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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, 2005
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
of incorporation or organization) Identification No.)
801 Fourth Street, Santa Rosa, California 95404
-------------------------------------------------------
(Address of principal executive offices) (Zip code)
707-579-2265
-----------------------------------------------------
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange act). Yes X No ___
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, 2005: 9,860,857
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS March 31, 2005 December 31, 2004
(unaudited)
Cash and equivalents:
Cash and due from banks $ 23,377 $ 21,006
Federal funds sold 98,245 95,498
---------- ----------
Total cash and equivalents 121,622 116,504
Investment securities available-for-sale 1,072 1,082
Federal Home Loan Bank
(FHLB) stock, at cost 10,994 9,020
Federal Reserve Bank stock, at cost 254 254
Loans receivable, net 986,870 938,104
Leasehold improvements and
equipment, net 2,702 2,709
Accrued interest receivable
and other assets 13,958 13,251
---------- ----------
Total assets $1,137,472 $1,080,924
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 802,477 $ 791,025
FHLB Advances 233,904 191,912
Accrued interest payable
and other liabilities 6,981 8,109
---------- ----------
Total liabilities 1,043,362 991,046
---------- ----------
Shareholders' equity:
Common stock, no par value;
authorized, 40,000,000 shares;
shares issued and outstanding,
10,354,089 at March 31, 2005 and
10,346,770 at December 31,2004
(March 31, 2005 and December 31,
2004 have been restated for 5%
stock dividend) 47,341 47,302
Additional paid-in-capital 7,681 7,681
Accumulated other comprehensive
income (loss) (17) (10)
Retained earnings 39,105 34,905
---------- ----------
Total shareholders' equity 94,110 89,878
---------- ----------
Total liabilities and
shareholders' equity $1,137,472 $1,080,924
========== ==========
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 per share data) 2005 2004
Interest income:
Loans $ 15,949 $ 12,042
Federal funds sold and
investment securities 706 249
------- -------
Total interest income 16,655 12,291
Interest expense 5,471 3,333
------- -------
Net interest income before
provision for loan losses 11,184 8,958
Provision for loan losses 525 225
------- -------
Net interest income after
provision for loan losses 10,659 8,733
------- -------
Other income:
Service charges on deposits 128 128
Gain on sale of loans 512 451
Other 203 396
------- -------
Total other income 843 975
------- -------
Other expenses:
Salaries and employee benefits 2,616 2,413
Occupancy 424 306
Equipment 254 201
Business development,
advertising and donations 191 143
Outside customer services 77 93
Shareholder & director expenses 115 59
Deposit and other insurance 129 111
Professional fees 212 104
Other 368 321
------- -------
Total other expenses 4,386 3,751
------- -------
Income before income taxes 7,116 5,957
Provision for income taxes 2,916 2,376
------- -------
Net income $ 4,200 $ 3,581
======= =======
Earnings per common share $ 0.41 $ 0.36
======= =======
Earnings per common share
assuming dilution $ 0.39 $ 0.31
======= =======
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)
2005 2004
Cash flows from operating activities:
Net income $ 4,200 $ 3,581
Adjustments to reconcile net income
to net cash from operating activities:
Provision for loan losses 525 225
Depreciation and amortization 195 139
FHLB Stock dividends (115) (165)
Change in deferred income taxes 553 -
Gain on sale of loans (512) (451)
Changes in operating assets
and liabilities:
Change in deferred loan fees
and discounts 53 58
Change in interest receivable
and other assets (1,260) (870)
Change in accrued interest payable
and other liabilities (1,348) 2,385
-------- --------
Net cash provided by operating activities 2,291 4,902
-------- --------
Cash flows from investing activities:
Proceeds from maturity of available
for sale securities 3 5
Purchase of FHLB stock (1,859) (879)
Net increase in loans receivable (48,611) (42,876)
Purchase of leasehold improvements
and equipment, net (188) (140)
Net cash used by investing activities (50,655) (43,890)
Cash flows from financing activities:
Net change in deposits 11,452 29,924
Net change in FHLB advances 41,991 19,992
Proceeds from exercise of stock options 39 406
-------- --------
Net cash from financing activities 53,482 50,322
-------- --------
Net change in cash and cash equivalents 5,118 11,334
Cash and cash equivalents,
at beginning of year 116,504 94,574
-------- --------
Cash and cash equivalents,
at end of period $121,622 $105,908
======== ========
Supplemental cash-flow information:
Interest paid $ 5,226 $ 3,189
======== ========
Income taxes paid $ 3,950 $ 2
======== ========
See Notes to Consolidated Financial Statements
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
March 31, 2005
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, 2005 and the results of operations for the three
months then ended. The results of operations for the three months ended
March 31, 2005, are not necessarily indicative of the operating results
to be anticipated for the year ending December 31, 2005.
