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 September 30, 1996

                                                            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 practical date.
Title of class: Common Stock, no par value Outstanding shares as of
October 31, 1996: 1,461,346
Transitional Small Business Disclosure Format (check one): Yes No X


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                                              PART I - FINANCIAL INFORMATION

                                               ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                                                                           September 30,             December 31,
                                                                                   1996                     1995
                                                                           ____________              ____________
<S>                                                                        <C>                       <C>        
ASSETS
Cash and equivalents:

Cash and due from banks                                                    $12,400,000               $11,288,000
Federal funds sold                                                          12,669,000                 5,000,000
                                                                           ------------              -------------
Total cash and equivalents                                                  25,069,000                16,288,000

Certificates of deposits in other financial institutions                     4,556,000                 5,139,000
Investment securities:
  Held to maturity (Market value: 1996 -$6,686,000;
      1995 - $10,882,000)                                                     6,778,000               10,879,000
  Available for sale                                                          1,123,000                        0

Loans held for sale                                                          23,404,000               14,324,000
Loans receivable, net                                                       130,870,000              115,263,000

Other real estate owned, net                                                     94,000                        0
Leasehold improvements and equipment, net                                       666,000                  747,000
Accrued interest receivable and other assets                                  4,687,000                4,322,000
                                                                           ---------------          ---------------


Total assets                                                               $197,247,000             $166,962,000
                                                                           -------------            ----------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
 Non-interest bearing                                                      $ 30,217,000             $ 23,017,000
 Interest bearing:
   Money market rate                                                         54,345,000               49,913,000
   Savings                                                                    4,439,000                5,086,000
   Demand                                                                     9,661,000                9,672,000
   Certificates of deposit                                                   84,159,000               66,533,000
                                                                            182,821,000              154,221,000
Accrued interest payable and other liabilities                                  695,000                  759,000
                                                                         ---------------          ---------------
Total liabilities                                                           183,516,000              154,980,000
                                                                            ------------             ------------

Shareholders' equity:
Common stock, no par value; authorized, 20,000,000 shares;
  shares issued and outstanding, 1,461,346 in 1996 and
  1,322,299 in 1995                                                           8,310,000                7,433,000
Retained earnings                                                             5,418,000                4,549,000
Unrealized gain on investment securities available for sale,
  net of tax                                                                      3,000                        0
                                                                          ----------------       --------------------
Total shareholders' equity                                                   13,731,000               11,982,000
                                                                            -------------            --------------

Total liabilities and shareholders' equity                                 $197,247,000             $166,962,000
                                                                             ------------           ------------

</TABLE>

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<TABLE>
<CAPTION>

NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                                                             Three Months Ended                     Nine Months Ended
                                                                September 30,                          September 30,
                                                     --------------------------------             ---------------------
                                                              1996                     1995             1996             1995
                                                             
 <S>                                                       <C>                      <C>             <C>              <C>   
Interest income:

Loans                                                     $3,784,000               $3,221,000      $10,810,000      $8,516,000
Certificates of deposits
   in other financial institutions                            64,000                  103,000          223,000         263,000
Federal funds sold and
  investment securities                                      306,000                  184,000          834,000         571,000
                                                           -----------              ------------      -------------  ------------
Total interest income                                      4,154,000                3,508,000        11,867,000      9,350,000

Interest expense                                           1,862,000                1,475,000         5,210,000      3,881,000
                                                           ----------               -----------      ------------    -----------
Nerest income before
  provision for loan losses                                2,292,000                 2,033,000         6,657,000     5,469,000

Provision for loan losses                                     90,000                    70,000           270,000       170,000
                                                            ----------             -------------     -------------   ------------
Net interest income after
  provision for loan losses                                2,202,000                 1,963,000         6,387,000     5,299,000
                                                           -----------              -----------      ------------    -----------

Other income:
Service charges on deposits                                  168,000                   106,000           342,000       289,000
Gain on sale of loans                                        132,000                   271,000           399,000       644,000
Other                                                         86,000                   122,000           433,000       358,000
                                                          -----------             - -----------       -------------  ------------
Total other income                                           386,000                   499,000         1,174,000     1,291,000
                                                          -----------              ------------       ------------   ----------

