<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-10198
THE SAN FRANCISCO COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 94-3071255
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Montgomery Street, 10th Floor
San Francisco, California 94111
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (415) 781-7810
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange
Class A Common Stock, on Which Registered
$0.01 Par Value None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 17, 1996, was $2,018,092 computed by reference to the
closing sales price of the Class A Common Stock as reported by Van Kasper &
Company.
The Registrant had 5,765,978 shares of Class A Common Stock outstanding on March
12, 1996.
Documents Incorporated by Reference
The definitive Proxy Statement for the Registrant's 1996 Annual Meeting of
Shareholders Part III
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THE SAN FRANCISCO COMPANY
1995 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENT
PART I
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Page
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<S> <C>
Item 1. Business....................................................................................... 1
The Company and the Bank..................................................................... 1
Private and Business Banking................................................................. 1
Association Bank Services.................................................................... 2
Stock Option Services........................................................................ 2
Escrow Services.............................................................................. 3
Trust Services............................................................................... 3
Real Estate Investment and Development Activities............................................ 3
Lending Activities........................................................................... 4
Problem Asset Portfolio...................................................................... 6
Correspondent Banks.......................................................................... 7
Employees.................................................................................... 7
Competition.................................................................................. 7
Regulatory Agreement and Orders.............................................................. 8
Regulation and Supervision................................................................... 10
Taxation..................................................................................... 18
Item 2. Properties..................................................................................... 18
Item 3. Legal Proceedings.............................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............................................ 19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ..................... 20
Item 6. Selected Financial Data........................................................................ 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......... 23
Item 8. Financial Statements and Supplementary Data.................................................... 41
Item 9. Changes in and Disagreements on Accounting and Financial Disclosures........................... 73
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 73
Item 11. Executive Compensation......................................................................... 73
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 73
Item 13. Certain Relationships and Related Transactions................................................. 73
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 73
</TABLE>
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PART I
ITEM 1 - BUSINESS
THE COMPANY AND THE BANK
The San Francisco Company (the "Company"), formerly the Bank of San
Francisco Company Holding Company, a Delaware corporation, is a one-bank holding
company, registered under the Bank Holding Company Act of 1956, for Bank of San
Francisco (the "Bank"), a California state chartered bank organized in 1978
whose deposits are insured by the Federal Deposit Insurance Corporation (the
"FDIC"), subject to applicable limits. The Company was organized in California
in 1981 and reincorporated in Delaware in 1988. The Bank, which the Company
acquired through a reorganization in 1982, is the only direct subsidiary of the
Company and accounts for over 99% of the consolidated assets of the Company. The
Bank delivers its services from its headquarters building, Bank of San Francisco
Building, at 550 Montgomery Street (at Clay Street), San Francisco, California
94111, and its phone number is (415) 781-7810.
The Company's Class A Common Stock, par value $0.01 per share (the
"Class A Common Stock"), is sold "over the counter". The closing price for the
Class A Common Stock on March 17, 1996 was $0.35.
The Bank currently specializes in providing private banking as well as
business banking for individuals, their businesses and other businesses,
primarily in the San Francisco banking market. See "-- Private and Business
Banking." In addition, the Bank provides specialized services related to
homeowners associations (see "-- Association Bank Services"), brokerage services
(see "-- Stock Option Services") and escrow services (see "-- Escrow"). In the
future, the Bank intends to establish specialized banking services for the Asian
private banking market for individuals who require private banking services both
in Asia and the United States.
In 1995, the Company recorded its first year of profit since 1990.
During the period from 1991 through 1994, the Company suffered an aggregate of
$74.6 million in losses, primarily as a result of defaulted loans secured by
real estate and losses on direct real estate development activities. The Company
and the Bank succeeded in avoiding insolvency during this period only through
the injection of a total of $56.3 million of new capital by the Company's
controlling majority stockholder, Mr. Putra Masagung. These losses nevertheless
caused impairments of capital and the breach of various regulatory requirements
that have led to the issuance of certain orders (the "Orders") by both state and
federal bank regulatory authorities imposing restrictions and requirements on
the Bank's business activities and requiring the timely resolution of problem
assets. In addition, the Company entered into an agreement with the Federal
Reserve Bank (the "FRB") which imposes restrictions and requirements on the
Company's business activities. See "-- Regulatory Agreements and Orders."
On February 26, 1996, the Company's majority shareholder committed to
investing additional capital totaling $4.5 million in the Company in
installments throughout 1996 in order to meet the minimum requirements of the
Capital Order and the Orders, and to provide opportunity for growth. See "--
Regulatory Agreements and Orders." On March 20, 1996, the Company received $1.0
million of the $4.5 million committed by the Company's majority shareholder
which was due on March 31, 1996.
Certain reclassifications were made in the prior years' financial
statements to conform to the current year presentation.
PRIVATE AND BUSINESS BANKING
Private and Business Banking at the Bank combines highly personalized
service with an array of products to meet the complex needs of its primary
clients -- executives, professionals and high net worth or high income
individuals and the private and closely held businesses with which these
individuals are associated. The Bank has specialized in private banking since it
began operations in 1979. In the San Francisco area, the Bank's focus on serving
the needs of its clients has led it to offer a range of services, including
general credit and depository services and specialized corporate escrow
services.
The Bank seeks to concentrate on establishing relationships with
private and closely held businesses and their owners and operators. In
particular, the Bank seeks relationships with individuals whose financial needs
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require customized banking programs. At December 31, 1995 and 1994, Private and
Business Banking managed approximately $38.0 million and $67.0 million in
deposits, representing approximately 36.0% and 45.5% of the Bank's total
deposits, respectively. At December 31, 1995 and 1994, Private and Business
Banking managed approximately $39.8 million and $72.7 million in loans,
representing approximately 74.8% and 68.3% of the Bank's total loans,
respectively.
Northern California has a highly diversified economic base, including
high technology electronic manufacturing, scientific research, real estate
construction, retail and wholesale trade and transportation. Much of the
diversity in the economic base is attributable to the service sector, including
finance, accounting, insurance, communications, law, consulting and tourism.
While many of the Bank's loans have been and continue to be collateralized by
real estate, and a significant portion of the Bank's clients' net worth has
historically consisted of real estate holdings, the Bank's deposit and lending
relationships have not been concentrated among borrowers within a specific
trade, service or industrial activity.
ASSOCIATION BANK SERVICES
Established in 1987, Association Bank Services operates throughout
California and is a major provider of deposit and financial management services
to homeowner and community associations in the State. The Bank offers deposit
accounts for operating funds and reserves, loans, assessment collection services
and investment services to homeowner and community associations. In addition,
the Bank offers lockbox and courier services, expedited deposit processing and
special handling of accounts to simplify banking operations. Deposits from
homeowner and community associations are a key component of the Bank's core
deposit base. A substantial portion of the Association Bank Services deposits
are held in individual accounts that are 100% covered by FDIC insurance. At
December 31, 1995 and 1994, the Association Bank Services Division accounted for
approximately $3.2 million and $3.1 million in loans, representing approximately
6.1% and 2.9% of the Bank's total loans, respectively.
At December 31, 1995 and 1994, the Association Bank Services accounted
for approximately $22.9 million and $41.6 million in deposits, representing
approximately 21.7% and 28.3% of the Bank's total deposits, respectively. The
Bank also offers a certificate of deposit placement service (CD Placement)
designed to invest a customer's funds in other insured financial institutions up
to a maximum of $100,000 per institution (for which the Bank is paid a fee based
on the average CD Placement investments outstanding).
Although a substantial portion of the individual Association Bank
Services deposit accounts are fully insured, a small number of "account
managers" control significant numbers of such individual accounts, thus
concentrating control of such deposits in the discretionary authority of a few
individuals. Accordingly, a decision by several such account managers to
withdraw their business from the Bank could have a significant impact on the
Bank's core deposits, and thus on the Bank's liquidity. In August 1995, the
manager and much of the staff of the Association Bank Services function left the
Bank to join a competitor, whose services have been actively marketed to the
Bank's customer base. Since September 30, 1995, there has been a decline of 5%
in Association Bank Service customer deposits, but management does not
anticipate that a significant loss of customer deposits is likely. However,
there can be no assurance that the Bank will be able to continue to stem the
loss of such deposits.
STOCK OPTION SERVICES
Begun in 1984, Stock Option Services provides a range of brokerage
services combined with a program to facilitate the exercise of stock options by
employees of publicly held companies. The stock option exercise program offers
employees the means to exercise, hold or sell their option shares at a minimum
cost.
In this program, the Bank makes loans to holders of stock options of
publicly traded companies for the purpose of enabling them to exercise their
options and sell the stock thus acquired. The Bank works with stock transfer and
employee benefits officers to coordinate the payment of the option exercise
price to the company granting such options, the provision for the payment of
taxes related to the exercise of such options, the issuance and subsequent sale
of the underlying stock and the distribution of the net sale proceeds. At
December 31, 1995 and 1994, the total amount of the Bank's stock option loans
outstanding was $1.2 million and $2.1 million, respectively. Such amounts can
vary substantially based upon the timing of the exercise of stock options as
well as market conditions.
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Historically, approximately 35% of Stock Option Services' clients have
generated over 90% of the fee income of Stock Option Services. These clients are
the focus of Stock Option Services' customer service activities; however, this
concentration of fee income and service activities exposes the Bank to the
possibility of losing certain important clients. This concentration of accounts
leaves the Bank vulnerable to losing a large source of fee income with the
departure of a few clients. Management considers the fee income produced by this
activity to be highly volatile, and there can be no guarantee that income levels
from the activity can be maintained at current levels.
Stock Option Services is a substantially self-funding activity with
associated deposit balances closely tracking outstanding loan balances. Because
Stock Option Services' deposits are primarily non-interest bearing demand
deposit accounts, the Bank benefits from them by reducing its cost of funds.
Management believes that most of these clients are in industries that continue
to present growth opportunities. Accordingly, stock option programs should
represent a continuing component of such clients' overall compensation programs.
In addition, the Bank is expanding its marketing efforts to increase revenue
resulting from discount brokerage services and to diversify its client base.
ESCROW SERVICES
Begun in 1989, the Corporate Escrow Services Department ("Escrow")
provides a service for all non-real estate escrows, including the temporary
deposit and investment of funds, deposit of securities, personal property and
other assets by attorneys, business brokers and clients for business
transactions, disputes, life care facilities, and court actions. Escrow has
always made a modest contribution to operating profit and provides a modest
amount of deposits to fund other business activities. At December 31, 1995 and
1994, Escrow managed approximately $8.0 million and $6.6 million in deposits,
representing approximately 7.6% and 4.5% of the Bank's total deposits,
respectively.
TRUST SERVICES
The Bank was granted trust powers in late 1989, and beginning in 1990,
began to combine the personalized services of private banking with comprehensive
investment management services. The Trust activities have never achieved the
size necessary to generate the revenues required to cover its direct costs. As a
result the Bank has elected to suspend its Trust activities in 1996. The Bank
has so notified its existing Trust clients who are expected to transfer their
trust accounts during the first quarter of 1996. It is expected that the Bank
will resume trust activities in the future when the Bank has achieved a net
income level sufficient to support the investment required to increase trust fee
revenues to a self sustaining level.
REAL ESTATE INVESTMENT AND DEVELOPMENT ACTIVITIES
Management has withdrawn the Bank from all real estate development
activities. From 1985 through 1992, the Bank was engaged in commercial and
residential real estate development through Bank of San Francisco Real Estate
Investors ("BSFRI"), a wholly-owned subsidiary of the Bank. Then-applicable
regulations and practices of the FDIC and the Federal Reserve Board permitted
state-chartered bank subsidiaries of bank holding companies to engage in real
estate investment activities if such activities were permitted under state law
(as was the case in California). Under FDICIA (see "--Regulation and Supervision
- -- Federal Deposit Insurance Corporation Improvement Act of 1991"), the Bank is
no longer permitted to engage in real estate development activities and must
dispose of assets acquired for such purposes. See "-- Regulation and
Supervision." As required by FDICIA, the Bank had filed an plan to continue the
orderly divestiture of its real estate investments by December 19, 1996.
BSFRI's activities were substantially cut back after 1989. During 1995,
BSFRI did not sell any property. During 1994, BSFRI sold one property. At
December 31, 1995 and 1994, real estate investment totaled $236,000
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and $682,000, or approximately 0.2% and 0.4%, respectively, of the Company's
total assets, excluding real estate accounted for as Bank premises.
LENDING ACTIVITIES
Historically, the Bank concentrated its lending activities in
commercial and financial loans, in real estate construction and development
loans and real estate mortgage loans made primarily to individuals and
businesses in the San Francisco area and, for a brief period, in the Sacramento
area. The Bank also provides financing for the exercise of employee stock
options. The Bank has offered credit for private or closely held businesses
ranging from $250,000 to $2.5 million and credit to high net worth and high
income individuals ranging from $150,000 to $1.5 million.
At December 31, 1995 and 1994, the Bank had net loans outstanding of
$47.1 million and $99.5 million, respectively, which represented approximately
44.6% and 67.6% of the Bank's total deposits at those dates and approximately
41.0% and 63.5% of the total assets of the Company. During 1995, the Bank
originated $32.3 million of new loans, compared with $30.5 million of new loans
during 1994. The interest rates charged on the Bank's loans have varied with the
degree of risk, maturity and amount of the loans and have been subject to
competitive pressures, money market rates, funds availability and governmental
regulations. Approximately 83.2% of the Bank's loans have interest rates that
either adjust with the Bank's prime rate or mature within 90 days.
As of December 31, 1995 and 1994, approximately 70.0% and 70.9%,
respectively, of the Bank's loans were secured by real estate. While the
percentage declined slightly, total loans secured by real estate actually
declined to $37.0 million as of December 31, 1995 from $75.5 million as of
December 31, 1994. A loan may be secured by real estate even though the purpose
of the loan is not to facilitate the purchase or development of real estate and
even though the principal source of repayment is not the sale of the real estate
serving as collateral. However, in accordance with the terms of the Orders the
Bank has agreed to diversify its risk by reducing the Bank's exposure to real
estate lending and investment. See "-- Regulation and Supervision."
LENDING POLICIES AND PROCEDURES
The Bank's lending policies are established by the Bank's senior
management and approved by the Board of Directors of the Bank and its Loan and
Investment Committee. The Bank is required by regulation to limit its maximum
outstanding balance to any one borrower to 25% of capital on secured loans and
to 15% of capital on unsecured loans. Secured loans are defined as loans secured
by a first deed of trust or possessory collateral. The Bank has established its
own internal limits on the outstanding balance of any single loan to a maximum
of $1.0 million. Any new or renewed loan for over $100,000 requires the approval
of the Loan and Investment Committee of the Board.
The Bank assesses the lending risks, economic conditions and other
relevant factors related to the quality of the Bank's loan portfolio in order to
identify possible credit quality risks. The Bank has requested its external
auditors, KPMG Peat Marwick LLP, to perform certain agreed upon procedures
beyond the scope of its external audit procedures in relation to certain loans
selected by the Bank. The credit review consultants review a sample of loans
periodically and report the results of its findings to the Audit Committee of
the Bank's Board of Directors. Results of reviews by the credit review
consultants as well as examination of the loan portfolio by state and federal
regulators are also considered by management in determining the level of the
allowance for loan losses. In addition, the allowance for loan losses is
reviewed and measured against the analysis of individual credits when the
potential for loss exceeds amounts assigned to assets of similar risk
classifications because of collateral values, payment history or economic
conditions.
When a borrower fails to make a required payment on a loan, the loan is
classified as delinquent. If the delinquency is not cured, workout procedures
are generally commenced. If workout proceedings are not successful, collection
procedures, which may include collection demands, negotiated restructures,
foreclosures and suits for collection, are initiated. In general, loans are
placed on non-accrual status after being contractually delinquent as to
principal and interest for more than 90 days, or earlier, if management believes
full collection of future principal and interest on a timely basis is unlikely.
When a loan is placed on non-accrual status, all interest accrued but not
received is charged against interest income. During the period in which a loan
is on non-accrual status, any
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payment received may be used to reduce the outstanding loan balance. A
non-accrual loan is restored to an accrual basis when principal and interest
payments are being paid currently and full payment of principal and interest is
expected. Loans that are well secured and in the process of collection remain on
accrual status.
The Bank may restructure loans as a result of a borrower's inability to
service the obligation under the original terms of the loan agreement.
Restructures are executed only when the Bank expects to realize more from a
restructured loan than from allowing the loan to be foreclosed or seeking other
forms of collection.
CREDIT QUALITY
In its lending operations, the Bank continues to take steps to
strengthen its credit management practices and to improve the overall quality of
the loan portfolio. Such steps include instituting more stringent underwriting
standards and emphasizing lending to small businesses, corporations and
individuals for cash flow, inventory funding and other investments. As a result
of the desire to reduce concentrations of real estate loans, the Bank has
substantially eliminated its origination of land acquisition and development
loans other than lending to community redevelopment projects and funding
outstanding commitments. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Valuation Allowances."
COMPOSITION OF LOAN PORTFOLIO
The composition of the Bank's loan portfolio at December 31 is
summarized as follows:
<TABLE>
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At December 31,
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(Dollars in Thousands) 1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
Real estate mortgage $ 31,388 $ 62,149 $ 82,403 $ 90,099 $ 120,264
Real estate construction 5,661 9,004 14,023 37,659 61,756
Commercial and financial 16,128 35,268 53,084 107,955 99,343
Net lease financing 31 31 230 363 490
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53,208 106,452 149,740 236,076 281,853
Deferred fees and discounts, net (180) (388) (550) (863) (1,162)
Allowance for possible loan losses (5,912) (6,576) (8,050) (8,400)
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Total loans, net $ 47,116 $ 99,488 $ 141,140 $ 226,813 $ 272,280
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</TABLE>
The following table presents the loan portfolio at December 31, 1995
based upon various contractually scheduled principal payments allocated to
maturity categories. This table does not reflect anticipated prepayment of
loans.
<TABLE>
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One to After
Within Five Five
(Dollars in Thousands) One Year Years Years Total
--------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage $ 9,103 $12,731 $ 9,554 $31,388
Real estate construction 5,661 -- -- 5,661
Commercial and financial 11,748 4,069 311 16,128
Net lease financing 31 -- -- 31
--------------------------------------------------
Total loans $26,543 $16,800 $ 9,865 $53,208
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Loans due in one year or more include $7.7 million with fixed interest
rates and $18.9 million with floating or adjustable rates based on prime rate.
Construction Lending and Real Estate Mortgage Lending. Historically,
the Bank has made loans to finance the construction of commercial, industrial
and residential properties and to finance land development. Presently, the
Bank's policy is not to make such loans. From time to time, the Bank sought
participants to share in the funding of real estate construction loans. At
December 31, 1995 and 1994, real estate construction and mortgage loans
constituted approximately 69.6% and 67.5%, respectively, of the Bank's gross
loans outstanding. In 1993, management decided to reduce the Bank's real estate
construction lending activities in order to help further diversify the
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Bank's loan portfolio. Accordingly, gross real estate construction loans
outstanding declined $3.3 million or 37.1%, and $5.0 million or 35.8% at
December 31, 1995 and 1994, respectively.
The Bank's real estate mortgage loans typically are secured by first or
second deeds of trust on either commercial or residential property, and have
original maturities of three years or more. Such loans have been non- revolving
and generally have had maturities that do not exceed ten years. Repayment terms
generally include principal amortization over a negotiated term, with balloon
principal payments due upon maturity of the loans. The typical purpose of these
loans is the acquisition of real property securing the loan. The primary sources
of repayment have been the properties' cash flow in the case of commercial real
estate loans and the borrowers' cash flow in the case of residential real
estate. The secondary source of repayment is the sale of the real property
securing the loan. Real estate mortgage loans accounted for approximately 59.0%
of the Bank's gross loans outstanding as of December 31, 1995 and 1994.
At December 31, 1995 and 1994, residential mortgage loans accounted for
$3.5 million and $4.2 million, or 6.6% and 4.0% of gross loans outstanding,
respectively.
Commercial and Financial Loans. The Bank offers a variety of commercial
and financial lending services, including revolving lines of credit, working
capital loans, letters of credit and loans to facilitate the exercise of stock
options. These loans are typically secured by cash deposits, accounts
receivable, equipment, inventories, investments, real estate and securities. In
underwriting commercial and financial loans, the Bank focuses on the net worth,
income, liquidity and cash flows of the borrower or borrowers and, in the case
of secured loans, the value of the collateral. The Bank's commercial and
financial loans typically bear a floating rate of interest based on the prime
rate. The Bank's commercial and financial loans are primarily in principal
amounts of at least $100,000 and generally have terms of one year or less.
As of December 31, 1995 and 1994, the Bank had commercial and financial
loans outstanding of $16.1 million and $33.3 million constituting approximately
30.3% and 31.3% of the Bank's gross loans, respectively. As of December 31,
1995, approximately 72.8% of the Bank's gross commercial and financial loans
were scheduled to mature within one year. During 1995, no single commercial
client accounted for more than 2.9% of the Bank's outstanding loan financings.
At December 31, 1995 and 1994, the total amount of the Bank's stock
option loans outstanding was $1.2 million and $2.1 million, respectively. See
"-- Stock Option Services."
PROBLEM ASSET PORTFOLIO
The Bank's problem assets portfolio consists of non-performing loans,
real estate held after foreclosure ("other real estate owned" or "OREO"), real
estate with an impaired value that was originally acquired by the Bank for its
own development and loans that are performing but otherwise have undesirable
characteristics (as a result, for instance, of impaired collateral or adverse
developments with respect to the borrower's ability to service the loan out of
the cash flow of the collateral property). As a result of the Bank's real
estate lending and the weak economic condition of the California real estate
markets, a significant number of loans and investments made by the Bank from
1985 through 1992 have subsequently proven difficult or impossible to recover
without incurring losses. As of December 31, 1995, the Bank had $7.5 million in
problem loans and $7.8 million in other problem assets (OREO and real estate
investments).
In 1995, the Bank reduced its problem asset portfolio by $4.8 million,
from $20.1 million to $15.3 million, in accordance with the requirements of the
Orders (See "-- Regulatory Agreement and Orders"), through resolutions, charge
offs and improvements in loan quality. Of the $15.3 million of problem assets in
the Bank's portfolio at December 31, 1995, properties classified by the Bank as
other real estate owned comprised 49.0% of the total value of the problem asset
portfolio and 49.0% was held on a non-accrual basis. Based upon information
presently available, management believes that the Bank has made sufficient
provision to its allowance for possible loan losses and specific reserves to
absorb expected losses that might result from the Bank's current strategies to
resolve the problem assets.
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Presently, the Bank's strategies include the reduction of problem
assets through individual sales and workout plans. Management expects that such
efforts would not be likely to entail further write downs of the problem assets
but there can be no assurance of this.
CORRESPONDENT BANKS
The Bank has correspondent relationships with twelve banks for the
purpose of check clearing, selling federal funds, buying and selling investment
securities, the safekeeping of investment portfolio and related record keeping,
stock registration and stock transfer services, credit card issuance and
servicing, and issuance of letters of credit.
EMPLOYEES
At December 31, 1995, the Company and the Bank employed 47 persons,
consisting of 44 full-time and 3 part-time employees.
COMPETITION
The banking business in California, and specifically the market area
served by the Bank, is highly competitive. The Bank competes for loans and
deposits with other commercial banks, including some of the country's and the
world's largest banks, savings and loan associations, finance companies, money
market funds, brokerage houses, credit unions and non-financial institutions. By
virtue of their larger amounts of capital, many of the financial institutions
with which the Bank competes have significantly greater lending limits than the
Bank and perform certain functions, including corporate trust services and
international banking services, which are not presently offered directly by the
Bank although such functions may be offered indirectly by the Bank through
correspondent institutions.
The Bank's strategy for meeting its competition has been to concentrate
on discrete segments of the market for financial services, particularly small to
medium-sized businesses and their owners, professionals, corporate executives,
affluent individuals, and homeowners and community associations, by offering
specialized and personalized banking services to such clients. In addition, the
Bank offers a range of brokerage services to employees of publicly held
companies and Private and Business Banking clients where it competes with other
brokerage firms, including some of the country's largest brokerage firms.
From time to time, legislation has been and continues to be proposed or
enacted which has the effect of increasing the cost of doing business for banks,
limiting the permissible activities of banks, or affecting the competitive
balance between banks and other financial institutions or between large banks
and small banks. It is difficult to predict the competitive impact that these
and other changes in legislation may have in the future on commercial banking in
general or on the business of the Bank in particular.
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REGULATORY AGREEMENT AND ORDERS
CAPITAL ORDERS
On March 24, 1995, the California State Banking Department (the "SBD")
issued an order for the Bank to increase its capital (the "Capital Order"). The
Capital Order required that the Bank increase its capital by $4.2 million on or
before April 10, 1995 and by a minimum amount necessary to at least equal the
amount of capital necessary to increase shareholder's equity to not less than
7.0% of total tangible assets (the "Leverage Capital") on or before June 30,
1995. During the second quarter 1995, the Company received contributions
totaling $4.3 million in capital from its majority shareholder. The Company
contributed $4.7 million to the Bank during the second quarter of 1995. As of
December 31, 1995, with the second quarter 1995 infusion of capital and the 1995
earnings, the Bank is considered adequately capitalized for the purpose of the
industry standard capital categories and the FDIC has so notified the Bank.
On February 26, 1996, the Company's majority shareholder committed to
investing additional capital totaling $4.5 million in the Company in
installments throughout 1996 in order to meet the minimum requirements of the
Capital Order and the Orders as described below. On March 20, 1996, the Company
received $1.0 million of the $4.5 million committed by the Company's majority
shareholder which was to be received by March 31, 1996. The Company contributed
the capital to the Bank. As a result of the March 20, 1996 capital contribution,
the Bank expects to meet the minimum Leverage Capital ratio of 7% as of March
31, 1996, but the Bank is not in compliance with the Capital Order. No
assurances have been given that the SBD will refrain from taking action against
the Bank to enforce its Capital Order should the Bank's Leverage Capital ratio
fall below the 7.0% minimum requirement.
FEDERAL RESERVE BOARD WRITTEN AGREEMENT
On December 16, 1994, the Company and the FRB entered into a Written
Agreement (the "Agreement") that supersedes the previous FRB directive dated
April 20, 1992. The Agreement prohibits the Company, without prior approval of
the FRB, from: (a) paying any cash dividends to its shareholders; (b) directly
or indirectly, acquiring or selling any interest in any entity, line of
business, problem or other assets; (c) executing any new employment, service, or
severance contracts, or renewing or modifying any existing contracts with any
executive officer; (d) engaging in any transactions with the Bank that exceeds
an aggregate of $20,000 per month; (e) engaging in any cash expenditures with
any individual or entity that exceeds $25,000 per month; (f) increasing fees
paid to any directors for attendance at board or committee meetings, or paying
any bonuses to any executive officers; (g) incurring any new debt or increasing
existing debt; and (h) repurchasing any outstanding stock of the Company. The
Company is required to submit a progress report to the FRB on a quarterly basis.
The Company was also required to submit to the FRB an acceptable
written plan to improve and maintain an adequate capital position, a
comprehensive business plan concerning current and proposed business activities,
and a comprehensive operating budget for the Bank and the consolidated Company.
In addition, the Board of Directors was required to submit an acceptable written
plan designed to enhance their supervision of the operations and management of
the consolidated organization.
The Company has filed all of the required submissions with the FRB in
accordance with the Agreement and management believes the Company is in
compliance with the Agreement.
CEASE AND DESIST ORDERS
On August 18, 1993, the Bank, without admitting or denying any alleged
charges, stipulated to Cease and Desist Orders (the "Orders") issued by the FDIC
and the SBD that became effective August 29, 1993 (the "Orders Effective Date").
The Orders directed, among other things, that the Bank: (a) achieve and maintain
a 7% leverage capital ratio on and after September 30, 1993; (b) pay no
dividends without the prior written consent of the FDIC and the California
Superintendent of Banks (the "Superintendent"); (c) reduce the $88.6 million in
assets classified "Substandard" or "Doubtful" as of November 30, 1992 (the date
of the then most recent full-scope FDIC and SBD Report of Examination of the
Bank), to no more than $40.0 million by September 30, 1994; (d) have and retain
management whose qualifications and experience are commensurate with their
duties and responsibilities to operate the Bank in a safe and sound manner,
notify the FDIC and the Superintendent at least 30 days prior to adding or
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replacing any new director or senior executive officer, and comply with certain
restrictions in compensation of senior executive officers; (e) maintain an
adequate reserve for loan losses; (f) not extend additional credit to, or for
the benefit of, any borrower who had a previous loan from the Bank that was
charged off or classified "Loss" in whole or in part; (g) develop and implement
a plan to reduce its concentrations of construction and development loans; (h)
not increase the amount of its brokered deposits above the amount outstanding on
the Orders Effective Date ($20.0 million) and submit a written plan for
eliminating reliance on brokered deposits; (i) revise or adopt, and implement,
certain plans and policies to reduce the Bank's concentration of construction
and land development loans, reduce the Bank's dependency on brokered deposits
and out of area deposits, and to improve internal routines and controls; (j)
reduce the Bank's volatile liability dependency ratio to not more than 15% by
March 31, 1994; (k) eliminate or correct all violations of law set out in the
most recent Report of Examination, and take all necessary steps to ensure future
compliance with all applicable laws and regulations; and (l) establish a
committee of three independent directors to monitor compliance with the Orders
and report to the FDIC and the Superintendent on a quarterly basis.
