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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, 2001
[ ] 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. $96,947,617,
as of February 15, 2002.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 3,973,263
shares of common stock as of February 15, 2002.
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 in California:
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 2001, SBA loans were generated throughout California and in
Arizona. 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 Sacramento, and Walnut Creek, California. 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 105 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, 2001 the Bank had 91 full-time and 26 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 by 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 is authorized to conduct examinations of insured
institutions that represent a heightened risk to the deposit insurance
funds when the FDIC determines that such an examination is necessary.
By agreement with other federal regulatory agencies, the FDIC is also
given access to supervisory information held by the federal agencies and
the right to participate in examinations.
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, 2001, 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
requires 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 tfhe 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 to be well capitalized as shown in Footnote 12 of the
Financial Statements, entitled Regulatory Capital Requirements, Item 8.
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.
Disclosure of the Corporation's policies and practices regarding
disclosure is to be made at the time a customer relationship is
established and not less than annually during the continuation of the
relationship. Effective July 1, 2001, federal banking agencies have
established standards and guidelines for financial institutions to
follow relating to administrative, technical and physical safeguards for
customer records and information. Financial institutions are required
to establish an information security program to assess and control risks
to customer information, including overseeing their service provider
arrangements to protect the security of customer information maintained
or processed by service providers.
Existing California state law provides protection against furnishing
customer information to third parties and law enforcement officials.
There is new legislation pending in California which would require
financial institutions to provide a specified notice to and to obtain
the written consent of customers before disclosing to or sharing
confidential customer information with third parties. The
Gramm-Leach-Bliley Act permits states to adopt privacy laws which are
more strict and to provide greater privacy protection than its own
provisions in protecting customer information.
(d) Deposit Insurance Reform. Legislation is being introduced
before Congress to raise deposit insurance from its current amount of
$100,000. In one proposed bill deposit insurance will be increased to
$130,000 per account with higher amounts for individual retirement
accounts and other retirement accounts. Under the proposal the amounts
of insurance will also be indexed so that the amount of insurance per
account will increase with inflation. Other proposals include
eliminating or reducing the requirement under current law for mandatory
increases in premium payments by depository institutions for deposit
insurance when the ratio of federal reserves in the insurance funds to
insured deposits is less than 1.25%. At the end of the fourth quarter
of 2001 the ratio was 1.27%.
Other proposals include merging the Bank Insurance Fund and the Savings
Association Insurance Fund and restructuring the federal banking
agencies.
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 Bank data processing, client services and personnel departments are
located at 1650 Northpoint Parkway, Santa Rosa. The Bank leases 7,122
square feet.
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.
Management believes that its facilities are adequate for its present
needs, but additional facilities may be needed as and when the Bank
continues to grow.
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 2001.
Part II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
On February 15, 2002, the Corporation had 3,973,263 shares of common
stock outstanding, held by approximately 295 shareholders of record.
At February 15, 2002, the directors and officers of the Corporation and
the Bank hold 11.9% and beneficially own 40.8% 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 39,732 shares in any three
month period without such registration.
As of February 15, 2002, the directors, officers and staff also have the
right to acquire 1,133,840 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 in Santa
Rosa, California. The bid prices and numbers of shares in this table
have been adjusted for the impact of the stock dividends issued during
2000 and 2001.
Bid Quotations for the Corporation's Common Stock
Approximate
Quarter Ended High Low Trading Volume
- ------------- ----- ----- --------------
March 31, 2000 17.69 13.15 206,057
June 30, 2000 14.89 13.22 142,013
September 30, 2000 15.95 13.81 254,625
December 31, 2000 17.86 15.71 137,477
March 31, 2001 20.71 18.21 264,533
June 30, 2001 19.50 18.25 77,458
September 30, 2001 22.36 18.05 394,475
December 31, 2001 22.55 21.60 173,188
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 $23.80 and $25.00, respectively, on February 15, 2002.
Dividends
On March 27, 2001, the Corporation declared a 5% stock dividend to
shareholders of record on May 4, 2001. On March 21, 2000, the
Corporation declared a 5% stock dividend to shareholders of record on
May 3, 2000.
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, 2001, $20,572,000 of retained earnings of the Bank was available for
the payment of dividends to the parent company under this requirement.
ITEM 6. Selected Financial Data
(Dollars in thousands)
Year ended December 31, 2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Interest income $44,345 $39,894 $29,824 $25,399 $20,645
Interest expense 20,803 19,495 12,836 11,103 9,191
Net interest income 23,542 20,399 16,988 14,296 11,454
Provision for loan losses 960 960 800 480 650
Non-interest income 1,677 1,456 1,572 1,702 1,403
Non-interest expense 10,521 9,530 8,428 7,582 6,716
Income before income taxes 13,738 11,365 9,332 7,936 5,491
Provision for income taxes 5,651 4,513 3,754 3,171 2,218
Net Income 8,087 6,852 5,578 4,765 3,273
Earnings per share:
Basic* $2.04 $1.74 $1.43 $1.25 $0.87
Diluted* $1.87 $1.67 $1.34 $1.20 $0.84
Per Share:
Cash Dividends paid $0.00 $0.00 $0.00 $0.00 $0.00
Book value at December 31* $11.15 $9.13 $7.40 $5.95 $4.68
Average common shares
outstanding* 3,966,454 3,948,242 3,905,110 3,821,849 3,757,687
Average diluted common
shares outstanding* 4,321,829 4,111,528 4,149,420 3,958,799 3,917,441
Shares outstanding at
December 31 (Actual) 3,973,263 3,766,382 3,560,296 3,309,712 1,555,069
At December 31
Loans, net 466,529 432,446 357,225 267,029 204,408
Total assets 561,004 494,390 397,928 322,253 233,737
Total deposits 502,137 453,437 357,867 295,969 214,747
Borrowed funds 11,802 1,828 9,050 1,872 0
Shareholders equity 44,297 36,103 29,062 22,810 17,709
Financial Ratios:
For the year:
Return on average assets 1.54% 1.54% 1.59% 1.69% 1.43%
Return on average equity 19.83% 20.87% 21.62% 23.39% 20.30%
Net interest margin 4.61% 4.71% 5.03% 5.23% 5.22%
Net loan losses to
average loans 0.01% 0.01% 0.01% 0.00% 0.08%
Efficiency ratio 41.72% 43.60% 45.41% 47.39% 52.24%
At December 31
Equity to assets 7.90% 7.30% 7.30% 7.08% 7.58%
Total capital to
risk adjusted assets 12.14% 10.69% 10.54% 10.63% 10.95%
Nonperforming assets to
total loans & OREO 0.45% 0.51% 0.52% 0.02% 0.29%
Nonperforming assets to
total assets 0.38% 0.46% 0.47% 0.02% 0.26%
Allowance for loan
losses to total loans 1.18% 1.06% 1.04% 1.11% 1.22%
Allowance for loan losses
to non-performing assets 260.48% 207.58% 200.58% 4869.35% 542.52%
* Prior years have been adjusted for stock dividends and stock split
during 2001, 2000, 1999 and 1998.
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 as of December 31, 2001 and
2000 and results of operations for the years ended December 31, 2001,
2000 and 1999 focuses primarily on the Bank.
During 2001, total consolidated assets grew 13.5% to $561,004,000 at
December 31, 2001. Total consolidated assets grew 24.2% during 2000 to
$494,390,000 at December 31, 2000. The growth in results from strong
loan demand during the first three quarters of 2001 and all of 2000.
See discussion on Loan Portfolio.
Total deposits increased 10.7% to $502,137,000 when comparing December
31, 2001 to December 31, 2000. For the year ended December 31, 2000,
total deposits increased 26.7% to $453,437,000. 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, 2001 was $8,087,000 as compared to $6,852,000 for the year ended
December 31, 2000, an increase of 18.0%. The Corporation's consolidated
net income for the year ended December 31, 2000, increased 22.8% over
the year ended December 31, 1999.
Net interest income before provision for loan losses increased
$3,143,000, or 15.4%, when comparing the year of 2001 to 2000. This
increase results from the growth in the volume of loans on which the
Bank earns a net interest margin. The interest margin for 2001 equaled
4.61% compared to 4.71% in 2000 and 5.03% in 1999. See, "Net Interest
Income."
The provision for loan losses of $960,000 in 2001 equaled the provision
in 2000. See, "Allowance for Loan Losses." Non-interest income
increased $221,000 primarily due to an increase in the amount of $98,000
in service charges on deposits and higher premiums on SBA loan sales
which increased gains on SBA loan sales by $94,000. See, "Non-Interest
Income." Operating expenses increased by $991,000 primarily because of
growth of the Bank. A new branch office was opened in Petaluma,
California in November 2000 and the Bank relocated data processing,
personnel and client services to a new building in August 2001.
When comparing 2000 to 1999 the provision for loan losses increased
$160,000 to $960,000 in 2000 from $800,000 in 1999 and other income
decreased $116,000 to $1,456,000 in 2000 from $1,572,000 in 1999.
Operating expenses increased $1,102,000 during 2000 primarily due to
increases in personnel costs and new branch offices.
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, 2001, net interest income before the
provision for loan losses totaled $23,542,000 as compared to $20,399,000
for the year ended December 31, 2000, representing an increase of 15.4%.
