Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange act). Yes X No ____
(NOTE: The accelerated filer status determination as of 12/31/02
governs the quarterly reports to be filed for the subsequent fiscal
year.)
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of class: Common Stock, no par value. Outstanding shares as of
April 15, 2003: 4,180,914
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
ASSETS March 31, 2003 December 31, 2002
Cash and equivalents:
Cash and due from banks $ 16,799 $ 14,717
Federal funds sold 68,327 72,746
-------- --------
Total cash and equivalents 85,126 87,463
Interest-bearing deposits in banks 198 198
Investment securities
available-for-sale 647 652
Federal Home Loan Bank
(FHLB) stock, at cost 3,770 2,740
Federal Reserve Bank stock, at cost 165 165
Loans receivable, net 593,610 586,461
Leasehold improvements and
equipment, net 1,424 1,361
Accrued interest receivable
and other assets 10,454 10,340
-------- --------
Total assets $695,394 $689,380
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $570,189 $577,585
Accrued interest payable
and other liabilities 4,143 3,281
FHLB Advances 64,770 54,776
-------- --------
Total liabilities 639,102 635,642
-------- --------
Shareholders' equity:
Common stock, no par value;
authorized, 20,000,000 shares;
shares issued and outstanding,
4,389,960 at March 31, 2003 and
December 31, 2002(retroactively
stated for 5% stock dividend) 27,529 27,529
Additional paid-in-capital 786 786
Accumulated other comprehensive
income 8 10
Retained earnings 27,969 25,413
-------- --------
Total shareholders' equity 56,292 53,738
-------- --------
Total liabilities and
shareholders' equity $695,394 $689,380
======== ========
See Notes to Consolidated Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended March 31,
2003 2002
(dollars in thousands,
except per share data)
Interest income:
Loans $ 10,386 $ 9,440
Federal funds sold and
investment securities 214 243
-------- --------
Total interest income 10,600 9,683
Interest expense 3,574 3,671
-------- --------
Net interest income before
provision for loan losses 7,026 6,012
Provision for loan losses 300 150
-------- --------
Net interest income after
provision for loan losses 6,726 5,862
-------- --------
Other income:
Service charges 198 180
Gain on sale of loans 357 217
Other 164 121
-------- --------
Total other income 719 518
-------- --------
Other expenses:
Salaries and employee benefits 1,961 1,474
Occupancy 299 257
Equipment 176 145
Business development & advertising 133 122
Outside customer services 84 114
Shareholder & director expenses 94 79
Deposit and other insurance 91 80
Professional fees 101 54
Other 292 235
-------- --------
Total other expenses 3,232 2,560
-------- --------
Income before income taxes 4,213 3,820
Provision for income taxes 1,657 1,544
-------- --------
Net income $ 2,556 $ 2,276
======== ========
Earnings per common share $ 0.58 $ 0.52
======== ========
Earnings per common share
assuming dilution $ 0.51 $ 0.47
======== ========
See Notes to Consolidated Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
(dollars in thousands) 2003 2002
Cash flows from operating activities:
Net income $ 2,556 $ 2,276
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 300 150
Depreciation and amortization 125 107
FHLB Stock dividends (27) (8)
Net increase (decrease) in deferred
loan fees and discounts (6) (166)
Change in deferred income taxes 130 325
Change in interest receivable and other assets (244) (261)
Change in accrued interest payable and
other liabilities 862 715
------- -------
Net cash provided by operating activities 3,696 3,138
------- -------
Cash flows from investing activities:
Proceeds from maturity of available for
sale securities 3 1,623
Purchase of FHLB stock (1,003) (1,750)
Net increase in loans receivable (7,443) (18,488)
Purchase of leasehold improvements and
equipment, net (188) (39)
------- -------
Net cash used by investing activities (8,631) (18,654)
------- -------
Cash flows from financing activities:
Net change in deposits (7,396) (1,533)
Net change in FHLB advances 9,994 9,994
------- -------
Net cash from financing activities 2,598 8,461
------- -------
Net change in cash and cash equivalents (2,337) (7,055)
Cash and cash equivalents, at
beginning of year 87,463 82,242
------- -------
Cash and cash equivalents, at end of period $85,126 $75,187
======= =======
Supplemental cash-flow information:
Interest paid $ 3,619 $ 3,716
======= =======
Income taxes paid $ 382 $ 45
======= =======
See Notes to Consolidated Financial Statements
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
March 31, 2003
Note 1 - Basis of Presentation
The unaudited financial information contained in this report reflects
all adjustments which, in the opinion of Management, are necessary to
present fairly the financial condition of Northern Empire Bancshares
and Subsidiary at March 31, 2003 and the results of operations for the
three months then ended. The results of operations for the three
months ended March 31, 2003 are not necessarily indicative of the
operating results through December 31, 2003.
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 2002 Annual Report on Form 10-K.
