FORM 10-QSB


                                            SECURITIES AND EXCHANGE COMMISSION

                                                  Washington, D.C.  20549


                  [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                                              SECURITIES EXCHANGE ACT OF 1934

                                   For the quarterly period ended June 30, 1997

                                                            OR

                 [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                                              SECURITIES EXCHANGE ACT OF 1934
                                              Commission File Number 2-91196


                                                NORTHERN EMPIRE BANCSHARES
                         (Exact name of registrant as specified in its charter)

California                                          94-2830529
(State or other jurisdiction of                     (I.R.S. Employer
incorporation or organization)                      Identification No.)


                                801 Fourth Street, Santa Rosa, California 95404
                            (Address of principal executive offices) (Zip code)


                Registrant's telephone number, including area code 707-579-2265
                                                           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  and Exchange Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.
                                                         Yes X No

                                           APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

Title of class: Common Stock, no par value Outstanding shares as of July 31, 
1997: 1,553,069
Transitional Small Business Disclosure Format (check one): Yes No X


<PAGE>




PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands)

                                                                    June 30,            December 31,
                                                                       1997                   1996
<S>                                                              <C>                   <C>         
ASSETS
Cash and equivalents:

     Cash and due from banks                                     $    9,352            $     11,066
     Federal funds sold                                               2,486                  22,724
                                                                 -----------------     ------------------
         Total cash and equivalents                                  11,838                  33,790
Certificates of deposits in other financial institutions                495                   3,368
Investment securities                                                16,819                  16,132
Loans receivable, net                                               189,772                 165,681
Leasehold improvements and equipment, net                               607                     620
Accrued interest receivable and other assets                          4,764                   5,202
                                                                  -----------------    ------------------
             Total assets                                        $  224,295            $    224,793
                                                                  =================    ==================


                   LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
     Deposits                                                    $  207,550            $    209,235
     Accrued interest payable and other liabilities                     777                   1,220
                                                                 ------------------    -------------------
         Total liabilities                                          208,327                 210,455
                                                                 ------------------    --------------------
Commitments and contingencies
Shareholders' equity:
  Preferred stock, no par value; authorized, 10,000,000 shares;
  none issued or outstanding
  Common stock, no par value; authorized, 20,000,000 shares; 
  shares issued and outstanding, 
  1,550,239 in 1997 and 1,534,470 in 1996                            9,754                   9,676
  Unrealized gain on available for sale securities                       8                       0
  Retained earnings                                                  6,206                   4,662
                                                                 ------------------    --------------------
  Total shareholders' equity                                        15,968                  14,338
                                                                 ------------------    --------------------
  Total liabilities and shareholders' equity                     $ 224,295             $    224,793
                                                                 ==================    ====================
</TABLE>

See Notes to Consolidated Financial Statements


<PAGE>
<TABLE>
<CAPTION>


NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the three and six months ended June 30, 1997 and 1996
(Unaudited)

                                                                    Three Months Ended            Six Months Ended
                                                                         June 30,                 June 30,
(dollars in thousands, except per share data)                          1997         1996            1997      1996
<S>                                                                <C>         <C>              <C>          <C>    
Interest income:

     Loans                                                          $  4,668    $  3,550         $  8,987     $ 7,026
     Certificates of deposits in other financial institutions             27          80               68         159
     Federal funds sold and investment securities                        319         248              671         528
                                                                  ------------- ------------    ------------ ------------
         Total interest income                                         5,014       3,878            9,726       7,713
Interest expense                                                       2,237       1,673            4,371       3,348
                                                                  ------------- ------------    ------------ ------------
         Net interest income before provision for loan losses          2,777       2,205            5,355       4,365
Provision for loan losses                                                120          90              240         180
                                                                  -------------  ------------   ------------  ------------
         Net interest income after provision for loan losses           2,657       2,115            5,115       4,185
                                                                  -------------  ------------   ------------  ------------
Other income:
     Service charges on deposits                                          91          87              180         174
     Gain on sale of loans                                               130         253              130         267
     Other                                                               203         176              388         347
                                                                  -------------  ------------    ------------ ------------
         Total other income                                              424         516              698         788
                                                                  -------------  ------------    ------------ ------------
Other expenses:
     Salaries and employee benefits                                      879         850            1,741       1,639
     Occupancy                                                           178         174              344         353
     Equipment                                                            84          78              167         154
     Outside customer services                                            63          66              123         127
     Deposit and other insurance                                          44          38               86          70
     Professional fees                                                    38          58               78         108
     Advertising                                                         101          99              174         159
     Other                                                               261         266              497         479
                                                                 -------------   ------------     ------------ ------------
         Total other expenses                                          1,648       1,629            3,210       3,089
                                                                 -------------   ------------     ------------ ------------
             Income before income taxes                                1,433       1,002            2,603       1,884
Provision for income taxes                                               560         424            1,056         805
                                                                 -------------   ------------      ------------ ------------
             Net income                                            $     873    $    578        $   1,547      $1,079
                                                                 =============   ============    ============  ============
Common stock earnings per share                                    $    0.55    $   0.37        $    0.97      $ 0.69
                                                                 =============  ============     ============  ============
Average common shares outstanding for net income per share          1,600,525    1,574,333        1,599,808     1,573,668
calculation
                                                                