The findings of the FDIC and SBD at their recent examination which
began January 29, 1996 were the Bank was not in compliance with certain
provisions of the Orders. As of December 31, 1995, the Bank did meet the
industry-wide capital requirements but failed to meet the 7% leverage ratio
imposed by the Orders. With the $1.0 million in capital contributed on March 20,
1996, the Bank expects to meet the minimum capital requirement of the Orders.
The Bank reduced its volatile liability dependency ratio to below the
requirement of the Order of 15% to negative 17% as of December 31, 1995.
Management believes that as of March 29, 1996 it is in substantial compliance
with the requirements of the Orders.
CAPITAL IMPAIRMENT ORDERS
The California Financial Code (the "Financial Code") requires the
Superintendent to order any bank whose contributed capital is impaired to
correct such impairment within 60 days of the date of his or her order. Under
Section 134(b) of the Financial Code, the "contributed capital," defined as all
shareholders' equity other than retained earnings, of a bank is deemed to be
impaired whenever such bank has deficit retained earnings in an amount exceeding
40% of such contributed capital. Under Section 662 of the Financial Code, the
Superintendent has the authority, in his or her discretion, to take certain
appropriate regulatory action with respect to a bank having impaired contributed
capital, including possible seizure of such bank's assets. A bank that has
deficit retained earnings may, subject to the approval of its shareholders and
of the Superintendent, readjust its accounts in a quasi- reorganization, which
may include eliminating its deficit retained earnings, under Section 663 of the
Financial Code. However, a bank that is not able to effect such a
quasi-reorganization or otherwise to correct an impairment of its contributed
capital within 60 days of an order to do so from the Superintendent must levy
and collect an assessment on its common shares pursuant to Section 423 of the
California Corporations Code.
As of December 31, 1995, the Bank had contributed capital of $70.9
million and deficit retained earnings of $64.0 million, or approximately 90.3%
of contributed capital, within the meaning of Section 134(b) of the Financial
Code. Thus, under Section 134(b) of the Financial Code, the Bank's contributed
capital was impaired as of that date in the approximate amount of $35.6 million.
The Superintendent issued orders, most recently on February 5, 1996, to the Bank
to correct the impairment of its contributed capital within 60 days. As the sole
shareholder of the Bank, the Company (not the Company's shareholders) will
receive any notices of assessment issued by the Bank. The Bank is in violation
of this California law requiring it to assess the shares of the Bank (which are
all held by the Company) in order to correct the impairment of the Bank's
capital.
In response to the February 5, 1996 order requiring the Bank to correct
its impaired capital within 60 days, the Bank notified the SBD in writing that
it did not believe it will be in a position to comply with the order within 60
days, and requested the SBD's cooperation as the Company implements its business
plan, and as the Company continues to consider the requirements for a
quasi-reorganization. It is the policy of the Superintendent not to grant a
quasi-reorganization unless a Bank can establish that (a) it has adequate
capital, (b) the problems that created past losses and the impairment of capital
have been corrected and (c) it is currently operating on a profitable basis and
will continue to do so in the future. As long as the Bank's contributed capital
is impaired, the Superintendent is authorized to take possession of the property
and business of the Bank, or to order the Bank to comply with the legal
requirement and levy an assessment on the shares of the Bank held by the Company
sufficient to correct the impairment. As the Company is the sole shareholder of
the Bank, the assessment would be made on the Company. The Company does not have
the funds to satisfy such an assessment. Management believes, however, that the
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Superintendent has never exercised his bank takeover powers under Section 134
solely on the basis that a bank's capital is impaired under the standards set
forth in Section 134.
REGULATION AND SUPERVISION
Bank holding companies and banks are subject to extensive supervision
and regulation. The following summaries of certain statutes and regulations
affecting banks and bank holding companies do not purport to be complete. Such
summaries are qualified in their entirety by reference to such statutes and
regulations.
THE COMPANY
The Company, as a bank holding company, is subject to regulation under
the U.S. Federal Bank Holding Company Act of 1956, as amended (the "Holding
Company Act"), and is registered with and subject to the supervision of the FRB.
It is the policy of the FRB that each bank holding company serve as a source of
financial and managerial strength to its subsidiary banks and conduct its
operations in an safe or sound manner.
The Holding Company Act generally restricts the Company from engaging
in any business other than managing or controlling banks or furnishing services
to its subsidiaries. Among the exceptions to such restrictions are certain
activities which, in the opinion of the FRB, are so closely related to banking
or to managing or controlling banks as to be a proper incident to banking. The
Company also is generally prohibited from acquiring direct or indirect ownership
or control of more than 5% of any class of voting shares of any company unless
that company is engaged in activities permissible for bank holding companies and
the Company receives the prior approval of the FRB.
The Company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, sale or
lease of property or provision of services. For example, with certain
exceptions, the Bank is not permitted to condition an extension of credit on a
customer obtaining other services provided by it or the Company, or on a promise
by the customer not to obtain other services from a competitor. The FRB is,
however, becoming increasingly receptive to pricing rebates conditioned upon the
Bank customer purchasing bundled groups of services. In addition, applicable
federal law imposes certain restrictions on transactions between the Bank and
its affiliates. As an affiliate of the Bank, the Company is subject, with
certain exceptions, to the provisions of federal law imposing limitations on,
and requiring collateral for, loans by the Bank to any affiliate.
The Holding Company Act also requires the Company to obtain the prior
approval of the FRB before acquiring all or substantially all of the assets of
any bank or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition, the Company would own or control, directly or
indirectly, more than 5% of any class of voting shares of such bank.
Finally, the Company is subject to restrictions on its operations
imposed by the Agreement. See "-- Regulatory Agreement and Orders -- Federal
Reserve Board Written Agreement."
THE BANK
The Bank is a California state-chartered bank and is subject to
regulation, supervision and periodic examination by the SBD and the FDIC. The
Bank is not a member of the Federal Reserve System, but is nevertheless subject
to certain regulations of the FRB. The Bank's deposits are insured by the FDIC
to the maximum amount permitted by law, which is currently $100,000 per
depositor in most cases.
The regulations of state and federal bank regulatory agencies govern
most aspects of the Bank's business and operations, including but not limited
to, the scope of its business, its investments, its reserves against deposits,
the timing of the availability of deposited funds, the payment of dividends,
potential expansion, and the maximum rates of interest allowed on certain
deposits.
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The Bank is subject to regulatory and operating restrictions pursuant
to several orders and a notification issued by the FDIC and SBD. These orders
and restrictions are discussed in full in "Regulatory Agreement and Orders".
CAPITAL ADEQUACY REQUIREMENTS
The Company is subject to the FRB's capital guidelines for bank holding
companies while the Bank is subject to the FDIC's regulations governing capital
adequacy for nonmember banks and to similar rules under California banking law.
As noted below, the Federal banking agencies have solicited comments on a
proposed regulation which would impose additional capital requirements on banks
based on the interest rate risk inherent in a bank's portfolio. While press
reports have suggested that this proposal will not be adopted, the banking
agencies have not withdrawn it.
The FRB has established a minimum leverage ratio of 3% Tier 1 capital1
to total assets for bank holding companies that have received the highest
composite regulatory rating (a regulatory measurement of capital, assets,
management, earnings and liquidity) and that are not anticipating or
experiencing any significant growth. All other institutions will be required to
maintain a leverage ratio of at least 100 to 200 basis points above the 3%
minimum.
FRB regulations require bank holding companies to maintain a minimum
ratio of qualifying total capital to risk-weighted assets of 8.00%. Risk-based
capital ratios are calculated with reference to risk-weighted assets, including
both on and off-balance sheet exposures, which are multiplied by certain risk
weights assigned by the FRB to those assets. At least one-half of the qualifying
capital must be in the form of Tier 1 capital.
In certain circumstances, the FRB may determine that the capital ratios
for a bank holding company must be maintained at levels which are higher than
the minimum levels required by the guidelines. A bank holding company which does
not achieve and maintain the required capital levels may be issued a capital
directive by the FRB to ensure the maintenance of required capital levels.
The FDIC has established risk-based and leverage capital regulations
for state nonmember banks which are similar to the FRB's capital guidelines for
bank holding companies. In addition to these capital requirements, the Orders
require the Bank to meet an individual minimum capital requirement after
September 30, 1993 of 7% for Tier 1 capital to total average assets (leverage
ratio). The Bank's leverage capital ratio was 6.0% as of December 31, 1995. See
"-- Regulatory Agreement and Orders."
PAYMENT OF DIVIDENDS
Since April 20, 1992, the FRB has prohibited the Company from paying
any cash dividends to its shareholders without prior FRB approval. The ability
of the Company to pay dividends in the future will depend in large part on the
Company's ability to satisfy the concerns of the FRB as set forth in the
Agreement regarding the financial performance of the Company, and the ability of
the Bank to make dividend payments to the Company. The Bank's ability to make
dividend payments is dependent upon the ability of the Bank to return to
profitability, to satisfy the regulatory concerns expressed in the Orders, and
the ability of the Bank to cure its capital impairment or obtain approval from
the SBD to conduct a quasi-reorganization to reduce or eliminate the Bank's
deficit retained earnings. See "-- Regulatory Agreement and Orders -- Capital
Impairment Order."
In addition, any future payment of dividends by the Bank is subject to
meeting the state law requirement that amount of funds available for a cash
dividend shall be the lesser of retained earnings of the bank or the bank's net
income for its last three fiscal years (less the amount of any distributions to
shareholders made during such period). If the above test is not met, cash
dividends may be paid with the prior approval of the SBD, in an amount
- -------------------------
1/ Tier 1 capital is generally defined as the sum of the core capital elements
less goodwill and certain intangibles. The following items are defined as core
capital elements: (i) common stockholders' equity; (ii) qualifying noncumulative
perpetual preferred stock; and (iii) minority interests in the equity accounts
of consolidated subsidiaries.
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<PAGE> 14
not exceeding greatest of the bank's retained earnings, net income for its last
fiscal year, or the amount of its net income for its current fiscal year.
Accordingly, any future payment of cash dividends will depend upon the
Bank correcting its capital impairment, meeting applicable capital requirements,
maintaining an adequate allowance for loan and lease losses, satisfying the
terms of the Orders outstanding against it, its ability to conduct profitable
operations and other factors.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
General
FDICIA primarily addresses the safety and soundness of the deposit
insurance fund, supervision of and accounting by insured depository institutions
and prompt corrective action by the federal bank regulatory agencies for
troubled institutions. FDICIA gives the FDIC, in its capacity as federal insurer
of deposits, broad authority to promulgate regulations to assure the viability
of the deposit insurance fund including regulations concerning safety and
soundness standards. FDICIA also places restrictions on the activities of
state-chartered institutions and on institutions failing to meet minimum capital
standards and provides enhanced enforcement authority for the federal banking
agencies. FDICIA has strengthened FRB regulations regarding insider
transactions.
Prompt Corrective Action
FDICIA amended the Federal Deposit Insurance Act (the "FDIA") to
establish a format for closer monitoring of insured depository institutions and
to enable prompt corrective action by regulators when an institution begins to
experience difficulty. The general thrust of these provisions is to impose
greater and earlier scrutiny and more restrictions on institutions as their
requirements for additional capitalization increases.
FDICIA establishes five capital categories for insured depository
institutions: (a) Well Capitalized;2 (b) Adequately Capitalized;3 (c)
Undercapitalized;4 (d) Significantly Undercapitalized;5 and (e) Critically
Undercapitalized.6 All insured institutions (i.e., the Bank) are barred from
making capital distributions or paying management fees to a controlling person
(i.e., the Company) if to do so would cause the institution to fall into any of
the three undercapitalized categories. At December 31, 1995, the Bank was
considered adequately capitalized.
Undercapitalized institutions are subject to several mandatory
supervisory actions, including increased monitoring and periodic review of the
institution's efforts to restore its capital, submitting an acceptable capital
restoration plan, restricted asset growth, and limits on acquisitions, new
branches or new lines of business. A parent holding company of an
undercapitalized bank is expected to guarantee that the bank will comply with
the bank's capital restoration plan until the bank has been adequately
capitalized, on the average, for four (4)
- -------------------------------
2/ Well Capitalized means a financial institution with a total risk-based ratio
of 10% or more, a Tier 1 risk-based ratio of 6% or more and a leverage ratio of
5% or more, so long as the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure.
3/ Adequately Capitalized means a total risk-based ratio of 8% or more, a Tier 1
risk-based ratio of 4% or more and a leverage ratio of 4% or more (3% or more if
the institution has received the highest composite rating in its most recent
report of examination) and does not meet the definition of a Well Capitalized
institution.
4/ Undercapitalized means a financial institution with a total risk-based ratio
of less than 8%, a Tier 1 risk-based ratio of less than 4% or a leverage ratio
of less than 4%.
5/ Significantly Undercapitalized means a financial institution with a total
risk-based ratio of less than 6%, a Tier 1 risk-based ratio of less than 3% or a
leverage ratio of less than 3%.
6/ Critically Undercapitalized means a financial institution with a ratio of
tangible equity to total assets that is equal to or less than 2%.
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<PAGE> 15
consecutive quarters. Such guarantee is limited to the lesser of 5% of the
bank's total assets at the time it became undercapitalized or the amount
necessary to bring the bank into full capital compliance.
Significantly undercapitalized institutions and undercapitalized
institutions that fail to submit and implement adequate capital restoration
plans are subject to the mandatory provisions applicable to undercapitalized
institutions and, in addition, may be required to: sell additional capital,
including voting shares; restrict transactions with affiliates; restrict
interest rates paid on deposits; restrict asset growth or reduce total assets;
terminate, reduce or alter any risky activities; elect new directors and install
new management; cease accepting deposits from correspondent depository
institutions; or divest or liquidate certain subsidiaries. A bank holding
company may be required to divest itself of any affiliate of the institution
(other than another insured depository institution) under certain conditions.
In addition, significantly undercapitalized institutions will be
prohibited from paying any bonus or raise to a senior executive officer without
prior agency approval. No such approval will be granted to an institution which
is required to but has failed to submit an acceptable capital restoration plan.
Critically undercapitalized institutions are required to enter into a
written agreement to increase Tier I leverage capital to such level as the FDIC
deems appropriate or the institution may be subject to termination of insurance
action by the FDIC. The written agreement would require the immediate efforts by
the institution to acquire the required capital.
FDICIA also provides that if a well or adequately capitalized or
undercapitalized institution is in an unsafe or unsound condition or is engaging
in an unsafe or unsound practice, its capital category may be downgraded to
achieve a higher level of regulatory scrutiny and prompt corrective action.
FDICIA restricts the solicitation and acceptance of and interest rates payable
on brokered deposits by insured depository institutions that are not well
capitalized and has added new bases for which a conservator or receiver may be
appointed for undercapitalized and critically undercapitalized institutions and
under certain other circumstances not relating to capital levels. Finally,
FDICIA establishes a risk-based assessment system for calculating a depository
institution's semiannual deposit insurance premium under which institutions pay
premiums based upon their capital classification and supervisory risk.
Brokered Deposits
FDICIA restricts the acceptance of brokered deposits by insured
depository institutions that are not well capitalized. It also places
restrictions on the interest rate payable on brokered deposits and the
solicitation of such deposits. An undercapitalized institution will not be
allowed to solicit brokered deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on insured deposits
in the particular institution's normal market areas or in the market area in
which such deposits would otherwise be accepted.
The FDIC has promulgated final regulations with respect to the ability
of insured depository institutions in each of the new capitalization categories
to accept brokered deposits. Under the regulations, undercapitalized
institutions are prohibited from accepting funds obtained directly or indirectly
though a deposit broker. Adequately capitalized institutions may accept brokered
deposits only if a waiver is first obtained from the FDIC. Well capitalized
institutions are permitted by the regulations to accept brokered funds without
restriction. For purposes of the brokered deposit regulation the FDIC has stated
that the term "well capitalized" means an institution whose leverage and
risk-based capital ratios are at least one to two percentage points higher than
those currently required by applicable regulations, and which has not been
notified that it is in a troubled condition.
In addition to the above restrictions on acceptance of brokered
deposits, FDICIA provides that no pass-through deposit insurance will be
provided to employee benefit plan deposits accepted by an institution which is
ineligible to accept brokered deposits under applicable law and regulations.
Under the Order, the Bank is required to submit a written plan to the
FDIC for eliminating its reliance on brokered deposits, and to provide the
Regional Director of the FDIC and the SBD with monthly written reports outlining
the Bank's progress under the plan. The FDIC had granted the Bank permission to
renew brokered deposits through September 1995, provided that the Bank continued
to meet the definition of an adequately capitalized institution.
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Conservatorship and Receivership
FDICIA adds grounds to the previously existing list of reasons for
appointing a conservator or receiver for an insured depository institution
including: (a) substantial dissipation of assets or earnings due to an unsafe or
unsound practice or any violation of law or regulation; (b) existence of an
unsafe or unsound condition; (c) any willful violation of a cease and desist
order; (d) any concealment of assets, records, books or papers from any federal
or state bank regulatory agency; (e) likely inability of the institution to meet
obligations in the normal course of business; (f) losses threatening capital;
(g) the institution becomes undercapitalized where certain factors are present
suggesting the institution may not become adequately capitalized; or (h) the
institution is critically undercapitalized or otherwise has substantially
insufficient capital. The FDIC's March 28, 1995 Notification of Capital Category
included a determination that the Bank was critically undercapitalized thus
making the Bank eligible for conservatorship or receivership. As of December 31,
1995, the Bank is considered adequately capitalized for the purpose of the
industry standard capital categories and the FDIC has so notified the Bank.
FIRREA provides other grounds upon which a receiver or conservator may
be appointed for a state bank. These other grounds include "having substantially
insufficient capital," incurrence or likely incurrence of losses that will
deplete all or substantially all of a bank's capital with no reasonable prospect
for that capital to be replenished without federal assistance, or a violation of
law or regulation which is likely to weaken the condition of the institution.
Deposit Insurance Premiums
The FDIC currently charges higher deposit insurance premiums on banks
which pose greater risks to the deposit insurance fund. Under the rule, a bank
is required to pay an annual insurance premium for domestic deposits, depending
upon the bank's risk classification. A bank's risk classification is determined
by the FDIC according to the bank's capital ratios and the FDIC's evaluation of
the bank based upon federal and state supervisory examinations and other
relevant information. Under the classification system, the FDIC has assigned the
Bank its medium risk classification and set the Bank's deposit insurance premium
at 0.24% of average deposits.
Restrictions on Insured State Bank Activities and Investments
FDIC regulations generally prohibit an insured state bank from directly
engaging as principal in any activity that is not permissible for a national
bank, and also prohibit majority-owned subsidiaries of an insured state bank
from engaging in any activity that is not permissible for a subsidiary of a
national bank, unless the bank meets and continues to meet applicable minimum
capital standards and the FDIC determines that the conduct of the activity by
the bank and/or its majority-owned subsidiary will not pose a significant risk
to the deposit insurance funds.
If consent to engage in the activity is denied, the bank is required to
cease the activity not later than one year from the denial. However, the FDIC
may condition or restrict the conduct of any impermissible activity during this
phase-out period. If the activities of a subsidiary are denied consent by the
FDIC, the bank is required to divest its interest in the subsidiary as quickly
as prudently possible, but in no event later than December 19, 1996.
Alternatively, the bank may discontinue the impermissible activity, but this
must be effected within one year of the date of denial.
These regulations also impose new restrictions on real estate
investments, requiring that undercapitalized banks with subsidiaries holding
impermissible equity investments in real estate have ceased the activity by June
8, 1994, and divest the subsidiary or the real estate investments owned by the
subsidiary as soon as practicable, but in no event later than December 19, 1996.
State banks also must obtain the prior consent of the FDIC before making real
estate loans other than in compliance with guidelines established for national
banks. The Bank has conducted real estate investment activities through its
subsidiary BSFRI. As required by FDICIA, the Bank has filed an application to
continue the orderly divestiture of its real estate investments until December
19, 1996. The Bank was granted until December 31, 1995 to effect an orderly
divestiture of its real estate investments. Although the divestiture has not yet
been completed, the FDIC has not taken enforcement action against the Bank with
respect to such divestiture. The Bank has filed a request to extend the
application to continue the orderly divestiture by December 19, 1996.
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<PAGE> 17
Proposed Standards on Safety and Soundness
Pursuant to the requirements of FDICIA, recent FDIC and FRB regulations
promulgated under the Federal Deposit Insurance Act (FDIC Regulation Part 364
and FRB Regulation 12 CFR Sections 263.300-305) provide new safety and soundness
standards for insured non-member banks and bank holding companies.
The new Interagency Guidelines for Establishing Standards for Safety
and Soundness set out a series of criteria for a financial institution's own
policies, procedures, and systems in the areas of internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, and interest rate exposure. In addition, criteria are provided as
to what may constitute excessive compensation.
Extensions of Credit to Insiders and Transactions with Affiliates
The Federal Reserve Act and FRB regulations, which are applicable to
state nonmember banks under regulations of the FDIC, place limitations and
conditions on loans or extensions of credit to: a bank's or bank holding
company's executive officers, directors and principal shareholders (i.e., in
most cases, those persons who own, control or have power to vote more than 10%
of any class of voting securities); any company controlled by any such executive
officer, director or shareholder; or any political or campaign committee
controlled by such executive officer, director or principal shareholder.
Loans extended to any of the above persons must comply with
loans-to-one-borrower limits, require prior full board approval when aggregate
extensions of credit to such person exceed specified amounts, must be made on
substantially the same terms (including interest rates and collateral) as, and
following credit-underwriting procedures that are not less stringent than, those
prevailing at the time for comparable transactions with non- insiders, and must
not involve more than the normal risk of repayment or present other unfavorable
features. Regulation O also prohibits a bank from paying an overdraft on an
account of an executive officer or director, except pursuant to a written
pre-authorized interest-bearing extension of credit plan that specifies a method
of repayment or a written pre-authorized transfer of funds from another account
of the officer or director at the bank.
The provisions of Regulation O summarized above reflect substantial
strengthening as a result of the adoption of FDICIA. FDICIA also resulted in an
amendment to Regulation O which provides that the aggregate limit on extensions
of credit to all insiders of a bank as a group cannot exceed the bank's
unimpaired capital and unimpaired surplus.
Government Monetary Policy
The earnings of the Bank and, therefore, the earnings of the Company,
are and will be affected by the policies of regulatory authorities, including
the FRB. An important function of the FRB is to regulate the national supply of
bank credit. Among the instruments used to implement these objectives are open
market operations in U.S. Government securities, changes in reserve requirements
against bank deposits, and changes in the discount rate which banks pay on
advances from the Federal Reserve System. These instruments are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect interest rates on loans
or interest rates paid for deposits. The monetary policies of the FRB have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. The effect, if any, of such
policies upon the future business earnings of the Company and the Bank cannot be
predicted.
RECENT FEDERAL AND STATE LEGISLATION
FEDERAL
In late September of 1994, two major pieces of financial services
legislation were signed into law.
The Riegle Community Development and Regulatory Improvement Act of 1994
seeks to facilitate securitization of small business loans, reduce bank's
paperwork and regulatory burden, streamline anti-money laundering rules, and
toughen flood insurance compliance.
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Small Business Capital Formation Small business access to capital is
encouraged by Title II of the ACT, which seeks to remove impediments in existing
law to the securitization of small business loans and leases. The Small Business
Loan Securitization and Secondary Market Enhancement Act of 1994 creates a
secondary market framework for small business related securities, with the goal
of stimulating the flow of funds to small businesses.
Paperwork Reduction and Regulatory Improvement Title III of the Act of
1994 provides a number of initiatives to lessen the regulatory burden placed
upon banks and other depository institutions. Title III also affects a number of
the consumer compliance laws by allowing streamlined disclosures for radio
advertising of consumer leases, providing consumers with information necessary
to challenge an "adverse characterization" due to a credit reporting agency
report and by clarifying the disclosure requirements under the Real Estate
Settlement Procedures Act regarding the transfer of serviced mortgaged loans.
Money Laundering Title IV addressed reform of Currency Transaction
Reports to increase their usefulness to the Federal Government and to various
law enforcement agencies in combating money laundering. The measure also calls
for improvement in the identification of money laundering schemes, better
controls over negotiable instruments drawn on foreign banks by making them
subject to reporting, and uniform licensing and registration of check cashing
and money transmitting businesses, which may be used to facilitate illegal
currency transactions. A new form of reporting suspicious transactions and
activity has recently been promulgated.
Flood Insurance Title V, the "National Flood Insurance Reform Act of
1994" reforms the financial condition of the National Flood Insurance Program
(NFIP). This legislation requires improved compliance with the mandatory
purchase requirements of the NFIP by bank lenders and secondary market
purchasers.
Mergers and Acquisitions The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 liberalizes both interstate banking by way of
bank subsidiaries and provides for phased-in direct interstate branch banking.
Specifically, Title I of the Interstate Banking Act allows adequately
capitalized and managed bank holding companies to acquire banks in any state
starting one year after enactment. Another important provision allows interstate
merger transactions beginning June 1, 1997. States are permitted, however, to
pass legislation providing for either earlier approval of mergers with out-of
State banks, or "opting-out" of interstate mergers entirely and as noted below,
California has "opted in" the interstate banking effective October 2, 1995.
Through interstate merger transactions, banks will be able to acquire branches
of out-of-State banks by converting their offices into branches of the resulting
bank. The Act provides that it will be the exclusive means for bank holding
companies to obtain interstate branches.
Protecting key provisions of State law, the Act provides that required
conditions and commitments made relating to interstate mergers that predate the
Act's affective date will remain in force. After the Act becomes effective,
State taxation, community reinvestment, antitrust, deposit concentration caps
and minimum age provisions will be honored unless preempted. In this regard,
Congress intended that the Act does not alter time-tested preemption rules.
Moreover, the Act expressly states that neither current federal law, nor the
Act's amendments provide authority to preempt State law dealing with homestead
protection.
Branching and Community Guidelines Banks may establish and operate a
"de novo branch" in any State that "opts-in" to de novo branching. Foreign banks
are allowed to operate branches, either de novo or by merger. These branches can
operate to the same extent that the establishment and operation of such branches
would be permitted if the foreign bank were a national bank or state bank.
Interstate banks proposing to close any branch in low-or moderate income areas
are now required to provide notice to customers of the proposed closing.
Title I also requires each Federal banking agency to prescribe uniform
regulations including guidelines ensuring that interstate branches operated by
out-of-State banks are reasonably helping to meet the credit need of communities
where they operate. These agencies are required to conduct evaluations of
overall Community Reinvestment Act performance of institutions with interstate
branches. New procedural requirements are also required of the Federal banking
agencies pertaining to agency preemption opinion letters and interpretive rules
in connection with community reinvestment, consumer protection, fair lending and
establishment of interstate branches.
From the competitive viewpoint, the direct interstate banking and
enhanced interstate banking could be expected in increase the level of
competition faced by the Company and the Bank in California as well as widen the
universe of buyers of attractive banks in California.
-16-
<PAGE> 19
Revival of Statute of Limitations Title II, among other things, permits
in certain circumstances, the FDIC or Resolution Trust Corporation, acting as
conservator or receiver of a failed depository institution to "revive" tort
claims that had expired under a State statute of limitations within five years
of the appointment of a receiver or conservator.
State
As a California state-chartered bank, the Bank is subject to the
California banking laws and to regulation, supervision and periodic examination
by the SBD.
The California banking laws, among other matters, regulate: (a) the
process of issuance of a banking permit, including the application for, term of
and surrender or revocation of the permit; (b) the conduct of the banking
business, including banking days, banking offices, preservation and disposal of
records, borrowing by the bank and pledges of assets; (c) accounts, including
types of deposit accounts and claims made thereon; (d) reserves, including
forms, computations, limitations and exemptions; (e) loans, including
limitations on obligations to the bank by borrowers in general and by the bank's
officers, directors and employees; (e) mergers, consolidations and conversions
of banks, including changes in control of banks; and (f) liquidation and
dissolution of banks.
On October 2, 1995, a California interstate banking and branching law
became effective to implement the Federal interstate act described above. This
legislation "opted out" of the de novo branching and single branch acquisitions
and "opted in" as of October 2, 1995 to the interstate acquisition of whole
banks which have been in existence for more than five years. The new legislation
also authorized expanded correspondent bank agency relationships among
affiliated and unaffiliated insured banks. Like the federal act, this new
legislation will both increase competition and increase the number of buyers of
attractive California banking franchises.
Legislation known as the State Bank Parity Act give the California
Superintendent of Banks regulatory authority to seek to remove competitive
advantages granted to national banks by Congress and the Comptroller of the
Currency.
Other
Various other legislation, including proposals to overhaul the bank
regulatory system and to limit the investments that a depository institution may
make with insured funds, is introduced into Congress from time to time. The
Company cannot determine the ultimate effect that any potential legislation, if
enacted, would have upon the financial condition or operations of the Company or
the Bank.
