SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 2-91196
NORTHERN EMPIRE BANCSHARES
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2830529
- ---------------------------- ----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation
or organization)
801 Fourth Street, Santa Rosa, California 95404
----------------------------------------- ---------
(Address of principal executive offices) (Zip code)
707-579-2265
--------------------------------------------------
Registrant's telephone number, including area code)
NONE
-------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of class: Common Stock, no par value. Outstanding shares as
of October 15, 2002: 4,177,547
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
ASSETS
September 30, 2002 December 31, 2001
Cash and equivalents:
Cash and due from banks $ 18,482 $ 16,726
Federal funds sold 66,880 65,516
-------- --------
Total cash and equivalents 85,362 82,242
Interest-bearing deposits in banks 198 298
Investment securities available-for-sale 653 998
Federal Home Loan Bank stock, at cost 2,339 599
Federal Reserve Bank stock, at cost 165 163
Loans receivable, net 569,596 466,529
Other real estate owned 110 -
Leasehold improvements and equipment, net 936 1,037
Accrued interest receivable and other assets 9,731 9,138
-------- --------
Total assets $669,090 $561,004
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $568,092 $502,137
Accrued interest payable and
other liabilities 2,944 2,768
FHLB advances 46,779 11,802
-------- --------
Total liabilities 617,815 516,707
-------- --------
Shareholders' equity:
Preferred stock, no par value;
authorized, 10,000,000 shares;
none issued or outstanding
Common stock, no par value;
authorized, 20,000,000 shares;
shares issued and outstanding,
4,177,547 at September 30, 2002
and 4,171,926 at December 31, 2001 27,500 21,946
Additional paid-in capital 786 786
Accumulated other comprehensive
income (loss) 9 (1)
Retained earnings 22,980 21,566
-------- --------
Total shareholders' equity 51,275 44,297
-------- --------
Total liabilities and
shareholders' equity $669,090 $561,004
======== ========
See Notes to Consolidated Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended September 30, 2002 and 2001
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in thousands, except per share data)
Interest income:
Loans $10,219 $10,647 $29,610 $32,617
Federal funds sold and
investment securities 343 402 863 1,385
-------- ------- ------- -------
Total interest income 10,562 11,049 30,473 34,002
Interest expense 4,224 5,297 11,707 16,321
-------- ------- ------- -------
Net interest income before
provision for loan losses 6,338 5,752 18,766 17,681
Provision for loan losses 240 240 540 720
-------- ------- ------- -------
Net interest income after
provision for loan losses 6,098 5,512 18,226 16,961
-------- ------- ------- -------
Other income:
Service charges on deposits 131 97 390 301
Gain on sale of loans 328 199 791 545
Other 216 176 544 537
-------- ------- ------- -------
Total other income 675 472 1,725 1,383
-------- ------- ------- -------
Other expenses:
Salaries and employee benefits 1,827 1,674 5,000 4,677
Occupancy 280 248 802 697
Equipment 148 157 446 448
Advertising and
business development 108 117 355 349
Outside customer services 91 121 293 347
Director and shareholder expenses 64 67 241 212
Deposit and other insurance 84 75 244 221
Professional fees 110 33 239 130
Other 262 270 738 792
-------- ------- ------- -------
Total other expenses 2,974 2,762 8,358 7,873
-------- ------- ------- -------
Income before income taxes 3,799 3,222 11,593 10,471
Provision for income taxes 1,527 1,341 4,691 4,268
-------- ------- ------- -------
Net income $ 2,272 $ 1,881 $ 6,902 $ 6,203
======== ======= ======= =======
Earnings per common share $ 0.54 $ 0.45 $ 1.65 $ 1.49
======== ======= ======= =======
Earnings per common share
assuming dilution $ 0.48 $ 0.41 $ 1.46 $ 1.37
======== ======= ======= =======
See notes to Consolidated Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the nine months ended September 30, 2002 and 2001
(dollars in thousands)
2002 2001
Cash flows from operating activities:
Net income $ 6,902 $ 6,203
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses and OREO losses 540 720
Depreciation, amortization and accretion 324 314
FHLB stock dividends (38) (27)
Change in deferred loan fees and discounts (438) (704)
Change in deferred income taxes 36 (333)
Tax benefit from stock options exercised - 44
Increase in interest receivable and other assets (629) (376)
Increase in accrued interest payable and
other liabilities 176 (393)
--------- ---------
Net cash provided by in operating activities 6,873 5,448
--------- ---------
Cash flows from investing activities:
Purchase of restricted securities (1,704) (3)
Maturities of available for sale securities 354 978
Redemption of restricted securities
Net (increase) decrease in interest bearing deposits 100 -
Net increase in loans receivable (103,279) (32,327)
Purchase of leasehold improvements
and equipment, net (223) (467)
--------- ---------
Net cash used in investing activities (104,752) (31,819)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 65,955 34,025
Net increase (decrease) in FHLB advances 34,977 9,981
Payment of cash dividends (6) (4)
Stock options exercised 73 65
--------- ---------
Net cash provided by financing activities 100,999 44,067
--------- ---------
Net increase in cash and cash equivalents 3,120 17,696
Cash and cash equivalents at beginning of year 82,242 49,527
--------- ---------
Cash and cash equivalents at end of period $ 85,362 $ 67,223
========= =========
Supplemental cash flow information:
Interest paid $ 11,672 $ 16,496
========= =========
Income taxes paid $ 4,536 $ 4,986
========= =========
Other real estate owned acquired
through foreclosure $ 110 $ -
========= =========
See notes to Consolidated Financial Statements
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2002
Note 1 - Basis of Presentation
In the opinion of Management, the unaudited interim consolidated
financial statements contain all adjustments of a normal recurring
nature, which are necessary to present fairly the financial condition of
Northern Empire Bancshares (the "Corporation") and Subsidiary (Sonoma
National Bank) at September 30, 2002 and the results of operations for
the three and nine months then ended.