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 2004 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 22, 2005 and March 16, 2004.
Earnings per share on a diluted basis are calculated based on the
average number of shares outstanding including options at the time.
There was a substantial reduction in the number of options in November
2004. The Corporation's EPS data is as follows:
For the three For the three
months ended months ended
March 31, 2005 March 31, 2004
--------------------------------- --------------------------------
Per Per
Income/ Shares/ Share Income/ Shares/ Share
Numerator Denominator Amount Numerator Denominator Amount
---------- ----------- ------ --------- ----------- ------
Net Income $4,200,000 $3,581,000
========== ==========
EPS-Income available
to common stockholders $4,200,000 10,348,724 $0.41 $3,581,000 10,017,092 $0.36
========== ==========
Effect of Dilutive
Securities- Stock
Options 429,562 1,547,806
---------- ----------
EPS assuming dilution-
Income available to
common stockholders
plus assumed conversion $4,200,000 10,778,286 $0.39 $3,581,000 11,564,898 $0.31
========== ========== ===== ========== ========== =====
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 December 31, 2002, 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) 2005 2004
------ ------
Net Income for the period $4,200 $3,581
Compensation expense, net of tax effect 33 18
------ ------
Proforma net income $4,167 $3,563
====== ======
Proforma earnings per common share $0.40 $0.36
Proforma earnings per common share,
assuming dilution $0.39 $0.31
No options were granted in the first quarter of 2005 or 2004.
Note 4 - Comprehensive Income
The Corporation's total comprehensive earnings presentation is as
follows:
For the three months ended March 31,
(In thousands) 2005 2004
------ ------
Net Income $4,200 $3,581
------ ------
Other Comprehensive income (loss):
Change in unrealized holding gain (losses)
arising during the period (25) (3)
Income tax benefit (expense) 18 1
------ ------
Net Other Comprehensive income (loss): (7) (2)
------ ------
Comprehensive income $4,193 $3,579
====== ======
Note 5 - Common Stock Dividend
On March 22, 2005 the Board of Directors declared a 5% stock dividend
payable on May 31, 2005 to shareholders of record on May 2, 2005.
Retained earnings have 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) 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
consultants, and assessment of economic conditions. The allocated and
unallocated components represent the total allowance for loan losses
that management estimates is adequate to 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 regarding the inherent losses which are
highly uncertain, 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
may 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 of 1934,
which include 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 their 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 $1,137,472,000 at March 31, 2005, grew
$56.5 million during the first quarter compared to $1,080,924,000 at
December 31, 2004. Net loans increased $48.8 million in the first
quarter of 2005. Cash and equivalents increased $5.1 million during the
first quarter.
The net income after tax for the first three months of 2005 equaled
$4,200,000 compared to $3,581,000 for the comparable period of 2004, an
increase of 17.3%. Increased profit resulted primarily from growth in
net interest income due to loan growth.
Net Interest Income
Net interest income (before the provision for loan losses) of
$11,184,000 for the first quarter of 2005 increased 24.8% from
$8,958,000 for the comparable period last year. This increase in net
interest income resulted primarily from volume increases of $233.1
million in average earning assets for the current quarter compared to
the first quarter of 2004. Average investments, average funds held in
interest bearing accounts and average Fed Funds investments increased
$22.9 million during the first quarter of 2005. Average interest
bearing deposits for the first quarter increased $110.7 million over
the same period last year and average borrowings with the Federal Home
Loan Bank increased $81.1 million.