RECENT REGULATIONS AND GUIDELINES
Interest Rate Risk
As required by FDICIA, the federal banking agencies have solicited
comments on a proposed method of incorporating an interest rate risk component
into the current risk-based capital guidelines, with the goal of ensuring that
institutions with high levels of interest rate risk have sufficient capital to
cover their exposure. Interest rate risk is the risk that changes in market
interest rates might adversely affect a bank's financial condition. Under the
proposal, interest rate risk exposures would be quantified by weighing assets,
liabilities and off-balance sheet items by risk factors which approximate
sensitivity to interest rate fluctuations. Institutions identified as having an
interest rate risk exposure greater than a defined threshold would be required
to allocate additional capital to support this higher risk. Higher individual
capital allocations could be required by the bank regulators based on
supervisory concerns. While press reports have suggested that this proposal will
not be adopted, the banking agencies have not withdrawn it.
As the federal banking agencies have solicited comments on this
proposal but have not yet proposed regulations to implement any interest rate
risk component into the risk-based capital guidelines, the ultimate impact on
the Company and the Bank of final regulation in this area cannot be predicted at
this time.
-17-
<PAGE> 20
State Bank Sales of Nondeposit Investments
Securities activities of state non-member banks, as well as their
subsidiaries and affiliates, are governed by FDIC regulations. The FDIC has
taken the position that bank sales of alternative investment products, such as
mutual funds and annuities, raise substantial bank safety and soundness concerns
involving consumer confusion over the nature of the products offered, and the
potential for mismanagement of sales programs for such investments which could
expose a bank to liability under the anti-fraud provisions of federal securities
laws.
Accordingly, the FDIC has issued guidelines to state non-member banks
which recommend, among other things, establishing a compliance and audit program
to monitor bank's mutual funds sales activities and compliance with applicable
federal securities laws, providing full disclosure to customers about the risks
of such investments (including the possibility of loss of principal investment),
conducting securities activities of bank subsidiaries or affiliates in separate
and distinct locations, and prohibiting bank employees involved in
deposit-taking activities from selling investment products or from giving
investment advice. Banks are also required to establish qualitative standards
for the selection and marketing of the investments offered by the bank and
maintain appropriate documentation regarding suitability of investments
recommended to bank customers.
TAXATION
The effective tax rates for the years ended December 31, 1995, 1994 and
1993, were 31.3%, 0.4% and 1.7%, respectively. The Company's Delaware Franchise
tax expense is included in income tax expense. For each of the years ended
December 31, 1995, 1994 and 1993, the federal statutory tax rate applicable to
the Company was 34.0%, (34.0)% and (34.0)%, respectively. Because the Company
has utilized all of its ability to carryback net operating losses, much of the
1995, 1994 and 1993 losses, and future losses, if any, must be carried forward
to offset future net operating income. In addition, the actual benefit rate may
be less than the current statutory rate due to tax differentials and the
alternative minimum tax. As of December 31, 1995, the Company has net operating
loss carryforwards for federal tax purposes of approximately $46.0 million which
expire in 2007 and onwards, and for California tax purposes of approximately
$27.0 million, which expire in 1998, 1999, and 2000. The Company has
rehabilitation tax credit carryforwards for federal tax purposes of
approximately $213,000, which expires in 2004 and 2005. In addition, the Company
has tax credits of approximately $275,000 which have no expiration. Utilization
of the net operating loss carryforwards, and rehabilitation and minimum tax
credit carryforwards may be limited on an annual basis under current tax law
due to the change in ownership in 1992 and a possible change in ownership in
future years.
ITEM 2 - PROPERTIES
The following table sets forth certain information concerning the
Bank's significant real property lease commitments:
<TABLE>
<CAPTION>
Square Expiration of Renewal
Banking Offices Footage Current Lease Period(s)
- --------------- ---------------------------- ---------
<S> <C> <C> <C>
550 Montgomery Street 89,000 2010 One option for an additional
San Francisco, CA 25 years
</TABLE>
The Bank has a long term lease on 550 Montgomery Street, an 89,000
square foot, historically significant office building on Clay and Montgomery
Streets in San Francisco's Financial District. The building serves as the
administrative and banking headquarters of the Company and the Bank. The Bank
currently subleases 48,682 square feet. An additional 14,100 square foot will be
made available for sublease in 1996.
The net rental expense and occupancy expenses for all leases of
premises were approximately $1.2 million and $2.1 million for each of the two
years ended December 31, 1995 and 1994.
-18-
<PAGE> 21
BANK OF SAN FRANCISCO BUILDING COMPANY (BSFBC)
During the third quarter of 1995, the Bank acquired all of the outside
limited partnership interest in BSFBC for a total of $3.3 million. The cost in
excess of book value of $525,000 is being amortized over the life of the
underlying lease through 2010 using the straight line method. As of December 31,
1995, the Bank holds all of the limited partnership interest. BSFBC holds the
lease on the Company's and Bank's headquarters at 550 Montgomery Street, San
Francisco, California.
The acquisition was accounted for by the purchase method. The
consolidated financial statements include the accounts of BSFBC. The Company's
consolidated operating results include the operations of BSFBC beginning July 1,
1995. On the acquisition date, the assets of BSFBC included leasehold
improvements and leasehold interest totaling $5.5 million and cash equivalent
investment securities totaling $1.3 million. The liabilities include other
borrowings which were used to finance the acquisition of leasehold interest by
BSFBC in 1986. The borrowing was repaid on October 31, 1995.
As a result of the acquisition, the Company's consolidated premises and
equipment increased to $8.7 million as of December 31, 1995 from $3.0 million as
of December 31, 1994. As of December 31, 1995, the Company's premises and
equipment is comprised of leasehold improvements totaling $5.6 million, lease
interest totaling $2.0 million, premium paid to acquire BSFBC totaling $508,000,
and furniture and equipment totaling $617,000. The acquisition, however, had the
effect of reducing the Bank's occupancy costs.
ITEM 3 - LEGAL PROCEEDINGS
LITIGATION
Because of the nature of its business, the Company and its
subsidiaries, including the Bank, are from time-to-time a party to legal
actions. The Bank has been dismissed from, or reached settlement or potential
settlement in litigation or potential litigation matters which management deems
material. In some instances the Bank has made or agreed to make certain
payments. As a result of the settlement or potential settlement of certain
lawsuits, the Company established a litigation reserve of $536,500 as of
December 31, 1994. The Company charged $411,000 to the reserve during 1995.
Litigation reserve balance at December 31, 1995 was $126,000. Based upon
information available to the Company and the Bank, and its review of such
outstanding claims to date, management believes the liability relating to these
actions, if any, will not have a material adverse effect on the Company's
liquidity, consolidated financial condition or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
-19-
<PAGE> 22
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MARKET
MARKET INFORMATION
The Company's Class A Common Stock was traded on the American Stock
Exchange (the "AMEX") under the symbol "SFH" until April 14, 1995 and was
delisted in November 1995. The closing sale price for the Class A Common Stock
on the AMEX on April 12, 1995 was $4.50. The following table sets forth the high
and low closing sale prices for the Class A Common Stock on the AMEX from
January 1994 to April 1995, and in the over-the-counter market from November to
December 31, 1995.
<TABLE>
<CAPTION>
1995 1994
--------------- -----------------
Quarter High Low High Low
--------------- -----------------
<S> <C> <C> <C> <C>
First $6.75 $4.50 $37.50 $22.50
Second (through April 12, 1995) 4.50 4.50 31.25 15.00
Third -- -- 17.00 10.00
Fourth 0.25 0.25 10.00 6.50
</TABLE>
The Series B Preferred Shares had been listed on the American Stock
Exchange since their issuance in October 1988. In March 1990, the Company
received approval from the Securities and Exchange Commission to delist the
Series B Preferred Shares, pursuant to Rule 12d2-2(d), under the Securities
Exchange Act of 1934, as amended. The Series A and Series C Preferred Shares
have never been listed on any exchange or traded in any other public market, and
none were outstanding at December 31, 1995. The Series D Preferred Shares have
never been listed on any exchange or traded in any other public market. At
December 31, 1995, 215,000 shares of Series D Preferred shares were outstanding.
The closing sales prices for the Class A Common Stock have been
adjusted to reflect the effect of the 1 for 20 reverse stock split that occurred
on May 23, 1994.
HOLDERS
As of December 31, 1995, the number of holders of record of the
Company's Class A Common Stock and Series B Preferred Shares was 382 and 13,
respectively, which management believes is in each case less than the number of
beneficial owners whose shares are held in nominee names. As of December 31,
1995, the Company's majority shareholder holds all of the outstanding Series D
Preferred Shares. As of December 31, 1995, there were no Series A or C Preferred
Shares outstanding.
DIVIDENDS
The Company is subject to dividend restrictions under the Delaware
General Corporation Law and regulations and policies of the FRB. The Company's
Series B Preferred Shares participate equally, share for share, in cash
dividends paid on the Class A Shares in addition to receiving the cash dividends
to which they are entitled. The Board of Directors suspended the dividend on the
Class A Shares and the Series B Preferred Shares.
The payment of cash dividends by the Bank to the Company is subject to
certain regulatory restrictions set forth in the California Financial Code. The
Bank and the Company have amended the Certificate of Determinations of Rights,
Preferences, Privileges and Restrictions of the 8% Series B Convertible
Preferred Stock issued by the Bank to the Company to provide that dividends on
the Bank's 8% Series B Convertible Preferred Stock shall be cumulative from year
to year. The Bank's Board of Directors has decided to suspend future payment of
dividends on the Preferred Stock to the Company, and the FRB Directive prohibits
the Company from paying any dividends without the prior approval of the FRB. See
"-- Regulatory Agreement and Orders" for a discussion of these restrictions.
-20-
<PAGE> 23
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16
Under Section 16(a) of the Securities Exchange Act of 1934, the
Company's directors, executive officers and any persons holding ten percent
(10%) or more of the Company's Class A Common Stock are required to report their
ownership of any class of stock and any changes in that ownership to the FRB and
to furnish the Company with copies of such reports. Specific due dates for these
reports have been established, and the Company is required to report any failure
to file on a timely basis by such persons. Based solely upon a review of copies
of reports filed with the FRB during the fiscal year ended December 31, 1995,
all reporting persons filed reports on a timely basis, except that Form 4
Statement of Changes in Beneficial Ownership (Form 4) and Form 5 Annual
Statement of Changes in Beneficial Ownership, from Mr. Putra Masagung, majority
shareholder, with respect to the purchases of Series D Preferred Shares and the
sale of 525,000 shares of Class A Common Stock during 1995.
-21-
<PAGE> 24
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data of the Company at and for the years ended December 31:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993 1992 1991
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets $114,862 $156,780 $231,021 $319,155 $402,699
Total loans 53,208 106,452 149,740 236,076 281,853
Total mortgage loans held-for-sale -- -- -- -- 6,826
Total securities held-to-maturity -- 7,859 5,078 3,683 1,608
Total securities available-for-sale 6,536 2,211 14,940 -- --
Total securities held-for-sale -- -- -- 18,731 20,457
Total deposits 105,673 147,148 210,111 285,685 373,199
Other borrowings -- 4,070 1,303 15,308 10,832
Shareholders' equity 6,880 2,129 17,455 15,676 16,181
OPERATING DATA:
Total interest income $10,691 $12,651 $18,155 $23,885 $36,742
Total interest expense 4,415 4,863 7,420 11,295 19,226
------------------------------------------------------------------------
Net interest income 6,276 7,788 10,735 12,590 17,516
Provision for loan losses 500 3,799 3,554 9,828 11,437
------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,776 3,989 7,181 2,762 6,079
Total non-interest income 2,521 2,135 4,497 4,368 6,173
Total non-interest expense 7,808 39,018 21,764 29,697 24,276
------------------------------------------------------------------------
Income (loss) before taxes 489 (32,894) (10,086) (22,567) (12,024)
Provision (benefit) for income taxes 153 142 169 (390) (2,870)
------------------------------------------------------------------------
Net income (loss) $ 336 $(33,036) $(10,255) $(22,177) $(9,154)
========================================================================
OTHER DATA:
Return on average assets 0.3% (16.8)% (3.5)% (6.2)% (2.2)%
Return on average equity 6.8 (183.0) (57.5) (153.0) (39.2)
Average equity to average assets 3.7 9.2 6.1 4.1 5.6
Equity to assets at period end 6.0 1.4 7.6 4.9 4.0
Interest rate spread for period 5.0 5.0 4.4 4.6 4.5
Net yield on average earning assets 5.1 5.1 4.6 4.5 4.8
Non-performing assets to total assets 13.1 12.8 18.8 16.8 13.5
Average interest-earning assets to
average interest-bearing liabilities 121.5 105.1 103.5 96.6 104.7
Non-interest expenses to average assets 6.0 19.8 7.6 8.9 5.9
Net interest income, after provision for
loan losses, to non-interest expense 72.2 10.24 32.4 9.2 25.0
Net loan charge-offs as a percent of
average loans 1.4 4.4 2.0 3.9 2.7
Allowance for loan losses as a
percent of loans 11.1 6.2 5.4 3.6 3.0
PER SHARE DATA:
Common shares outstanding,
end of period 5,765,978 5,766,008 444,990 445,100 114,134
Preferred shares outstanding,
end of period 231,291 16,291 916,591 316,591 437,500
Common Shares:
Book value per common share $0.43 $0.37 $(1.60) $21.60 $119.00
Income (loss) per weighted average
common share 0.05 (10.73) (23.00) (83.60) (82.60)
Cash dividend declared per common share -- -- -- -- 0.10
Dividend payout ratio -- -- -- -- --
</TABLE>
-22-
<PAGE> 25
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company recorded net income of $336,000 for the year ended December
31, 1995, following net losses of $33.0 million and $10.3 million for the years
1994 and 1993, respectively. The net income in 1995 resulted primarily from net
income from real estate operations. The net losses in 1994 and 1993 were
principally due to the high level of the provision for loan and real estate
owned losses, and declines in net interest income. In addition, the Company's
non-interest expense reached extremely high levels at 263.9% and 96.1% of total
revenues for the years 1994 and 1993, respectively.
Although the Company's provision for loan losses declined to $500,000 in
1995 from $3.8 million in 1994, and declined from $3.6 million in 1993, the
allowance for loan losses as a percentage of loans grew from 5.4% in 1993 to
6.2% in 1994, and to 11.1% in 1995. The Company's provision for loan losses and
the increase in the loan loss allowance as a percentage of outstanding loans
reflects management's concern over the decline in the credit quality of the
Bank's loan portfolio, regulatory examinations, and the high level of net loan
charge-offs during the period 1992 through 1994. The Company's net loan
charge-offs, primarily associated with unsecured commercial loans, loans secured
by real estate, and loans to facilitate the development of real estate, amounted
to $1.2 million in 1995 compared to $5.3 million in 1994, and $3.9 million in
1993.
The Company's net interest income was reduced to $6.3 million in 1995
from $7.8 million in 1994, a 19.4% decline, following a decline of 27.5% from
$10.7 million in 1993. These declines in net interest income were principally
due to a reduction in average earning assets from $234.8 million in 1993 to
$152.9 million in 1994, a 34.9% decline, and a further reduction to $124.1
million in 1995, a decline of 18.9%.
The Company's non-interest expenses were largely driven by expenses
associated with managing its high level of non-earning assets (average
non-earning assets were 7.3% of total average assets in 1995, 22.3% in 1994 and
19.6% in 1993) in addition to litigation settlements and reserve, legal,
accounting and consulting expenses related to the Company's loan collection and
recapitalization efforts. These costs comprised 29.6% of the Company's
non-interest expense in 1993, increasing to 66.1% in 1994 and declining to 14.4%
during 1995. In 1995, the Bank recognized net gains on sale of real estate
properties totaling $1.5 million compared to an additional provision in 1994
totaling $16.5 million for the decline in the fair value of other real estate
owned properties to reflect the fair value less selling expenses.
At December 31, 1995, total assets and deposits of $114.9 million and
$105.7 million, respectively, had declined 26.7% and 28.1%, respectively, from
amounts reported at December 31, 1994. Loans, net of deferred loan fees, were
$53.0 million, a decrease of 50.0% from the amount reported at December 31,
1994. At December 31, 1994, total assets, deposits and net loans were $156.8
million, $147.1 million and $106.1 million, respectively, a decline of 32.1%,
30.0% and 13.2%, respectively, from amounts reported at the close of 1993. The
declines in assets and loans during 1993, 1994 and 1995 reflect the condition of
the Bank and the general economic conditions in Northern California and more
particularly the depressed value of real estate collateral in the San Francisco
Bay Area from which the repayment of a substantial portion of the Company's
loans are based. The declines followed substantial operating losses of the
Company, beginning in 1991 and continuing through 1994. These operating losses
were the major cause of the Company's failure to meet its capital adequacy
requirements causing it to reduce its assets in order to meet regulatory capital
adequacy requirements and the resulting Agreement and Orders which generally
require the Bank to reduce its classified assets, concentration of real estate
related credits, volatile liability dependence, and maintain its liquidity and
increase its capital. See "-- Regulatory Agreement and Orders" for a full
description of the Agreement and the Orders.
In response to the significant problems experienced by the Company
during the period from 1991 through 1994 the Company restructured its management
team and has analyzed several different business strategies. In 1996, the
Company contemplates four specific measures; 1) the raising an additional $4.5
million in capital, 2) the continued reduction of non-performing assets through
asset sales and loan collections, 3) maintaining profitability through focusing
on the Private and Business Banking concept, and 4) expanding its stock option
lending and discount brokerage business, ABS, and escrow services. Recent
financial trends experienced by the Company may not be indicative of future
trends; however,
-23-
<PAGE> 26
due to the numerous factors affecting the successful implementation of the 1996
Business and Profit Plan, many of which are beyond the control of the Company,
no prediction can be made with respect to the nature or extent of future
financial trends.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NET INTEREST INCOME
Yields Earned and Rates Paid
One of the fundamental measures of the Bank's results of operations is
net interest income. Net interest income is the difference between the combined
yield earned on interest earning assets and the combined rate paid on interest
bearing liabilities. Net interest income is also dependent on whether the
balance of interest earning assets equals, exceeds or is less than the balance
of interest bearing liabilities. If an excess in the balance of interest bearing
liabilities over interest earning assets exists, then the positive interest rate
spread between yields earned and rates paid may need to be increased in order to
achieve a positive net interest position.
The following table presents the consolidated average balance sheets of
the Company, together with the total dollar amounts of interest income and
expense, and weighted average interest rates for each of the years in the three
year period ended December 31, 1995. Where possible, the average balances are
calculated on a daily average basis. When this information is not available,
Average balances are calculated on a monthly basis.
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------ --------------------------- ----------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in Thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------------------------- --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Federal Funds and deposit $ 35,184 $ 1,790 5.1% $ 17,326 $ 740 4.3% $ 20,237 $ 594 2.9%
Investment securities 7,786 449 5.8 14,539 653 4.5 17,128 902 5.3
Loans, net (1) 81,080 8,452 10.4 120,991 11,2589 9.3 197,446 16,659 8.4
------------------------------ --------------------------- ---------------------------
Total earning assets 124,050 10,691 8.6 152,857 12,651 8.3 234,811 18,155 7.7
------------------------------ --------------------------- ---------------------------
Non-interest earning assets 7,688 43,761 57,153
-------- -------- --------
Total assets $131,738 $196,618 $291,964
======== ======== ========
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing deposit $100,357 $ 4,244 4.2 $142,775 4,694 3.3 $220,996 6,966 3.2
Other borrowings 1,752 171 9.8 2,710 169 6.5 5,891 454 7.7
------------------------------ --------------------------- ---------------------------
Total interest-bearing liabilities 102,109 4,415 4.3 145,485 4,863 3.3 226,887 7,420 3.3
------------------------------ --------------------------- ---------------------------
Non-interest bearing liabilities 24,699 33,079 47,271
Stockholders' equity 4,930 18,054 17,806
-------- -------- --------
Total liabilities and
stockholders' equity $131,738 $196,618 $291,964
======== ======== ========
Net interest income $ 6,276 $ 7,788 $ 10,735
======== ======== ========
Primary interest rate spread 4.3% 5.0% 4.4%
=== === ===
Margin as a percent of earning assets:
Interest income 8.6% 8.3% 7.7%
Interest expense 3.6 3.2 3.1
=== === ===
Spread on earning assets 5.0% 5.1% 4.6%
=== === ===
</TABLE>
(1) Non-performing loans have been included in the average loan balances.
Interest income is included on non-accrual loans only to the extent to which
cash payments have been received and full principal repayment is probable.
The dollar amount of interest income and interest expense fluctuates
depending on changes in the respective interest rates and on changes in the
respective amounts (volume) of the Bank's earning assets and interest bearing
-24-
<PAGE> 27
liabilities. For each category of interest earning asset and interest bearing
liability, information is provided in the following table for changes
attributable to (i) changes due to volume (change in average balance multiplied
by prior year's rate), and (ii) changes in rate (changes in rates multiplied by
prior year's average balances). Changes attributable to the combined impact of
volumes and rates have been allocated pro-rata to each category.
<TABLE>
<CAPTION>
1995 versus 1994 1994 versus 1993
---------------------------- --------------------------------
(Dollars in Thousands) Rate Volume Net Rate Volume Net
---------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds and time deposits $ 164 $ 886 $ 1,050 $ 213 $ (67) $ 146
Investment securities 154 (358) (204) (124) (125) (249)
Loans, net 1,235 (4,041) 1,953 (5,401)
---------------------------- -----------------------------
Total interest-earning assets 1,553 (3,513) 2,042 (5,504)
---------------------------- -----------------------------
Interest-bearing liabilities:
Interest-bearing deposits 1,147 (1,598) (451) 316 (2,587) (2,271)
Other borrowings 76 (73) 3 (76) (210) (286)
---------------------------- -----------------------------
Total interest bearing liabilities 1,223 (1,671) (448) 240 (2,797) (2,557)
---------------------------- -----------------------------
Change in net interest income $ 330 $(1,842) $(1,512) $ 1,802 $(4,749) $(2,947)
============================ =============================
</TABLE>
The Company's interest income decreased during the three year period
ended December 31, 1995 due mainly to a 33.0% decrease in average loans. The
decrease in the loan portfolio primarily resulted from a decision to reduce the
size of the Company's assets to comply with regulatory capital requirements, and
loan repayments. The weighted average yield on loans increased in 1995 after
declines since 1992 primarily due to an increase in the Bank's prime rate from
8.5% at December 31, 1994 to an average 8.8% during 1995. During the two year
period prior to 1995 the Bank's prime rate increased from an average of 6.0% in
1993 and to 7.1% in 1994.
Interest income and dividends on Federal funds sold and investment
securities was $2.2 million in 1995 compared to $1.4 million in 1994. Although
average portfolio balances were $43.0 million in 1995 compared to $31.9 million
in 1994, average portfolio yields were 5.2% in 1995 compared to 4.4% in 1994.
Interest income on investment securities was $1.5 million in 1993. Average
portfolio balances was $37.4 million in 1993, and average portfolio yield was
4.0% in 1993. The higher average yields in 1995 reflect the overall increase in
market interest rates and higher average yield realized from reinvestment.
Interest expense for 1995 was $4.4 million, a decrease of $448,000, or
10.2% during 1995, as compared to 1994. This decrease was primarily attributable
to a decrease in average interest bearing liabilities of $43.4 million to $102.1
million, or 29.8%, as compared to 1994, partially offset by a 100 basis point
increase in average interest rates. The average cost of deposits and borrowings
for 1995 was 4.3% as compared to 3.3% for 1994. Interest expense for 1994 was
$4.9 million, a decrease of $2.5 million, or 34.5% during 1994, as compared to
1993. This decrease was primarily attributable to a decrease in average
interest bearing liabilities of $81.4 million to $145.5 million, or 35.9%, as
compared to 1993. The average cost of deposits and borrowings for 1994 was
3.3% as compared to 3.3% for 1993.
PROVISION FOR LOAN LOSSES
During 1995, 1994, and 1993, the Bank provided $500,000, $3.8 million
and $3.6 million, respectively, to its allowance for loan losses. Net charge
offs recorded for 1995, 1994 and 1993 were $1.2 million, $5.3 million, and $3.9
million, respectively. The decrease in the loan loss provision in 1995 as a
percentage of average loans to 0.6% from 3.1% in 1994 was the result of the
lower level of charge-offs required in 1995 compared to 1994, and reflects
management's assessment that the loan loss allowance adequately provides for the
risk in the Bank's loan portfolio. The increase in the loan loss provision in
1994 as a percentage of average loans to 3.1% from 1.8% in 1993 was required as
a result of the increase in charge offs in 1994 compared to 1993 and reflected
management's assessment that higher loan loss allocation on loans with specific
weaknesses was required. The Company's loan loss provisions were largely loan
loss reserves allocated to specific classified and non-performing loans. See "--
Allowance for Loan Losses" herein.
-25-
<PAGE> 28
Summary of Loan Loss Experience
Net loan charge-offs for the years ended December 31, 1995, 1994 and
1993 were $1.2 million, $5.3 million, and $3.9 million, respectively. As a
percentage of average total loans, net loan charge-offs were 1.4%, 4.4% and 2.0%
for 1995, 1994, and 1993, respectively.
In 1995, loan losses from the deterioration in borrowers' financial
condition and the value of collateral securing loans occurred as a result of the
continued insipid economy in the California. A summary of significant charge-off
activity during 1995 is as follows:
- - Unsecured loans charged off totaled $332,000 comprised of seven loans.
- - The charge-offs related to commercial and financial loans totaled $95,000
and were comprised of four loans.
- - The charge-offs related to real estate construction loans totaled $2.1
million and were comprised of five loans. The loans were secured by a first
deed of trust on land under development located in Northern California. The
largest charge-off was $1.0 million.
- - The charge-offs related to real estate mortgage loans totaled $363,000 and
were comprised of seven loans. The single largest charge-off was $146,000.
In 1994, loan losses from the deterioration in borrowers' financial
condition and the value of collateral securing loans occurred as a result of the
inability of certain borrowers to sustain the insipid economy in California.
A summary of significant charge-off activity during 1994 is as follows:
- - Unsecured loans charged off totaled $306,000 comprised of two loans.
- - The charge-offs related to commercial and financial loans totaled $3.0
million and were comprised of 14 loans. The single largest charge-off was
$529,000. This loan is secured by a limited partnership interest. The loan
was classified as non-accrual in the first quarter 1994 and a partial
charge-off was recorded in the third quarter of 1994 and the remaining
balance was charged off in the fourth quarter of 1994.
- - The charge-offs related to real estate construction loans totaled $630,300
and were comprised of two loans. The loans were secured by a first deed of
trust on land under development located in Northern California. The largest
charge-off on these loans related to a restructuring which provided for a
discount for a partial payoff.
- - The charge-offs related to real estate mortgage loans totaled $2.6 million
and were comprised of 13 loans. The single largest charge-off was $1.0
million. This loan was secured by a first deed of trust on land zoned for
single family development property and the purpose of the loan was for the
purchase of real estate. The loan was a loan to facilitate the sale of real
estate foreclosure which was placed on non-accrual during the third quarter
of 1994 and the charge-off recorded during the fourth quarter reflected a
deterioration in the collateral value based on updated appraisal
information.
NON-INTEREST INCOME
Non-interest income increased $386,000 or 18.1% in 1995 as compared to
1994, primarily as a result of a gain on sale of other assets in 1995 of
$183,000 compared to loss on sale of $257,000 in 1994, and income from BSFBC of
$48,000 in 1995 compared to an operating loss on results of operations from
BSFBC of $264,000 in 1994.
Non-interest income decreased $2.4 million or 52.5% in 1994 as compared
to 1993, primarily as a result of a decrease in brokerage fee income related to
the exercise of stock options of $1.3 million, a decrease in income from limited
partnership of $527,000 as a result of the decline in the limited partnership's
earnings resulting primarily from deferred maintenance costs, and a decline in
service charge and fee revenue and all other income of $514,000 related to trust
management fees, referral fees on CD Placement, and deposit products and
services because of lower transaction volumes and lower average deposit balance
outstanding, lower levels of assets under management through trust services, and
an increase in the loss on sale of securities.
-26-
<PAGE> 29
The following table provides a detail of non-interest income for the
years ended December 31:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Service charges and fees $ 381 $ 452 $ 684
Results of operations from limited partnership 48 (264) 263
Loan brokerage and servicing fees 248 347 324
Stock option commissions and fees 1,486 1,562 2,906
Other income 175 295 383
Gain/(loss) on sale of assets, net 183 (257) (63)
--------------------------------
Total non-interest income $2,521 $2,135 $4,497
================================
</TABLE>
NON-INTEREST EXPENSE
For the year ended December 31, 1995, non-interest expenses decreased
$31.2 million, or 80.0%, from the year ended December 31, 1994. The reduction
was attributed primarily to a lower level of costs related to asset and credit
quality, lower compensation related expenses, and lower level of legal and
consulting costs related to the Company's loan collection and recapitalization
efforts.
For the year ended December 31, 1994, non-interest expense increased
$17.3 million, or 79.3%, from the year ended December 31, 1993. The increase was
attributed primarily to higher a level of costs related to real estate asset, a
higher level of litigation settlement and provision charges, and a higher
professional costs for legal and consulting costs related to the Company's
litigation matters, and the requirement for special services related to
addressing the Company's financial condition.
