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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 June 30, 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 (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 ____
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
July 15, 2003: 4,399,842
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
ASSETS June 30, 2003 December 31, 2002
Cash and equivalents:
Cash and due from banks $ 19,169 $ 14,717
Federal funds sold 81,266 72,746
-------- --------
Total cash and equivalents 100,435 87,463
Interest-bearing deposits in banks 198 198
Investment securities
available-for-sale 643 652
Federal Home Loan Bank (FHLB) stock,
at cost 3,962 2,740
Federal Reserve Bank stock, at cost 165 165
Loans receivable, net of discounts
and allowance for loan losses 639,311 586,461
Leasehold improvements and
equipment, net 1,470 1,361
Accrued interest receivable
and other assets 10,701 10,340
-------- --------
Total assets $756,885 $689,380
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $615,040 $577,585
Accrued interest payable
and other liabilities 3,602 3,281
FHLB Advances 79,227 54,776
-------- --------
Total liabilities 697,869 635,642
-------- --------
Shareholders' equity:
Common stock, no par value;
authorized, 20,000,000 shares;
shares issued and outstanding,
4,399,842 at June 30, 2003 and
4,389,960 at December 31, 2002
(retroactively stated for 5%
stock dividend) 33,128 27,529
Additional paid-in-capital 786 786
Accumulated other comprehensive income 6 10
Retained earnings 25,096 25,413
-------- --------
Total shareholders' equity 59,016 53,738
-------- --------
Total liabilities and
shareholders' equity $756,885 $689,380
======== ========
See Notes to Consolidated Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the three and six months ended June 30, 2003 and 2002
(Unaudited)
(dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Interest income:
Loans $10,817 $ 9,950 $21,203 $19,390
Federal funds sold and
investment securities 260 277 474 520
------- ------- ------- -------
Total interest income 11,077 10,227 21,677 19,910
Interest expense 3,615 3,812 7,189 7,483
------- ------- ------- -------
Net interest income
before provision for
loan losses 7,462 6,415 14,488 12,427
Provision for loan losses 300 150 600 300
------- ------- ------- -------
Net interest income
after provision for
loan losses 7,162 6,265 13,888 12,127
------- ------- ------- -------
Other income:
Service charges on
deposits 153 120 309 259
Gain on sale of loans 343 246 700 463
Other 203 166 410 328
------- ------- ------- -------
Total other income 699 532 1,419 1,050
------- ------- ------- -------
Other expenses:
Salaries and employee
benefits 2,100 1,699 4,061 3,173
Occupancy 310 265 609 522
Equipment 178 153 354 298
Advertising and business
development 139 125 272 247
Outside customer services 82 88 166 202
Director and shareholder
expenses 114 98 208 177
Deposit and other insurance 91 80 182 160
Professional fees 115 75 217 129
Other 308 241 601 476
------- ------- ------- -------
Total other expenses 3,437 2,824 6,669 5,385
------- ------- ------- -------
Income before income
taxes 4,424 3,973 8,637 7,793
Provision for income taxes 1,789 1,619 3,446 3,163
------- ------- ------- -------
Net income $ 2,635 $ 2,354 $ 5,191 $ 4,630
======== ======= ======= =======
Basic earnings per
common share $ 0.60 $ 0.54 $1.18 $1.06
======== ======= ======= =======
Diluted earnings per
common share $ 0.53 $ 0.47 $1.04 $0.93
======== ======= ======= =======
See notes to Consolidated Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Six months ended June 30,
2003 2002
Cash flows from operating activities:
Net income $ 5,191 $ 4,630
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 600 300
Depreciation and amortization 251 216
FHLB Stock dividends (78) (12)
Net (decrease) in deferred loan fees
and discounts (164) (332)
Change in deferred income taxes (102) 120
Change in interest receivable and other assets (259) (331)
Change in accrued interest payable and
other liabilities 321 655
-------- --------
Net cash provided by operating activities 5,760 5,246
-------- --------
Cash flows from investing activities:
Maturities of available for sale securities 360
Purchase of restricted stock (1,139) (1,238)
Net increase in loans receivable (53,286) (62,210)
Purchase of leasehold improvements and
equipment, net (360) (195)
-------- --------
Net cash used by investing activities (54,785) (63,283)
-------- --------
Cash flows from financing activities:
Net increase in deposits 37,455 54,873
Net increase in FHLB advances 24,451 24,988
Payment of cash dividends (7) (6)