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
2000, net interest income before the provision for loan losses totaled
$20,399,000 as compared to $16,988,000 in 1999 representing an increase
of 20.1%. The majority of this increased resulted from 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 to 4.61% in 2001 from 4.71% in 2000 and 5.03%
in 1999. 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
reduce 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 2001, The Federal Reserve Board lowered
the discount rate and Fed Funds rates 11 times to 40 year lows with
prime rate also declining 11 times following the Federal Reserve Board's
actions. Prime rate declined to 4.75% at December 31, 2001 from 9.50%
at December 31, 2000. The majority of SBA loans are tied to prime rate
and reprice on a quarterly basis. Other loan indexes also declined;
however, not as immediately as prime rate. The rapid decline in market
rates had a negative impact on the Bank's interest margin during 2001
and will impact loan yield as loans reprice based upon their repricing
schedule and index. 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.
The Bank is considered asset sensitive, meaning more assets are
immediately adjustable than liabilities, the net interest margin tends
to increase when interest 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 to 3.07% for December 2001 from 5.62% for December
2000 and 4.85% for December 1999. The Bank also has a fixed rate loan
portfolio which generally reduces net interest margin as interest rates
rise and benefits interest margin as rates decline.
Market rates also impact the Bank's ability to attract deposits and grow
the loan portfolio. The current low rates offered on deposits makes
them less attractive to depositors. The Bank has also experienced an
increase in loan payoffs as borrowers have refinanced to other loans
tied to indexes which bear lower rates than loans tied to the COFI
index.
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 decreased during
2001, when it averaged 97.3%, as compared to 98.2% in 2000. This ratio
equaled 96.1% in 1999. A decrease in the loan-to-deposit ratio
generally results in a decrease in 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 $64.4 million in 2001 and $91.2 million in
2000. In both those years the majority of the growth in average loans
occurred in commercial real estate loans. There were increases of $33.3
million and $80.5 million in average commercial real estate loans,
respectively which bear a lower average interest yield of 9.25% in 2001
and 8.93% in 2000. 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 during a period of declining
rates. There is a significant lag in the repricing of these loans since
first the COFI index need to reflect the decline cost of funds in the
11th District before it is factored into the repricing rate on the COFI
loans. In a declining rate environment, COFI based loans help interest
margin; however, in an increasing market they lag other indexes and have
a negative impact on net interest margin. 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 which reduces the interest margin.
Average commercial loans yields (the majority of these loans are SBA
loans) for 2001 decreased 144 basis points over 2000. The majority of
these loans reprice to prime rate on a quarterly repricing schedule.
This average decline results from the quarterly repricing of SBA loans
to reflect drop of prime rate during the preceding quarters of 1.50%
effective on April 1, 2001, 1.25% effective July 1, 2001and 0.75%
effective October 1, 2001. SBA loans repriced 1.25% on January 1, 2002
which also reduces the interest margin.
Average Construction loans grew $14.8 million during 2001. The average
yield was 9.25% during 2001 compared to 10.35% in 2000. These loans
have short maturity dates (approximately one year). Rate competition
for construction loans has been strong within our market area.
Interest income increased to $44.3 million in 2001 from $39.9 million
in 2000 and $29.8 million in 1999. This is a direct result of growth in
loans. Average loans increased to $463.5 million from $399.2 million in
2000 and $308.0 million in 1999. The yield on loans equaled 9.20% in
2001, 9.47% in 2000 and 9.20% in 1999. The 25 basis point decline
during 2001 resulted primarily from the mix in loans and the lag in
repricing COFI loans which mitigated the impact the rapidly declining
market rates. In 2000 the Bank experienced the benefit of increasing
rates on prime based loans with the repricing benefit of COFI loans
carried over into 2001. The decline in rates experienced in 2001 will
be factored into rates on COFI loans well into 2002.
The economic conditions and competition have impacted the mix of loans.
COFI loans are less attractive to borrowers in a declining rate
environment when loan products tied to prime rate, U.S. Treasury rates
or LIBOR are more popular. Construction loans generally decline when
economic conditions worsen and the Bank has experienced less demand for
constructions loans during the last quarter of 2001. With excess
liquidity in the Banking system, the Bank has experienced increased
competition for loans, which has resulted in lower loan pricing in the
market place, which impacts 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 $1,658,000 for the year ended
December 31, 2001, $1,403,000 for the year ended December 31, 2000 and
$1,246,000 for the year ended December 31, 1999. This fee income
increased yields on average loans by 36 basis points in 2001, as
compared to 35 basis points in 2000. Deferred loan fees are a product
of origination and commitment fees net of certain direct loan
origination costs. The deferred fee amounts equaled $2,004,000 at
December 31, 2001 and $2,366,000 at December 31, 2000. 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, 2001, $639,000 was
recorded as discounts compared to $594,000 at December 31, 2000. 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 $143,000 during 2001 compared to $186,000 during 2000 and
$60,000 during 1999 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 6.7% when comparing 2001 to 2000 and 51.9%
when comparing 2000 to 1999, 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, 2001 was 4.88% versus 5.39% for the year ended
December 31, 2000 and 4.62% for the year ended December 31, 1999.
Deposit costs decreased 51 basis points during 2001 and increased 77
during 2000.
The Bank's money market rate account, the Sonoma Investors Reserve
Account remained competitive and average balances grew $10.8 million
during 2001. Balances held in Sonoma Investors Reserve accounts
increased to $137.8 million at December 31, 2001 from $126.4 million
December 31, 2000 and $97.5 million at December 31, 1999. Average
balances for savings and money market accounts at the Bank were $129.7
million for 2001, $118.9 million for 2000 and $87.9 million for 1999.
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 adjustments in the interest paid on this
account. In November 2000, the Bank changed from this volatile index to
a discretionary rate which allows 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 has a more immediate impact on the Bank's cost of funds than
changes in offering rates on time certificates. The cost of funds on
savings and money market accounts equaled 3.23% in 2001 compared to
5.03% in 2000, representing a decline of 180 basis points.
Time deposits reprice at a slower pace, since certificates of deposits
usually do not reprice until their maturity dates, which generally range
from six to eighteen months. Time deposits have increased to $276.7
million at December 31, 2001 from $254.0 million at December 31, 2000
and $132.9 million at December 31, 1999. During both 2001 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
loan growth. The cost of time deposits averaged 5.93% in 2001 and 5.91%
in 2000 compared to savings and money market rate accounts which
averaged 3.23% in 2001 and 5.03% in 2000. 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 11.6% in 2001 to $59.4
million at December 31, 2001 compared to $51.0 million at December 31,
2000. Growth in non-interest bearing deposits has a positive impact on
the interest margin.
The majority of the Bank's growth has been 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. Due to the restructuring of the Federal Home Loan Bank,
the Bank's borrowing capacity has been significantly increased (over
$100 million with acceptable collateral). The Bank borrowed $10 million
from the FHLB after the September 11 tragedy in anticipation of needs
for liquidity by our depositors during this uncertain time. The Bank has
also 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. The Bank has used this line as a contingency source
of funds; however, it plans to expand the use of this line to fund
future loan growth. At December 31, 2001, the Bank had pledged loan
collateral which increased our borrowing capacity to $60.3 million and
had borrowed $11.8 million against that line. Borrowing costs with the
FHLB are lower than the cost of attracting new deposits of similar
duration. Therefore, expanding Bank borrowing's at the FHLB would
improve net interest margins.
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, 2001
(dollars in thousands)
Average Interest Average
Balance Income/Expense Yield/Rate
------- -------------- ----------
Certificates of deposit
with other banks $490 $22 4.39%
Investments 2,073 123 5.95%
Federal funds sold 44,285 1,556 3.51%
Loans:
Commercial (including SBA loans) 139,902 12,300 8.79%
Installment loans to individuals 2,239 229 10.20%
Real estate - Construction 52,031 5,175 9.95%
Real estate - Other 269,358 24,940 9.25%
-------- ------- -----
Total Loans 463,530 42,644 9.20%
-------- ------- -----
Total earning assets 510,378 44,345 8.69%
-------
Non-earning assets:
Allowance for loan losses (5,135)
Deferred Loan Fees & Discounts (2,490)
Cash and due from banks 12,663
Other assets 9,481
--------
TOTAL ASSETS $524,897
========
Deposits:
Demand - interest bearing $18,861 $192 1.02%
Savings & money market 129,696 4,194 3.23%
Time certificates 273,550 16,232 5.93%
-------- ------- -----
Total interest bearing deposits 422,107 20,618 4.88%
Other Interest bearing liabilities 4,729 185 3.91%
-------- ------- -----
Total Interest bearing
deposits & liabilities 426,836 20,803 4.87%
-------
Non-interest bearing liabilities:
Non-interest bearing deposits 54,302
Other liabilities 3,071
Shareholders' equity 40,688
--------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $524,897
========
Net interest income $23,543
=======
Net interest margin 4.61%
=======
AVERAGE BALANCE SHEET
Year Ended
December 31, 2000
(dollars in thousands)
Average Interest Average
Balance Income/Expense Yield/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)
Average Interest Average
Balance Income/Expense Yield/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%
=======
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
2001 OVER 2000
(dollars in thousands)
Yield
Volume /Rate Total
------ ------ ------
Increase/(decrease) in interest income:
Certificates of deposit
with other banks $(1) $(12) $(13)
Investments (108) 2 (106)
Federal funds sold 920 (1,178) (258)
Loans:
Commercial (incl. SBA loans) 1,613 (2,007) (394)
Installment loans to individuals 56 (5) 51
Real estate - Construction 1,533 (208) 1,325
Real estate - Other 2,969 877 3,846
------ ------ ------
Total 6,982 (2,531) 4,451
------ ------ ------
Increase/(decrease) in interest expense:
Deposits & other interest
bearing liabilities:
Demand - interest bearing 19 (5) 14
Savings & money market 541 (2,328) (1,787)
Time certificates 3,060 55 3,115
Other interest bearing liabilities 59 (93) (34)
------ ------ ------
Total 3,679 (2,371) 1,308
------ ------ ------
Increase/(decrease) in net
interest income $3,303 $(160) $3,143
====== ====== ======
ANALYSIS OF VOLUME AND RATE CHANGES
ON NET INTEREST INCOME AND EXPENSE
2000 OVER 1999
(dollars in thousands)
Yield
Volume /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
====== ====== ======
Provision for Loan Losses
The provision for loan losses was $960,000 for 2001, compared to
$960,000 for 2000, and $800,000 in 1999. The provision reflects the
overall growth in loans and the level of non-accrual loans during this
year. For further discussion see "Allowance for Loan Losses."
