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 March 31, 1995
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 April 28, 1995 : 1,322,299
Transitional Small Business Disclosure Format (check one): Yes No X
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1995 1994
<S> <C> <C>
Cash and equivalents:
Cash and due from banks $6,422,000 $6,042,000
Federal funds sold 15,276,000 11,924,000
Total cash and equivalents 21,698,000 17,966,000
Certificates of deposits in other financial institutions 5,040,000 6,231,000
Investment securities
(market value: 1995 - $3,099,000; 1994 - $3,060,000) 3,102,000 3,072,000
Loans held for sale 9,006,000 3,831,000
Loans receivable, net 90,761,000 86,285,000
Leasehold improvements and equipment, net 626,000 677,000
Accrued interest receivable and other assets 4,016,000 3,714,000
Total assets $134,249,000 $121,776,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $123,053,000 $111,083,000
Accrued interest payable and other liabilities 370,000 494,000
Total liabilities 123,423,000 111,577,000
Shareholders' equity:
Common stock, no par value; authorized, 20,000,000 shares;
shares issued and outstanding, 1,320,157 in 1995 and
1,253,350 in 1994 6,807,000 6,489,000
Retained earnings 4,019,000 3,710,000
Total shareholders' equity 10,826,000 10,199,000
Total liabilities and shareholders' equity $134,249,000 $121,776,000
</TABLE>
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
March 31, March 31,
1995 1994
<S> <C> <C>
Interest income:
Loans $2,457,000 $1,925,000
Certificates of deposits in other financial institutions 78,000 34,000
Federal funds sold and investment securities 127,000 91,000
Total interest income 2,662,000 2,050,000
Interest expense 1,037,000 657,000
Net interest income before provision for loan losses 1,625,000 1,393,000
Provision for loan losses 60,000 90,000
Net interest income after provision for loan losses 1,565,000 1,303,000
Other income:
Service charges on deposits 90,000 97,000
Gain on sale of loans 261,000 273,000
Other 119,000 64,000
Total other income 470,000 434,000
Other expenses:
Salaries and employee benefits 757,000 643,000
Occupancy 181,000 153,000
Furniture & equipment 74,000 91,000
Outside customer services 68,000 67,000
Deposit and other insurance 87,000 80,000
Professional fees 32,000 38,000
Advertising & business development 82,000 52,000
Other 218,000 170,000
Total other expenses 1,499,000 1,294,000
Income before income taxes 536,000 443,000
Provision for income taxes 227,000 183,000
Net income $309,000 $260,000
Common stock earnings per share data:
Net income $0.24 $0.23
Average common shares outstanding for net income per
share calculation 1,288,393 1,142,680
</TABLE>
<TABLE>
<CAPTION>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
March 31, March 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $309,000 $260,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 60,000 90,000
Depreciation and amortization 59,000 85,000
(Increase) decrease in loans held for sale (5,175,000) (3,171,000)
Increase in interest receivable and other assets (302,000) (234,000)
Increase in accrued interest payable and
other liabilities (124,000) 229,000
Net cash (used in) provided by operating activities (5,173,000) (2,741,000)
Cash flows from investing activities:
Net (increase) decrease in investment securities (30,000) (4,000)
Net decrease in deposits in other financial institutions 1,191,000 99,000
Net (increase) in loans receivable (4,536,000) (84,000)
Purchase of leasehold improvements and equipment, net (8,000) (48,000)
Investment in other real estate owned 0 52,000
Net cash used in investing activities (3,383,000) 15,000
Cash flows from financing activities:
Net increase in deposits 11,970,000 9,501,000
Stock options exercised 318,000 71,000
Net cash provided by financing activities 12,288,000 9,572,000
Net increase in cash and cash equivalents 3,732,000 6,846,000
Cash and cash equivalents at beginning of year 17,966,000 16,407,000
Cash and cash equivalents at end of year $21,698,000 $23,253,000
Other cash flow information:
Interest paid $1,027,000 $661,000
Income taxes paid $ 127,000 $0
</TABLE>
Northern Empire Bancshares and Subsidiary
Notes to Consolidated Financial Statements
March 31, 1995
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 March 31, 1995 and the
results of operations for the three 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
accompany unaudited interim consolidated financial statements should
be read in conjunction with the consolidated financial statements and
notes thereto included in the Corporation's 1994 Annual Report on Form
10-KSB. The results of operations for the three months ended March
31, 1995 are not necessarily indicative of the operating results
through December 31, 1995.
Note 2 - New Accounting Pronouncements
In May, 1993, the Financial Accounting Standards Board issued
statement #114 as amended by statement #118, which requires
recognition of impairment of contractual loan obligations when it is
probable that both principal and interest are not collectable under
the contractual terms of the loan agreement. SFAS #114 and #118 have
been adopted by the Corporation's for the 1995 fiscal year. It has
not had a material impact on the Corporation or the Bank.
Note 3 - Net Income per Common Share
Net income per share is calculated by using the weighted average
number of common shares outstanding during the period.
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 equalled $134,249,000 at March 31, 1995
compared to $121,776,000 at December 31, 1994. The majority of the
increase in assets occurred in loans held for investments, loans held
for sale and Federal funds sold. The asset growth was funded through
an increase in deposits of approximately $12 million.
