 5,000
----------- ----------- -----------
COMPREHENSIVE INCOME $6,873,000 $5,557,000 $4,770,000
=========== =========== ===========
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
Accumulated
Common Stock Additional Other
-------------------- Paid-in Comprehensive Retained
Shares Amount Capital Income (Loss Earnings Total
--------- ---------- -------- -------- ----------- -----------
Balance, December 31, 1997 3,110,138 $9,778,000 $0 ($1,000) $7,932,000 $17,709,000
5% stock dividend 156,976 2,453,000 0 0 (2,453,000) 0
Stock options exercised 42,598 134,000 202,000 0 0 336,000
Payout of fractional shares 0 0 0 0 (5,000) (5,000)
Unrealized gains on securities,
net of tax 0 0 0 5,000 0 5,000
0
Net income 0 0 0 4,765,000 4,765,000
--------- ---------- -------- -------- ----------- -----------
Balance, December 31, 1998 3,309,712 12,365,000 202,000 4,000 10,239,000 22,810,000
5% stock dividend 169,351 2,942,000 0 0 (2,942,000) 0
Stock options exercised 81,233 254,000 444,000 0 0 698,000
Payout of fractional shares 0 0 0 0 (3,000) (3,000)
Unrealized gains on securities,
net of tax 0 0 0 (21,000) 0 (21,000)
0
Net income 0 0 0 5,578,000 5,578,000
--------- ---------- -------- -------- ----------- -----------
Balance, December 31, 1999 3,560,296 15,561,000 646,000 (17,000) 12,872,000 29,062,000
5% stock dividend 179,157 2,632,000 0 0 (2,632,000) 0
Stock options exercised 26,929 74,000 96,000 0 0 170,000
Payout of fractional shares 0 0 0 0 (2,000) (2,000)
Unrealized gain on securities,
net of tax 0 0 0 21,000 0 21,000
0
Net income 0 0 0 6,852,000 6,852,000
--------- ---------- -------- -------- ----------- -----------
Balance, December 31, 2000 3,766,382 $18,267,000 $742,000 $4,000 $17,090,000 $36,103,000
========= =========== ======== ======== =========== ===========
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $6,852,000 $5,578,000 $4,765,000
Adjustments to reconcile net income to net cash from
operating activities:
Provision for loan losses 960,000 800,000 480,000
Depreciation, amortization and accretion 396,000 356,000 380,000
FHLB stock dividend (63,000) (75,000) (90,000)
Net increase in deferred loan fees and discounts 271,000 691,000 164,000
Change in deferred income taxes (642,000) (644,000) (448,000)
Tax benefit from stock options exercised 96,000 444,000 202,000
Gain on sale of fixed assets (9,000) (4,000) 0
Increase in interest receivable and other assets (543,000) (648,000) (474,000)
Increase in accrued interest payable and
other liabilities 1,073,000 347,000 321,000
----------- ----------- -----------
Net cash from operating activities 8,391,000 6,845,000 5,300,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 2,984,000 4,000,000 3,953,000
Net change in interest bearing deposits (693,000) 0 0
Net increase in loans (76,452,000) (91,687,000) (63,265,000)
Purchase of leasehold improvements and equipment, net (543,000) (294,000) (561,000)
Purchase of Federal Reserve Bank stock (32,000) 0 0
FHLB stock redemptions 667,000 512,000 0
Proceeds from sale of fixed assets 11,000 23,000 0
Purchase of available-for-sale securities (1,978,000) 0 (6,998,000)
Maturities of held-to-maturity securities 0 0 1,499,000
----------- ----------- -----------
Net cash from investing activities (76,036,000) (87,446,000) (65,372,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 95,570,000 61,898,000 81,222,000
Net increase (decrease) in FHLB advances (7,222,000) 7,178,000 1,872,000
Payout of fractional shares (2,000) (3,000) (5,000)
Proceeds from exercise of stock options 74,000 254,000 134,000
----------- ----------- -----------
Net cash from financing activities 88,420,000 69,327,000 83,223,000
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 20,775,000 (11,274,000) 23,151,000
CASH AND CASH EQUIVALENTS, beginning of year 28,059,000 39,333,000 16,182,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $48,834,000 $28,059,000 $39,333,000
=========== =========== ===========
SUPPLEMENTAL CASH-FLOW INFORMATION
Cash paid during the year for:
Interest $19,200,000 $12,725,000 $10,995,000
Income taxes $4,652,000 $4,246,000 $2,853,000
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of operations - Northern Empire Bancshares (the Company) is
a bank holding company that conducts its business through its
wholly-owned subsidiary, Sonoma National Bank (the Bank). The Bank is
headquartered in Santa Rosa, California, and operates six branches in
suburban communities located throughout Sonoma County, California. Its
primary source of revenues is derived from providing commercial and real
estate loans to predominantly small and middle-market businesses. The
Bank is a Preferred Lender under the Small Business Administration's
(SBA) Loan Guarantee Program.
Principles of consolidation - All significant, intercompany transactions
and accounts between Northern Empire Bancshares and its wholly-owned
subsidiary, Sonoma National Bank, have been eliminated in consolidation.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities. The amounts estimated could differ
from actual amounts.
Cash and cash equivalents - For purposes of reporting cash flows, cash
and cash equivalents consist of cash on hand, amounts due from banks,
and federal funds sold. Generally, federal funds are sold overnight.
Substantially all cash and cash equivalents held in other financial
institutions exceed existing deposit insurance coverage.
Interest bearing deposits in other banks - Interest bearing deposits in
other banks mature within one year and are carried at cost. The amounts
held in other banks do not exceed the FDIC insurance threshold.
Investment securities - The Bank classifies and accounts for debt and
equity securities as follows:
Held-to-maturity: Debt securities that management has the positive
intent and ability to hold until maturity are classified as
held-to-maturity and are carried at their remaining unpaid principal
balance, net of unamortized premiums or nonaccreted discounts. Premiums
are amortized and discounts are accreted using the level interest yield
method over the estimated term of the underlying security.
Available-for-sale: Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity, and changes in the availability of and the yield of
alternative investments, are classified as available-for-sale. After
amortization or accretion of any premiums or discounts, these assets are
carried at market value. Market value is determined using published
quotes as of the close of business. Unrealized gains and losses are
excluded from earnings and reported net of tax as a separate component
of stockholders' equity.
Trading securities: Debt and equity securities that are bought and held
principally for the purposes of selling them in the near term are
classified as trading securities and reported at market value, with
unrealized gains and losses included in earnings.
Stock-based compensation - The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB No. 25), and complies with the disclosure provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123). Under APB No. 25, compensation
expense is the excess, if any, of the fair value of the Company's stock
at a measurement date over the amount that must be paid to acquire the
stock. SFAS No. 123 requires a fair value method to be used when
determining compensation expense for stock options and similar equity
instruments. SFAS No. 123 permits a company to continue to use APB No.25
to account for stock-based compensation to employees, but proforma
disclosures of net income and earnings per share must be made as if SFAS
No. 123 had been adopted in its entirety. Stock options issued to
non-employees are valued under the provisions of SFAS No. 123.
