<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
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:
Name of Each Exchange on Which
Title of Class Registered
- - ------------------------------------- ------------------------------
Class A Common Stock, $0.01 Par Value American Stock Exchange
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 [x].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on April 12, 1995, was $25,946,901 computed by reference to the
closing sales price of the Class A Common Stock as reported by the American
Stock Exchange.
The Registrant had 5,765,978 shares of Class A Common Stock outstanding on April
12, 1995.
Documents Incorporated by Reference
None
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THE SAN FRANCISCO COMPANY
1994 ANNUAL REPORT ON FORM 10-K/A
TABLE OF CONTENT
PART II
<TABLE>
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PAGE
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................. 1
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................... 34
ITEM 11. EXECUTIVE COMPENSATION....................................................... 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT................ 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................... 41
</TABLE>
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants............................................................2
Consolidated Statements of Financial Condition,
December 31, 1994 and 1993..............................................................3
Consolidated Statements of Operations,.......................................................4
Years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Shareholders' Equity,..................................5
Years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows,.......................................................6
Years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements...................................................8
</TABLE>
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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,
1994 and 1993 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, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to report 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 report.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company and subsidiaries at
December 31, 1993 and the results of their operations and their cash flows for
each of the years in the two-year period ended December 31, 1993 in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company's recurring losses from
operations; noncompliance of the Bank of San Francisco (the Bank) with the
Orders to Cease and Desist issued jointly by the Federal Deposit Insurance
Corporation (the FDIC) and the California State Banking Department (the SBD);
the Bank's noncompliance with the Impairment Orders issued by the SBD; the
Bank's designation as a critically undercapitalized institution by the FDIC and
the restrictions imposed by the prompt corrective action provisions of Federal
Deposit Insurance Corporation Improvement Act of 1991; and the uncertainty
relating to the potential unfavorable outcome of pending litigation discussed in
note 17 to the consolidated financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. The ability of the Company
to continue as a going concern is dependent on many factors, including obtaining
additional capital contributions, increasing and maintaining its capital ratios,
achieving profitable operations and obtaining full compliance with the Cease and
Desist and Impairment Orders. Management's plans in regard to these matters are
described in note 2 to the consolidated financial statements. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Because of the significance of the uncertainties discussed above, we are unable
to express, and we do not express, an opinion on the accompanying 1994
consolidated financial statements.
KPMG Peat Marwick LLP
April 4, 1995, except as to note 3,
which is as of April 20, 1995
San Francisco,California
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THE SAN FRANCISCO COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
(Dollars in Thousands Except Per Share Data) Notes 1994 1993
----- ---- ----
ASSETS:
<S> <C> <C> <C>
Cash and due from banks $ 11,397 $ 8,333
Federal funds sold 17,250 17,500
--------- -------
Cash and cash equivalents 28,647 25,833
Investment securities held-to-maturity
(Market value: 1994 - $9,173; 1993 - $6,353) 4 9,196 6,351
Investment securities available-for-sale 5 2,211 14,940
Loans 6 106,452 149,740
Deferred loan fees 6 (388) (550)
Allowance for loan losses 7 (6,576) (8,050)
--------- -------
Loans, net 99,488 141,140
Other real estate owned 8 10,021 32,372
Real estate investments 9 2,364 3,643
Premises and equipment, net 10 2,996 3,592
Interest receivable 820 946
Other assets 1,037 2,204
--------- --------
Total assets $ 156,780 $231,021
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Non-interest bearing deposits $ 30,259 $ 34,859
Interest bearing deposits 116,889 175,252
--------- --------
Total deposits 11 147,148 210,111
Other borrowings 12 4,070 1,303
Other liabilities and interest payable 3,433 2,152
--------- --------
Total liabilities 154,651 213,566
--------- --------
Commitments and contingencies 17
Shareholders' Equity: 14
Preferred Stock (par value $0.01 per share)
Series B - Authorized - 437,500 shares
Issued and outstanding - 16,291 and 16,591 shares, respectively 114 116
Series C - Authorized - 1,800,000 shares
Issued and outstanding - 0 and 900,000 shares, respectively -- 18,000
Common stock (par value $0.01 per share)
Class A - Authorized - 40,000,000 shares
Issued and outstanding - 5,766,008 and 444,990 shares, respectively 58 4
Class B - Authorized - None
Issued and outstanding - None -- --
Additional paid in capital 70,168 34,662
Retained deficit (68,137) (35,101)
Employee purchase and option plans (70) (166)
Unrealized loss on securities available-for-sale (4) (60)
-------- --------
Total shareholders' equity 2,129 17,455
-------- --------
Total liabilities and shareholders' equity $156,780 $231,021
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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THE SAN FRANCISCO COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
(Dollars in Thousands Except Per Share Data) Notes 1994 1993 1992
----- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $ 11,258 $ 16,659 $ 21,707
Investments 1,329 1,451 2,152
Dividends 64 45 26
----------- --------- ---------
Total interest income 12,651 18,155 23,885
----------- --------- ---------
Interest expense:
Deposits 11 4,694 6,966 10,746
Other borrowings 169 454 549
----------- --------- ---------
Total interest expense 4,863 7,420 11,295
----------- --------- ---------
Net interest income 7,788 10,735 12,590
Provision for loan losses 7 3,799 3,554 9,828
----------- --------- ---------
Net interest income after provision for loan losses 3,989 7,181 2,762
----------- --------- ---------
Non-interest income:
Service charges and fees 143 173 223
Results of operations from limited partnership 9/18 (264) 263 202
Loan brokerage and servicing fees 347 324 201
Stock option commissions and fees 1,562 2,906 2,320
Other income 604 894 1,633
Loss on sale of assets, net (257) (63) (211)
----------- --------- ---------
Total non-interest income 2,135 4,497 4,368
----------- --------- ---------
Non-interest expense:
Salaries and related benefits 7,330 8,325 9,858
Occupancy expense 10 2,121 2,054 2,061
Professional fees 3,071 2,326 3,426
Litigation settlement and reserve 3,601 --
Equipment expense 564 849 937
FDIC insurance premiums 633 849 816
Data processing 439 457 478
Loss on sale of Sacramento Branch 420 --
Marketing 369 71 379
Insurance premiums 189 97 251
Telephone 155 314 274
Other operating expenses 1,419 1,876 2,496
----------- --------- ---------
Total operating expenses 19,891 17,638 20,976
Net cost of real estate operations 19,127 4,126 8,721
----------- --------- ---------
Total non-interest expense 39,018 21,764 29,697
----------- --------- ---------
Loss before income taxes (32,894) (10,086) (22,567)
Provision (benefit) for income taxes 13 142 169 (390)
----------- --------- ---------
Net loss $ (33,036) $ (10,255) $ (22,177)
=========== ========= =========
Loss per share:
Weighted average shares outstanding 3,078,303 445,064 265,718
Net loss $ (10.73) $ (23.00) $ (83.60)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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THE SAN FRANCISCO COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
Employee Unrealized Total
Purchase Loss on Share-
Additional and Securities Holders
Preferred Common Paid-in Retained Option Available- (Deficit)/
(Dollars in Thousands) Stock Stock Capital (Deficit) Plans for-Sale Equity
----- ----- ------- --------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1992 $ 3,000 $ 1 $ 16,291 $ (2,669) $(442) $ -- $ 16,181
Net change in employee stock
ownership plans -- -- (4) -- 176 172
Conversion of stock (2,884) -- 2,884 -- -- --
Net proceeds from sale of stock 6,000 3 14,782 -- -- 20,785
Conversion of subordinated debt -- -- 715 -- -- 715
Net loss -- -- -- (22,177) -- (22,177)