Other expenses:
Salaries and employee benefits                               833,000                   834,000         2,472,000     2,346,000
Occupancy                                                    178,000                   171,000           531,000       523,000
Furniture & equipment                                         79,000                    70,000           233,000       215,000
Outside customer services                                     64,000                    55,000           191,000       171,000
Deposit and other insurance                                   35,000                    24,000           105,000       199,000
Professional fees                                             31,000                    32,000           139,000       102,000
Advertising & business development                            71,000                    57,000           230,000       211,000
Other                                                        225,000                   190,000           704,000       593,000
                                                           ----------                ------------    -------------    ------------
Total other expenses                                       1,516,000                 1,433,000         4,605,000     4,360,000
                                                          ----------                 -----------     ------------    -----------

Income before income taxes                                1,072,000                  1,029,000         2,956,000     2,230,000
Provision for income taxes                                  455,000                    453,000         1,260,000       973,000
                                                         ------------               ------------       ------------   ------------

Net income                                                 $617,000                   $576,000        $1,696,000    $1,257,000
                                                          -----------               -----------      -----------    -----------

Common stock earnings per share                               $0.41                      $0.39             $1.13         $0.85
Average common shares outstanding
  for net income per share calculation                    1,502,338                  1,484,377         1,500,452     1,473,020


</TABLE>

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<TABLE>
<CAPTION>


NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                           Nine Months Ended September 30,
                                                                                1996                1995
<S>                                                                         <C>                    <C>
Cash flows from operating activities:


Net income                                                                  $1,696,000             $1,257,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
  Provision for loan losses and OREO losses                                    303,000                170,000
  Depreciation and amortization                                                215,000                166,000
  (Increase) decrease in loans held for sale                                (9,080,000)            (7,650,000)
  Increase in interest receivable and other assets                            (365,000)              (483,000)
  Increase in accrued interest payable and
    other liabilities                                                          (64,000)               (14,000)
                                                                            -----------            -----------
Net cash (used in) provided by operating activities                         (7,295,000)            (6,554,000)
                                                                            -----------            -----------

Cash flows from investing activities:

(Purchases) of investment securities
  Held to maturity                                                         (11,025,000)           (10,810,000)
  Available-for-sale                                                          (997,000)
Maturities of investment securities
  Held-to-maturity                                                          15,000,000              9,000,000
Net decrease in deposits in other financial institutions                       583,000                  3,000
Net (increase) in loans receivable                                         (16,001,000)           (24,975,000)
Purchase of leasehold improvements and equipment, net                         (134,000)              (164,000)
                                                                            ------------       ---------------
Net cash used in investing activities                                      (12,574,000)           (26,946,000)
                                                                         -----------------     ---------------

Cash flows from financing activities:

Net increase in deposits                                                    28,600,000              27,747,000
Cash dividend and stock dividend fractional share payout                        (2,000)               (264,000)
Stock options exercised                                                         52,000                 328,000
                                                                            -----------             ------------
Net cash provided by financing activities                                   28,650,000              27,811,000
                                                                            ----------               ----------

Net increase in cash and cash equivalents                                    8,781,000              (5,689,000)

Cash and cash equivalents at beginning of year                              16,288,000              17,966,000
                                                                            ----------              ----------

Cash and cash equivalents at end of period                                 $25,069,000              $12,277,000
                                                                            -----------             -----------

Cash Flows - Supplemental Disclosures:
  Cash paid during the period for:
    Interest on deposits and other borrowings                               $5,235,000               $3,836,000
    Income taxes                                                             1,390,000                  959,000
  Non-cash transactions:
    Additions to other real estate owned                                        97,000                        0

</TABLE>

<PAGE>




                                      Northern Empire Bancshares and Subsidiary
                                      Notes to Consolidated Financial Statements
                                                   September 30, 1996

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  and  Subsidiary  at September 30, 1996 and the results of operations
for the three and nine 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  1995 Annual Report on Form 10-KSB.  The results of operations for
the  three  and  nine  months  ended  September  30,  1996  are not  necessarily
indicative of the operating results through December 31, 1996.