Premises and equipment - Premises and equipment are stated at cost and
depreciated or amortized using the straight-line method over the shorter
of the estimated useful lives of the assets, which are three to seven
years, or the term of the applicable lease.
Advertising - Advertising costs are charged to expense during the year
in which they are incurred.
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
Income taxes - The Company and the Bank file consolidated federal income
tax returns and combined state tax returns for California, Arizona, and
New Mexico. Income taxes are recognized using enacted tax rates and are
composed of taxes on financial accounting income that is adjusted for
requirements of current tax law and deferred taxes. Deferred taxes are
the expected future tax consequences of temporary differences between
the financial statement carrying amounts and tax bases of existing
assets and liabilities.
Recent accounting pronouncements - The Financial Accounting Standards
Board has issued SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB Statement No. 125." SFAS No. 140, while carrying over most of
the provisions of FASB No. 125 without reconsideration, revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral, and requires certain disclosures. The
Statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001. This
Statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions
and collateral for fiscal years ending after December 15, 2000. The
adoption of SFAS No. 140 is not expected to have a material effect on
the Company's consolidated financial statements.
Loans - Loans are carried at amortized cost. The Bank's portfolio
consists primarily of commercial and real estate loans generally
collateralized by first and second deeds of trust on real estate, as
well as business assets and personal property.
Interest income is accrued daily on the outstanding loan balances using
the simple interest method. Loans are generally placed on nonaccrual
status when the borrowers are past due 90 days and when full payment of
principal or interest is not expected. At the time a loan is placed on
nonaccrual status, any interest income previously accrued but not
collected is reversed. Interest accruals are resumed on such loans only
when they are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest.
The Bank charges loan origination and commitment fees. Net loan
origination fees are deferred and amortized to interest income over the
life of the loan. Loan commitment fees are amortized to interest income
over the commitment period.
Sales and servicing of Small Business Administration (SBA) loans - The
Bank originates loans to customers under SBA programs that generally
provide for SBA guarantees of 70% to 90% of each loan. The Bank has the
option to sell the guaranteed portion of each loan and retain the
unguaranteed portion in its own portfolio. Funding for the SBA programs
depends on appropriations by the U.S. Congress.
Gains on these sales are earned through the sale of the guaranteed
portion of the loan for an amount in excess of the adjusted carrying
value of the portion of the loan sold. The Bank allocates the carrying
value of such loans between the portion sold, the portion retained, and
a value assigned to the right to service the loan. The difference
between the adjusted carrying value of the portion retained and the face
amount of the portion retained is amortized to interest income over the
life of the related loan using a method that approximates the interest
method.
The amount assigned to the right to service the loan is based on its
fair value relative to the loan as a whole. To determine the fair value
of servicing rights, the Bank uses models that incorporate assumptions
that market participants would use in estimating future net servicing
income, which includes estimating the cost of servicing per loan, the
discount rate, and loan prepayment estimates. The Bank amortizes the
servicing rights using the effective interest methods. The balance of
the servicing asset is included in other assets.
Allowance for loan losses - An allowance for loan losses is maintained
at a level deemed appropriate by management to provide for both known
and unidentified losses in the loan portfolio. The allowance is based
upon management's assessment of various factors affecting the
collectibility of the loans, including current and projected economic
conditions, past credit experience, delinquency status, the value of the
underlying collateral, if any, and continuing review of the portfolio of
loans and commitments.
The allowance for loan losses is an estimate, and actual losses may vary
from these estimates. The estimate is reviewed periodically and
adjustments, if necessary, are reported in earnings in the periods in
which the adjustment becomes known.
A loan is considered impaired if it is probable the Bank will be unable
to collect the scheduled payments of principal or interest according to
the contractual terms of the loan agreement. Any allowance for losses on
impaired loans is measured under one of three prescribed methods. Since
nearly all of the Bank's loans are collateral dependent, the calculation
of the impaired loans is generally based on the fair value of the
collateral.
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
Earnings per share - Earnings per share (EPS) are computed using the
weighted average number of common shares outstanding during the year.
Diluted earnings per share are computed by adjusting the common shares
outstanding for the assumed conversion of all potentially dilutive stock
options. The computation of basic and dilutive earnings per share is
retroactively adjusted for all periods presented to reflect the change
in the capital structure resulting from stock dividends.
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for the years
ended December 31, 2000, 1999 and 1998:
2000
--------------------------------
Weighted
Average Per
Income Shares Share
(Numerator) (Denominator) Amount
---------- --------- ------
Income per common share $6,852,000 3,760,230 $1.82
Effect of dilutive securities -
Stock options 0 155,611
---------- --------- -----
Income per common share -
assuming dilution $6,852,000 3,915,841 $1.75
========== ========= =====
1999
--------------------------------
Weighted
Average Per
Income Shares Share
(Numerator) (Denominator) Amount
---------- --------- -----
Income per common share $5,578,000 3,719,153 $1.50
Effect of dilutive securities -
Stock options 0 232,788
---------- --------- -----
Income per common share -
assuming dilution $5,578,000 3,951,941 $1.41
========== ========= =====
1998
--------------------------------
Weighted
Average Per
Income Shares Share
(Numerator) (Denominator) Amount
---------- --------- -----
Income per common share $4,765,000 3,639,856 $1.31
Effect of dilutive securities -
Stock options 0 130,428
---------- --------- -----
Income per common share -
assuming dilution $4,765,000 3,770,284 $1.26
========== ========= =====
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
Comprehensive income - Comprehensive income is composed of net income
and changes in equity from non-stockholder sources. These
non-stockholder sources are reported net of tax and include unrealized
gains and losses on certain investments in debt and equity securities
and foreign currency translation adjustments. Accumulated balances of
these non-stockholder sources are reflected as a separate item in the
equity section of the balance sheet.
Federal Home Loan Bank system - As a member of the Federal Home Loan
Bank (FHLB), the Company is required to maintain an investment in the
FHLB's capital stock. The investment is carried at cost. Interest rates
on the advances from the FHLB currently range from 5.56% to 5.637%, and
mature through 2008. To collateralize these advances, the Bank has
pledged loans to FHLB with outstanding principal balances of
$25,153,000, which results in a borrowing capacity of $15,521,000.
Derivatives and hedging - The Bank's investment policy does not allow
derivatives, interest swaps, caps, collars, or hedging investments.
NOTE 2 - INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities with a carrying value of $625,000 were pledged to
secure deposits and borrowings, as required by law, at both December 31,
2000 and 1999. The securities held at December 31, 2000, mature within
one year.
Unrealized Market
Cost Gains (Losses) Value
---------- ------------ ----------
U.S. Government Agency Securities -
December 31, 2000 $1,978,000 $7,000 $1,985,000
---------- ------------ ----------
U.S. Government Agency Securities -
December 31, 1999 $3,000,000 ($30,000) $2,970,000
---------- ------------ ----------
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The Bank's lending activities are concentrated primarily in Sonoma
County, California, with SBA loans also being generated in California,
Arizona and New Mexico. There were no industry or borrower group
concentrations at December 31, 2000 and 1999.