Certain information and footnote disclosures presented in the
Corporation's annual consolidated financial statements are not included
in these interim financial statements. Accordingly, the accompanying
unaudited interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Corporation's 2001 Annual Report on Form 10-K. The
results of operations for the three and nine months ended September 30,
2002 are not necessarily indicative of the operating results through
December 31, 2002.
Note 2 - Net Income per Common and Common Equivalent Share
Basic earnings per share (EPS) is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted EPS is computed by dividing
diluted income available to common shareholders by the weighted average
number of common shares and common equivalent shares outstanding which
include dilutive stock options. The computation of common stock
equivalent shares is based on the weighted average market price of the
Corporation's common stock throughout the period. Prior year common
stock has been adjusted for the impact of the 5% stock dividend declared
on March 26, 2002. The Corporation's pertinent EPS data is as follows:
For the three months ended For the three months ended
September 30, 2002 September 30, 2001
Per Per
Income/ Shares/ Share Income/ Shares/ Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ------ ---------- ----------- ------
Net Income $2,272,000 $1,881,000
--------- ----------
EPS -Income available to
common stockholders $2,272,000 4,174,498 $0.54 $1,881,000 4,163,158 $0.45
---------- ----------
Effect of Dilutive
Securities -Stock
Options 594,437 383,105
----------- -----------
EPS assuming dilution -Income
available to common
stockholders plus
assumed conversion $2,272,000 4,768,935 $0.48 $1,881,000 4,546,263 $0.41
========== =========== ====== ========== =========== ======
For the nine months ended For the nine months ended
September 30, 2002 September 30, 2001
Per Per
Income/ Shares/ Share Income/ Shares/ Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ------ ---------- ----------- ------
Net Income $6,902,000 $6,203,000
---------- ----------
EPS -Income available to
common stockholders $6,902,000 4,174,366 $1.65 $6,203,000 4,162,663 $1.49
Effect of Dilutive
Securities -Stock
Options 558,765 352,857
----------- -----------
EPS assuming dilution -Income
available to common
stockholders plus
assumed conversion $6,902,000 4,733,131 $1.46 $6,203,000 4,515,520 $1.37
========== ========== ====== ========== ========== ======
Note 3 - Comprehensive Income
The Corporation's total comprehensive earnings presentation is as
follows:
For the three For the nine
months ended months ended
September 30, September 30,
(dollars in thousands)
2002 2001 2002 2001
---- ---- ---- ----
Net Income $2,272 $1,881 $6,902 $6,203
Other Comprehensive
income (loss):
Change in unrealized holding
gain (losses) arising during
the period 9 (4) 19 (3)
Income tax benefit (expense) (3) 2 (9) 1
------ ------ ------ ------
Comprehensive income $2,278 $1,879 $6,912 $6,201
====== ====== ====== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Northern Empire Bancshares is the financial holding company of Sonoma
National Bank (the "Bank"). Since the principal business of the
Corporation is the Bank, the following discussion pertains mainly to the
Bank.
This report contains "forward-looking statements" as defined in section
27A of the Securities Act of 1933, as amended, and section 21E of the
Securities Exchange Act of 1934, as amended, which includes statements
such as projections, plans and objectives and assumptions about the
future, and such forward looking statements are subject to the safe
harbor created by these sections. Many factors could cause the actual
results, amounts or events to differ materially from those the
Corporation expects to achieve or occur, such as changes in competition,
market interest rates, economic conditions and regulations. Although the
Corporation has based its plans and projections on certain assumptions,
there can be no assurances that its assumptions will be correct, or that
its plans and projections can be achieved.
Summary of Financial Results
Total consolidated assets equaled $669,090,000 at September 30, 2002
compared to $561,004,000 at December 31, 2001. Net loans increased
$103.1 million since year-end with $40.8 million occurring in the third
quarter. Cash and equivalents equaled $85.4 million compared to $82.2
million at December 31, 2001.
Net income after tax for the first nine months of 2002 equaled
$6,902,000 compared to $6,203,000 for the comparable period last year,
an increase of 11.3%. The net income for the third quarter of $2,272,000
increased 20.8% over the third quarter of 2001 when net income equaled
$1,881,000. The higher profit resulted mainly from increases in net
interest income due to loan growth.
Net Interest Income
Net interest income (before the provision for loan losses) of $6,338,000
for the third quarter of 2002 increased 10.2% from $5,752,000 for the
comparable period last year.
Interest income decreased to $10,562,000 for the third quarter of 2002
compared to $11,049,000 for the third quarter of 2001 due to the decline
in yields on earning assets which equaled 6.63% in the third quarter of
2002 compared to 8.52% for the same quarter of 2001. The impact of the
declining rates was mitigated by volume increases of $117.6 million in
average earning assets when comparing average earning assets for the
third quarter of 2002 to the third quarter of 2001. Average loans
outstanding increased $83.7 million over the third quarter of 2001 while
average investments, certificates of deposits and fed funds sold
increased $33.9 million.
