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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 March 31, 2004
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
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 March 31, 2004: 9,110,704
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS March 31, 2004 December 31, 2003
(unaudited)
Cash and equivalents:
Cash and due from banks $ 18,356 $ 20,078
Federal funds sold 87,552 74,496
-------- --------
Total cash and equivalents 105,908 94,574
Investment securities available-for-sale 625 632
Federal Home Loan Bank (FHLB) stock, at cost 7,005 5,961
Federal Reserve Bank stock, at cost 165 165
Loans receivable, net 776,901 733,857
Leasehold improvements and equipment, net 1,588 1,586
Accrued interest receivable and other assets 12,321 11,451
-------- --------
Total assets $904,513 $848,226
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $688,245 $658,320
Accrued interest payable and other
liabilities 5,546 3,162
FHLB Advances 139,203 119,211
-------- --------
Total liabilities 832,994 780,693
-------- --------
Shareholders' equity:
Common stock, no par value; authorized,
40,000,000 shares; shares issued and
outstanding, 9,566,239 at March 31, 2004
and 9,491,422 at December 31, 2003
(restated for 5% stock dividend) 35,060 34,653
Additional paid-in-capital 1,702 1,702
Accumulated other comprehensive income - 2
Retained earnings 34,757 31,176
-------- --------
Total shareholders' equity 71,519 67,533
-------- --------
Total liabilities and shareholders
equity $904,513 $848,226
======== ========
See Notes to Consolidated Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended March 31,
(dollars in thousands, except 2004 2003
per share data)
Interest income:
Loans $12,042 $10,386
Federal funds sold and investment securities 249 214
------- -------
Total interest income 12,291 10,600
Interest expense 3,333 3,574
------- -------
Net interest income before provision
for loan losses 8,958 7,026
Provision for loan losses 225 300
------- -------
Net interest income after provision for
loan losses 8,733 6,726
------- -------
Other income:
Service charges 177 198
Gain on sale of loans 451 357
Other 347 164
------- -------
Total other income 975 719
------- -------
Other expenses:
Salaries and employee benefits 2,413 1,961
Occupancy 306 299
Equipment 201 176
Business development & advertising 143 134
Outside customer services 93 84
Shareholder & director expenses 59 94
Deposit and other insurance 111 91
Professional fees 104 101
Other 321 292
------- -------
Total other expenses 3,751 3,232
------- -------
Income before income taxes 5,957 4,213
Provision for income taxes 2,376 1,657
------- -------
Net income $ 3,581 $ 2,556
======= =======
Earnings per common share $ 0.38 $ 0.28
======= =======
Earnings per common share assuming dilution $ 0.33 $ 0.24
======= =======
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) 2004 2003
Cash flows from operating activities:
Net income $ 3,581 $ 2,556
Adjustments to reconcile net income to
net cash from operating activities:
Provision for loan losses 225 300
Depreciation and amortization 139 125
FHLB Stock dividends (165) (27)
Change in deferred income taxes - 130
Gain on sale of loans
Changes in operating assets and liabilities:
Change in deferred loan fees and discounts 58 (6)
Change in interest receivable and other
assets (870) (244)
Change in accrued interest payable and
other liabilities 2,385 862
-------- --------
Net cash provided by operating
activities 5,353 3,696
Cash flows from investing activities:
Proceeds from maturity of available for
sale securities 5 3
Purchase of FHLB stock (879) (1,003)
Net increase in loans receivable (43,327) (7,443)
Purchase of leasehold improvements and
equipment, net (140) (188)
-------- --------
Net cash used by investing activities (44,341) (8,631)
Cash flows from financing activities:
Net change in deposits 29,924 (7,396)
Net change in FHLB advances 19,992 9,994
Proceeds from exercise of stock options 406 -
-------- --------
Net cash from financing activities 50,322 2,598
Net change in cash and cash equivalents (11,334) (2,337)
Cash and cash equivalents, at beginning of year 94,574 87,463
-------- --------
Cash and cash equivalents, at end of period $105,908 $ 85,126
======== ========
Supplemental cash-flow information:
Interest paid $ 3,189 $ 3,619
======== ========
Income taxes paid $ 2 $ 382
======== ========
See Notes to Consolidated Financial Statements
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
March 31, 2004
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, 2004 and the results of operations for the three
months then ended. The results of operations for the three months ended
March 31, 2004 are not necessarily indicative of the operating results to
be anticipated for the year ended December 31, 2004.