Stock options exercised 98 71
-------- --------
Net cash provided by financing activities 61,997 79,926
-------- --------
Net change in cash and cash equivalents 12,972 21,889
Cash and cash equivalents, at beginning of year 87,463 82,242
-------- --------
Cash and cash equivalents, at end of period $100,435 $104,131
======== ========
Supplemental cash-flow information:
Interest paid $ 7,264 $ 7,435
======== ========
Income taxes paid $ 3,332 $ 2,430
======== ========
See Notes to Consolidated Financial Statements
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
June 30, 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 June 30, 2003 and the results of operations for the three
months and six months then ended. The results of operations for the
three and six months ended June 30, 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
June 30, 2003 June 30, 2002
Per Per
Income/ Shares/ Share Income/ Shares/ Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ------ --------- ----------- ------
Net Income $2,635,000 $2,354,000
========== ==========
EPS - Income available
to common stockholders $2,635,000 4,393,896 $0.60 $2,354,000 4,382,465 $0.54
========== ===== ========== =====
Effect of Dilutive
Securities -
Stock Options 618,134 634,234
--------- ---------
EPS assuming dilution -
Income available to
common stockholders
plus assumed conversion $2,635,000 5,012,030 $0.53 $2,354,000 5,016,699 $0.47
========== ========= ===== ========== ========= =====
For the six months ended For the six months ended
June 30, 2003 June 30, 2002
Per Per
Income/ Shares/ Share Income/ Shares/ Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ------ --------- ----------- ------
Net Income $5,191,000 $4,630,000
========== ==========
EPS - Income available
to common stockholders $5,191,000 4,391,807 $1.18 $4,630,000 4,381,385 $1.06
========== ===== ========== =====
Effect of Dilutive
Securities -
Stock Options 618,134 586,704
--------- ----------
EPS assuming dilution -
Income available to
common stockholders
plus assumed conversion $5,191,000 5,009,941 $1.04 $4,630,000 4,968,089 $0.93
========== ========= ===== ========== ========= =====
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.
As of January 1, 2003 the Company adopted the disclosure requirements of
SFAS 148, Accounting for Stock Based Compensation, which amends
accounting principals Board ("APB") No. 28 by adding to the list of
disclosures to be made for interim periods.
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. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized over the options'
vesting period. Stock options issued to non-employees are valued under
the provisions of SFAS No. 123. Had compensation cost for the Company's
options been determined based on the methodology prescribed under SFAS
No. 123, the Company's net income and income per share would have been
as follows:
For the three For the six
months end months ended
June 30, June 30,
2003 2002 2003 2002
------ ------ ------ ------
(In thousands)
Net Income for the period $2,635 $2,354 $5,191 $4,630
Compensation expense,
net of tax effect 38 88 75 177
------ ------- ------ ------
Proforma net income $2,597 $2,266 $5,116 $4,453
====== ====== ====== ======
Proforma Earnings per
common share $0.59 $0.52 $1.16 $1.02
Proforma Earnings per
common share,
assuming dilution $0.52 $0.45 $1.02 $0.90
The fair value of each option is estimated on date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2002
----
Dividends 5%
Expected volatility 16.51%
Risk-free interest rate 4.94
Expected life 10 years
Note 4 - Comprehensive Income
The Corporation's total comprehensive earnings presentation is as
follows:
For the three For the six
months ended months ended
June 30, June 30,
2003 2002 2003 2002
------ ------ ------ ------
(In thousands)
Net Income $2,635 $2,354 $5,191 $4,630
Other Comprehensive income (loss):
Change in unrealized holding
gain (losses) arising during
the period (2) 5 (5) 6
------ ------ ------ ------
Income tax benefit (expense) 0 (2) (1) 2
(2) 3 (4) 4
------ ------ ------ ------
Comprehensive income $2,633 $2,357 $5,188 $4,634
====== ====== ====== ======
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 the 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), 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 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 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 equaled $756,885,000 at June 30, 2003 compared
to $689,380,000 at December 31, 2002. Net loans increased $52.9 million
since year-end with $45.7 million occurring in the second quarter. Cash
and equivalents increased $15.3 million during the second quarter.