The following table provides a detail of non-interest expense for the
years ended December 31:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Salaries and related benefits $4,279 $ 7,330 $8,325
Occupancy expense 1,200 2,121 2,054
Professional fees 876 3,071 2,326
Litigation settlement and reserve (158) 3,601 --
Equipment expense 417 564 849
FDIC insurance premiums 457 633 849
Data processing 526 439 457
Loss on sale of Sacramento Regional Office -- -- 420
Marketing 86 369 71
Insurance premiums 374 189 97
Telephone 116 155 314
Other operating expenses 559 1,419 1,876
--------------------------------
Total operating expenses 8,732 19,891 17,638
Net (income)cost of real estate operations (924) 19,127 4,126
--------------------------------
Total non-interest expense $7,808 $39,018 $21,764
================================
</TABLE>
The decrease in compensation related expenses of $3.0 million in 1995
to $4.3 million, or 41.6% from the 1994 level, resulted from lower staffing
levels and lower incentive compensation paid. The decrease in compensation
related expenses of $1.0 million in 1994 to $7.3 million, or 12.0% from the 1993
level, resulted from lower staffing levels, partially offset by higher incentive
compensation paid and by severance related costs. The compensation expense
included performance-based incentives of $5,000, $755,000, and $526,000 for
1995, 1994 and 1993, respectively.
The Company's expenses for professional services were $876,000 in 1995
compared to $3.1 million and $2.3 million in 1994 and 1993, respectively. The
Company includes in professional fees the costs of legal, accounting, and
management consulting services. Professional service expenses declined in 1995
from 1994 primarily as a result lower level of professional services required to
manage problem assets, the reduction in litigation matters, and lower costs
related to the analysis and preliminary activities required to establish various
-27-
<PAGE> 30
international business strategies. Professional service expenses increased in
1994 compared to 1993 as a result of the continuing activities related to
recapitalization, consulting services related to the new lines of business, and
the increase in professional services required to manage the resolution of
classified and non-performing assets during that year.
The decrease in the net income(cost) of real estate operations in 1995
compared to 1994 of $20.1 million resulted from the decline in the real estate
owned portfolio, lower level of provisions required to write the properties down
to market value, and gain on sale of real estate owned. The increase of $15.0
million in 1994 compared to 1993 in net cost of real estate operations related
to asset and credit quality from $4.1 million in 1993 to $19.1 million in 1994
reflected a continued deterioration in the value of the real estate collateral.
The decline of $860,000 in 1995 other operating costs to $559,000 from
$1.4 million in 1994 and the $457,000 decrease in 1994 other operating expenses
from $1.9 million in 1993 resulted primarily from cost reduction initiatives in
miscellaneous expenses and customer related service expenses.
In 1995, the Bank recorded loss provisions totaling $87,000 for other
real estate owned assets compared to $16.5 million in 1994 on 18 properties, a
decrease of 99.4%. In addition to the provisions, the Bank did not recognize a
loss on sale real estate owned properties in 1995 compared to losses of $73,300
on the sale of two real estate properties acquired in settlement of loans in
1994 compared to $712,000 on 11 properties in 1993. The Bank recognized
recoveries and gains on sale of other real estate owned totaling $ 2.1 million
on eight properties in 1995 compared to $253,000 on three properties in 1994,
and compared to $1.7 million in 1993 on four properties.
The Bank recorded a loss provision of $419,000 for two real estate
investment property compared to $513,500 on three properties in 1994. The Bank
did not recognize a gain or loss on sale in 1995 compared to a gain on sale of
real estate investments totaling $10,000 in 1994 on one property. A loss of
$54,000 on sale and no gains on sale were recognized in 1993.
FINANCIAL CONDITION
TOTAL ASSETS
Management of the Company implemented a strategy of reducing the
Company's total assets in order to more easily meet its regulatory capital
ratios and an aggressive loan work-out program to reduce the level of the real
estate related and other problem loans. As a result, the Company's assets
decreased 26.7% in 1995 from $156.8 million at December 31, 1994 to $114.9
million at December 31, 1995.
CASH AND CASH EQUIVALENTS
The Bank maintains cash and cash equivalents, such as federal funds
sold, at levels management believes are sufficient to meet the liquidity needs
of its deposit customers. At December 31, 1995, the Company's cash and cash
equivalents were $42.8 million or 40.5% of total deposits and 209.8% of
non-interest bearing deposits. At December 31, 1994, the Company's cash and cash
equivalents were $28.6 million or 19.5% of total deposits and 94.7% of
non-interest bearing deposits. See also "Liquidity" herein for a further
discussion of the Bank's other sources of liquid assets.
INVESTMENT ACTIVITIES
The Bank maintains a securities portfolio consisting of United States
Government and Federal agency securities, collateralized mortgage obligations,
investments in certificates of deposits at other financial institutions,
mortgage-backed securities, and mutual funds. The balance of the investment
securities maintained by the Bank in excess of the requirement of applicable
regulations and the Orders reflect management's objective of ensuring compliance
with liquidity requirements. Most securities are held in safekeeping by an
independent custodian.
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt & Equity Securities." The Statement addresses the accounting and
reporting for investments in equity securities that have a readily determinable
fair value and for
-28-
<PAGE> 31
all investments in debt securities. The Statement requires that all securities
be classified, at acquisition, into one of three categories: held-to-maturity
securities, trading securities, and available-for-sale securities.
Held-to-maturity securities are those securities the Bank has the intent and
ability to hold to maturity and are carried at amortized cost. Trading
securities are those securities that are bought and held principally for the
purpose of selling in the near term and are reported at fair value, with
unrealized gains or losses included in current earnings. Available-for- sale
securities are those securities that do not fall into the other two categories
and are reported at fair value, with unrealized gains or losses reported as a
separate component of shareholders' equity. This Statement is effective for
fiscal years beginning after December 15, 1993, however, earlier implementation
is permitted. The Bank elected to implement SFAS No. 115 effective as of
December 31, 1993.
The Bank determines the classification of all securities at the time of
acquisition. In classifying securities as being held-to-maturity, trading, or
available-for-sale, the Bank considers its collateral needs, asset/liability
management strategies, liquidity needs, interest rate sensitivity and other
factors in determining its intent and ability to hold the securities to
maturity.
Investment securities held-to-maturity include United States Treasury
and Federal agency securities, investments in certificates of deposit, and
mortgage-backed securities. The objectives of these investments are to increase
portfolio yield, and to provide collateral to pledge for federal, state and
local government deposits and other borrowing facilities. The investments
held-to-maturity have an average term to maturity of zero and 20 months at
December 31, 1995 and 1994, respectively. The investments held-to-maturity are
carried at amortized cost. At December 31, 1995 and 1994, the investment
securities held-to-maturity portfolio includes zero and $7.9 million in fixed
rate investments, and zero and $1.8 million in adjustable-rate investments,
respectively. During 1994, the Bank reclassified certain collateralized mortgage
obligations to the available-for-sale category as a result of a change in the
strategy regarding the investment in these types of securities.
Investment securities available-for-sale may include United States
Treasury and Federal agency securities, mutual funds, mortgage-backed
securities, and collateralized mortgage obligations. These securities are
typically used to supplement the Bank's liquidity portfolio with the objective
of increasing yield. Investment securities available-for-sale are accounted for
at fair value. Unrealized gains and losses are recorded as an adjustment to
equity and are not reflected in the current earnings of the Bank. If the
security is sold any gain or loss is recorded as a charge to earnings and the
equity adjustment is reversed. At December 31, 1995 and 1994, the Bank held $6.5
million and $2.2 million classified as investments available-for-sale,
respectively. At December 31, 1995, $41,000 was shown as an increase in equity,
and at December 31, 1994, $4,000 was charged against equity to reflect the
market value adjustment to the securities available-for-sale.
The table below sets forth certain information regarding the carrying
values and market values, and the weighted average yields of the Bank's
investment securities portfolio by maturity at December 31, 1995:
<TABLE>
<CAPTION>
Within One Year One to Five Years Total Investment Securities
----------------- ----------------- -----------------------------
Carrying Average Carrying Average Carrying Market Average
(Dollars in Thousands) Value Yield Value Yield Value Value Yield
----------------- ---------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 3,019 6.1% $ 3,517 6.1% $ 6,536 $ 6,536 6.1%
FHLB stock -- -- -- -- 632 632 5.2
----------------- -------------- ----------------------------
Total $ 3,019 6.1% $ 3,517 6.1% $ 7,168 $ 7,168 6.0%
================= ============== =============================
</TABLE>
No investment securities had a maturity of more than five years at
December 31, 1995. The Bank holds stock in the Federal Home Loan Bank of San
Francisco (FHLB) as a membership requirement. The FHLB stock has no term to
maturity. During 1995, FHLB stock totaling $750,000 was re-purchased by the
FHLB. No gain or loss resulted from the repurchase.
In October 1994, Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) no. 119, Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments. The
provisions of SFAS No. 119 are effective for the Company and the Bank as of
December 31, 1995. SFAS No. 119 required disclosure about derivative financial
instruments -- futures, forwards, swap and option contracts, and other financial
instruments with similar characteristics. As of December 31, 1995 and 1994, the
Company and the Bank had no derivative financial instruments that would be
subject to such disclosure.
-29-
<PAGE> 32
LOANS
During 1995, the Company reduced its total loans by $53.2 million from
$106.5 million at December 31, 1994. The reduction in total loans resulted
primarily from a strategic decision to reduce concentrations in real estate
and/or real estate related loans and to reduce the total loan portfolio to
improve the liquidity position of the Bank through loan repayments. In addition,
loans were reduced by charge-offs of $2.9 million.
In addition, the increase in classified loans from $25.0 million at
December 31, 1994 to $25.3 million at December 31, 1995 was the result of
reviewing all loans to re-evaluate loan characteristics to assess
classification. During 1995, there were $13.7 million in newly classified loans.
During 1994, there were $14.7 million in newly classified loans, of which
$12.2 million were reclassified in the first quarter of 1994 based on FDIC
examiners' comments. For a description of the composition of the loan
portfolio and a description based upon various contractually scheduled
repayments, see "BUSINESS -- The Company and the Bank -- Lending Activities --
Composition of Loan Portfolio."
CLASSIFIED ASSETS AND IMPAIRED LOANS
Federal regulations require banks to review their assets on a regular
basis and to classify them if any weaknesses are noted. Banks must maintain
adequate allowances for assets classified as "Substandard" or "Doubtful" and to
immediately write off those assets classified as "Loss". The Bank has a
comprehensive process for classifying assets and asset reviews are performed on
a periodic basis. In addition to identifying adversely classified assets, the
Bank identifies certain assets as "Special Mention", which do not currently
expose the Bank to a sufficient degree of risk to warrant a more adverse
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets that do not possess credit
deficiencies are not classified and are labeled "Pass". The Bank stratifies its
loan portfolio based on collateral type concentrations. The objective of the
review process is to identify any trends and determine the levels of loss
exposure to the Bank.
Classified assets include non-accrual loans, other real estate owned,
real estate investments and performing loans that exhibit credit quality
weaknesses. The table below outlines the Bank's classified assets as of
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
--------------------
<S> <C> <C>
Loans - performing $17,800 $15,580
Non-accrual loans 7,511 9,377
Other real estate owned 7,514 10,021
Real estate investments 236 682
--------------------
Total classified assets $33,061 $35,660
====================
</TABLE>
The Bank is required by the Orders to reduce its classified assets, as
defined by the Orders, to no more than $40.0 million by September 30, 1994. At
December 31, 1995, the Bank had less than $40.0 million in such assets.
NON-PERFORMING ASSETS
When a borrower fails to make a required payment on a loan, the loan is
classified as delinquent. If the delinquency is not cured, workout procedures
are generally commenced and the loan is transferred to the Bank's Special Assets
Department. If workout proceedings are not successful, collection procedures,
which may include collection demands, negotiated restructures, foreclosures,
suits for collection and borrower bankruptcy, are initiated. In general, loans
are placed on non-accrual status after being contractually delinquent for more
than 90 days, or earlier if management believes full collection of future
principal and interest on a timely basis is unlikely. When a loan is placed on
non-accrual status, all interest accrued but not received is charged against
interest income. During the period in which a loan is on non-accrual status, any
payment received may be used to reduce the outstanding loan balance. A
non-accrual loan is restored to an accrual basis when principal and interest
payments are paid current and full payment of principal and interest is
probable. Loans that are well secured and in the process of collection remain on
accrual status.
-30-
<PAGE> 33
The Bank may restructure loans as a result of a borrower's inability to
service the obligation under the original terms of the loan agreement.
Restructures are executed only when the Bank expects to realize more from a
restructured loan rather than allowing it to go into foreclosure or other form
of collection.
At December 31, 1995 and 1994, other real estate owned totaled
$7.5 million and $10.0 million, respectively. At December 31, 1995 and 1994,
in-substance foreclosed loans were zero and $4.6 million, respectively. As of
December 31, 1995 and 1994, all other real estate owned and real estate
investments were classified.
Non-performing assets include non-accrual loans and real estate
foreclosures. Non-performing assets were $15.0 million at the end of 1995, down
22.7% from $19.4 million in 1994.
The following table provides information on all non-performing assets
at December 31:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993 1992 1991
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 7,511 $ 9,377 $11,086 $17,811 $11,781
Other real estate owned 7,514 10,021 32,372 35,457 39,927
-----------------------------------------------------------------
Total non-performing assets $15,025 $19,398 $43,458 $53,268 $51,708
=================================================================
Non-performing assets as a percentage
of total loans and OREO outstanding 24.7% 16.7% 23.9% 19.7% 16.1%
Loans past due 90 days or more and accruing $ -- $ 940 $ -- $ 182 $ 2,513
Loans restructured and in compliance
with modified terms 4,126 6,317 1,967 -- 3,146
</TABLE>
In addition to the loans disclosed in the foregoing table, the Bank had
approximately $8.3 million in loans on December 31, 1995 that were between 31
and 89 days delinquent. In the opinion of management, these loans may have a
greater than ordinary risk that the borrowers may not be able to perform under
the terms of their contractual arrangements. Approximately $4.1 million of these
loans are secured by first or subordinate deeds of trust on real estate.
Approximately $6.4 million of these loans had matured and were in the process of
renewal.
The following table provides a stratification of non-performing assets,
which includes non-accrual loans and other real estate owned, by collateral type
as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
--------------------
<S> <C> <C>
Real Estate:
Residential $ 1,046 $ 1,403
Residential development 4,151 7,012
Commercial development 1,569 1,309
Land under development 1,950 3,665
Raw land 2,975 4,494
Other 3,334 1,515
--------------------
Total non-performing assets $15,025 $19,398
====================
</TABLE>
At December 31, 1995, substantially all of the non-performing assets
are real estate or loans secured by real estate located in Northern California.
Raw land consists of land acquired for the purpose of future residential or
commercial development. The Bank had no non-performing assets secured by
subordinate deeds of trust as of December 31, 1995.
-31-
<PAGE> 34
Restructured loans totaled $5.9 million and $6.3 at December 31, 1995
and 1994, respectively. For the years ended December 31, 1995 and 1994, interest
income foregone on restructured loans was $24,000 and $18,000, respectively.
VALUATION ALLOWANCES
The Bank charges current earnings with provisions for estimated losses
on loans receivable, other real estate owned, and real estate investments. The
provisions take into consideration specifically identified problem loans, the
financial condition of the borrowers, the fair value of the collateral, recourse
to guarantors, and other factors.
Effective January 1, 1995, the Company adopted SFAS No. 114 "Accounting
by Creditors for Impairment of a Loan" as amended by SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures". The
Company identified certain classified loans as impaired loans under SFAS No.
114. Of the recorded investment in impaired loans of $7.6 million at December
31, 1995, the Company measured the impairment of $7.3 million using the
collateral value method and $307,000 using discounted cash flow method. Total
interest recognized on impaired loans during 1995 was $430,000 and the related
allowance for loan losses totaled $1.1 million.
Allowance for Loan Losses
Prior to 1991, the Bank's method of analyzing the adequacy of its
allowance for loan losses generally relied on the application of historic loan
loss ratios and specific allocations of loss allowances based on specific credit
reviews. In 1991, the Bank revised its methodology because of deterioration in
the credit quality of the loan portfolio, resulting from weakness in the market
for the underlying collateral and/or the borrowers' financial condition, and the
oversupply of properties similar to the properties collateralizing many of the
Bank's loans. The Bank has continued to refine the allowance methodology to
ensure that all known risks, trends, and facts are utilized in determining the
adequacy of the allowance for loan losses.
Fair value of the underlying collateral is based on current market
conditions, appraisals, and estimated sales values of similar properties, less
an estimated discount for selling and other expenses. In addition, the Bank
establishes a specific loss allowance based on the asset classification and
credit quality grade. This specific loss allowance is utilized to ensure that
allowances are allocated based on the credit quality grading to capture inherent
risks. In addition, the Bank carries an "unallocated" loan loss allowance to
provide for losses that may occur in the future in loans that are not presently
classified, based on present economic conditions, trends, and related
uncertainties.
-32-
<PAGE> 35
The following table summarizes the loan loss experience of the Bank for
the years ended December 31:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993 1992 1991
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan
losses at beginning of period $ 6,576 $ 8,050 $ 8,400 $ 8,411 $ 5,052
Loans charged off:
Commercial, financial and unsecured (427) (3,888) (2,407) (6,315) (5,653)
Real estate (2,444) (2,732) (1,254) (3,750) (2,495)
Sale of Sacramento loans -- -- (402) -- --
Net lease financing -- -- -- -- (24)
-----------------------------------------------------------------
Subtotal (2,871) (6,620) (4,063) (10,065) (8,172)
Recoveries of previous losses:
Commercial and financial 1,565 1,181 148 221 40
Real estate construction 142 166 6 5 16
Net lease financing -- -- 5 -- 38
-----------------------------------------------------------------
Subtotal 1,707 1,347 159 226 94
-----------------------------------------------------------------
Net loans charged off (1,164) (5,273) (3,904) (9,839) (8,078)
Provision for loan losses 500 3,799 3,554 9,828 11,437
-----------------------------------------------------------------
Balance of allowance for loan and
lease losses at end of period $ 5,912 $ 6,576 $ 8,050 $ 8,400 $ 8,411
=================================================================
Ratio of the allowance to total loans 11.1% 6.2% 5.4% 3.6% 3.0%
Ratio of the allowance to non-performing loans 78.7 70.1 72.6 47.2 71.4
Ratio of net charge-offs to average loans 1.4 4.4 2.0 3.9 2.7
</TABLE>
Allocation of the allowance for loan losses by collateral type at
December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------- -------------------- ---------------------
(Dollars in Thousands) Balance Percent(1) Balance Percent(1) Balance Percent(1)
------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and financial $3,079 59.0% $3,881 59.0% $2,548 53.7%
Real estate construction 425 10.6 1,208 8.5 635 9.4
Real estate mortgage 1,188 30.3 1,114 31.3 2,072 36.8
Lease financing -- 0.1 -- -- -- 0.1
Unallocated ,220 -- 373 -- 2,795 --
----------------- ------------------ ------------------
Total $5,912 100.0% $6,576 100.0% $8,050 100.00%
================== ================== ===================
<CAPTION>
1992 1991
-------------------- -------------------
Balance Percent(1) Balance Percent(1)
-------------------- -------------------
<S> <C> <C> <C> <C>
Commercial and financial $1,905 38.2% $3,135 42.7%
Real estate construction 1,958 16.0 2,304 21.9
Real estate mortgage 4,261 45.7 2,057 35.2
Lease financing 2 0.1 3 0.2
Unallocated 274 -- 912 --
------------------ -------------------
Total $8,400 100.0% $8,411 100.0%
================== ===================
</TABLE>
(1) Percent refers to the percent of loans in each category to total loans.
-33-
<PAGE> 36
Allowance for Losses on Other Real Estate Owned
Real estate acquired through foreclosure is recorded at fair value at
the time of transfer to OREO. The Bank periodically obtains either an appraisal
or market valuation analysis on all other real estate owned. If the valuation
analysis indicates a decline in the market value of the property, a specific
loss allowance is established. The Bank provides a charge against current
earnings for estimated losses on foreclosed property when the carrying value of
the property exceeds its fair value net of estimated selling expenses. Fair
value is based on current market conditions, appraisals, and estimated sales
values of similar properties, net of an estimated discount for selling and
other expenses.
The following table summarizes the other real estate owned loss
experience of the Bank for the periods shown:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Balance of allowance for losses - beginning $19,404 $ 2,986 $ 6,632
Charge-offs (7,500) (33) (6,982)
Provision 87 16,451 3,336
---------------------------------
Balance of allowance for losses - ending $11,991 $19,404 $ 2,986
================================
</TABLE>
The Bank recognizes a charge-off when the sale of a property with a
specific allowance occurs. A gain on sale is recorded when the net proceeds from
a sale exceed the book value of the property net of the specific allowance. A
loss on sale is recorded when the net proceeds from a sale are less than the
book value of the property net of the specific allowance. The Bank recorded
gains on sale of other real estate owned totaling $2.1 million in 1995 and
$253,000 in 1994. The Bank recorded no losses on sale of other real estate owned
in 1995 compared to $73,000 in 1994. The losses in 1994 were related to two
properties. The OREO properties are shown net of allowance for losses.
Allowance for Losses on Real Estate Investments
Real estate investments are recorded at the lower of cost or fair
value. Periodically, the Bank obtains either an appraisal or market valuation
analysis on all real estate investments. If the valuation analysis indicates a
decline in the market value of the property subsequent to the date of
acquisition, a specific loss allowance is established. The Bank provides a
charge against current earnings for estimated losses on real estate investments
when the carrying value of the property exceeds its fair value less estimated
selling expenses. Fair value is based on current market conditions, appraisals,
and estimated sales values of similar properties, less an estimated discount for
selling and other expenses.
The following table summarizes the real estate investments loss
experience of the Bank for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994
--------------------
<S> <C> <C>
Balance of allowance for losses - beginning $ 1,059 $ 712
Charge-off -- (167)
Provision 419 514
--------------------
Balance of allowance for losses - ending $ 1,478 $ 1,059
====================
</TABLE>
DEPOSITS
The Bank had total deposits of $105.7 million and $147.1 million at
December 31, 1995 and 1994, respectively. As of December 31, 1995, deposits
consisted of demand deposits totaling $20.4 million, money market accounts
totaling $16.2 million, savings and NOW accounts totaling $25.4 million and time
deposits totaling $43.7 million. As of December 31, 1995, the Bank had a total
of 3,186 deposit accounts consisting of 744 demand deposit accounts with an
average balance of approximately $27,000 each, 542 money market accounts with an
average balance of approximately $30,000 each, approximately 1,231 savings and
NOW accounts with an average balance of approximately $21,000 each and 669 time
accounts with an average balance of approximately $65,000.
-34-
<PAGE> 37
The Bank's deposits and, correspondingly, its liquidity, are largely dependent
upon three sources of funds: deposits acquired through its Association Bank
Services function, Private Banking, and deposits solicited through the Bank's
money desk. These sources of deposits comprised 88.2% of the Bank's total
deposits at December 31, 1995.
Certificates of deposit having a balance of at least $100,000
represented approximately 6.1% of the Bank's total deposits as of December 31,
1995 compared to 7.0% as of December 31, 1994. As of December 31, 1995, 49.2% of
the Bank's certificates of deposit of at least $100,000 mature in 90 days or
less, 42.8% between 91 days and one year. The aggregate average maturity of all
of the Bank's certificates of deposit of at least $100,000 was five months as of
December 31, 1995, and the aggregate amount of all such certificates of deposit
as of December 31, 1995 was $6.4 million. Concentrations of large certificates
of deposit and certain money market deposits have been classified by bank
regulatory authorities as volatile liabilities associated with certain risks,
including the risks of reduced liquidity if a bank is unable to retain such
deposits and reduced margins if its interest costs are increased by a bank in
order to retain such deposits. See "-- Regulation and Supervision."
Deposits from homeowner and community associations are a key component
of the Bank's core deposit base. See "Association Bank Services". At December
31, 1995 and 1994, the Association Bank Services function accounted for $22.9
million and $34.5 million in deposits, representing approximately 21.7% and
23.4% of the Bank's total deposits, respectively. During 1995, Association Bank
Service customer deposits declined 33.6% from a year earlier. In August 1995,
the manager and much of the staff of the Association Bank Services function left
the Bank to join a competitor, whose services have been actively marketed to the
Bank's customer base. Since September 30, 1995, there has been a decline of 5%
in Association Bank Service customer deposits, but management does not
anticipate that a significant loss of customer deposits is likely. However,
there can be no assurance that the Bank will be able to continue to stem the
loss of such deposits.
At December 31, 1995 and 1994, the Bank had brokered deposits totaling
$3.4 million or 3.2% and $19.7 million or 13.5% of total deposits, respectively.
At December 31, 1995 and 1994, the Bank's brokered deposits were approximately
4.0% and 12.5% of the Bank's total assets, respectively. During 1995 and 1994
brokered deposits averaged $8.6 million and $24.9 million, respectively, with
high and low balances for 1995 of $15.6 million and $3.4 million, respectively.
Such brokered certificates of deposit have a remaining weighted average term to
maturity of less than one month. The Bank's brokered deposit waiver, as
described below, was suspended on January 30, 1995 by the FDIC. As a result of
the suspension of the brokered deposit waiver, the Bank did not renew the
maturing brokered deposits.
In March 1993, the Bank initiated a money desk for the purpose of
attracting additional deposits. These deposits are gathered principally from
other financial institutions and municipalities outside of the Bank's market
area. As of December 31, 1995 and 1994, the Bank had outstanding money desk
deposits of $28.0 million or 26.5% of total Bank's total deposits and $15.1
million or 10.3% of Bank's total deposits. During 1995, the money desk deposits
averaged $24.5 million, with a high balance of $30.3 million. As of December 31,
1995, money desk deposits had a remaining weighted average maturity of
approximately eight months.
The Bank's ability to accept brokered placements of deposits was
restricted in the first quarter of 1992 under FDICIA and new FDIC regulations
that prohibit undercapitalized banks from accepting or renewing such brokered
deposits and prohibit adequately capitalized institutions from accepting or
renewing such deposits unless such institutions obtain a waiver of such
prohibition from the FDIC. As of December 31, 1995, the Bank was not accepting
brokered deposits. As required by the Orders, the Bank has submitted a plan to
the FDIC and the SBD to eliminate reliance on brokered deposits and to reduce
its dependency on out of area deposits and volatile liabilities. See --
"Regulatory Agreement and Orders" and "Regulation and Supervision".
The following table sets forth the maturities, as of December 31, 1995,
of the Bank's interest-bearing deposits and other interest-bearing liabilities:
-35-
<PAGE> 38
<TABLE>
<CAPTION>
Over 3 Over More Than
3 Months Months to 6 Months 1 Year to
(Dollars in Thousands) or Less 6 Months to 1 Year 5 Years Total
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-Bearing Liabilities:
Money market accounts $16,185 -- -- -- $16,185
Savings and NOW accounts 25,411 -- -- -- 25,411
Time deposits 12,765 $13,126 $12,147 $ 5,674 43,712
-------------------------------------------------------------
Total interest-bearing
liabilities $54,361 $13,126 $12,147 $ 5,674 $85,308
=============================================================
</TABLE>
OTHER BORROWINGS
The Bank's other borrowings at December 31, 1995 were zero compared to
$4.1 million at December 31, 1994. The Bank's other borrowing facilities include
advances from the FHLB and reverse repurchase agreements.
The Bank's short term line of credit with the Federal Reserve Bank of
San Francisco (Federal Reserve Bank) was canceled effective April 3, 1995.
However, the Bank has an overdraft line with the Federal Reserve Bank of
$667,000 secured by loans in the Bank's portfolio. The Bank's short term line of
credit with the FHLB of up to $3.1 million is secured by pledged loans. At
December 31, 1995 and 1994, the Bank had no borrowings outstanding with the FHLB
or Federal Reserve Bank. During 1995 and 1994, the Bank did not borrow at the
discount window at the Federal Reserve Bank. In the first quarter of 1995, the
Bank activated its FHLB borrowing.
The borrowing was repaid in the second quarter of 1995.
As a result of the acquisition of BSFBC, the Bank assumed an obligation
of BSFBC totaling $2.2 million secured by the leasehold interest in the Bank of
San Francisco Building, 550 Montgomery Street, San Francisco, California. The
Bank repaid this loan during the fourth quarter of 1995.
ASSET AND LIABILITY MANAGEMENT
Banking is a business which depends on rate differentials. In general,
the difference between the interest rate paid by the Bank on its deposits and
its other borrowing and the interest rate received by the Bank on loans extended
to its customers and securities held in the Bank's portfolio comprise the major
portion of the Bank's earnings. These rates are highly sensitive to many factors
which are beyond the control of the Bank. Accordingly, the earnings and growth
of the Bank are subject to the influence of domestic economic conditions,
including inflation, recession and unemployment.
The most important component of the Bank's earnings is the difference
between the rates earned on its assets as compared to the rates paid on its
liabilities. The difference between the amount of assets and the amount of
liabilities which are subject to interest rate risk is referred to as the "gap."
The gap represents the risk and the opportunity inherent in mismatching asset
and liability interest rate changes. If more assets than liabilities are
interest rate sensitive at a given time in a rising interest rate environment,
net interest income increases. In a declining interest rate environment with the
same "gap", net interest income decreases. If more liabilities change rates than
assets, the same scenarios produce the opposite effects.
The Bank's risk management policies are established by the Asset
Liability Committee (the "ALCO"). The ALCO meets periodically to formulate the
Bank's strategies. The basic responsibilities of the ALCO include the management
of interest rate risk, liquidity, funding, and asset and liability products. The
Bank's approach is to measure interest rate risk, assess and determine if the
risk level is acceptable and to develop strategies to either reduce excessive
risk or recognize the trade-offs between risk and return.