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements. Changes in these
estimates and assumptions are considered reasonably possible and may have
a material impact on the consolidated financial statements and thus actual
results could differ from the amounts reported and disclosed herein. The
Company considers the allowance for loan loss a critical accounting policy
subject to estimate.
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 2003 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 dividends
declared on March 16, 2004 and April 1, 2003 and the two for one stock
split to shareholders of record on December 1, 2003. The Corporation's
EPS data is as follows:
For the three months For the three months
ended March 31, 2004 ended March 31, 2003
-------------------------------------- -----------------------------------
Per Per
Income/ Shares/ Share Income/ Shares/ Share
Numerator Denominator Amount Numerator Denominator Amount
---------- ----------- ------ ---------- ----------- ------
Net Income $3,581,000 $2,556,000
========== ==========
EPS - Income available to
common stockholders $3,581,000 9,540,088 $0.38 $2,556,000 9,218,916 $0.28
========== ===== ========== =====
Effect of Dilutive
Securities - Stock Options 1,474,100 1,240,814
---------- ----------
EPS assuming dilution
-Income available to
common stockholders plus
assumed conversion $3,581,000 11,014,189 $0.33 $2,556,000 10,459,730 $0.24
========== ========== ===== ========== ========== =====
Note 3 - Stock Based Compensation
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method 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. 25 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 months ended March 31,
(In thousands) 2004 2003
---- ----
Net Income for the period $3,581 $2,556
Compensation expense, net of tax effect 17 38
------ ------
Proforma net income $3,564 $2,518
====== ======
Proforma earnings per common share $0.37 $0.27
Proforma earnings per common share,
assuming dilution $0.32 $0.24
No options were granted in the first quarter of 2004 or 2003.
Note 4 - Comprehensive Income
The Corporation's total comprehensive earnings presentation is as follows:
For the three months ended March 31,
(In thousands) 2004 2003
---- ----
Net Income $3,581 $2,556
------ ------
Other Comprehensive income (loss):
Change in unrealized holding gain
(losses) arising during the period (2) (3)
Income tax benefit (expense) - 1
------ ------
(2) (2)
------ ------
Comprehensive income $3,579 $2,554
====== ======
Note 5 - Common Stock Dividend
On March 16, 2004 the Board of Directors declared a 5% stock dividend
payable on May 31, 2004 to shareholders of record on May 3, 2004. 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 make assumptions which are highly uncertain, and requires a
high degree of judgment; and is impacted by regional, national and global
economic trends. 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
The discussion of certain matters in this report may constitute
"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 and 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 accounting standards by the Financial Accounting Standards
Board, the Securities and Exchange Commission (SEC) or other
standard-setting bodies.
Such changes could affect the manner in which the Corporation and the
Bank are required to account for and report income, expenses, reserves,
or a merger or acquisition, if any and could materially affect the
Corporation's business and financial statements.
Changes in the U.S. Small Business Administration (SBA) 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; such changes are
a possibility because of current budget constraints at the SBA.
Changes in Federal Home Loan Bank (FHLB) borrowing policies.
The Bank relies upon the FHLB for a large portion of the funding which
is collateralized by loan assets. Based upon the current policies of
the FHLB we believe the advances are renewable. Changes in the
requirements of the FHLB could materially affect the Bank's business
and financial statements.
Investors are cautioned to consider these and other risks and
uncertainties.
The Corporation specifically disclaims any obligation to update any such
factors or to publicly announce the results of any revisions to any
forward-looking statements in this report to reflect future events or
developments.
Summary of Financial Results
Total consolidated assets of $904,513,000 at March 31, 2004 grew
$56.3 million during the first quarter compared to $848,226,000 at
December 31, 2003. Net loans increased $43.0 million in the first quarter
of 2004. Cash and equivalents increased $11.3 million during the first
quarter.
The net income after tax for the first three months of 2004 equaled
$3,581,000 compared to $2,556,000 for the comparable period of 2003, an
increase of 40.1%. Increased profit resulted primarily from growth in net
interest income due to loan growth and the lower cost of funds resulting
from the decision to borrow on its credit line with the Federal Home Loan
Bank.