The net income after tax for the first six months of 2003 equaled
$5,191,000 compared to $4,630,000 for the comparable period of 2002, an
increase of 12.1%. The net income for the second quarter of $2,635,000
increased 11.9% over the second quarter of 2002 when net income equaled
$2,354,000. 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 $7,462,000
for the second quarter of 2003 increased 16.3% from $6,415,000 for the
comparable period last year. This increase in net interest income
resulted primarily from volume increases of $120.5 million in average
earning assets for the current quarter compared to the second quarter of
2002. The Bank experienced a $110.0 million increase in average loans
outstanding, which have the highest yields. Investments, certificates of
deposits and Fed Funds investments increased $10.5 million. Average
interest bearing deposits for the second quarter increased $79.8 million
over the same period last year and average borrowings with the Federal
Home Loan Bank increased $41.1 million.
The net interest margin equaled 4.24% during the second quarter of 2003
compared to an average margin for the second quarter of 2002 of 4.39%
and 4.23% for the year ended December 31, 2002. The yield on average
loans equaled 6.29% in the second quarter compared to 7.00% for the same
period last year, while the Bank's cost of funds decreased to 2.38% for
the second quarter of 2003 from 3.13% for the second 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 low) where it remained
until June 30, 2003 when it declined to 4.00%. The majority of SBA loans
are tied to prime rate and reprices on a quarterly basis so the impact
of this prime rate change will occur on July 1, 2003 when the SBA
portfolio reprices. Other loan indexes generally move with, precede or
lag changes in prime rate. Declines in prime rate reduces interest
income 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 $162.7 million in SBA 7(a) loans which reprice based upon
the prime rate on the first day of the calendar quarter. The Bank has
$184.2 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 2.13% for May 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 $647.6 million at June 30, 2003,
$281.1 million or 43.4% of total loans are adjustable rate loans which
have not reached a floor or ceiling rate. Of that total approximately
$205.1 million are prime-based loans, of which $41.4 million reprice
immediately and $163.7 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 $135.9 million in Sonoma Investor Reserve
accounts (money market rate deposit accounts). The cost of these
deposits equaled 1.25% during the second quarter of 2003 compared to
1.82% for the second quarter last year.
The Bank has $384.1 million in time certificates of deposits. These
accounts reprice at a slower pace. The cost of time deposits equaled
3.12%for the second quarter of 2003 compared to 3.98% in the second
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 107.0%
in second quarter of 2003 compared to 100.2% 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 $426.9
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 have
continued to decline during this quarter as borrowers move to other
indexes which have lower rates.
Construction loans decreased to $26.8 million at the end of this quarter
from $32.4 million at year end. Due to risks associated with
construction loans they generally have higher yields than other real
estate loans. General economic conditions greatly influence the demand
for construction loans and the Bank has continued to experience less
demand during this quarter.
SBA loans, which generally are secured by real estate, are classified as
commercial loans. Commercial loans totaled $187.6 million at June 30,
2003 compared to $173.3 million at December 31, 2002. SBA loans
continue to be a popular loan product; however, the rate of growth has
declined as borrowers move to more fixed rate or indexes which are less
volatile than prime rate.
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 June 30, 2003 the Bank had $1,497,000 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.
As of June 30, 2003 the Bank had increased borrowed funds from the FHLB
by $42.4 million since June 30, 2002. The cost of borrowing was more
than 100 basis points below the current offering rate on deposits of
similar term.