-------- --- -------- -------- ----- -------- --------
Balances at December 31, 1992 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) (166) (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
======== === ======== ======== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 8
SAN FRANCISCO COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(33,036) $(10,255) $(22,177)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for loan losses 3,799 3,554 9,828
Depreciation and amortization expense 660 770 990
Provision for other real estate owned and real estate investment 17,074 2,629 4,917
Loss on investment securities held-for-sale -- 67 235
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 mortgage loans held-for-sale -- -- 6,826
Decrease in interest receivable 126 539 1,078
Decrease in interest payable (143) (213) (362)
Decrease in deferred loan fees (162) (313) (299)
Deferred income tax expense (benefit) -- -- 528
-------- ------- ------
Net cash flows provided by (used in) operating activities (11,403) (3,222) 1,564
--------- -------- ------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities held-to-maturity 7,516 28,200 1,608
Sale of investment securities held-to-maturity prior to maturity 2,344 -- --
Purchase of investment securities held-to-maturity (12,719) (29,404) (3,242)
Proceeds from sales of investment securities available-for-sale 19,402 24,472 21,533
Purchase of investment securities available-for-sale (8,492) -- --
Purchase of investment securities held-for-sale -- (20,808) (20,042)
Proceeds from maturities of investment securities available-for-sale 1,610 -- --
Capital expenditures for real estate owned (575) (3,790) (1,358)
Net decrease in loans 39,101 51,253 29,745
Loans sold in sale of branch -- 27,934 --
Recoveries of loans previously charged off 1,347 159 226
Purchases of premises and equipment (64) (124) (159)
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 4,700 7,563 10,500
Net decrease in other assets 1,165 1,152 3,155
-------- -------- --------
Net cash provided by investing activities 55,335 87,158 41,966
-------- -------- --------
Cash Flows from Financing Activities:
Net decrease in deposits (62,963) (42,459) (87,514)
Net increase (decrease) in other borrowings 2,859 (14,005) 4,640
Deposits sold in sale of branch -- (33,115) --
Net increase (decrease) in other liabilities 1,426 (121) 361
Net proceeds from sale of preferred stock -- 12,000 6,000
Net proceeds from sale of common stock 17,560 -- 14,793
Net proceeds from issuance of subordinated debt -- -- 715
-------- -------- --------
Net cash used in financing activities (41,118) (77,700) (61,005)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 2,814 6,236 (17,475)
Cash and cash equivalents at beginning of year 25,833 19,597 37,072
-------- -------- --------
Cash and cash equivalents at end of year $ 28,647 $ 25,833 $ 19,597
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements. (continued)
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<PAGE> 9
THE SAN FRANCISCO COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(continued)
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $5,006 $7,632 $11,666
Income taxes 142 106 65
Supplemental Schedule of Noncash Investing and Financing Activities:
Net transfer of loans to other real estate owned 587 2,943 5,967
Conversion of subordinated debt to common stock -- -- 715
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-7-
<PAGE> 10
THE SAN FRANCISCO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
Note 1: Statement of Accounting Policies
Organization
The San Francisco Company (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 and Bank of San Francisco Realty Investors (BSFRI) acquired
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. The Company accounts for its
investment in BSFBC using the equity method.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
the Bank, and the Bank's wholly owned subsidiary, BSFRI, formerly BSF Equities.
All material intercompany transactions have been eliminated in consolidation.
Other ventures and partnerships in which the Company or any of its
subsidiaries have a significant ownership interest are accounted for by the
equity method. These investments are recorded as real estate investments, and
gains or losses upon disposition of these investments are recorded in gain/loss
on sale of real estate.
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 changes 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 1994 and 1993, the average reserve
balances outstanding were $2.8 million and $5.7 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' (deficit)/equity.
Investment securities include both debt and equity securities. At December
31, 1994, 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
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<PAGE> 11
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 market
price.
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.
Interest on 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. 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 in 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 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, delinquency trends, collateral concentrations and past loss experience.
Losses are recognized as charges to the allowance when 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.
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
and has made investments in joint ventures and partnerships. 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.
Investments in real estate joint ventures and partnerships are reported using
the equity method of accounting.
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<PAGE> 12
Other Real Estate Owned
Other real estate owned (OREO) includes loans receivable that have either
been repossessed in settlement of debt (foreclosures) or substantially
repossessed ("in-substance foreclosures"). In-substance foreclosures occur when
the market value of the collateral is less than the legal obligation of the
borrower and the Bank expects the payment of the loan to come only from sale of
the collateral. 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.
Other Assets
Other assets include equipment owned by the Bank and leased to third
parties under an operating lease which is stated at cost less accumulated
depreciation. Depreciation is computed using a straight-line method over five
years.
Income Taxes
Prior to 1987, the Company filed consolidated Federal income and combined
California franchise tax returns, using the cash method of accounting. Beginning
in 1987, as required by the Tax Reform Act of 1986, the Company filed
consolidated tax returns using the accrual method of accounting.
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 1994 and
1993.
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.
Loss per Share
Loss per share is calculated using the weighted average number of common
shares outstanding divided into net 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.
Recent Accounting Pronouncements
In October 1994, Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting
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<PAGE> 13
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, 1994, the Company and the Bank had no
derivative financial instruments that would be subject to such disclosure.
In 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan". This Statement required that impaired loans be measured
based on the present value of expected future cash flows discounted at the
effective rate of the loan's observable market price or the fair market value of
the collateral if the loan is collateral dependent. This Statement applies to
financial statements for fiscal years beginning after December 31, 1994. In
October 1994, the FASB issued SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan- Income Recognition and Disclosures". SFAS No. 118 amends
SFAS No. 114 to allow a creditor to use existing methods for recognizing
interest income on an impaired loan. SFAS No. 118 is effective concurrent with
the effective date of SFAS No. 114. The Company elected not to implement SFAS
No. 114 and 118 for the period ended December 31, 1994. It has been determined
that the effect of SFAS No. 114 and 118 on the Company's financial statements
would not have been material had the Company implemented SFAS No. 114 and 118 as
of December 31, 1994.
Reclassifications
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to current year presentation.
Note 2: Regulatory Orders and Going Concern Considerations
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.
-11-
<PAGE> 14
The Bank
Capital Orders
On March 24, 1995, the State Banking Department (SBD) issued an order
for the Bank to increase its level of capital. The capital order requires that
the Bank increase its capital by $4.2 million on or before April 10, 1995 and by
a minimum of $10.5 million (including the first installment of $4.2 million) on
or before June 30, 1995. The second installment 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 as of February 28, 1995. No assurances were
given that the SBD would refrain from taking action against the Bank until the
deadlines specified have passed.