Note 2 - Net Income per Common and Common Equivalent Share
Basic earnings per share (EPS) is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted EPS is computed by dividing
income available to shareholders by the weighted average number of
common shares and common equivalent shares outstanding which include
dilutive stock options. The computation of common stock equivalent
shares is based on the weighted average market price of the
Corporation's common stock throughout the period adjusted for the impact
of the 5% stock dividend declared on April 1, 2003. The Corporation's
pertinent EPS data is as follows:
For the three months ended For the three months ended
March 31, 2003 March 31, 2002
Per Per
Income/ Shares/ Share Income/ Shares/ Share
Numerator Denominator Amount Numerator Denominator Amount
Net Income $2,556,000 $2,276,000
========== ==========
EPS-Income available
to common stockholders $2,556,000 4,389,960 $0.58 $2,276,000 4,380,522 $0.52
========== ===== ========== =====
Effect of Dilutive
Securities -
Stock Options 590,865 499,695
--------- ---------
EPS assuming dilution -
Income available to
common stockholders
plus assumed conversion $2,556,000 4,980,824 $0.51 $2,276,000 4,880,217 $0.47
========== ========= ===== ========== ========= ======
Note 3 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 pro forma 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 provision of SFAS No. 123.
No options were granted in the first quarter of 2003 or 2002.
Note 4 - Comprehensive Income
The Corporation's total comprehensive earnings presentation is as
follows:
For the three months
ended March 31,
(In thousands) 2003 2002
Net Income $2,556 $2,276
------ ------
Other Comprehensive income (loss):
Change in unrealized holding gain
(losses) arising during the period (3) 12
Reclassification adjustment for gains
included in net income - -
------ ------
(3) 12
Income tax benefit (expense) 1 (5)
------ ------
(2) 7
Comprehensive income $2,554 $2,277
====== ======
Note 5 - Common Stock Dividend
On April 1, 2003 the Board of Directors declared a 5% stock dividend
payable on May 30, 2003 to shareholders of record on May 9, 2003.
Retained earnings has not been adjusted for the impact of the stock
dividend; however, common stock and the earnings per share amounts have
been adjusted for the impact of the stock dividend.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Northern Empire Bancshares (the "Corporation") is the bank holding
company of Sonoma National Bank (the "Bank"). Since the principal
business of the Corporation is the Bank, the following discussion
pertains mainly to the Bank.
Critical Accounting Policies
The Corporation and Bank's accounting policies are fundamental to
understanding management's discussion and analysis of results of
operations and financial condition. One policy, Allowance for Loan
Losses, has been identified as being critical because it requires
management to make difficult and subjective judgments about matters
that are inherently uncertain and because of the likelihood that
materially different amounts would be reported under different
conditions or using different assumptions. This policy is
reviewed by Loan Committee and approved by the Board of Directors.
The Allowance for Loan Losses represents management's estimate of
probable losses inherent in the loan portfolio at the balance sheet
date. The allowance for loan losses is reviewed monthly and is based on
allocations 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 and are on 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 to the allocated component there is an
unallocated component. The unallocated component incorporates
management's judgment of the inherent risks in the portfolio based on:
historical loan loss experience, loan concentrations, evaluations
made by regulatory agencies and our outside accountants, and assessment
of economic conditions. The allocated and unallocated components
represent the total allowance for loan losses to adequately cover losses
inherent in the loan portfolio.
Changes in the estimate related to the allowance for loan losses can
materially affect net income. The process of determining the allowance
requires us to forecast losses on loans in the future which are highly
uncertain and require a high degree of judgment; and is impacted by
regional, national and global economic trends and different assumptions
regarding possible future economic conditions could have been used and
would have had a material impact on the provision for loan losses and on
the consolidated results of operations.
Forward-looking statements
This report contains "forward-looking statements," as defined in Section
27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act, which includes statements such as projections, plans,
objectives and assumptions about the future, and such forward looking
statements are subject to the safe harbor created by these sections.
Although the Corporation and the Bank have based their plans and
projections on certain assumptions, there can be no assurances that such
assumptions will be correct, or that such plans and projections can be
achieved. Many factors, risks and uncertainties could cause the actual
results, amounts or events to differ materially from those the
Corporation and the Bank expect to achieve or occur. Such factors,
risks and uncertainties include, but are not limited to, the following:
* Changes in the market interest rates and volatility of rate sensitive
loans and deposits. Changes in interest rates impact the demand for
new loans, the rates received on loans and securities and the rates
paid on deposits and borrowings. Significant fluctuations in interest
rates may have an adverse effect on the business, financial condition
and results of operations of the Corporation and the Bank.
* Competitive pressures in the banking industry. The banking business
is highly competitive, and competition among financial institutions
for all types of financial products and services is expected to
increase. The ability of the Bank to compete in the future will
depend on the nature and level of future competition.
* Changes in the legislative and regulatory environment. Banks and bank
holding companies are subject to extensive supervision and regulation.