-36-
<PAGE> 39
The following table shows the repricing opportunities for the Bank's
interest-earning assets and interest-bearing liabilities at December 31, 1995:
<TABLE>
<CAPTION>
Over 3 Over More Than
3 Months Months to 6 Months 1 Year to Over
(Dollars in Thousands) or Less 6 Months to 1 Year 5 Years 5 Years Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Investment securities and
certain cash equivalents $40,986 $ -- $ -- $4,503 $ -- $45,489
Loans (1) 36,737 6 1,220 3,024 4,711 45,698
--------------------------------------------------------------------
Total interest-earning assets 77,723 6 1,220 7,527 4,711 91,187
-------------------------------------------------------------------
Interest-Bearing Liabilities:
Interest-bearing deposits 54,361 13,126 12,147 5,674 -- 85,308
Other borrowings -- -- -- -- -- --
--------------------------------------------------------------------
Total interest-bearing liabilities 54,361 13,126 12,147 5,674 -- 85,308
--------------------------------------------------------------------
Interest bearing assets over (under)
interest bearing liabilities $23,362 $(13,120) $(10,927) $1,853 $ 4,711 $ 5,879
====================================================================
Cumulative primary gap $23,362 $ 10,242 $ (685) $1,168 $ 5,879
=========================================================
Gap as a percentage of total assets 20.3% 8.9% (0.6)% 1.0% 5.1%
</TABLE>
1) Excludes non-accrual loans.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods, and
thus only partially depicts the dynamics of the Bank's sensitivity to interest
rate changes. Such an analysis does not fully describe the complexity of
relationships between product features and pricing, market rates and future
management of the balance sheet mix. As a result, assets and liabilities
indicated as repricing within the same period may in fact reprice at different
times and different rates. The Company's net interest margins on average
earnings assets for the years ended December 31, 1995, 1994 and 1993, were 5.0%,
5.1% and 4.6%, respectively.
LIQUIDITY
In 1995 and 1994, the Company's principal source of liquidity has been
repayment of loans and new capital from the issuance of its capital stock.
Generally, the Bank has various sources of liquidity including core deposits,
money desk deposits, other borrowings, loan participations and sales, loan
repayments, and the sale of problem assets. The Bank's access to all of these
sources of liquidity may be limited as a result of the failure to meet capital
requirements, the contractual maturities of performing loans, and/or the
inability of borrowers to repay loans according to the contractual terms.
Liquidity is the Bank's ability to meet the present and future needs of
its clients for loans and deposit withdrawals. The Bank's liquidity generally
decreases as a result of increases in the Bank's loans and other assets, and
fluctuations in the maturities of deposits in the Bank can have a significant
effect on the Bank's liquidity. The sources of the Bank's liquidity include
deposits, other liquid assets and short-term borrowings. The most important
source of these assets are core deposits. Core deposits are defined as all
deposits from its customer base except time deposits of $100,000 or greater and
all deposits identified as volatile. At December 31, 1995, the Bank's core
deposits were $73.4 million, representing a 27.5% decrease from core deposits of
$101.2 million at December 31, 1994, which in turn represents a 12.8% decrease
from core deposits of $116.0 million at December 31, 1993. The Bank's liquid
assets, which includes cash and short term investments, at December 31, 1995
totaled $49.4 million, an increase of 23.2% from $40.1 million at December 31,
1994. As of December 31, 1995, the Bank had pledged loans and securities
enabling the Bank to borrow up to $3.1 million from the FHLB, and the Bank
drew on this line of credit during the first quarter of 1995 and repaid the
borrowing during the second quarter of 1995.
-37-
<PAGE> 40
The Bank's ability to generate liquidity through acceptance of brokered
placements of certificates of deposit was restricted in the first quarter of
1992 under FDICIA and new FDIC regulations that prohibit undercapitalized banks
from accepting or renewing such brokered deposits and prohibit adequately
capitalized institutions from accepting or renewing such deposits unless such
institutions obtain a waiver of such prohibition from the FDIC. Under the
Orders, the Bank was required to submit a written plan to the FDIC and the SBD
for eliminating its reliance on brokered deposits, and to provide the Regional
Director of the FDIC and the Superintendent with monthly reports outlining the
Bank's progress under such plan. During the first quarter of 1995, the Bank's
brokered deposit waiver was suspended. See "-- Regulation and Supervision."
The Bank's present strategy focuses on the stabilization of the
existing core deposit portfolio. The proceeds from loan pay offs will be used to
fund new loans, reinvestment in the investment securities, and repay maturing
volatile liabilities.
Although management believes that the Bank's ability to eliminate its
reliance on out of area and volatile liabilities can be accomplished through
local deposit marketing efforts, the success of which cannot be assured, and
because out of area deposits presently comprise over 26.6% of the Bank's total
deposits, it is not expected that, in the near future, these deposits can be
replaced with core deposits. Nor can any assurance be given that the Bank will
be able to successfully implement its plans, find alternate sources of deposits.
See "-- Regulatory Directives and Orders."
CAPITAL
Shareholders' equity totaled $6.9 million at December 31, 1995, an
increase of $4.8 million from $2.1 million at December 31, 1994. During the
period from 1991 through 1994, the Company suffered an aggregate of $74.6
million in losses, primarily as a result of defaulted loans secured by real
estate and losses on direct real estate development activities. The Company and
the Bank succeeded in avoiding insolvency during this period only through the
injection of a total of $56.3 million in new capital as of December 31, 1995.
The Company's majority shareholder committed to an additional capital
contribution of $4.5 million, expected by December 31, 1996.
Pursuant to federal law, the Company is subject to the Federal Reserve
Board's capital guidelines of the FRB and the Bank is subject to the FDIC's
regulations governing capital adequacy for banks that are not members
("non-member banks") of the Federal Reserve System. As a result of the Bank's
failure to meet its minimum regulatory and Orders capital requirements at
December 31, 1994, the Bank filed the Capital Restoration Plan in compliance
with "Prompt Corrective Action" imposed by FDICIA. The FDIC has approved the
Plan subject to the infusion of additional capital. The Plan supersedes
previously filed plans under the "Prompt Corrective Action" regulations. In
addition, in 1995 the Company agreed to guarantee that the Bank will comply with
the Plan until the Bank has met its minimum capital requirements on average
during each of four consecutive calendar quarters. This guarantee supersedes
previously issued guarantee as agreed to in 1993. The Company's liability under
the guarantee is limited to the lesser of 5% of the Bank's total assets at the
time it became undercapitalized, $7.8 million or an amount necessary (or that
would have been necessary) to bring the Bank into compliance with all of its
capital requirements as of the time it fails to comply with the Capital
Restoration Plan. The Company currently does not have sufficient funds to
satisfy the guarantee, and would be in default thereunder if called upon to do
so. See "-- Supervision and Regulation" for further information concerning
FDICIA's "Prompt Corrective Action" system.
Under California law, if a bank's deficit retained earnings exceed 40%
of its contributed capital, its capital is deemed to be impaired, and the bank
is required to levy an assessment on its shares to correct the impairment. The
SBD has issued eight Impairment Orders to the Bank, most recently dated February
5, 1996. At December 31, 1995, the Bank had contributed capital of $70.9 million
and deficit retained earnings of $64.0 million resulting in a $35.6 million
capital impairment. See "-- Regulatory Directives and Orders -- Capital
Impairment Order" for more discussion on the Bank's impairment of capital.
On May 23, 1994, the holder of the Company's Series C Preferred Stock
converted each share of his Preferred Stock into 40 shares of Class A Common
Stock and 40 warrants, with each warrant granting the right to purchase an
additional share of Class A Common Stock, exercisable at $0.50 per share (before
the reverse split). The warrants expired on December 31, 1995. In addition to
the conversion, the Company effected a 1-for-20 reverse stock split of the
Company's Class A Common Stock and changed the authorized number of shares to
-38-
<PAGE> 41
40,000,000. As a result of the reverse stock split, the Company repurchased the
fractional shares which totaled 119 new shares. No Series C Preferred Shares
were outstanding at December 31, 1995.
On July 25, 1994, the Company issued 3,521,126 shares of Class A Common
Stock, and warrants to purchase an additional 3,521,126 shares with an exercise
price for each share of $10.00 to its principal stockholder in its first closing
of a private stock offering for $20.0 million in capital. The warrants expired
on December 31, 1995. The price per unit was $5.68. Each unit sold included a
Risk Protection Right which the Company's majority shareholder has relinquished.
The total cost of this capital raising was $2.4 million for a net
capital contribution of $17.6 million. On July 27, 1994 and December 31, 1994,
the Company contributed net capital of $13.5 million and $3.5 million,
respectively, to the Bank.
Mr. Kaharudin Latief of Jakarta, Indonesia has acquired 525,000 shares
of the Class A Common Stock from the majority shareholder through the
cancellation of an unsecured, personal loan in the amount of $5.3 million which
Mr. Latief previously extended to the Company's controlling stockholder.
Assuming the conversion of the majority shareholder's 215,000 Series D Preferred
Shares into 12,685,000 shares of Class A Common Stock, Mr. Latief's ownership
percentage would be 2.9% and the Company's controlling stockholder's new common
ownership would be approximately 96.3%.
On April 21, and June 30, 1995, the Company issued 190,000 and 25,000
shares, respectively, of 9% Series D Perpetual Preferred Stock (the "Series D
Preferred Stock")at a price of $20.00 per share to the its majority shareholder.
The shares of Series D Preferred Stock are not currently convertible but will
become so if the conversion feature is approved by a majority of the holders of
the Class A Common Stock and Series B Preferred Stock (voting as a single
class). If the conversion feature is approved, each share of the Series D
Preferred Stock will become convertible into approximately 59 shares of Class A
Common Stock.
On March 20, 1996, the Company issued an additional 50,000 shares of
Series D Preferred Stock and warrants to purchase additional shares to the
Company's majority shareholder at a price of $20.00 per share in accordance with
an agreement dated February 26, 1996 between the Company and its majority
shareholder. Pursuant to the agreement, the Company's majority shareholder will
purchase a total of 225,000 additional shares Series D Preferred Stock on or
before specific dates during 1996 and the Company would grant an option to
purchase up to an additional 525,000 Series D Preferred Shares at a price of
$20.00 per share exercisable in whole or part at any time after the purchase of
the 225,000 shares of Series D Preferred Stock in 1996, but before February 26,
2003.
The Company and the Bank are subject to general regulations issued by
the FRB, FDIC, and SBD which require maintenance of a certain level of capital
and the Bank is under specific capital requirements as a result of the Orders.
As of December 31, 1995, the Company was in compliance with all minimum capital
requirements and the Bank was not in compliance with all minimum capital
requirements including the minimum leverage ratio of 7.0% mandated by the
Orders. With the additional capital received March 20, 1996, management expects
to meet the minimum leverage ratio of 7.0% as of March 31, 1996.
The following table reflects both the Company's and the Bank's capital
ratios with respect to the minimum capital requirements in effect as of December
31, 1995.
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
---------------------------------------------
<S> <C> <C> <C> <C>
Leverage ratio 6.0% 6.0% 4.0% 7.0%
Tier 1 risk-based capital 8.5 8.6 4.0 N/A
Total risk-based capital 10.4 10.4 8.0 N/A
</TABLE>
On March 20, 1996, the Company received $1.0 million of the $4.5
million committed by the Company's majority shareholder. The Company contributed
the capital to the Bank. The following table reflects both the
-39-
<PAGE> 42
Company's and the Bank's capital ratios with respect to the minimum capital
requirements in effect as of December 31, 1995 giving effect to the $1.0 million
received on March 20, 1996.
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
--------------------------------------------
<S> <C> <C> <C> <C>
Leverage ratio 6.7% 6.7% 4.0% 7.0%
Tier 1 risk-based capital 9.7 9.7 4.0 N/A
Total risk-based capital 11.7 11.7 8.0 N/A
</TABLE>
-40-
<PAGE> 43
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants............................... 42
Consolidated Statements of Financial Condition,
December 31, 1995 and 1994................................. 43
Consolidated Statements of Operations,.......................... 44
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Shareholders' Equity,..... 45
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows,.......................... 46
Years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements...................... 48
-41-
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of
The San Francisco Company:
We have audited the accompanying consolidated statements of financial condition
of The San Francisco Company and subsidiaries (the Company) as of December 31,
1995 and 1994 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The San Francisco
Company and subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
March 20, 1996
San Francisco, California
-42-
<PAGE> 45
THE SAN FRANCISCO COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
(Dollars in Thousands Except Per Share Data) Notes 1995 1994
----------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 4,814 $ 11,397
Federal funds sold 38,000 17,250
----------------------
Cash and cash equivalents 42,814 28,647
Investment securities held-to-maturity
(Market value: 1994 - $7,836) 3 -- 7,859
Investment securities available-for-sale 3 6,536 2,211
Federal Home Loan Bank stock, at par 3 632 1,337
Loans 4 53,208 106,452
Deferred loan fees 4 (180) (388)
Allowance for loan losses 5 (5,912) (6,576)
----------------------
Loans, net 47,116 99,488
Other real estate owned 6 7,514 10,021
Real estate investments 7 236 2,364
Premises and equipment, net 8 8,689 2,996
Interest receivable 527 820
Other assets 798 1,037
----------------------
Total assets $114,862 $156,780
======================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Non-interest bearing deposits $ 20,365 $ 30,259
Interest bearing deposits 85,308 116,889
----------------------
Total deposits 9 105,673 147,148
Other borrowings 10 -- 4,070
Other liabilities and interest payable 2,309 3,433
----------------------
Total liabilities 107,982 154,651
----------------------
Commitments and contingencies 15
Shareholders' Equity: 12
Preferred Stock (par value $0.01 per share)
Series B - Authorized - 437,500 shares
Issued and outstanding - 1995 - 16,291 and 1994 - 16,591 shares 114 114
Series D - Authorized - 750,000 shares
Issued and outstanding - 1995 - 215,000 4,300 --
Common stock (par value $0.01 per share)
Class A - Authorized - 40,000,000 shares
Issued and outstanding - 1995 - 5,765,978 and 1994 - 5,766,008 shares 58 58
Additional paid in capital 70,168 70,168
Retained deficit (67,801) (68,137)
Employee purchase and option plans -- (70)
Unrealized gain (loss) on securities available-for-sale 41 (4)
----------------------
Total shareholders' equity 6,880 2,129
----------------------
Total liabilities and shareholders' equity $114,862 $156,780
======================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-43-
<PAGE> 46
THE SAN FRANCISCO COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
(Dollars in Thousands Except Per Share Data) Notes 1995 1994 1993
-------------------------------------------------
<C> <C> <C> <C>
Interest income:
Loans $ 8,452 $ 11,258 $ 16,659
Fed funds sold 1,771 702 576
Investments 423 627 875
Dividends 45 64 45
--------------------------------------
Total interest income 10,691 12,651 18,155
--------------------------------------
Interest expense:
Deposits 9 4,244 4,694 6,966
Other borrowings 171 169 454
--------------------------------------
Total interest expense 4,415 4,863 7,420
--------------------------------------
Net interest income 6,276 7,788 10,735
Provision for loan losses 5 500 3,799 3,554
--------------------------------------
Net interest income after provision for loan losses 5,776 3,989 7,181
--------------------------------------
Non-interest income:
Service charges and fees 381 452 684
Results of operations from limited partnership 7/16 48 (264) 263
Loan brokerage and servicing fees 248 347 324
Stock option commissions and fees 1,486 1,562 2,906
Other income 175 295 383
Gain (loss) on sale of assets, net 183 (257) (63)
---------------------------------------
Total non-interest income 2,521 2,135 4,497
--------------------------------------
Non-interest expense:
Salaries and related benefits 4,279 7,330 8,325
Occupancy expense 8 1,200 2,121 2,054
Professional fees 876 3,071 2,326
Litigation settlement and reserve (158) 3,601 --
Equipment expense 417 564 849
FDIC insurance premiums 457 633 849
Data processing 526 439 457
Loss on sale of Sacramento Branch -- -- 420
Marketing 86 369 71
Insurance premiums 374 189 97
Telephone 116 155 314
Other operating expenses 559 1,419 1,876
--------------------------------------
Total operating expenses 8,732 19,891 17,638
Net (income from) cost of real estate operations (924) 19,127 4,126
--------------------------------------
Total non-interest expense 7,808 39,018 21,764
--------------------------------------
Income (loss) before income taxes 489 (32,894) (10,086)
Provision for income taxes 11 153 142 169
--------------------------------------
Net Income (loss) $ 336 $(33,036) $(10,255)
======================================
Income (loss) per share:
Weighted average shares outstanding 5,765,985 3,078,303 445,064
Net Income (loss) $0.05 $(10.73) $(23.00)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-44-
<PAGE> 47
THE SAN FRANCISCO COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Unrealized
Employee Gain
Purchase (Loss) on Total
Additional and Securities Share-
Preferred Common Paid-in Retained Option Available- Holders
(Dollars in Thousands) Stock Stock Capital (Deficit) Plans for-Sale Equity
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1993 $ 6,116 $ 4 $34,668 $(24,846) $ (266) $ -- $15,676
Net change in employee stock
ownership plans -- -- (6) -- 100 -- 94
Net proceeds from sale of stock 12,000 -- -- -- -- -- 12,000
Unrealized loss on securities
available-for-sale -- -- -- -- -- (60) (60)
Net loss -- -- -- (10,255) -- -- (10,255)
-----------------------------------------------------------------------------
Balances at December 31, 1993 18,116 4 34,662 (35,101) (266) (60) 17,455
Net change in employee stock
ownership plans -- -- -- -- 96 96
Conversion of preferred stock
to common stock (18,002) 18 17,984 -- -- -- --
Net proceeds from sale of stock -- 36 17,524 -- -- 17,560
Redemption of fractional shares -- -- (2) -- -- -- (2)
Appreciation in market value of
securities available-for-sale -- -- -- -- -- 56 56
Net loss -- -- -- (33,036) -- -- (33,036)
-----------------------------------------------------------------------------
Balances at December 31, 1994 $114 58 70,168 (68,137) (70) (4) 2,129
Net change in employee stock
ownership plans -- -- -- -- 70 -- 70
Net proceeds from sale of stock 4,300 -- -- -- -- -- 4,300
Appreciation in market value of
securities available-for-sale -- -- -- -- -- 45 45
Net income -- -- -- 336 -- -- 336
-----------------------------------------------------------------------------
Balances at December 31, 1995 $ 4,414 $ 58 $70,168 $(67,801) $ -- $ 41 $ 6,880
=============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-45-
<PAGE> 48
SAN FRANCISCO COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 336 $(33,036) $(10,255)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for loan losses 500 3,799 3,554
Depreciation and amortization expense 581 660 770
Provision for other real estate owned and real estate investment 506 17,074 2,629
Loss on investment securities held-for-sale -- -- 67
Loss on sale of investment securities available for sale -- 265 --
Loss on sale of investment securities held-to-maturity prior to maturity -- 14 --
Decrease in interest receivable 293 126 539
Decrease in interest payable (36) (143) (213)
Decrease in deferred loan fees (208) (162) (313)
-------------------------------------
Net cash flows provided by (used in) operating activities 1,972 (11,403) (3,222)
-------------------------------------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities held-to-maturity 7,859 7,516 28,200
Redemption of Federal Home Loan Bank stock, net 705 2,344 --
Purchase of investment securities held-to-maturity -- (12,719) (29,404)
Proceeds from sales of investment securities available-for sale -- 19,402 24,472
Purchase of investment securities available-for-sale (8,414) (8,492) --
Purchase of investment securities held-for-sale -- -- (20,808)
Proceeds from maturities of investment securities available-for-sale 4,134 1,610 --
Capital expenditures for real estate owned (855) (575) (3,790)
Net decrease in loans 49,132 39,101 51,253
Loans sold in sale of branch -- -- 27,934
Recoveries of loans previously charged off 1,707 1,347 159
Acquisition of leasehold interest -- BSFBC (4,471) -- --
Purchases of premises and equipment (120) (64) (124)
Premises and equipment sold in sale of branch -- -- 350
Decrease in other assets sold in sale of branch -- -- 201
Proceeds from sales of real estate investments 4,543 4,700 7,563
Net decrease in other assets 239 1,165 1,152
------------------------------------
Net cash provided by investing activities 54,459 55,335 87,158
------------------------------------
Cash Flows from Financing Activities:
Net decrease in deposits (41,475) (62,963) (42,459)
Net increase (decrease) in other borrowings (4,070) 2,859 (14,005)
Deposits sold in sale of branch -- -- (33,115)
Net increase (decrease) in other liabilities (1,019) 1,426 (121)
Net proceeds from sale of preferred stock 4,300 -- 12,000
Net proceeds from sale of common stock -- 17,560 --
------------------------------------
Net cash used in financing activities (42,264) (41,118) (77,700)
------------------------------------
Increase (decrease) in cash and cash equivalents 14,167 2,814 6,236
Cash and cash equivalents at beginning of year 28,647 25,833 19,597
------------------------------------
Cash and cash equivalents at end of year $42,814 $28,647 $25,833
====================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements. (continued)
-46-
<PAGE> 49
THE SAN FRANCISCO COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(continued)
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
-----------------------------------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 4,450 $ 5,006 $ 7,632
Income taxes 153 142 106
Supplemental Schedule of Noncash Investing and Financing Activities:
Net transfer of loans to other real estate owned 1,197 587 2,943
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-47-
<PAGE> 50
THE SAN FRANCISCO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
Note 1: Statement of Accounting Policies
The accounting and reporting policies of The San Francisco Company
(Company) and its subsidiaries are in accordance with generally accepted
accounting principals and practices within the banking industry.
Organization
The San Francisco Company, formerly the Bank of San Francisco Company
Holding Company is a Delaware corporation and a bank holding company registered
under the Bank Holding Company Act of 1956, as amended. The Company was
organized in 1981 under the laws of the State of California. In July 1988, the
Company changed its state of incorporation from California to Delaware by means
of a merger of the Company into a newly formed wholly owned Delaware subsidiary.
Bank of San Francisco (Bank), a state chartered bank, was organized as a
California banking corporation in 1978 and became a wholly owned subsidiary of
the Company through a reorganization in 1982. The Bank specializes in providing
private banking and business banking for such professional individuals, their
business and other business in the San Francisco banking market.
Prior to December 31, 1994, the Bank and Bank of San Francisco Realty
Investors (BSFRI) had partnership interests of 34.5% and 2.5%, respectively, in
Bank of San Francisco Building Company (BSFBC), a California limited partnership
which holds the leasehold interest in the Company's headquarters building
located at 550 Montgomery Street, San Francisco, California. During 1995, the
Bank acquired 100% of the outside limited partnership interest.
Principles of Consolidation
The accompanying financial statements include the accounts of the
Company, the Bank, and the Bank's wholly owned subsidiary, BSFRI. During 1995,
the Bank acquired controlling interest in BSFBC. The Consolidated Statement of
Financial Condition includes the accounts of BSFBC as of December 31, 1995 and
the Consolidated Statements of Operations and Cash Flow include the accounts of
BSFBC beginning July 1, 1995, approximately the date of acquisition. All
material intercompany transactions have been eliminated in consolidation. Prior
to the acquisition, the Company accounted for its investment in BSFBC using the
equity method.
Cash and Cash Equivalents and Statements of Cash Flows
Cash equivalents are defined as short-term, highly liquid investments
both readily convertible to known amounts of cash and so near maturity that
there is insignificant risk of change in value because of changes in interest
rates. Generally, only investments with maturities of three months or less at
the time of purchase qualify as cash equivalents. Cash and cash equivalents
include cash and due from banks, time deposits with other financial
institutions, and Federal funds sold.
The Bank is required to maintain non-interest bearing cash reserves
equal to a percentage of certain deposits. In 1995 and 1994, the average reserve
balances outstanding were $1.5 million and $2.8 million, respectively.
Generally, the Bank does not maintain compensating balance arrangements.
Investment Securities
At December 31, 1993, the Company adopted Statement of Financial
Accounting Standards "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115) which requires the classification of debt and equity
securities into one of three categories; held-to-maturity, trading, or
available-for-sale. The investments classified as held-to-maturity are carried
at amortized cost because management has both the intent and ability to hold
these investments to maturity. Investments classified as available-for-sale are
carried at fair value with any unrealized gains and loss included as a separate
component of shareholders' equity.
-48-
<PAGE> 51
Investment securities include both debt and equity securities. At
December 31, 1995 and 1994, the Bank maintained two securities portfolios;
investment securities held-to-maturity, and debt and equity securities
available- for-sale. Investment securities held-to-maturity are carried at
amortized cost and discounts or premiums are accreted or amortized to income
over the expected term of the investment based on prepayment assumptions.
Discounts or premiums are adjusted periodically to reflect actual prepayment
experience. The gain or loss on all investment securities sold is determined
based on the specific identification method. The estimated fair value is based
on quoted market prices.
Loans Receivable
Loans are stated at the principal amount outstanding, net of the
allowance for loan losses, deferred fees and unearned discount, if any. The Bank
holds loans receivable primarily for investment purposes. A significant portion
of the Bank's loan portfolio is comprised of adjustable rate loans.
Effective January 1, 1995, the Company adopted SFAS No. 114 "Accounting
by Creditors for Impairment of a Loan" as amended by SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures". Interest
on loans as well as impaired loans is calculated using the simple interest
method on the daily balances of the principal amount outstanding. The accrual of
interest is discontinued and any accrued and unpaid interest is charged against
current income when the payment of principal or interest is 90 days past due,
unless the amount is well-secured and in the process of collection. Subsequent
interest payments on loans in non-accruing status are recorded as a reduction of
the loan balance. A non-accrual loan is restored to an accrual basis when
principal and interest payments are being paid currently and full payment of
principal and interest is probable. Interest payments received on loans for
which the future collection of the recorded principal is probable are recognized
as interest income.
Lease financing receivables, net of unearned income, are included in
loans. Unearned income and residual values related to lease financing
receivables are recognized as income over the life of the lease under a method
that yields an approximately level rate of return on the unrecovered lease
investment.
Loan Fees
The Bank charges nonrefundable fees for originating loans. Loan
origination fees, net of the direct costs of underwriting and closing the loans,
are deferred and amortized to interest income using the interest method.
Unamortized net fees and costs on loans sold or paid in full are recognized as
income. Other loan fees and charges, which represent income from delinquent
payment charges, and miscellaneous loan services, are recognized as interest
income when collected.
Allowance for Loan Losses
The Company identifies certain classified loans as impaired loans under
SFAS No. 114. The Company measures the impairment of real estate loans using the
collateral value method, and commercial and financial loans using discounted
cash flow method.
The Company records a provision for estimated losses on loans
receivable considering both specifically identified problem loans and credit
risks not specifically identified in the loan portfolio. The allowance for loan
losses takes into consideration numerous factors including the financial
condition of the borrowers, the fair value of the collateral prior to the
anticipated date of sale, collateral concentrations and past loss experience.
These allowances are subjective and may be adjusted in the future depending on
economic conditions. In addition, regulatory examiners may require the Company
to provide additional allowances based on their judgements of the information
regarding problem loans and credit risks available to them at the time of their
examinations.
Losses are recognized as charges to the allowance when the loan or a
portion of the loan is considered uncollectible or at the time of foreclosure.
Recoveries on loans receivable previously charged off are credited to allowance
for loan losses.
-49-
<PAGE> 52
Premises and Equipment
Premises and equipment are stated at historical cost less accumulated
depreciation and amortization. Depreciation on furniture, fixtures and equipment
is computed on the straight-line method over the estimated useful life of each
type of asset. Estimated useful lives are from three to seven years. Leasehold
improvements are amortized over the term of the applicable lease or their
estimated useful life, whichever is shorter.
Real Estate Investments
The Company, through BSFRI, has acquired property for development and
sale. Real estate acquired for development and sale is recorded at the lower of
cost (adjusted for subsequent development costs) or fair value net of estimated
selling costs. Interest costs are capitalized when properties are in the
development stage.
Other Real Estate Owned
Other real estate owned (OREO) includes loans receivable that have been
repossessed in settlement of debt (foreclosures). At the date of transfer, OREO
is recorded at fair value net of estimated selling costs.
The Company provides a charge against current earnings for estimated
losses on foreclosed property when the carrying value of the property exceeds
its fair value net of estimated selling expenses. The Bank obtains an appraisal
or market valuation analysis on all other real estate owned periodically. If the
periodic valuation indicates a decline in the fair value below recorded carrying
value, an allowance for OREO losses is established. Fair value is based on
current market conditions, appraisals, and estimated sales values of similar
properties, net of estimated selling and other expenses.
Income Taxes
Effective January 1, 1993, the Company changed its method of accounting
for income taxes to adopt Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109). Under the asset and liability
method prescribed by SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences of differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases (temporary differences). Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period of enactment.
Under SFAS No. 109, deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards, and then
a valuation allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized. The
adoption of SFAS No. 109 did not have a material impact on the Company's January
1, 1993 net deferred tax asset. Additionally, the adoption of this accounting
method did not have a material impact on tax expense and net income for 1995 and
1994.
Non-Interest Income
Fees for other customer services represent fees earned for the
brokerage of certificates of deposit and commissions earned in connection with
the Bank's stock option lending program and other banking services. Fees for
services are recorded as income when the services are performed.