Note 2 - Net Income per Common Share

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


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

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.

Total consolidated assets equaled $197,247,000 at September 30, 1996 compared to
$166,962,000 at December 31, 1995.  Total loans,  including loans held for sale,
increased  $25.1  million  since  year-end,  with $14.4  million of that  growth
occurring  in the third  quarter.  This rapid  growth was funded by new deposits
which have grown $28.6 million since year end.

The net income after tax for the nine months of 1996 equaled $1,696,000 compared
to $1,257,000 for the comparable period of 1995, an increase of 34.9%. The third
quarter's net income after tax of $617,000 increased 7.1% over the third quarter
of 1995 when net  income  equaled  $576,000.  The  higher  profits  result  from
increases in net interest  income due to loan growth  (higher  yielding  earning
assets), while controlling the Bank's operating costs.

Net Interest Income

Net interest  income of $2,292,000 for the third quarter of 1996 increased 12.7%
from  $2,033,000  for the  comparable  period  last year.  This  increase in net
interest  income during the third quarter of 1996 compared to 1995 resulted from
volume  increases of $37.3 million in average  earning assets during the current
quarter  compared to the third  quarter of 1995.  $30.0 million of that increase
was in average loans outstanding which have the highest yields. Average interest
bearing  deposits for the third  quarter  increased  $31.7 million over the same
period last year.

While net interest  income has increased,  the net interest  margin has declined
from 5.72%  during the third  quarter of 1995 to 5.10% for the third  quarter of
1996. This change results from declining  rates which have  negatively  impacted
the loan yields while deposit costs have remained at approximately the same


<PAGE>



level.  The Bank is considered  asset  sensitive which means that rate increases
benefit the Bank and conversely  declining rate negatively impact the Bank since
more of its assets  reprice at a faster rate than  deposits.  Of the Bank's loan
portfolio totaling $158.1 million at September 30, 1996, 71.2% are floating rate
loans which have not reached rate ceilings or floors.

During the third  quarter of 1996 the loan yield was 9.2% compared to 10.53% for
the third  quarter of 1995.  Loan yields have  declined  mainly due the drops in
prime rate from last year.  The prime rate was 9% at the  beginning of the third
quarter of 1995 and now equals 8.25%.  At September  30, 1996,  the Bank had $23
million in prime based loans which reprice  immediately with prime rate changes.
In addition,  the Small Business  Administration (SBA) loan portfolio,  totaling
$53 million,  is tied to prime and reprices on a quarterly basis.  Approximately
$52.4 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 5.14% in  September  1995 and has  declined  to 4.84% as of  September
1996.

The net interest margin was also negatively impacted by a new fee imposed by the
SBA of 50 basis points on the  outstanding  balances of all guaranteed SBA loans
approved since October 12, 1995. This fee which equaled $17,000 during the third
quarter was deducted from SBA loan yields. As of September 30, 1996 the Bank had
$15 million in SBA guaranteed loans subject to this new fee.

The net interest margin was further  impacted by the minimal decline in the cost
of funds.  There has been a shift from deposit growth in savings  deposits which
are  tied to rates on US  Treasuries  to time  certificates  which  bear  higher
interest  rate.  This shift in the  deposit  composition  has  resulted  in time
certificates  now  comprising  46.0%  of  total  deposits  compared  to 38.5% at
September 30, 1995. (See Deposits). With the rapid loan growth, the Bank offered
very competitive rates on time certificates to fund new loan volume and maintain
liquidity.  The  shift  in the  deposit  composition  and  the  fact  that  time
certificates  bear the highest  interest  cost has resulted in the cost of funds
remaining at a similar level as the third quarter of last year.

Interest  expense  increased  from  $1,475,000  in the third  quarter of 1995 to
$1,862,000  in the third  quarter of 1996.  The major factor was the increase of
$31.7 million in average  interest  bearing  deposits  when  comparing the third
quarter of 1996 to 1995, while cost of interest bearing deposits declined only 3
basis points to 4.99% during this same period.