Interest expense decreased to $3,615,000 in the second quarter of 2003
from $3,812,000 in the second quarter of 2002. The major factor was the
decrease in the average cost of interest bearing liabilities which
declined to 2.38% from 3.13% when comparing the second quarter of this
year to the second quarter of last year. In addition, the increase in
the funds borrowed from the FHLB to fund loan growth at an average rate
of 1.53% had a positive impact rather than attracting new deposits at
market rates. The following are analyses of the net interest margin:
Three months ended Three months ended
June 30, 2003 June 30, 2002
------------------------- ------------------------
Average Average
Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
(dollars in thousands)
Earning assets (1) $706,470 $11,077 6.29% $585,962 $10,227 7.00%
Interest bearing
liabilities 608,829 3,614 2.38% 487,902 3,812 3.13%
------- -------
Net interest
income $7,463 $6,415
======= =======
Net Interest income
to earning assets 4.24% 4.39%
==== ====
(1) Non-accrual loans are included in the calculation of average
balance of earning assets, and interest not accrued is excluded.
Six months ended Six months ended
June 30, 2003 June 30, 2002
------------------------- ------------------------
Average Average
Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
(dollars in thousands)
Earning assets (1) $686,046 $21,677 6.37% $560,898 $19,910 7.16%
Interest bearing
liabilities 591,288 7,189 2.45% 467,222 7,483 3.23%
------- -------
Net interest income $14,488 $12,427
======= =======
Net Interest income
to earning assets 4.26% 4.47%
==== ====
(1) Non-accrual loans are included in the calculation of average
balance of earning assets, and interest not accrued is excluded.
The following tables 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 six months ended June 30, 2003
and 2002. Changes not solely attributable to rate or volume have been
allocated to rate.
For the three months ended June 30, 2003
over June 30, 2002
(dollars in thousands) Volume Yield/Rate Total
------ ---------- -----
Increase (decrease) in interest income:
Portfolio loans $8,160 ($7,294) $866
Other earning assets 215 (231) (16)
------ ------ ------
Total increase (decrease) 8,375 (7,525) 850
------ ------ ------
Increase (decrease) in interest expense
Interest-bearing transaction accounts 116 (293) (177)
Time deposits 2,794 (2,897) (103)
Other borrowings 1,016 (934) 82
------ ------ ------
Total increase (decrease) 3,926 (4,124) (198)
------ ------ ------
Increase (decrease) in net
interest income $4,449 ($3,401) $1,048
====== ====== ======
For the six months ended June 30, 2003
over June 30, 2002
(dollars in thousands) Volume Yield/Rate Total
------ ---------- ------
Increase (decrease) in interest income:
Portfolio loans $8,791 ($6,978) $1,813
Other earning assets 210 (256) (46)
------ ------ ------
Total increase (decrease) 9,001 (7,234) 1,767
------ ------ ------
Increase (decrease)in interest expense
Interest-bearing transaction accounts 53 (410) (357)
Time deposits 3,002 (3,176) (174)
Other borrowings 1,258 (1,021) 237
------ ------ ------
Total increase (decrease) 4,313 (4,607) (294)
------ ------ ------
Increase (decrease) in net
interest income $4,688 ($2,627) $2,061
====== ====== ======
Provision for Loan Losses
The provision for loan losses equaled $300,000 for the three months
ended June 30, 2003 and $600,000 for the first six months of 2003
compared to $150,000 and $300,000 for the same periods in 2002. The
provision was based upon the overall growth in 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 $699,000 from $532,000 when comparing the second quarter of
2003 to the same period last year.