The net interest margin equaled 4.19% during the first quarter of 2005
compared to net interest margin for the first quarter of 2004 of 4.25%
and 4.20% for the year ended December 31, 2004. The yield on average
loans equaled 6.65% in the first quarter compared to 6.36% for the same
period last year, while the Bank's cost of funds increased to 2.39% for
the first quarter of 2005 from 1.82% for the first quarter of 2004.
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 increase or decrease the Fed Funds and Discount rates have a direct
impact on the Bank's net interest margin since prime rate and other
market indices generally move in response to Federal Reserve Board
actions. During 2004 prime rate increased to 5.25% at year end. During
the first quarter of 2005 prime rate has increased 50 basis points to
5.75%. There are no assurances that earnings will not be adversely
impacted by future actions of the Federal Reserve Board and changes in
market interest rates.
The full impact of rate changes on the Bank's earnings are not realized
for several months, since not all loans or deposits reprice immediately.
The majority of SBA loans is tied to the prime rate and reprice on a
calendar quarter basis. The Bank also has adjustable rate loans, mainly
commercial real estate loans, which are tied to a variety of indices
including the Eleventh District Cost of Funds Index (COFI), LIBOR, the
six-month constant maturity treasury (CMT) and the five-year CMT. Each
of these indices reacts to changes in market interest rates at different
speeds and magnitudes. 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 $996.8 million at March 31, 2005,
$544.2 million or 54.6% of total loans were adjustable rate loans which
had not reached a floor or ceiling rate. Of that total, approximately
$327.7 million were prime-based loans, of which $102.8 million reprice
when prime changes and $224.9 million reprice on a quarterly basis.
Market rates also impact the Bank's ability to attract deposits and grow
the loan portfolio. The current relatively 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
their existing loans with loans at more attractive rates.
Interest rates offered on deposits have increased due to an increasing
interest rate environment. The Bank has responded to the highly
competitive rate environment by increasing rates, especially savings and
certificate of deposit rates. The Bank had $112.7 million in Sonoma
Investor Reserve accounts (money market rate deposit accounts) at March
31, 2005. The cost of these deposits equaled 1.43% during the first
quarter of 2005 and 1.08% for the first quarter last year.
The Bank had $519.8 million in time certificates of deposits. These
accounts reprice at the time the certificate matures which delays the
impact for rising interest rates. The Bank has offered competitive
market rates for deposits when compared to other financial institutions
in our area. The cost of time deposits equaled 2.65% for the first
quarter of 2005 compared to 2.35% in the first quarter of the preceding
year.
* Level of Loans Relative to Deposits
The Bank's ratio of loans-to-deposits increased to an average of 122.0%
in the first quarter of 2005 compared to 114.1% 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 Loans 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
$705.2 million at this quarter end from $663.6 million at December 31,
2004. The yield on this category was 6.65%, which equaled the yield on
the entire loan portfolio for the quarter. 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 were relatively unchanged at $42.1 million at the end
of this quarter compared to $41.1 million at December 31, 2004. During
the first quarter construction lending activity remained strong.
Residential construction lending continues to benefit from competitive
and continued low rates on residential mortgages. The Bank's
Construction loans yielded 7.45% in the first quarter compared to 7.48%
for the first quarter of last year. Construction loans generally have
higher yields than other real estate loans. General economic conditions
greatly influence the demand for construction loans and there are no
guarantees that the current level of construction lending will continue.