Interest expense decreased to $4,224,000 in the third quarter of 2002
from $5,297,000 in 2001. The major factor was the decrease in the
average cost of funds to 3.10% for the third quarter of 2002 from 4.89%
for the third quarter of 2001. The benefit of the lower interest rate
environment was offset by the increase in average interest bearing
liabilities (deposit and borrowings) of $111.3 million when comparing
the third quarter of 2002 to 2001.
The average net interest margin equaled 3.98% during the third quarter
of 2002 compared to an average margin for the third quarter of 2001 of
4.43% and 4.61% for the year ended December 31, 2001. The yield on
average loans equaled 7.34% in the third quarter of 2002 compared to
9.01% for the same period last year, while the Bank's cost of funds
decreased to 3.10% for the third quarter of 2002 from 4.89% for the
third quarter of 2001. The decline in yields on earning assets and cost
of funds resulted from decline in market rates due to general economic
conditions.
Several factors impact the Bank's interest margin. These include changes
in market interest rates, level of loans relative to deposits, mix of
loans and other 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 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% on December 12, 2001and has
remained at 4.75% through the third quarter of 2002. Prime was 9.50% at
January 1, 2001 and declined to 8.00% at March 31, 2001, 6.75% on June
30, 2001, 6.00% at September 30, 2001 and 4.75 at December 31, 2001. The
rapid decline in prime rate had a negative impact on the Bank's net
interest margin and continues to have a negative impact as loan products
continue to reprice at lower rates depending 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 full impact of rate changes on the Bank's earnings is not realized
for several months, since not all loans or deposits reprice immediately.
The Bank has $143.8 million in SBA section 7(a) loans which reprice
based upon the prime rate on the first day of the calendar quarter. The
Bank has $189.7 million adjustable rate loans, mainly commercial real
estate loans, that are tied to the Eleventh District Cost of Funds Index
(COFI) which adjust at a slower pace. The COFI index was 2.76% for
August 2002 (latest available) and 3.07% for December 2001 compared to
5.62% for December 2000. The Bank also has a fixed rate loan portfolio
which generally reduces net interest margin as interest rates rise and
benefits interest margin as rates decline. The rate of loan prepayments
has increased as borrowers refinance to indexes which bear lower rates
than loans tied to COFI or fixed rates.
Of the Bank's loan portfolio totaling $577.3 million at September 30,
2002, $274.4 million or 47.5% of total loans are adjustable rate loans,
which have not reached a floor or ceiling rate. Approximately $212.1
million are prime-based loans, of which $67.8 million reprice
immediately and $144.3 million reprice on a quarterly basis.
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.
Interest rates offered on deposits have been relatively stable during
the since the first of this year and remain at historically low levels.
The Bank had $134.9 million in Sonoma Investor Reserve accounts (money
market rate deposit accounts). The cost of these deposits equaled 1.81%
during the third quarter of 2002 compared to 3.25% for the third quarter
last year.
The Bank has $351.7 million in time certificates of deposits. These
accounts reprice at a slower pace. The cost of time deposits equaled
3.83% for the third quarter of 2002 compared to 5.93% in the third
quarter of the preceding year. The benefit of lower rates on time
deposits will continue to occur as certificates of deposits mature and
are renewed at the lower rates offered on their maturity dates. The
Bank has offered competitive market rates for deposits when compared to
financial institutions in our area.
* Level of Loans Relative to Deposits
The Bank's ratio of loans to deposits averaged 98.8% in the third
quarter of 2002 compared to 97.5% for the same period last year. A
higher loan to deposit ratio has a beneficial impact on the Bank's net
interest margin, since loans generally have a higher yield than other
types of earning assets. The Bank has been able to increase the level
of loans relative to deposits as a result of the large line of credit
with the Federal Home Loan Bank (FHLB). FHLB provides a lower cost
source of funds than deposits. The average cost of FHLB advances
equaled 2.34% during the third quarter compared to the cost of time
deposits, which equaled 3.15% during the same period.
* Mix of Loan and Earning Assets
The mix of loans influences the overall yield on loans. The largest
loan growth occurred in real estate loans, which grew $82.9 million
since December 31, 2001 to $367.7 million at this quarter's end.
Commercial loans grew $29.2 million since December 31, 2001 (SBA loans,
which generally are secured by real estate, are classified as commercial
loans). This category has a higher yield than other types of loans.
Construction loans decreased from $49.6 million at year-end to $35.8
million at the end of this quarter. Construction loans have higher
yields than other real estate loans; however, they have declined due to
the impact of the weaker economic conditions.
* Non-Accrual Loan Balances
Loans, which have been placed on non-accrual status also, impact the net
interest margin. At the time a loan is placed on non-accrual, the
unpaid interest is reversed and interest accruals are discontinued until
the credit quality of the loan justifies returning it to accrual status.
As of December 31, 2001 the Bank had $2,156,000 in non-accrual loans
compared to $1,544,000 million at the end of this quarter. When a
non-accrual loan pays off or is reinstated to accrual status the
interest income is reinstated to income which has a positive effect on
loan yields. At September 30, 2002 non-accrual loans equaled 0.27% of
total loans. The current level of non-accrual loans is considered by
management to be a low level of non-accrual loans based upon comparisons
to our peer group (other banks of comparable asset size). See Allowance
for Loan Losses for additional information.
* Mix of Deposits and Other Funding Sources
The mix of funding sources determines the cost of funds for the Bank.