</TABLE>

See notes to Consolidated Financial Statements


<PAGE>
<TABLE>
<CAPTION>


NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1997 and 1996
(Unaudited)

(dollars in thousands)                                                                           1997                       1996
<S>                                                                                   <C>                          <C>          
Cash flows from operating activities:

Net income                                                                            $         1,547              $       1,079
Adjustments to reconcile net income to net cash provided by operating activities:
         Provision for loan losses and OREO losses                                                240                        210
         Depreciation, amortization and accretion                                                 150                        142
         Net increase (decrease) in deferred loan fees and discounts                             (112)                        30
         Decrease (increase) in interest receivable and other assets                              438                       (331)
         Increase (decrease) in accrued interest payable and other liabilities                   (443)                      (103)
                                                                                        ---------------             --------------
             Net cash provided by in operating activities                                       1,820                      1,027
                                                                                        ---------------             --------------
Cash flows from investing activities:
     Purchase of investment securities                                                        (18,375)                   (12,035)
     Maturities of investment securities                                                       17,696                     15,000
     Net decrease in deposits in other financial institutions                                   2,873                       (110)
     Net decrease (increase) in loans receivable                                              (24,219)                   (10,844)
     Purchase of leasehold improvements and equipment, net                                       (137)                      (114)
                                                                                       ---------------              --------------
             Net cash used in investing activities                                           (22,162)                     (8,103)
                                                                                       ---------------              --------------
Cash flows from financing activities:
     Net increase (decrease) in deposits                                                      (1,685)                      5,382
     Payment of cash dividends                                                                    (2)                          -
     Stock options exercised                                                                      77                          56
                                                                                       ---------------              --------------
             Net cash provided by financing activities                                        (1,610)                      5,438
                                                                                       ---------------              --------------
             Net increase (decrease) in cash and cash equivalents                            (21,952)                     (1,638)
Cash and cash equivalents at beginning of year                                                33,790                      16,288
                                                                                       ---------------              --------------
Cash and cash equivalents at end of year                                              $       11,838           $          14,650
                                                                                       ===============             ==============
Cash Flows- Suppliemental Disclosures:
  Cash paid during the period for:
     Interest on deposits and borrowings                                              $        4,389           $           3,396
                                                                                       ===============             ==============
     Income taxes                                                                     $          944           $             657
                                                                                       ===============             ==============
 Non-cash transactions:
     Additions to Other Real Estate Owned                                             $           97           $             97
                                                                                       ===============             ==============
</TABLE>

See notes to Consolidated Financial Statements


<PAGE>






Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
June 30, 1997

Note 1 - Basis of Presentation

In the opinion of  Management,  the  unaudited  interim  consolidated  financial
statements  contain all  adjustments  of a normal  recurring  nature,  which are
necessary  to  present  fairly  the  financial   condition  of  Northern  Empire
Bancshares (the  "Corporation")  and Subsidiary at June 30, 1997 and the results
of operations for the three and six months then ended.

Certain  information  and footnote  disclosures  presented in the  Corporation's
annual  consolidated  financial  statements  are not  included in these  interim
financial   statements.   Accordingly,   the  accompanying   unaudited   interim
consolidated  financial  statements  should  be read  in  conjunction  with  the
consolidated   financial   statements   and  notes   thereto   included  in  the
Corporation's  1996 Annual Report on Form 10-KSB.  The results of operations for
the three and six months ended June 30, 1997 are not  necessarily  indicative of
the operating results through December 31, 1997.

Note 2 - Net Income per Common and Common Equivalent Share

Net income per common and common equivalent share, adjusted for stock dividends,
is calculated by using the weighted average number of common shares  outstanding
during the period.