Non-Interest Income
Non-interest income equaled $1,677,000 in 2001 compared to $1,456,000 in
2000 and $1,572,000 in 1999. The following table sets forth income by
category for the years indicated.
Years ended December 31,
(Dollars in thousands) 2001 2000 1999
----- ----- -----
Gain on SBA loan sales $545 $451 $475
Service charges on deposits 430 332 444
Loan servicing fees 288 285 301
Merchant and other service fees 181 137 152
Income on insurance policies 123 128 105
Discount brokerage 6 8 19
Gain on OREO sales 0 39 (2)
Other 104 76 78
------ ------ ------
Total Other Income $1,677 $1,456 $1,572
====== ====== ======
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,
2001 to December 31, 2000, non-interest income increased 15.2% to
$1,677,000 compared to $1,456,000 last year. This increase results
mostly from higher premiums on SBA loan sales and increased service
charges on deposit accounts. When comparing the year ended December 31,
2000 to December 31, 1999, non-interest income decreased 7.4% 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."
Gains on SBA Loan Sales
Gains on the sale of the guaranteed portion of SBA loans increased to
$545,000 in 2001 compared to $451,000 in 2000 and $475,000 in 1999.
This increase in gains on sales resulted from increases in premiums
offered by the secondary market. The Bank's premiums averaged 6.4% in
2001 compared to 4.10% in 2000 and 5.40% in 1999. During 2001, the Bank
sold SBA loans totaling $8,514,000 compared to $11,004,000 in 2000 and
$10,017,000 in 1999. Iis higher premiums reflects a lower prepayment
rate on SBA 7(a) loans due to the lower prime rate during 2001. The SBA
implemented a prepayment penalty on 7(a) loans in 2000 which has also
had a positive impact on rate of prepayments.
Service Charges on Deposits
Non-interest income includes service charges on deposit accounts.
During 2001, service charges totaled $430,000 versus $332,000 in 2000
and $444,000 in 1999. Service charges vary depending upon the
customers' uses of various Bank services. During 2001, the earnings
credit rate declined due the lower interest rate environment. This meant
that account holders' earnings were lower to cover the cost of services,
and therefore, service charges were higher than the previous year.
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 during 2000. During 1999 the earnings credit rate was also lower
than it was during 2000 which increased service charges on customers
accounts. While the earnings credit rate does impact the service
charges, our business account holders continue to manage their accounts
activity to minimize their service charges.
Loan Servicing Fees
SBA servicing fees equaled $288,000 compared to $285,000 in 2000 and
$295,000 in 1999. Service fee income is based on loan payments and
payoffs received on the sold portion of SBA loans, and therefore, varies
from year to year. During 2001, the Bank's average SBA loan portfolio
serviced was $31.6 million versus $30.3 million in 2000 and $25.3
million in 1999. 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 $123,000 versus
$128,000 in 2000 and $105,000 in 1999.
Discount Brokerage
Discount brokerage services generated $6,000 in 2001 compared to $8,000
in 2000 and $19,000 in 1999. 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 Other Real Estate Owned (OREO) Sales
During 2001 the Bank had no OREO or OREO sales. In 2000, $39,000 in
gain on sale of other real estate owned (OREO) was recorded compared to
a $2,000 loss in 1999. See, "Other Real Estate Owned."
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, 2001,
non-interest expenses totaled $10,521,000, an increase of 10.4% over the
previous year. The following table outlines the components of
non-interest expense for the periods indicated:
(In thousands)
Year Ended December 31,
Expense Item 2001 2000 1999
------- ------ ------
Salaries & Employee Benefits $6,154 $5,468 $4,820
Occupancy 957 855 789
Equipment 604 535 468
Advertising/Business Development/Donations 487 493 441
Outside Customer Services 469 420 347
Director & Shareholder expenses 295 296 311
Deposit and Other Insurance 299 270 211
Postage & courier expenses 244 222 209
Professional Fees 247 245 165
Stationery & Supplies 196 193 173
Telephone expense 174 163 146
Loan expenses 94 82 135
Other 301 288 213
------- ------ ------
TOTAL $10,521 $9,530 $8,428
======= ====== ======
Salaries and Employee Benefits
A portion of the 12.5% increase in salaries and benefits resulted from
staff increases associated with the first full year of operation of the
Petaluma Branch which opened in November 2000. During 2001 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
averaged 105 in 2001, 96 in 2000 and 83 in 1999.
Occupancy
Occupancy costs increased 11.9% due to the new Petaluma branch and the
new operations center which opened in August 2001. The new operations
center, located in West Santa Rosa, has computer operations, client
services and personnel which were relocated from downtown Santa Rosa.
In addition, there were annual increases in the rents charged on most
facilities as called for in the lease agreements. Occupancy costs are
expected to increase as the Bank expands into new market areas.
Equipment
Equipment expenses increased 12.9% to $604,000 in 2001 compared to
535,000 in 2000. During 2001, the Bank continued to upgrade and expand
our technology. In 2001, the Bank implemented "I Banc" an internet
banking product for consumers. Equipment costs are expected to continue
to increase during 2002 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 (I Banc,
Telebanc, SBA, commercial and construction lending and deposit
campaigns) and promoting new locations. The Bank continued its strong
support of the local community through contributions to local charitable
agencies.
Outside Customer Services
Outside customer services increased to $469,000 in 2001 from $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 equaled $295,000 in 2001 compared 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 $$200,000 in
2001compared 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; a rate increase is
expected because of the low ratio of federal reserves to insured
disposits. The Bank is also charged a "Financing Corporation" (FICO)
assessment. The annual rate varies and is calculated per $100 of insured
deposits. This cost equaled $85,000 in 2001and $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 $115,000 in 2001 and
$98,000 in 2000 See, "Description of Business-Supervision and
Regulation."
Professional Fees
Professional fees increased to $247,000 in 2001 from $245,000 in 2000.
The Bank's legal costs vary depending upon the 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 other consulting
services.
Loan Expenses
Loan expenses equaled $94,000 in 2001 compared to $82,000 and vary
between years based upon many factors; however, problem loan expenses
have the biggest impact since the borrower generally does not reimburse
the Bank for the costs. Included in this category are credit reports,
appraisals, foreclosure expenses, inspection costs and other loan
related expenses. The Bank generally charges for direct costs associated
with loan originations. Broker fees are 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.
The other expense categories increased due to growth of the Bank.
Non-interest expenses are expected to increase in 2002 due to the
anticipated growth in the Bank.
The increase in non-interest expenses of 13.1% to $9,530,000 from
$8,428,000 in 1999 was due primarily to increased salary expenses
attributable to the full year of operation of the Sebastopol Branch,
salary increases and staff incentives associated with increased volume
of loan and deposit activity. Most expense categories were higher as a
result of the loan and deposit growth and the new branch facilities
(Sebastopol and the opening of Petaluma in November).
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,
Type of Loan
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Commercial $137,711 $118,134 $112,277 $110,468 $91,860
Real Estate Construction 49,604 46,244 39,523 28,177 10,982
Real Estate Other 284,782 273,298 210,119 131,661 103,936
Installment Loans
to Individuals 2,052 2,412 1,783 1,749 2,012
-------- -------- -------- -------- --------
Total, gross 474,149 440,088 363,702 272,055 208,790
Deferred fees and
discounts, net (2,004) (2,961) (2,690) (2,007) (1,843)
-------- -------- -------- -------- --------
Total loans net of deferred
fees and discounts 472,145 437,126 361,012 270,048 206,947
-------- -------- -------- -------- --------
Allowance for loan losses (5,616) (4,681) (3,787) (3,019) (2,539)
TOTAL LOANS, NET $466,529 $432,446 $357,225 $267,029 $204,408
======== ======== ======== ======== ========
The table above illustrates the Bank's emphasis on commercial and real
estate lending. At December 31, 2001 and 2000 commercial loans
comprised 29.0% and 26.8%, respectively, of the Bank's total loan
portfolio. Construction and other real estate loans (combined)
comprised 70.5% and 72.6% 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, 2001, 95.0% or $450.3 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 85%, 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. In
2000, the SBA began requiring a prepayment penalty of 5% in first year,
3% in second year and 1% in the third year, on all 7(a) loans. 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, 2001, the
Bank held $232,268,000 in loans generated by the SBA department, of
which $145,478,000 were 7(a) loans of which $76,458,000 was guaranteed
by the SBA. 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, 2001 there
were no SBA guaranteed loans more than 90 days past due and still
accruing interest: there were three SBA guaranteed loans totaling
$1,639,000, of which $1,220,000 was guaranteed by the SBA, on
non-accrual status. There were no charge-offs on SBA loans during 2001
and a total of $36,000 in charge offs on loans with SBA guarantees
during 2000 and no charge offs on SBA guaranteed loans during 1999.