SBA loans totaling $224.3 million at March 31, 2005, which generally are
secured by real estate, are classified as commercial loans. Commercial
loans totaled $243.5 million at March 31, 2005 compared to $236.7
million at December 31, 2004. Under the SBA's 504 program 55% of the
loan is funded by the Bank compared to 100% of loan amount 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%. Under the current 7(a) program the maximum guaranty amount was
increased to $1.5 million last year, providing for a $2 million limit on
each 7 (a) loan. The 7 (a) loan program was approved at an
authorization level of $16.5 billion last year. This provides for a
more stable loan program as it eliminates the appropriation battles that
have historically hampered the program resulting in periodic caps and
program shut downs. The zero subsidy was achieved by increasing
borrower and bank fees. Budget funds are no longer appropriated to fund
the program, hence there is a zero subsidy from the government. Should
the default rates within the program increase dramatically, the borrower
and bank fees could rise, thereby impacting the profitability of the
program for the Bank. 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. The
increasing interest rate environment has resulted in higher rates on
loans. The structure of the variable interest rate loans determines how
often and how rapidly interest rates increases on loans. Refinancing
activity continues to be strong as borrowers seek loan products which
will reduce their interest cost during an increasing rate environment.
The Bank offers loan products tied to prime rate, U.S. Treasury rates or
LIBOR which may have lower interest rates at the time of funding but
reprice at a faster rate than loans tied to COFI. 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, 2005, the Bank had $292,000 in non-accrual loans or
0.03% of total loans compared to $311,000 at December 31, 2004. 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 impact to the Bank's cost of funds in a upward interest
rate market. Sonoma Investor Reserve accounts are repriced weekly at
the discretion of the Bank. The impact of increasing interest rates is
more immediate since all balances will earn at the higher rates at the
time of a rate change. Competition also is a factor in the repricing of
certain deposit products. In an increasing rate environment deposit
rates are monitored to be competitive in the market place to retain
existing deposits and when liquidity is needed higher rates are offered
to attract new deposits to fund growth. The Bank also has a borrowing
line with the Federal Home Loan Bank (FHLB) which has been used as a
source of funding balance sheet growth and liquidity. The initial
borrowing rates are generally 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 2005, the Bank
increased borrowed funds from the FHLB by $42 million. The cost of
variable rate advances was generally 100 basis points below the current
offering rate on deposits of similar term.
Interest expense increased to $5,471,000 in the first quarter of 2005
from $3,333,000 in the first quarter of 2004. A major factor was the
increase in funds borrowed from the FHLB to fund loan growth and the
increase in the cost of these prime based advances to 2.70% in this
quarter from 1.31% for the same period last year. In addition, the
average cost of interest bearing deposits increased to 2.30% from 1.93%
when comparing the first quarter of this year to the first quarter of
last year. The following is an analysis of the net interest margin:
Three months ended Three months ended
March 31, 2005 March 31, 2004
(dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
Earning assets (1) $1,081,289 $16,655 6.25% $848,211 $12,291 5.83%
Interest bearing
liabilities 928,742 5,471 2.39% 736,985 3,333 1.82%
------- ------
Net interest income $11,184 $8,958
======= ======
Net Interest income
to earning assets 4.19% 4.25%
==== ====
(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, 2005 and
2004. Changes not solely attributable to rate or volume have been
allocated to rate.
For the three months ended March 31, 2005
over March 31, 2004
(dollars in thousands)
Yield
Volume /Rate Total
------ ------ ------
Increase (decrease)
in interest income:
Portfolio loans $3,427 $480 $3,907
Investment securities and other
interest bearing investments 41 16 57
Federal funds sold 41 359 400
------ ------ ------
Total increase (decrease) 3,509 855 4,364
------ ------ ------
Increase (decrease) in interest expense
Interest-bearing transaction accounts 61 226 287
Time deposits 510 357 867
Other borrowings 261 723 984
------ ------ ------
Total increase (decrease) 832 1,306 2,138
------ ------ ------
Increase (decrease) in net interest income $2,677 ($451) $2,226
====== ====== ======
Provision for Loan Losses
The provision for loan losses for the three months ended March 31, 2005,
amounted to $525,000 compared to $225,000 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.
Non-Interest Income
Other income is derived primarily from service charges, SBA loan sales,
SBA loan servicing and sales of other real estate owned. Other income
decreased to $843,000 from $975,000 when comparing the first quarter of
2005 to the same period last year. The majority of the decrease results
from a gain on the sale of other real estate owned which equaled
$183,000 in the first quarter of 2004 compared to no sales in this
quarter.