Net Interest Income
Net interest income (before the provision for loan losses) of $8,958,000
for the first quarter of 2004 increased 27.5% from $7,026,000 for the
comparable period last year. This increase in net interest income
resulted primarily from volume increases of $182.8 million in average
earning assets for the current quarter compared to the first quarter of
2003 and the lower cost of funds obtained through increased borrowings
from the FHLB. The Bank experienced an increase of $163.7 million in
average loans outstanding. Investments, interest bearing investments and
Fed Funds investments increased $19.1 million. Average interest bearing
deposits for the first quarter increased $97.8 million over the same
period last year and average borrowings with the Federal Home Loan Bank
increased $65.3 million.
The net interest margin equaled 4.25% during the first quarter of 2004
compared to an average margin for the first quarter of 2003 of 4.28% and
4.25% for the year ended December 31, 2003. The yield on average loans
equaled 6.36% in the first quarter compared to 7.04% for the same period
last year, while the Bank's cost of funds decreased to 1.82% for the first
quarter of 2004 from 2.53% for the first quarter of 2003.
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 conditions and the 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 2003 prime rate equaled 4.25% until June when it
declined to 4.00%, a 40 year low, where it remained through the first
quarter of 2004. Prime rate has remained fairly stable during the last two
years following 2001 when Fed Funds and Prime rates declined 11 times. The
prime rate declined from 9.50% to 4.75% during that period. The majority
of SBA loans are tied to prime rate and reprice on a quarterly basis.
Other loan indexes also declined; however, not as immediately as prime
rate. The decline in market rates has a negative impact on the Bank's net
interest margin depending upon the loans repricing schedule and the 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 $194.9 million in SBA 7(a) loans which reprice based upon the
prime rate on the first day of the calendar quarter. The Bank has
$232.0 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 1.841% for February 2004
(latest available) and 1.90% for December 2003 compared to 2.38% for
December 2002. 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.
Of the Bank's loan portfolio totaling $785.2 million at March 31, 2004,
$294.5 million or 37.5% of total loans are adjustable rate loans which
have not reached a floor or ceiling rate. Of that total approximately
$217.3 million are prime-based loans, of which $21.6 million reprice
immediately and $195.7 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. The Bank has also experienced an increase
in loan payoffs as borrowers have refinanced to other loans tied to
indexes which bear lower rates than loans tied to COFI or loans at floors
or fixed rates.
While interest rates offered on deposits have stabilized, they remain at
low levels. The Bank had $134.1 million in Sonoma Investor Reserve
accounts (money market rate deposit accounts). The cost of these deposits
equaled 1.08% during the first quarter of 2004 and the first quarter last
year.
The Bank has $448.9 million in time certificates of deposits. These
accounts reprice at a slower pace. The cost of time deposits equaled
2.35% for the first quarter of 2004 compared to 3.34% in the first quarter
of the preceding year. The benefit of lower rates of time deposits
continued to occur as certificates of deposits matured 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 114.1% in
first quarter of 2004 compared to 107.1% 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
Changes in the mix of loans also impact the Bank's interest margin. The
largest loan growth occurred in real estate mortgage loans growing to
$539.3 million at this quarter end from $495.5 million at December 31,2003.
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 and the Bank's competitive rate structure.
Construction loans experienced a modest decline to $25.4 million at the
end of this quarter from $26.3 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 as
commercial loans. Commercial loans totaled $214.5 million at March 31, 2004
compared to $214.0 million at December 31, 2003. As a result of the SBA's
budgetary constraints, the SBA had imposed a maximum loan cap of $750,000
on 7(a) loans with a maximum guaranteed amount of $562,500 per loan.
During this period the Bank converted SBA loan requests which exceeded the
$750,000 loan cap to loans under the SBA's 504 program. Under the 504
program 55% of the loan is funded by the Bank compared to 100% of loan
amount under the 7(a) program. Consequently the Bank would need to do
almost twice the volume of 504 loans to generate the same volume possible
under the 7(a) program. The 504 loans also carry additional risks since
the Bank's loan amount is not guaranteed by the SBA; however, this is
mitigated by the lower loan to collateral value ratio of approximately 50%.
On April 5, 2004, funding was restored for the SBA's 2004 fiscal year, the
loan cap was lifted and the program was increased to allow for guaranteed
loans up to $2 million which will provide a better loan product for
borrowers. Additional government actions may further alter the SBA
program, which could have a negative impact on the Bank's profits.