The category entitled "Real Estate-Other" includes loans which are
secured by real estate and not classified as a construction or
commercial loans. 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 1.5% of the total loan portfolio at December 31, 2001 compared
to 1.1% at December 31, 2000. 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 to $49,604,000 in 2001 from
$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 0.4% of the
total loan portfolio at December 31, 2001. 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, 2001. 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 $1,111 $33,726 $13,848 $890 $49,575
Variable rate 1,723 9,165 3,031 -0- 13,919
One to five years
Fixed rate 2,820 -0- 8,734 344 11,898
Variable rate 4,022 61 1,733 125 5,941
After five years
Fixed rate 12,906 -0- 61,082 131 74,119
Variable rate 115,129 6,652 196,354 562 318,697
-------- ------- -------- ------ --------
TOTAL $137,711 $49,604 $284,782 $2,052 $474,149
======== ======= ======== ====== ========
Of the total loans due in more than one year at December 31, 2001,
$86,017,000 were at fixed interest rates, which includes loans currently
at their floor rate, and $324,638,000 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, 2001. SBA loans
are considered commercial loans for this analysis. Most of the SBA
loans are secured by real estate. The Bank has approximately $55.2
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 Over
3 Months 1 Year
3 Months or through through Over 5
Less 1 Year 5 Years Years Total
-------- -------- ------- ------- --------
Commercial $130,972 $1,880 $3,905 $954 $137,711
Real Estate -
Construction 22,905 25,594 1,104 -0- 49,604
Real Estate -Other 67,124 100,922 51,909 64,827 284,782
Installment Loans 746 832 344 131 2,052
-------- -------- ------- ------- --------
TOTAL $221,747 $129,228 $57,262 $65,912 $474,149
======== ======== ======= ======= ========
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, 2001 and 2000 approximately 74% and 82%,
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 20.0% to $5,616,000 at December 31, 2001 compared to
$4,680,000 in 2000. The provision for loan losses for the year ended
December 31, 2001 was $960,000, the same as last year's provision. 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 1.4% at December 31,
2001 and 1.2% at December 31, 2000.
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)
ALLOWANCE FOR LOAN LOSSES:
Year Ended December 31,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Balance at Beginning of Period $4,681 $3,787 $3,019 $2,539 $2,042
Provision for Loan Losses
Charged to Expense 960 960 800 480 650
Less Charge-Offs:
Commercial 0 0 13 0 48
Real Estate-Other 25 66 0 0 140
Consumer loans 0 0 19 0 34
-------- -------- -------- -------- --------
Total Charge-offs 25 66 32 0 222
-------- -------- -------- -------- --------
Recoveries:
Commercial 0 0 0 0 69
Real Estate - Other 0 0 0 0 0
Consumer 0 0 0 0 0
-------- -------- -------- -------- --------
Total Recoveries 0 0 0 0 69
-------- -------- -------- -------- --------
Net Charge-offs/(Recoveries) 25 66 32 0 153
Balance at the End of the Period $5,616 $4,681 $3,787 $3,019 $2,539
======== ======== ======== ======== ========
Total Loans Outstanding at End
of Period-Net of SBA Guarantees $397,693 $378,141 $302,665 $213,034 $162,077
Ratio of Ending Allowance to
Ending Loans Outstanding-Net
of SBA Loan Guarantees 1.4% 1.2% 1.3% 1.4% 1.6%
AVERAGE TOTAL LOANS $463,530 $399,170 $308,013 $239,549 $191,292
Ratio of Net Charge-offs
to Average Loans Outstanding
During the Period 0.005% 0.012% 0.010% 0.000% 0.079%
During 2001 there were charged-offs on two consumer loans totaling
$25,000 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, 2001 December 31, 2000 December 31, 1999
% of % of %of
Amount Loans Amount Loans Amount Loans
------ ------ ------ ------ ------ ------
Category
Commercial $1,832 29.0% $1,194 26.8% $1,269 30.8%
Real Estate -Construction 1,216 10.5 1,057 10.5 776 10.9
Real Estate -Other 2,533 60.1 2,383 62.1 1,700 57.8
Installment Loans 35 0.4 47 0.6 42 0.5
------ ------ ------ ------ ------ ------
TOTAL $5,616 100.0% $4,681 100.0% $3,787 100.0%
====== ====== ====== ====== ====== ======
(dollars in thousands)
December 31, 1998 December 31, 1997
% of % of
Amount Loans Amount Loans
------ ------ ------ ------
Category
Commercial $1,565 40.6% $1,312 44.0%
Real Estate -Construction 444 10.4 133 5.2
Real Estate -Other 959 48.4 1,021 49.8
Installment Loans 51 0.6 73 1.0
------ ------ ------ ------
TOTAL $3,019 100.0% $2,539 100.0%
====== ====== ====== ======
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)
2001 2000 1999 1998 1997
------- ------- ------- ------ -------
Nonperforming loans:
Non-accrual loans $2,156 $2,097 $1,888 $62 $318
Accruing loans past
due 90 days 0 158 0 0 150
Restructured loans 0 0 0 0 0
------- ------- ------- ------ -------
Total nonperforming
loans 2,156 2,255 1,888 62 468
------- ------- ------- ------ -------
Other real estate owned 0 0 0 0 130
Total nonperforming/
impaired assets $2,156 $2,255 $1,888 $62 $598
======= ======= ======= ====== =======
Nonperforming assets to
total loans and other real
estate owned 0.45% 0.51% 0.52% 0.02% 0.29%
Nonperforming assets to
total assets 0.38% 0.46% 0.47% 0.02% 0.26%
The following table sets forth the classified loans at the end of the
last five years.
(In thousands)
2001 2000 1999 1998 1997
------- ------- ------- ------ -------
Substandard $2,269 $3,071 $3,607 $2,679 $1,602
Doubtful 705 0 2 18 25
Loss 0 0 0 0 0
Other real estate owned 0 0 0 0 130
------- ------- ------- ------ -------
Total classified assets $2,974 $3,071 $3,609 $2,697 $1,757
------- ------- ------- ------ -------
Classified to total loans
and other real
estate owned 0.63% 0.70% 0.99% 0.99% 0.84%
Allowance for loan losses
to total classified 188.84% 152.43% 119.54% 106.22% 86.04%
The amount of interest foregone on the loans on non-accrual at December
31, 2001 totaled approximately $143,000 for 2001 and $43,000 in interest
was earned on those loans (prior to those loans being placed on
non-accrual) during the year.
On December 31, 2001, the Bank had $2,156,000 in non-accrual loans, of
which $1,639,000 was collateralized by real estate and $1,220,000 was
guaranteed by the SBA. As of 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.
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, 2001, 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
The Bank had no OREO properties during 2001. During 2000, the Bank sold
one building acquired by the Bank through a foreclosure sale at a gain
of $39,000.
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, 2001, deposits totaled $502,137,000, which was an
increase of 10.7% from $453,437,000 at December 31, 2000.
Non-interest bearing demand deposits totaled $59,413,000 at December 31,
2001 as compared to $51,017,000 at December 31, 2000. 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 $54,302,000 during 2001 from $48,655,000
during 2000.
Time deposits increased $22.7 million or 9.0% in 2001. During 2001 and
2000, the Bank offered highly competitive rates on time deposits in
order to fund growth in loans. Time deposits increased to $276,704,000
at December 31, 2001 from $253,959,000 at December 31, 2000 and
$197,416,000 at December 31, 1999. Time deposits bear a higher interest
rate than other types of deposits and increase the Bank's overall cost
of funds. See, "Net Interest Income."
Money market deposits increased $11.4 million or 9.0% in 2001. 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. The Sonoma Investors Reserve accounts generally
offers 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, 2001.
$100,000 and Over Less than $100,000
Amount Amount
(in 000's) Pct (in 000's) Pct
-------- ----- -------- ------
Three Months or Less $28,636 25.1% $40,100 24.7%
3 to 6 months 24,625 21.6 37,965 23.3
6 months to 1 year 36,201 31.7 52,625 32.4
Over 1 year 24,645 21.6 31,907 19.6
-------- ----- -------- -----
Total $114,107 100.0% $162,597 100.0%
======== ===== ======== =====
At December 31, 2001, certificates of deposit of $100,000 or more
constituted approximately 22.7% 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, 2001, 2000 and 1999.
(in thousands) December 31,
2001 2000 1999
---- ---- ----
U.S. Treasury Securities $0 $0 $0
U.S. Government-Sponsored Agencies 998 1,985 2,970
Federal Home Loan Bank Stock 599 561 1,165
Federal Reserve Stock 163 161 129
------ ------ ------
Total $1,760 $2,707 $4,264
====== ====== ======
Securities Pledged $625 $625 $625
====== ====== ======
The following table shows the yield of investments (at amortized cost)
by maturity ranges as of December 31, 2001. Federal Home Loan Bank and
Federal Reserve stock are excluded from this table.
(in thousands)
Amount Yield
------ -----
One year or less $998 3.28%
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 $998 3.28%
==== ====
The yield on average investments (including Federal Home Loan Bank and
Federal Reserve Bank stock) equaled 5.95% during 2001 compared to 5.85%
in 2000. See, "Net Interest Income."
The Bank is required to own Federal Home Loan Bank ("FHLB") stock to
maintain its 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
5.88% during 2001 and 7.2% during 2000. The Federal Reserve Bank stock
had a yield of 6.2% during 2001.
Investments are carried at amortized cost or market value, depending on
whether they are held to maturity or available for sale. At December
31, 2001, $998,000 was classified as available for sale per accounting
definitions. At December 31, 2000, $1,985,000 was classified as
available for sale. The market value of securities equaled $998,000 and
$1,985,000 at December 31, 2001 and December 31, 2000, 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 $82,540,000 or
14.7% of total assets at December 31, 2001 compared to $49,527,000 or
10.0% of total assets at December 31, 2000. The liquidity level at
December 31, 2001 exceeded the Bank's policy guideline of 10%.