Certificates of deposit reprice at the time the certificate matures
which delays the benefit to the Bank's cost of funds in a downward
interest market. Sonoma Investor Reserve accounts can be repriced
weekly; and therefore, the benefit of falling interest rates is more
immediate. Competition also is a factor in the repricing of certain
deposit products. While prime rate drops immediately on loans it often
takes longer to receive the same benefit when repricing market rate
deposits due to competitive rates in our market area. The Bank also has
a borrowing line with the Federal Home Loan Bank, which has been used,
as a source of liquidity. The borrowing rates are often below rates
offered on certificates of deposits and the Bank will be increasing the
use of this line as a way to reduce its cost of funds.
The following is an analysis of the net interest margin:
Three months ended Three months ended
September 30, 2002 September 30, 2001
Average Average
Balance Interest Yield Balance Interest Yield
-------- -------- ----- ------- -------- -----
(dollars in thousands)
Earning assets (1) $632,229 $10,562 6.63% $514,624 $11,049 8.52%
Interest bearing
liabilities 541,307 4,224 3.10% 430,028 5,297 4.89%
------ ------
Net interest income $6,338 $5,752
====== ======
Net Interest income
to earning assets 3.98% 4.43%
===== =====
(1) Non-accrual loans are included in the calculation of average balance
of earning assets, and interest not accrued is excluded.
Nine months ended Nine months ended
September 30, 2002 September 30, 2001
Average Average
Balance Interest Yield Balance Interest Yield
-------- -------- ----- ------- -------- -----
(dollars in thousands)
Earning assets (1) $584,936 $30,473 6.97% $501,899 $34,002 9.06%
Interest bearing
liabilities 492,183 11,707 3.18% 419,947 16,321 5.20%
------- -------
Net interest income $18,766 $17,681
======= =======
Net Interest income
to earning assets 4.29% 4.71%
==== ====
(1) Non-accrual loans are included in the calculation of average balance
of earning assets, and interest not accrued is excluded.
The following table sets forth changes in interest income and interest
expense for each major category of interest-earning asset and
interest-bearing liability, and the amount of change attributable to
volume and rate changes for the three and nine months ended September
30, 2002 and 2001. Changes not solely attributable to rate or volume
have been allocated to rate.
For the three months ended September 30, 2002
over September 30, 2001
(dollars in thousands)
Volume Yield/Rate Total
------ ------ -----
Increase (decrease) in interest income:
Portfolio loans $7,365 ($7,793) ($428)
Other earning assets 1,175 (1,234) (59)
------ ------ -----
Total increase (decrease) 8,540 (9,027) (487)
------ ------ -----
Increase in interest expense
Interest-bearing transaction accounts 175 (638) (463)
Time deposits 4,194 (4,981) (787)
Other borrowings 1,415 (1,238) 177
------ ------ -----
Total increase 5,784 (6,857) (1,073)
------ ------ -----
Increase (decrease) in
net interest income $2,756 ($2,170) $586
====== ====== =====
For the nine months ended September 30, 2002
over September 30, 2001
(dollars in thousands)
Volume Yield/Rate Total
------ ------ -----
Increase (decrease) in interest income:
Portfolio loans $5,318 ($8,325) ($3,007)
Other earning assets 1,106 (1,628) (522)
------ ------ -----
Total increase (decrease) 6,424 (9,953) (3,529)
------ ------ -----
Increase in interest expense
Interest-bearing transaction accounts 365 (1,993) (1,628)
Time deposits 2,203 (5,611) (3,408)
Other borrowings 1,231 (809) 422
------ ------ -----
Total increase 3,799 (8,413) (4,614)
------ ------ -----
Increase (decrease) in
net interest income $2,625 ($1,540) $1,085
====== ====== =====
Provision for Loan Losses
The provision for loan losses equaled $240,000 for the three months
ended September 30, 2002 and $540,000 for the first nine months of 2002
compared to $240,000 and $720,000 for the same periods in 2001. The
provision is intended to maintain the Allowance for Loan Losses given
the overall growth in loans and the level of non-accrual loans. For
further discussion see Allowance for Loan Losses
Other Income
Other income is derived primarily from service charges, SBA loan sales,
SBA loan servicing and sales of other real estate owned. Other income
increased to $675,000 from $472,000 when comparing the third quarter of
2002 to the same period last year.
* Service Charges
Service charges on deposit accounts equaled $131,000 in the third
quarter of 2002 compared to $97,000 for the same period last year. The
increase relates to charges on analysis customers. The earnings credit
rate has remained at a low level due to the declining interest rate
environment. Analysis customers earn less on their average balance to
cover the cost of services provided to them. If the earnings credit do
not cover the cost of services they are charged a service fee. In
addition, the Bank has added more businesses to the analysis program.
The Bank also receives fees for safe deposit, visa, and other services.
* SBA Loan Sales and Loan Participations
In the third quarter of this year, the Bank sold the guaranteed portion
of SBA loans totaling $4.7 million. The SBA loan sales resulted in
$330,000 in gains on sale of SBA loans. During the third quarter of last
year, the Bank sold the guaranteed portion of SBA loans totaling $2.9
million and recognized gains on those sales of $199,000. The Bank
continues to retain the majority of the SBA loans it makes, in order to
realize the interest yield, rather than selling the guaranteed portion
for a one time gain and servicing fees. Management considers the Bank's
liquidity needs and anticipates loan and deposit growth as a part of the
decision to hold SBA guaranteed loans versus selling them. The premiums
on loan sales remained at higher levels over those received in earlier
quarters of last year. The average premium on sales in the third
quarter of 2002 equaled 7.0%. Premiums are market driven based upon
factors such as rate of prepayment of SBA loans experienced throughout
the country. There is no guarantee that premiums will continue at the
current level.
During the third quarter, the Bank participated $1.4 million in
commercial real estate loans to other California financial institutions.