2000 1999 1998
------------ ------------ ------------
Commercial loans $118,134,000 $112,277,000 $110,468,000
Consumer installment loans 2,412,000 1,783,000 1,749,000
Real estate loans - construction 46,244,000 39,523,000 28,177,000
Real estate loans - mortgage 273,298,000 210,119,000 131,661,000
------------ ------------ ------------
440,088,000 363,702,000 272,055,000
Deferred loan fees and discount (2,961,000) (2,690,000) (2,007,000)
Allowance for loan losses (4,681,000) (3,787,000) (3,019,000)
------------ ------------ ------------
$432,446,000 $357,225,000 $267,029,000
============ ============ ============
A summary of activity in the allowance for loan losses is as follows:
2000 1999 1998
---------- ---------- ----------
Balance, beginning of year $3,787,000 $3,019,000 $2,539,000
Provision for loan losses 960,000 800,000 480,000
Loans charged-off (66,000) (32,000) 0
---------- ---------- ----------
$4,681,000 $3,787,000 $3,019,000
========== ========== ==========
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
At December 31, 2000, there were five loans totaling $2,097,000 in
nonaccrual status. There were five loans totaling $1,888,000 on
nonaccrual status at December 31, 1999. Interest foregone on these loans
totaled $186,000 and $60,000, respectively. That portion of the
allowance for loan losses associated with these nonaccrual loans was
$40,000 and $127,000, respectively.
The Bank has the option to sell to outside investors the guaranteed
portion of SBA loans while retaining the unguaranteed portion in its
loan portfolio. The SBA guarantee is transferred to the buyer and the
Bank retains the loan's servicing function. The Bank serviced
$30,263,000 and $25,267,000 in loans guaranteed by the SBA at December
31, 2000 and 1999, of which the Bank's retained interests in those loans
ranged from 10% to 45%. Losses on these loans are shared between the
Bank and the SBA on a pro rata basis. SBA guaranteed loans that could be
sold in the future totaled $61,946,000 at December 31, 2000.
The Bank serviced non-SBA loans for others totaling $24,579,000 and
$9,300,000 in unpaid principal balances at December 31, 2000 and 1999.
NOTE 4 - PREMISES AND EQUIPMENT
2000 1999
---------- ----------
Leasehold improvements $1,211,000 $1,083,000
Furniture and equipment 2,718,000 2,337,000
---------- ----------
3,929,000 3,420,000
Less accumulated depreciation
and amortization 2,992,000 2,628,000
---------- ----------
$937,000 $792,000
========== ==========
NOTE 5 - DEPOSITS
Certificates of deposit with balances of $100,000 or more totaled
$86,066,000 and $63,620,000 at December 31, 2000 and 1999. Deposits
consist of the following:
2000 1999
----------- ------------
Noninterest-bearing $51,017,000 $40,358,000
Interest-bearing:
Money market 126,422,000 97,500,000
Savings 4,643,000 5,029,000
Demand 17,396,000 17,564,000
Certificates of deposit 253,959,000 197,416,000
------------ ------------
$453,437,000 $357,867,000
============ ============
Certificates of deposit are scheduled to mature as follows:
Year Ending December 31,
------------------------
2001 $209,625,000
2002 43,743,000
2003 565,000
2004 26,000
------------
$253,959,000
============
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
The components of the provision for federal and state income taxes are
as follows:
2000 1999 1998
---------- ----------- -----------
Provision for income taxes
Federal $3,752,000 $2,928,000 $2,539,000
State 1,307,000 1,026,000 878,000
---------- ----------- -----------
5,059,000 3,954,000 3,417,000
Change in deferred income taxes (642,000) (644,000) (448,000)
Tax benefit from options exercised 96,000 444,000 202,000
---------- ----------- ------------
$4,513,000 $3,754,000 $3,171,000
========== =========== ============
A reconciliation of the statutory tax rates to the effective tax rates
is as follows:
2000 1999 1998
------ ------ ------
Federal income tax at statutory rate 34.0 % 34.0 % 34.0 %
State franchise taxes, net of federal 7.6 7.3 6.2
Other, net (1.9) (1.1) (0.2)
------ ------ ------
39.7 % 40.2 % 40.0 %
====== ====== ======
The components of net deferred tax assets are as follows:
2000 1999
---------- ----------
Loan loss reserves $1,924,000 $1,559,000
State taxes, net of federal effect 454,000 349,000
Deferred compensation 362,000 239,000
All others 273,000 224,000
---------- ----------
$3,013,000 $2,371,000
========== ==========
NOTE 7 - STOCK OPTIONS
The Company's nonqualifying stock option plans provide for granting of
stock options to directors and officers to purchase shares of the
Company's stock. All shares covered by the options granted to date may
be purchased at a price not less than the fair-market value on the date
the option was granted. Options vest over three to five years and expire
ten years from the date of grant.
During the year options to several directors were canceled and reissued.
At the time the options were canceled, the exercise price was less than
the fair value of the shares, the directors were 40% vested and the
remaining life of the options was eight years. Under the new plan, the
directors were issued the same number of shares at a price in excess of
the options canceled and equal to the fair market value at the time of
the grant. The new options contain an accelerated vesting period, to
match the vesting of the canceled options and have a ten-year life.
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company granted 10,000 nonqualifying stock options to employees
during the current year.
Had compensation cost for the Company's options been determined based on
the methodology prescribed under SFAS No. 123, the Company's net income
and income per share would have been as follows:
2000 1999 1998
---------- ---------- ----------
Net income for the year $6,852,000 $5,578,000 $4,765,000
Compensation expense,
net of tax effect 287,000 266,000 0
---------- ---------- ----------
Proforma net income $6,565,000 $5,312,000 $4,765,000
========== ========== ==========
Proforma earnings per
common share $1.75 $1.43 $1.31
Proforma earnings per common
share, assuming dilution $1.68 $1.34 $1.26
The fair value of each option is estimated on date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2000 1999 1998
------------ ------------- ------------
Dividends 5% 5% 0
Expected volatility 15.13% 25.91% 0
Risk-free interest rate 5.9% - 6.35% 4.57% - 5.45% 0
Expected life 10 years 10 years 0
The following tables summarize the number of options granted and
exercisable, and the weighted average exercise prices and remaining
contractual lives of the options:
2000 1999
-------------------- ------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 839,020 $13.33 881,578 $12.99
Granted 299,406 $14.33 0 $0.00
Options granted attributable
to the stock dividend 40,606 $13.02 39,975 $13.39
Forfeited (290,878) $13.32 (1,300) $14.00
Exercised (26,929) $2.78 (81,233) $3.12
------- -------
Outstanding at end of year 861,225 $13.38 839,020 $13.33
======= =======
Options exercisable at end of year 352,200 203,812
======= =======
Weighted-
Number Weighted- Number Average
Outstanding Weighted- Average Exercisable Exercise Price
at Average Remaining at of Options at
December 31, Exercise Contractual December 31, December 31,
2000 Price Life 2000 2000
- ------------ --------- ----------- ----------- ------------
14,365 $2.48 .7 years 14,365 $2.48
5,153 2.98 3.2 years 5,153 $2.98
67,676 12.70 7.6 years 27,070 $12.70
474,625 13.32 7.8 years 189,850 $13.32
289,406 14.25 7.6 years 115,762 $14.25
10,000 16.56 9.8 years 0 $16.56
------- -------
861,225 352,200
======= =======
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the Plan, options were granted during 2000 to prevent
the antidilutive effect of the 5% stock dividend during the year. The
exercise price was reduced accordingly.