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, 2004 the Bank had $454,000 in non-accrual loans compared to
$1,274,000 million at December 31, 2003. 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 2004, the Bank
increased borrowed funds from the FHLB by $20 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 $3,333,000 in the first quarter of 2004 from
$3,574,000 in the first quarter of 2003. The major factor was the decrease
in the average cost of interest bearing liabilities which declined to
1.82% from 2.53% 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 1.31%
had a positive impact as opposed to attracting new deposits at market
rates. The following is an analysis of the net interest margin:
Three months ended Three months ended
March 31, 2004 March 31, 2003
----------------------- -----------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(dollars in thousands)
Earning assets (1) $848,211 $12,291 5.83% $665,395 $10,600 6.46%
Interest bearing
liabilities 736,985 3,333 1.82% 573,836 3,574 2.53%
------- -------
Net interest income $ 8,958 $ 7,026
======= =======
Net Interest income to
earning assets 4.25% 4.28%
==== ====
(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, 2004 and 2003.
Changes not solely attributable to rate or volume have been allocated to
rate.
For the three months ended March 31, 2004
over March 31, 2003
(dollars in thousands)
Yield/
Volume Rate Total
------ ------ ------
Increase (decrease) in interest income:
Portfolio loans $2,894 ($1,238) $1,656
Investment securities and other
interest bearing investments 27 10 37
Federal funds sold 46 (48) (2)
------ ------ ------
Total increase (decrease) 2,967 (1,276) 1,691
------ ------ ------
Increase (decrease) in interest expense
Interest-bearing transaction accounts 29 (98) (69)
Time deposits 687 (1,028) (341)
Other borrowings 258 (89) 169
Total increase (decrease) 974 (1,215) (241)
------ ------ ------
Increase (decrease) in net interest income $1,993 ($61) $1,932
====== ====== ======
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2004
amounted to $225,000 compared to $300,000 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 $975,000 from $719,000 when comparing the first quarter of
2004 to the same period last year. The majority of the increase results
from the gain on sale of other real estate owned which equaled $183,000.
Service Charges
Service charges on deposit accounts equaled $127,000 in the first quarter
of 2004 compared to $155,000 for the same period last year. The decrease
relates to charges on analysis customers. 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. Analysis
customers can increase their average balances to reduce the charges or
alter the services to reduce their service charges. 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 $3.8 million and recognized gains on those sales of
$451,000. During the first quarter of last year, the Bank sold the
guaranteed portion of SBA loans totaling $3.4 million and recognized
gains on those sales of $357,000. 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 2004 increased over those received during the
first quarter of last year. The average percent gain on sales in the
first quarter of 2004 equaled 12.1% compared to 10.5% in the first quarter
of 2003. 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 $97,000 during the first quarter of 2004,
compared to fees of $80,000 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 $51.9 million at March 31, 2004 compared to
$43.0 million at March 31, 2003.
Sales of Other Real Estate Owned
During the first quarter of this year the Bank took possession of property
as a result of a loan foreclosure. This property was sold at a gain of
$183,000 during the quarter. There were no sales of other real estate
owned (OREO) during the first quarter of 2003.
Non-Interest Expenses
The Bank's non-interest expenses totaling $3,751,000 in the first quarter
of 2004 increased 16.1% from $3,232,000 for the first quarter of last year.
It was expected that non-interest expenses would increase in the first
quarter of 2004 as a result of the rapid growth of the Bank.
Salaries and Employee Benefits
The Bank's largest expense category is salaries and benefits which
increased 23.1% to $2,413,000 in the first quarter of 2004 from $1,961,000
during the first quarter of 2003. The Bank?s full time equivalent (FTE)
staff level has increased to 141 at March 31, 2004 compared to 124 at
March 31, 2003. Staff additions included 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 insurance and benefit
costs.
Occupancy and Equipment
Occupancy expenses increased to $306,000 in the first quarter of 2004 from
$299,000 in the first quarter of 2003 This modest increase results from
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 $201,000 increased 14.2% over $176,000 for the first
quarter last year. The Bank continues to upgrade computer equipment which
should result in growth in these costs. In addition, the Bank recently
added equipment for imaging of bank documents and customer checks which
will result in operational efficiencies and better service for our
customers. The Bank continues to focus on security procedures, such as
intrusion testing, over the Bank's computer systems which has resulted in
increased equipment costs.
Deposit and Other Insurance
Deposit and other insurance of $111,000 increased $20,000 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 $104,000 increased from $101,000 for the first
quarter of 2003. 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 compliance with new regulations
such as the 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. It is expected that cost of professional
services will continue to increase with the expansion of the Bank.