The following table sets forth non-interest income by category for the
periods indicated.
(in thousands) Three months ended March 31,
2005 2004
---- ----
Gains on loan sales $512 $451
Service charges on deposits 128 128
Other Service charges 56 49
Loan servicing fees 105 97
Income on insurance policies 24 34
Gain on OREO sales - 183
Other 18 33
---- ----
Total Other Income $843 $975
==== ====
The increase in gains on the sale of the guaranteed portion of SBA loans
results from the increase in the volume of loan sales with $4.5 million
sold in the first quarter of this year compared to $4.0 million in the
first quarter of 2004. 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 2005 increased over those received during the first quarter
of last year. The average percent gain on sales in the first quarter of
2005 equaled 11.5% compared to 11.4% for the first quarter of 2004.
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 servicing fees are based on loan payments and payoffs received on
the sold potion of SBA loans, and therefore, vary from quarter to
quarter. The Bank's average SBA loan portfolio serviced was $53.8
million in the first quarter of 2005 compared to $49.2 million for the
same period last year. The serviced portfolio reflects SBA loan payoffs
and volume of new sales during the period.
There can be no assurances that the SBA program will continue to
generate significant amounts of other non-interest income in the future.
The governmental actions may alter the SBA program at any time, which
could have a negative impact on the Bank's profits.
The Bank did not hold any OREO property during the first quarter of 2005
and therefore there were no OREO sales during this quarter. During the
first quarter of 2004 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 first quarter of 2004.
Non-Interest Expenses
For the first quarter of 2005, non-interest expense totaled $4,386,000,
an increase of 17.0%. The following table outlines the components of
non-interest expense for the periods indicated:
(In thousands) Quarters Ended March 31, Percentage
Expense Item 2005 2004 Change
------ ------ ----
Salaries & Employee Benefits $2,616 $2,413 8.4%
Occupancy 424 306 38.6
Equipment 254 201 26.4
Advertising/Business
Development/Donations 191 143 33.6
Outside Customer Services 77 93 (17.2)
Director & Shareholder expenses 115 59 94.9
Deposit and Other Insurance 129 111 16.2
Postage & courier expenses 101 81 24.7
Professional Fees 212 104 103.8
Stationery & Supplies 75 67 11.9
Telephone expense 51 41 24.4
Loan expenses 19 54 (64.8)
Other 122 78 56.4
------ ------ ----
TOTAL $4,386 $3,751 17.0%
====== ====== ====
Most of the Bank's expense categories increased as a result of Bank
expansion. The San Rafael branch opened in the third quarter of 2004
and the Walnut Creek branch opened this April. Petaluma and Concord
branch locations are currently in process of construction. The Bank
also relocated its lending functions and certain administrative
departments to a larger location in Santa Rosa during the second quarter
last year and also expanded the operations center's premises in mid
2004. In addition to those mentioned below, increases in postage &
courier, stationery & supplies and telephone expenses grew due to the
Bank's expansion.
The increase in salaries and employee benefits results primarily from an
increase in staff with the Bank's full time equivalent (FTE) staff
positions increasing to 155 for March 2005 compared to 141 for March
2004. The increase in staff is mainly caused by new staff hired for the
new branches. Personnel costs are also affected by annual salary
increases, incentives based upon production goals and changes in
insurance and benefit costs.
Occupancy expenses increased due to the expansion discussed above.
Occupancy expenses will continue to increase as and if the Bank
continues to expand. Growth in equipment costs was also caused by Bank
expansion. The Bank continues to upgrade computer equipment, which
should result in an increase in these costs. In 2004, the Bank purchased
equipment for imaging of bank documents and customer checks which has
resulted in operational efficiencies and better service for our
customers.
Advertising, business development and donations increased due to
expansion to new locations which required additional publicity.
Regulatory assessments and FDIC insurance costs 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 fees significantly increased in legal, consulting costs for
our internal controls review, and accounting costs associated with SEC
reporting and compliance with new regulations, such as the Sarbanes
Oxley Act. 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. Professional fees were incurred
as part of the preparation of the application filed with NASDAQ for the
listing of the Company's common stock on the NASDAQ National Market. It
is expected that the cost of professional services will continue to
increase with the expansion of the Bank.