NOTE 8 - DEFERRED COMPENSATION
The Company has deferred compensation agreements with two key officers
and four Board members. The agreements require the Company to provide
annual benefits ranging from $75,000 to $100,000 for the officers, and
$13,000 to $55,000 for the Board members for 15 years after retirement
or disability. In the event of death, the beneficiaries are to receive
the benefits. The estimated present value of future benefits to be paid
is being accrued over the period from the effective date of the
agreements until the expected retirement dates of the participants. The
expense incurred for the years ended December 31, 2000, 1999 and 1998,
totaled $93,000, $173,000 and $186,000. The Company is the beneficiary
of life insurance policies that have been purchased as a method of
financing the benefits under the agreements. At December 31, 2000 and
1999, the cash surrender value of these policies, which is included on
the balance sheet in other assets, was $2,191,000 and $2,079,000.
NOTE 9 - EMPLOYEE BENFIT PLAN
The Company has a 401(k) savings plan covering substantially all
employees of the Company and the Bank. Employees who elect to
participate are able to defer up to 15% of their annual salary, subject
to limitations imposed by federal tax law. The Company makes matching
contributions equal to 100% of each participant's elective deferral, up
to a maximum of $1,200 per employee. Contributions by the Company for
the years ended December 31, 2000, 1999 and 1998, were $75,000, $51,000
and $53,000.
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - RELATED-PARTY TRANSACTIONS
The Company has an operating lease with a major stockholder of the
Company for office facilities. The lease expires in August 2004, with an
option to extend the lease for an additional five years. Rental payments
under this lease were $168,000, $155,000 and $110,000 for the years
ended December 31, 2000, 1999 and 1998.
The Company has, and expects to have in the future, banking transactions
in the ordinary course of business with directors, officers, and their
associates. An analysis of the loans to related parties is as follows:
2000 1999
---------- ----------
Balance, beginning of year $7,016,000 $6,331,000
Additions 10,728,000 6,721,000
Principal reductions (9,127,000) (6,036,000)
Loans sold to other institutions (1,344,000) 0
---------- ----------
$7,273,000 $7,016,000
========== ==========
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Bank is required by federal regulations to maintain certain minimum
average balances with the Federal Reserve, based primarily on the Bank's
daily demand deposit balances. Required deposits held with the Federal
Reserve at December 31, 2000 and 1999, were $2,867,000 and $1,474,000.
The Company and the Bank have entered into operating leases for branches
and office facilities that expire through October 31, 2010. Two of the
leases have options to extend the term for two additional five-year
terms, and one lease has an option to extend the term for three
additional five-year terms. Rental payments under these various leases
were $482,000, $416,000 and $205,000 for the years ended December 31,
2000, 1999 and 1998. Total rental expense for the years ended December
31, 2000, 1999 and 1998, was $650,000, $571,500 and $520,000.
Future minimum non-cancelable lease payments are as follows:
Year Ending December 31,
2001 $672,000
2002 640,000
2003 608,000
2004 407,000
2005 122,000
Thereafter 199,000
----------
$2,648,000
==========
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2000 and 1999, that the Company
and the Bank meet all capital adequacy requirements to which it is
subject.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ---------------------- ---------------------
Amount Amount Amount
(in thousands) Ratio (in thousands) Ratio (in thousands) Ratio
------------ ----- ------------ ----- ------------ -----
At December 31, 2000:
Total Capital to Risk-Weighted Assets
Consolidated $40,731 10.7% $30,473 8.0% $38,092 10.0%
Bank $40,506 10.6% $30,446 8.0% $38,058 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated $36,050 9.5% $15,237 4.0% $22,855 6.0%
Bank $35,825 9.4% $15,223 4.0% $22,835 6.0%
Tier 1 Capital to Average Assets
Consolidated $36,050 7.5% $14,471 3.0% $24,118 5.0%
Bank $35,825 7.4% $14,471 3.0% $24,118 5.0%
At December 31, 1999:
Total Capital to Risk-Weighted Assets
Consolidated $32,823 10.5% $24,902 8.0% $31,128 10.0%
Bank $32,646 10.5% $24,877 8.0% $31,096 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated $29,036 9.3% $12,451 4.0% $18,677 6.0%
Bank $28,859 9.3% $12,438 4.0% $18,658 6.0%
Tier 1 Capital to Average Assets
Consolidated $29,036 7.5% $15,479 4.0% $19,349 5.0%
Bank $28,859 7.5% $15,471 4.0% $19,339 5.0%
At December 31, 2000, the Bank was categorized as well capitalized under
the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum Total risk-based,
Tier I risk-based, and Tier I average ratios as set forth in the table
above.
Payment of dividends by the Bank is limited under regulation. The amount
that can be paid in any calendar year without prior approval of the
Office of the Comptroller of the Currency cannot exceed the lesser of
net profits (as defined) for that year, plus the net profits for the
preceding two calendar years, or retained earnings.
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value estimates are determined as of a specific date in time
utilizing quoted market prices, where available, or various assumptions
and estimates. As the assumptions underlying these estimates change, the
fair value of the financial instruments will change. The use of
assumptions and various valuation techniques, as well as the absence of
secondary markets for certain financial instruments, will likely reduce
the comparability of fair value disclosures between financial
institutions. Additionally, the Bank has not disclosed highly subjective
values of other non-financial instruments. Accordingly, the aggregate
fair value amounts presented do not represent, and should not be
construed to represent the full underlying value of the Company. The
methods and assumptions used to estimate the fair values of each class
of financial instruments are as follows:
Cash and cash equivalents - The carrying value of cash and cash
equivalents approximates fair value due to the relatively short-term
nature of these instruments.
Investment securities - The fair value of investment securities is based
on quoted market prices. If quoted market prices are not available, then
fair values are based on quoted market prices of comparable instruments.
Loans - In order to determine the fair values for loans, the loan
portfolio was segmented based on loan type, credit quality and repricing
characteristics. For certain variable rate loans with no significant
credit concerns and frequent repricings, estimated fair values are based
on the carrying values. The fair values of other loans are estimated
using discounted cash flow analyses. Discount rates used in these
analyses are generally based on origination rates for similar loans of
comparable credit quality. Maturity estimates of installment loans are
based on historical experience with prepayments.
Deposits - The fair values for deposits subject to immediate withdrawal,
such as interest and noninterest bearing and savings deposit accounts,
are equal to the amount payable on demand at the reporting date (i.e.,
their carrying amount on the balance sheet). Fair values for fixed-rate
certificates of deposits are estimated by discounting future cash flows
using interest rates currently offered on time deposits with similar
remaining maturities.
Off-balance sheet instruments - The fair value of commitments to extend
credit and standby letters of credit is estimated using the fees
currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness
of the counter parties.