Service Charges
Service charges on deposit accounts equaled $153,000 in the second
quarter of 2003 compared to $120,000 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 and Loan Participations
In the second quarter of this year, the Bank sold the guaranteed portion
of SBA loans totaling $4.0 million with no loan participations and
recognized gains on those sales of $343,000. During the second quarter
of last year, the Bank sold the guaranteed portion of SBA loans totaling
$3.7 million and participated $9.9 million in commercial real estate
loans which resulted in recognized gains on those sales of $251,000. 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 second quarter of 2003 increased
over those received during the second quarter of last year. The average
percent gain on SBA loan sales in the second quarter of 2003 equaled
8.4% compared to 6.8% in the second quarter of 2002 which explains the
increase in income when comparing this quarter to the second 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 $75,000 during the second quarter of 2003,
compared to fees of $66,000 recorded in the second 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 $46.3 million at June 30, 2003
compared to $35.2 million at June 30, 2002.
Sales of Other Real Estate Owned
There were no sales of other real estate owned (OREO) during the second
quarter of 2003 or 2002.
Non-Interest Expenses
The Bank's non-interest expenses totaling $3,437,000 in the second
quarter of 2003 increased 21.7% from $2,824,000 for the second quarter
of last year. It was expected that non-interest expenses would increase
in the second 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 23.6% to $2,100,000 in the second quarter of 2003 from
$1,699,000 during the second quarter of 2002. The Bank's full time
equivalent (FTE) staff level has increased to 129 at June 30, 2003
compared to 114 at June 30, 2002. Staff additions included the staff for
the new Sonoma Branch which opened in the third quarter of 2002; new
regional loan officers, additional support staff in the Loan, Branch
Administration and Finance Departments and a Vice President Audit/Risk
Manager. Personnel costs are also affected by annual salary increases,
incentives based upon production goals and changes in benefit costs.
Incentive cost also increased due to the high level of loan production
during the second quarter of 2003.
Occupancy and Equipment
Occupancy expenses increased to $310,000 in the second quarter of 2003
from $265,000 in the second 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. It is expected that occupancy expenses will continue to
increase as and if the Bank continues to expand. Equipment costs of
$178,000 increased 16.3% over $153,000 for the second quarter last year.
The Bank has and will continue to upgrade and replace computer equipment
which should result in increases 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 $9,000 over the second
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 $115,000 increased from $75,000 for the second
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 as a result of SEC reporting and the new regulations
due to the Sarbanes Oxley Act. Activity on problem loans (see discussion
on Allowance for Loan Losses) and other legal actions also impact legal
cost. Audit or review services are contracted by the Audit Committee
and are performed on a varying schedule. In addition, audit fees
increased as a result of FDICA audit requirements which the Bank must
comply since the Bank's total assets exceed $500 million. The Directors
have been working with a consultant regarding the Bank's executive
compensations programs.
Advertising and Business Development
Advertising and business development costs, which vary depending on loan
and deposit promotions, increased to $139,000 from $125,000 in the
second quarter of 2002.
Outside Customer Services
Outside customer services decreased by $6,000 when comparing this
quarter to second quarter of 2002. The Bank pays for certain direct
costs (i.e.: 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
Second quarter expenses for shareholder and director expenses equaled
$114,000 compared to $98,000 for the second quarter of last year.
Included in this category are directors fees for attending Board, Loan
Committee, ALCO, Executive Committee, Audit and Compensation Committee
meetings. Since the second 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, armored car and courier costs, loan expenses, dues and
subscriptions and automobile costs increased to $308,000 from $241,000
in the second quarter of 2002. These expenses have grown as the Bank
has grown and are expected to continue to increase as and if the Bank
grows.
Non-interest expense attributable to SBA Lending Department
Total non-interest expenses for the SBA lending department for the
second quarter of 2003 was approximately $621,000 ($387,000 in personnel
costs, $75,000 in occupancy and equipment expenses, $28,000 in
marketing/business development and $131,000 in other expenses) compared
to $522,000 for the second 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 $255.4 million.
The Bank services $46.3 million of SBA loans which have been sold. In
addition, the SBA loan staff also generated $229.0 million in commercial
real estate loans which are not guaranteed by the SBA.