The operations for the first quarter of 1995 resulted in net income
after tax of $309,000 as compared to the first quarter of last year
which resulted in net income of $260,000.
Net Interest Income
Net interest income of $1,625,000 for the first quarter of 1995
increased 16.7% from $1,393,000 for the comparable period last year.
The increase in net interest income resulted primarily from volume
increases of $12.7 million in average earning assets. The net
interest margin which increased from 5.59% in the first quarter of
1994 to 5.77% in the first quarter of 1995 also had a positive impact
on the net interest margin.
In March 1994, the Federal Reserve Bank started to increase the Fed
Funds Rate. The prime lending rate had been 6% since July 1992;
however, since March 1994 the Fed Funds rate and the Prime Rate has
increased six times. The prime lending rate increased 300 basis
points during this period. During the first quarter of 1995, the
prime rate increased 50 basis points.
The Bank is considered asset sensitive and has benefited from these
rate increases since more of its assets reprice at a faster rate than
deposits. Of the Bank's loan portfolio totalling $103 million at
March 31, 1995, 89% of the loans are floating rate loans.
Approximately $41 million are prime-based loans, of which $14 million
reprice immediately and $24 million reprice on a quarterly basis. The
Bank has approximately $38 million in the loan portfolio which is
periodically adjustable (generally every six months) based upon the
Eleventh District's cost of funds index. This index was 3.71% in
March 1994 and increased to 4.93% in March 1995. The overall impact
of the rate increases has been to increase the yield on earning assets
from 8.23% for the first quarter of 1994 to 9.49% in 1995.
The increase in interest income has been offset by a comparable
increase in interest expense, which increased from $657,000 in the
first quarter of 1994 to $1,037,000 in the first quarter of 1995. A
major factor was the increase of $12 million in average interest
bearing deposits when comparing the first quarter of 1994 to 1995.
The cost of interest bearing deposits has also increased significantly
during the quarter from 3.32% last year to 4.56% in 1995. The
increase in the average cost of funds was similar to the increase in
yield on earning assets. The rising interest rate environment and
competition for deposits have resulted in the higher deposit costs.
The increase in time certificates (see "Deposits"), which bear higher
interest rates, by $12 million during the quarter has increased the
average cost of funds.
Other Income
Other income increased 8% when comparing the first quarter of 1995 to
the same period last year. Gains on sale of loans decreased from
$273,000 in 1994 to $261,000 in 1995 because of the drop in mortgage
refinance market ($40,000 in gains in 1994 versus $2,000 this
quarter). Gains on sale of Small Business Administration (SBA) loans
equalled $260,000 in the first quarter of 1995 compared to $233,000 in
first quarter of 1994. The SBA servicing fees have increased due to
the growth in the portfolio of SBA loans serviced and equalled $87,000
in the first quarter this year compared to $49,000 for the same period
of 1994.
With the increase in residential loan rates, the volume of mortgage
refinance and home sales declined to such a level that the Bank
stopped actively marketing its residential mortgage product. Members
of the residential mortgage loan staff were either laid off or
reassigned to other job duties.
Service charges have declined due to the increase in earning credits
on analysis customers accounts and the drop in average balances held
by title companies which have had lower balances due to the reduced
level of refinance activity in their business. The majority of this
income results from service charges on deposit accounts, especially
demand accounts. The Bank utilizes analysis for many of the large
business customers, and thereby, reduces income from service charges
and increases interest income in the federal funds area, as customers
keep the required balances in their accounts to cover the services
they receive. Title companies are analysis customers.
Non-Interest Expenses
The Bank's operating expenses increased by 16% over the first quarter
of 1994 to $1,499,000 in the first quarter of 1995. Salaries and
benefits increased 18% due to the addition of seven new employees (SBA
staff additions), annual salary increases and increased employee
benefits costs. Occupancy expenses increased 18% due the leasing of
additional space for the SBA lending functions in San Francisco,
Fresno, Hollister, Ukiah and Tucson, AZ. Equipment costs declined 19%
due to the reduction in depreciation of the data processing equipment
which is now fully amortized. Deposit insurance has increased due to
the higher level of deposits. Advertising and marketing costs vary
significantly based upon the marketing activities and needs of the
Bank. The time certificate promotion was heavy advertised and the
Bank was a major contributor to the Human Race during the first
quarter of 1995 which increased our costs. Professional expenses
have declined due to the lower level of legal activity on problem
loans. Other expenses which include: stationery & supplies,
telephone, postage, loan expenses, director fees, dues and
subscriptions, automobile costs and others increased as a result of
the Bank's growth in staff and the cost associated with the increased
volume of loans and deposits.
The total non interest expenses for the SBA lending department for the
first quarter was approximately $327,000 ($187,000 in personnel costs,
$55,000 in occupancy and equipment expenses, $28,000 in
marketing/business development) compared to $182,000 for the first
quarter of 1994. The increase in SBA costs relate to the continued
expansion of the SBA department. The SBA department as added six new
employees, opened a new regional office and has double their loan
portfolio.