Note 3 - New and Pending Accounting Standards

Effective  January 1, 1997,  the  Corporation  adopted  Statement  of  Financial
Accounting  Standards ("SFAS") No. 125,  "Accounting for Transfers and Servicing
of Financial Assets and  Extinguishment  of Liabilities".  SFAS No. 125 provides
guidance for distinguishing  transfers of financial assets that are "sales" from
transfers that are "secured  borrowings."  This  Statement  supersedes or amends
numerous existing guidelines and earlier adoptions was not permitted.

Under  SFAS No.  125,  a  transfer  of  financial  assets  in which  control  is
surrendered  over those  assets is  accounted  for as a sale to the extent  that
consideration  other than  beneficial  interests  in the  transferred  assets is
received in the exchange.  Liabilities and  derivatives  incurred or obtained by
the transfer of financial  assets are required to be measured at fair value,  if
practicable.  Also,  any servicing  assets and other  retained  interests in the
transferred  assets must be measured by allocating  the previous  carrying value
between  the  asset  sold  and the  interest  retained,  if any,  based on their
relative  fair values at the date of transfer.  For each  servicing  contract in
existence  before January 1, 1997,  previously  recognized  servicing rights and
excess  servicing  receivables  that  do  not  exceed  contractually   specified
servicing  are  required  to be  combined,  net  of  any  previously  recognized
servicing  obligations  under that contract,  as a servicing asset or liability.
Previously recognized servicing receivables that exceed contractually  specified
servicing  fees  are  required  to  be  reclassified  as  interest-only   strips
receivable.

The Statement also requires an assessment of interest-only  strips, loans, other
receivables  or retained  interests in  securitizations.  If these assets can be
contractually  prepaid  or  otherwise  settled  such that the  holder  would not
recover substantially all of its recorded investment, the asset will be measured
like available-for-sale securities or trading securities, under SFAS No.115.

The adoption of SFAS No. 125 did not have a material affect on the Corporation's
financial statements.

In  February  1997,  the FASB issued SFAS No.  128,  "Earning  per Share."  This
statement  establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock.  This statement
simplifies the standards for computing EPS  previously  found in APB Opinion No.
15,  "Earnings  per  Share",  and makes them  comparable  to  international  EPS
standards. It replaces the presentation


<PAGE>



of  primary  EPS  with a  presentation  of  basic  EPS.  It also  requires  dual
presentation  of basic and diluted EPS on the face of the income  statements for
all entities with complex capital  structures and requires a  reconciliation  of
the numerator and  denominator of the basic EPS computation to the numerator and
denominator  of the diluted EPS  computation.  This  statement is effective  for
financial  statements issued for periods ending after December 15, 1997; earlier
application is not permitted.  Management  does not believe that the application
of this statement  will have a material  impact on the  Corporation's  financial
statements.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

Northern  Empire  Bancshares 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.

This report contains  "forward-looking  statements" as defined in section 27A of
the  Securities  Act of 1993,  as amended,  and  section  21E of the  Securities
Exchange Act of 1934, as amended, which includes statements such as projections,
plans and objectives and assumptions about the future,  and such forward looking
statements  are  subject  to the safe  harbor  created by these  sections.  Many
factors could cause the actual results,  amounts or events to differ  materially
from those the  Corporation  expects  to  achieve  or occur,  such as changes in
competition,   market  interest  rates,  economic  conditions  and  regulations.
Although  the  Corporation  has  based  its plans  and  projections  on  certain
assumptions, there can be no assurances that its assumptions will be correct, or
that its plans and projections can be achieved.

Total  consolidated  assets  equaled  $224,295,000  at June 30, 1997 compared to
$224,793,000  at  December  31,  1996.  At  year  end,  the  Bank's  assets  had
temporarily  increased by a large  short-term  deposit of $16 million which were
invested in liquid assets (Fed Funds and short-term  investments).  The majority
of this deposit was  withdrawn by January 31, 1997.  Without this large  deposit
the Bank would have  grown  $15.5  million  since  year end,  with $2.1  million
occurring  during the second quarter.  Net loans,  including loans held for sale
and bankers acceptances, increased $24.1 million since year end with $14 million
occurring  in the second  quarter.  The loan growth was funded by new  deposits,
after adjusting for the temporary deposit at year end, and from liquid assets.