Income Taxes
The effective tax rate was 40.4% for the second quarter of 2003 compared
to 40.8% for the second quarter of last year. The provision for the
second quarter of 2003 was $1,789,000 versus $1,619,000 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 $100.6 million or 13.3% of total assets at June 30, 2003,
compared to $87.7 million or 12.7% of total assets at December 31, 2002.
The Bank sold $4.0 million in SBA loans during the second quarter of
2003 which increased the Bank's liquidity. The Bank also increased
borrowings from the Federal Home Loan Bank by $14.5 million during the
second quarter of 2003. Bank deposits increased $ 44.9 million during
the second quarter of 2003 as a result of deposit promotions to fund the
projected loan growth.
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 June 30,
2003, the Bank held $108.0 million in SBA guaranteed loans which could
be sold for additional liquidity.
At June 30, 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). As of June 30, 2003 the Bank has collateral pledged which
would allow the Bank to borrow up to $133.7 million. The Bank could
borrow an amount equal to 25% of our assets, assuming that collateral
values would support that level of borrowings. At June 30, 2003, the
Bank had borrowed $79.2 million which leaves $54.4 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 June
30, 2003, the Corporation had non-interest and interest bearing cash
balances of $428,000, 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 second quarter of 2003, deposits increased to $615.0 million
compared to $577.6 million at the end of the year.
Money market deposits totaling $135.9 decreased $8.7 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 declined during this quarter even though there is 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.
There has been some movement into other investments with signs of the
stock market improving. These funds are also more volatile and fluctuate
during various business cycles.
Certificates of deposits totaling $384.1 million at June 30, 2003
increased $32.0 million from $352.1 million at December 31, 2002. The
Bank offered time deposit promotions during this quarter which was
successful in attracting new depositors.
As of June 30, 2003, non-interest bearing deposits equaled $60.8 million
compared to $50.6 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 $639.3 million at June 30,
2003 compared to $586.5 million at December 31, 2002, increasing 9.0%
over year end and 20.9% over the June 30, 2002 balance of $528.8
million. The following is an analysis of the loan portfolio.
Type of Loan June 30, December 31,
(in thousands) 2003 2002
-------- ---------
Commercial $187,610 $173,325
Real Estate Construction 26,820 32,412
Real Estate Other 426,910 382,134
Installment Loans to Individuals 6,265 6,445
-------- ---------
647,605 594,316
Deferred loan fees and discount (1,300) (1,466)
Allowance for loan losses (6,994) (6,389)
-------- ---------
TOTAL $639,311 $586,461
======== =========
The SBA loan program continues to be a popular program; however,
competition remains very strong in our market areas. At June 30, 2003,
total SBA (7a) guaranteed loans equaled $209.1 million, net of $46.3
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 $108.0 million at June 30, 2003
compared to $83.7 million at June 30, 2002.
The Bank continues to emphasize commercial and real estate lending. At
June 30, 2003, 29.0% of the loans held for investment were commercial
loans and 70.1% 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 $26.8 million at June 30, 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 1.0% of the total loan
portfolio at June 30, 2003 and 1.1% of the total loan portfolio at
December 31, 2002.
Allowance for Loan Losses
The allowance for loan losses equaled $6,994,000 at June 30, 2003,
compared to $6,389,000 at December 31, 2002. At June 30, 2003, the
allowance for loan losses equaled 1.30% 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 June 30, 2003, there were 5 borrowers on non-accrual totaling
$1,497,000 with $1,399,000 of that amount collateralized by real estate
and $174,000 of it also guaranteed by the SBA. There was one unsecured
loan past due 90 days or more totaling $20,000 and still accruing
interest. Loans past due 30 to 89 days totaled $6,752,000, with
$6,601,000 of that amount collateralized by real estate and $742,000
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 second 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)
Three months ended Six months ended
June 30, 2003 June 30, 2003
------------------ ----------------
Balance Beginning of period $6,692 $6,390
Provision for loan losses 300 600
Charge offs 0 0
Recoveries 2 4
------ ------
Balance - End of period $6,994 $6,994
====== ======
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 June 30,
2003, the Bank was considered "well capitalized." The total risk-based
capital ratios were 11.5% for the Bank and 11.6% for the Corporation.