The operating expenses for the Windsor Branch, which opened in July of
1993, totalled $58,000 for the first quarter of 1995 compared to
$51,000 for the same period last year. The Branch has increased their
deposit total from $3 million at March 31, 1994 to $7 million at March
31, 1995.
Income Taxes
The effective tax rate approximated 42.1% for the first quarter of
1995 and 42.0% during 1994. The current provision for the first
quarter of 1995 was $225,000 versus $183,000 for the same period last
year. The increase results from the increase in pre-tax income during
the first quarter of 1995 compared to 1994.
Liquidity and Investment Portfolio
Liquidity is a bank's ability to meet possible deposit withdrawals, to
meet loan commitments and increased loan demand, and to take advantage
of other investment opportunities as they arise. The Bank's liquidity
practices are defined in both the Asset and Liability Policy and the
Investment Policy. These policies define acceptable liquidity
measures in terms of ratios to total assets, deposits, liabilities and
capital. As of March 31, 1995, the Bank was in compliance with these
policies and specified ratios.
Cash and due from banks, federal funds sold and certificates of
deposit totalled $26,738,000 or 19.9% of total assets at March 31,
1995, compared to $24,197,000 or 19.9% of total assets at December 31,
1994. In addition, the bank held at March 31,1995 $3,102,000 in
investments (includes $2 million in U.S. Treasuries and one million in
a Freddie Mac discount note) which mature within three months. These
investments totalled $3,072,000 at year end. The Bank pledges
$500,000 of its investment as required by the Federal Tax Regulations.
This level of liquidity is similar to the Bank's liquidity position
over the last several years, and comparable to financial institutions
in its asset size range.
The Bank also has three unused federal funds lines of credit totalling
$8,000,000. The Bank feels this amount of liquidity is adequate to
meet any cash demands that may arise.
Liquidity is also provided through the sale or participation of loans.
During the first quarter of 1995 the Bank sold $3,241,000 in SBA loans
(guaranteed portion) compared to $2,659,000 for the same period last
year. At March 31, 1995, the Bank held $9 million in SBA loans which
could be sold to provide liquidity, if needed.
At present, the Corporation's primary sources of liquidity are from
short term investments on its capital, exercise of stock options and
dividends from the Bank. The Bank's ability to pay dividends to the
Corporation is subject to the restrictions of the national banking
laws and, under certain circumstances, the approval of the Comptroller
of the Currency.
At March 31, 1995, the Corporation had non-interest and interest
bearing cash balances of $630,000 which management believes is
adequate to meet the Corporation's operational expenses.
The Corporation and the Bank do not engage in hedging transactions
(interest rate futures, caps, swap agreements, etc.).
Deposits
During the first quarter of 1995, deposits increased 10.8% to $123
million. This increase resulted from two certificate of deposit (CD)
campaigns which were offered to new customers at slightly higher than
market rates. The first product was a one year time deposit and the
second product was an eighteen month time deposit with a one time
adjustment, made at the depositor's request, to its rate based upon
the 26 week US Treasury Bill rate plus one half of one percent. These
promotions increased deposits by approximately $12 million during the
first quarter of 1995.
The amounts raised were used to fund loans and the balance invested in
short term investments. This additional liquidity will be used to
fund projected loan demand during the second and third quarters of
this year.
Deposit rates have been increasing. Rates on the various deposit
products had been compressed to a very narrow margin, if any, between
rates offered on transactions accounts and certificates of deposit
(CDs). With the increasing rate environment, CD rates have increased
at a faster pace than interest rates on transaction accounts. This
change has resulted in time certificate becoming a more attractive
investment option to depositors.
Demand deposits include $46 million in the "Sonoma Investors Reserve"
account. 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. Due to the low rate environment, the rate offered
on this account has been very attractive and many of the Bank's
customers have moved their funds into this deposit product. New
customers have also found this type of deposit preferable due to the
immediate availability of the funds versus a time certificate bearing
a future maturity; however, with the rise in interest rates depositors
may place these funds into a higher yielding investment such as a time
deposit.
At the end of March 1995, noninterest bearing deposits equalled $19.5
million compared to $21.2 December 31, 1994. Transaction accounts
include balances with title companies. This type of deposit account
has greater balance fluctuations than other types of deposits based
upon their business activity. During the third quarter of last year
one title company which had been holding balances approximating $1.5
million changed their operating procedures on escrow accounts and no
longer has these balances on deposit.
At March 31, 1995, certificates of deposits of $100,000 or more
equalled $10,695,000 or 8.7% of total deposits versus $8,616,000 or
7.8% of total deposits at December 31, 1994. 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, as they are obtained primarily from customers
with other banking relationships with the Bank. The increase in the
balance results from certificate of deposit promotions previously
discussed.
The lower interest rate environment and the increased competition from
the financial services industry has made it more difficult to attract
new deposits at favorable rates. With the recent increases in Federal
Funds rates and the prime lending rate there has been more pressure to
increase rates on deposit accounts and deposit rates have been
increasing. The Bank continually monitors competitors rates and
strives to be competitive in pricing deposits.
Loans
Total loans held for investment of $90,761,000 increased 5.2% from
$86,285,000 at December 31, 1995. The Bank has continued to
experience growth and strong loan demand in its SBA lending program.