Outside customer services vary depending upon the costs incurred by
analysis customers. The Bank pays for certain direct costs (i.e.:
payroll services, escrow fees, etc.), which are included in non-interest
expense. 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 have the option of
paying for covered services, or increasing their average balances to
increase the earnings on their accounts. These expenses vary depending
upon the cost of services incurred by the analysis customers.
Shareholder and director expenses were impacted by the addition of two
new Bank directors in March of 2004 after the resignation of a director
at the end of 2003. In comparison, expenses in this category during the
first quarter of 2003 equaled $94,000, dropped to $59,000 in the first
quarter of 2004 and increased to $115,000 in this quarter. Included in
this category are directors' fees for attending Board, Loan Committee,
ALCO, Executive Committee and Audit Committee meetings. The cost of the
Corporation's annual report, transfer agent fees and other costs of
communicating with shareholders are also included in this expense
category.
Loan expenses vary depending upon the level of problem loans and the use
of contracted loan services to assist staff during periods of high loan
production. The Bank generally charges for direct costs associated with
loan originations. Due to the low level of problem loans during this
quarter, these costs were minimal. The Bank also had adequate staff to
handle the loan volume during this quarter, which reduced the need for
contracted services.
Income Taxes
The effective tax rate was 41.0% for the first quarter of 2005, compared
to 39.9% for the first quarter of last year. The increase was partially
caused by the higher federal tax rate due to the Bank's level of income.
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
deposits totaled $121.6 million or 10.7% of total assets at March 31,
2005, compared to $116.5 million or 10.8% of total assets at December
31, 2004. The Bank sold $4.5 million in SBA loans during the first
quarter of 2005. The Bank also increased borrowings from the Federal
Home Loan Bank by $42 million. Bank deposits increased 1.4% to $802.5
million during the first quarter of 2005. The Bank has offered and
continues to offer special rates on time deposit promotions to attract
new deposits to contribute to projected loan growth. Management used
borrowing from the FHLB to fund loan growth at favorable rates as
compared with current rates 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 transaction can typically be completed within 30 days.
As of March 31, 2005, the Bank held $152.7 million in SBA guaranteed
loans which could be sold for additional liquidity.
At March 31, 2005, the Bank had unused federal funds lines of credit
totaling $26,000,000. The Bank also has a credit line with the Federal
Home Loan Bank which is based upon the value of collateral (investments
and loans). At March 31, 2005, the Bank had collateral pledged which
would allow the Bank to borrow up to $288.8 million. The FHLB will
permit the Bank to borrow up to 35% of the Bank's total assets provided
that adequate collateral has been pledged to the FHLB. At March 31,
2005, the Bank had borrowed $233.9 million, which left $54.9 million
available to borrow. Management believes this amount of secondary
liquidity is adequate to meet any cash demands that may arise.
At present, the Corporation's primary sources of liquidity are from
interest on deposits, exercise of stock options and dividends from the
Bank. The Bank's ability to pay dividends to the Corporation is subject
to the restrictions of the national banking laws and, under certain
circumstances, the approval of the Comptroller of the Currency. At
March 31, 2005, the Corporation had non-interest and interest bearing
cash balances of $10.7 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 2005, deposits increased to $802.5 million
compared to $791.0 million at the end of the year.
The following table outlines the components of deposits on the dates
indicated:
(in thousands)
March 31, 2005 December 31, 2004
-------------- -----------------
Non-interest bearing
demand deposits $80,472 $72,156
Interest bearing
transaction accounts 202,195 210,959
Time certificates, $100,000
and over 232,928 228,838
Other time certificates 286,882 279,072
-------- --------
$802,477 $791,025
======== ========
Demand deposits and interest bearing transaction account balances vary
depending upon the activity of customers. Approximately 51% of these
accounts are business accounts which tend to be more volatile than
consumer deposits. During the first quarter, a large depositor withdrew
over $10 million, which accounts for the decline in transactions
accounts. Money market accounts, which are included in interest bearing
transactions accounts, have been very competitively priced by Bank
competitors. The money market account is a limited transaction account
with a discretionary rate set by management. The Bank has tried to
remain competitive without offering the highest rates, which has made
retention of these accounts more challenging as market rates have
increased over this quarter. The Bank offered a new saving product at a
more competitive rate and was successful in attracting new money into
that account. Many depositors continue to retain funds in transaction
accounts rather that locking in time certificate rates even though rates
on time certificates have improved due to the increasing interest rate
market. These funds are also more volatile and fluctuate during various
business cycles.