December 31, 2000 December 31, 1999
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $49,527,000 $49,529,000 $28,059,000 $28,059,000
Investment securities 2,707,000 2,707,000 4,264,000 4,124,000
Loans, net 432,466,000 439,451,000 357,225,000 356,754,000
------------ ------------ ------------ ------------
$484,700,000 $491,687,000 $389,548,000 $388,937,000
------------ ------------ ------------ ------------
Financial liabilities - deposits $453,437,000 $452,891,000 $357,867,000 $356,858,000
------------ ------------ ------------ ------------
Off-balance sheet financial
instruments:
Commitments to extend credit $0 $343,000 $0 $354,000
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. To date, these financial instruments include commitments to
extend credit and standby letters of credit that involve elements of
credit and interest rate risk in excess of the amount recognized in the
statement of financial position.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses, and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis, and generally requires collateral or other security
to support commitments to extend credit.
Standby letters of credit are performance assurances made on behalf of
customers who have a contractual obligation to produce or deliver goods
or services or otherwise perform. Credit risk in these transactions
arises from the possibility that a customer may not be able to repay the
Bank if the letter of credit is drawn upon. As with commitments to
extend credit, the Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if any, is based
on management's credit evaluation of the counter-party.
At December 31, 2000 and 1999, loan commitments totaled $34,297,000 and
$35,387,000, and standby letters of credit totaled $3,727,000 and
$1,936,000.
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The condensed financial statements of Northern Empire Bancshares (parent
company only) as of December 31, 2000 and 1999, and for each of the
three years then ended December 31, 2000, are as follows:
ASSETS
2000 1999
----------- -----------
Cash and cash equivalents $213,000 $16,000
Loans receivable 0 149,000
Investment in Sonoma National Bank 35,878,000 28,886,000
Other assets 52,000 51,000
----------- -----------
Total assets $36,143,000 $29,102,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $40,000 $40,000
----------- -----------
Preferred stock, no par value;
10,000,000 shares authorized;
none issued or outstanding 0 0
Common stock, no par value;
20,000,000 shares authorized;
3,766,382 and 3,560,296 shares issued
and outstanding in 2000 and 1999 18,267,000 15,561,000
Additional paid-in-capital 742,000 646,000
Accumulated other comprehensive income 4,000 (17,000)
Retained earnings 17,090,000 12,872,000
----------- -----------
Total stockholders' equity 36,103,000 29,062,000
----------- -----------
Total liabilities and
stockholders' equity $36,143,000 $29,102,000
=========== ===========
2000 1999 1998
---------- ---------- ----------
STATEMENTS OF INCOME
Interest and other income $13,000 $25,000 $12,000
Administrative expenses (37,000) (23,000) (24,000)
Income tax expense (1,000) (1,000) (1,000)
Equity in undistributed earnings
of Sonoma National Bank 6,877,000 5,577,000 4,778,000
---------- ---------- ----------
Net income $6,852,000 $5,578,000 $4,765,000
========== ========== ==========
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $6,852,000 $5,578,000 $4,765,000
Adjustments to reconcile net income
to net cash from operating activities:
Changes in other assets 1,000 0 35,000
Equity in undistributed earnings (6,877,000) (5,577,000) (4,778,000)
---------- ---------- ----------
Net cash from operating activities (24,000) 1,000 22,000
---------- ---------- ----------
Cash flows from investing activities:
Capital contribution to
to Sonoma National Bank 0 (400,000) 0
Net change in loans receivable 149,000 (149,000) 0
---------- ---------- ----------
Net cash from investing activities 149,000 (549,000) 0
---------- ---------- ----------
Cash flows from financing activities:
Payout of fractional shares (2,000) (3,000) (5,000)
Proceeds from exercise of stock options 74,000 254,000 134,000
---------- ---------- ----------
Net cash from financing activities 72,000 251,000 129,000
---------- ---------- ----------
Net change in cash and cash equivalents 197,000 (297,000) 151,000
Cash and cash equivalents, beginning of year 16,000 313,000 162,000
---------- ---------- ----------
Cash and cash equivalents, end of year $213,000 $16,000 $313,000
========== ========== ==========
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
The information required to be reported in this item has been previously
reported in a Form 8-K filed on October 4, 1999 and a Form 8-K/A filed
on October 7, 1999
Part III
ITEM 10. Directors and Executive Officers of the Registrant
The following are the directors and executive officers of the
Corporation and the Bank:
Name and Positions with the Principal Occupation
Corporation and the Bank Age During the Past 5 Years
Deborah A. Meekins, 48 President and Chief Executive
President & Chief Executive Officer of the Bank
Officer and Director of the Bank since February 1991.
Clement C. Carinalli 55 Retired CPA, local businessman,
Director of the Corporation rancher and real estate
and the Bank investor.
Patrick R. Gallaher, 55 Certified Public Accountant and
Chief Accounting Officer of local businessman; major
the Corporation and Director shareholder in Oakmont
of the Corporation and the Bank Developers, a Santa Rosa
development company.
William P. Gallaher, 50 Real Estate developer and
Director of the Corporation investor; President of Oakmont
and the Bank Developers; President of
Gallaher Construction Company.
William E. Geary, 72 Senior Partner in Geary, Shea &
Director of the Corporation O'Donnell, a Santa Rosa law
and the Bank firm.
Dennis R. Hunter, 58 Real estate investor and
Chairman of the Board of the developer in Santa Rosa;
Corporation and Vice Chairman principal in Investment of the
Bank of the Board Development Fund, a venture
capital fund, a director of
Pinnacle Oil International,
Inc.
James B. Keegan, Jr., 52 Partner in Keegan & Coppin
President & Director of the Company, a Santa Rosa real
Corporation and Chairman of estate brokerage and
the Board of the Bank development firm, since 1976.
Robert V. "Buzz" Pauley, 56 Owner of Pauley Exports, Ltd.,
Secretary/Treasurer of the an exporter of California
Corporation and Director food and beverage products to
of the Bank the Pacific Rim; commercial
properties manager; trader of
futures and options contracts
in Chicago and other
international market exchanges.
David F. Titus, 48 Executive Vice President &
Executive Vice President Senior Loan Officer of the
and Senior Loan Officer of Bank since January, 1995.
the Bank Senior Vice President &
Senior Loan Officer of the
Bank from August 1991 to
January, 1995.
JoAnn Barton, 47 Senior Vice President and
Senior Vice President & Senior Operations Administrator
Senior Operations Officer of the Bank since March 1992;
of the Bank from November 1985 Vice
President and Senior Operations
Administrator of the Bank.
Jane M. Baker 54 Senior Vice President and
Senior Vice President & Chief Financial Officer
Chief Financial Officer of the Bank since August 1995;
of the Bank Vice President and Chief
Financial Officer of the Bank
since August 1992.
Each of the directors of the Corporation has served as a director since
the initial organization of the Corporation in 1982, except for Patrick
R. Gallaher who was elected on May 19, 1992, William P. Gallaher who was
elected on June 21, 1994 and Clement C. Carinalli who served from 1982
until 1992 and from 1996 to date. William P. Gallaher and Patrick R.
Gallaher are brothers.
William E. Geary, Dennis R. Hunter, James B. Keegan, Jr. and Robert V.
Pauley have served as directors of the Bank since the initial
organization of the Bank in 1984. Clement C. Carinalli served from 1984
to 1992 and from 1996 to date. Deborah A. Meekins was appointed as Bank
director in August 1990; William P. Gallaher was appointed in November
1988; and Patrick R. Gallaher was appointed in December 1991. As the
sole shareholder of the Bank, the Corporation elects the directors of
the Bank.