Income (loss) per Share
Income (loss) per share is calculated using the weighted average number
of common shares outstanding divided into net income (loss). The conversion of
the Series C Preferred Shares and warrants are included in the calculations of
loss per share for 1994 effective from the date of conversion. No common stock
equivalents were used in calculating income (loss) per share.
-50-
<PAGE> 53
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 permits a company to choose either a new
fair value based method of accounting for its stock-based compensation (stock
options) or the current Accounting Principles Board (APB) Opinion No. 25
intrinsic value based method of accounting for its stock-based compensation.
SFAS No. 123 requires pro-forma disclosures of net income and earnings per share
computed as if the fair value based method had been applied in financial
statements of companies that continue to follow current practice in accounting
for such arrangement under APB No. 25. The Company has elected to use the
current APB No. 25 intrinsic value based method of accounting for its
stock-based compensation and to disclose its stock-based compensation in
accordance with SFAS No. 123.
In 1995, FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes
indicate that the carrying value of an asset may not be recoverable. The
Company elected not to implement SFAS No. 121 for the period ended December 31,
1995. The effect of adopting SFAS No. 121, if any, has not been determined.
Reclassifications
Certain reclassifications have been made in the prior years'
consolidated financial statements to conform to current year presentation.
Use of Estimates
The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reporting amounts of assets and liabilities and
the contingent assets and liabilities at the date of the financial statements
and the reporting amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2: Regulatory Orders
The Company
On December 16, 1994, the Company and the Federal Reserve Bank of San
Francisco (FRB) entered into a Written Agreement (the "Agreement") that
supersedes the previous directive dated April 20, 1992. The Agreement prohibits
the Company, without prior approval of the FRB, from: (a) paying any cash
dividends to its shareholders; (b) directly or indirectly, acquiring or selling
any interest in any entity, line of business, problem or other assets; (c)
executing any new employment, service, or severance contracts, or renewing or
modifying any existing contracts with any executive officer; (d) engaging in any
transactions with the Bank that exceeds an aggregate of $20,000 per month; (e)
engaging in any cash expenditures with any individual or entity that exceeds
$25,000 per month; (f) increasing fees paid to any directors for attendance at
board or committee meetings, or paying any bonuses to any executive officers;
(g) incurring any new debt or increasing existing debt; and (h) repurchasing any
outstanding stock of the Company. The Company is required to submit a progress
report to the FRB on a quarterly basis.
The Company was also required to submit to the FRB an acceptable
written plan to improve and maintain adequate capital position, a comprehensive
business plan concerning current and proposed business activities, a
comprehensive operating budget at the Bank and the consolidated organization. In
addition, the Board of Directors was required to submit an acceptable written
plan designed to enhance their supervision of the operations and management of
the consolidated organization. The Company has filed all of the required
submissions with the FRB in accordance with the Agreement.
-51-
<PAGE> 54
The Bank
Capital Orders
On March 24, 1995, the State Banking Department (SBD) issued an order
for the Bank (Capital Order) to increase its level of capital. The capital order
requires that the Bank increase its capital by a minimum of $10.5 million on or
before June 30, 1995. The capital contribution must be at least equal to the
amount of capital necessary to increase the shareholder's equity to not less
than 7.0% of total tangible assets. On or before June 30, 1995, the Company
contributed $4.7 million to the Bank as partial payment on the requirement of
the Capital Order. On March 20, 1996, the Company contributed an additional $1.0
million to the Bank. No assurances were given that the SBD will continue to
refrain from taking action against the Bank to enforce the Capital Order.
On March 28, 1995, the Federal Deposit Insurance Corporations (FDIC)
issued a Notification of Capital Category ("Notification") in accordance with
Prompt Corrective Action regulations. The FDIC had determined that the Bank was
Critically Undercapitalized. As of December 31, 1995, with the second quarter
infusion of capital and 1995 earnings, the Bank is considered adequately
capitalized for the purpose of the industry standard capital categories and the
FDIC has so notified the Bank. However, the Bank remains below the 7% leverage
capital ratio required by the Orders as described below.
Orders to Cease and Desist
On August 18, 1993, the Bank stipulated to Orders to Cease and Desist
(Orders) issued jointly by the FDIC and the SBD, whereby the Bank agreed to
correct alleged unsafe and unsound practices disclosed in the FDIC and SBD
Reports of Examination as of November 30, 1992. The Orders supersede the
Memorandum of Understanding that the Bank had been operating under since
November 15, 1991. As a result of the Orders, the Bank is classified as a
"troubled institution" by the FDIC.
The Orders, which became effective on August 29, 1993, require that the
Bank: (a) achieve and maintain a 7% leverage capital ratio on and after
September 30, 1993; (b) pay no dividends without the prior written consent of
the FDIC and the California Superintendent of Banks (the "Superintendent"); (c)
reduce the $88.6 million in assets classified "Substandard" or "Doubtful" as of
November 30, 1992 (the date of the most recent full-scope FDIC and SBD Report of
Examination of the Bank), to no more than $40.0 million by August 31, 1994; (d)
have and retain management whose qualifications and experience are commensurate
with their duties and responsibilities to operate the Bank in a safe and sound
manner, notify the FDIC and the Superintendent at least 30 days prior to adding
or replacing any new director or senior executive officer and comply with
certain restrictions in compensation of senior executive officers; (e) maintain
an adequate reserve for loan losses; (f) not extend additional credit to, or for
the benefit of, any borrower who had a previous loan from the Bank that was
charged off or classified "Loss" in whole or in part; (g) develop and implement
a plan to reduce its concentrations of construction and development loans; (h)
not increase the amount of its brokered deposits above the amount outstanding on
the Orders Effective Date ($20.0 million) and submit a written plan for
eliminating reliance on brokered deposits; (i) revise or adopt, and implement,
certain plans and policies to reduce the Bank's concentration of construction
and land development loans, reduce the Bank's dependency on brokered deposits
and out of area deposits, and to improve internal routines and controls; (j)
reduce the Bank's volatile liability dependency ratio to not more than 15% by
March 31, 1994; (k) eliminate or correct all violations of law set out in the
most recent Report of Examination, and take all necessary steps to ensure future
compliance with all applicable laws and regulations; and (l) establish a
committee of three independent directors to monitor compliance with the Orders
and report to the FDIC and the Superintendent on a quarterly basis.
As of December 31, 1995, the Bank failed to meet the 7% leverage
capital ratio imposed by the Orders. As to the other requirements of the
Orders, the Bank believes that the findings of the FDIC and SBD at its recent
examination which began January 29, 1996 will be that the Bank is in compliance
with substantial requirements of the Orders. However, no Report of Examination
has been received from the FDIC and the SBD as a result of their recent
examination of the Bank.
In response to the Orders and Prompt Correction Action regulations,
management has submitted a 1995 Business and Profit Plan to the FDIC and the SBD
for approval. The FDIC has approved the Plan subject to the infusion of
additional capital. Subject to the risk associated with the banking business
generally, management believes that the Bank will be able to take the actions
contemplated by such plan without need for further FDIC
-52-
<PAGE> 55
approval. A number of the restrictions imposed by the Orders will remain in
effect until the Orders are officially lifted. Although management anticipates
the FDIC and the SBD will lift the Orders if the Bank's problem assets are fully
resolved, no assurance can be given as to when all conditions precedent to the
lifting of the Orders will be fulfilled. The Company also is subject to certain
restrictions imposed by the FRB pursuant to the Agreement that may prevent the
Company from taking steps to establish new businesses (or new subsidiaries) at
the Company level until similar conditions precedent are fulfilled.
Prompt Corrective Action
The Bank's failure to meet minimum regulatory requirements as of
December 31, 1994, resulted in the imposition of operating restrictions pursuant
to the prompt corrective action provisions of FDIC Improvement Act (FDICIA). In
accordance with FDICIA, the Bank submitted a capital restoration plan (Plan) for
meeting regulatory capital requirements. The Plan has been approved subject to
the infusion of additional capital. In addition, in 1995 the Company agreed to
revise its guarantee that the Bank will comply with the previously filed capital
restoration plan until the Bank has met its minimum capital requirements on
average during each of four consecutive calendar quarters. The Company agreed to
guarantee the Bank's performance under the Plan for up to five percent (5%) of
the Bank's assets or the amount needed to bring the Bank into compliance. The
Company's guarantee will remain in effect until the Bank maintains compliance
with the minimum capital ratio requirements for four consecutive calendar
quarters.
Impairment Orders
Under California law, if a bank's deficit retained earnings exceed 40%
of its contributed capital, its capital is deemed to be impaired, and the bank
is required to levy an assessment on its shares to correct the impairment. The
SBD has issued eight impairment orders to the Bank, with the most recent dated
February 5, 1996 (the "Impairment Orders"). At December 31, 1995, the Bank had
contributed capital of $70.9 million and deficit retained earnings of $64.0
million.
The Impairment Orders require the Bank to correct the impairment within
60 days by levying an assessment on the Company as the Bank's sole shareholder.
The Bank has not levied an assessment against its shares nor has it otherwise
corrected the impairment, and, therefore, is in violation of this law. In
addition, the SBD has specifically reserved the right to take such other action
as the Superintendent may deem appropriate or necessary, which may include
taking possession of the Bank's property and business, including ultimately
liquidating the business and affairs of the Bank.
The Company plans to correct the Bank's capital impairment by
requesting the SBD to approve a quasi- reorganization of the Bank. In a
quasi-reorganization, the Bank's retained deficit would be reduced or eliminated
by netting the retained deficit against contributed capital. Management believes
that approval for such a quasi- reorganization would only be granted by the SBD
upon the Bank raising sufficient additional capital for the Bank to sustain
profitable operations and meet all of its regulatory capital requirements in the
future. Should the SBD deny approval for a quasi-reorganization of the Bank, the
Bank would be required to raise additional new capital of $89.1 million, to cure
the capital impairment at December 31, 1995. Any operating losses thereafter
would further impair the Bank's capital and give rise to further capital
assessments.
No assurance can be given that the Bank's capital condition will not
deteriorate prior to any such quasi- reorganization as a result of operating
losses. In addition, because a quasi-reorganization requires that the Bank
adjust its assets and liabilities to market value at the time of the
reorganization, the Bank's capital could be further reduced from its present
level. Finally, there can be no assurance given that, following a correction of
the Bank's capital impairment, whether through a quasi-reorganization or an
infusion of sufficient capital, the Bank's capital position will not erode
through future operating losses.
-53-
<PAGE> 56
Note 3: Investment Securities
The carrying and estimated market values of investment securities
held-to-maturity at December 31 are as follows:
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Market
(Dollars in Thousands) Value Gains Losses Value
--------------------------------------------
<S> <C> <C> <C> <C>
1994:
U.S. Treasury and agency securities $7,859 $ -- $ (23) $7,836
--------------------------------------------
Total $7,859 $ -- $ (23) $7,836
============================================
</TABLE>
During 1994, the Bank reclassified collateralized mortgage obligations
with an amortized cost of $2.3 million to the available-for-sale investment
category as a result of a change in the strategy regarding the investment in
these types of securities. The Bank recorded a loss of $14,000 on the transfer
of securities to the available-for- sale category.
As of December 31, 1995 and 1994, The Bank's investment in Federal Home
Loan Bank stock totaled $632,000 and $1.3 million and is stated at par. During
1995, the Bank redeemed 7,500 shares at $750,000. The Federal Home Loan Bank
stock has no term to maturity.
The carrying and estimated market values of investment securities
available-for-sale at December 31 are as follows:
<TABLE>
<CAPTION>
Original Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
--------------------------------------------
<S> <C> <C> <C> <C>
1995:
U.S. Treasury and agency securities $6,495 $ 41 -- $6,536
--------------------------------------------
Total $6,495 $ 41 -- $6,536
============================================
1994:
U.S. Treasury and agency securities $1,943 $ -- $ (2) $1,941
Collateralized mortgage obligation (CMO) 272 -- (2) 270
--------------------------------------------
Total $2,215 $ -- $ (4) $2,211
============================================
</TABLE>
For 1995 and 1994, the Company included an unrealized gain of $41,000
and an unrealized loss of $4,000 as a separate component of stockholders'
equity. The Company sold its mutual fund investments classified as available for
sale totaling $1.1 million during 1995. During 1995, the Company recorded no
gains or losses on sale of investment securities.
The table below sets forth certain information regarding the carrying
values and market values, and the weighted average yields of the Bank's
investment securities portfolio by maturity at December 31, 1995:
<TABLE>
<CAPTION>
Within One Year One to Five Years Total Investment Securities
---------------- ----------------- ----------------------------
Carrying Average Carrying Average Carrying Market Average
(Dollars in Thousands) Value Yield Value Yield Value Value Yield
---------------- ----------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 3,019 6.1% $ 3,517 6.1% $ 6,536 $ 6,536 6.1%
FHLB stock -- -- -- -- 632 632 5.2
-------------- ---------------- --------------------------
Total $ 3,019 6.1% $ 3,517 6.1% $ 7,168 $ 7,168 6.0%
============== ================ ==========================
</TABLE>
The average yield on investments securities was 6.1% and 4.6% at
December 31, 1995 and 1994, respectively. U.S. Treasury and agency securities
held by the Company have effective maturities of less than two years.
-54-
<PAGE> 57
At December 31, 1995 and 1994, $1.4 million and $2.5 million,
respectively, of securities were pledged as collateral for treasury, tax, loan
deposits, public agency, bankruptcy and trust deposits. At December 31, 1995 and
1994, the Company had no securities sold under agreements to repurchase.
As of December 31, 1995 and 1994, the Company and the Bank had no
derivative financial instruments that would be subject to SFAS No. 119,
"Disclosure About Derivative Financial Instruments and Fair Value of Financial
Instruments".
Note 4: Loans Receivable
The Bank's loan portfolio at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
---------------------
<S> <C> <C>
Real estate mortgage $ 31,388 $ 62,149
Real estate construction 5,661 9,004
Commercial and financial 16,128 35,268
Net lease financing 31 31
---------------------
Total loans 53,208 106,452
Deferred fees (180) (388)
Allowance for loan losses (5,912) (6,576)
---------------------
Total loans, net $ 47,116 $ 99,488
=====================
</TABLE>
At December 31, 1995 and 1994, non-accrual loans totaled $7.5 million
and $9.4 million, respectively, and loans past due 90 days or more and still
accruing were zero and $940,000, respectively. For the years ended December 31,
1995, 1994 and 1993, interest income foregone on non-accrual loans was $177,000,
$918,000, and $797,000, respectively. Restructured loans totaled $5.9 million
and $6.3 million at December 31, 1995 and 1994, respectively. For the years
ended December 31, 1995, 1994 and 1993, interest income foregone on restructured
loans were $24,000, $18,000 and $166,000, respectively.
There were $7.8 million of fixed rate loans at December 31, 1995 with a
weighted average yield of 9.0%. Total fixed rate loans, most of which will
mature within six years, comprised approximately 14.7% of the Bank's loan
portfolio at December 31, 1995.
The Company makes commercial and financial loans secured by real
estate, which are principally located in Northern California. At December 31,
1995 loans secured by deeds of trust on property located in these areas
represented 77.3% of the Bank's loans. The primary source of repayment of real
estate loans is the borrower's or property's debt service capacity while the
secondary source of repayment is the underlying real estate collateral.
Note 5. Allowance for Loan Losses
Changes in the Company's allowance for loan losses for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Balances at beginning of the year $6,576 $8,050 $8,400
Provision loan losses 500 3,799 3,554
Loans charged off (2,871) (6,620) (4,063)
Recoveries of loans charged off 1,707 1,347 159
--------------------------------
Balances at end of the year $5,912 $6,576 $8,050
================================
</TABLE>
-55-
<PAGE> 58
Effective January 1, 1995, the Company adopted SFAS No. 114 "Accounting
by Creditors for Impairment of a Loan" as amended by SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures". Impaired
loans as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Allowance Interest
Recorded Average for Loan Income
(Dollars in Thousands) Investment Balance Losses Recognized
---------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage $ 3,891 $ 8,856 $ 782 $ 367
Real estate construction 3,428 5,449 292 14
Commercial and financial 307 2,323 29 49
---------------------------------------------------------
Total loans $ 7,626 $16,628 $ 1,103 $ 430
=========================================================
</TABLE>
Of the recorded investment in impaired loans of $7.6 million at
December 31, 1995, the Company measured the impairment of $7.3 million using the
collateral value method and $307,000 using discounted cash flow method. The Bank
had one impaired loan totaling $1.4 million with no allowance for loan loss that
was paid off in January 1996.
Note 6: Other Real Estate Owned
Other real estate owned at December 31 consist of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
--------------------
<S> <C> <C>
Real Estate:
Residential $ 399 $ 2,216
Residential development 4,134 7,127
Commercial development 1,808 1,045
Land under development -- 2,543
Raw land 13,164 16,494
--------------------
Subtotal 19,505 29,425
Allowance for losses (11,991) (19,404)
--------------------
Total $ 7,514 $ 10,021
====================
</TABLE>
As of December 31, 1995 and 1994, other real estate owned was
comprised of 6 and 18 properties, respectively. As of December 31, 1995, the
largest single property totaled $3.2 million.
The following table summarizes the other real estate owned loss
experience of the Bank for the periods shown:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Balance of allowance for losses - beginning $19,404 $ 2,986 $ 6,632
Charge-offs (7,500) (33) (6,982)
Provision 87 16,451 3,336
-------------------------------
Balance of allowance for losses - ending $11,991 $19,404 $ 2,986
===============================
</TABLE>
-56-
<PAGE> 59
Note 7: Real Estate Investments
Real estate investments at December 31 consist of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
--------------------
<S> <C> <C>
Residential development $ 505 $ 507
Commercial development 1,209 1,234
General and limited partnership investment in Bank premises -- 1,682
--------------------
Subtotal 1,714 3,423
Allowance for losses (1,478) (1,059)
--------------------
Total $ 236 $2,364
====================
</TABLE>
At December 31, 1995 and 1994, real estate investments included one
residential development property and one property available for commercial
development. In 1995, the Bank acquired 100% of the limited partnership interest
in the investment in the Bank's premises.
Note 8: Premises and Equipment
Premises and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
-------------------
<S> <C> <C>
Leasehold $ 3,741 $ --
Leasehold improvements 8,482 3,129
Furniture and equipment 5,187 5,065
-------------------
Subtotal 17,410 8,194
Less: Accumulated depreciation and amortization (8,721) (5,198)
-------------------
Total $ 8,689 $ 2,996
===================
</TABLE>
The amount of depreciation and amortization included in non-interest
expense was $581,000, $660,000, and $770,000 in 1995, 1994 and 1993,
respectively. Total rental expense net of sublease income and other occupancy
expenses for the Company premises were $1.2 million, $2.1 million and $2.1
million in 1995, 1994 and 1993.
At December 31, 1995, the approximate future minimum rental payment
under a non-cancelable operating lease, with a remaining term of fifteen years,
for the Company's premises are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) Amount
-------
<S> <C>
1996 $ 134
1997 134
1998 134
1999 134
2000 134
Thereafter 1,318
-------
Total $ 1,988
=======
</TABLE>
The lease payment is fixed until the expiration of the lease on October
31, 2010. During 1995, 1994 and 1993, the Company received $435,000, $169,000
and $59,000 of sublease income, respectively. The total future minimum rent
payments to be received under noncancellable operating subleases at December 31,
1995 were approximately $1.3 million. These payments are not reflected in the
above table.
-57-
<PAGE> 60
Note 9: Deposits
Deposit balances by deposit programs offered by the Bank at December 31
are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------- --------------------
Average Average
(Dollars in Thousands) Balance Rate Balance Rate
------------------- --------------------
<S> <C> <C> <C> <C>
Demand deposit accounts $ 20,365 0.0% $ 30,259 0.0%
Savings and NOW accounts 25,411 2.4 43,415 2.4
Money market accounts 16,185 2.8 25,250 3.2
Time accounts 43,712 6.1 48,224 5.0
------------------ --------------------
Total $105,673 3.5% $147,148 2.9%
================== ====================
</TABLE>
Total deposit balances averaged $122.6 million and $172.9 million
during 1995 and 1994, respectively, with average interest rates of 3.5% and
2.7%, respectively. The weighted average stated rates on deposits as of December
31, 1995 and 1994 was 3.5% and 2.9%, respectively.
Domestic time deposits in amounts of $100,000 or more by time remaining
to maturity at December 31 are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
-------------------
<S> <C> <C>
Three months or less $3,157 $ 7,028
Three months to six months 1,371 1,586
Six months to one year 1,373 1,216
Over one year 515 405
------------------
Total $6,416 $10,235
==================
</TABLE>
Interest expense on time deposits in amounts of $100,000 or more was
$353,000, $935,000 and $2.0 million in 1995, 1994, and 1993, respectively. Time
deposit accounts in amounts of $100,000 or more averaged $6.9 million and $24.5
million during 1995 and 1994, respectively, with weighted average rates of 5.1%
and 3.8%, respectively. The weighted average stated interest rate on such
deposits at December 31, 1995 and 1994 was 5.4% and 4.4%, respectively.
Brokered deposits totaled $3.4 million and $19.7 million, and money
desk deposits totaled $28.0 million and $15.1 million at December 31, 1995 and
1994, respectively.
-58-
<PAGE> 61
Note 10: Other Borrowings
Other borrowings at December 31 are as follows:
<TABLE>
<CAPTION>
Maximum
Balance Stated Average Average Balance
(Dollars in Thousands) Outstanding Rate Balance Rate Outstanding
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995:
Borrowings for employee stock ownership plan $ -- -- $ 18 8.3% $ 70
Mortgage indebtedness -- -- 432 9.5 2,198
Other borrowings - FHLB line of credit -- -- 1,297 9.7 6,000
----------------------------------------------------------------
Total -- -- $1,747 9.6% $8,268
================================================================
1994:
Borrowings for employee stock ownership plan $ 70 8.1% $ 83 6.8% $ 163
Mortgage indebtedness -- -- 629 10.0 1,141
Securities sold under agreements to repurchase 4,000 5.8 639 5.3 11,201
Other borrowings - FHLB line of credit -- -- 1,359 5.0 9,800
-----------------------------------------------------------------
Total $ 4,070 5.8% $ 2,710 6.4% $ 22,305
=================================================================
</TABLE>
The securities pledged under the agreement to resell are held in safe
keeping by an unrelated third party.
The Bank can borrow from the FHLB by application, of which $3.1 million
was available at December 31, 1995, based on the collateral pledged. At December
31, 1995 and 1994, $4.3 million and $11.4 million of loans and securities are
pledged as collateral against other borrowings. The Bank is required to hold
FHLB stock as a condition for maintaining its membership in the FHLB.
In 1995, the Bank's other borrowings included a loan on the Bank's
premises. The borrowing was repaid in 1995.
Note 11: Income Taxes
The provision for Federal and state income taxes consists of:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 153 142 169
---------------------------------
Total current 153 142 169
---------------------------------
Deferred:
Federal -- -- --
State -- -- --
--------------------------------
Total deferred -- -- --
---------------------------------
Total provision for income taxes $ 153 $ 142 $169
=================================
</TABLE>
The provision for state taxes for 1995, 1994 and 1993 consists of the
minimum amount of franchise taxes due.
-59-
<PAGE> 62
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
----------------------
<S> <C> <C>
Deferred Tax Assets:
Book loan loss reserve in excess of tax $ 1,967 $ 2,213
Other provisions 58 256
Provision for losses for real estate 5,569 9,164
Net operating losses 17,591 15,120
Tax credits 489 489
Difference in recognition of income from partnerships -- 63
Income recognized on leased property -- 1,832
Capitalized costs -- 391
Net tax value of premises in excess of book 294 --
Other 344 131
---------------------
Total deferred tax assets 26,312 29,659
Valuation allowance (25,873) (27,534)
---------------------
Total deferred tax assets, net 439 2,125
---------------------
Deferred Tax Liabilities:
Net book value of premises and equipment in excess of tax -- (1,608)
Loan origination costs (56) (116)
Taxable income in excess of book for rehabilitation credit (383) (401)
---------------------
Total deferred tax liabilities (439) (2,125)
----------------------
Net deferred taxes -- $ --
======================
</TABLE>
The Bank provided a valuation allowance for deferred tax assets because
it is more likely than not that the underlying benefits may not be recognized in
the foreseeable future. The utilization of the net operating loss carryforwards
and rehabilitation and minimum tax credit carryforwards may be limited on an
annual basis under current tax law due to the change in ownership in 1992 and
possible changes in ownership in future years.
The total tax provision (benefit) differs from the statutory Federal
rates for the reasons shown in the following table:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Tax expense (benefit) at the statutory federal rate 34.0% (34.0)% (34.0)%
Utilization of prior taxable (loss) income (34.6) 34.0 34.1
State income taxes, net of federal tax benefit 31.3 0.4 1.7
Non-deductible expenditures and non-taxable income 0.6 -- (0.1)
-------------------------------
Total effective tax provision rate 31.3% 0.4% 1.7%
===============================
</TABLE>
At December 31, 1995 and 1994, there is no deferred income tax
receivable. Because the Company has utilized most of its ability to carryback
net operating losses, much of the 1994 and 1993 losses, and future losses, if
any, must be carried forward to offset future net operating income. In addition,
the actual benefit rate may be less than the current statutory rate due to tax
differentials and the alternative minimum tax. As of December 31, 1995, the
Company has net operating loss carryforwards for federal tax purposes of
approximately $46.0 million which expire in 2007 and onwards, and for California
tax purposes of approximately $27.0 million, which expire in 1997, 1998, 1999,
and 2000. The Company has rehabilitation tax credits carryforwards for federal
tax purposes of approximately $213,000, which expire in 2004 and 2005. In
addition, the Company has minimum tax credits of approximately $275,000 which
have no expiration.
-60-
<PAGE> 63
Note 12: Shareholders' Equity
The capital infusion by the Company's controlling stockholder in 1995,
1994, and 1993 was $4.3 million, $20.0 million, and $12.0 million, respectively.
The capital in 1995 was raised by the issuance of 215,000 shares of Series D
Preferred Stock at $20.00 per share. The capital for 1994 was raised from the
issuance of 3,521,126 shares of Class A common stock at $5.68 per share. The
capital for 1993 was raised from the issuance of shares of Series C Perpetual
Preferred Shares (Series C Preferred Shares) at twenty dollars ($20.00) per
share. The Series C Preferred Shares were converted in to Class A Common shares
in 1994.
Description of Capital Stock
The authorized capital stock of the Company consists of 40,000,000
Class A Shares, par value $0.01 per share and 2,500,000 shares of preferred
stock, par value $0.01 per share, of which 437,500 are designated as Series B
Preferred Shares and 750,000 are designated as Series D Preferred Shares. The
remainder are not designated.
In accordance with the Agreement and the Orders, the Company and the
Bank are prohibited from paying dividends without the prior written consent or
approval of the FDIC, the Superintendent of Banks and the Federal Reserve Bank
of San Francisco.
Description of Class A Common Stock
As of December 31, 1995 there were 5,765,978 Class A Shares outstanding
out of a total of 40,000,000 shares authorized. During 1994, the Shareholders of
the Company approved a reclassification of all Class B Common Stock into Class A
Common Stock. The Series B Preferred Shares, which were convertible into shares
of the Class B Common Stock at the option of the holders thereof are now
convertible to Class A Common Stock. The reclassification is not deemed by the
Company to alter or change any of the relative powers, preferences or special
rights of the holders of the Class B Preferred Stock.
Dividends
Subject to the rights and preferences of any preferred stock
outstanding, each Class A Share Common Stock is entitled to receive dividends
if, as and when declared by the Board of Directors of the Company. Subject to
the rights of the Series B Preferred Shares and the Series C Preferred Shares,
dividends must be paid on the Class A Shares Common Stock, together with the
Series B Preferred Shares and the Series C Preferred Shares, at any time that
dividends are paid on either. Any dividend so declared and payable in cash,
capital stock of the Company or other property will be paid equally, share for
share, on the Class A Common Stock, Series B Preferred Shares, Series C
Preferred Shares and on any other participating series of preferred stock issued
in the future; provided, however, that the Company may issue dividends
consisting solely of its Class A Shares on the Class A Shares of Common Stock.
Liquidation Rights
In the event of the liquidation, dissolution or winding up of the
Company, holders of the Class A Common Stock are entitled to share equally,
share for share, in the assets available for distribution, subject to the
liquidation preferences of the Series B Preferred Shares and Series C Preferred
Shares and the rights of any other class or series of preferred stock then
outstanding.
Description of Preferred Stock
The Board of Directors of the Company is authorized by the Certificate
of Incorporation to provide for the issuance of one or more series of preferred
stock. The Board of Directors has the power to fix various terms with respect to
each such series, including voting powers, designations, preferences, dividend
rates, conversion and exchange provisions, redemption provisions, and the
amounts which holders are entitled to receive upon any liquidation, dissolution,
or winding up of the Company. As of December 31, 1995, the Board of Directors
has authorized only the issuance of the Series B Preferred Shares and the Series
D Preferred Shares. Pursuant to the Amended Stock Purchase Agreement, the
Company's Certificate of Incorporation and Bylaws were amended to provide that
additional securities, including additional shares of any class of preferred
stock, can be issued only if
-61-
<PAGE> 64
unanimously approved by the Board of Directors or by stockholders holding a
majority of the voting power of the Company.