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 has determined that the Bank is
Critically Undercapitalized. On the date of the Notification the Bank became
subject to certain mandatory requirements including submission of a capital
restorations plan and restrictions on asset growth, acquisitions, new
activities, new branches, payment of dividends or making any other capital
distribution, management fees, and senior executive compensation. Prior to the
Notification, the Bank was subject to the Orders to Cease and Desist (Orders),
as described below, which included these limitations. In addition, immediately
upon receiving notice, the Bank must obtain FDIC's prior written approval before
entering into any material transaction other than in the usual course of
business, extending any credit for any highly leveraged transactions, as defined
by regulation, amending the Bank's charter or bylaws, except to the extent
necessary to carry out any other requirement of any law, regulation, or order,
making any change in accounting methods, engaging in any covered transaction as
defined in section 23A(b) of the Federal Reserve Act, pay excessive compensation
or bonuses, paying interest on new or renewed liabilities at a rate that would
increase the Bank's weighted average cost of funds to a level significantly
exceeding the prevailing rates of interest on insured deposits in the Bank's
normal market area, and making any principal or interest payment on subordinated
debt.
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.
-12-
<PAGE> 15
Failure to comply with the above Orders could result in the termination of
the Bank's federal deposit insurance, imposition of civil money penalties
against the Bank or other responsible parties, or possession of the Bank's
property and business and ultimate liquidation thereof by the SBD.
As of December 31, 1994, the Bank failed to meet industry-wide capital
requirements and to meet the 7% leverage capital ratio imposed by the Orders
primarily because of the continued losses incurred as a result of problem
assets. As to the other requirements of the Orders and the Restoration Plan, the
Bank believes that the findings of the FDIC and SBD at its recent examination
which began January 30, 1995 will be that the Bank is not in compliance with
substantial requirements of the Orders including the SBD's order requiring the
Bank to correct its capital impairment. 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 addition, because of its asset quality, continued operating
losses, volatile liability dependency and liquidity problems, the Bank is
potentially subject to further regulatory sanctions that are generally
applicable to banks that are critically undercapitalized.
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. It is expected that the business plan will be acceptable to the
FDIC and the SBD after the receipt of additional capital. Management believes
that the Bank will be able to take the actions contemplated by such plan without
need for further FDIC approval, subject to the general requirement that the Bank
return to profitability and be operated safely and soundly. 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 not been approved. In
addition, in 1993 the Company agreed to 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.
Failure to maintain minimum capital requirements or to implement the Plan
can result in the imposition of additional restrictions upon the Bank's
activities including increased supervision and ultimately regulatory takeover.
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 six impairment orders to the Bank, with the most recent dated
February 1, 1995 (the "Impairment Orders"). At December 31, 1994, the Bank had
contributed capital of $66.2 million and deficit retained earnings of $64.6
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.
-13-
<PAGE> 16
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 $95.3 million, to cure
the capital impairment at December 31, 1994. 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 further 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 continue to
erode through future operating losses.
Going Concern Considerations
During the period 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 $52.0 million of new capital by the Company's
controlling stockholder. The Company's and the Bank's recurring losses from
operations, noncompliance with minimum regulatory capital requirements, the
negative capital position, the Bank's designation as a critically
undercapitalized institution by the FDIC, and the Bank's noncompliance with the
Orders and Impairment Order raise substantial doubt about the Company's ability
to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon
many factors, including increasing and maintaining its capital ratios, obtaining
additional capital contributions and returning the Company to profitable
operations. In response to these problems, the Company and the Bank have
developed a business strategy and capital plan to raise new capital and return
the Company and the Bank to profitability. The Company intends to raise
additional capital in 1995 and contribute that capital to the Bank. If the
Company does not succeed in raising new capital, termination of the Bank's FDIC
insurance is likely.
Note 3: Subsequent Event -- Capital Contribution
In April 1995, the Company received a binding commitment from its majority
shareholder for $3.8 million in capital, expected by April 24, 1995. The Company
intends to contribute a total of $4.2 million in capital to the Bank upon
receipt of the $3.8 million. The following table reflects both the Company's and
Bank's capital ratios with respect to minimum capital requirements in effect as
of December 31, 1994 giving effect to the capital commitment.
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
<S> <C> <C> <C> <C>
Leverage ratio 3.4% 3.4% 4.0% 7.0%
Tier 1 risk-based capital 4.5 4.4 4.0 N/A
Total risk-based capital 6.0 5.9 8.0 N/A
</TABLE>
-14-
<PAGE> 17
Note 4: Investment Securities Held-to-Maturity
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
Federal Home Loan Bank stock 1,337 - -- 1,337
------ -- ---- ------
Total $9,196 $0 $(23) $9,173
====== == ==== ======
1993:
U.S. Treasury and agency securities $4,082 $2 $ (1) $4,083
Collateralized mortgage obligation (CMO) 996 1 -- 997
Federal Home Loan Bank stock 1,273 - -- 1,273
------ -- ---- ------
Total $6,351 $3 $ (1) $6,353
====== == ==== ======
</TABLE>
At December 31, 1994 and 1993, $2.5 million and $2.1 million, respectively,
of securities were pledged as collateral for treasury, tax, loan deposits,
public agency, bankruptcy and trust deposits. At December 31, 1994 and 1993, the
Company had no securities sold under agreements to repurchase.
The average yield on investments securities was 4.6% and 3.6% at December
31, 1994 and 1993, respectively. U.S. Treasury and agency securities held by the
Company have maturities of less than one year. The FHLB stock has no stated
maturity.
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.
Note 5: Investment Securities Available-for-Sale
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
1994:
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 1,943 $ -- $ (2) $ 1,941
Collateralized mortgage obligation (CMO) 272 -- (2) 270
------- ------- ---- -------
Total $ 2,215 $ -- $ (4) $ 2,211
======= ======= ==== =======
1993:
Mutual funds $15,000 $ -- $(60) $14,940
======= ======= ==== =======
</TABLE>
For 1994 and 1993, the Bank included an unrealized loss of $4,000 and
$60,000 as a separate component of stockholders' equity. U.S. Treasury and
agency securities and CMO held by the Company have maturities of less than one
year. The maturity on the CMO is estimated based on the prepayment experience of
similar investment securities.
The proceeds from sales of securities available for sale were $19.4
million at December 31, 1994. During 1994, the Bank recorded no gains, and
losses of $265,000 were realized.
-15-
<PAGE> 18
Note 6: Loans Receivable
The Bank's loan portfolios at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
---- ----
<S> <C> <C>
Commercial and financial $83,141 $109,008
Real estate construction 9,004 14,023
Real estate mortgage 14,276 26,479
Net lease financing 31 230
------- --------
Total loans 106,452 149,740
Deferred fees (388) (550)
Allowance for loan losses (6,576) (8,050)
------- ------
Total loans, net $99,488 $141,140
======= ========
</TABLE>
At December 31, 1994 and 1993, non-accrual loans totaled $9.4 million and
$11.1 million, respectively, and loans past due 90 days or more and still
accruing totaled $940,000 and $182,000, respectively. For the years ended
December 31, 1994, 1993 and 1992, interest income foregone on non-accrual loans
was $918,000, $797,000, and $713,000, respectively. Restructured loans totaled
$6.3 million and $2.0 million at December 31, 1994 and 1993, respectively. For
the years ended December 31, 1994, 1993 and 1992, interest income foregone on
restructured loans were $18,000, $166,000 and zero, respectively.
There were $9.4 million of fixed rate loans at December 31, 1994 with a
weighted average yield of 7.1%. Total fixed rate loans, most of which mature in
more than five years, comprised approximately 8.8% of the Bank's loan portfolio
at December 31, 1994.
The Company makes commercial and financial loans secured by real estate,
which are principally located in Northern California. At December 31, 1994 loans
secured by deeds of trust on property located in these areas represented 65.4%
of the Bank's loans. The primary source of repayment of commercial and financial
loans is the borrower's or property's debt service capacity while the secondary
source of repayment is the underlying real estate collateral.