These participations are treated as loan sales and due to the terms of
the participations the Bank recognized a loss of $2,000 on these sales.
Management considers the Bank's liquidity needs and anticipates loan and
deposit growth as a part of the decision to participate loans. During
the third quarter of 2002, loan growth was strong and the funds from
these transactions were used to fund new loan growth.
* SBA Loan Servicing
SBA servicing fees totaled $73,000 during the third quarter of 2002,
compared to fees of $72,000 recorded in the third quarter of last year.
The income varies depending on the fee income calculated based upon the
payments received during the period and the size of the portfolio
serviced. The serviced portfolio equaled $37.8 million at September 30,
2002 compared to $34.0 million at September 30, 2001.
* Sales of Other Real Estate Owned
During the third quarter of 2002, the Bank foreclosed on real estate
located in Phoenix, Arizona which supported an SBA loan. This property
was recorded at $110,000 and a small charge off was taken at the time of
foreclosure. The Bank has a 75% guarantee from the SBA on this
property. This is the only other real estate owned (OREO) held by the
Bank at September 30, 2002. There were no sales of OREO during the third
quarter of 2002 or 2001.
Non-Interest Expenses
The Bank's non-interest expenses increased to $2,974,000 for the third
quarter of this year compared to $2,762,000 from the third quarter of
2001. This increase was anticipated since the Bank has continued to grow
at a rapid rate.
* Salaries and Employee Benefits
The Bank's largest expense category is salaries and benefits which
increased 9.1% to $1,827,000 up from $1,674,000 for the third quarter of
2001 The Bank's full time equivalent (FTE) staff level has increased to
113 in September 2002 from 105 in September 30, 2001. The Bank hired an
Executive Vice President in charge of Corporate Development, a new
branch manager for the Main Branch, staff for the new branch in Sonoma
and several new loan support employees to manage the high loan volume.
Incentive payments continue at a high level due to growth in the loan
portfolio. Personnel costs are also affected by annual salary increases
and changes in benefit costs and are expected to continue to increase as
the Bank grows.
* Occupancy and Equipment
Occupancy expenses increased 5.7%, mainly due to rent increases on
existing facilities and special billings for cost increases on
maintaining the properties as called for in the lease agreements. The
Bank is currently working on tenant improvements for a new branch
located in the city of Sonoma, California, which opened on October 15.
In August 2001, the Bank relocated its computer operations to a separate
location, which has increased our occupancy costs relative to the third
quarter of 2001. Equipment costs decreased slightly to $148,000 from
$157,000 for the third quarter last year. Bank continues its
commitment to upgrade computer equipment and operations and it is
expected that equipment costs increase as the Bank grows.
* Deposit and Other Insurance
Deposit and other insurance of $84,000 increased from $75,000 for the
same period of last year. The increase results from growth of the Bank,
which determines the regulatory assessments. There is no assurance that
regulatory assessments will continue at the current low level. The cost
of other insurance is included in this category.
* Professional Services
Professional fees increased to $110,000 for the third quarter of 2002 up
from $33,000 for the same period last year. The majority of the
increase results from legal costs on problem loans requiring which
required outside counsel (See discussion on Allowance for Loan Losses).
Other professional services vary depending upon the scheduling of other
contracted services such as loan reviews, tax services, and other
consulting services. The Bank has increased the use of consultants to
assist in special projects such as interest rate risk and deposit decay
analyses. It is expected that this trend will continue.
* Business Development and Advertising
Advertising and business development costs, which vary depending on the
timing of loan and deposit promotions, was relatively unchanged at
$108,000 for the quarter compared to $117,000 in the third quarter of
2001.
* Outside Customer Services
Outside customer services declined 24.8% to $91,000. This decline
resulted from a change in the analysis activity of one large analysis
account. This analysis account was closed during when that company was
sold to a company not located in Sonoma County. The Bank pays for
certain direct costs (i.e.: payroll services, escrow fees, etc.) which
are expensed. The analysis customer receives earnings credits based
upon their deposit account balances which can be used to offset these
charges. The customer is charged a bank service fee if their earnings
credits do not cover the costs.
* Shareholder and Director Expenses
Third quarter expenses for shareholder and director expenses equaled
$64,000, relatively unchanged from $67,000 for the third quarter of last
year. Included in this category are directors' fees for attending
Board, Loan Committee, Asset Liability Committee (ALCO), Executive
Committee, Audit Committee and Personnel Committee meetings. It is
expected that these expenses will increase due to the increased
responsibilities of directors due to recent regulatory changes. The Bank
has increased the frequency of ALCO meetings and expects to have more
Executive and Audit Committee meetings. In addition, the fee for ALCO
meetings was increased to $500 per meeting in recognition of the
expanded responsibilities of ALCO members. The cost of the Corporation's
annual report, transfer agent fees and other costs of communicating with
shareholders is included in this expense category.
* Other Expenses
Other expenses, which includes stationery and supplies, telephone,
postage, loan expenses, dues and subscriptions and automobile costs were
relatively unchanged at $262,000 in the third quarter of 2002 compared
to $270,000 for the same period in 2001. The Bank continues to closely
monitor operating expenses as part of the Bank's overall cost controls.
Total non-interest expenses for the SBA lending department for the third
quarter of 2002 was approximately $549,000 ($390,000 in personnel costs,
$59,000 in occupancy and equipment expenses, $17,000 in
marketing/business development and $93,000 in other expenses) compared
to $655,000 for the third quarter of 2001. The decline in department's
cost relate to the cost recovery allocations on new loans due to the
large volume of new loans during the third quarter of this year compared
to last year. The SBA department's loan portfolio includes $181.6
million of SBA section 7(a) loans and $161.8 of commercial real estate
and other loans of which $37.8 million has been sold and is being
serviced.