The banking business is also affected by the monetary and fiscal
policies of the United States government and the Federal Reserve
Board. The future regulatory environment may significantly affect the
Bank's business.
* Declines in the national or regional economy. A worsening of economic
conditions could reduce the demand for loans, cause credit quality
deterioration and/or result in a decline in the value of real estate
collateral securing a substantial portion of the Bank's loans. Any of
these factors could have an adverse impact on the Bank's financial
condition.
* Changes in the U.S. Small Business Administration program. The Bank
makes a significant portion of its commercial loans through the U.S.
Small Business Administration program, which guarantees a portion of
such loans, and the Bank generates income through the sale of such
loans. Changes in the Small Business Administration program could
have an adverse effect on the Bank's business.
Summary of Financial Results
Total consolidated assets of $695,394,000 at March 31, 2003 grew $6.0
million compared to $689,380,000 at December 31, 2002. Net loans
increased $7.1 million. Cash and equivalents decreased $2.3 million
during the first quarter.
The net income after tax for the first three months of 2003 equaled
$2,556,000 compared to $2,276,000 for the comparable period of 2002, an
increase of 12.3%. Increased profit resulted from growth in net
interest income due to loan growth.
Net Interest Income
Net interest income (before the provision for loan losses) of $7,026,000
for the first quarter of 2003 increased 16.9% from $6,012,000 for the
comparable period last year. This increase in net interest income
resulted primarily from volume increases of $129.9 million in average
earning assets for the current quarter compared to the first quarter of
2002. The Bank experienced a $120.8 million increase in average loans
outstanding, which have the highest yields. Investments, certificates of
deposits and Fed Funds investments increased $9.1 million. Average
interest bearing deposits for the first quarter increased $94.3 million
over the same period last year and average borrowings with the Federal
Home Loan Bank increased $52.4 million.
The net interest margin equaled 4.28% during the first quarter of 2003
compared to an average margin for the first quarter of 2002 of 4.55% and
4.23% for the year ended December 31, 2002. The yield on average loans
equaled 7.04% in the first quarter compared to 8.02% for the same period
last year, while the Bank's cost of funds decreased to 2.53% for the
first quarter of 2003 from 3.49% for the first quarter of 2002.
Several factors impact the Bank's 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 2002 prime rate equaled 4.75% until
November 7 when it declined to 4.25% (40 year lows) where it remained
through the first quarter of 2003. During 2001, the Federal Reserve
Board lowered the discount and Fed Funds rates 11 times with the prime
rate also declining 11 times following the Federal Reserve Board's
actions. The majority of SBA loans are tied to prime rate and reprices
on a quarterly basis. Other loan indexes also declined; however, not as
immediately as prime rate. 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 Bank is considered asset sensitive, meaning more assets are
immediately adjustable than liabilities. The Bank's 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 Bank has $153.9 million in SBA 7(a) loans which reprice based upon
the prime rate on the first day of the calendar quarter. The Bank has
$181.8 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 2.26% for February
2003 (latest available) and 2.38% for December 2002 compared to 3.07%
for December 2001. 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 loans at floors or fixed rates.
Of the Bank's loan portfolio totaling $601.8 million at March 31, 2003,
$285.2 million or 47.4% of total loans are adjustable rate loans which
have not reached a floor or ceiling rate. Of that total approximately
$213.2 million are prime-based loans, of which $58.1 million reprice
immediately and $155.0 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.
While interest rates offered on deposits have stabilized, they remain at
low levels. The Bank had $133.4 million in Sonoma Investor Reserve
accounts (money market rate deposit accounts). The cost of these
deposits equaled 1.35% during the first quarter of 2003 compared to
1.83% for the first quarter last year.
The Bank has $351.6 million in time certificates of deposits. These
accounts reprice at a slower pace. The cost of time deposits equaled
3.34% for the first quarter of 2003 compared to 4.36% in the first
quarter of the preceding year. The benefit of lower rates of 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 increased to an average of 107.1%
in first quarter of 2003 compared to 97.2% for the same period last
year. An increase in the loan-to-deposit ratio generally results in an
increase in net interest margin.
* Mix of Loan and Earning Assets
The mix of loans influences the overall yield on loans. The largest
loan growth occurred in commercial real estate loans growing to $390.2
million at this quarter end from $382.1 million at December 31, 2002.
This category has a lower yield than other types of loans. The Bank has
developed new loan products tied to US Treasury and LIBOR index with
other favorable terms to attract new loan volume. Loan volume has
increased as a result of these new products. Total COFI loans declined
during this quarter as borrowers move to other indexes which have lower
rates.
Construction loans decreased to $28.4 million at the end of this quarter
from $32.4 million at year end. Construction loans generally have higher
yields than other real estate loans. General economic conditions greatly
influence the demand for construction loans and the Bank has experienced
less demand during this recessionary period.
SBA loans, which generally are secured by real estate, are classified
are commercial loans. Commercial loans totaled $176.8 million at March
31, 2003 compared to $173.3 million at December 31, 2002. SBA loans
continue to be a popular loan product.