Other Income

Other income  decreased  22.6% when  comparing  the third quarter of 1996 to the
same period last year. The income generated from gains on sale of Small Business
Administration  (SBA) loans can vary significantly  based upon the timing of SBA
loan sales.  Gains on SBA loan sales  equaled  $132,000 in the third  quarter of
1996  compared to  $271,000  in the third  quarter of 1995 with the year to date
income equaling $399,000 compared to last year's level of $644,000.  Included in
other  income are SBA  servicing  fees,  which  equaled  $101,000,  and fees for
investment  services  provided through PrimeVest (new product in last quarter of
1995) which added $8,000  during the third quarter of 1996.  Service  charges on
deposit accounts  increased due to an increase in the number of deposit accounts
subject to charges,  the  implementation  of a higher service charge schedule in
February 1996 and larger  overdraft  activity due to the increase in the deposit
base.

Non-Interest Expenses

The Bank's operating  expenses  increased by 5.8% over the third quarter of 1995
to $1,516,000 in the third quarter of 1996.  Salaries and benefits were slightly
below the 1995 expenses level during the third quarter; however,  increased 5.4%
for the year due to annual salary increases and incentives on Commercial and SBA
loan production.  The Bank's loans and deposits has grown rapidly without adding
new staff.  Occupancy  expenses  increased 4.1% mainly due to increases in lease
rates tied to indexes.  Equipment costs increased 13% due to depreciation on new
data processing equipment and increased usage of personal computers. Deposit and
other insurance has increased when comparing the third quarter of 1995


<PAGE>



to 1996 due to the large FDIC  insurance  refund which was received and recorded
in the third quarter of 1995,  excluding this refund, this expense has decreased
from last year due to the low assessment rate charged for FDIC insurance.  There
are no  assurance  that the  currently  low  FDIC  assessment  rate  will not be
increased in the future.

Advertising  and  marketing  costs  vary  significantly   based  upon  marketing
activities.  Professional  expenses  have  increased  due to the higher level of
legal  activity  on problem  loans and OREO  properties,  these  were,  however,
comparable to the third quarter of 1995.  Other expenses  include:  stationery &
supplies,   telephone,   postage,   loan  expenses,   director  fees,  dues  and
subscriptions and automobile  expenses.  Many of these other expense  categories
have  increased  due to growth  within the Bank.  The majority of the  increases
relate to costs  associated with problem loans,  foreclosure  expenses and Other
Real Estate Owned (OREO) costs. During the second and quarter of 1996 a total of
$33,000 for a valuation  reserve for  potential  losses on OREO  properties  was
recorded and included in other expenses.

Income Taxes

The effective  tax rate  approximated  42.4% for the third quarter of 1996.  The
provision  for the third  quarter of 1996 was $454,000  versus  $453,000 for the
same period last year.  The  provision  for the year equaled  $1,259,000 up from
$973,000 last year. This increase resulted from the increase in pre-tax 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
internal  guidelines  for  acceptable  liquidity  measures in terms of ratios to
total assets,  deposits,  liabilities and capital with exceptions being reported
to ALCO committee and the Board. As of September 30, 1996, the Bank's  liquidity
ratio of liquid  assets to total assets of 17.9% was above the policy's  minimum
guideline  of 15%.  The  Bank's  liquidity  position  improved  during the third
quarter due to an increase in deposits of $23.2 million.  The funds generated by
this  increase were used to fund the  significant  loan growth the Bank has been
experiencing and to improve the Bank's liquidity position.

Liquidity has also been affected by the Bank's  decision to hold the  guaranteed
portion of SBA loans  rather than  selling  them,  to enjoy the higher  yield on
loans versus other  investments.  These guaranteed loans are not included in the
liquidity calculation;  however, they could be sold and converted to cash within
a few weeks. At September 30, 1996 the Bank had $23.4 million in SBA loans which
could be sold.  If these loans were included in the  liquidity  calculation  the
ratio would equal 29.8%.