Income Taxes
The effective tax rate was 40.2% for the third quarter of 2002 compared
to 41.6% for the comparable quarter last year. The reduction in the
effective tax rate results from projected tax savings associated with
the favorable tax treatment of interest on loans in enterprise zones.
The provision for the third quarter of 2002 was $1,527,000 versus
$1,341,000 for the same period last year. The increase resulted from
the increase in pre-tax income during the comparable quarters.
Liquidity and Investment Portfolio
Liquidity is a bank's ability to meet possible deposit withdrawals, to
meet loan commitments and increased loan demand, and to take advantage
of other investment opportunities as they arise. The Bank's liquidity
practices are defined in both the Asset and Liability Policy and the
Investment Policy. These policies define acceptable liquidity measures
in terms of ratios to total assets, deposits, liabilities and capital.
Cash and due from banks and federal funds sold totaled $85.4 million or
12.8% of total assets at September 30, 2002, compared to $82.2 million
or 14.7% of total assets at December 31, 2001. The Bank sold $4.7
million in SBA loans and participated $1.4 million in commercial real
estate loans during the third quarter of 2002 to increase the Bank's
liquidity. As of September 30, 2002 the Bank held $83.1 million in SBA
guaranteed loans which could be sold if additional liquidity was needed.
At September 30, 2002, the Bank had unused federal funds lines of credit
totaling $11 million. The Bank also has a credit line with the Federal
Home Loan Bank (FHLB) which is based upon the value of collateral
(investments and loans). The Bank has collateral pledged which would
allow the Bank to borrow up to $110.6 million. As of September 30,
2002, the Bank had borrowed $46.8 million leaving $63.8 million
available for future liquidity needs. The Bank could borrow an amount
equal to 25% of our assets, assuming that collateral values would
support that level of borrowings. Management believes this amount of
secondary liquidity is adequate to meet any cash demands that may arise.
At present, the Corporation's primary sources of liquidity are from
interest on deposits, exercise of stock options and dividends from the
Bank. The Bank's ability to pay dividends to the Corporation is subject
to the restrictions of the national banking laws and, under certain
circumstances, the approval of the Comptroller of the Currency.
At September 30, 2002, the Corporation had non-interest and interest
bearing cash balances of $296,000, which management believes is adequate
to meet the Corporation's operational expenses.
The Corporation and the Bank do not engage in hedging transactions
(interest rate futures, caps, swap agreements, etc.).
Deposits
During the third quarter of 2002 total deposits increased by $11.1
million to $568.1 million at September 30, 2002.
Money market deposits totaling $134.9 million at September 30, 2002 have
declined from $137.8 at December 31, 2001. This is a limited transaction
account with a discretionary rate, which is set by management. The
decline in this account and non-interest bearing deposits resulted from
the loss of a large title company account which had maintained large
average balances (averaging more than $15 million). The rate offered on
this account dropped significantly during the first quarter of this year
as a result of the declining rate environment. The lower rates offered
have negatively impacted the growth of this account. There has also been
increased competition in our market area for these types of funds with
local financial institutions offering high rates on money market
accounts. The Bank's customers have held their funds in this deposit
product rather than locking into a specific maturity since the
certificate of deposit rates, especially for short term maturities, have
been comparable.
Certificates of deposits increased to $351.7 million from $281.5 million
as of September 30, 2001. The Bank has increased certificates of deposit
by offering attractive rates on certificates for specific terms. The
Bank has been successful in retaining the majority of funds received
through certificate advertising campaigns; however, with the lower rate
environment deposits have become more volatile. Depositors are
negotiating rates based upon specials offered in the local market, and
there is increased competition for these deposits.
As of September 30, 2002, non-interest-bearing deposits equaled $54.7
million compared to $59.4 million at December 31, 2001. The Bank's
transaction accounts have increased volatility than other types of
deposit accounts since large business accounts transfer funds depending
upon their business activity.
The low interest rate environment over the last nine months and the
increased competition from the financial services industry has made it
more difficult to attract new deposits at favorable rates. The Bank
continually monitors competitors' rates, strives to be competitive in
pricing deposits, and has offered attractive time deposit rates to raise
funds during periods of high loan growth.
Loans
Loans, net of discounts and reserves, equaled $569.6 million at
September 30, 2002 compared to $466.5 million at December 31, 2001,
increasing 22.1% over year-end and 22.6% over the September 30, 2001
balance of $464.8 million.
The following is an analysis of the loan portfolio.
September 30, December 31,
2002 2001
-------- --------
Type of Loan
(in thousands)
Commercial $166,957 $137,711
Real Estate Construction 35,843 49,604
Real Estate Other 367,694 284,782
Installment Loans to Individuals 6,756 2,052
-------- --------
577,250 474,149
Deferred loan fees and discount (1,566) (2,004)
Allowance for loan losses (6,088) (5,616)
-------- --------
TOTAL $569,596 $466,529
======== ========
The SBA loan program continued to be a popular program and competition
has continued to be strong in our market area. At September 30, 2002,
loans with SBA guarantees equaled $143.8 million, net of $37.8 million
in SBA loans sold and being serviced by the Bank. The majority of the
Bank's SBA loans are secured by real estate; however, these loans are
reported as commercial loans. SBA loans have the same underwriting
requirements, as the Bank's other loans. They are sometimes for longer
terms (7 to 25 years) and have higher loan-to-value ratios than the Bank
typically accepts. The SBA loan program remains subject to budget
considerations at the Federal government level. Major changes to the
federal program could affect the Bank's profitability and future SBA
loan growth. The guaranteed portion of SBA loans currently held by the
Bank which could be sold in the secondary market increased to $94.8
million at September 30, 2002 from $71.9 million at September 30, 2001.