At December 31, 1994, 8.5% of the Bank's loan portfolio was composed of
loans secured by properties that were under construction or contract for
construction.
Note 7. 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) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Balances at beginning of the year $ 8,050 $ 8,400 $ 8,411
Additions to allowance for loan losses 3,799 3,554 9,828
Loans charged off (6,620) (4,063) (10,065)
Recoveries of loans charged off 1,347 159 226
------- ------- --------
Balances at end of the year $ 6,576 $ 8,050 $ 8,400
======= ======= ========
</TABLE>
-16-
<PAGE> 19
Note 8: Other Real Estate Owned
Other real estate owned (including in-substance foreclosures) at December
31 consist of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
---- ----
<S> <C> <C>
Real Estate:
Residential $ 2,216 $ 3,695
Residential development 7,127 12,704
Commercial development 1,045 819
Land under development 2,543 1,632
Raw land 16,494 16,508
------- -------
Subtotal 29,425 35,358
Allowance for losses (19,404) (2,986)
-------- -------
Total $10,021 $32,372
======= =======
</TABLE>
At December 31, 1994 and 1993, other real estate owned included $4.6
million and $19.1 million, respectively, of in-substance foreclosed loans. For
both December 31, 1994 and 1993, other real estate owned was comprised of 18
properties, with the largest single property totaling $3.5 million.
The following table summarizes the other real estate owned loss experience
of the Bank for the periods shown:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Balance of allowance for losses - beginning $ 2,986 $6,632 $1,672
Charge-offs (33) (6,982) (531)
Provision 16,451 3,336 $5,491
------- ------ ------
Balance of allowance for losses - ending $19,404 $2,986 $6,632
======= ====== ======
</TABLE>
Note 9: Real Estate Investments
Real estate investments at December 31 consist of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
---- ----
<S> <C> <C>
Residential development $ 507 $ 954
Commercial development 1,234 1,226
General and limited partnership investment in Bank premises 1,682 2,175
------ ------
Subtotal 3,423 4,355
Allowance for losses (1,059) (712)
------ ------
Total $2,364 $3,643
====== ======
</TABLE>
At December 31, 1994 and 1993, real estate investments included two
residential development properties, one commercial land available for
development, and the general and limited partnership investments in BSFBC. In
1994 and 1993, the Bank had losses of $264,000 and earnings of $263,000,
respectively from BSFBC.
-17-
<PAGE> 20
Note 10: Premises and Equipment
Premises and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
---- ----
<S> <C> <C>
Leasehold improvements $3,129 $3,103
Furniture and equipment 5,065 5,073
------ ------
Subtotal 8,194 8,176
Less: Accumulated depreciation and amortization (5,198) (4,584)
------ ------
Total $2,996 $3,592
====== ======
</TABLE>
The amount of depreciation and amortization included in non-interest
expense was $660,000, $770,000, and $990,000 in 1994, 1993 and 1992,
respectively. Total rental expense net of sublease income and other occupancy
expenses for the Company premises were $2.1 million in 1994, 1993 and 1992.
At December 31, 1994, the approximate future minimum rental payments under
non-cancelable operating leases, with remaining terms ranging from six months to
twenty-three years, for the Company's premises are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) Amount
<S> <C>
1995 $ 1,697
1996 1,625
1997 1,950
1998 1,950
1999 1,950
Thereafter 53,908
-------
Total $63,080
=======
</TABLE>
Lease payments are subject to rent adjustments every five years to reflect
changes in the consumer price index with a minimum increase of 20%. During 1994,
1993 and 1992, the Company received $169,000, $59,000 and $30,000 of sublease
income, respectively. The total future minimum rent payments to be received
under noncancellable operating subleases at December 31, 1994 were approximately
$354,000. These payments are not reflected in the above table.
Note 11: Deposits
Deposit balances by deposit programs offered by the Bank at December 31 are
as follows:
<TABLE>
<CAPTION>
1994 1993
-------------- ------------
Average Average
(Dollars in Thousands) Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Demand deposit accounts $ 30,259 0.0% $ 34,859 0.0%
Savings and NOW accounts 43,415 2.4 35,050 2.5
Money market accounts 25,250 3.2 56,453 2.9
Time accounts 48,224 5.0 83,749 3.8
-------- --- -------- ---
Total $147,148 2.9% $210,111 2.6%
======== === ======== ===
</TABLE>
Total deposit balances averaged $172.9 million and $264.7 million during
1994 and 1993, respectively, with average interest rates of 2.7% and 2.6%,
respectively. The weighted average stated rates on deposits as of December 31,
1994 and 1993 was 2.9% and 3.0%, respectively.
-18-
<PAGE> 21
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) 1994 1993
---- ----
<S> <C> <C>
Three months or less $ 7,028 $27,765
Three months to six months 1,586 1,917
Six months to one year 1,216 1,674
Over one year 405 810
------- -------
Total $10,235 $32,166
======= =======
</TABLE>
Interest expense on time deposits in amounts of $100,000 or more was
$935,000, $2.0 million and $1.8 million in 1994, 1993, and 1992, respectively.
Time deposit accounts in amounts of $100,000 or more averaged $24.5 million and
$54.7 million during 1994 and 1993, respectively, with weighted average rates of
3.8% and 3.7%, respectively. The weighted average stated interest rate on such
deposits at December 31, 1994 and 1993 was 4.4% and 3.3%, respectively.
Brokered deposits totaled $19.7 million and $20.0 million, and money desk
deposits totaled $15.1 million and $41.5 million at December 31, 1994 and 1993,
respectively.
Note 12: 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>
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
======= ==== ======= ==== =======
1993:
Borrowings for employee stock ownership plan $ 162 5.7% $ 213 5.7% $ 255
Mortgage indebtedness 1,141 10.0 703 9.5 1,813
Securities sold under agreements to repurchase -- -- 1,917 3.7 11,201
Other borrowings - FHLB line of credit -- -- 3,975 3.4 9,800
------- --- ------- --- -------
Total $ 1,303 9.5% $ 6,808 4.3% $23,069
======= ==== ======= ==== =======
</TABLE>
The terms of the borrowings outstanding at December 31, 1994 provide for
the repayment of $4.1 million in 1995. The securities pledged under the
agreement to resell are held in safe keeping by an unrelated third party.
The Bank has an approved FHLB line of credit, of which $5.5 million was
available at December 31, 1994, based on the collateral pledged. At December 31,
1994 and 1993, $11.4 million and $6.4 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 line of credit.
The Bank's other borrowings included senior liens of other real estate
owned. The rates and terms of these borrowings vary. As of December 31, 1994,
there was no outstanding balance in real estate owned securing the senior liens.
-19-
<PAGE> 22
Note 13: Income Taxes
The provision (benefit) for Federal and state income taxes consists of:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $(968)
State 142 169 50
------- ------- -----
Total current 142 169 (918)
------- ------- -----
Deferred:
Federal -- -- 528
State -- -- --
------- ------- -----
Total deferred -- -- 528
------- ------- -----
Total provision (benefit) for income taxes $ 142 $ 169 $(390)
======= ======= =====
</TABLE>
The provision for state taxes for 1994, 1993 and 1992 consists of the
minimum amount of franchise taxes due.