Cash and due from banks,  federal funds sold and certificates of deposit totaled
$29,625,000  or 15.0%  of total  assets  at  September  30,  1996,  compared  to
$21,427,000 or 12.8% of total assets at December 31, 1995. At September 30, 1996
the Bank  held a total of $7.9  million  in U.S.  Treasuries  compared  to $10.9
million at year end. The Bank is required to pledge $500,000 of its U.S.
Treasury investment for Federal Tax Deposits.

Liquidity is also provided through the sale or  participation  of loans.  During
the third  quarter of 1996 the Bank sold $1.6  million in SBA loans  (guaranteed
portion)  compared to $4.1  million  for the same period last year.  The Bank is
currently in the process of selling approximately $2.3 million in SBA guaranteed
loans.

The Bank also has unused federal funds lines of credit totaling $9 million.  The
Bank feels this  amount of  liquidity  is  adequate  to meet any short term cash
demands that may arise.

At present,  the Corporation's  primary sources of liquidity are from short term
investments  on its capital,  exercises of stock options and dividends  from the
Bank. The Bank's ability to pay dividends to the


<PAGE>



Corporation  is subject to the  restrictions  of the national  banking laws and,
under certain circumstances, the approval of the Comptroller of the Currency.

At September 30, 1996, the Corporation  had  non-interest  and interest  bearing
cash  balances of  $195,000  which  management  believes is adequate to meet the
Corporation's operational expenses.

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

Deposits

Deposits  grew 18.5% since the end of 1995 to $182.8  million at  September  30,
1996.  During the third  quarter the Bank offered a time  certificate  at a very
competitive  rate,  and  time  certificates  increased  by  approximately  $12.8
million.  The deposit growth was used to maintain adequate liquidity and to fund
new loan growth.

The overall cost of funds of 4.99% has remained at approximately  the same level
during the third quarter of 1996 when compared to 5.02% for the third quarter of
last year.  Eighteen months ago rates on the various  deposit  products had been
compressed  to a very  narrow  margin;  however,  since  then  rates  offered on
certificates   of  deposit  have  increased   making  them  more  attractive  to
depositors.  Therefore  deposit  growth has centered in time deposits which grew
$30.7  million  to  $84.2  million  over  the  last  year.  The  growth  in time
certificates is attributable to deposit campaigns which offer competitive rates.
The  Bank's  need for funds and the shift to time  certificates,  which bear the
highest cost, has  negatively  impacted the Bank's cost of funds during a period
when market rates were  declining.  There has been an increase in the volatility
of deposits as a result of these campaigns which offer higher prices.

Deposits  include  $54.3  million  in the  "Sonoma  Investors  Reserve"  account
compared  to $50.2  million a year ago.  This  account is a limited  transaction
account with a floating  rate which is tied 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 in 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.

At the end of  September  1996,  non-interest  bearing  deposits  equaled  $30.2
million  compared to $23.0  million at December 31, 1995.  These  balances  have
greater  fluctuations  on a daily  basis with  average  balances  of $23 million
during the  current  year.  Transaction  accounts  include  balances  with title
companies  which  held  higher  than  normal  balances  at the end of the  third
quarter.  This type of deposit  account has greater  balance  fluctuations  than
other types of deposits based upon their business activity;  however, they carry
average balances of approximately $2 million.

At  September  30,  1996,  certificates  of deposits of $100,000 or more equaled
$23.0 million or 12.6% of total deposits  versus $19.3 million or 12.5% of total
deposits at December 31, 1995. The holders of these deposits are primarily local
customers of the Bank. While these deposits are considered to be rate sensitive,
the Bank believes they are stable deposits,  with many of these customers having
other banking relationships with the Bank.

The lower  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  rates on time deposit to raise funds during periods of high
loan growth.

Loans

Loans held for investment  plus loans available for sale equaled $158.1 million,
at September 30, 1996,


<PAGE>



increasing  18.9% from $133.0  million at  December  31,  1995.  The loan demand
continued strong in the third quarter with loan growth for the first nine months
of 1996 equaling $25.1 million.  The majority of this growth occurred in SBA and
commercial real estate lending.