Net income  for the first six  months of 1997  equaled  $1,547,000  compared  to
$1,079,000 for the  comparable  period last year, an increase of 43%. The second
quarter's net income after tax of $873,000 increased 51% over the second quarter
of 1996 when net income  equaled  $578,000.  The  higher  profit  resulted  from
increases  in net  interest  income due to loan growth (a larger  volume of high
yielding earning assets) while controlling the Bank's operating costs.

Net Interest Income

Net interest  income of $2,777,000  for the second quarter of 1997 increased 26%
from  $2,205,000  for the  comparable  period  last year.  This  increase in net
interest  income  resulted  from volume  increases  of $48.9  million in average
earning  assets for the second quarter of 1997 compared to the second quarter of
1996.  $47.8 million of that increase was in average  loans  outstanding,  which
have the highest yields of interest  earning assets.  Average  interest  bearing
deposits for the second  quarter  increased  $44.4  million over the same period
last year.

The net interest margin equaled 5.21% during the second quarter of 1997 compared
to an average  margin  during 1996 of 5.30%.  The yield on average loans equaled
9.93% in the second  quarter  compared to 10.14%  during 1996,  while the Bank's
cost of funds was 4.97%  compared to 4.96% during  1996.  The yield on loans has
been  negatively  impacted by a 50 basis point charge  applied to the guaranteed
portion of Small Business  Administration (SBA) loans booked since October 1995.
Since the guaranteed portion of SBA loans subject to this fee has increased from
$16.4  million  at June  30,  1996 to $43.6  million  as of June  30,  1997,  it
continues  to have a larger  impact on  interest  income.  The mix of loans also
impacts the overall yield on loans. During the second quarter of 1997, there was
significant  growth in real  estate  loans,  which have a lower yield than other
types of loans.  In  addition,  the Bank  invested  excess  liquidity in Bankers
Acceptances  which had an average  yield of 5.64%  during the second  quarter of
1997.  Bankers  Acceptances are classified as loans;  and therefore,  affect the
yield  calculation.  There  were no Banker  Acceptances  held  during the second
quarter of 1996.

<PAGE>

Net interest margin is also affected by the level of loans relative to deposits.
The Bank's ratio of loans to deposits increased from an average of 87.9% in 1996
to 90.0% for the year to date and 91.4% during the second  quarter of 1997.  The
Bank has been experiencing a higher loan-to-deposit ratio than in the past which
has a positive impact on profits.

The Bank is considered  asset sensitive and benefits from rate increases,  since
its assets  reprice  at a faster  rate than  deposits.  The Prime  lending  rate
increased on March 26,1997 from 8.25% to 8.5% which has a positive impact on the
Bank's interest margin. Of the Bank's loan portfolio  totaling $193.8 million at
June 30, 1997, $ 127.8 million or 65.9% of the loans are  adjustable  rate loans
which have not reached a floor or ceiling rate.  Approximately $94.9 million are
prime-based loans, of which $22.0 million reprice  immediately and $68.9 million
reprice on a quarterly  basis.  Approximately  $31.2  million of the Bank's loan
portfolio is periodically adjustable (generally every six months) based upon the
Eleventh  District's cost of funds index.  This index was 4.82% in June 1996 and
equaled 4.86% in June 1997.

Interest  expense  increased  from  $1,673,000 in the second  quarter of 1996 to
$2,237,000  in 1997.  The major  factor  was the  increase  of $44.4  million in
average  interest  bearing deposits when comparing the second quarter of 1996 to
1997. The average cost of interest  bearing deposits was 4.97% during the second
quarter of 1997 compared to 4.92% in the second quarter of 1996.

Other Income

Other  income is derived  primarily  from service  charges on deposit  accounts,
discount brokerage income, earnings on life insurance,  SBA loan servicing,  SBA
loan sales and sales of other real  estate  owned.  Other  income  decreased  to
$424,000  from $516,000  when  comparing the second  quarter of 1997 to the same
period last year.  This decline  resulted from fewer SBA loan sales occurring in
1997 compared to the second quarter of 1996.

Service charges during the quarter  increased to $91,000 from $87,000 during the
second  quarter  last year.  This  increase  results  primarily  from  growth in
transaction accounts and deposit customers on analysis.