During the first three months of 1995, $11.7 million in loans which
were partially guaranteed by the SBA were funded and $3.2 million in
SBA guaranteed loans were sold in the secondary market. Loans held
for sale include SBA guaranteed loans which could be sold totalling $9
million as of March 31, 1995 versus $3.8 million at year end.
During the past two years, the Bank was very active in residential
mortgage refinancing. The Bank originates residential mortgage loans
with the intent to sell them to the Federal Home Loan Mortgage
Corporation (FHLMC) or outside investors at a price approximating par
value. The increasing mortgage rates during 1994 severely impacted
the refinance activity. The Bank's mortgage loan sales declined to
the level that it was no longer economically feasible to have a
designated staff assigned to residential mortgage lending. The Bank
continues to offer residential mortgage services on a limited basis.
If the market conditions change the Bank may expand its residential
mortgage products and services.
The Bank continues to emphasize commercial and real estate lending.
At March 31, 1995, 39% of the loans held for investment were
commercial loans and 58% were real estate and construction loans,
compared to 39% and 58% respectively at December 31, 1994. Management
is aware of the risk factors in making commercial and real estate
loans and is continually monitoring the local market place. Real
estate construction loans are primarily for single family residences
and commercial properties under $1,500,000 located within Sonoma
County. 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 market
area. 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 March 31, 1995, the Bank had
$2,045,000 outstanding in construction loan financing. 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.
The Bank has a small portfolio of consumer loans which equaled 3.3% of
the total loan portfolio at March 31, 1995.
Allowance for Loan Losses
The allowance for loan losses equalled $1,413,000 at March 31, 1995 as
compared to $1,421,000 at December 31, 1994. At March 31, 1995, the
allowance for loan losses equalled 1.5% of total loans (net of loans
held for sale) compared to 1.6% at December 31, 1994. 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 March 31, 1995 there were six loans on non-accrual which totalled
$350,000. There were three loans totalling $27,000 past due 90 days or
more, and loans past due 30-89 days totalled $317,000. Many of these
loans are secured by real estate or other property. On December 31,
1994, there were five loans on non-accrual totalling $201,000, there
were no loans past due 90 or more days, and past due 30-89 days
totalled $327,000.
Capital Resources
Pursuant to regulations under FDICIA , five capital levels were
prescribed as applicable for banks, ranging from well-capitalized to
critically under-capitalized. These capital levels are summarized
below:
<TABLE>
<CAPTION>
Risk-Based Leverage
FDICIA Capital Levels Capital Ratios Capital Ratios
<S> <C> <C>
Well-capitalized 10% or above 5% or above
Adequately-capitalized 8% or above 4% or above
Under-capitalized Under 8% Under 4%
Significantly under-capitalized Under 6% Under 3%
Critically under-capitalized Tangible capital less than 2% of
total assets
</TABLE>
At March 31, 1995, the Bank's risk-based capital ratio was 10.6% and
leverage capital ratio was 8.3%.
In March 1995, the Corporation declared a $0.20 cash dividend to
shareholders of record on April 28, 1995.
SCHEDULES
LOANS HELD FOR INVESTMENT
<TABLE>
<CAPTION>
Maturities and sensitivities of loans held for investment (gross of deferred fees) to
changes in interest rates by loan types as of March 31, 1995 is summarized in the following table:
Due in over
Due in One One Year but Due in More
Year or Less Less than Five than Five Total
Years Years
<S> <C> <C> <C> <C>
Commercial $8,111,000 $6,776,000 $21,590,000 $36,477,000
Real Estate-Construction 1,505,000 540,000 0 2,045,000
Real Estate- Other 3,587,000 7,262,000 41,326,000 52,175,000
Installment Loans 1,270,000 1,102,000 680,000 3,052,000
Total $14,473,000 $15,680,000 $63,596,000 $93,749,000
</TABLE>
Of the total loans due in more than one year $8,112,000 were at fixed
interest rates and $71,164,000 were at adjustable interest rates at March
31, 1995. The loan portfolio has no foreign balances.
<TABLE>
<CAPTION>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
March 31, 1995
<S> <C>
Balance - Beginning of Period $1,421,000
Provision for Loan Losses 60,000
Charge Offs 73,000
Recoveries 5,000
Balance - End of the Period $1,413,000
</TABLE>
There were six loans on non-accrual at March 31, 1995 amounting to $350,000
of which $327,000 was secured by real estate collateral.
<TABLE>
GAP ANALYSIS
<CAPTION>
The following schedule represents interest rate sensitivity profile of assets, liabilities and shareholder's equity classified
by earliest possible repricing opportunity or maturity date.