The Bank continues to emphasize commercial and real estate lending. At
September 30, 2002, 28.9% of the loans held for investment were
commercial loans and 69.9% were real estate and construction loans,
compared to 29.0% and 70.5% respectively at December 31, 2001. The Bank
has increased the commercial and commercial real estate portfolio
through its reputation in Sonoma and surrounding counties as an
experienced business and real estate lender that facilitates the
successful negotiation of complex commercial loans. The Bank maintains
high credit qualifications with most real estate loans having 60-70%
loan-to-value ratios. Management is aware of the risk factors in making
commercial and real estate loans and is continually monitoring the local
market place. A decline in real estate values and/or demand could
potentially have an adverse impact on the loan portfolio, and on the
financial condition of the Bank.
Construction loans equaled $35.8 million from $49.6 million at December
31, 2001. The Bank has continued to be committed to residential
construction lending; however, the economic conditions have resulted in
a softening of the demand for construction loans. 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. 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 offers residential mortgages on a limited basis. The Bank has
a small portfolio of consumer loans, which equaled 1.2% of the total
loan portfolio at September 30, 2002.
Allowance for Loan Losses
The allowance for loan losses equaled $6,088,000 at September 30, 2002,
compared to $5,616,000 at December 31, 2001. At September 30, 2002 the
allowance for loan losses equaled 1.3% of loans, net of the guaranteed
portion of SBA loans. The allowance for loan losses is reviewed on a
monthly basis, based upon an allocation for each loan category, plus an
allocation for any outstanding loans which have been classified by
regulators or internally for the "Watch List". Each loan that has been
classified is individually analyzed for the risk involved with a
specific reserve allocation assigned according to the risk assessment.
At September 30, 2002, there were four borrowers on non-accrual totaling
$1,544,000 of which $1,217,000 was collateralized by real estate and the
SBA guaranteed $662,000. There were no loans that were past due 90 days
or more and still accruing interest. Loans past due 30 to 89 days
totaled $6,559,000 of which $6,051,000 was collateralized by real estate
and $714,000 was guaranteed by the SBA. On December 31, 2001, the Bank
had $2,156,000 in non-accrual loans, and no loans past due 90 or more
days and still accruing interest.
During the third quarter of 2002 there were $41,000 in loan charge offs
and $68,000 in loan charge offs for the year-to-date. During the third
quarter of 2002, and year-to-date, recoveries totaled less than $1,000.
During the first nine months of 2001 there was $24,000 in charge offs
and no recoveries. The Bank has a low charge off experience compared to
industry standards, but there is no guarantee that this will continue.
The following is an analysis of the activity in the allowance for loan
losses during the quarter and year-to-date.
(dollars in thousands)
Quarter ended Nine months ended
September 30, 2002 September 30, 2002
------------------ ------------------
Balance - Beginning of period $5,889 $5,616
Provision for loan losses 240 540
Charge offs (41) (68)
Recoveries - -
------ ------
Balance - End of period $6,088 $6,088
====== ======
Capital Resources
Pursuant to regulations under the FDIC Improvement Act of 1991 (FDICIA),
five capital levels were prescribed as applicable for banks, ranging
from well-capitalized to critically under-capitalized. At September 30,
2002, the Bank was considered "well capitalized." The total risk-based
capital ratios were 11.2% for the Bank and 11.3% for the Corporation.
A March 26, 2002, the Corporation declared a 5% stock dividend to
shareholders of record on April 30, 2001.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Bank's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Bank utilizes no derivatives to
mitigate its credit risk, relying instead on loan review and adequate
loan loss reserves. See Allowance for Loan Losses.
Interest rate risk is the risk of loss in value due to changes in
interest rates. Since virtually all of the Corporation's interest rate
risk exposure lies at the Bank level, this risk is addressed by the
Bank's Asset Liability Committee ("ALCO"), which includes members of the
Board of Directors and senior officers of the Bank. ALCO attempts to
manage the various components of the Corporation's balance sheet to
minimize the impact of sudden and sustained changes in interest rates on
portfolio values and net interest income.
A fundamental objective is to manage its assets and liabilities to
maximize the economic value of the Bank while maintaining adequate
liquidity and minimizing exposure to interest rate risk. Management
believes an acceptable degree of exposure to interest rate risk results
from the management of assets and liabilities through maturity, pricing
and mix with the goal of limiting its exposure to interest rate risk.
The Bank's profitability is dependent to a large extent upon its net
interest income. The Bank is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its
interest-bearing liabilities.
Interest rate sensitivity analysis is used to measure the Bank's
interest rate risk by computing estimated changes in the net present
value (NPV) of its cash flows from assets, liabilities and off-balance
sheet items in the event of a range of assumed changes in market
interest rates. NPV represents the market value of portfolio equity and
is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market rate sensitive instruments
in the event of sudden and sustained increases and decreases in market
interest rates. The Bank has no trading securities.
Management expects that, in a declining rate environment, the Bank's net
interest margin would tend to decline, and, in an increasing rate
environment, the Bank=s net interest margin would tend to increase. On
a monthly basis, management prepares an analysis of interest rate risk
exposure. Such analysis calculates the change in net interest income
given a change in general interest rates of 200 basis points up or down.