Economic conditions and competition have impacted the mix of loans.
Refinancing of COFI loans due to the higher floor rate than current
rates has reduced loan yields. The Bank is currently offering loan
products tied to prime rate, U.S. Treasury rates or LIBOR which have
lower interest rates but reprice at a faster rate than COFI loans.
Construction loans generally decline when economic conditions worsen.
The Bank continues to experience strong competition for loans, which has
resulted in lower loan pricing in the market place, which impacts the
Bank's offering rates on new loans and negatively impacts the Bank's net
interest margin.
* 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 March 31, 2003 the Bank had $679,000 in non-accrual loans
compared to $3,035,000 million at December 31, 2002. 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. 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 (FHLB) which has been
used as a source of liquidity. The borrowing rates are below rates
offered on certificates of deposits and the Bank has increased the use
of this line as a way to reduce our cost of funds. During the first
quarter of 2003 and 2002, the Bank increased borrowed funds from the
FHLB by $10 million. The cost of borrowing was more than 100 basis
points below the current offering rate on deposits of similar term.
Interest expense decreased to $3,574,000 in the first quarter of 2003
from $3,671,000 in the first quarter of 2002. The major factor was the
decrease in the average cost of interest bearing liabilities which
declined to 2.53% from 3.34% when comparing the first quarter of this
year to the first quarter of last year. In addition, the increase in the
funds borrowed from the FHLB to fund loan growth at an average rate of
1.59% had a positive impact from attracting new deposits at market
rates. The following is an analysis of the net interest margin:
Three months ended Three months ended
March 31, 2003 March 31, 2002
(dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
Earning assets (1) $665,395 $10,600 6.46% $535,556 $9,683 7.33%
Interest bearing
liabilities 573,836 3,574 2.53% 446,320 3,671 3.34%
------- ------
Net interest income $ 7,026 $6,012
======= ======
Net Interest income
to earning assets 4.28% 4.55%
==== ====
(1) Non-accrual loans are included in the calculation of average
balance of earning assets, and interest not accrued is excluded.
The following table sets forth changes in interest income and interest
expense for each major category of interest-earning asset and interest-
bearing liability, and the amount of change attributable to volume and
rate changes for the three months ended March 31, 2003 and 2002.
Changes not solely attributable to rate or volume have been allocated to
rate.
For the three months
ended March 31, 2003
over March 31, 2002
(dollars in thousands)
Yield
Volume /Rate Total
Increase (decrease) in interest income:
Portfolio loans $9,515 ($8,569) $946
Certificates of Deposit (24) 18 (6)
Investment securities 104 (87) 17
Federal funds sold 131 (171) (40)
------ ------ ------
Total increase (decrease) 9,726 (8,809) 917
------ ------ ------
Increase in interest expense
Interest-bearing transaction accounts 1,305 (1,487) (182)
Time deposits 3,233 (3,303) (70)
Other borrowings 1,715 (1,560) 155
------ ------ ------
Total increase (decrease) 6,253 (6,350) (97)
------ ------ ------
Increase (decrease) in net interest income $3,473 ($2,459) $1,014
====== ====== ======
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2003
amounted to $300,000 compared to $150,000 in the first quarter of last
year. The provision was based upon the overall growth in loans and
nonperforming loans at the end of the current quarter. For further
discussion see Allowance for Loan Losses.
Other Income
Other income is derived primarily from service charges, SBA loan sales,
SBA loan servicing and sales of other real estate owned. Other income
increased to $719,000 from $518,000 when comparing the first quarter of
2003 to the same period last year.
* Service Charges
Service charges on deposit accounts equaled $155,000 in the first
quarter of 2003 compared to $139,000 for the same period last year. The
increase relates to charges on analysis customers and general growth in
deposit accounts. The earnings credit rate has remained at low rates
due to the current interest rate environment. Analysis customers earn
less on their average balance to cover the cost of services provided to
them. If the earnings credits earned do not cover the cost of services,
the customer is charged a service fee. The Bank also receives fees for
safe deposit, visa, and other services.
* SBA Loan Sales
In the first quarter of this year, the Bank sold the guaranteed portion
of SBA loans totaling $3.4 million and recognized gains on those sales
of $357,000. During the first quarter of last year, the Bank sold the
guaranteed portion of SBA loans totaling $3.0 million and recognized
gains on those sales of $217,000. 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
received in the first quarter of 2003 increased over those received
during the first quarter of last year. The average percent gain on sales
in the first quarter of 2003 equaled 10.5% compared to 7.1% in the first
quarter of 2002. Changes in premium on loan sales are market driven
based upon factors such as rate of prepayments of SBA loans experienced
throughout the country and there is no guarantee that premiums will
continue at the current level.
* SBA Loan Servicing
SBA servicing fees totaled $80,000 during the first quarter of 2003,
compared to fees of $78,000 recorded in the first quarter of last year.