Voting Rights
Holders of Class A Common Stock (when and if issued) are entitled to
one vote per share. Except as described below, holders of Class A vote together
with holders of the Company's Series B Preferred Shares and Series D Preferred
Shares, on all matters including the election of directors. The Board of
Directors is presently authorized to have 14 members. The Board of Directors is
a classified Board with staggered terms providing for a maximum of three classes
of directors, which are as nearly equal in number as possible, and with one
class elected each year for a maximum term of three years. Holders of Class A
Common Stock are not entitled to vote cumulatively for the election of
directors.
The holders of Class A Common Stock are entitled to vote as separate
classes on any modification to the rights of either class of stock and as
otherwise required by law. As part of the transactions contemplated by the
Amended Stock Purchase Agreement, the stockholders of the Company eliminated
multiple voting rights of the Series B Preferred Shares.
Description of Series B Preferred Stock
The Company issued the Series B Preferred Shares during 1988. As of
December 31, 1995, there were 16,291 Series B Preferred Shares outstanding.
Dividends
Holders of the Series B Preferred Shares are entitled to receive, when
funds of the Company are legally available for payment, an annual cash dividend
of Fifty-Six Cents ($0.56) per share, payable quarterly in January, April, July
and October of each year. Dividends on the Series B Preferred Shares are
cumulative. Cumulative unpaid dividends on the Series B Preferred Stock at
December 31, 1995 total approximately $41,000.
Payment of dividends on the Series B Preferred Shares shall be junior
to payment of dividends at the stated rate of all other series of preferred
stock that the Company may issue in the future and that are designated senior to
the Series B Preferred Shares. Dividends on the Series B Preferred Shares will
be declared and paid or set apart for payment in full for all previous dividend
periods (i) before the payment or setting apart of any funds or assets for the
payment of any dividends on the Class A Common Stock or any other class of
stock, except preferred stock ranking on a parity with or senior to the Series B
Preferred Shares, and (ii) before any purchase or other acquisition for value of
any Class A Common Stock or any future class of stock except preferred stock
ranking on a parity with or senior to the Series B Preferred Shares; provided,
however, that the Company may issue dividends consisting of its Class A Shares
on the Class A Shares.
After payment of dividends at the stated rate on all series of
preferred stock that the Company may issue in the future and that are designated
senior to the Series B Preferred Shares and on any other preferred stock of the
Company that is on a parity with the Series B Preferred Shares, and payment of
dividends at the stated rate on the Series B Preferred Shares, holders of the
Series B Preferred Shares will participate pro rata with the holders of Class A
Common Stock and Series C Preferred Shares, on the basis of number of shares
owned, in all other dividends by the Company to its stockholders, except that,
as noted above, the Company may issue dividends consisting solely of its Class A
Shares on the Class A Shares.
Liquidation Rights
In the event of any liquidation, dissolution, receivership, bankruptcy,
or winding up of the Company, voluntarily or involuntarily, the holders of the
Series B Preferred Shares are entitled to receive the sum of Seven Dollars
($7.00) per share, plus any accrued and unpaid dividends thereon, before any
distributions will be made to the holders of the Class A Common Stock or any
other class of stock junior in preference upon liquidation, but after or
concurrent with distributions to be made at the stated rate on preferred stock
of any series ranking on a parity with or senior in preference upon liquidation
to the Series B Preferred Shares, and will be entitled to no other distribution.
-62-
<PAGE> 65
Conversion
The holders of Series B Preferred Shares are entitled at any time to
convert their Series B Preferred Shares into Class A Common Stock of the Company
at the conversion ratio of one Series B Preferred Share convertible into
one-tenth of one share of Class A Common Stock, upon payment of a conversion fee
of Seven Dollars ($7.00) per share, subject to adjustment under certain
conditions.
Prior to the reclassification of the Class B Common Stock, the Amended
Stock Purchase Agreement required that at least 90% of the Series B Preferred
Shares be converted into Class A Shares on a share-for-share basis. Holders of
408,865 Series B Preferred Shares so converted on July 13, 1992, and a total of
420,909 Series B Preferred Shares had been so converted as of December 31, 1992.
Three hundred shares converted during 1994.
Voting Rights
The holders of the Series B Preferred Shares are entitled to one vote
per Series B Preferred Share on all matters on which shareholders are entitled
to vote. Holders of the Series B Preferred Shares have full voting rights and
powers equal to the voting rights and powers of the holders of the Class A
Common Stock. Holders of the Series B Preferred Shares are entitled to vote
generally for the election of directors and vote with the holders of the Class A
Common Stock and Series C Preferred Shares as a single class, except that the
holders of the Series B Preferred Shares are entitled to vote as a class on any
modification to the rights of the Series B Preferred Shares and otherwise as
required by law.
Description of Series D Preferred Shares
The Board of Directors, pursuant to the Company's Certificate of
Incorporation, has designated seven hundred fifty thousand (750,000) shares of
the Company's preferred stock as "9% Series D Perpetual Preferred Stock" (the
"Series D Preferred Stock"). During the Second Quarter of 1995, the Company sold
two hundred fifteen thousand (215,000) shares of the Series D Preferred Stock,
par value $.01 per share to the Company's principal stockholder who owns
approximately 86.7% of the Company's outstanding Class A Common Stock, for the
purchase price of $20.00 per share (an aggregate purchase price of $4.3
million). The principal features of the Series D Preferred Stock are as follows:
Dividends
Holders of shares of Series D Preferred Stock are entitled to receive
out of funds legally available therefore, if, as and when declared by the Board
of Directors of the Company, an annual cash dividend of One Dollar and Eighty
Cents ($1.80) per share, payable semi-annually in April and October of each
year, before any cash dividends can be paid on the common stock of the Company.
Dividends on the Series D Preferred Stock are junior to payment of dividend at
the stated annual rate of fifty-six Cents ($.56) per share on the Company's 8%
Series B Convertible Preferred Stock (the "Series B Preferred Stock") and all
other series of preferred stock that the Company may issue in the future that
are designated senior to the Series D Preferred Stock. No dividends or other
distributions (other than those payable solely in common stock) shall be payable
with respect to the Company's Class A Common Stock or any other stock junior to
the Series D Preferred Stock during any fiscal year of the Company until cash
dividends on each share of the Series D Preferred Stock shall have been paid in
full or declared and set apart for payment in full during that fiscal year.
Dividends on the Series D Preferred Stock are not cumulative and the Board of
Directors has the right at any time to eliminate or defer such dividends during
any fiscal year of the Company.
After payment of cash dividends at the stated rate on the Series B
Preferred Stock and all other series of preferred shares that the Company may
issue in the future and that are designated senior to the Series D Preferred
stock and payment of cash dividends at the stated rate on the Series D Preferred
Stock, and on any other preferred stock of the Company that is on a parity with
the Series D Preferred Stock, holders of the Series D Preferred Stock will
participate pro rata with the holders of Class A Common Stock and Series B
Preferred Stock on the basis of number of shares owned, in all other cash
dividends by the Company to its shareholders.
-63-
<PAGE> 66
Voting Rights
Subject to applicable law, the holders of shares of Series D Preferred
Stock are entitled to one vote per each share of Series D Preferred Stock on all
matters on which shareholders are entitled to vote, including the election of
directors. Holders of shares of Series D Preferred Stock generally vote with the
holders of shares of Class A Common Stock and the holders of shares of Series B
Preferred Stock as a single class, except that the holders of shares of the
Series D Preferred Stock are entitled to vote as a separate class on any
modifications to the rights of the holders of shares of Series D Preferred Stock
and otherwise as required by law.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of shares of Series D
Preferred Stock are entitled to receive out of the assets of the Company
available for distribution to the Company's shareholders an amount equal to
Twenty Dollars ($20.00) per share, plus any declared but unpaid dividends
thereon, before any distributions will be made to the holders of shares of Class
A Common Stock or any other class of stock junior in preference upon
liquidation, but after distribution at the rate of Seven Dollars ($7.00) per
share on the Series B Preferred Stock and after or concurrent with distributions
to be made at the stated rate on any other preferred shares of any series
ranking on a parity with or senior in preference upon liquidation to the Series
D Preferred Stock.
Conversion
Shares of the Series D Preferred Stock are not currently convertible
but will become so if the conversion feature is approved by the holders of a
majority of the Class A Common Stock and Series B Preferred Stock (voting as a
single class). If the conversion feature of the Series D Preferred Stock is so
approved, each share of the Series D Preferred Stock will become convertible
into approximately 59 shares of Class A Common Stock as determined by a
committee of the Board of Directors of the Company determined to be independent
and without any personal interest in the determination of such conversion ratio,
in consultation with the holder or holders of the Series D Preferred Stock.
Moreover, if holders of a majority of the Company's Class A Common Stock and
Series B Preferred Stock outstanding on the date that is thirty (30) days
following the date of the adoption of such shareholder resolution approving the
conversion feature, the Series D Preferred Stock will be mandatorily converted
into Class A Common Stock on the terms described above.
Risk Protection Rights
In 1994, the Company issued 3,521,126 shares of Class A Common Stock to
its majority shareholder in a private stock offering for $20.0 million in
capital. Each unit sold under the private stock offering included a Risk
Protection Right (the "RPR"). Under the RPR, additional Class A Common Stock
would be issued to the holder of each RPR if a net loss were incurred on certain
specified assets or as the result of losses incurred related to certain
litigation actions. Adjustment shares, to a maximum of 9,723,000 shares, would
have been issued to compensate for the losses related to specific assets and
certain lawsuits none of which, as of December 31, 1995, have been issued. The
Company's majority shareholder relinquished his rights under the RPR.
Description of Stock Option Plans
Prior to 1994, the Company had various stock option plans which
provided for the issuance of up to 20,000 Class A Common Shares. The stock
option plans expired by their terms in January 1992 except that options granted
prior to that date remain in effect and exercisable during the term of the
options. Generally, options were granted at a price not less than the fair
market value of the stock at the date of grant, were exercisable in increments
of 40%
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<PAGE> 67
after two years after the date of the grant and 20% each year thereafter, and
expire ten years after the date of the grant.
<TABLE>
<CAPTION>
Options Outstanding
Shares ---------------------------
Available Number Price
for Grant of Options Per Share
---------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1992 -- 17,909 $72.5 - $107.5
Options canceled -- (12,999) 72.5 - 107.5
---------------------------------------------
Balances at December 31, 1993 -- 4,910 72.5 - 107.5
Options canceled -- (2,837) 72.5 - 107.5
---------------------------------------------
Balances at December 31, 1994 -- 2,073 $72.5 - $100.0
Options canceled -- (2,073) 72.5 - 100.0
---------------------------------------------
Balances at December 31, 1995 -- -- --
=============================================
</TABLE>
During 1994, the Company's shareholders approved two new stock option
plans; the 1993 Executive Stock Option Plan ("Executive Plan") and the 1993
Non-employee Directors Stock Option Plan ("Director Plan").
Executive Plan
Options under the Executive Plan may be granted to key employees and
consultants of the Company and its subsidiaries. The Executive Plan has reserved
a total of 550,000 shares of Class A Common Stock. The number of shares granted
is subject to adjustment as determined by a Committee of the Board of Directors.
The exercise price of options must be at least the fair market value of the
shares of the Company's Class A Common Stock as of the date the option is
granted. As of December 31, 1995 and 1994, shares to be granted under the
Executive Plan total 1,660,558 and 188,022, respectively, with an average
exercise price of $1.82 and $10.00, respectively. The expiration date of the
options is ten years from the effective date that the options were granted.
None of the options have been exercised.
The agreements for certain executive officers and directors provide
that options shall be granted to acquire shares of Class A Common Stock under
the Executive Plan equal to 9% of the fully-diluted shares of the Company's
Class A Common Stock, with additional shares to be issued in the future to
maintain the 9% ratio. The effective dates of the initial grant of options for a
total of 553,530 shares of Class A Common Stock for certain directors are
September 30, 1993 and October 1, 1994. The effective dates of the initial grant
of options for 1,107,058 shares of Class A Common Stock for certain executive
officers are October 1, 1994 and December 1, 1995.
Directors' Plan
Options under the Directors' Plan may be granted to non-executive
directors of the Company and its subsidiaries. The Directors' Plan will cover a
total of 25,000 shares of Class A Common Stock. The number of shares granted is
subject to adjustment to prevent dilution. The exercise price of options must be
at least the fair market value of the shares of the Company's Class A Common
Stock as of the date the option is granted. As of December 31, 1995, shares to
be granted under the Directors' Plan total 7,500 with an average exercise price
of $23.00. Each non-employee director serving on each subsequent April 1 shall
automatically be granted additional options to acquire up to 1,250 shares of
Class A Common Stock. The expiration date of the options is ten years from the
effective date that the options were granted. None of the options have been
exercised.
Note 13: Regulation
In accordance with FIRREA, the FRB and the FDIC established capital
regulations requiring the Company and Bank to maintain minimum: (i) tier 1
capital equal to 4% of total assets, as defined; (ii) tier 1 capital equal to 4%
of risk-weighted assets; and (iii) total capital, as defined, equal to 8% of
risk-weighted assets, as defined.
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<PAGE> 68
The following table sets forth the Company's and the Bank's capital
ratios compared to minimum capital requirements as of December 31, 1995 and the
requirements contained in the Orders:
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
--------------------------------------------
<S> <C> <C> <C> <C>
Leverage 6.0% 6.0% 4.0% 7.0%
Tier 1 risk-based capital 8.5 8.6 4.0 N/A
Total risk-based capital 10.4 10.4 8.0 N/A
</TABLE>
The FDICIA requires each federal banking agency to implement prompt
corrective actions for institutions that it regulates. In response to this
requirement, the FDIC adopted final rules, effective for December 19, 1992,
based upon FDICIA's five capital tiers: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized. Under FDICIA, the FDIC is required to take supervisory action
against financial institutions that are not deemed either well capitalized or
adequately capitalized. The rules generally provide that a bank is adequately
capitalized if its total risk-based capital ratio is 8% or greater, its Tier 1
capital to risk based assets is 4% or greater, its leverage ratio is 4% or
greater, and the financial institution is not subject to a capital directive.
Note 14: Employee Benefit Plans
Employee Stock Ownership Plan
Effective December 1, 1995, the Company terminated its Employee Stock
Ownership Plan ("ESOP"). During 1988, the ESOP established a loan for $650,000
from a third party financial institution which was repaid as of March 31, 1995.
Throughout 1988, the Company purchased 1,429 shares of the Company's Series B
Preferred Shares at a price of $140.00 per share, and the Company's Class A
Shares. During 1989, the Company purchased 2,500 shares of the Company's Class A
Shares at a price of $100.00 per share. During 1995 and 1994, the ESOP did not
purchase any shares of the Company's stock.
At December 1, 1995, the Company had provided a total of approximately
$2.0 million in contributions to the ESOP since its inception in 1985. During
1995, 1994 and 1993, the Company contributed $77,000, $130,000, and $120,000,
respectively, to the ESOP.
Employee Stock Purchase Plan
The Company's Board of Directors adopted an Employee Stock Purchase
Plan ("ESPP") for the benefit of substantially all employees in March 1990,
which was approved by the Company's stockholders in July 1990.
A total of 1,250 shares of the Company's Class A Shares have been made
available for purchase under the Plan, and a total of 1,250 shares of Class A
Shares have been made available for matching awards under the Plan. The purchase
price of the shares available under the Plan is the lesser of (i) 85% of the
fair market value of such shares on the first day of the purchase period, or
(ii) 85% of the fair market value of such shares on the last day of such
purchase period.
At December 31, 1995, there were no Class A Shares outstanding under
the ESPP. At December 31, 1994, the Company had outstanding 364 Class A Shares
under the ESPP of which 2.0% of which represented matching shares. The Company's
Board of Directors suspended this Plan as of December 31, 1991.
Employee 401K Plan
The Company provides a 401k plan for its employees. The Company
provides matching contributions up to 2% of the employees qualifying earnings.
During 1995, 1994, and 1993, the Company included $40,000, $42,000 and $81,000,
respectively in non-interest expense in order to recognize contributions to the
401k Plan.
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<PAGE> 69
Note 15: Commitments and Contingencies
Lending and Letter of Credit Commitments
In the normal course of its business, the Bank has entered into various
commitments to extend credit which are not reflected in the consolidated
financial statements. Over 90% of such commitments consist of the undisbursed
balance on personal and commercial lines of credit and of undisbursed funds on
construction and development loans. At December 31, 1995 and 1994, the Bank had
outstanding loan commitments, which had primarily adjustable rates, totaling
approximately $5.9 million and $16.3 million, respectively. In addition, the
Bank had outstanding letters of credit, which represent guarantees of
obligations of Bank customers, totaling $9.8 million and $10.4 million at
December 31, 1995 and 1994, respectively. The actual liquidity needs or the
credit risk that the Company will experience will be lower than the contractual
amount of commitments to extend credit because a significant portion of these
commitments is expected to expire without being drawn upon. The Bank's
outstanding loan commitments are made using the same underwriting standards as
comparable outstanding loans. The credit risk associated with these commitments
is considered in management's determination of the allowance for loan losses.
Litigation
Because of the nature of its business, the Company and its
subsidiaries, including the Bank, are from time-to-time a party to legal
actions. The Bank has been dismissed from, or reached settlement or potential
settlement in litigation or potential litigation matters which management deems
material. In some instances the Bank has made or agreed to make certain
payments. Based upon information available to the Company and the Bank, and its
review of such outstanding claims to date, management believes the liability
relating to these actions, if any, will not have a material adverse effect on
the Company's liquidity, consolidated financial condition or results of
operations.
Note 16: Related Party Transactions
In the ordinary course of business, the Bank makes loans to directors,
officers, shareholders and their associates on substantially the same terms,
including interest rates and collateral, as in comparable loan transactions with
unaffiliated persons, and such loans do not involve more than the normal risk of
collection. The following table sets forth the activity related to loans to
directors, officers and principal shareholders and their associates for the year
ended December 31, 1995:
<TABLE>
<CAPTION>
(Dollars in Thousands) Amount
-------
<S> <C>
Balance at December 31, 1994 $ 238
New loans or disbursements --
Principal reductions (including cash repayments) (233)
-------
Balance at December 31, 1995 $ 5
=======
</TABLE>
Bank of San Francisco Building Company (BSFBC)
During the third quarter of 1995, the Bank acquired all of the outside
limited partnership interest in BSFBC for a total of $3.3 million. The cost in
excess of book value of $525,000 is being amortized over the life of the
underlying lease through 2010 using the straight line method. As of December 31,
1995, the Bank holds all of the limited partnership interest. BSFBC holds the
lease on the Company's and Bank's headquarters at 550 Montgomery Street, San
Francisco, California.
The acquisition was accounted for by the purchase method. The
consolidated financial statements include the accounts of BSFBC. The Company's
consolidated operating results include the operations of BSFBC beginning July 1,
1995. The assets of BSFBC included leasehold improvements and leasehold interest
totaling $5.5 million and cash equivalents and investment securities totaling
$1.3 million. The liabilities included other borrowings which were used to
finance the acquisition of leasehold interest by BSFBC in 1986. The borrowing
was repaid on October 31, 1995.
-67-
<PAGE> 70
As a result of the acquisition, the Company's consolidated premises and
equipment increased to $8.7 million as of December 31, 1995 from $3.0 million as
of December 31, 1994. As of December 31, 1995, the Company's premises and
equipment is comprised of leasehold improvements totaling $5.6 million,
leasehold interest totaling $2.0 million, premium paid to acquire BSFBC totaling
$508,000, and furniture and equipment totaling $617,000. The acquisition,
however, had the effect of reducing the Bank's occupancy costs.
Prior to 1995, the Company accounted for its investment in BSFBC using
the equity method. Condensed statements of financial condition and operations of
BSFBC at December 31 are as follows:
Condensed Statements of Financial Condition (Unaudited)
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994
------
<S> <C> <C> <C>
Assets:
Cash $1,271
Receivables 43
Fixed assets, net 5,707
------
Total assets $7,021
Liabilities and Partners' Equity:
Notes payable $2,230
Other liabilities 239
Partners' equity 4,552
------
Total liabilities and partners' equity $7,021
Condensed Statements of Operations (Unaudited)
(Dollars in Thousands) 1995(1) 1994 1993
-------------------------------
Rental income $ 947 $ 1,834 $ 1,845
Other income 49 113 101
-------------------------------
Total income 996 1,947 1,946
Total expense 743 2,555 1,004
-------------------------------
Net income of partnership $ 253 $ (608) $ 942
===============================
</TABLE>
1. For the six month period ended June 30, 1995.
The Bank's and BSFRI's equity in the operating results of BSFBC in
1995, 1994, and 1993 was earnings of $48,000, a loss of $264,000, and earnings
of $263,000, respectively. Such income is included in the Bank's other income in
the Company's Consolidated Financial Statements.
Note 17: Fair Value of Financial Instruments
The following disclosures of the estimated fair value of financial
instruments are made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107 "Disclosures about Fair Value of
Financial Instruments" (SFAS No. 107). The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgement is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
-68-
<PAGE> 71
The carrying amount and estimated fair values of the Company's
financial instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
----------------------- -----------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 42,814 $ 42,814 $28,647 $ 28,647
Investment securities 7,168 7,168 11,407 11,384
Loans, net 47,116 48,642 99,488 99,326
Financial Liabilities:
Deposits 105,673 105,299 147,148 147,071
Other borrowings -- -- 4,070 4,070
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each major classification of financial instruments at December 31, 1995
and 1994:
CASH AND CASH EQUIVALENTS: Current carrying amounts approximate estimated fair
value.
TIME DEPOSITS WITH OTHER FINANCIAL INSTITUTIONS: Due to the short term nature of
time deposits with other financial institutions (original maturities of 90 days
or less), current carrying amounts approximate market.
INVESTMENT SECURITIES HELD-TO-MATURITY AND AVAILABLE-FOR-SALE: For securities
held-to-maturity and available-for- sale, current market prices were used to
determine fair value.
LOANS RECEIVABLE: The carrying amount of loans is net of unearned fee income and
the reserve for possible losses. To estimate fair value of the Company's loans,
primarily adjustable rate, commercial and real estate secured loans, each loan
collateral type is segmented into categories based on fixed or adjustable
interest rate terms, maturity, estimated credit risk, and accrual status. The
fair value of loans is calculated by discounting cash flows expected to be
received through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Bank's historical experience with
repayments for each loan classification, modified, as required, by an estimate
of the effect of current economic and lending factors.
DEPOSIT LIABILITIES: The fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings and NOW accounts, and money market
and checking accounts, is equal to the amount payable on demand as of December
31, 1995. The fair value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
OFF BALANCE SHEET INSTRUMENTS: The estimated fair value of off balance sheet
instruments, principally letters of credit and loan commitments, is
approximately the face value of commitment fees collected.
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<PAGE> 72
Note 18: The San Francisco Company
Condensed statements of financial condition and operations of the San
Francisco Company at December 31 are as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
---------------------
<S> <C> <C> <C>
Assets:
Cash and short term investments $ 157 $ 656
Other real estate owned -- 85
Investment in subsidiary 6,885 1,592
Other assets 70 131
--------------------
Total assets $ 7,112 $2,464
====================
Liabilities:
Borrowings for Employee Stock Ownership Plan $ -- $ 70
Other liabilities 232 265
--------------------
Total liabilities 232 335
--------------------
Stockholders' equity 6,880 2,129
--------------------
Total liabilities and shareholders' equity $ 7,112 $2,464
====================
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands) 1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Income:
Interest earned $ 9 $ 51 $ 13
Other Income 1 33 --
--------------------------------
Total income 10 84 13
--------------------------------
Expense:
Provision for loan losses -- -- 53
Other expense 222 251 409
--------------------------------
Total expense 222 251 462
--------------------------------
Loss before equity in undistributed
net income (loss) of subsidiary (212) (167) (449)
Equity in undistributed net income (loss) of subsidiary 548 (32,869) (9,806)
--------------------------------
Net income (loss) $ 336 $(33,036) $(10,255)
================================
</TABLE>
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<PAGE> 73
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 336 $(33,036) $(10,255)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in undistributed net (income) loss of subsidiary (548) 32,869 9,806
Provision for loan losses -- -- 53
---------------------------------
Net cash flows used in operating activities (212) (167) (396)
---------------------------------
Cash Flows used in investing activities:
Investment in Bank (4,700) (17,000) (11,850)
Proceeds from sale of other real estate owned 85 -- --
Net decrease (increase) in other assets 61 136 (246)
---------------------------------
Net cash used in investing activities (4,554) (16,864) (12,096)
---------------------------------
Cash Flows provided by financing activities:
Proceeds from sale of Preferred Stock -- -- 12,000
Proceeds from sale of Common Stock 4,300 17,560 --
Net increase (decrease) in other liabilities (33) (122) 390
Other net -- -- --
---------------------------------
Net cash provided by financing activities 4,267 17,438 12,390
---------------------------------
Increase (decrease) in cash and cash equivalents (499) 407 (102)
Cash and cash equivalents at beginning of year 656 249 351
---------------------------------
Cash and cash equivalents at end of year $ 157 $ 656 $ 249
=================================
</TABLE>
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<PAGE> 74
Note 19: Quarterly Information (Unaudited)
The following table sets forth the condensed operating results of the
Company for each quarter of the two year periods ending December 31, 1995, and
is qualified in its entirety by the more detailed information and financial
statements contained elsewhere in this report:
<TABLE>
<CAPTION>
1995 Quarters Ended
(Dollars in Thousands Except Per Share data) March 31 June 30 Sept. 30 Dec. 31
-------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $2,902 $2,776 $2,722 $2,291
Interest expense 1,097 1,152 1,161 1,005
-------------------------------------------------------
Net interest income 1,805 1,624 1,561 1,286
Provision for loan losses -- 500 -- --
Non-interest income 771 789 562 399
Non-interest expense 2,470 1,753 1,962 1,623
-------------------------------------------------------
Income before income taxes 106 160 161 62
Provision for taxes 38 40 37 38
-------------------------------------------------------
Net income $ 68 $ 120 $ 124 $ 24
=======================================================
Earnings per common share:
Average common shares outstanding 5,765,993 5,765,978 5,765,978 5,765,978
Net income $0.01 $0.02 $0.02 $0.00
<CAPTION>
1994 Quarters Ended
(Dollars in Thousands Except Per Share data) March 31 June 30 Sept. 30 Dec. 31
-------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $3,263 $3,203 $3,164 $3,021
Interest expense 1,295 1,268 1,172 1,128
-------------------------------------------------------
Net interest income 1,968 1,935 1,992 1,893
Provision for loan losses 141 141 141 3,376
Non-interest income 815 462 235 623
Non-interest expense 5,798 8,253 7,666 17,301
-------------------------------------------------------
Loss before income taxes (3,156) (5,997) (5,580) (18,161)
Provision for taxes 28 39 38 37
-------------------------------------------------------
Net loss $(3,184) $(6,036) $(5,618) $(18,198)
=======================================================
Loss per common share:
Average common shares outstanding 444,990 1,176,718 4,847,501 5,766,008
Net loss $(7.15) $(5.13) $(1.16) $(3.16)
</TABLE>
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<PAGE> 75
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be furnished in the
Company's definitive Proxy Statement for the Registrant's 1996 Annual
meeting, to be filed pursuant to Regulation 14A with the Securities and
Exchange Commission not later than 120 days after December 31, 1995,
and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item will be furnished in the
Company's definitive Proxy Statement for the Registrant's 1996 Annual
meeting, to be filed pursuant to Regulation 14A with the Securities and
Exchange Commission not later than 120 days after December 31, 1995,
and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be furnished in the
Company's definitive Proxy Statement for the Registrant's 1996 Annual
meeting, to be filed pursuant to Regulation 14A with the Securities and
Exchange Commission not later than 120 days after December 31, 1995,
and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be furnished in the
Company's definitive Proxy Statement for the Registrant's 1996 Annual
meeting, to be filed pursuant to Regulation 14A with the Securities and
Exchange Commission not later than 120 days after December 31, 1995,
and is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. List of documents filed as a part of the report.
The following financial statements are included in Item 8 of this
report:
Report of Independent Public Accountants;
Consolidated Statement of Financial Condition at December 31, 1995
and 1994;
Consolidated Statements of Income for the years ended December 31,
1995, 1994, and 1993;
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993;
Consolidated Statements of Cash Flow for the years ended December 31,
1995, 1994 and 1993;
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<PAGE> 76
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable or not required, or because the required information is
included in the Consolidated Financial Statements or the notes thereto.