At December 31, 2001 and 2000, the Bank's ratio of loans-to-deposits was
94.4% and 97.0% respectively which were in compliance with its internal
guideline.
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
$105,420,000 in loans pledged which provided a borrowing capacity of
$60,256,000. As of December 31, 2001, the Bank had borrowed $11,802,000
compared to $1,828,000 at December 31, 2000.
The Bank funded loan growth during 2001 and 2000 through increased
interest-bearing deposits (mainly time deposits), borrowing from the
Federal Home Loan Bank and liquidity. Deposits increased during 2001
and 2000 largely due to deposit campaigns which offered higher rates to
attract new time deposits. While this trend is expected to continue,
the Bank also plans 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, 2001, the Corporation had non-interest and interest
bearing cash balances of $251,000, 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, 2001, 2000 and 1999.
Year Ended December 31,
2001 2000 1999
---- ---- ----
Return on Average Assets 1.5% 1.5% 1.6%
Return on Average
Shareholders' Equity 19.8% 20.9% 21.6%
Average Shareholders' Equity
as a Percent of Average Assets 7.8% 7.4% 7.4%
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
8.0% of its total assets. The Bank's total risk-based capital ratio was
12.1% at December 31, 2001. The minimum acceptable level at December
31, 2001 was 8.0%. The Corporations leverage capital ratio was 8.0%,
with total risk-based capital equaling 12.1%, at December 31, 2001.
Income Taxes
The 2001 provision for income tax equaled $5,651,000. The overall
effective tax rate was 41.1% during 2001. See, "Item 7, Consolidated
Financial Statements, Note 6." The provision for federal income taxes
for 2000 was $4,513,000. The overall effective tax rate for 2000 and
1999 was 39.7% and 40.2%.
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, 2002,
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 $25,380 $2,582
+100 24,492 1,693
Base Scenario 22,799 -0-
- -100 21,842 957
- -200 21,131 1,668
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, 2001. Assets, liabilities and
shareholders' equity are classified by the earliest possible repricing
opportunity or maturity date, whichever first occurs.
Balance Sheet
(in thousands)
Over 3 Over Non-rate
months 1 year Sensitive
Through through through or Over
3 months 1 year 5 years 5 years Total
------ ------ ------- ------- ------
Assets
Fed funds sold and
Time Deposits $65,516 $298 $65,814
Investment securities $998 $762 1,760
Loans 221,747 129,228 57,262 65,912 474,149
Non-interest-earning
assets (net of
allowance for
loan losses) 19,281 19,281
-------- -------- -------- -------- --------
$287,263 $129,526 $58,260 $85,955 $561,004
======== ======== ======== ======== ========
Liabilities
& Shareholders Equity
Time Deposits $100,000
and over $28,741 $60,927 $24,439 $114,107
Other interest-bearing
deposits and
liabilities 206,625 100,084 31,907 $1,803 340,419
Non-interest bearing
liabilities 59,413 59,413
Other Liabilities &
Shareholders' Equity 47,065 47,065
-------- -------- -------- -------- --------
$235,366 $161,011 $56,346 $108,281 561,004
======== ======== ======== ======== ========
Interest Rate
Sensitivity (1) $51,897 ($31,485) $1,914 ($22,326)
Cumulative Interest Rate
Sensitivity $51,897 $20,412 $22,326 -0-
(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
NORTHERN EMPIRE BANCSHARES
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of income F-3
Consolidated statements of comprehensive income F-4
Consolidated statements of changes in stockholders' equity F-5
Consolidated statements of cash flows F-6
Notes to financial statements F-7
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, 2001 and 2000, and
the related consolidated statements of income, comprehensive income,
changes in stockholders' equity, and cash flows for each of the three
years ended December 31, 2001. 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 auditing standards generally
accepted in the United States. 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, 2001 and
2000, and the results of its operations and cash flows for each of the
three years ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ MOSS ADAMS LLP
Santa Rosa, California
January 22, 2002
FINANCIAL STATEMENTS
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
ASSETS
2001 2000
------------ ------------
Cash and due from banks $16,726,000 $13,329,000
Federal funds sold 65,516,000 35,505,000
------------ ------------
Cash and cash equivalents 82,242,000 48,834,000
Interest-bearing deposits in banks 298,000 693,000
Investment securities available-for-sale 998,000 1,985,000
Federal Home Loan Bank (FHLB) stock, at cost 599,000 561,000
Federal Reserve Bank stock, at cost 163,000 161,000
Loans, net 466,529,000 432,446,000
Premises and equipment 1,037,000 937,000
Accrued interest receivable and other assets 9,138,000 8,773,000
------------ ------------
Total assets $561,004,000 $494,390,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $502,137,000 $453,437,000
Accrued interest payable and other liabilities 2,768,000 3,022,000
FHLB advances 11,802,000 1,828,000
------------ ------------
Total liabilities 516,707,000 458,287,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares
authorized; 3,973,263 and 3,766,382 shares
issued and outstanding in 2001 and 2000 21,946,000 18,267,000
Additional paid-in capital 786,000 742,000
Accumulated other comprehensive income (loss) (1,000) 4,000
Retained earnings 21,566,000 17,090,000
------------ ------------
Total stockholders' equity 44,297,000 36,103,000
------------ ------------
Total liabilities and stockholders' equity $561,004,000 $494,390,000
============ ============
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- ----------
INTEREST INCOME
Loans $42,644,000 $37,816,000 $28,346,000
Federal funds sold and
investment securities 1,701,000 2,078,000 1,478,000
----------- ----------- ----------
Total interest income 44,345,000 39,894,000 29,824,000
INTEREST EXPENSE 20,803,000 19,495,000 12,836,000
----------- ----------- ----------
Net interest income before provision
for loan losses 23,542,000 20,399,000 16,988,000
PROVISION FOR LOAN LOSSES 960,000 960,000 800,000
----------- ----------- ----------
Net interest income after provision
for loan losses 22,582,000 19,439,000 16,188,000
----------- ----------- ----------
NONINTEREST INCOME
Service charge on deposits 430,000 332,000 444,000
Gain on sale of loans 545,000 451,000 475,000
Other 702,000 673,000 653,000
----------- ----------- ----------
Total noninterest income 1,677,000 1,456,000 1,572,000
----------- ----------- ----------
NONINTEREST EXPENSES
Salaries and benefits 6,154,000 5,468,000 4,820,000
Occupancy 957,000 855,000 789,000
Equipment 604,000 535,000 468,000
Outside customer services 469,000 420,000 347,000
Deposit and other insurance 299,000 270,000 211,000
Professional fees 247,000 245,000 165,000
Advertising 243,000 248,000 213,000
Other administrative 1,548,000 1,489,000 1,415,000
----------- ----------- ----------
Total noninterest expenses 10,521,000 9,530,000 8,428,000
----------- ----------- ----------
INCOME BEFORE INCOME TAXES 13,738,000 11,365,000 9,332,000
PROVISION FOR INCOME TAXES 5,651,000 4,513,000 3,754,000
----------- ----------- ----------
NET INCOME $8,087,000 $6,852,000 $5,578,000
=========== =========== ==========
EARNINGS PER COMMON SHARE $2.04 $1.74 $1.43
=========== =========== ==========
EARNINGS PER COMMON SHARE,
ASSUMING DILUTION $1.87 $1.67 $1.34
=========== =========== ==========
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---------- ---------- ----------
NET INCOME $8,087,000 $6,852,000 $5,578,000
---------- ---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses arising
during period (2,000) 7,000 (30,000)
Reclassification adjustment for (gains)
losses included in net income (7,000) 30,000 (4,000)
---------- ---------- ----------
(9,000) 37,000 (34,000)
Income tax benefit (expense) 4,000 (16,000) 13,000
---------- ---------- ----------
(5,000) 21,000 (21,000)
---------- ---------- ----------
COMPREHENSIVE INCOME $8,082,000 $6,873,000 $5,557,000
=========== =========== ==========
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
Accumulated
Additional Other
Common Stock Paid-in Comprehensive Retained
Shares Amount Capital Income (Loss Earnings Total
--------- ----------- -------- -------- ----------- -----------
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 loss on securities,
net of tax 0 0 0 (21,000) 0 (21,000)
Net income 0 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
Net income 0 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
5% stock dividend 188,641 3,608,000 0 0 (3,608,000) 0
Stock options exercised 18,240 71,000 44,000 0 0 115,000
Payout of fractional shares 0 0 0 0 (3,000) (3,000)
Unrealized loss on securities,
net of tax 0 0 0 (5,000) 0 (5,000)
Net income 0 0 0 0 8,087,000 8,087,000
--------- ----------- -------- -------- ----------- -----------
Balance, December 31, 2001 3,973,263 $21,946,000 $786,000 ($1,000) $21,566,000 $44,297,000
========= =========== ========= ======== =========== ===========
NORTHERN EMPIRE BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $8,087,000 $6,852,000 $5,578,000
Adjustments to reconcile net income to net cash from
operating activities:
Provision for loan losses 960,000 960,000 800,000
Depreciation, amortization and accretion 404,000 396,000 356,000
FHLB stock dividend (35,000) (63,000) (75,000)
Net change in deferred loan fees
and discounts (957,000) 271,000 691,000
Change in deferred income taxes (437,000) (642,000) (644,000)
Tax benefit from stock options exercised 44,000 96,000 444,000
Gain on sale of fixed assets 0 (9,000) (4,000)
Change in interest receivable and other assets 72,000 (543,000) (648,000)
Change in accrued interest payable and
other liabilities (252,000) 1,073,000 347,000
----------- ----------- -----------
Net cash from operating activities 7,886,000 8,391,000 6,845,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale
securities 3,650,000 2,984,000 4,000,000
Net change in interest bearing deposits 395,000 (693,000) 0
Net increase in loans (34,086,000) (76,452,000) (91,687,000)
Purchase of leasehold improvements and
equipment, net (524,000) (543,000) (294,000)
Purchase of Federal Reserve Bank stock (3,000) (32,000) 0
FHLB stock redemptions 0 667,000 512,000
Proceeds from sale of fixed assets 0 11,000 23,000
Purchase of available-for-sale securities (2,650,000) (1,978,000) 0
----------- ----------- -----------
Net cash from investing activities (33,218,000) (76,036,000) (87,446,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 48,698,000 95,570,000 61,898,000
Net change in FHLB advances 9,974,000 (7,222,000) 7,178,000
Payout of fractional shares (3,000) (2,000) (3,000)
Proceeds from exercise of stock options 71,000 74,000 254,000
----------- ----------- -----------
Net cash from financing activities 58,740,000 88,420,000 69,327,000
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 33,408,000 20,775,000 (11,274,000)
CASH AND CASH EQUIVALENTS, beginning of year 48,834,000 28,059,000 39,333,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $82,242,000 $48,834,000 $28,059,000
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $21,098,000 $19,200,000 $12,725,000
Income taxes $6,061,000 $4,652,000 $4,246,000
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 accounting principles generally accepted in the United States
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 results.