The income varies since the fee income is calculated based upon the
payments received during the period and the size of the portfolio
serviced. The serviced portfolio equaled $43.0 million at March 31, 2003
compared to $33.1 million at March 31, 2002.
* Sales of Other Real Estate Owned
There were no sales of other real estate owned (OREO) during the first
quarter of 2003 or 2002.
Non-Interest Expenses
The Bank's non-interest expenses totaling $3,232,000 in the first
quarter of 2003 increased 26.3% from $2,560,000 for the first quarter of
last year. It was expected that non-interest expenses would increase in
the first quarter of 2003 as a result of branch expansion and growth in
other areas of the Bank.
* Salaries and Employee Benefits
The Bank's largest expense category is salaries and benefits which
increased 33.0% to $1,961,000 in the first quarter of 2003 from
$1,474,000 during the first quarter of 2002. The Bank's full time
equivalent (FTE) staff level has increased to 124 at March 31, 2003
compared to 108 at March 31, 2002. Staff additions included the staff
for the new Sonoma Branch which opened in the third quarter of 2002; new
regional loan officers and additional support staff in the Loan, Branch
Administration and Finance Departments. Personnel costs are also
affected by annual salary increases, incentives based upon production
goals and changes in benefit costs.
* Occupancy and Equipment
Occupancy expenses increased to $299,000 in the first quarter of 2003
from $257,000 in the first quarter of 2002 This increase results from
the opening of the new Sonoma branch and the new loan production office
in San Rafael and increases in the rent and operating cost on existing
facilities. Occupancy expenses will continue to increase as and if the
Bank continues to expand. Equipment costs of $176,000 increased 23% over
$145,000 for the first quarter last year. The Bank continues to upgrade
computer equipment which should result in growth in these costs.
Security procedures, such as intrusion testing, over the Bank's computer
systems have been increased which has resulted in higher equipment
costs.
* Deposit and Other Insurance
Deposit and other insurance of $91,000 increased $11,000 over the first
quarter of last year. Regulatory assessments and FDIC insurance cost
grew due to the increase in deposits. There is no assurance that
regulatory assessments will continue at the current low level. The cost
of other insurance was higher due to increases in coverage and insurance
rates.
* Professional Services
Professional fees of $101,000 increased from $54,000 for the first
quarter of 2002. Included in this category are legal, accounting and
consulting fees which tend to vary depending upon the timing and need
for services. There has been a significant increase in legal and
accounting costs associated with SEC reporting and the new regulations
resulting from Sarbanes Oxley Act. The level of problem loans (see
discussion on Allowance for Loan Losses) and other legal actions impact
legal cost. Audit or review services are contracted by the Audit
Committee and are performed on a varying schedule with most of the audit
fees occurring during the first quarter. Due to the size of the Bank
the audit fees increased since this was the first year the Bank was
subject to FDICA audit requirements. During the first quarter of this
year the Directors have been working with a consultant regarding the
Bank's executive compensations programs. The Bank also paid for other
professional services which included loan review during the first
quarter of 2003.
* Business Development and Advertising
Advertising and business development costs, which vary depending on loan
and deposit promotions, increased to $133,000 from $122,000 in the first
quarter of 2002.
* Outside Customer Services
Outside customer services decreased by $30,000 when comparing this
quarter to first quarter of 2002. The Bank pays for certain direct costs
(ie: payroll services, escrow fees, etc.) which are expensed. These
costs are based upon the depositor using the analysis system. 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. With the lower interest rate environment the earnings credit
rate is low and as a result our customers are paying for more of the
covered services directly rather than reimbursing the Bank.
* Shareholder and Director Expenses
First quarter expenses for shareholder and director expenses equaled
$94,000 compared to $79,000 for the first quarter of last year. Included
in this category are directors fees for attending Board, Loan Committee,
ALCO, Executive Committee, Audit and Personnel Committee meetings. Since
the first quarter of last year, the meeting frequency has been increased
for some of the committees which has resulted in additional fees. The
cost of the Corporation's annual report, transfer agent fees and other
costs of communicating with shareholders is also included in this
expense category.
* Other Expenses
Other expenses, which includes stationery and supplies, telephone,
postage, loan expenses, dues and subscriptions and automobile costs
increased to $292,000 from $235,000 in the first quarter of 2002. These
expenses have grown as the Bank has grown and are expected to continue
to increase as the Bank grows.
* Non-interest expense attributable to SBA Lending Department
Total non-interest expenses for the SBA lending department for the first
quarter of 2003 was approximately $522,000 ($319,000 in personnel costs,
$70,000 in occupancy and equipment expenses, $27,000 in
marketing/business development and $106,000 in other expenses) compared
to $328,000 for the first quarter of 2002. These costs have increased
with the additional staff and new locations. There are also variances
caused by loan production incentives which are based on loan productions
and which vary significantly from quarter to quarter. The SBA loan
portfolio (serviced portion and Bank's portion) equaled $240.0 million.