There were  $1,454,000 in sales of SBA loans during the second  quarter of 1997,
compared  to sales of  $2,540,000  for the second  quarter of 1996.  These sales
resulted  in gains of  $130,000  during the second  quarter of 1997  compared to
$253,000 for the same period last year. The Bank has been retaining the majority
of the  guaranteed  portion of SBA loans to realize the interest  yield,  rather
than selling the  guaranteed  portion for a one time gain and then servicing the
loan  for a fee.  Management  considers  the  Bank's  liquidity  needs  and  the
estimated  loans  and  deposit  growth  as a part of the  decision  to hold  SBA
guaranteed  loans versus selling them.  There is an  established  market for SBA
guaranteed  loans which the Bank can access to sell  qualifying  SBA  guaranteed
loans.

SBA servicing fees, which totaled  $103,000 during the quarter,  increasing from
$65,000 for the same period of 1996.  The pool of loans  serviced,  on which the
Bank receives a servicing fee, equaled $38.9 million.
Service fee income has been averaging $35,000 per month during 1997.

In 1997, the Bank owned six properties  which were recorded as other real estate
owned (OREO).  During 1997, the Bank has sold four of these properties realizing
book gains totaling $23,000. While the Bank recorded gains on these sales, there
were cost  associated  with  perfecting  title to these  properties  which  were
included in loan  expenses in  accordance  with  generally  accepted  accounting
procedures. There were no sales of OREO in the first half of 1996.

Non-Interest Expenses

Deposits  and loans have grown 30% and 35%  respectively  from June 30,  1996 to
June 30,  1997;  however,  the Bank has  controlled  the growth of  non-interest
expenses to 1.2% when comparing the second quarter of 1997 to the second quarter
of 1996.  The Bank's  largest  expense  category is salaries and benefits.  This
category  increased 3.4% due to annual salary increases and four staff additions
since June 30, 1996.


<PAGE>



Occupancy  expenses  increased  2.2%,  which  resulted from rent  adjustment and
increasing  cost of building  maintenance.  Equipment costs increased to $84,000
over  $78,000 for the  comparable  quarter last year.  This  increase was due to
additional computer equipment and associated maintenance.

Deposit and other insurance of $44,000  increased $6,000 over the second quarter
of last year. Regulatory  assessments and FDIC insurance cost grew $9,000 due to
the new Financing  Corporation  (FICO) assessment which became effective January
1, 1997 and the increase in total assets which is the basis of the Office of the
Comptroller  of the Currency's  assessment.  The FDIC charged the minimum fee of
$500 during the second  quarter of 1997.  There is no assurance that the current
FDIC assessment will continue at such a low level.

Advertising and business development costs increased to $101,000 up from $99,000
the second  quarter of 1996.  Professional  fees  declined  by $20,000  from the
second  quarter  of 1996 to  $38,000.  Both of  these  expense  categories  vary
significantly  based on activity  throughout  the year.  Other  expenses,  which
includes  stationery & supplies,  telephone,  postage,  loan expenses,  director
fees,  dues and  subscriptions  and automobile  costs,  approximated  the second
quarter of 1996's expense level.

Total  non-interest  expenses  for the SBA  lending  department  for the  second
quarter was  approximately  $380,000  ($221,000 in personnel  costs,  $43,000 in
occupancy and equipment  expenses,  $30,000 in  marketing/business  development)
compared to $384,000 for the second  quarter of 1996.  Since June 30, 1996,  the
SBA loan portfolio  (serviced portion and Bank's portion) has increased 23.9% to
$120.9 million, of which $38.9 million has been sold and is being serviced.

Income Taxes

The effective tax rate was 39.1% for the second  quarter of 1997.  The provision
for the second quarter of 1996 was $560,000  versus $424,000 for the same period
last year. The increase  resulted from the increase in pre-tax income during the
comparable quarters.

Liquidity and Investment Portfolio

Liquidity is a bank's ability to meet possible deposit withdrawals, to meet loan
commitments and increased loan demand, and to take advantage of other investment
opportunities as they arise.

Cash and due from banks,  federal funds sold and certificates of deposit totaled
$12.3  million  or 5.5% of total  assets  at June 30,  1997,  compared  to $37.2
million or 16.5% of total assets at December 31, 1996. Liquid assets were higher
than normal at year end due to a large short-term  deposit which was received at
the end of the year.

The Bank has several ways of providing  additional  liquidity.  Special  deposit
campaigns,  which offer slightly higher than market rates,  continues to attract
new deposits to the Bank. The Bank also has the option of selling SBA guaranteed
loans to provide liquidity.  As of June 30, 1997, the Bank held $38.9 million in
SBA guaranteed loans which could be sold if liquidity was needed.