Over Over Non-rate
Balance Sheet - March 31, 1995 Through 3 Months 1 Year Sensitive Total
(In 000's) 3 Months through through or Over
1 Year 5 Years 5 Years
<S> <C> <C> <C> <C> <C>
Assets
Time Deposits-other financial institutions $1,881 $3,159 $5,040
Fed funds sold 15,276 15,276
Investment securities 2,985 $117 3,102
Loans and loans held for sale 52,494 40,458 $6,697 3,106 102,755
Non-interest-earning assets (net) 8,076 8,076
Total Assets $69,651 $46,602 $6,697 $11,299 $134,249
Liabilities & Shareholders Equity
Time Deposits $100,000 and over $4,250 $5,027 $1,418 $10,695
All other interest-bearing deposits 69,954 15,843 6,998 92,795
Non-interest bearing liabilities $19,933 19,933
Shareholders' Equity 10,826 10,826
Total Liabilities & Shareholders' Equity $74,204 $20,870 $8,416 $30,759 $134,249
Interest Rate Sensitivity GAP (1) ($4,553) $25,732 ($1,719) ($19,460)
Cumulative Interest Rate Sensitivity GAP ($4,553) $21,179 $19,460 $0
<FN>
<F1>
(1) Interest rate sensitivity gap is the difference between interest rate sensitive assets and interest rate sensitive
liabilities within the above time frames.
</F>
The Bank is considered to be asset sensitive. In a declining interest rate environment
there is an immediate negative impact on net interest margin, since more assets reprice quickly to lower rates then liabilities.
In a raising interest rate environment, the Bank's earnings are positively affected immediately. The Bank
continually monitors its interest rate sensitivity as part of the Bank's planning processes.
</TABLE>
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
On March 30, 1995, a cash dividend of $0.20 per share was declared to
shareholders of record on April 28, 1995. The cash dividend will be
paid on approximately May 12, 1995.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
10 (a) Indemnification Agreement between William P. Gallaher and
Northern Empire Bancshares.
27 Financial Data Schedule
b. Reports on Form 8-K
None
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: May 9, 1995
/s/James B. Keegan Jr. /s/Patrick R. Gallaher
Director & President Director & Chief Accounting Officer
EXHIBITS: 10 (a)
INDEMNIFICATION AGREEMENT
Preamble
This Indemnification Agreement (this "Agreement") is made as of
this 26th day of April, 1995, by and between Northern Empire
Bancshares, a California corporation (the "Company"), and William
P. Gallaher ("Indemnitee").
Recitals
A. The Company and Indemnitee recognize the increasing difficulty
in obtaining directors', officers' and agents' liability insurance,
the significant increases in the cost of such insurance, and the
general reductions in the coverage of such insurance.
B. The Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers
and directors to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely
limited and may not be available to the Company in the future.
C. Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other
directors, officers and agents of the Company may not be willing to
continue to serve as directors, officers and agents without
additional protection.
D. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as directors,
officers and agents of the Company and to indemnify its directors,
officers and agents so as to provide them with the maximum
protection permitted by law.
Agreement
Based upon the facts and premises contained in the above Recitals
and in consideration of the mutual promises below, the Company and
Indemnitee hereby agree as follows:
1. Indemnification and Expense Advancement.
(a) Action. Etc. Other than by Right of the company. The Company
shall indemnify Indemnitee if Indemnitee was or is a party or is
threatened to be made a party to any proceeding (other than an
action by or in the right of the Company to procure a judgment in
its favor) by reason of the fact that Indemnitee is or was an Agent
of the Company, against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with
such proceeding if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in the best interests of the
Company and, in the case of a criminal proceeding, has no
reasonable cause to believe the conduct of Indemnitee was unlawful.
The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of no lo contendere or its equivalent
shall not, of itself, create a presumption that Indemnitee did not
act in good faith and in a manner which Indemnitee reasonably
believed to be in the best interests of the Company or that
Indemnitee had reasonable cause to believe that Indemnitee's
conduct was unlawful.
(b) Action Etc., BY or in the Right of the Company. The Company
shall indemnify Indemnitee if Indemnitee was or is a party or is
threatened to be made a party to any threatened, pending or
completed action by or in the right of the Company to procure a
judgment in its favor by reason of the fact that Indemnitee is or
was an Agent of the Company, against expenses actually and
reasonably incurred by Indemnitee in connection with the defense or
settlement of such action if Indemnitee acted in good faith, in a
manner Indemnitee believed to be in the best interests of the
Company and its shareholders; except that no indemnification shall
be made under this Subparagraph (b) for any of the following:
(i) In respect of any claim, issue or matter as to which Indemnitee
shall have been adjudged to be liable to the Company in the
performance of Indemnitee's duty to the Company and its shareholders,
unless and only to the extent that the court in which such proceeding
is or was pending shall determine upon application that, in view of
all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for the expenses which such court shall determine;
(ii) Of amounts paid in settling or otherwise disposing of a
pending action without court approval; or
(iii) Of expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval.
(c) Determination of Right of Indemnification. Any indemnification
under Subparagraphs (a) and (b) shall be made by the Company only
if authorized in the specific case, upon a determination that
indemnification of Indemnitee is proper in the circumstances
because Indemnitee has met the applicable standard of conduct set
forth above in Subparagraphs (a) and (b) by any of the following:
(i) A majority vote of a quorum consisting of directors who are not
parties to such proceeding;
(ii) If such a quorum of directors is not obtainable, by
independent legal counsel in a written opinion;
(iii) Approval of the shareholders by the affirmative vote of a
majority of the shares entitled to vote represented at a duly held
meeting at which a quorum is present or by the written consent of
shareholders as provided in the Bylaws, with the shares owned by
the person to be indemnified not being entitled to vote thereon; or
(iv) The court in which such proceeding is or was pending upon
application made by the Company or its Agent or attorney or other
person rendering services in connection with the defense, whether
or not such application by the Agent, attorney or other person is
opposed by the Company.