All changes are measured in dollars and are compared to projected net
interest income and the value of the Bank=s equity is calculated by
discounting cash flows associated with the Bank's assets and
liabilities. The following table summarizes the simulated change in net
interest income based on the twelve months ending December 31, 2002,
given a change in general interest rates of 200 basis points up or down.
Change in Interest Estimated Estimated Change in
Rate in basis points Net Interest Income Net Interest Income
+200 $24,954,000 $947,000
+100 24,470,000 463,000
Base Scenario 24,007,000 -
-100 23,574,000 (433,000)
-200 23,197,000 (810,000)
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 is
subject to repricing at various time horizons. The differences are known
as interest rate sensitivity gaps.
The following schedule represents interest rate sensitivity profile as
of September 30, 2002 of assets, liabilities and shareholders' equity
classified by earliest possible repricing opportunity or maturity date.
Balance Sheet
(dollars in thousands)
Non-rate
Over 3 Over Sensitive
months 1 year or
Through through through Over 5
3 months 1 year 5 years years Total
-------- -------- -------- -------- ------
Assets
Fed funds sold & certificates
of deposit $66,880 $198 $67,078
Investment securities 653 $2,504 3,157
Loans (net of discounts) 248,521 105,391 $142,561 79,211 575,684
Non-interest-earning assets
(net of allowance for
loan losses) 23,171 23,171
-------- -------- -------- -------- ------
$315,401 $106,242 $142,561 $104,886 $669,090
-------- -------- -------- -------- ------
Liabilities & Shareholders'
Equity
Time Deposits $100,000 and over $36,793 $83,280 $28,648 $148,721
All other interest-bearing
liabilities 203,621 142,285 63,784 $1,779 411,469
Non-interest bearing
liabilities 54,681 54,681
Other Liabilities &
Shareholders' Equity 54,219 54,219
-------- -------- -------- -------- ------
$240,414 $225,565 $92,432 $110,679 $669,090
-------- -------- -------- -------- ------
Interest Rate Sensitivity(1) $74,987 ($119,323) $50,129 ($5,793)
Cumulative Interest
Rate Sensitivity $74,987 ($44,336) $5,793 $ -0-
(1) Interest rate sensitivity is the difference between interest rate
sensitive assets and interest rate sensitive liabilities within the
above time frames.
Item 4. Controls and Procedures
Within the 90 day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 15d-14 ( c ). Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective in a
timely manner to alert them to material information relating to the
Company which is required to be included in the Company's periodic
Securities and Exchange Commission filings. There have been no
significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the
evaluation date.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -
None other than in the ordinary course of business.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
(3) (a) Articles of Incorporation of the Corporation (filed as Exhibit
3.1 to the Corporation's S-1 Registration Statement, filed May
18, 1984 and incorporated herein by this reference).
(b) Certificate of Amendment to Articles of Incorporation, filed
January 17, 1989 (filed as exhibit (3)(b) to the Corporation's
Annual Report on Form 10-K for the Fiscal Year Ended December
31, 1988 and incorporated herein by this reference).
(c) Bylaws of the Corporation, as amended (filed as Exhibit 3.2 to
the Corporation's S-2 Registration Statement, File No. 33-51906
filed September 11, 1992 and incorporated herein by this
reference).
(d) Amendment to the Bylaws of the Corporation and revised Bylaws
(filed as Exhibit (3)(d) to the Corporation's Annual Report on
Form 10-KSB for the Fiscal Year Ended December 31, 1994 and
incorporated herein by this reference).
(e) Secretary's certificate of Amendment to the Bylaws of the
Corporation and revised Bylaws ((filed as Exhibit (3)(e) to
the Corporation's Annual Report on Form 10-KSB for the Fiscal
Year Ended December 31, 1997 and incorporated herein by this
reference).
10 (a) Indemnification Agreement between David Titus and Sonoma
National Bank.
b. Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements 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
Date: November 12, 2002
/S/ James B. Keegan, Jr. /s/ Patrick R. Gallaher
- ------------------------ ------------------------
James B. Keegan, Jr. Patrick R. Gallaher
President Chief Accounting Officer
Section 302 Certification
I, James B. Keegan, Jr., certify that:
1. I have reviewed this quarterly report on Form 10q Northern Empire
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within that
entity, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"0; and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November ,2002
Signature
/s/ James B. Keegan, Jr.
- -------------------------------
James B. Keegan, Jr., President
Section 302 Certification
I, Patrick R. Gallaher, certify that:
1. I have reviewed this quarterly report on Form 10q Northern Empire
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within that
entity, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"0; and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November ,2002
Signature
/s/ Patrick R. Gallaher
- --------------------------------------------
Patrick R. Gallaher, Chief Financial Officer
Exhibit 1
SECTION 906 CERTIFICATION
The undersigned each certify that:
1. They are the duly appointed Chief Executive Officer and Chief
Financial Officer, respectively, of Northern Empire Bancshares, a
California Corporation ("the Company"); and
2. To his best knowledge and belief, the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002, and to which the
Certification is attached as Exhibit 1, fully complies with the
requirements of Sections 13(a) or 15(d) of the Securities and
Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition
and results of operations of Northern Empire Bancshares.
Date: November , 2002
/s/ James B. Keegan, Jr. /s/ Patrick R. Gallaher
- ------------------------- -------------------------
James B. Keegan, Jr. Patrick R. Gallaher
President Chief Financial Officer