Certificates of deposit totaled $519.8 million at March 31, 2005 with a
modest increase of 1.4% over $507.9 million at December 31, 2004. The
Bank has offered time deposit promotions during this quarter.
Competition has increased with a new community bank opening this quarter
and other competitors offering similar rates and products, which has
made it more challenging to attract new deposits.
The interest rate environment and the increased competition have 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 $986.9 million at March
31, 2005 compared to $938.1 million at December 31, 2004, increasing
5.2% during the first quarter. The following is an analysis of the loan
portfolio.
Type of Loan
(in thousands)
March 31, December 31,
2005 2004
-------- --------
Real estate - mortgage $705,232 $663,620
Real estate - construction 42,097 41,145
Commercial loans 243,545 236,718
Consumer installment loans 5,927 6,193
-------- --------
996,801 947,676
Deferred loan fees and discount (907) (852)
Allowance for loan losses (9,024) (8,719)
-------- --------
TOTAL $986,870 $938,104
======== ========
The SBA loan program continues to be a popular program; however,
competition remains very strong in our market areas. At March 31, 2005,
total SBA (7a) guaranteed loans equaled $224.3 million, net of $54.1
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 7(a) program is now operating at a zero
subsidy thereby removing the budget considerations at the Federal
government level. With a $16.5 billion dollar authorization level, the
program will not be subject to any limitations on funding. Major
changes to the default rates and subsequent subsidy calculation 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 $152.7 million at March 31, 2005 compared to $130.7 million
at March 31, 2004.
The Bank continues to emphasize commercial and real estate lending. At
March 31, 2005, 24.4% of the loans held for investment were commercial
loans and 75.0% were commercial and residential real estate and
construction loans, compared to 25.0% and 74.4% respectively at December
31, 2004. 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 60-75% 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 have maintained at $42.1 million at March 31, 2005 up
from $41.1 million at December 31, 2004. 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 equity lines of credit on a limited basis.
The Bank has a small portfolio of consumer loans which equaled 0.6% of
the total loan portfolio at March 31, 2005 and 0.8% at December 31,
2004.
Allowance for Loan Losses
The allowance for loan losses equaled $9,024,000 at March 31, 2005,
compared to $8,719,000 at December 31, 2004. At March 31, 2005, 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, 2005, there were two borrowers on non-accrual totaling
$292,000 with $264,000 of that amount collateralized by real estate and
$198,000 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 $5,429,000, with
$5,427,000 of that amount collateralized by real estate and $289,000
guaranteed by the SBA. At December 31, 2004, the Bank had $311,000 in
non-accrual loans and $777,000 in loans past due 90 or more days and
still accruing interest. Past due 30 to 89 days totaled $5,368,000 at
December 31, 2004.
During the first quarter of 2005, there were no loans charged off and
there were no recoveries on loans previously charged off. 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, 2005
Balance - Beginning of period $8,719
Reclassification to other liabilities (220)
Provision for loan losses 525
Charge offs 0
Recoveries 0
------
Balance - End of period $9,024
======
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,
2005, the Bank was considered "well capitalized." The capital ratios
for the Bank and the Corporation are presented in the following table.