Business Development and Advertising
Advertising and business development costs, which vary depending on loan
and deposit promotions, increased to $143,000 from $134,000 in the first
quarter of 2003.
Outside Customer Services
Outside customer services increased by $9,000 when comparing this quarter
to first quarter of 2003. 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 either paying for more of the covered services or
increasing their average balances to increase the earnings on their
accounts.
Shareholder and Director Expenses
First quarter expenses for shareholder and director expenses equaled
$59,000 compared to $94,000 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.
Directors' fees decreased due to the resignation of one director who had
served on several committees. In March two new directors were added to
the Bank's board of directors and it is expected that directors' fees will
increase as a result. 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 include stationery and supplies, telephone, postage,
loan expenses, dues and subscriptions and automobile costs, increased 9.8%
to $321,000 from $292,000 in the first quarter of 2003. These expenses
have grown as the Bank has grown and are expected to continue to increase
as the Bank grows.
Income Taxes
The effective tax rate was 39.9% for the first quarter of 2004 compared to
39.3% for the first quarter of last year. The provision for the first
quarter of 2004 was $2,376,000 versus $1,657,000 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 interest bearing deposit
totaled $105.9 million or 11.7% of total assets at March 31, 2004,
compared to $94.6 million or 11.1% of total assets at December 31, 2003.
The Bank sold $3.8 million in SBA loans during the first quarter of 2004
to increase the Bank's liquidity. The Bank also increased borrowings from
the Federal Home Loan Bank by $20 million. Bank deposits increased 4.5% to
$688.2 million during the first quarter of 2004. During the first quarter
the Bank has offered special rates on time deposit promotions to attract
new deposits to partially fund projected loan growth. Management also
funded new loans growth by borrowing from the FHLB 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, 2004,
the Bank held $130.7 million in SBA guaranteed loans which could be sold
for additional liquidity.
At March 31, 2004, 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 $193.6 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, 2004, the Bank had borrowed $139.2 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 March
31, 2004, the Corporation had non-interest and interest bearing cash
balances of $2.3 million, 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 2004, deposits increased to $688.2 million
compared to $658.3 million at the end of the year.
Money market deposits totaling $134.1 at March 31, 2004 were relatively
unchanged from $133.4 million at December 31, 2003. 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 $448.9 million at March 31, 2004
increased 11.1% from $404.0 million at December 31, 2003. The Bank has
offered time deposit promotions during this quarter; however, the low rate
environment makes it difficult to attract new deposits.
As of March 31, 2004, non-interest bearing deposits equaled $66.3 million
compared to $61.4 million at December 31, 2003. The Bank's transaction
accounts have significant changes in daily balances, mainly due to deposits
held by large business 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 $776.9 million at March 31,
2004 compared to $733.9 million at December 31, 2003, increasing 5.9%.
The following is an analysis of the loan portfolio.
Type of Loan
(in thousands)
March 31, December 31,
2004 2003
-------- --------
Real estate - mortgage $539,308 $495,538
Real estate - construction 25,421 26,271
Commercial loans 214,481 214,000
Consumer installment loans 5,979 6,185
-------- --------
785,189 741,994
Deferred loan fees and discount (896) (838)
Allowance for loan losses (7,392) (7,299)
-------- --------
TOTAL $776,901 $733,857
======== ========
The SBA loan program continues to be a popular program; however,
competition remains very strong in our market areas. At March 31, 2004,
total SBA (7a) guaranteed loans equaled $194.9 million, net of $51.9
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 $130.7 million at March 31, 2004 compared to $92.0 million at
March 31, 2003.
The Bank continues to emphasize commercial and real estate lending. At
March 31, 2004, 27.3% of the loans held for investment were commercial
loans and 71.9% were real estate and construction loans, compared to 28.8%
and 70.3% respectively at December 31, 2003. 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 slightly to $25.4 million at March 31, 2004
from $26.3 million at December 31, 2003. 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 .8% of the total loan
portfolio at March 31, 2004 and December 31, 2003.
Allowance for Loan Losses
The allowance for loan losses equaled $7,392,000 at March 31, 2004,compared
to $7,299,000 at December 31, 2003. At March 31, 2004, the allowance for
loan losses equaled 1.1% 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, 2004, there were three borrowers on non-accrual totaling
$454,000 with $424,000 of that amount collateralized by real estate and
$69,000 of it also guaranteed by the SBA. There were no loans past due 90
days or more. Loans past due 30 to 89 days totaled $4,476,000, with
$4,475,000 of that amount collateralized by real estate and $219,000
guaranteed by the SBA. At December 31, 2003, the Bank had $1,274,000 in
non-accrual loans and no loans past due 90 or more days and still accruing
interest. Past due 30 to 89 days totaled $1,950,000 at December 31, 2003.