The Bank also services $43.0 million of SBA loans which have been sold.
In addition, the SBA loan staff also generated $195.6 million in
commercial real estate loans which are not guaranteed by the SBA.
Income Taxes
The effective tax rate was 39.3% for the first quarter of 2003 compared
to 40.4% for the first quarter of last year. The provision for the
first quarter of 2003 was $1,657,000 versus $1,544,000 for the same
period last year. A portion of this increase resulted from increases in
pre-tax income during the comparable quarters.
Liquidity and Investment Portfolio
Liquidity is a bank's ability to meet possible deposit withdrawals, to
meet loan commitments and increased loan demand, and to take advantage
of other investment opportunities as they arise. The Bank's liquidity
practices are defined in both the Asset and Liability Policy and the
Investment Policy. These policies define acceptable liquidity measures
in terms of ratios to total assets, deposits, liabilities and capital.
Cash and due from banks, federal funds sold and certificates of deposit
totaled $85.3 million or 12.3% of total assets at March 31, 2003,
compared to $87.7 million or 12.7% of total assets at December 31, 2002.
The Bank sold $3.4 million in SBA loans during the first quarter of 2003
to increase the Bank's liquidity. The Bank also increased borrowings
from the Federal Home Loan Bank by $10 million. Bank deposits declined
during the first quarter of 2003 which results from lower market rates
and fewer time deposit promotions offered by the Bank. Management
decided to borrow at more favorable rates than those offered on time
deposits.
The Bank considers the unsold guaranteed portion of 7(a) SBA loans as a
secondary source of liquidity. There is an established market for these
loans and a sale can be completed within a few weeks. As of March 31,
2003, the Bank held $92.0 million in SBA guaranteed loans which could be
sold for additional liquidity.
At March 31, 2003, the Bank had unused federal funds lines of credit
totaling $14,000,000. The Bank also has a credit line with the Federal
Home Loan Bank which is based upon the value of collateral (investments
and loans). The Bank has collateral pledged which would allow the Bank
to borrow up to $124.7 million. The Bank could borrow an amount equal
to 25% of our assets, assuming that collateral values would support that
level of borrowings. At March 31, 2003, the Bank had borrowed $64.8
million which leaves $59.9 million available to borrow. Management
believes this amount of secondary liquidity is adequate to meet any cash
demands that may arise.
At present, the Corporation's primary sources of liquidity are from
interest on deposits, exercise of stock options and dividends from the
Bank. The Bank's ability to pay dividends to the Corporation is subject
to the restrictions of the national banking laws and, under certain
circumstances, the approval of the Comptroller of the Currency.
At March 31, 2003, the Corporation had non-interest and interest bearing
cash balances of $310,000, which management believes is adequate to meet
the Corporation's operational expenses.
The Corporation and the Bank do not engage in hedging transactions
(interest rate futures, caps, swap agreements, etc.).
Deposits
During the first quarter of 2003, deposits decreased to $570.2 million
compared to $577.6 million at the end of the year. It is not uncommon
for deposits to decline at the first of the year, when many of our
business accounts decrease their balance for a variety of reason, which
includes income tax, incentive and pension plan payments.
Money market deposits totaling $133.7 decreased $11.2 million from
December 31, 2002. This is a limited transaction account with a
discretionary rate which is set by management. The rate offered on this
account has been relatively stable during this quarter. There continues
to be strong competition in our market area for these types of funds.
The Bank's customers have held their funds in this deposit product
rather than locking into a specific maturity during this time of low
interest rates. These funds are also more volatile and fluctuate during
various business cycles.
Certificates of deposits totaling $351.6 million at March 31, 2003 were
relatively unchanged from $352.1 million at December 31, 2002. The Bank
has offered time deposit promotions during this quarter; however, the
low rate environment makes it difficult to attack new deposits. Since
the loan demand was slower during this quarter the rates offered in
promotions were less aggressive than other promotions.
As of March 31, 2003, non-interest bearing deposits equaled $54.4
million compared to $50.5 million at December 31, 2002. The Bank's
transaction accounts have significant changes in daily balances, mainly
due to deposits held by large businesses accounts.
The interest rate environment and the increased competition from the
financial services industry has made it more difficult to attract new
deposits at favorable rates. The Bank continually monitors competitors'
rates, strives to be competitive in pricing deposits, and has offered
attractive time deposit rates to raise funds during periods of high loan
growth.
Loans
Loans, net of discounts and reserves, equaled $593.6 million at March
31, 2003 compared to $586.5 million at December 31, 2002, increasing
1.2%. The following is an analysis of the loan portfolio.