The Corporation's common stock is not registered pursuant to section 12
of the Exchange Act, therefore Item 405 of Regulation S-K is not
applicable.
ITEM 11. Executive Compensation
The following table sets forth the cash compensation paid to or accrued
for the executive officers of the Bank whose cash compensation exceeded
$100,000, for services rendered for the periods indicated. The
executive officers of the Corporation, including the President, do not
receive compensation for their services as such. The President of the
Corporation, James B. Keegan, Jr., serves as the Chairman of the Board
of the Bank and receives $2,000 per month from the Bank for his services
in that capacity. All other executive officers of the Corporation are
considered outside directors of the Bank and, as such, they receive
directors' fees. See, "Compensation of Directors," below.
Summary Compensation Table
(dollars in thousands)
Long Term
Annual Compensation Compensation
Options All Other
Name and Principal Position Year Salary Bonus (No. of Shares) (1)
Deborah A. Meekins, 1998 $149 $132 84,000 $46
President and Chief Executive 1999 157 138 53
Officer and Director of 2000 173 152 51
the Bank
David F. Titus, 1998 107 88 15,000 37
Executive Vice President 1999 111 97 41
and Senior Loan Officer 2000 118 106 39
of the Bank
JoAnn Barton, 1998 90 17 5,000 1
Senior Vice President and 1999 94 18 2
Senior Operations Officer 2000 99 20 5,000 4
of the Bank
Jane Baker, 1998 90 17 5,000 1
Senior Vice President and 1999 94 18 2
Chief Financial Officer 2000 98 20 5,000 4
of the Bank
(1) Includes contribution by the Bank for the benefit of the named
officer pursuant to the Bank's 401(k) plan and expenses incurred with
respect to the Salary Continuation Agreement for the named officer, as
described below.
Salary Continuation Agreements
The Bank has deferred compensation agreements with Deborah A. Meekins,
President & Chief Executive Officer, and David F. Titus, Executive Vice
President & Senior Loan Officer. Under these agreements, the Bank is
obligated to provide for them or their beneficiaries, during a period of
15 years after the employee's death, disability, or retirement, annual
benefits ranging from $75,000 to $100,000. Benefits are also provided
to the officer if he/she resigns following a change in control or if
he/she voluntarily resigns after June 1, 1995. The estimated present
value of future benefits to be paid is being accrued over the period
from the effective date of the agreements until their expected
retirement dates. The accrued expense is included in Other Liabilities
in the financial statements. The Bank is the beneficiary of life
insurance policies that have been purchased as a method of financing the
benefits under the agreements. At December 31, 2000, the total cash
surrender value of these policies was $1,011,000, which is included in
other assets.
Stock Option Plan
Neither the Corporation nor the Bank award restricted stock or have long
term incentive plans, other than the Corporation's 1984 and 1997 Stock
Option Plans. No stock options have been granted under the 1984 Plan
since its expiration in February 1994. Options for a total of 19,518
shares (5,624 to directors and 13,894 to officers and employees of the
Bank) granted under the 1984 Plan remain outstanding even though the
1984 Plan has terminated. Options for a total of 841,707 shares
(671,422 to all directors of the Corporation and 170,285 shares to
thirty-five officers and employees of the Bank) are outstanding under
the 1997 Plan as of December 31, 2000. As of February 15, 2001 options
for a total of 1,097,003 shares ( 826,422 to all directors of the
Corporation and 251,063 share to fifty-two officers and employees of the
Bank) were outstanding.
The following sets forth information regarding all stock options granted
to executive officers during 2000.
Option Grants Table
Potential realizable value
at assumed annual rates of
stock price appreciation for
Individual Grants option term
- --------------------------------------------------------------------------- ----------------------------
Number of Percent of total
securities options granted Exercise of 5% 10%
underlying to employees in base price Expiration ($) ($)
Name options granted fiscal year ($/SH) date $ $
- --------------------------------------------------------------------------- ---------------------------
JoAnn Barton 5,000 50% $16.563 10/5/2010 $52,085 $131,985
Jane Baker 5,000 50% $16.563 10/5/2010 $52,085 $131,985
The following sets forth information regarding all options held by the
named officers as of December 31, 2000 and options exercised during
2000:
Aggregated Year-End Option Exercises and Values
December 31, 2000
-----------------------------------------------------
Number of Securities
Shares Underlying Unexercised Value of Unexercised
acquired on Value Options (No. of Shares)(1) Options (2)
Name exercise (#) realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------- ----------- ------------ ------------------------- -------------------------
Deborah A. Meekins 8,000 $105,200 44,667 / 55,565 $325,128 / $301,609
David F. Titus n/a n/a 9,423 / 9,922 $84,325 / $60,045
JoAnn Barton n/a n/a 2,764 / 8,307 $22,440 / $30,949
Jane Baker n/a n/a 4,550 / 8,307 $50,334 / $30,949
(1) Adjusted for stock dividends issued since date of the option grant.
(2) Calculated based on the difference between the fair market value of
the stock and the exercise price of the options, as of December 31,
2000.
Compensation of Directors
Outside Directors of the Bank (including directors who serve as
executive officers of the Corporation) receive director fees as follows:
$1,500 for each monthly board meeting attended, $500 per executive and
$250 per all other committee meetings attended. The Chairman of the
Board of the Bank receives a fee of $2,000 per month in addition to the
committee fees described above. The Corporation does not pay directors'
fees at this time, and does not plan to in the near future.
Outside directors were eligible to receive options under the
Corporation's 1984 Stock Option Plan and are also eligible to receive
options under the 1997 Stock Option Plan. See "Item 12, Security
Ownership of Certain Beneficial Owners and Management." During 2000,
stock options for 17,885 shares were exercised by directors, realizing a
value of approximately $213,000. During 2000, options to several
outside directors were canceled and reissued. At the time the options
were canceled, their exercise price was less than the fair market value
of the shares, the directors were 40% vested, and the remaining life of
the options was eight years. The directors were granted options for the
same number of shares at an exercise price that exceeds the exercise
price of the canceled options and equal to the fair market value at the
time of the grant. The new options contain an accelerated vesting
period, to match the vesting of the canceled options, and have a ten
year life. Outside directors held on December 31, 2000 options for
677,046 shares, which options had an estimated value of $3,467,000 based
on the difference between the fair market value of the stock as of that
date and the exercise price of the options.
The Corporation has deferred compensation agreements with directors
Patrick R. Gallaher, William P. Gallaher, William Geary, and James B.
Keegan, Jr. Under each of these agreements, the Corporation is
obligated to provide for the director or his beneficiaries, during a
period of between 10 to 15 years after the director's death, disability
or retirement, annual benefits ranging from $13,000 to $55,000. The
estimated present value of future benefits to be paid is being accrued
over the period from the effective date of the agreements until the
expected retirement dates. The Corporation is beneficiary of life
insurance policies that have been purchased as a method of financing the
benefits. At December 31, 2000, the total cash surrender value of these
policies was $1,180,000, which is included in other assets.