During the first quarter of 2004, there were loans charged off totaling
$135,000 and $2,000 in loan recoveries. The large charge off for
approximately $135,000 occurred preceding the foreclosure on a loan secured
by real estate which was recorded as other real estate owned and sold
during the quarter. 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, 2004
--------------
Balance - Beginning of period $7,299
Provision for loan losses 225
Charge offs (135)
Recoveries 3
------
Balance - End of period $7,392
======
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, 2004, the
Bank was considered "well capitalized." The total risk-based capital
ratios were 11.3% for the Bank and 11.6% for the Corporation compared to
11.4% and 11.7% at December 31, 2003.
The Corporation declared a 5% stock dividend on March 16, 2004 with a
record date of May 3, 2004. 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 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 $38,621 $2,177
+100 37,539 1,095
Base Scenario 36,444 -
-100 36,156 (288)
-200 34,893 (1,551)
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, 2004 of assets, liabilities and shareholders' equity classified
by earliest possible repricing opportunity or maturity date.
Non-rate
Over Over Sensitive
3 months 1 year or
Through 3 through through Over
Balance Sheet months 1 year 5 years 5 years Total
(in thousands) -------- -------- -------- -------- -------
Assets
Fed funds sold &
certificates of deposit $87,552 $87,552
Investment securities 625 $7,170 7,795
Loans (net of discounts) 379,366 $201,458 $197,259 6,210 784,293
Non-interest-earning
assets (net of allowance
for loan losses)
-------- -------- -------- -------- --------
24,873 24,873
$467,543 $201,458 $197,259 $38,253 $904,513
======== ======== ======== ======== ========
Liabilities &
Shareholders' Equity
Time Deposits $100,000
and over $43,149 $59,444 $90,298 $192,891
All other interest-
bearing liabilities 251,387 185,374 131,250 $198 568,209
Non-interest bearing
liabilities 71,894 71,894
Shareholders' Equity 71,519 71,519
-------- -------- -------- -------- -------
$294,536 $244,818 $221,548 $143,611 $904,513
======== ======== ======== ======== ========
Interest Rate Sensitivity (1) $173,007 ($43,360) ($24,289) ($105,358)
Cumulative Interest
Rate Sensitivity $173,007 $129,647 $105,358 $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-15(e). 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. No change in internal control over financial
reporting, as defined in Securities and Exchange Act Rule 15d-15(f),
occurred during the fiscal quarter ended March 31, 2004 that has materially
affected or is reasonably likely to materially affect the Corporation's
internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None other than in the ordinary course of business.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
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).
(31) Rule 13a-14(a)/15d-14(a) Certifications
(32) Section 1350 Certification
b. Reports on Form 8-K
(i) Form 8-K, filed on April 20, 2004, reporting, under Items 7 and 12,
first quarter of 2004 results.
(ii) Form 8-K, filed on March 19, 2004, reporting under Items 5 and 7,
a 5% stock dividend and the appointment of two new directors of
Sonoma National Bank.
(iii) Form 8-K, filed on January 21, 2004 reporting under Items 7 and 9,
fourth quarter of 2004 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: May 4, 2004
- --------------------------
/s/ Deborah A. Meekins /s/ Jane M. Baker
- ------------------------------------- -------------------------------
Deborah A. Meekins Jane M. Baker
President and Chief Executive Officer Chief Financial Officer
Exhibit 31
Rule 13a-14(a)/15d-14(a) 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: May 4, 2004
Signature /s/ Deborah A. Meekins
-------------------------------
Deborah A. Meekins, President
and Chief Executive Officer
Rule 13a-14(a)/15d-14(a) 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: May 4, 2004
Signature /s/ Jane M. Baker
--------------------------
Jane M. Baker,
Chief Financial Officer
Exhibit 32
SECTION 1350 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, 2004, and to which the
Certification is attached as Exhibit 32, 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 4, 2004
/s/ Deborah A. Meekins /s/ Jane M. Baker
- ----------------------- ------------------------
Deborah A. Meekins Jane M.Baker
President and Chief Chief Financial Officer
Executive Officer