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 banks - Interest bearing deposits in 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.
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Depreciation expense for the
years ended December 31, 2001, 2000 and 1999, was $423,000, $396,000,
and $358,000.
Advertising - Advertising costs are charged to expense during the year
in which they are incurred.
Income taxes - The Company and the Bank file consolidated federal income
tax returns and combined state tax returns for California and Arizona.
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 (FASB) has issued the following accounting pronouncements:
SFAS No. 141, "Business Combinations." This Statement addresses
financial accounting and reporting for business combinations and
supersedes Accounting Principles Board (APB) Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in
the scope of this Statement are to be accounted for using one method,
the purchase method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001. The adoption of
SFAS No. 141 is not expected to have a material effect on the Company's
consolidated financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets." This Statement
addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, "Intangible
Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements
upon their acquisition. This Statement also addresses how goodwill and
other intangible assets should be accounted for after they have been
initially recognized in the financial statements. The provisions of this
Statement are required to be applied starting with fiscal years
beginning after December 15, 2001. The adoption of SFAS No. 142 is not
expected to have a material effect on the Company's consolidated
financial statements.
SFAS No. 143, "Accounting for Asset Retirement Obligations," addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. This Statement applies to legal obligations associated
with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of
a long-lived asset. The provisions of this Statement are required to be
applied starting with fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 is not expected to have a material effect on
the Company's consolidated financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS 144 replaces SFAS 121 and amends
certain other accounting pronouncements. The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The adoption of SFAS No. 144 is not
expected to have a material effect on the Company's consolidated
financial statements.
In July 2001, Staff Accounting Bulletin (SAB) No. 102, was issued by the
Division of Corporation Finance at the Securities and Exchange
Commission. This SAB expresses the staff's views on the development,
documentation and application of a systematic methodology for
determining allowances for loan and lease losses in accordance with
generally accepted accounting principles and as required by Financial
Reporting Release No. 28. In particular, the guidance focuses on the
documentation the staff normally would expect registrants to prepare and
maintain in support of their allowances for loan losses. The guidance in
this staff accounting bulletin is being issued in light of the March 10,
1999 Joint Interagency Letter to Financial Institutions in which the
staff agreed to provide, in parallel with guidance provided by the
federal banking agencies, guidance on loan loss allowance methodologies
and supporting documentation. On July 6, 2001, the federal banking
agencies issued their guidance through the Federal Financial
Institutions Examination Council (FFIEC) as interagency guidance,
"Policy Statement on Allowance for Loan and Lease Losses Methodologies
and Documentation for Banks and Savings Institutions." This statement is
not expected to have a material effect on the Company's consolidated
financial statements.
NORTHERN EMPIRE BANCSHARES
NOTES TO 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 against interest income. 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. 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. The Bank incurs loan costs when originating some SBA
loans. These costs are deferred and expensed over the life of the loan.
The deferred costs and fees are reported as net on the balance sheet.
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.
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.
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
Year Ended December 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
Basic:
Net income $8,087,000 $6,852,000 $5,578,000
========== ========== ==========
Weighted average common shares
outstanding 3,966,454 3,948,242 3,905,111
========== ========== ==========
Earnings per common share $2.04 $1.74 $1.43
========== ========== ==========
Assuming dilution:
Weighted average common shares
outstanding 3,966,454 3,948,242 3,905,111
Stock options 355,375 163,391 244,426
========== ========== ==========
4,321,829 4,111,633 4,149,537
========== ========== ==========
Diluted earnings per common share $1.87 $1.67 $1.34
========== ========== ==========
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.
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 2.92% to 5.63% and
mature through 2008. To collateralize these advances, the Bank has
pledged loans to FHLB with outstanding principal balances of
$105,420,000, which results in a borrowing capacity of $60,256,000.
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,
2001 and 2000. The securities held at December 31, 2001, mature August
2003.
Unrealized Market
Cost Gains (Losses) Value
---------- ------ ----------
U.S. Government Agency Securities -
December 31, 2001 $1,000,000 ($2,000) $998,000
---------- ------ ----------
U.S. Government Agency Securities -
December 31, 2000 $1,978,000 $7,000 $1,985,000
---------- ------ ----------
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 other
counties in Northern California and in Arizona. There were no industry
or borrower group concentrations at December 31, 2001 and 2000.
2001 2000
------------ ------------
Commercial loans $137,711,000 $118,134,000
Consumer installment loans 2,052,000 2,412,000
Real estate loans - construction 49,604,000 46,244,000
Real estate loans - mortgage 284,782,000 273,298,000
------------ ------------
474,149,000 440,088,000
Deferred loan fees and discount (2,004,000) (2,961,000)
Allowance for loan losses (5,616,000) (4,681,000)
------------ ------------
$466,529,000 $432,446,000
============ ============
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of activity in the allowance for loan losses is as follows:
2001 2000 1999
---------- ---------- ----------
Balance, beginning of year $4,681,000 $3,787,000 $3,019,000
Provision for loan losses 960,000 960,000 800,000
Loans charged-off (25,000) (66,000) (32,000)
---------- ---------- ----------
$5,616,000 $4,681,000 $3,787,000
========== ========== ==========
At December 31, 2001, there were nine loans totaling $2,156,000 in
nonaccrual status. At December 31, 2000, there were five loans totaling
$2,097,000 in nonaccrual status. Interest foregone on these loans
totaled $143,000, $186,000, and $60,000, respectively, for the years
ended December 31, 2001, 2000 and 1999. That portion of the allowance
for loan losses associated with these nonaccrual loans was $282,000 and
$40,000, 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. Loans serviced for others
are not included in the accompanying consolidated balance sheets. The
unpaid principal balances of SBA loans serviced for others were
$31,649,000 and $30,263,000 guaranteed by the SBA at December 31, 2001
and 2000, of which the Bank's retained interests in those loans ranged
from 10% to 54%. The balance of capitalized servicing rights included in
other assets at December 31, 2001 and 2000, was $639,000 and $575,000.
The fair value of these rights was determined using discount rates of 10
percent and prepayment speeds ranging from 6% to 15% depending upon the
stratification of the specific right. The amortized servicing rights for
the years ended December 31, 2001, 2000 and 1999, totaled $65,000,
$61,000, and $59,000. 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 $76,458,000 at December 31, 2001.
The bank serviced non-SBA loans for others totaling $25,683,000 and
$24,579,000 in unpaid principal balances at December 31, 2001 and 2000.
These loans are not included in the accompanying consolidated balance
sheet, and there are no servicing assets recorded associated with these
loans.
NOTE 4 - PREMISES AND EQUIPMENT
2001 2000
---------- ----------
Leasehold improvements $1,269,000 $1,211,000
Furniture and equipment 3,158,000 2,718,000
---------- ----------
4,427,000 3,929,000
Less accumulated depreciation
and amortization 3,390,000 2,992,000
---------- ----------
$1,037,000 $937,000
========== ==========
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - DEPOSITS
Certificates of deposit with balances of $100,000 or more totaled
$114,107,000 and $86,066,000 at December 31, 2001 and 2000. Deposits
consist of the following:
2001 2000
------------ ------------
Noninterest-bearing $59,413,000 $51,017,000
Interest-bearing:
Money market 137,826,000 126,422,000
Savings 5,904,000 4,643,000
Demand 22,290,000 17,396,000
Certificates of deposit 276,704,000 253,959,000
------------ ------------
$502,137,000 $453,437,000
============ ============
Certificates of deposit are scheduled to mature as follows:
Year Ending December 31,
------------------------
2002 $215,950,000
2003 55,683,000
2004 93,000
Thereafter 4,978,000
------------
$276,704,000
============
NOTE 6 - INCOME TAXES
The components of the provision for federal and state income taxes are
as follows:
2001 2000 1999
---------- ---------- ----------
Provision for income taxes
Federal $4,553,000 $3,752,000 $2,928,000
State 1,491,000 1,307,000 1,026,000
---------- ---------- ----------
6,044,000 5,059,000 3,954,000
Change in deferred
income taxes (437,000) (642,000) (644,000)
Tax benefit from
options exercised 44,000 96,000 444,000
---------- ---------- ----------
$5,651,000 $4,513,000 $3,754,000
========== ========== ==========
A reconciliation of the statutory tax rates to the effective tax rates
is as follows:
2001 2000 1999
---- ---- ----
Federal income tax at statutory rate 34.0 % 34.0 % 34.0 %
State franchise taxes, net of federal
income tax benefit 6.7 7.6 7.3
Other, net 0.4 (1.9) (1.1)
---- ---- ----
41.1 % 39.7 % 40.2 %
==== ==== ====
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net deferred tax assets are as follows:
2001 2000
---------- ----------
Loan loss reserves $2,311,000 $1,924,000
State taxes 487,000 454,000
Deferred compensation 432,000 362,000
All others 220,000 273,000
---------- ----------
$3,450,000 $3,013,000
========== ==========
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.