Compensation Committee
The Bank has a personnel committee that determines the salary and other
compensation for the Bank's executive officers. The members of the
committee are Mr. Geary and Mr. Pauley, both outside directors of the
Bank and Corporation.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
Other than as set forth below, the Corporation knows of no person who is
the beneficial owner of more than 5.0% of the Corporation's outstanding
shares as of February 15, 2001.
The following sets forth the numbers of shares of common stock
beneficially owned by each director of the Corporation and the Bank and
by the directors and officers (including vice presidents and above) of
the Corporation and the Bank as a group, as of February 15, 2001. The
numbers of shares beneficially owned include the numbers of shares which
each person has the right to acquire upon exercise of stock options
granted pursuant to the Corporation's Stock Option Plans. The
percentages of shares owned beneficially are calculated, pursuant to SEC
Rule 13d-3(d) (1), based on the number of shares presently outstanding
plus the number of shares which the person or group has the right to
acquire.
Number of Shares
Name Beneficially Owned Pct
Clement C. Carinalli 167,544 (1) 4.4%
Patrick R. Gallaher 134,050 (2) 3.6
William P. Gallaher 101,715 (3) 2.7
William E. Geary 208,142 (4) 5.5
Dennis R. Hunter 249,265 (5) 6.6
James B. Keegan, Jr. 120,307 (6) 3.2
Deborah A. Meekins 86,074 (7) 2.3
Robert V. Pauley 207,108 (8) 5.5
All other officers as
a group (16 people) 68,209 (9) 1.8
Directors and Officers as
a group (24 persons) 1,342,414 35.6%
(1) Including 37,044 shares issuable to Mr. Carinalli upon the exercise
of stock options exercisable within 60 days and 50,424 shares held
by members of his immediate family residing at his home.
(1) Including 37,044 shares issuable to Mr. Gallaher upon the exercise
of stock options exercisable within 60 days, 96,786 shares held in
Mr. & Mrs. Gallaher's trust and 220 shares owned by a child living
at home.
(3) Including 42,668 shares issuable to Mr. W. Gallaher upon the
exercise of stock options exercisable within 60 days.
(4) Including 37,044 shares issuable to Mr. Geary upon the exercise of
stock options exercisable within 60 days, 38,229 shares held in
Mr. Geary's profit sharing plan, 17,997 shares held in employee
pension and profit sharing plan of Geary, Shea & O'Donnell, 41,484
shares held by Mrs. Geary and 9,141shares held in a trust account
for which Mr. Geary serves as trustee but does not have a
beneficial interest.
(5) Including 41,674 shares issuable to Mr. Hunter upon the exercise of
stock options exercisable within 60 days and 205,591 shares held in
trust accounts for which Mr. Hunter serves as trustee but does not
have a beneficial interest.
(6) Including 41,674 shares issuable to Mr. Keegan upon the exercise of
stock options exercisable within 60 days, 56,408 shares held by
Keegan & Coppin Company, Inc., 8,312 shares held by the Keegan &
Coppin Profit Sharing Plan and 13,892 held in trust accounts for
which Mr. Keegan is trustee or held in accounts for the benefit of
his minor children.
(7) Including 44,667 shares issuable to Ms. Meekins upon the exercise
of stock options exercisable within 60 days.
(8) Including 37,044 shares issuable to Mr. Pauley upon the exercise of
stock options exercisable within 60 days and 14,583 shares held by
Mrs. Pauley.
(9) Including 27,311 shares issuable to such officers upon the exercise
of stock options exercisable within 60 days.
The business addresses of each of the above individuals is c/o Northern
Empire Bancshares, 801 Fourth Street, Santa Rosa, CA 95404
ITEM 13. Certain Relationships and Related Transactions
The Bank leases facilities for the loan department and some
administrative offices from Mr. James Ratto, a major shareholder of the
Corporation. Total rental expense on this lease for the year ended
December 31, 2000 and 1999 was $168,000 and $155,000, respectively.
The Bank has had in the ordinary course of business, and expects to have
in the future, banking transactions with its directors, officers and
their associates, including transactions with corporations of which such
persons are directors, officers or controlling shareholders. The
transactions involving loans have been and will be entered into with
such persons in the ordinary course of business, on substantially the
same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other persons, and on terms
not involving more than the normal risk of collectibility or presenting
other unfavorable features. At December 31, 2000, loans by the Bank to
directors, officers and their associates totaled approximately
$7,273,000, constituting 1.7% of total loans, 20.3% of the Bank's
shareholders' equity and 20.1% of the consolidated shareholders' equity
of the Corporation.
Loans to insiders, such as officers, directors, and certain other
persons are subject to the limitations and requirements of the Financial
Institutions Regulatory and Interest Rate Control Act of 1978 and
regulations thereunder.
Part IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) 1. All Financial Statements.
See item 8.
(a) 2 Financial Statement Schedules.
None required
(b) 3. Exhibits
The following is a list of the exhibits to this Form 10-K.
(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, file number 2-91196, 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, file number 2-91196, and
incorporated herein by this reference).
(c) 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, file number 2-91196, and incorporated
herein by this reference).
(d) 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, file number
2-91196, and incorporated herein by this reference).
(10) (a) Lease for Bank Premises at 801 Fourth Street, Santa
Rosa, California (filed as Exhibit 10.2 to the
Corporation's S-2 Registration Statement, filed
September 11, 1992, file number 2-91196, and
incorporated herein by this reference).
(b)* Stock Option Plan (filed as Exhibit 10.2 to the
Corporation's S-1 Registration Statement, filed May 18,
1984, file number 2-91196, and incorporated herein by
this reference).
(c)* Amendment No. 1 to Stock Option Plan (filed as Exhibit
(10)(d) to the Corporation's Annual Report on Form 10-K
for the Fiscal Year ended December 31, 1989, file number
2-91196, and incorporated herein by this reference).
(d)* Amendment No. 2 to Stock Option Plan (filed as Exhibit
(10)(f) to the Corporation's Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1991, file number
2-91196, and incorporated herein by this reference).
(e)* Indemnification Agreements between James B. Keegan, Jr.
and Northern Empire Bancshares and Sonoma National Bank
(filed as Exhibit (10)(h) to the Corporation's Annual
Report on Form 10-KSB for the Fiscal Year Ended December
31,1992, file number 2-91196, and incorporated herein by
this reference).
(f)* Indemnification Agreements between Dennis R. Hunter and
Northern Empire Bancshares and Sonoma National Bank
(filed as Exhibit (10)(i) to the Corporation's Annual
Report on Form 10-KSB for the Fiscal Year Ended December
31,1992, file number 2-91196, and incorporated herein by
this reference).
(g)* Indemnification Agreements between Robert V. Pauley and
Northern Empire Bancshares and Sonoma National Bank
(filed as Exhibit (10)(j) to the Corporation's Annual
Report on Form 10-KSB for the Fiscal Year Ended December
31,1992, file number 2-91196, and incorporated herein by
this reference).
(h)* Indemnification Agreements between William E. Geary and
Northern Empire Bancshares and Sonoma National Bank
(filed as Exhibit (10)(k) to the Corporation's Annual
Report on Form 10-KSB for the Fiscal Year Ended December
31,1992, file number 2-91196, and incorporated herein by
this reference).