In 1992, during which period the Company accounted for income taxes under
the deferred method as described in APB Opinion No. 11, deferred taxes arose
from timing differences in the recognition of revenues and expenses for tax and
financial reporting purposes. The tax effects of the principal items resulting
in deferred tax expense (benefit) were the difference between:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1992
- - ---------------------- ----
<S> <C>
Accrual and cash basis income $(127)
Book and tax provision for loan losses 648
Book and tax depreciation (111)
Book and tax treatment of leases (13)
Book and tax recognition of rehabilitation tax credit (153)
Book and tax treatment for provision for 351 California lease 47
Book and tax treatment for other real estate owned 243
Other, net (6)
-----
Total $ 528
=====
</TABLE>
-20-
<PAGE> 23
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1994 and 1993 are presented below:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
---- ----
<S> <C> <C>
Deferred Tax Assets:
Book loan loss reserve in excess of tax $ 2,213 $ 2,348
Other provisions 256 376
Provision for losses for real estate 9,164 2,212
Net operating losses 15,120 9,100
Tax credits 489 489
Difference in recognition of income from partnerships 63 23
Income recognized on leased property 1,832 1,772
Capitalized costs 391 390
Other 131 93
-------- --------
Total deferred tax assets 29,659 16,803
Valuation allowance (27,534) (14,341)
-------- --------
Total deferred tax assets, net 2,125 2,462
-------- --------
Deferred Tax Liabilities:
Net book value of premises and equipment in excess of tax (1,608) (1,751)
Loan origination costs (116) (223)
Difference in recognition of income from partnerships -- (43)
State tax -- (28)
Taxable income in excess of book for rehabilitation credit (401) (417)
-------- --------
Total deferred tax liabilities (2,125) (2,462)
-------- --------
Net deferred taxes $ -- $ --
======== ========
</TABLE>
The Bank provided a valuation allowance for deferred tax assets as 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>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Tax benefit at the statutory federal rate (34.0)% (34.0)% (34.0)%
Limitation on utilization of net operating loss carryback due to
tax rate differential, alternative minimum tax and
utilization of prior taxable income 34.0 34.1 32.0
State income taxes, net of federal tax benefit 0.4 1.7 0.2
Non-deductible expenditures and non-taxable income -- (0.1) 0.1
----- ----- -----
Total effective tax provision (benefit) rate 0.4% 1.7% (1.7)%
===== ===== =====
</TABLE>
At December 31, 1994 and 1993, there is no deferred income tax receivable.
The tax benefits reported in 1992 were attributable to the Company's
ability to carryback net operating losses for 1992 against net operating income
of prior periods. Because the Company has utilized all of its ability to
carryback net operating losses, much of the 1994, 1993, and 1992 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, 1994, the Company has net operating loss carryforwards for federal
tax purposes of approximately $39.0 million which expire in 2007 and onwards,
and for California tax purposes of approximately $24.0 million, which expire in
1997, 1998, and 1999. The Company has rehabilitation tax credits carryforwards
for federal tax purposes of approximately $250,000, which expire in 2004 and
2005. In addition, the Company has minimum tax credits of approximately $230,000
which have no expiration.
-21-
<PAGE> 24
Note 14: Shareholders' Equity (See Note 2: Impairment Orders)
The capital infusion by the Company's controlling stockholder in 1994, 1993
and 1992 was $20.0 million, $12.0 million and $20.0 million, respectively. 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 and 1992 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. 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.
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 shareholder in its closing of a
private stock offering for $20.0 million in capital. The price per unit was
$5.68. Each unit sold under the private placement includes a Risk Protection
Right (RPR). Under the RPR, additional Class A Common Stock will be issued to
the holder of each RPR if a net loss is incurred on certain specified assets or
as the result of losses, incurred related to certain litigation actions. The RPR
will effectuate this risk allocation by compensating the holder with additional
shares of Class A Common Stock (Adjustment Shares) up to a maximum number of
shares per RPR without the payment of additional consideration. This
compensation will be effected through periodic distributions of Adjustment
Shares. Adjustment Shares will be issued to compensate for net Losses, net
charge-offs and expenses on certain specified assets (Specified Assets) and the
lawsuit that was settled for $2.0 million during July 1994 up to a cumulative
amount of $16.0 million. The maximum number of Class A Common shares to be
issued is 9,723,000. As a result of the losses incurred in 1994, the maximum
number of Adjustment Shares would have been issued at December 31, 1994 as a
result of the losses incurred in 1994.
Description of Class A Common Stock
As of December 31, 1994 there were 5,766,008 Class A Shares outstanding out
of a total of 40,000,000 shares authorized. During 1994, the Shareholders of
Company approved to reclassification of all Class B Common Stock as and 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
-22-
<PAGE> 25
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. To date the Board of Directors has authorized only
the issuance of the Series B Preferred Shares and the Series C 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 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 C 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, 1994, 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.
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.
-23-
<PAGE> 26
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.
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. The remaining shares outstanding at
December 31, 1994 are 16,291.
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 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%
-24-
<PAGE> 27
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, 1991 935 17,586 $80.0 - $118.2
Options granted (8,674) 8,673 72.5
Options cancelled 7,739 (8,350) 80.0 - 107.5
------ ------- --------------
Balances at December 31, 1992 -- 17,909 72.5 - 107.5
Options cancelled -- (12,999) 72.5 - 107.5
------ ------- --------------
Balances at December 31, 1993 -- 4,910 $ 72.5 -$107.5
Options cancelled -- (2,837) 72.5 - 107.5
------ ------- --------------
Balances at December 31, 1994 -- 2,073 $ 72.5- $100.0
====== ======= ==============
</TABLE>
Outstanding stock options for the purchase of 50 shares exercisable at
$100.00, 1,423 shares exercisable at $80.00 and 600 shares exercisable at $72.50
were outstanding at December 31, 1994.
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 will cover a
total of 1,100,000 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, 1994, shares
granted under the Executive Plan total 188,022 with an average exercise price of
$10.00. None of the options have been exercised.
The executive employment agreement for certain officers provide that
certain officers shall be granted options to acquire shares of Class A Common
Stock under the Executive Plan equal to 8% 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 8% ratio. The effective dates of the initial grant of
options for certain officers are September 30, 1993 and October 1, 1994. Based
on the current capitalization of the Company, certain officers received options
to purchase 501,392 shares of the Company, as of December 31, 1994.
Director 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
50,000 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 April 1, 1994, shares granted under
the Directors' Plan total 12,500 with an average exercise price of $30.00. 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. None of the options have been exercised.
Note 15: 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.
-25-
<PAGE> 28
The following table sets forth the Company's and the Bank's capital ratios
compared to minimum capital requirements as of December 31, 1994 and the
requirements contained in the Orders:
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
------- ---- ----------- ------
<S> <C> <C> <C> <C>
Leverage 1.2% 0.9% 4.0% 7.0%
Tier 1 risk-based capital 1.6 1.2 4.0 N/A
Total risk-based capital 3.0 2.6 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.
See "Note 3. Subsequent Event -- Capital Contribution".
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). See Note
2: Regulatory Orders and Going Concern Considerations.
Note 16: Employee Benefit Plans
Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan ("ESOP") for
the benefit of its employees. During 1985, the ESOP borrowed $500,000 from a
third party financial institution at a floating rate based upon 90% of the
institution's current prime rate. Repayment of the principal occurred in seven
annual installments of $71,000 through June 30, 1992 and was completed as
scheduled. The proceeds from this borrowing, which was not guaranteed by the
Company, were used to purchase 5,208 Class A Shares at a price of $160.00 per
share. During 1988, the ESOP established a loan for $650,000 from a third party
financial institution at a floating rate based upon 95% of the current prime
rate. At December 31, 1988, the ESOP had drawn $325,000 from this loan.