3. List of Exhibits (numbered in accordance with Item 601 of Regulation
S-K):
Exhibit 3.1 Certificate of Incorporation of Bank of San Francisco
(Delaware) Holding Company, dated June 23, 1988 (1)
Exhibit 3.2 Agreement and Plan of Merger of Bank of San Francisco
(Delaware) Holding Company, a Delaware corporation and
Bank of San Francisco Company Holding Company, a
California Corporation, dated June 24, 1988 (1)
Exhibit 3.3 Certificate of Amendment of the Certificate of
Incorporation of Bank of San Francisco Company Holding
Company, dated May 22, 1989 (1)
Exhibit 3.4 Certificate of Amendment of the Certificate of
Incorporation of Bank of San Francisco Company Holding
Company, dated September 21, 1989 (1)
Exhibit 3.5 Bylaws of Bank of San Francisco (Delaware) Holding
Company, dated June 23, 1988 (1)
Exhibit 3.6 First Amendment to Bylaws of Bank of San Francisco
Company Holding Company, dated July 19, 1989 (1)
Exhibit 3.7 Second Amendment to Bylaws of Bank of San Francisco
Company Holding Company, dated June 6, 1990 (1)
Exhibit 3.8 Certificate of Amendment of the Certificate of
Incorporation of Bank of San Francisco Company Holding
Company, dated May 23, 1994 (8)
Exhibit 3.9 Amended and Restated Certificate of Incorporation of
The San Francisco Company, dated May 23, 1994 (8)
Exhibit 4.1 Certificate of Designations of Rights, Preferences,
Privileges and Restrictions of 8% Series B Convertible
Preferred Stock of Bank of San Francisco Company
Holding Company, dated July 28, 1988 (1)
Exhibit 4.2 Amended Certificate of Designations of Rights,
Preferences, Privileges and Restrictions of 7% Series
B Convertible Preferred Stock of Bank of San Francisco
Company Holding Company, dated October 7, 1988 (1)
Exhibit 4.3 Certificate of Correction of Certificate of
Incorporation, dated June 18, 1990 (1)
Exhibit 10.1 Sales agreement dated October 23, 1986 between Bank of
San Francisco Realty Investors (BSFRI) and Bank of
America with respect to the lease on 550 Montgomery
Street, San Francisco, California (2)
Exhibit 10.2 Lease dated November 1, 1960 between The Lurie Company
and Bank of America, with respect to premises at 550
Montgomery Street (2)
Exhibit 10.3 Consent to Assignment of Lease, dated October 8, 1986,
between The Lurie Company and Bank of San Francisco
and Bank of San Francisco Realty Investors, with
respect to premises at 550 Montgomery Street (2)
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<PAGE> 77
Exhibit 10.4 Assignment of Lease, dated October 17, 1986, by Bank
of America to Bank of San Francisco and Bank of San
Francisco Realty Investors, with respect to premises
at 550 Montgomery Street (2)
Exhibit 10.5 Nominee Agreement between Bank of San Francisco Realty
Investors and 550 Partners, with respect to premises
at 550 Montgomery Street (2)
Exhibit 10.6 Employee Stock Purchase Plan (3)
Exhibit 10.7 Letter Agreement with the Board of Governors of the
Federal Reserve Board, dated April 21, 1989 (1)
Exhibit 10.8 Escrow Agreement dated December 31, 1990 between Bank
of San Francisco Company Holding Company and Bank of
San Francisco with respect to the Employee Stock
Purchase Plan (4)
Exhibit 10.9 Bank of San Francisco Company Holding Company 401(k)
Profit Sharing Plan (4)
Exhibit 10.10 Amended and Restated Indemnification Agreements dated
October 29, 1991 between Bank of San Francisco Company
Holding Company and each director and executive
officer of the Company (6)
Exhibit 10.11 Stock Purchase Agreement dated as of April 10, 1992
between Bank of San Francisco Company Holding and
Peninsula Holdings (7)
Exhibit 10.12 First amendment to Stock Purchase Agreement dated May
14, 1992 between Bank of San Francisco Company Holding
Company and Putra Masagung (7)
Exhibit 10.13 Second amendment to Stock Purchase Agreement dated
June 18, 1992 between Bank of San Francisco Company
Holding Company and Putra Masagung (7)
Exhibit 10.14 Agreement Respecting Assignment, Assumption, Consent
and Amendments dated as of May 8, 1992 among Bank of
San Francisco Company Holding Company, Peninsula
Holdings and Putra Masagung (8)
Exhibit 10.15 Subscription Agreement dated as of October 29, 1992
between Bank of San Francisco Holding Company and
Putra Masagung (8)
Exhibit 10.16 Employment Agreements dated October 1, 1994 between
Mr. Gilleran and The San Francisco Company and the
Bank of San Francisco. (10)
Exhibit 10.17 The San Francisco Company 1993 Executive Stock Option
Plan(9)
Exhibit 10.18 The San Francisco Company 1993 Non-Employee Directors
Stock Option Plan (9)
Exhibit 10.19 Employment Agreements dated November 27, 1995 between
Mr. John McGrath and the Bank of San Francisco. *
Exhibit 10.20 Subscription Agreement dated as of February 26, 1996
between The San Francisco Company and Putra Masagung *
Exhibit 21 Subsidiaries of registrant (5)
-75-
<PAGE> 78
---------------------------
Footnotes to List of Exhibits:
* Indicates filed herewith.
(1) Incorporated by reference from the exhibits included with the
Registrant's Form S-2 Registration Statement (Registration No.
33-34985), previously filed with the Commission.
(2) Incorporated by reference from exhibits included in the
Company's Annual Report on Form 10-K for the year ended December
31, 1986, previously filed with the Commission.
(3) Incorporated by reference from exhibits included with the
Company's Form S-8 Registration Statement (Registration No.
33-35649), previously filed with the Commission.
(4) Incorporated by reference from exhibits included with the
Company's Annual Report on Form 10- K for the year ended
December 31, 1990, previously filed with the Commission.
(5) Incorporated by reference from exhibits included with the
Company's Annual report on Form 10- K for the year ended
December 31, 1990, previously filed with the Commission.
(6) Identical agreements have been signed by each executive officer
and director of the Company.
(7) Incorporated by reference from exhibits included with the
Company's Proxy Statement for the Special Meeting of
Stockholders' held on June 25, 1992, previously filed with
the Commission.
(8) Incorporated by reference from exhibits included with the
Company's Annual report on Form 10- K for the year ended
December 31, 1992, previously filed with the Commission.
(9) Incorporated by reference from exhibits included with the
Company's Proxy Statement for the Special Meeting of
Stockholders' held on May 23, 1994, previously filed with
the Commission.
(10) Incorporated by reference from exhibits included with the
Company's Annual report on Form 10- K for the year ended
December 31, 1994, previously filed with the Commission.
(b) Reports on Form 8-K filed in the fourth quarter of 1995:
None
-76-
<PAGE> 79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE SAN FRANCISCO COMPANY
<TABLE>
<S> <C> <C>
/s/ James E. Gilleran Chairman of the Board and March 29, 1996
- ---------------------------- Chief Executive Officer
James E. Gilleran (Principal Executive Officer)
/s/ Keary L. Colwell Senior Vice President March 29, 1996
- ---------------------------- (Principal Accounting Officer)
Keary L. Colwell
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James E. Gilleran Chairman of the Board and March 29, 1996
- ---------------------------- Chief Executive Officer
James E. Gilleran (Principal Executive Officer)
/s/ Steven R. Champion Director March 29, 1996
- ----------------------------
Steven R. Champion
/s/ Willard D. Sharpe Director March 29, 1996
- ----------------------------
Willard D. Sharpe
/s/ Gordon B. Swanson Director March 29, 1996
- ----------------------------
Gordon B. Swanson
/s/ Kent D. Price Director March 29, 1996
- ----------------------------
Kent D. Price
/s/ Nicholas C. Unkovic Director March 29, 1996
- ----------------------------
Nicholas C. Unkovic
/s/ Jackson L. Schultz Director March 29, 1996
- ----------------------------
Jackson L. Schultz
</TABLE>
-77-
<PAGE> 80
EXHIBIT INDEX
Exhibit 10.19 Employment Agreements dated November 27, 1995 between Mr.
John McGrath and the Bank of San Francisco. *
Exhibit 10.20 Subscription Agreement dated as of February 26, 1996
between The San Francisco company and Putra Massgung *
Exhibit 27 Financial Data Schedule
<PAGE> 1
Exhibit 10.19 Employment Agreements dated November 27, 1995 between Mr.
John McGrath and the Bank of San Francisco.
John F. McGrath
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
November 27, 1995 by and between Bank of San Francisco (the "Bank"), (the
"Employer"), and John F. McGrath ("Executive").
R E C I T A L S:
A. The Employer desires to employ Executive to serve as President,
Chief Operating Officer, Chief Credit Officer and Director of the Bank, and the
Board of Directors of the Bank have approved the Employer's employment of
Executive.
B. Executive hereby accepts such employment on the terms and
conditions set forth in this Agreement.
A G R E E M E N T:
i. Agreement to Employ. Subject to the terms and
conditions contained herein, the Employer hereby employs Executive and Executive
hereby accepts employment by the Employer.
ii. Term of Employment. The term shall be for three (3)
years commencing on November 27, 1995, and ending, unless terminated earlier,
November 27, 1998 (the "Expiration Date").
iii. Position and Duties/Authority of Executive. During the
term of this Agreement, Executive shall hold the positions of President, Chief
Operating Officer, and Chief Credit Officer of the Bank. Executive shall report
to the Chief Executive Officer and shall perform such other or additional duties
and responsibilities, consistent with the foregoing positions as may be assigned
to Executive from time to time by the Chief Executive Officer or Board of
Directors of the Employer.
iv. Place of Employment. Executive's principal place of
employment shall be 550 Montgomery Street, San Francisco, California. While
discharging his duties and responsibilities hereunder, Executive may be required
to travel from time to time and, as a result, be temporarily absent from his
principal place of employment.
v. Devotion of Time to Business. Except as provided below,
Executive shall devote his best efforts and ability, and attention to the
business and affairs of the Employer and to performing the duties and
responsibilities set forth herein on behalf of the Employer. Notwithstanding any
language herein to the contrary, Executive shall be entitled to devote time to
charitable, political and civic activities and speaking engagements, and
Executive shall be permitted to serve on the boards of directors of other
companies which do not directly compete with the Employer provided such
activities do not have a material, adverse effect on Executive's performance
hereunder.
vi. Confidential Information/Trade Secrets.
(1) In performing his duties under this Agreement, Executive
will have access to and become acquainted with information concerning the
Employer's operations, including financial, personnel, marketing, and other
information and customer lists that are owned by the Employer and regularly used
in the Employer's business, and such information is confidential and constitutes
trade secrets of the Employer.
-78-
<PAGE> 2
(2) Executive will not misuse, misappropriate, or disclose any
such trade secrets, directly or indirectly, to any other person, or use them in
any way, except as required in the course of his employment hereunder.
(3) The unauthorized use or disclosure of any of the
Employer's confidential information/trade secrets (including without limitation
information concerning current or future proposed work, services, or products,
the fact that any such work, services, or products are planned, under
consideration, or in use, and any descriptions thereof) constitute unfair
competition.
(4) Any violation by Executive of any of the provisions of
this paragraph would result in irreparable injury to the Employer, and the
Employer shall be entitled to injunctive relief to prevent or terminate such
violation.
(5) This paragraph shall not apply to any information that
becomes generally known to or available for use by the public other than as a
result of Executive's acts.
(6) The covenants set forth in this paragraph shall survive
termination of this Agreement for a period of one year; provided, however, that
with respect to the Employer's customer lists and relationships, such period
shall be two years.
vii. Compensation to Executive.
(1) Salary and Benefits. Subject to the terms and conditions
contained herein, throughout the term of this Agreement, Executive shall be
entitled to receive the following salary and benefits from the Employer:
1) Annual Base Salary. The Employer shall pay to Executive
as compensation for his services an Annual Base Salary of One Hundred
and Seventy Thousand Dollars ($170,000) in such intervals as other
salaried executives of the Employer are presently paid (but in no case
less frequently than monthly). The Annual Base Salary shall be paid
subject to all federal, state and local rules for payment, deduction
and withholding of taxes.
2) Annual Performance Bonus. For each calendar year,
Executive and the Chief Executive Officer of the Bank shall establish
reasonable goals for such year which, if met, will result in a bonus
payable to Executive from 0% to 50% of his base salary in cash. Such
goals shall be set no later than January 31st of the current year and
be based upon performance criteria which will include asset quality,
resolution of problem assets, development of a credit culture,
adherence to regulatory orders, quality of operational procedures and
controls, quality of staff, and financial performance of the Bank.
Evaluation and payment of bonus will occur no later than March 15th of
the current year for the previous years goals. Payment of the Annual
Performance Bonus is subject to regulatory approval.
(2) Retirement Plan. The Employer shall provide Executive with
retirement benefits, including any Section 401(k) Plan, under which the Employer
provides retirement or similar benefits to the other Bank employees. The
employees of the Bank currently participate in The San Francisco Company
("Company") 401(k) Plan. Executive's participation in the Section 401(k) Plan
shall begin as of July 1, 1996.
(3) Benefits. The Employer shall, during the term of this
Agreement, make available to Executive the following:
1) insurance coverage and benefits according to
existing or then current health plans;
2) group term life insurance, accidental death and
dismemberment insurance, and long-term group disability insurance, all in
accordance with the Employer's existing or then current group plans; and
-79-
<PAGE> 3
3) vacation of four weeks per year.
(4) Expense Account. The Employer will require Executive
to incur travel, lodging, meal, entertainment, and similar expenses. The
Employer shall advance or promptly reimburse Executive for all authorized
expenses reasonably incurred by Executive in the performance of his duties for
which Executive furnishes the Employer with adequate records and other
documentary evidence as required by applicable federal and state laws and
regulations.
(5) Stock Options.
1) The Board of Directors of the Company has adopted
an Executive Stock Option Plan (the "Stock Plan") under which Executive
shall be eligible to receive options to purchase shares of the
Company's Class A Common Stock, and the Company has reserved shares for
issuance under the Stock Plan and shall grant options under the Stock
Plan to Executive to purchase one percent (1%) of the shares of the
Company's Class A Common Stock. The options shall be granted effective
on December 1, 1995, and the option price shall be $ 0.34 per share.
Thirty-three and one-third (33-1/3) of such options shall vest on each
anniversary of this Agreement until all such options are vested.
2) Additional options (the "anti-dilution options")
shall be granted to Executive from time to time at the then current
fair market value and in such amounts as to assure that Executive's
options and shares previously issued to Executive upon the exercise of
options will comprise not less than one percent (1%) of the fully
diluted number of shares of all classes of the Company's Common Stock
(i.e., the sum of the number of shares of all classes of Common Stock
issued and outstanding, plus the number of shares of all classes of
Common Stock subject to options, warrants, conversion rights and all
other outstanding rights to purchase any class of shares of Common
Stock). Such additional options shall be granted at the fair market
value at the date of grant. The antidilution options shall vest on the
schedule set forth above, except that notwithstanding such vesting
schedule options granted on account of options, warrants, conversion
rights or other rights to purchase Common Stock shall not be
exercisable unless and until Common Stock is issued upon the exercise
of such rights. The Company shall have no obligation to grant Executive
any antidilution options with respect to any dilutive events occurring
after the completion of the next public offering by the Company of its
Common Stock.
(6) Other Benefits. The Employer shall provide Executive
with such other pension, health and welfare benefits as it may from time to time
offer to other senior executives in the ordinary course of its business, or as
may be reasonably required or necessary for him to perform his duties.
g. Temporary Living. The Employer shall provide
Executive a temporary living allowance in the amount of One Thousand Five
Hundred Dollars ($1,500) per month for a period of six (6) months.
viii. Termination.
(1) Termination by the Employer for Cause. The Employer may
terminate Executive's employment at any time for "cause." For the purpose of the
Employer's termination of this Agreement, the term "cause" shall include any of
the following:
1) Adjudication of Executive's guilt in
connection with the commission of a felony or a misdemeanor involving moral
turpitude (excluding traffic violations);
2) Good faith finding by the Employer's Chief
Executive Officer of Executive's theft, conversion, misappropriation, or
embezzlement of any assets of the Employer;
3) Executive's (A) habitual neglect of his
duties, (B) failure to obey the lawful direction of the Chief Executive Officer
of the Employer that do not contravene regulations or regulatory policies,
guidelines, agreements or orders, or (C) conduct that has a direct, substantial
and adverse effect
-80-
<PAGE> 4
on the Employer's reputation, in each case, after written notice and
adequate opportunity to cure any such asserted neglect, failure or
conduct; or
4) Good faith finding by the Employer's Chief
Executive Officer or Board of Directors that Executive's performance of
his duties resulted in a material deterioration in the condition of the
Bank, provided that such deterioration is not the result of conditions
either existing on the date of Executive's employment or external to
the Bank and beyond Executive's control.
(2) Termination without Cause.
i) The Employer may terminate Executive's
employment without "cause" at any time subject only to the provisions
of paragraph 9.d.
ii) The Executive may terminate employment without
"cause" at any time with a minimum of thirty (30) days notice.
(3) Termination for Death. Executive's employment shall
terminate upon Executive's death.
d. Termination for Disability. The Employer may terminate
Executive's employment upon the disability of Executive. As used herein, the
term "disability" shall mean sickness or physical or mental disability that
renders Executive unable to perform a substantial portion of his duties under
this Agreement for an aggregate period of more than ninety (90) days in any
twelve (12) month period.
e. Notice of Termination. If the Employer desires to terminate
Executive's employment under this Agreement, whether or not for cause, the
Employer shall deliver a notice of termination in writing to Executive (the
"Notice of Termination"). The Notice of Termination shall specify whether the
termination is (A) for cause (in which case the conduct of Executive or the
Employer giving rise to the termination shall be specified), (B) for death, (C)
for disability, or (D) without cause. The Notice of Termination shall specify an
effective date of termination (the "Termination Date") on or after the date
notice is given.
ix. Effect of Termination. Upon the termination of this
Agreement by either party, the parties shall comply with the following
obligations and duties:
(1) Termination for Cause. If the Employer terminates
Executive's employment for cause:
1) Annual Base Salary. The Employer shall on
the Termination Date pay Executive Executive's Annual Base Salary through the
Termination Date.
2) Annual Performance Bonus. The Executive
shall not be entitled to receive any performance bonus.
iii) Reimbursable Expenses. The Employer shall, on
the Termination Date, pay Executive all reimbursable expenses for which expense
reports have been provided to the Employer in accordance with the Employer's
policy.
iv) Vesting of Stock Options. All of the stock
options granted to Executive which have vested as of the Termination Date shall
be retained by Executive and shall be exercisable in accordance with the Stock
Plan, and any unvested options shall be forfeited.
(2) Termination for Death. If Executive's employment is
terminated as a result of Executive's death:
1) Annual Base Salary. The Employer's
obligation to pay Executive's salary shall terminate upon his death.
-81-
<PAGE> 5
2) Reimbursable Expenses. The Employer shall,
within thirty (30) days following the date of Executive's death, pay
Executive's estate all reimbursable expenses for which expense reports
have been provided to the Employer in accordance with the Employer's
policy.
3) Annual Performance Bonus. The Employer shall,
within thirty (30) days following the date of death, pay Executive's
estate Executive's Annual Performance Bonus at a rate of fifty percent
(50%) of Bonus, if any, that Executive would have earned for the
current year, prorated by the number of full months served during the
current year.
4) Vesting of Stock Options. All of the stock
options granted to Executive which have vested as of the Termination
Date shall be retained by Executive's estate in accordance with
paragraph 7.e., and unvested options shall be forfeited.
(3) Termination for Disability.
1) Annual Base Salary. The Employer shall pay
Executive Executive's Annual Base Salary through Termination Date.
2) Reimbursable Expenses. The Employer shall,
within thirty (30) days following the Termination Date, pay Executive
all reimbursable expenses for which expense reports have been
provided to the Employer in accordance with the Employer's policy.
3) Annual Performance Bonus. The Employer shall,
within thirty (30) days following the Termination Date, pay Executive's
Annual Performance Bonus, if any, that Executive would have earned for
the current year, prorated by the number of full months served during
the current year.
4) Vesting of Stock Options. All of the stock
options granted to Executive which have vested as of the Termination
Date shall be retained by Executive in accordance with paragraph 7.e.,
and unvested options shall be forfeited.
(4) Termination without Cause. If the Employer
terminated Executive's employment without cause:
1) Annual Base Salary. The Employer shall, on the
Termination Date, pay Executive his Annual Base Salary through the
Termination Date. In addition, the Employer shall, on the Termination
Date, pay Executive an additional one (1) year of Annual Base Salary,
or the amount remaining on this three (3) year Agreement, whichever is
less, provided, however, that (A) such payment shall be subject to
applicable statutory or regulatory restrictions, and (B) no such
payment shall be made for so long as the Federal Reserve or the Federal
Deposit Insurance Corporation determines that the Employer is in an
unsafe or unsound financial condition.
ii) Annual Performance Bonus. The Employer shall, on the Termination
Date, pay Executive's Annual Performance Bonus, if any, that Executive
would have earned for the current year, provided, however, that (A)
such payment shall be subject to applicable statutory or regulatory
restrictions, and (B) no such payment shall be made for so long as the
Federal Reserve or the Federal Deposit Insurance Corporation determines
that the Employer is in an unsafe or unsound financial condition. No
Annual Performance Bonus will be paid for the additional severance
identified in d.i., above.
i2) Reimbursable Expenses. The Employer shall,
on the Termination Date, pay Executive all reimbursable expenses for which
expense reports have been provided to the Employer in accordance with the
Employer's policy.
iv) Vesting of Stock Options. All of the stock
options granted to Executive which have vested as of the Termination
Date shall be retained by Executive and shall be exercisable in
accordance with the Stock Plan, and any unvested options shall be forfeited.
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<PAGE> 6
(5) Voluntary Termination by Executive. If Executive
terminates this Agreement voluntarily:
1) Annual Base Salary. The Employer shall,
within three (3) days following the Termination Date, pay Executive
Executive's Annual Base Salary through the Termination Date.
ii) Annual Performance Bonus. The Executive
shall not be entitled to receive any performance bonus.
iii) Notice. The Executive will provide a
minimum of thirty (30) days notice.
iv) Reimbursable Expenses. The Employer shall,
within thirty (30) days following the Termination Date, pay Executive
all reimbursable expenses for which expense reports have been provided
to the Employer in accordance with the Employer's policy.
v) Vesting of Stock Options. All of the stock
options granted to Executive which have vested as of the Termination
Date shall be retained by Executive and shall be exercisable in
accordance with the Stock Plan, and any unvested options shall be
forfeited.
(6) Expiration of the Term of the Agreement. If
Executive's employment terminates upon the Expiration Date:
1) Annual Base Salary. The Employer shall on
the Expiration Date pay Executive Executive's Annual Base Salary
through the Expiration Date.
2) Reimbursable Expenses. The Employer shall,
within thirty (30) days following the Expiration Date, pay Executive
all reimbursable expenses for which expense reports have been provided
in accordance with the Employer's policy.
3) Annual Performance Bonus. The Employer
shall, no later than November 27, 1998, pay Executive's Annual
Performance Bonus, if any, for the year which the Chief Executive
Officer determines has been earned through the Expiration Date.
4) Vesting of Stock Options. All of the stock
options granted to Executive which have vested as of the Expiration
Date shall be retained by Executive and shall be exercisable in
accordance with paragraph 7.e., and any unvested options shall be
forfeited.
5) Other. Executive shall be entitled to no
other compensation or benefits upon expiration of this Agreement.
g. Other. Amounts set forth in paragraph 9.a. - f.
above, shall be the total sums that will be due and owing to the Executive in
the circumstances set forth in each of these subparagraphs. The Bank will have
no obligation to make any other payment or provide any other compensation except
as set forth therein.
x. Indemnification of Executive.
(1) Pre-Execution Actions and Events. Notwithstanding any
other provision to the contrary contained in this Agreement, the Employer shall
indemnify, defend at its expense, and hold Executive entirely harmless against
and from any claim, demand, cause of action, judgment, loss, liability, damage,
cost or expense whatsoever, including without limitation reasonable attorneys'
fees, which Executive may suffer, sustain, incur or otherwise become subject to
either directly or indirectly as a result of any claim, controversy, dispute,
legal action or proceeding whatsoever arising from actions taken by the Employer
or events relating to the business of the Bank or the Company occurring prior to
the execution of this Agreement.
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<PAGE> 7
(2) Post-Execution Actions and Events. Notwithstanding any
other provision to the contrary contained in this Agreement, the Employer shall
indemnify, defend at its expense, and hold Executive entirely harmless against
and from any claim, demand, cause of action, judgment, loss, liability, damage,
cost or expense whatsoever, including without limitation reasonable attorneys'
fees, which Executive may suffer, sustain, incur or otherwise become subject to
either directly or indirectly as a result of any claim, controversy, dispute,
legal action or proceeding whatsoever arising from actions taken by the Employer
or events relating to the business of the Bank or the Company occurring
subsequent to the execution of this Agreement, other than any such claim,
demand, cause of action, judgment, loss, liability, damage, cost or expense
whatsoever which is due to Executive's misconduct or gross negligence.
Notwithstanding the foregoing, in any administrative proceeding or civil action
initiated by any federal banking agency, the Bank or the Company may only
reimburse, indemnify or hold harmless Executive if the Bank is in compliance
with any applicable statute, rule, regulation or policy of the Federal Deposit
Insurance Corporation, Federal Reserve Board, or the California State Banking
Department regarding permissible indemnification payments.
(3) Payment of expenses. In the event the Employer is
obligated hereunder to defend and indemnify Executive and in the event Executive
is also required to retain independent legal counsel, other experts or
professionals or should incur any reasonable litigation cost himself in
connection with Paragraph 10.b. above, the Employer shall promptly pay such
expenses as incurred.
(4) Survival of Indemnification. The obligations of the
Employer under this paragraph 10 to indemnify Executive shall survive the
expiration or termination of this Agreement.
xi. General provisions.
(1) Binding on Successors. Subject to any restrictions stated
in any other provision of this Agreement, this Agreement shall be binding on and
shall inure to the benefit of the parties and their respective successors and
assigns.
(2) Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersedes all prior oral or written understandings and
agreements.
(3) Amendments; Waivers. No provision of this Agreement may
be changed, waived, modified, discharged or terminated, except by a written
instrument executed by the parties hereto.
(4) Notices. Any notice to be given under this Agreement shall
be in writing and shall be deemed effective only when hand-delivered or when
delivered by overnight courier, or three (3) days after the date postmarked if
sent by certified or registered mail, postage prepaid, return receipt requested,
addressed as follows:
If to the Employer:
Bank of San Francisco
550 Montgomery Street
San Francisco, California 94111
Attn: Chief Executive Officer
If to Executive:
John F. McGrath
470 Crocker Road
Sacramento, CA 95864
(5) Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of California.
-84-
<PAGE> 8
(6) Title and Headings. Title and headings to paragraphs,
subparagraphs and sub-subparagraphs of this Agreement are for the purpose of
reference only and shall not affect the interpretation of this Agreement.
(7) Regulatory Approval. This Agreement is subject to and
shall not become effective until any required approval or non-disapproval of the
employment of Executive by the Federal Deposit Insurance Corporation and the
California State Banking Department has been obtained.
(8) Insolvency. The terms and conditions of the Agreement
shall in no way be binding on the FDIC, or any successor agency, in the event
the Bank is determined to be insolvent and becomes subject to a receiver,
conservator or liquidator.
(9) Resolution of disputes. Any and all disputes pertaining or
relating to entering into this Agreement, the performance of this Agreement, the
interpretation of this Agreement, or the termination of the employment
relationship, including any claims for discrimination or harassment on any
basis, shall be resolved exclusively by binding arbitration before the Judicial
Arbitration & Mediation Service ("JAMS") in San Francisco. Each party shall bear
its own costs and expenses.
IN WITNESS WHEREOF, the undersigned have hereunto caused this
Agreement to be executed as of the day and year first above written.
BANK OF SAN FRANCISCO
By:
-------------------------------
James E. Gilleran
Chairman and
Chief Executive Officer
EXECUTIVE:
-----------------------------------
John F. McGrath
-85-
<PAGE> 1
Exhibit 10.20 Subscription Agreement dated as of February 26, 1996
between The San Francisco Company and Putra Masagung
February 26, 1996
The San Francisco Company
550 Montgomery Street
San Francisco, California 94111
Attention: Board of Directors
Gentlemen:
This letter confirms my agreement to invest an additional $4.5
million in the Series D Preferred Stock of The San Francisco Company, on the
following schedule. I will invest $1.0 million on or before March 31, 1996, $1.5
million on or before June 30, 1996, $1.0 million on or before September 30,
1996, and $1.0 million on or before December 31, 1996.
This agreement is conditioned on the following terms. The
conversion rate for the Series D Preferred Stock will continue to be the
existing rate approximately $0.34 per share of Class A Common Stock (the
Conversion Rate) for all such investments. In the event that the Series D
Preferred Stock is converted into Class A Common Stock prior to the completion
of my investments, subsequent installments of my investment will be in Class A
Common Stock at a price per share equal to the approximately $0.34 per share
Conversion Rate. In addition, I will be issued options exercisable for a period
of seven years to purchase an additional $10.0 million in value of Class A
Common Shares, or shares convertible into Class A Common Shares, at a price per
share equal to the approximately $0.34 per share Conversion Rate.
Very truly yours,
Putra Masagung
-86-
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<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 4,814
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 38,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,536
<INVESTMENTS-CARRYING> 632
<INVESTMENTS-MARKET> 632
<LOANS> 53,208
<ALLOWANCE> 5,912
<TOTAL-ASSETS> 114,862
<DEPOSITS> 105,673
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,306
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58
0
<COMMON> 4,414
<OTHER-SE> 2,408
<TOTAL-LIABILITIES-AND-EQUITY> 114,862
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<INCOME-PRETAX> 489
<INCOME-PRE-EXTRAORDINARY> 489
<EXTRAORDINARY> 0
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<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
<YIELD-ACTUAL> 5.0
<LOANS-NON> 7,511
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</TABLE>