(d) Advances of Expenses. Expenses (including attorneys' fees),
costs, and charges incurred in defending any proceeding shall be
advanced by the Company prior to the final disposition of such
proceeding upon receipt of an undertaking by or on behalf of
Indemnitee to repay such amount unless it shall be determined
ultimately that Indemnitee is entitled to be indemnified as
authorized in this Paragraph 1.
(e) Indemnification Against Expenses of Successful Party.
Notwithstanding the other provisions of this Paragraph 1, to the
extent that Indemnitee has been successful on the merits in a
defense of any proceeding, claim, issue or matter referred to in
Subparagraphs (a) and (b), Indemnitee shall be indemnified against
all expenses actually and reasonably incurred by Indemnitee in
connection therewith.
(f) Right of Indemnitee to Indemnification UP on Application:
Procedure Upon Application. Any indemnification provided for in
Subparagraphs (a), (b) or (e) shall be made no later than ninety
(90) days after the Company is given notice of request by
Indemnitee, provided that such request is made after final
adjudication, dismissal, or settlement unless an appeal is filed,
in which case the request is made after the appeal is resolved
(hereafter referred to as "Final Disposition"). Upon such notice,
if a quorum of directors who were not parties to the action, suit,
or proceeding giving rise to indemnification is obtainable, the
Company shall within two (2) weeks call a Board of Directors
meeting to be held within four (4) weeks of such notice, to make a
determination as to whether Indemnitee has met the applicable
standard of conduct. Otherwise, if a quorum consisting of directors
who were not parties in the relevant action, suit, or proceeding is
not obtainable, the Company shall retain (at the Company's expense)
independent legal counsel chosen either jointly by the Company and
Indemnitee or else by Company counsel within two (2) weeks to make
such determination. If (1) at such directors meeting such a quorum
is not obtained or, if obtained, refuses to make such determination
or (2) if such legal counsel is not so retained or, if retained,
does not make such determination within four (4) weeks, then the
Board of Directors shall cause a shareholders meeting to be held
within four (4) weeks to make such a determination.
If notice of a request for payment of a claim under any statute,
under this Agreement, or under the Company's Articles of
Incorporation or Bylaws providing for indemnification or advance of
expenses has been given to the Company by Indemnitee, and such
claim is not paid in full by the Company within ninety (90) days of
the later occurring of the giving of such notice and Final
Disposition in case of indemnification and twenty (20) days of the
giving of such notice in case of advance of expenses, Indemnitee
may, but need not, at any time thereafter bring an action against
the Company to receive the unpaid amount of the claim or the
expense advance and, if successful, Indemnitee shall also be paid
for the expenses (including attorneys' fees) of bringing such
action. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in
connection with any action, suit, or proceeding in advance of its
Final Disposition) that Indemnitee has not met the standards of
conduct which make it permissible under applicable law for the
Company to indemnify Indemnitee for the amount claimed, and
Indemnitee shall be entitled to receive interim payment of expenses
pursuant to Subparagraph (d) unless and until such defense may be
finally adjudicated by court order or judgment from which no
further right of appeal exists. Neither the failure of the Company
(including its Board of Directors, independent legal counsel, or
its shareholders) to have made a determination that indemnification
of Indemnitee is proper in the circumstances because Indemnitee has
met the applicable standard of conduct required by applicable law,
nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its shareholders) that
Indemnitee has not met such applicable standard of conduct, shall
create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
(g) Other Rights and Remedies. The indemnification provided by this
Paragraph 1 shall not be deemed exclusive of, and shall not affect,
any other rights to which an Indemnitee may be entitled under any
law, the Company's Articles of Incorporation, Bylaws, agreement,
vote of shareholders or disinterested directors or otherwise, both
as to action in his or her official capacity and as to action in
another capacity while holding such office, and shall continue
after Indemnitee has ceased holding such office or acting in such
official capacity and shall inure to the benefit of the heirs,
executors, and administrators of Indemnitee.
(h) Insurance. The Company may purchase and maintain insurance on
behalf of any person who is or was an Agent against any liability
asserted against such person and incurred by him or her in any such
capacity, or arising out of his or her status as such, whether or
not the Company would have the power to indemnify such person
against such liability under the provisions of this Paragraph 1.
(i) Optional Means of Assuring Payment. Upon request by an
Indemnitee certifying that Indemnitee has reasonable grounds to
believe Indemnitee may be made a party to a proceeding for which
Indemnitee may be entitled to be indemnified under this Paragraph
1, the Company may, but is not required to, create a trust fund,
grant a security interest or use other means (including, without
limitation, a letter of credit) to ensure the payment of such sums
as may become necessary to effect indemnification as provided
herein.
(j) Savings Clause. If this Paragraph 1 or any portion thereof
shall be invalidated on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify
Indemnitee as to expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement with respect to any action,
suit, proceeding, or investigation, whether civil, criminal or
administrative, and whether internal or external, including a grand
jury proceeding and an action or suit brought by or in the right of
the Company, to the full extent permitted by any applicable portion
of this Paragraph 1 that shall not have been invalidated, or by any
other applicable law.