The Corporation declared a 5% stock dividend on April 1, 2003 with a
record date of May 9, 2003.
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 next twelve months, 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 $32,212 $3,231
+100 30,536 1,555
Base Scenario 28,981 0
-100 27,975 (1,006)
-200 27,082 (1,899)
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 June 30, 2003 of assets, liabilities and shareholders' equity
classified by earliest possible repricing opportunity or maturity date.
Over Over
3 months 1 year Non-rate
Balance Sheet Through through through Sensitive or
(in thousands) 3 months 1 year 5 years Over 5 years Total
---------- ---------- ---------- ---------- ----------
Assets
Fed funds sold &
certificates of deposit $81,464 $81,464
Investment securities $643 $4,127 4,770
Loans (net of discounts) 226,231 67,584 $47,916 304,574 646,305
Non-interest-earning
assets (net of allowance
for loan losses) 24,346 24,346
---------- ---------- ---------- ---------- ----------
$307,695 $68,227 $47,916 $333,047 $756,885
========== ========== ========== ========== ==========
Liabilities &
Shareholders' Equity
Time Deposits $100,000
and over $27,854 $104,951 $32,704 $165,509
All other interest-bearing
liabilities 224,293 193,168 48,521 $1,961 467,943
Non-interest bearing
liabilities 60,815 60,815
Other Liabilities &
Shareholders' Equity 62,618 62,618
---------- ---------- ---------- ---------- ----------
$252,147 $298,119 $81,225 $125,394 $756,885
========== ========== ========== ========== ==========
Interest Rate
Sensitivity (1) $55,548 ($229,892) ($33,309) $207,653
Cumulative Interest
Rate Sensitivity $55,548 ($179,344) ($207,653) $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
As of the end of the period covered by 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
The Annual Meeting of Shareholders of the Corporation
was held on May 20, 2003. The following candidates
received the votes indicated.
Withheld/Abstained/
For Broker Non-Votes
Clement C. Carinalli 3,582,700 123,127
Patrick R. Gallaher 3,583,437 122,390
William P. Gallaher 3,583,437 122,390
William E. Geary 3,583,085 122,742
James B. Keegan, Jr. 3,583,437 122,390
Dennis R. Hunter 3,583,437 122,390
Robert V. Pauley 3,576,923 128,904
All candidates were re-elected
No other matters were voted on at the meeting
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).
(f) The Section 302 Certifications of the Chief Executive
Officer and Chief Financial Officer are filed herewith
collectively as Exhibit 31.
(g) The Section 906 Certifications of the Chief Executive
Officer and Chief Financial Officer are filed herewith as
Exhibit 32.
(b) Reports on Form 8-K
Form 8-K, filed on July 16, 2003, reporting, under Item 9,
second 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
Date: August 7, 2003
- ---------------------
/s/ Deborah A. Meekins /s/ Jane M. Baker
- -------------------------- ---------------------
Deborah A. Meekins Jane M. Baker
President and Chief Executive Officer Chief Financial Officer
Exhibit 31
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 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-15(e) and 15d-1(e)) for the registrant and have:
a. designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
c. disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that
has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting,, 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 and material weaknesses
in the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial data; 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 over financial reporting.
Date: August 7, 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 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-15(e) and 15d-1(e)) for the registrant and have:
a. designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
c. disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that
has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting,, 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 and material weaknesses
in the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial data; 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 over financial reporting.
Date: August 7, 2003
Signature /s/ Jane M. Baker
--------------------------------------
Jane M. Baker, Chief Financial Officer
Exhibit 32
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 June 30, 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: August 7, 2003
/s/ Deborah A. Meekins /s/ Jane M. Baker
- --------------------------------- -------------------------
Deborah A. Meekins Jane M. Baker
President and Chief Executive Officer Chief Financial Officer