Repayment of the principal is scheduled in quarterly payments of $23,000 through
March 31, 1995. Payment on this loan started in the fourth quarter of 1988. The
proceeds from the borrowing were used to purchase 1,429 shares of the Company's
Series B Preferred Shares at a price of $140.00 per share, and to purchase the
Company's Class A Shares throughout 1988. The stock purchased is pledged as
collateral for the loan. During 1989, the ESOP drew the remaining $325,000 from
this loan. The proceeds from the borrowing were used to purchase 2,500 shares of
the Company's Class A Shares at a price of $100.00 per share. During 1994 and
1993, the ESOP did not purchase any shares of the Company's stock.
The Company has determined that its contribution to the ESOP will be
sufficient to cover the yearly debt service on the ESOP's borrowings. At
December 31, 1994, the Company had provided a total of approximately $1.9
million in contributions to the ESOP since its inception in 1985. During 1994,
1993 and 1992, the Company contributed $130,000, $120,000, and $240,000,
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
-26-
<PAGE> 29
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, 1994, the Company had outstanding 364 Class A Shares under
the ESPP, approximately 2.0% of which represented matching shares. At December
31, 1993, the Company had outstanding 429 Class A Shares under the ESPP. 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
1994, 1993, and 1992, the Company included $42,000, $81,000 and $90,000,
respectively in non-interest expense in order to recognize contributions to the
401k Plan.
Note 17: 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, 1994 and 1993, the Bank had
outstanding loan commitments, which are primarily adjustable rates, totaling
approximately $16.3 million and $29.6 million, respectively. In addition, the
Bank had outstanding letters of credit, which represent guarantees of
obligations of Bank customers, totaling $10.4 million and $12.1 million at
December 31, 1994 and 1993, 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. At December
31, 1994, the Company and/or the Bank are defendants in certain lawsuits for
which the damages sought are substantial as described below.
Presently, the Bank is involved in several lawsuits. In the first lawsuit,
BSFRI is named as a defendant and has been served with a cross-complaint for
indemnity in a deficiency judgement with respect to a first deed of trust on a
property owned by a limited partnership. The plaintiff under the cross complaint
is seeking damages in the amount of $5.0 million, and unspecified punitive
damages. BSFRI was once a limited partner in the partnership but became a
secured lender of the partnership under a second deed of trust, at which time
BSFRI was given a release for any liability. The Bank believes it has
meritorious defenses to the cross-claim and will contest any allocation of
liability to it if defendants are found liable for any deficiency.
In the second lawsuit, the Bank has been named a defendant in an action
brought in Florida by the institutional purchaser of a block of loans from the
Bank, alleging failure of the Bank to properly perform a credit check for one of
the loans. The plaintiff is seeking approximately $155,000 it allegedly lost
when the loan defaulted. The Bank is defending the matter vigorously and
believes it has meritorious defenses. In addition, the Bank has been threatened
with arbitration proceedings by another institutional purchaser in connection
with a $750,000 principal amount loan purchased from the Bank on the sale of its
former Sacramento branch. The institutional purchaser contends that the Bank
breached the sale agreement by failing to notify the purchaser of the
downgrading of the loan and the release of certain collateral. The Bank denies
that it has breached the sale agreement.
The Bank is currently involved in two lawsuits which were brought by former
employees of the Bank; one former employee has alleged discrimination and
wrongful termination. The other former employee alleges wrongful termination.
The former employees have sought unspecified damages.
-27-
<PAGE> 30
The Bank has denied these allegations and is vigorously defending these
proceedings. The disposition of these proceedings could have a material adverse
effect on the Company's financial position or results of operation, however,
management cannot predict the specific outcome of these actions. Accordingly,
the accompanying financial statements do not include any adjustments that might
result from the outcome of the uncertainties.
The Bank has reached settlement or potential settlement in numerous other
litigation or potential litigation matters. In some instances the Bank has
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 and the Bank intend to pursue their rights under an
indemnification agreement with Mr. Donald R. Stephens, a former Chairman of the
Board and Chief Executive Officer of the Company who resigned in 1993, pursuant
to which Mr. Stephens is required to provide indemnification in respect of
certain expenses related to actions brought by a former employee.
The jury ruled in favor of the Bank on another lawsuit where the plaintiffs
were seeking compensatory damages in an amount of $6.0 million, and unspecified
punitive damages. The plaintiffs were claiming breach of an alleged joint
venture agreement, and of other duties owed to the plaintiffs, arising from the
Bank's foreclosure on a series of loans made to the plaintiffs by the Bank in
connection with the development of an 800 acre parcel of land.
Other Contingencies
During 1993, the Bank transferred a loan with a carrying value of $1.6
million collateralized by commercial real estate to in-substance foreclosure.
The collateral securing this loan requires seismic upgrading and may be located
on property containing hazardous materials. During 1994, the asset was charged
off.
Note 18: 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, 1994:
<TABLE>
<CAPTION>
(Dollars in Thousands) Amount
- - ---------------------- ------
<S> <C>
Balance at December 31, 1993 $ 496
New loans or disbursements 22
Principal reductions (including cash repayments) (280)
-------
Balance at December 31, 1994 $ 238
=======
</TABLE>
The Company accounts for its investment in BSFBC, a California limited
partnership, using the equity method. Condensed statements of financial
condition and operations of BSFBC at December 31 are as follows:
-28-
<PAGE> 31
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in Thousands) 1994 1993
---- ----
<S> <C> <C>
Assets:
Cash $1,271 $1,380
Receivables 43 25
Fixed assets, net 5,707 6.860
------ ------
Total assets $7,021 $8,265
====== ======
Liabilities and Partners' Equity:
Notes payable $2,230 $2,297
Other liabilities 239 207
Partners' equity 4,552 5,761
------ -----
Total liabilities and partners' equity $7,021 $8,265
====== ======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Rental income $1,834 $1,845 $1,846
Other income 113 101 99
------ ------ ------
Total income 1,947 1,946 1,945
Total expense 2,555 1,004 1,456
------ ------ ------
Net income of partnership $ (608) $ 942 $ 489
====== ====== ======
</TABLE>
The Bank's and BSFRI's equity in the operating results of BSFBC in 1994,
1993 and 1992 was approximately a loss of $264,000, and earnings of $263,000,
$202,000, respectively. Such income is included in the Bank's other income in
the Company's Consolidated Financial Statements.
Note 19: 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.
-29-
<PAGE> 32
The carrying amount and estimated fair values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 28,647 $ 28,647 $ 25,833 $ 25,833
Investment securities 11,407 11,384 21,191 21,293
Loans, net 99,488 99,326 141,140 145,350
Financial Liabilities:
Deposits 147,148 147,071 210,111 209,934
Other borrowings 4,070 4,070 1,303 1,361
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at December 31, 1994 and
1993:
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, 1994. 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.
BORROWED FUNDS: Due to the terms of these borrowings, current carrying amounts
approximate estimated fair value. A total of $4.0 million matures in January
1995.
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.