At June 30, 1997,  the Bank had unused  federal  funds lines of credit  totaling
$9,000,000.  Management  believes this amount of secondary liquidity is adequate
to meet any cash  demands  that may arise.  The Bank's  application  to join the
Federal Home Loan Bank (FHLB) was approved on July 25, 1997. This will allow the
Bank to borrow funds from the FHLB as a source of  additional  liquidity  and to
provide a source of lower cost funding for longer term loans.

At present, the Corporation's  primary sources of liquidity are from interest on
deposits,  exercise of stock  options and  dividends  from the Bank.  The Bank's
ability to pay dividends to the  Corporation is subject to the  restrictions  of
the national banking laws and, under certain circumstances,  the approval of the
Comptroller of the Currency.

At June 30, 1997, the Corporation  had  non-interest  and interest  bearing cash
balances  of  $71,000,  which  management  believes  is  adequate  to  meet  the
Corporation's operational expenses.



<PAGE>



The  Corporation  and the Bank do not engage in hedging  transactions  (interest
rate futures, caps, swap agreements, etc.).

Deposits

During  the  first  two  quarters  of 1997,  deposits  decreased  0.8% to $207.5
million.  Deposits at December  31,1996  included a large deposit of $16 million
which was on deposit for  approximately  30 days in money market rate  accounts.
During 1997, deposits would have grown approximately 7.4% if the Bank's deposits
had not included this short term deposit at year end.

Money market rate deposits, excluding the large deposit, grew from $55.1 million
at year end to $60.4  million at June 30,  1997.  This is a limited  transaction
account  which pays a floating  rate equal to the 13 week  treasury  bill less a
margin  of 50 basis  points.  The rate  offered  on this  account  has been very
attractive  and many of the  Bank's  customers  have  held  their  funds in this
deposit product rather than locking a specific maturity.  New customers continue
to find this deposit account attractive due to the immediate availability of the
funds versus a time certificate bearing a future maturity.

Certificates  of deposits  increased  from $94  million at December  31, 1996 to
$105.1 million as of June 30, 1997. The majority of the deposit growth  occurred
during the first quarter of 1997 when the Bank offered an  attractive  rate on a
nine month  certificate.  The Bank has been successful in retaining the majority
of funds received through certificate campaigns.

As of June  30,  1997,  non-interest  bearing  deposits  equaled  $26.7  million
compared  to $28.6  million at December  31, 1996 and $23.6  million on June 30,
1996.  The  Bank's  transaction  accounts  have  significant  changes  in  daily
balances,  mainly due to deposits held by title companies.  This type of deposit
account has greater balance fluctuations than other types of deposits based upon
their business  activity;  however,  they carry average balances in excess of $3
million.

The low  interest  rate  environment  over the past few years 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  $189.8 million at June 30, 1997
compared  to $165.7  million  at  December  31,  1996.  $2  million  in  Bankers
Acceptances (BA) at June 30, 1997,  compared to no investment in BAs at December
31,  1996.  The Bank places its excess  liquidity  in BAs only when their yields
exceed Fed Funds rates. BAs have short maturities and are viewed as a short term
investment by the Bank;  however,  they are  classified as loans for  accounting
purposes and by Bank  regulators.  Excluding  the BAs, net loans  increased  $18
million in the second quarter of 1997.

The SBA department continued to experience strong loan demand, especially in the
Arizona  market,  with SBA loans growing to $82.1 million on June 30, 1997.  The
Bank has experienced  higher than expected SBA loan payoffs.  Many of these loan
payoffs were by borrowers in Arizona, where property values have been increasing
enabling borrowers to refinance for additional loan proceeds. In California, the
Bank is competing with bank and non-bank  lenders in a mature  market.  However,
the  improving  California  economy  has  increased  local SBA  production.  The
majority  of the Bank's SBA loans are  secured by real  estate;  however,  these
loans are reported as  commercial  loans.  SBA loans have the same  underwriting
requirements  as the Bank's other loans,  they are sometimes for longer terms (7
to 25  years)  and have  higher  loan-to-value  ratios  than the Bank  typically
accepts.  The SBA loan program remains subject to budget  considerations  at the
Federal   government   level.   Major   changes  to  the  program  could  affect
profitability and future SBA loan growth. SBA loans available for sale increased
87% from $20.7 million to $38.7 million when comparing June 30, 1996 to June 30,
1997.