(k) Definition of Agent. For the purposes of this Paragraph 1,
"Agent" means any person who is or was a director, officer,
employee or other agent of the Company, or is or was serving at the
request of the Company as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint
venture, trust or other enterprise, or was a director, officer,
employee or agent of a foreign or domestic corporation which was a
predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation; "proceeding" means
any threatened, pending or completed action or proceeding, whether
civil, criminal, administrative or investigative; and "expenses"
includes without limitation attorneys' fees and any expenses of
establishing a right to indemnification.
(1) Indemnification under Section 204(a)(11) of the California
Corporations Code. Subject to the provisions of California
Corporations Code Section 204(a)(11) and any other applicable law,
notwithstanding any other provisions of this Paragraph 1, the
following shall apply to the indemnification of Indemnitee:
(i) The Company shall indemnify Indemnitee pursuant to this
Subparagraph (1) if the Company would be required to indemnify
Indemnitee pursuant to Subparagraphs (a) or (b) if in Subparagraphs
(a) or (b) the phrase "in a manner Indemnitee reasonably believed
to be in the best interests of the Company" is replaced with the
phrase "in a manner Indemnitee did not believe to be contrary to
the best interests of the Company". If pursuant to Subparagraphs
(c) and (f) the person making the Subparagraph (a) and/or (b)
conduct standard determination determines that such standard has
not been satisfied, such person shall also determine whether this
Subparagraph (l)(i) conduct standard has been satisfied;
(ii) There shall be a presumption that Indemnitee met the
applicable standard of conduct required to be met in Subparagraph
(c) for indemnification, rebuttable by clear and convincing
evidence to the contrary;
(iii) The Company shall have the burden of proving that Indemnitee
did not meet the applicable standard of conduct in Subparagraph
(c);
(iv) In addition to the methods provided for in Subparagraph (c),
a determination that indemnification is proper in the circumstances
because that Indemnitee met the applicable standard of conduct may
also be made by the arbitrator in any arbitration proceeding in
which such matter is or was pending;
(v) Unless otherwise agreed to in writing between an Indemnitee and
the Company in any specific case, indemnification may be made under
Subparagraph (b) for amounts paid in settling or otherwise
disposing of a pending action without court approval.
2. Changes.
In the event of any change, after the date of this Agreement, in
any applicable law, statute, or rule which expands the right of a
California corporation to indemnify a member of its board of
directors or an officer, such changes shall be automatically,
without further action of the parties, within the purview of
Indemnitee's rights and Company's obligations, under this
Agreement. In the event of any change in any applicable law,
statute or rule which narrows the right of a California corporation
to indemnify a member of its board of directors or an officer, such
changes, to the extent not otherwise required by such law, statute
or rule to be applied to this Agreement, shall have no effect on
this Agreement or the parties' rights and obligations hereunder. In
the event of an amendment to the Company's Bylaws which expands the
right of a California corporation to indemnify a member of its
board of directors or an officer, such change shall be
automatically, without further action of the parties, within
Indemnitee's rights and Company's obligations under this Agreement.
In the event of any amendment to the Company's Bylaws which narrows
such right of a California corporation to indemnify a member of its
board of directors or an officer, such change shall only apply to
the indemnification of Indemnitee for acts committed, or lack of
action, by Indemnitee after such amendment. The Company agrees to
give Indemnitee prompt notice of amendments to the Company's Bylaws
which concern indemnification.
3. Nonexclusivity.
The indemnification provided by this Agreement shall not be deemed
exclusive of any rights to which Indemnitee may be entitled under
the Company's Articles of Incorporation, its Bylaws, any agreement,
any vote of shareholders or disinterested Directors, the California
Corporations Code, or otherwise, both as to action in Indemnitee's
official capacity and as to action in any other capacity while
holding such office (an "Indemnified Capacity"). The
indemnification provided under this Agreement shall continue as to
Indemnitee for any action taken or not taken while serving in an
Indemnified Capacity even though he may have ceased to serve in an
Indemnified Capacity at the time of any action, suit or other
covered proceeding.
4. Partial Indemnification.
If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for some or a portion of the
expenses, judgment, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal or settlement
of any civil or criminal action, suit or proceeding, but not,
however, for the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion of such expenses,
judgments, fines or penalties to which Indemnitee is entitled.
5. Mutual Acknowledgement.
Both the Company and Indemnitee acknowledge that in certain
instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors
and officers under this Agreement or otherwise. For example, the
Company and Indemnitee acknowledge that the Securities and Exchange
Commission (the "SEC") has taken the position that indemnification
is not permissible for liabilities arising under certain federal
securities laws, and federal legislation prohibits indemnification
for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in
the future to undertake with the SEC to submit questions of
indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to
indemnify Indemnitee. Furthermore, Indemnitee and Company
acknowledge that the extent of indemnification permissible under
Section 204(a)(11) of the California Corporations Code has not been
judicially determined; therefore, the enforceability of
Indemnitee's rights under Subparagraph (1) is uncertain.