-30-
<PAGE> 33
Note 20: The San Francisco Company
Condensed statements of financial condition and operations of the San
Francisco Company at December 31 are as follows:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands) 1994 1993
---- ----
<S> <C> <C>
Assets:
Cash and short term investments $ 656 $ 249
Other real estate owned 85 96
Investment in subsidiary 1,592 17,407
Other assets 131 252
------- -------
Total assets $ 2,464 $18,004
======= =======
Liabilities:
Borrowings for Employee Stock Ownership Plan $ 70 $ 162
Other liabilities 265 387
------- -------
Total liabilities 335 549
------- -------
Stockholders' equity 2,129 17,455
------- -------
Total liabilities and shareholders' equity $ 2,464 $18,004
======= =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Income:
Interest earned $ 51 $ 13 $ 30
Other Income 33 -- --
-------- -------- ----
Total income 84 13 30
-------- -------- --------
Expense:
Provision for loan losses -- 53 --
Other expense 251 409 53
-------- -------- --------
Total expense 251 462 53
-------- -------- --------
Income (loss) before equity in undistributed
net loss of subsidiary (167) (449) (23)
Equity in undistributed net loss of
subsidiary (32,869) (9,806) (22,154)
-------- -------- --------
Net loss $(33,036) $(10,255) $(22,177)
======== ======== ========
</TABLE>
-31-
<PAGE> 34
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(33,036) $(10,255) $(22,177)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in undistributed net loss of subsidiary 32,869 9,806 22,154
Provision for loan losses -- 53 --
-------- -------- --------
Net cash flows used in operating activities (167) (396) (23)
-------- -------- --------
Cash Flows used in investing activities:
Principal collected on loans -- -- 10
Investment in Bank (17,000) (11,850) (22,000)
Net decrease (increase) in other assets 136 (246) (2)
-------- -------- --------
Net cash used in investing activities (16,864) (12,096) (21,992)
-------- -------- --------
Cash Flows provided by financing activities:
Proceeds from sale of Preferred Stock -- 12,000 6,000
Proceeds from sale of Common Stock 17,560 -- 15,500
Net increase (decrease) in other liabilities (122) 390 (3)
Other net -- -- 8
-------- -------- --------
Net cash provided by financing activities 17,438 12,390 21,505
-------- -------- --------
Increase (decrease) in cash and cash equivalents 407 (102) (510)
Cash and cash equivalents at beginning of year 249 351 861
-------- -------- --------
Cash and cash equivalents at end of year $ 656 $ 249 $ 351
======== ======== ========
</TABLE>
Note 21: 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, 1994, and
is qualified in its entirety by the more detailed information and financial
statements contained elsewhere in this report:
<TABLE>
<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>
-32-
<PAGE> 35
<TABLE>
<CAPTION>
1993 Quarters Ended
---------------------------------------
(Dollars in Thousands Except Per Share Data) March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest income $ 4,826 $ 4,922 $ 4,445 $ 3,962
Interest expense 1,947 2,056 1,845 1,572
-------- -------- -------- --------
Net interest income 2,879 2,866 2,600 2,390
Provision for loan losses 141 2,641 618 154
Non-interest income 1,226 1,249 1,333 1,071
Non-interest expense 6,466 5,465 5,260 4,955
-------- -------- -------- --------
Loss before income taxes (2,502) (3,991) (1,945) (1,648)
Provision for taxes 68 20 15 66
-------- -------- -------- --------
Net loss $ (2,570) $ (4,011) $ (1,960) $ (1,714)
======== ======== ======== ========
Loss per common share:
Average common shares outstanding 445,100 445,100 445,066 444,991
Net loss $ (5.77) $ (9.01) $ (4.40) $ (3.85)
</TABLE>
-33-
<PAGE> 36
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following is a list of directors of the Company, their occupation for
the previous five years, age and the length of service as a director. Except as
stated below, no director of the Company is a director of any company with a
class of securities registered pursuant to section 12 of the Securities Exchange
Act of 1934, as amended, or subject to the requirements of section 15(d) of such
Act or of any company registered as an investment company under the Investment
Company Act of 1940, as amended. Except for the Bank, none of the corporations
or organizations discussed below is an affiliate of the Company. No director,
nominee for director or executive officer of the Company or the Bank has any
family relationship with any other director or executive officer of the Company
or director or executive officer of the Bank.
JAMES E. GILLERAN...............................................................
Mr. Gilleran has served as the Chairman and Chief Executive Officer of the
Company and the Bank since October 1994. He served as Superintendent of
Banks for the state of California from 1989 to 1994. At December 31, 1994,
Mr. Gilleran was 61 years of age and he had been serving as a director of
the Company since 1994 and a director of the Bank since 1994.
DONNA MILLER CASEY..............................................................
Mrs. Casey served as a partner of Loder & Associates, a special events,
marketing and promotion firm, from May 1991 to June 1993, and as Executive
Director of San Francisco Beautiful, a non-profit organization dedicated to
civic beautification, from 1987 to 1989. Mrs. Casey served as Secretary of
the Company from its organization in 1981 until 1992 and as Secretary of
the Bank from its organization in 1978 until 1992. Mrs. Casey has served as
a director of Compensation Resource Group, Inc. since 1990, a Trustee of
University of San Francisco since 1984, and a Trustee of the California
State Summer School for the Arts since 1983. At December 31, 1994, Mrs.
Casey was 45 years of age and she had been serving as a director of the
Company since 1981 and a director of the Bank since 1978.
STEVEN R. CHAMPION..............................................................
Mr. Champion has served as President and Chief Financial Officer of San
Francisco and East Asia Capital Management since January 1995. Mr. Champion
was the Vice Chairman and Chief Financial Officer of the Company and the
Bank, and Chief Investment Officer of the Bank, from August 1993 to October
1994. He served as Chief International Investment Officer of Bank of
America from 1992 to 1993, President and Chief Executive Officer of the
R.O.C. - Taiwan Fund from 1989 to 1992, and President and Chief Executive
Officer of International Investment Trust Company in Taipei, Taiwan from
1987 to 1992. At December 31, 1994, Mr. Champion was 49 years of age and he
had been serving as a director of the Company since 1993 and a director of
the Bank since 1993.
DAVID R. HOLBROOKE, M.D.........................................................
Dr. Holbrooke has served as Chief Executive Officer of Holbrooke &
Associates, a health care investment and management firm, since 1985. He
has served as a director of TriCare Inc., a health care services company,
since 1985. Dr. Holbrooke is a principal and director of a number of
privately held firms in the health care field. At December 31, 1994, Mr.
Holbrooke was 53 years of age and he had been serving as a director of the
Company since 1981 and a director of the Bank since 1978.
KENT D. PRICE...................................................................
Mr. Price has served as Executive Vice President of IBM since September
1994. Mr. Price was the Chairman and Chief Executive Officer of the Company
and the Bank from September 1993 to August 1994. He served as Executive
Vice President, Private Banking and Corporate Development of Bank of
America from 1991 to 1993; Chief Financial Officer and Executive Vice
President of Bank of New England Corporation from 1990 to 1991; and Chief
Operating Officer, Chief Financial Officer and Director of Barr Rosenberg
Investment Management in 1990. At December 31, 1994, Mr. Price was 51 years
of age and he had been serving as a director of the Company since 1993 and
was a director of the Bank from 1993 to 1994.
-34-
<PAGE> 37
WILLARD D. SHARPE...............................................................
Mr. Sharpe is a retired economist who, at the time of his retirement in
1987, served as a Vice President of Chase Manhattan Bank and as the Bank's
chief economist for Asia. In addition, since 1993, Mr. Sharpe has been a
Vice President of two privately held companies involved in efforts to
explore prospects for investment in Vietnam. At December 31, 1994, Mr.