The Bank continues to emphasize  commercial and real estate lending. At June 30,
1997,  49.3% of the loans held for investment  were  commercial  loans and 49.8%
were  real  estate  and  construction   loans,   compared  to  50.1%  and  46.6%
respectively at December 31, 1996. The Bank has increased the commercial and


<PAGE>



commercial real estate  portfolio  through its  reputation,  in Sonoma and Marin
Counties, as an experienced business and real estate lender that facilitates the
successful  negotiation  of complex  commercial  loans.  The Bank maintains high
credit  qualifications  with most real estate loans having  60-70% loan to value
ratios.  Management is aware of the risk factors in making  commercial  and real
estate loans and is continually  monitoring the local market place. A decline in
real estate values and/or demand could potentially have an adverse impact on the
loan portfolio, and on the financial condition of the Bank.

During the second quarter,  the Bank expanded its construction  loan programs by
promoting residential construction loans primarily in Sonoma and Marin Counties.
Additional  staff has been  added to  oversee  this area and  construction  loan
commitments  and  outstanding  loan balances have increased from $2.1 million at
March 31, 1997 to $4.5 million at June 30, 1997. Construction loans equaled 2.3%
of the total loan portfolio at June 30, 1997.

The Bank has a small  portfolio of consumer  loans and real estate  construction
loans which equaled 0.8% of the total loan  portfolio at June 30, 1997. The Bank
offers residential mortgage services on a limited basis.

Allowance for Loan Losses

The allowance for loan losses equaled $2.2 million at June 30, 1997, compared to
$2.0 million at December 31, 1996.  At June 30,  1997,  the  allowance  for loan
losses  equaled  1.4% of loans  (net of  loans  available  for sale and  bankers
acceptances)  compared to 1.5% at December  31,  1996.  The  allowance  for loan
losses is reviewed on a monthly  basis,  based upon an allocation  for each loan
category,  plus  an  allocation  for  any  outstanding  loans  which  have  been
classified by regulators or internally for the "Watch List".  Each loan that has
been classified is  individually  analyzed for the risk involved with a specific
reserve allocation assigned according to the risk assessment.

At June 30, 1997,  there were two loans on  non-accrual  totaling  $117,000 with
both nonaccrual loans  collateralized by real estate and $105,000 was guaranteed
by the SBA.  There was one loan for $123,000  past due 90 days or more and still
accruing interest which was secured by real estate. Loans past due 30 to 89 days
totaled  $1,290,000 of which  $1,219,00 was secured by real estate.  On December
31, 1996,  the Bank had $438,000 in non-accrual  loans,  and there were no loans
past due 90 or more days and still accruing interest.

During the second quarter of 1997, the Bank  charged-off  loans totaling  $9,000
and  received  $69,000  in  recoveries  on  previous  charge-offs.  The Bank has
experienced very low credit losses.

Capital Resources

Pursuant to regulations  under the FDIC  Improvement Act of 1991 (FDICIA),  five
capital  levels  were   prescribed  as  applicable   for  banks,   ranging  from
well-capitalized to critically under-capitalized. At June 30, 1997, the Bank was
considered "well  capitalized."  The Bank's total  risk-based  capital ratio was
10.4%.

The  Corporation  declared a 5% stock dividend  during the first quarter of 1997
with a record date of March 31, 1997. In May 1996, the Corporation declared a 5%
stock dividend to shareholders of record on June 14, 1996.




<PAGE>

SCHEDULES
<TABLE>
<CAPTION>

LOANS HELD FOR INVESTMENT
(In thousands)

                                                               June 30, 1997             December 31, 1996

<S>                                                                 <C>                           <C>     
Commercial Loans                                                    $ 95,654                      $ 84,969
Real Estate Loans-Construction                                         4,525                         1,533
Real Estate Loans-Other                                               92,039                        81,008
Installment Loans                                                      1,616                         2,218
   Total                                                            $193,834                      $169,728

</TABLE>

Of the  total  loans  due in more than one  year,  $66.0  million  were at fixed
interest rates or had reached the loan's floor or ceiling rates.  $127.8 million
were at adjustable  interest  rates at June 30, 1997.  The loan portfolio has no
foreign balances.
<TABLE>
<CAPTION>

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(In thousands)

                                                               Quarter Ended              Six Months Ended
                                                               June 30, 1997                 June 30, 1997

<S>                                                                   <C>                           <C>   
Balance - Beginning of Period                                         $1,989                        $2,042
Provision for Loan Losses                                                120                           240
Charge Offs                                                                9                           182
Recoveries                                                                69                            69
Balance - End of the Period                                           $2,169                        $2,169
</TABLE>

There were two loans on non-accrual at June 30, 1997, amounting to $117,000,  of
which $117,000 were secured by real estate collateral.