Type of Loan
(in thousands)
March 31, December 31,
2003 2002
-------- ---------
Commercial $176,833 $173,325
Real Estate Construction 28,409 32,412
Real Estate Other 390,205 382,134
Installment Loans to Individuals 6,313 6,445
-------- ---------
601,760 594,316
Deferred loan fees and discount (1,458) (1,466)
Allowance for loan losses (6,692) (6,389)
-------- ---------
TOTAL $593,610 $586,461
======== =========
The SBA loan program continues to be a popular program; however,
competition remains very strong in our market areas. At March 31, 2003,
total SBA (7a)guaranteed loans equaled $92.0 million, net of $43.0
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, they are
reported as commercial loans. SBA loans have the same underwriting
requirements as the Bank's other loans, except they are sometimes for
longer terms (7 to 25 years) and have higher loan-to-value ratios than
the Bank typically accepts. The SBA loan program remains subject to
budget considerations at the Federal government level. Major changes to
the federal government program could affect the Bank's profitability and
future SBA loan growth. The guaranteed portion of SBA loans which could
be sold in the secondary market was $92.0 million at March 31, 2003
compared to $73.4 million at March 31, 2002.
The Bank continues to emphasize commercial and real estate lending. At
March 31, 2003, 29.4% of the loans held for investment were commercial
loans and 69.5% were real estate and construction loans, compared to
29.2% and 69.7% respectively at December 31, 2002. The Bank has
continued to grow its commercial and commercial real estate portfolio
through its reputation as an experienced business and real estate lender
which facilitates the successful negotiation of complex commercial
loans. The Bank maintains high credit qualifications with most real
estate loans having 60-70% loan to value ratios. Management is aware of
the risk factors in making commercial and real estate loans and is
continually monitoring the local market place. A decline in real estate
values and/or demand, a worsening of economic conditions or a natural
disaster could potentially have an adverse impact on the value of
collateral, on the loan portfolio, and on the financial condition of the
Bank.
Construction loans decreased to $28.4 million at March 31, 2003 from
$32.4 million at December 31, 2002 due to the reduced demand caused by
general economic conditions. 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 1.1% of the total loan
portfolio at March 31, 2003 and December 31, 2002.
Allowance for Loan Losses
The allowance for loan losses equaled $6,692,000 at March 31, 2003,
compared to $6,389,000 at December 31, 2002. At March 31, 2003, the
allowance for loan losses equaled 1.3% of loans (net of the guaranteed
portion of SBA loans). The allowance for loan losses is reviewed on a
monthly basis, based upon an allocation for each loan category, plus an
allocation for any outstanding loans which have been classified by
regulators or internally for the "Watch List". Each loan that has been
classified is individually analyzed for the risk involved with a
specific reserve allocation assigned according to the risk assessment.
At March 31, 2003, there were four borrowers on non-accrual totaling
$679,000 with $581,000 of that amount collateralized by real estate and
$95,000 of it also guaranteed by the SBA. There was one loan past due 90
days or more totaling $634,000 (secured by real estate and guaranteed by
SBA) and still accruing interest. Loans past due 30 to 89 days totaled
$8,988,000, with $8,917,000 of that amount collateralized by real estate
and $1,160,000 guaranteed by the SBA. At December 31, 2002, the Bank
had $3,035,000 in non-accrual loans and no loans past due 90 or more
days and still accruing interest. Past due 30 to 89 days totaled
$6,358,000 at December 31, 2002.
During the first quarter of 2003, there were no loans charged off and
$2,000 in loan recoveries. The Bank continues to have a low charge off
experience compared to industry standards but there can be no assurances
that this will continue or that the Bank will not experience loan
losses. The following is an analysis of the activity in the allowance
for loan losses during the quarter:
(In thousands) March 31, 2003
--------------
Balance - Beginning of period $6,390
Provision for loan losses 300
Charge offs 0
Recoveries 2
------
Balance - End of period $6,692
======
Capital Resources
Pursuant to regulations under the FDIC Improvement Act of 1991 (FDICIA),
five capital levels were prescribed as applicable for banks, ranging
from well-capitalized to critically under-capitalized. At March 31,
2003, the Bank was considered "well capitalized." The total risk-based
capital ratios were 12.0% for the Bank and 12.1% for the Corporation.
The Corporation declared a 5% stock dividend on April 1, 2003 with a
record date of May 9, 2003. Retained earnings in the financial
statements have not been adjusted to include the impact of this stock
dividend.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Bank's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Bank utilizes no derivatives to
mitigate its credit risk, relying instead on loan review and adequate
loan loss reserves. See Allowance for Loan Losses.
Interest rate risk is the risk of loss in value due to changes in
interest rates. Since virtually all of the Corporation's interest rate
risk exposure lies at the Bank level, this risk is addressed by the
Bank's Asset Liability Committee ("ALCO"), which includes members of the
Board of Directors and senior officers of the Bank. ALCO attempts to
manage the various components of the Corporation's balance sheet to
minimize the impact of sudden and sustained changes in interest rates on
portfolio values and net interest income.
A fundamental objective is to manage its assets and liabilities to
maximize the economic value of the Bank while maintaining adequate
liquidity and minimizing exposure to interest rate risk. Management
believes an acceptable degree of exposure to interest rate risk results
from the management of assets and liabilities through maturity, pricing
and mix with the goal of limiting its exposure to interest rate risk.