The SBA  department  experienced  strong loan demand,  especially in the Arizona
market, through the first nine months of 1996. The 7a loan product has been more
popular in the Arizona  market than  California.  The California SBA loan market
has shown signs of maturing in that new construction has softened, more bank and
non-bank  lenders are offering the product and  conventional  and other SBA loan
products  have been  developed  to compete  with the core 7a loan  facility.  In
Arizona new construction  remains strong and growth of that economy is among the
strongest in the nation.  Improvement  in California  production may result from
recent changes within the SBA loan programs and an improving California economy.
The SBA loan program  remains  subject to budget  considerations  at the Federal
level.  Major changes to the program could affect  profitability  and future SBA
loan growth.  SBA loans available for sale increased $9.1 million since December
31, 1995 to $23.4 million at September 30, 1996.

The Bank continues to emphasize  business and real estate lending.  At September
30, 1996,  38.7% of the loans held for  investment  were  commercial or business
loans and 59.6% were real estate and construction loans, compared to 40% and 58%
respectively  at December 31, 1995.  The Bank has increased the  commercial  and
commercial real estate  portfolio  through its  reputation,  in Sonoma and Marin
Counties,  as an experienced  business and real estate lender which  facilitates
the successful  negotiation of complex commercial loans. The Bank maintains high
credit  qualifications  with most real estate loans having  60-70% loan to value
ratios.  The  commercial  real  estate  portfolio  are  secured by office  space
(approximately 45%), industrial & warehouse (approximately 36%) and retail space
(approximately  15%).  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.

Real estate  construction  loans are primarily for single family  residences and
commercial  properties  located within our targeted  market place.  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 Corporation's.  The construction lending business is subject to, among other
things,  the  volatility of interest  rates,  real estate prices in the area and
market  availability  of  conventional  real  estate  financing  to  repay  such
construction  loans.  As of  September  30,  1996,  the Bank  had  $2.7  million
outstanding in construction loan financing.

The Bank has a small  portfolio  of consumer  loans,  which  equaled 1.7% of the
total loan portfolio at September 30, 1996. The Bank offers residential mortgage
services on a limited basis.

Allowance for Loan Losses

The  allowance  for loan losses  equaled  $1,893,000  at  September  30, 1996 as
compared to  $1,676,000  at December  31,  1995.  At  September  30,  1996,  the
allowance  for loan  losses  equaled  1.5% of total loans (net of loans held for
sale)  compared to 1.4% at December 31,  1995.  The  allowance  for loan loss is
reviewed  on a  monthly  basis  and is based  on 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 and reserved for
according to the risk assessment.

At  September  30,  1996 there were eight  loans on  non-accrual  which  totaled
$846,000.  There  were no  loans  past due 90 days or more  and  still  accruing
interest.  Of the  nonaccrual  loans  $810,000  have real  estate  security.  On
December 31, 1995, there were six loans on non-accrual totaling $398,000,  there
were no loans past due 90 or more days and still accruing  interest.  At the end
of the third  quarter,  loans past due 30-89 days totaled  $513,000 of which the
Bank held real estate security on $445,000 of that total.


<PAGE>



Other Real Estate Owned

As of September 30, 1996, the Bank owned two commercial  buildings,  one located
in Moraga,  California  and the other in San  Francisco,  California.  Title was
transferred  through  foreclosure  actions on SBA guaranteed  loans in which the
Bank  had  previously  sold a 75%  interest  to  investors.  Based  upon  recent
appraisals, a valuation reserve for $33,000 has been recorded to adjust the book
value to  approximate  market  value.  The  Bank's  basis,  after the  valuation
reserve,  for the two properties totaled $94,000 at September 30, 1996. The Bank
held no other real estate owned during 1995.

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 September 30, 1996,  the
Bank's was considered "well  capitalized."  The Bank's total risk-based  capital
ratio was 10.3% and leverage capital ratio was 7.2%. Northern Empire Bancshares'
(on a consolidated  basis) total risk-based capital ratio was 10.6% and leverage
capital ratio was 7.4%.