(i)* Indemnification Agreements between Patrick R. Gallaher
and Northern Empire Bancshares and Sonoma National Bank
(filed as Exhibit (10)(l) to the Corporation's Annual
Report on Form 10-KSB for the Fiscal Year Ended December
31,1992, file number 2-91196, and incorporated herein by
this reference).
(j)* Indemnification Agreement between William P. Gallaher
and Sonoma National Bank (filed as Exhibit (10)(m) to
the Corporation's Annual Report on Form 10-KSB for the
Fiscal Year Ended December 31,1992, file number 2-91196,
and incorporated herein by this reference).
(k)* Indemnification Agreement between Deborah A. Meekins and
Sonoma National Bank (filed as Exhibit (10)(p) to the
Corporation's Annual Report on Form 10-KSB for the
Fiscal Year Ended December 31,1992, file number 2-91196,
and incorporated herein by this reference).
(l)* Executive Salary Continuation Agreement between Deborah
A. Meekins and Sonoma National Bank (filed as Exhibit
(10)(O) to the Corporation's Annual Report on Form
10-KSB for the Fiscal Year Ended December 31,1993, file
number 2-91196, and incorporated herein by this
reference).
(m)* Executive Salary Continuation Agreement between David F.
Titus and Sonoma National Bank (filed as Exhibit (10)(p)
to the Corporation's Annual Report on Form 10-KSB for
the Fiscal Year Ended December 31,1993, file number
2-91196, and incorporated herein by this reference).
(n) Lease for premises in Lakeside Village Shopping Center,
Windsor, California, dated March 1,1993 (filed as
Exhibit (10.15) to the Corporation's Amendment No. 1 to
Form S-2 Registration Statement, File No. 33-60566,
filed May 13, 1993, file number 33-60566, and
incorporated herein by this reference).
(o)* Director's Deferred Compensation Plan between Patrick R.
Gallaher and Sonoma National Bank (filed as Exhibit
(10)(r) to the Corporation's Annual Report on Form
10-KSB for the Fiscal Year Ended December 31,1994, file
number 2-91196, and incorporated herein by this
reference).
(p)* Director's Deferred Compensation Plan between William P.
Gallaher and Sonoma National Bank (filed as Exhibit
(10)(s) to the Corporation's Annual Report on Form
10-KSB for the Fiscal Year Ended December 31,1994, file
number 2-91196, and incorporated herein by this
reference).
(q)* Director's Deferred Compensation Plan between James B.
Keegan, Jr. and Sonoma National Bank (filed as Exhibit
(10)(t) to the Corporation's Annual Report on Form
10-KSB for the Fiscal Year Ended December 31,1994, file
number 2-91196, and incorporated herein by this
reference).
(r)* Director's Deferred Compensation Plan between William E.
Geary and Sonoma National Bank (filed as Exhibit
(10)(u) to the Corporation's Annual Report on Form
10-KSB for the Fiscal Year Ended December 31,1994, file
number 2-91196, and incorporated herein by this
reference).
(s)* Director's Deferred Compensation Plan between William P.
Gallaher and Sonoma National Bank (filed as Exhibit
(10)(v) to the Corporation's Quarterly Report on Form
10-QSB for the Quarter Ended June 30,1996, file number
2-91196, and incorporated herein by this reference).
(t) Lease for Bank Premises at 6641 Oakmont Drive, Santa
Rosa, California, dated October 1, 1996 (filed as
Exhibit (10)(w) to the Corporation's Quarterly Report on
Form 10-QSB for the Quarter ended September 30, 1996,
file number 2-91196, and incorporated herein by this
reference).
(u) Lease for Loan and Administration Offices at 815 Fifth
Street, Santa Rosa, California, dated February 24, 1998
(filed as Exhibit (10)(w) to the Corporation's Annual
Report on Form 10-KSB for the Fiscal Year Ended December
31,1997, file number 2-91196, and incorporated herein by
this reference).
(v)* Indemnification Agreements between William P. Gallaher
and Northern Empire Bancshares (filed as Exhibit (10)(a)
to the Corporation's Quarterly Report on Form 10-QSB for
the Quarter Ended June 30,1998, file number 2-91196, and
incorporated herein by this reference).
(w)* Indemnification Agreements between Clement C. Carinalli
and Northern Empire Bancshares and Sonoma National Bank
(filed as Exhibit (10)(b) to the Corporation's Quarterly
Report on Form 10-QSB for the Quarter Year Ended June
30, 1998, file number 2-91196, and incorporated herein
by this reference).
(x)* 1997 Stock Option Plan, as amended, and Stock Option
Agreement (filed as Exhibit (10)(b) to the Corporation's
Quarterly Report on Form 10-QSB for the Quarter Year
Ended June 30, 1998, file number 2-91196, and
incorporated herein by this reference).
(y) Lease for West College Branch in G & G Market at 1211A
West College Avenue, Santa Rosa, California, dated June
30, 1998 (filed as Exhibit (10)(y) to the Corporation's
Annual Report on Form 10-KSB for the Fiscal Year Ended
December 31, 1998, file number 2-91196, and incorporated
herein by this reference).
(z) Lease for Petaluma Branch in G & G Market at 701-B
Sonoma Mountain Parkway, Petaluma, California, dated
November 1, 2000.
(aa) Lease for Operations Center at 1650 Northpoint Parkway,
Santa Rosa, California, dated -----------------._
*Management contract or compensation plan or arrangement.
(21) Subsidiaries of the Corporation (filed as Exhibit 22 to
Post Effective Amendment No. 5 to the Corporation's S-1
Registration Statement, filed May 29, 1987, File No
2-91196 and incorporated herein by this reference).
(23) Consent of Moss Adams, LLP
Consent of PricewaterhouseCoopers, LLP
(27) Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter
of the period covered by this report.
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Exchange Act by Non Reporting Issuers.
Four copies of the Registrant's 2000 Annual Report to Security Holders
will be furnished to the Commission for its information when it is sent
to the security holders.
The Registrant's Proxy Materials for the 2001 Shareholders' Meeting have
not yet been sent to the Security Holders. Copies of the Proxy
materials will be furnished to the Commission for its information when
they are sent to the security holders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Northern Empire Bancshares
By /s/ James B. Keegan, Jr.
---------------------------------
James B. Keegan, Jr.
President/ Director
Date March 21, 2001
By /s/ Partick R. Gallaher
----------------------------------
Patrick R. Gallaher
Chief Accounting Officer/Director
Date March 21, 2001
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
___________________________________
Dennis R. Hunter Date
Chairman of the Board of Directors
/s/ James B. Keegan, Jr.
- --------------------------
James B. Keegan, Jr. Date March 21, 2001
President/Director
/s/ Patrick R. Gallaher
- --------------------------
Patrick R. Gallaher, Date March 21, 2001
Chief Accounting Officer/Director
_________________________________
Robert V. Pauley, Date
Secretary and Treasurer/Director
/s/ Clement C. Carinalli
- --------------------------
Clement C. Carinalli, Date March 21, 2001
Director
___________________________________
William P. Gallaher, Date
Director
/s/ William E. Geary
- ------------------------
William E. Geary, Date March 21, 2001
Director