The Company granted 242,350 nonqualifying stock options to directors and
employees during the year ended December 31, 2001.
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:
2001 2000 1999
---------- ---------- ----------
Net income for the year $8,087,000 $6,852,000 $5,578,000
Compensation expense, net of tax effect 347,000 287,000 266,000
---------- ---------- ----------
Proforma net income $7,740,000 $6,565,000 $5,312,000
========== ========== ==========
Proforma earnings per common share $1.95 $1.66 $1.36
========== ========== ==========
Proforma earnings per common share, assuming dilution $1.79 $1.60 $1.28
========== ========== ==========
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:
2001 2000 1999
---- ---- ----
Dividends 5% 5% 5%
Expected volatility 14.80% 15.13% 25.91%
Risk-free interest rate 4.86 5.9% - 6.35% 4.57% - 5.45%
Expected life 10 years 10 years 10 years
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the number of options granted and
exercisable and the weighted average exercise prices and remaining
contractual lives of the options:
2001 2000 1999
---------------- ---------------- -----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------- ------- ------- ------ -------
Outstanding at beginning of year 861,225 $13.38 839,020 $13.33 881,578 $12.99
Granted 242,350 $19.88 299,406 $14.33 0 $0.00
Options granted attributable to the
stock dividend 54,458 $19.13 40,606 $13.02 39,975 $13.39
Forfeited (5,953) $14.90 (290,878) $13.32 (1,300) $14.00
Exercised (18,240) $3.89 (26,929) $2.78 (81,233) $3.12
--------- ------- -------
Outstanding at end of year 1,133,840 $14.27 861,225 $13.38 839,020 $13.33
========= ======= =======
Options exercisable at end of year 526,448 352,200 203,812
========= ======= =======
Weighted-
Weighted- Average Weighted-
Options Average Remaining Options Average
Outstanding at Exercise Contractual Exercisable at Exercise
12/31/2001 Price Life 12/31/2001 Price
---------- ------- ---------- ---------- -------
4,410 $2.84 2.2 4,410 $2.84
64,334 $12.09 6.6 38,600 $12.09
498,354 $12.69 6.8 299,013 $12.69
303,875 $13.57 6.6 182,325 $13.57
10,500 $15.77 8.8 2,100 $15.77
252,367 $18.93 9.0 0 $0.00
--------- -------
1,133,840 $14.27 7.2 526,448 12.88
========= =======
In accordance with the Plan, options were granted during 2001 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, 2001, 2000 and 1999,
totaled $182,000, $174,000, and $173,000. 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, 2001 and
2000, the cash surrender value of these policies, which is included on
the balance sheet in other assets, was $2,287,000 and $2,191,000.
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - EMPLOYEE BENEFIT 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, 2001, 2000 and 1999, were $91,000, $75,000,
and $51,000.
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, $168,000, and $155,000 for the years
ended December 31, 2001, 2000 and 1999.
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:
2001 2000
---------- ---------
Balance, beginning of year $7,273,000 $7,016,000
Additions 16,616,000 10,728,000
Principal reductions (15,317,000) (9,127,000)
Loans sold to other institutions - (1,344,000)
---------- ----------
$8,572,000 $7,273,000
========== ==========
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, 2001 and 2000, were $4,098,000 and $2,867,000.
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 $530,000, $482,000, and $416,000 for the years ended December 31,
2001, 2000 and 1999. Total rental expense for the years ended December
31, 2001, 2000 and 1999, was $706,000, $650,000, and $571,500.
Future minimum non-cancelable lease payments are as follows:
Year Ending December 31,
------------------------
2002 $783,000
2003 737,000
2004 540,000
2005 255,000
2006 236,000
Thereafter 758,000
----------
$3,309,000
==========
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 1 capital
(as defined in the regulations) to risk-weighted assets (as defined) and
of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2001 and 2000, 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 (in (in
thousands) Ratio thousands) Ratio thousands) Ratio
At December 31, 2001:
Total Capital to Risk-Weighted Assets
Consolidated $49,321 12.1% $32,491 8.0% $40,614 10.0%
Bank $49,060 12.1% $32,487 8.0% $40,609 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated $44,238 10.9% $16,246 4.0% $24,368 6.0%
Bank $43,977 10.8% $16,243 4.0% $24,365 6.0%
Tier 1 Capital to Average Assets
Consolidated $44,238 8.0% $16,555 3.0% $27,592 5.0%
Bank $43,977 8.0% $16,554 3.0% $27,591 5.0%
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, 2001, 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 1 risk-based, and Tier 1 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 CONSOLDATED 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.
Interest-bearing deposits in banks - The fair value of interest-bearing
deposits are estimated using discounted cash flow analysis based on
current rates for similar types of deposits.
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.
12/31/2001 12/31/2000
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Financial assets:
Cash and cash equivalents $82,242,000 $82,242,000 $48,834,000 $48,834,000
Interest-bearing deposits in banks 298,000 299,000 693,000 695,000
Investment securities 1,760,000 1,760,000 2,707,000 2,707,000
Loans, net 466,529,000 473,833,000 432,466,000 439,451,000
------------ ------------ ------------ ------------
$550,829,000 $558,134,000 $484,700,000 $491,687,000
============ ============ ============ ============
Financial liabilities - deposits $502,137,000 $505,814,000 $453,437,000 $452,891,000
============ ============ ============ ============
Off-balance sheet financial instruments:
Commitments to extend credit $0 $50,923,000 $0 $34,301,000
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, 2001 and 2000, loan commitments totaled $47,451,000 and
$34,297,000, and standby letters of credit totaled $3,472,000 and
$3,727,000.
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The condensed financial statements of Northern Empire Bancshares (parent
company only) as of December 31, 2001 and 2000, and for each of the
three years then ended December 31, 2001, are as follows:
2001 2000
----------- -----------
ASSETS
Cash and cash equivalents $251,000 $213,000
Investment in Sonoma National Bank 44,036,000 35,878,000
Other assets 52,000 52,000
----------- -----------
Total assets $44,339,000 $36,143,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $42,000 $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;
3,973,263 and 3,766,382 shares
issued and outstanding in
2001 and 2000 21,946,000 18,267,000
Additional paid-in-capital 786,000 742,000
Accumulated other comprehensive
income (loss) (1,000) 4,000
Retained earnings 21,566,000 17,090,000
----------- -----------
Total stockholders' equity 44,297,000 36,103,000
----------- -----------
Total liabilities and stockholders' equity $44,339,000 $36,143,000
=========== ===========
NORTHERN EMPIRE BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000 1999
---------- ---------- ----------
STATEMENTS OF INCOME
Interest and other income $9,000 $13,000 $25,000
Administrative expenses (38,000) (37,000) (23,000)
Income tax expense (1,000) (1,000) (1,000)
Equity in undistributed earnings
of Sonoma National Bank 8,117,000 6,877,000 5,577,000
---------- ---------- ----------
Net income $8,087,000 $6,852,000 $5,578,000
========== ========== ==========
STATEMENTS OF CASH FLOWS 2001 2000 1999
Cash flows from operating activities:
Net income $8,087,000 $6,852,000 $5,578,000
Adjustments to reconcile net
income to net cash from
operating activities:
Changes in other assets 0 1,000 0
Equity in undistributed earnings (8,117,000) (6,877,000) (5,577,000)
---------- ---------- ----------
Net cash from operating activities (30,000) (24,000) 1,000
---------- ---------- ----------
Cash flows from investing activities:
Capital contribution to
Sonoma National Bank 0 0 (400,000)
Net change in loans receivable 0 149,000 (149,000)
---------- ---------- ----------
Net cash from investing activities 0 149,000 (549,000)
---------- ---------- ----------
Cash flows from financing activities:
Payout of fractional shares (3,000) (2,000) (3,000)
Proceeds from exercise of stock options 71,000 74,000 254,000
---------- ---------- ----------
Net cash from financing activities 68,000 72,000 251,000
---------- ---------- ----------
Net change in cash and cash equivalents 38,000 197,000 (297,000)
Cash and cash equivalents,
beginning of year 213,000 16,000 313,000
---------- ---------- ----------
Cash and cash equivalents,
end of year $251,000 $213,000 $16,000
========== ========== ==========
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
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, 49 President and Chief Executive
President & Chief Executive Officer of the Bank
Officer and Director since February 1991.
of the Bank
Clement C. Carinalli 56 Retired CPA, local
Director of the Corporation businessman, rancher and real
and the Bank estate investor.
Patrick R. Gallaher, 56 Certified Public Accountant
Chief Accounting Officer of and local businessman; major
the Corporation and Director shareholder in Oakmont
of the Corporation and the Bank Developers, major a Santa Rosa
development company.