<PAGE>



                                                       GAP ANALYSIS

The following schedule  represents  interest rate sensitivity profile of assets,
liabilities and shareholder's  equity classified by earliest possible  repricing
opportunity or maturity date.
<TABLE>
<CAPTION>


                                                   Over           Over        Non-rate
Balance Sheet - June 30, 1997                      3 Months       1 Year      Sensitive
(in thousands)                      Through        through        through     or Over
                                    3 Months       1 Year         5 Years     5 Years          Total
<S>                                <C>            <C>             <C>         <C>             <C>     
Assets

Time Deposits-other financial
                                     
     institutions                  $    396       $     99                                    $    495
Fed funds sold                        2,486                                                      2,486
Investment securities                11,969          2,933        $   777     $  1,140          16,819
Loans and loans held for sale        96,508         41,753         16,389       39,184         193,834
Non-interest-earning assets (net)                                               10,661          10,661


Total Assets                       $111,359       $ 44,785        $17,166     $ 50,985        $224,295


Liabilities & Shareholders Equity

Time Deposits $100,000 and over    $  6,892       $ 18,967        $  2,258                    $ 28,117
All other interest-bearing deposits  91,795         53,914           6,976                     152,685
Non-interest bearing liabilities                                              $ 27,525          27,525
Shareholders' Equity                                                            15,968          15,968
Total Liabilities & Shareholders' 
 Equity                            $ 98,687       $ 72,881        $  9,234    $ 43,493        $224,295

Interest Rate Sensitivity GAP (1)  $ 12,672       ($28,096)       $  7,932    $  7,492

Cumulative Int. Rate Sensitivity 
GAP                                $ 12,672       ($15,424)       $  7,492    $      0

<FN>

(1) Interest  rate  sensitivity  gap is the  difference  between  interest  rate
sensitive assets and interest rate sensitive  liabilities  within the above time
frames.
</FN>
</TABLE>




<PAGE>




                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

None other than in the ordinary course of business.

Item 2.  Changes in Securities

None

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Security Holders

The Annual Meeting of  Shareholders of the Corporation was held on May 20, 1997.
The following candiates received the votes indicated.
<TABLE>
<CAPTION>


                                     For        Against       Withheld

<S>                                  <C>           <C>        <C>  
Clement C. Carinalli                 988,636       0          4,937
Patrick R. Gallaher                  988,636       0          4,937
William P. Gallaher                  988,636       0          4,937
William E. Geary                     988,636       0          4,937
James B. Keegan, Jr.                 988,636       0          4,937
Dennis R. Hunter                     988,636       0          4,937
Robert V. Pauley                     988,058       0          5,515
</TABLE>

All candidates were re-elected. No other matters were voted on at the meeting.

Item 5.  Other Information

None

Item 6.  Exhibits and Reports on Form 8-K

a.  Exhibits:

(3) (a) Articles of  Incorporation  of the Corporation  (filed as Exhibit 3.1 to
the   Corporation's  S-1  Registration   Statement,   filed  May  18,  1984  and
incorporated herein by this reference).

  (b) Certificate of Amendment to Articles of  Incorporation,  filed January 17,
1989 (filed as exhibit  (3)(b) to the  Corporation's  Annual Report on Form 10-K
for the Fiscal  Year Ended  December  31, 1988 and  incorporated  herein by this
reference).

  (c)  Bylaws  of the  Corporation,  as  amended  (filed as  Exhibit  3.2 to the
Corporation's S-2 Registration Statement,  File No. 33-51906 filed September 11,
1992 and incorporated herein by this reference).

  (d) Amendment to the Bylaws of the  Corporation  and revised  Bylaws (filed as
Exhibit (3)(d) to the Corporation's  Annual Report on Form 10-KSB for the Fiscal
Year Ended December 31, 1994 and incorporated herein by this reference).

(27)(a)  Financial Data Schedule

b.  Reports on Form 8-K

None


<PAGE>




SIGNATURES

In accordance with the requirements of the Securities  Exchange Act of 1934, the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

NORTHERN EMPIRE BANCSHARES

Date: August 5, 1997


/s/Dennis R. Hunter                     /s/Patrick R. Gallaher
Dennis R. Hunter                        Patrick R. Gallaher
Chairman of the Board                   Director & Chief Accounting Officer