In May 1996, the  Corporation  declared a 5% stock dividend to  shareholders  of
record on June 14, 1996, new stock certificates  representing the stock dividend
were issued on July 1, 1996.




<PAGE>



<TABLE>
<CAPTION>


                                                         SCHEDULES


                                                 LOANS HELD FOR INVESTMENT


                                                          September 30, 1996             December 31, 1995

<S>                                                             <C>                           <C>
Commercial Loans                                                $ 52,167,000                  $ 47,745,000
Real Estate Loans-Construction                                     2,680,000                     6,819,000
Real Estate Loans-Other                                           77,639,000                    61,450,000
Installment Loans                                                  2,242,000                     2,702,000
                                                                  -----------                  ------------
   Total                                                        $134,728,000                  $118,716,000
                                                                ------------                  ------------
</TABLE>

Of the  total  loans  due in more than one  year,  $42.5  million  were at fixed
interest  rates or had reached the loan's floor or ceiling  rate $112.1  million
were at adjustable interest rates at September 30,1996.
The loan portfolio has no foreign balances.

<TABLE>
<CAPTION>


                                         ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

                                                               Quarter Ended             Nine Months Ended
                                                          September 30, 1996            September 30, 1996

<S>                                                            <C>                              <C>
Balance - Beginning of Period                                  $1,858,000                       $1,676,000
Provision for Loan Losses                                          90,000                          270,000
Charge Offs                                                        59,000                           59,000
Recoveries                                                          6,000                            6,000
                                                               -------------                 -------------
Balance - End of the Period                                    $1,893,000                       $1,893,000
                                                               ----------                       ----------
</TABLE>


There were eight loans on  non-accrual  at  September  30,  1996,  amounting  to
$846,000, of which $810,000 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 - September 30, 1996                                 3 Months         1 Year       Sensitive
                                                  Through          through          through      or Over
($000)                                            3 Months         1 Year           5 Years      5 Years          Total
<S>                                                <C>            <C>            <C>             <C>           <C> 
                                                  --------        -------          -------       --------          -----
Assets

Time Deposits-other financial

     institutions                                  $ 1,287        $ 3,269                                        $4,556
Fed funds sold                                      12,669                                                       12,669
Investment securities                                  752          6,026         $1,000            $123          7,901
Loans and loans held for sale                       83,155         53,139         10,040          11,797        158,131
Non-interest-earning assets (net)                                                                 13,990         13,990
                                              ------------   ------------    -----------          ------        -------


Total Assets                                       $97,863        $62,434        $11,040         $25,910       $197,247
                                                   -------        -------       --------         -------       --------


Liabilities & Shareholders Equity

Time Deposits $100,000 and over                     $5,163        $16,016         $1,831                        $23,010
All other interest-bearing deposits                 77,015         45,231          7,346               4        129,596
Non-interest bearing liabilities                                                                 $30,910         30,910
Shareholders' Equity                                                                              13,731         13,731
                                              ------------    -----------    -----------      ----------         ------
Total Liabilities & Shareholders' Equity           $82,178        $61,247          $9,177        $44,645       $197,247
                                                  --------        -------          ------      ---------       --------

Interest Rate Sensitivity GAP (1)                  $15,685         $1,187        ($1,863)       ($18,735)
                                                   -------         ------        --------      ----------

Cumulative Int. Rate Sensitivity GAP               $15,685        $16,872        $18,735              $0
                                                   -------        -------        -------   -------------

</TABLE>

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




<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

None

Item 5.  Other Information

None

Item 6.  Exhibits and Reports on Form 8-K

a.  Exhibits:

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

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

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

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

(10)(w) Lease for Bank Premises at 6641 Oakmont Drive, Santa Rosa, California,
dated October 1, 1996.

(10)(x) Lease for Loan and Administration  Offices at 751 and 755 Fourth Street,
Santa Rosa, California, dated June 1, 1996.

(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: November 12, 1996

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