Sonoma National Bank Northern Empire Bancshares
March 31, December 31, March 31, December 31,
2005 2004 2005 2004
Tier 1 leverage ratio 7.5% 7.6% 8.5% 8.6%
Tier 1 risk-based
capital ratio 9.8% 9.7% 11.1% 11.1%
Total risk based
capital ratio 10.9% 10.8% 12.2% 12.1%
The Corporation declared a 5% stock dividend on March 22, 2005 with a
record date of May 2, 2005. 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 $42,228 ($700)
+100 42,777 (151)
Base Scenario 42,928 -
- -100 42,914 (14)
- -200 34,893 498
The model utilized by management to create the report presented above
makes numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit runoff and should not be relied upon
as indicative of actual future results. Computations do not contemplate
any actions that ALCO could undertake in response to changes in interest
rates. Actual results could differ significantly from those estimates,
which would result in significant differences in the calculated
projected change.
Interest rate risk management is a function of the repricing
characteristics of the portfolio of assets and liabilities. Interest
rate risk management focuses on the maturity structure of assets and
liabilities and their repricing characteristics during periods of
changes in market interest rates. Effective interest rate risk
management seeks to ensure that both assets and liabilities respond to
changes in interest rates within an acceptable time frame, thereby
minimizing the effect of interest rate movements on net interest income.
Interest rate sensitivity is measured as the difference between the
volume of assets and liabilities in the current portfolio that is
subject to repricing at various time horizons. The differences are known
as interest rate sensitivity gaps.
The following schedule represents interest rate sensitivity profile as
of March 31, 2005 of assets, liabilities and shareholders' equity
classified by earliest possible repricing opportunity or maturity date.
Balance Sheet
(in thousands)
Over Over Non-rate
Through 3 months 1 year Sensitive
3 through through or Over
months 1 year 5 years 5 years Total
-------- -------- -------- -------- ----------
Assets
Fed funds sold &
certificates of deposit $98,245 $98,245
Investment securities 1,072 $11,248 12,320
Loans (net of discounts) 466,279 $196,822 331,755 1,038 995,894
Non-interest-earning assets
(net of allowance for
loan losses) 31,013 31,013
-------- -------- -------- -------- ----------
$564,524 $196,822 $332,827 $43,299 $1,137,472
======== ======== ======== ======== ==========
Liabilities &
Shareholders' Equity
Time Deposits $100,000
and over $73,354 $134,284 $25,290 $232,928
All other interest-bearing
liabilities 518,573 164,661 39,552 $195 722,981
Non-interest bearing
liabilities 87,453 87,453
Shareholders' Equity 94,110 94,110
-------- -------- -------- -------- ----------
$591,927 $298,945 $64,842 $181,758 $1,137,472
======== ======== ======== ======== ==========
Interest Rate
Sensitivity (1) ($27,403) ($102,123) $267,985 ($138,459)
Cumulative Interest
Rate Sensitivity ($27,403) ($129,526) ($138,459) $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, 2005 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) Restated Articles of Incorporation, as amended through
December 1, 2003 (filed as Exhibit (3)(d) to the
Corporation's Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 2003, file number 2-9116, and
incorporated herein by this reference).
(b) Secretary's certificate of Amendment to the Bylaws
of the Corporation and revised Bylaws (filed as Exhibit
(3)(b) to the Corporation's Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 2004 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 25, 2005, reporting, under Items 2.02
and 9.01, financial results for the first quarter of 2005.
(ii) Form 8-K, filed on March 23, 2005, reporting under Items 8.01
and 9.01, a 5% stock dividend
(iii) Form 8-K, filed on February 25, 2005, reporting under Item 8.01
and 9.01, announcing intent to file a listing application with
NASDAQ.
(iv) Form 8-K, filed on January 26, 2005 reporting under Items 2.02
and 9.01, 2004 financial results.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTHERN EMPIRE BANCSHARES
May 9, 2005
Date: ________________________
/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. designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. 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
d. 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 9, 2005
Signature /s/ Deborah A. Meekins
---------------------------------------
Deborah A. Meekins, President and Chief
Executive Officer
Exhibit 31
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. designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. 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
d. 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 9, 2005
Signature /s/ Jane M. Baker
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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, 2005, 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 9, 2005
/s/ Deborah A. Meekins /s/ Jane M. Baker
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Deborah A. Meekins Jane M. Baker
President and Chief Executive Officer Chief Financial Officer