William P. Gallaher, 51 Real Estate developer
Director of the Corporation and investor; President
and the Bank of Oakmont Developers;
President of Gallaher
Construction Company.
William E. Geary, 73 Senior Partner in Geary,
Director of the Corporation Shea & O'Donnell,
and the Bank a Santa Rosa law firm.
Dennis R. Hunter, 59 Real estate investor and
Chairman of the Board of the developer in Santa Rosa;
Corporation and Vice Chairman Investment Development Fund,
of the Board of the Bank principal in a venture capital
fund, a director of Pinnacle
Oil International, Inc.
James B. Keegan, Jr. 53 Partner in Keegan & Coppin
President & Director of the Company, a Santa Rosa real
Corporation and Chairman of the estate brokerage and
Board of the Bank development firm, since 1976.
Robert V. "Buzz" Pauley, 57 A commercial properties
Secretary/Treasurer of the manager; trader of futures and
Corporation and Director options contracts in Chicago
of the Bank and other international
market exchanges.
David F. Titus, 49 Executive Vice President &
Executive Vice President & Senior Loan Officer of the
Senior Loan Officer and Bank since January, 1995.
Director of the Bank Senior Vice President &
Senior Loan Officer of
the Bank from August 1991
to January, 1995.
JoAnn Barton, 48 Senior Vice President and
Senior Vice President & Senior Operations
Senior Operations Officer Administrator of the Bank
of the Bank since March 1992; from
November 1985 Vice President
and Senior Operations
Administrator of the Bank.
Jane M. Baker 55 Senior Vice President and
Senior Vice President & Chief Financial Officer of
Chief Financial Officer 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. William P. Gallaher was appointed as
Bank director in November 1988; Deborah A. Meekings was appointed in
August 1990; Patrick R. Gallaher was appointed in December 1991 and
David F. Titus was appointed in June 2001. 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
Compensation
Name and Annual Compensation Options All Other
Principal Position Year Salary Bonus (No. of Shares) (1)
- ------------------- ---- ------ ----- -------------- ---------
Deborah A. Meekins, 1999 $157 $138 $53
President and Chief 2000 173 152 51
Executive Officer 2001 181 152 21,000 67
and Director of
the Bank
David F. Titus, 1999 111 97 41
Executive Vice 2000 118 106 39
President and Senior 2001 123 106 15,000 55
Loan Officer and
Director of the Bank
JoAnn Barton, 1999 94 18 2
Senior Vice President 2000 99 20 4
and Senior Operations 2001 103 20 5,000 5
Officer of the Bank
Jane Baker, 1999 94 18 2
Senior Vice President 2000 99 20 4
and Chief Financial 2001 103 20 5,000 5
Officer 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, 2001, the total cash
surrender value of these policies was $1,061,000, which is included in
other assets.
Stock Option Plan
Neither the Corporation nor the Bank award restricted stock or have long
term incentive plans, other than the Corporation's 1984 and 1997 Stock
Option Plans. No stock options have been granted under the 1984 Plan
since its expiration in February 1994. Options for a total of 4,410
shares (to officers of the Bank) granted under the 1984 Plan remain
outstanding even though the 1984 Plan has terminated. Options for a
total of 1,129,430 shares (869,840 to all directors of the Corporation
and 259,590 shares to forty-eight officers and employees of the Bank)
are outstanding under the 1997 Plan as of December 31, 2001. As of
February 15, 2002 options for a total of 1,131,916 shares (869,840 to
all directors of the Corporation and 262,076 share to forty-seven
officers and employees of the Bank) were outstanding.
The following sets forth information regarding all stock options granted
to executive officers during 2001.
Option Grants Table
Potential realizable value
at assumed annual rates of
stock price appreciation
Individual Grants for option term
------------------------------------------------ ---------------------------
Percent
Number of of total Exercise
securities options of
underlying granted to base 5% 10%
options employees in price Expiration ($) ($)
Name granted (1) fiscal year ($/Sh) date $ $
- ------------------ ---------- ----------- -------- ---------- --------- --------
Deborah A. Meekins 22,050 24.6% $18.9333 1/22/2011 $262,615 $665,469
David Titus 15,750 17.6% $18.9333 1/22/2011 $187,582 $475,335
(1) Adjusted for stock dividends issued since date of the option grant.
The following sets forth information regarding all options held by the
named officers as of December 31, 2001 and options exercised during
2001:
Aggregated Year-End Option Exercises and Values
December 31, 2001
-----------------------------------------------
Shares Number of Securities
acquired Underlying Unexercised Value of
on Value Options (No. Unexercised
exercise realized of Shares)(1) Options (2)
Name (#) ($) Exerciable/Unexercisable Exerciable/Unexercisable
- ----------------- ------- -------- ------------------------ ------------------------
Deborah A. Meekins 7,623 $145,018 58,343 / 60,946 $572,489 / $460,305
David F. Titus 1,000 $19,266 12,366 / 22,695 $146,721 / $128,449
JoAnn Barton 559 $10,634 4,522 / 6,515 $43,195 / $52,336
Jane Baker 0 0 6,984 / 6,515 $91,613 / $52,336
(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,
2001.
Compensation of Outside Directors
During 2001outside 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 2001, options for 157,000 were
granted to outside directors. 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, 2001 options for
869,840 shares, which options had an estimated value of $7,237,000 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, 2001, the total cash surrender value of these
policies was $1,226,000, which is included in other assets.
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, 2002.
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, 2002. 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 148,933 (1) 3.8%
Patrick R. Gallaher 159,196 (2) 4.0
William P. Gallaher 130,656 (3) 3.3
William E. Geary 222,459 (4) 5.6
Dennis R. Hunter 352,196 (5) 8.9
James B. Keegan, Jr. 160,161 (6) 4.0
Deborah A. Meekins 113,333 (7) 2.8
Robert V. Pauley 233,546 (8) 5.9
David Titus 21,245 (9) 0.5
All other officers
as a group (20 people) 80,220 (10) 2.0
--------- -----
Directors and Officers as
a group (29 persons) 1,621,945 40.8%
========= =====
(1) Including 62,754 shares issuable to Mr. Carinalli upon the exercise
of stock options exercisable within 60 days.
(2) Including 62,754 shares issuable to Mr. Gallaher upon the exercise
of stock options exercisable within 60 days, 96,211 shares held in
Mr. & Mrs. Gallaher's trust and 231 shares owned by a child living
at home.
(3) Including 62,754 shares issuable to Mr. W. Gallaher upon the
exercise of stock options exercisable within 60 days and 21,422
held in Mr. & mrs. Gallaher's trust.
(4) Including 62,754 shares issuable to Mr. Geary upon the exercise of
stock options exercisable within 60 days, 37,091 shares held in Mr.
Geary's profit sharing plan, 43,558 shares held by Mrs. Geary and
9,598 shares held in a trust account for which Mr. Geary serves as
trustee but does not have a beneficial interest.
(5) Including 71,097 shares issuable to Mr. Hunter upon the exercise of
stock options exercisable within 60 days and 265,958 shares held in
trust accounts for which Mr. Hunter serves as trustee but does not
have a beneficial interest.
(6) Including 71,097 shares issuable to Mr. Keegan upon the exercise of
stock options exercisable within 60 days, 59,228 shares held by
Keegan & Coppin Company, Inc., 8,727 shares held by the Keegan &
Coppin Profit Sharing Plan and 12,073 held in trust accounts for
which Mr. Keegan is trustee or held in accounts for the benefit of
his minor children.
(7) Including 62,753 shares issuable to Ms. Meekins upon the exercise
of stock options exercisable within 60 days.
(8) Including 62,754 shares issuable to Mr. Pauley upon the exercise of
stock options exercisable within 60 days and 15,311 shares held by
Mrs.Pauley.
(9) Including 15,516 shares issuable to Mr. Titus upon the exercise of
stock options exercisable within 60 days.
(10) Including 33,751 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, 2001 and 2000 was $168,000 and $168,000, 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, 2001, loans by the Bank to
directors, officers and their associates totaled approximately
$8,572,000, constituting 1.8% of total loans, 19.5% of the Bank's
shareholders' equity and 19.4% 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 10-K
(1) 1. All Financial Statements.
See item 8.
(1) 2 Financial Statement Schedules.
None required
(2) 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 February 1, 2001.
*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
(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 2001 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 2002 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/ Dennis R. Hunter
-----------------------------------
Dennis R. Hunter,
Chairman of the Board of Directors
Date March 19, 2002
By /s/ Patrick R. Gallaher
----------------------------------
Patrick R. Gallaher
Chief Accounting Officer/Director
Date March 19, 2002
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.
/s/ Dennis R Hunter Date March 19, 2002
- ----------------------------------
Dennis R. Hunter
Chairman of the Board of Directors
/s/ James B. Keegan, Jr. Date March 19, 2002
- -----------------------------------
James B. Keegan, Jr.
President/Director
/s/ Patrick R. Gallaher Date March 19, 2002
- -----------------------------------
Patrick R. Gallaher,
Chief Accounting Officer/Director
/s/ Robert V. Pauley Date March 19, 2002
- -----------------------------------
Robert V. Pauley,
Secretary and Treasurer/Director
/s/ Clement C. Carinalli Date March 19, 2002
- -----------------------------------
Clement C. Carinalli,
Director
/s/ William P. Gallaher Date March 19, 2002
- -------------------------------------
William P. Gallaher,
Director
/s/ William E. Geary Date March 19, 2002
- ------------------------------------
William E. Geary,
Director