6. Severability.
Nothing in this Agreement is intended to require or shall be
construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to
court order, to perform its obligations under this Agreement shall
not constitute a breach of the Agreement. If the application of any
provision or provisions of the Agreement to any particular facts or
circumstances shall be held to be invalid or unenforceable by any
court of competent jurisdiction, then (i) the validity and
enforceability of such provision or provisions as applied to any
other particular facts or circumstances and the validity of other
provisions of this Agreement shall not in any way be affected or
impaired thereby and (ii) such provision(s) shall be reformed
without further action by the parties to make such provision(a)
valid and enforceable when applied to such facts and circumstances
with a view toward requiring Company to indemnify Indemnitee to the
fullest extent permissible by law.
7. Exceptions.
Any other provision herein to the contrary notwithstanding, the
Company shall not be obligated pursuant to the terms of this
Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims
(except counter-claims or cross-claims) initiated or brought
voluntarily by Indemnitee and not by way of defense, except with
respect to proceedings brought to establish or enforce a right to
indemnification under this Agreement or any other statute or law or
otherwise as required by the California Corporations Code, but such
indemnification or advancement of expenses may be provided by the
Company in specific cases if the Board of Directors finds it to be
appropriate; or
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of
competent jurisdiction determines that each of the material
assertions made by Indemnitee in such proceeding was not made in
good faith or was frivolous; or
(c) Insured Claims. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes or penalties, and amounts paid
in settlement) which have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors'
liability insurance maintained by the Company; or
(d) Claims under Section 16(b). To indemnify Indemnitee for
expenses or the payment of profits arising from the purchase and
sale by Indemnitee of securities in violation of Section 16(b) of
the Securities Exchange Act of 1934, as amended, or any similar
successor statute.
8. Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall constitute an original.
9. Successors and Assigns.
This Agreement shall be binding upon the Company and its successors
and assigns, and shall inure to the benefit of Indemnitee and
Indemnitee's estate, heirs, and legal representatives and permitted
assigns. Indemnitee may not assign this Agreement without the prior
written consent of the Company.
10. Attorneys' Fees.
In the event that any action is instituted by Indemnitee under this
Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and
expenses, including reasonable attorneys' fees, incurred by
Indemnitee with respect to such action, unless as a part of such
action, the court of competent jurisdiction determines that each of
the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event
of an action instituted by or in the name of the Company under this
Agreement or to enforce or interpret any of the terms of this
Agreement, Indemnitee shall be entitled to be paid all court costs
and expenses, including attorneys' fees, incurred by Indemnitee in
defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a
part of such action the court determines that each of Indemnitee's
material defenses to such action were made in bad faith or were
frivolous.
11. Notice.
All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the
date of such receipt, or (ii) if mailed by certified or registered
mail with postage prepaid, on the third business day after the date
postmarked. Addresses for notice to either party are as shown under
Authorized Signatures at the end of this Agreement, or as
subsequently modified by written notice.
12. Paragraph Headings.
The Paragraph and Subparagraph headings in this Agreement are
solely for convenience and shall not be considered in its
interpretation.
13. Waiver.
A waiver by either party of any term or condition of the Agreement
or any breach thereof, in any one instance, shall not be deemed or
construed to be a waiver of such term or condition or of any
subsequent breach thereof.
14. Entire Agreement: Amendment.
This instrument contains the entire integrated Agreement between
the parties hereto and supersedes all prior negotiations,
representations or agreements, whether written or oral except for
the Company's Articles of Incorporation and Bylaws. It may be
amended only by a written instrument signed by a duly authorized
officer of Company and by Indemnitee.
15. Choice of Law and Forum.
Except for that body of law governing choice of law, this Agreement
shall be governed by, and construed in accordance with, internal
laws of the State of California which govern transactions between
California residents. The parties agree that any suit or proceeding
in connection with, arising out of or relating to this Agreement
shall be instituted only in a state court located in Sonoma County
in the State of California to the fullest extent permissible or in
a federal court located in San Francisco County in the State of
California, and the parties, for the purpose of any such suit or
proceeding, irrevocably agree and submit to the personal and
subject matter jurisdiction and venue of any such court in any such
suit or proceeding and agree that service of process may be
effected in the same manner notice is given pursuant to Section 11
above.
16. Consideration.
Part of the consideration the Company is receiving from Indemnitee
to enter into this Agreement is Indemnitee's agreement to serve or
to continue to serve, as applicable, for the present as an Agent of
the Company. Nothing in this Agreement shall preclude Indemnitee
from resigning as an Agent of the Company nor the Company, by
action of its shareholders, board of directors, or officers, as the
case may be, from terminating Indemnitee's services as an Agent, as
the case may be, with or without cause.
Authorized Signatures
In order to bind the parties to this Indemnification Agreement,
their duly authorized representations have signed their names below
on the dates indicated.
Northern Empire Bancshares
By
DENNIS R. HUNTER, CHAIRMAN OF THE BOARD
801 FOURTH STREET
SANTA ROSA, CA 95404
Date Executed: APRIL 26, 1995
AGREED TO AND ACCEPTED:
INDEMNITEE:
WILLIAM P. GALLAHER
9066 BROOKS ROAD SOUTH
WINDSOR, CA 95492
Date Executed: APRIL 26, 1995
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This schedule contains summary financial information extracted from the Balance
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