The Bank's profitability is dependent to a large extent upon its net
interest income. The Bank is subject to interest rate risk to the degree
that its interest-earning assets reprice differently than its
interest-bearing liabilities.
Interest rate sensitivity analysis is used to measure the Bank's
interest rate risk by computing estimated changes in the net present
value (NPV) of its cash flows from assets, liabilities and off-balance
sheet items in the event of a range of assumed changes in market
interest rates. NPV represents the market value of portfolio equity and
is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market rate sensitive instruments
in the event of sudden and sustained increases and decreases in market
interest rates of 100 and 200 basis points. 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 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, 2003,
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) (in thousands) (in thousands)
+200 $30,282 $2,514
+100 28,970 1,202
Base Scenario 27,768 0
-100 27,000 (768)
-200 26,543 (1,225)
The model utilized by management to create the report presented above
makes numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit runoff and should not be relied upon
as indicative of actual future results. Computations do not contemplate
any actions that ALCO could undertake in response to changes in interest
rates. Actual results could differ significantly from those estimates,
which would result in significant differences in the calculated
projected change.
Interest rate risk management is a function of the repricing
characteristics of the portfolio of assets and liabilities. Interest
rate risk management focuses on the maturity structure of assets and
liabilities and their repricing characteristics during periods of
changes in market interest rates. Effective interest rate risk
management seeks to ensure that both assets and liabilities respond to
changes in interest rates within an acceptable time frame, thereby
minimizing the effect of interest rate movements on net interest income.
Interest rate sensitivity is measured as the difference between the
volume of assets and liabilities in the current portfolio that are
subject to repricing at various time horizons. The differences are known
as interest rate sensitivity gaps.
The following schedule represents interest rate sensitivity profile as
of March 31, 2003 of assets, liabilities and shareholders' equity
classified by earliest possible repricing opportunity or maturity date.
Over Over Non-rate
Through 3 months 1 year Sensitive
Balance Sheet 3 through through or Over
(in thousands) months 1 year 5 years 5 years Total
Assets
Fed funds sold & certificates of deposit $68,327 $198 $68,525
Investment securities $647 $3,935 4,582
Loans (net of discounts) 212,315 79,407 52,951 255,629 600,302
Non-interest-earning assets
(net of allowance for loan losses) 21,985 21,985
-------- -------- -------- -------- --------
$280,642 $79,605 $53,598 $281,549 $695,394
======== ======== ======== ======== ========
Liabilities & Shareholders' Equity
Time Deposits $100,000 and over $44,294 $84,265 $20,281 $148,840
All other interest-bearing liabilities 236,893 160,126 32,944 $1,769 431,732
Non-interest bearing liabilities 54,387 54,387
Other Liabilities & Shareholders' Equity 60,435 60,435
-------- -------- -------- -------- --------
$281,187 $244,391 $53,225 $116,591 $695,394
======== ======== ======== ======== ========
Interest Rate Sensitivity (1) ($545) ($164,786) $373 $164,958
Cumulative Interest Rate Sensitivity ($545) ($165,331) $164,958 $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
Corporation carried out an evaluation, under the supervision and with
the participation of the Corporation's management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Corporation's disclosure controls and
procedures, as defined in Securities Exchange Act Rule 15d-14 (c).
Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls
and procedures are effective in a timely manner to alert them to
material information relating to the Corporation which is required to be
included in the Corporation's periodic Securities and Exchange
Commission filings. There have been no significant changes in the
Corporation'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).
(99) Additional Exhibits
(i) Certification of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form 8-K, filed on April 16, 2003, reporting, under Item 9, first
quarter of 2003 results.
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
May 8, 2003
Date: ________________________
/s/ Deborah A. Meekins /s/ Jane M. Baker
- ---------------------- --------------------
Deborah A. Meekins Jane M. Baker
President and Chief Executive Chief Financial Officer
Officer
Section 302 Certification
I, Deborah A. Meekins, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 report, 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 subsidiaries, is made known to us by others within
those entities, 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"); 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: May 6, 2003
Signature /s/ Deborah A. Meekins
-------------------------------------------------
Deborah A. Meekins, President and Chief Executive Officer
Section 302 Certification
I, Jane M. Baker, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 report, 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 subsidiaries, is made known to us by others within
those entities, 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"); 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: May 6, 2003
Signature /s/ Jane M. Baker
--------------------------------------
Jane M. Baker, Chief Financial Officer
Exhibit 99(i)
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 their best knowledge and belief, the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003, and to which the
Certification is attached as Exhibit 99(i), fully complies with the
requirements of Sections 13(a) or 15(d) of the Securities 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: May 6, 2003
/s/ Deborah A. Meekins /s/ Jane M. Baker
- ---------------------------------- ----------------------------
Deborah A. Meekins Jane M. Baker
President and Chief Executive Officer Chief Financial Officer