Sharpe was 71 years of age and he had been serving as a director of the
Company since 1993 and a director of the Bank since 1993.
GORDON B. SWANSON ..............................................................
Mr. Swanson has been Vice President of Real Estate with Levi Strauss &
Company since 1993. He served as President of G. B. Swanson & Co., a real
estate advisory firm from 1991 to 1992. Mr. Swanson has served as Director
Emeritus of the San Francisco Chamber of Commerce since 1986 and as
Managing Director of Jones Lang Wootton U.S.A., a commercial real estate
investment company, from 1989 to 1991. At December 31, 1994, Mr. Swanson
was 50 years of age and he had been serving as a director of the Company
since 1985 and a director of the Bank since 1985.
NICHOLAS UNKOVIC................................................................
Mr. Unkovic has been a partner for the law firm of Graham & James, LLP for
more than five years. At December 31, 1994, Mr. Unkovic was 43 years of age
and he had been serving as a director of the Company since 1994.
EXECUTIVE OFFICERS AND OTHER SIGNIFICANT OFFICERS
Each executive officer is selected annually by the Board of Directors
pursuant to provisions of the bylaws of the Company and the Bank. The following
is a listing of executive officers of the Company and/or Bank, their occupation
for the previous five years, age and the length of service as an officer.
JAMES E. GILLERAN...............................................................
(See position description of Mr. Gilleran's position with the Company and
the Bank, and his background under the heading "DIRECTORS").
C. WILLIAM CRISS, JR............................................................
Mr. Criss has been Executive Vice President and Senior Credit Officer of
the Bank since August 1993 and Executive Vice President for the Bank's
Special Assets Department since 1992. At December 31, 1994, Mr. Criss was
52 years of age. Prior to serving as an officer of the Bank, Mr. Criss was
a principal of Wright Houlihan & Associates in 1992, President and Chief
Executive Officer of East West Financial Group and East West Bank, N. A.
from 1989 to 1991, and Vice President and General Manager of Chase Bank
International from 1981 to 1989.
STEPHEN V. R. SPAULDING.........................................................
Mr. Spaulding, a director of the Bank since 1994, has been the Bank's
Executive Vice President and Managing Director of Private and Business
Banking since 1993. Prior to serving as an officer of the Bank, Mr.
Spaulding, was President of Chase Manhattan Trust Company of California
from 1992 to 1993 and Senior Vice President and Manager of United States
Private Banking Division of Bank of America from 1984 to 1992. At December
31, 1994, Mr. Spaulding was 57 years of age and he had been servings as a
director of the Bank since 1994.
ITEM 11 - EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Decisions on the compensation of the Company's and the Bank's executives
are generally made by the four- member Personnel/Compensation Committee. The
members of the Personnel/Compensation Committee are members of the Board of
Directors of the Company. All decisions by the Personnel/Compensation Committee
relating to the compensation of the Company's and the Bank's executive officers
are reviewed by the Company's and the Bank's full Boards of Directors, except
for decisions about awards under certain of the Company's stock- based
compensation plans, which are made solely by the Committee in order for the
grants or awards under such plans to satisfy Rule 16b-3 under the Securities
Exchange Act of 1934, as amended. Set forth below is a report of the
Personnel/Compensation Committee addressing the Company's compensation policies
for 1994 as they affected the Chief Executive Officer of the Company and the
Bank serving at the end of 1994, and the one other
-35-
<PAGE> 38
most highly-compensated officer of the Bank at the end of 1994, and two
additional highly-compensated officers who would have qualified for disclosure
if they had not terminated employment, (collectively, the "Named Executives") as
December 31, 1994. The Named Executives compensation in 1994 is shown in the
"Executive Compensation Tables" below.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company's Personnel/Compensation Committee, which during 1994 consisted
of Mrs. Donna Miller Casey, Mr. Gilleran (Chairman and Chief Executive Officer
of the Company and the Bank), Mr. Unkovic and Mr. Sharpe, makes decisions with
respect to the compensation of executive officers.
BOARD OF DIRECTORS' FEES
The Company and the Bank pay director fees to each non-employee Director
for attendance at Board meetings and Committee meetings which are held monthly.
The fee for attendance at a Board meeting is $750 per meeting. The Chairman of
each committee receives $300 and each member receives $200 for each committee
meeting attended.
COMPENSATION PHILOSOPHY
The compensation policies adopted by the Personnel/Compensation Committee
in 1992 and approved by the Board of Directors of the Bank, and continued in
practice during 1994, were designed to provide competitive levels of
compensation, reward improvements in corporate performance, recognize
above-average individual achievements and initiative, and thereby assist the
Bank in attracting and retaining qualified employees.
The Personnel/Compensation Committee either approved or recommended to the
Board of Directors payment amounts and award levels for all executives of the
Bank including the Named Executives. With regard to compensation actions
affecting Mr. Gilleran, Chairman and Chief Executive Officer of the Company and
Bank, all of the non-employee members of the Board of Directors acted as the
approving body.
The Company and the Bank experienced significant financial losses from 1991
to 1994, and, in connection therewith, the Named Executives were required to
devote a substantial and unusual amount of time and effort in dealing with
non-performing assets, raising new capital, responding to regulatory concerns
and implementing changes in operating systems and controls. Consequently, the
use of traditional corporate performance measures such as earnings per share or
increases in book value to determine executive compensation was not considered
to be in the Company's best interests. Therefore, there was no direct
relationship in 1993 or 1994 between executive compensation and the Company's
financial performance, either as compared to the Company's prior performance or
as compared to the banking companies with which the Company competes for
executive talent. Instead, the 1993 and 1994 executive compensation programs of
the Bank were designed to provide compensation which would allow the Bank to
attract and retain talented and experienced executives necessary for management
of the Bank's turnaround program. The focus of the executive compensation
program was on base salary, although some effort was made to provide longer term
incentives through the grant of stock options.
Going forward, in addition to the philosophies described above, the
Committee will also be guided by the terms of the FDIC Order in setting
executive compensation. The FDIC Order provides that, without the prior written
approval of the FDIC, the Bank may not (a) pay a bonus to an executive officer,
or (b) provide compensation to an executive officer at a rate exceeding his or
her average rate of compensation (excluding bonuses, stock options and
profit-sharing) during the 12 calendar months preceding the months in which the
Bank first became undercapitalized.
EXECUTIVE COMPENSATION TABLES
SUMMARY OF 1992-1994 COMPENSATION. The following table sets forth the
annual compensation, long-term compensation and other compensation paid to each
of the Named Executives. Compensation is listed as of
-36-
<PAGE> 39
December 31, 1994, 1993 and 1992. Messrs. Price, Freed, and Champion, have
terminated their employment with the Bank and Company, all other positions
listed on the table are positions held by the Named Executives as of December
31, 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
===================================================================================================================================
ANNUAL COMPENSATION LONG TERM COMPENSATION
- - -----------------------------------------------------------------------------------------------------------------------------------
AWARDS
- - -----------------------------------------------------------------------------------------------------------------------------------
OTHER ALL
ANNUAL RESTRICTED OTHER
COMPEN- STOCK COMPEN
NAME AND PRINCIPAL SALARY BONUS SATION AWARD(S) OPTIONS/ -SATION
POSITION YEAR ($) ($) ($) ($)(7) SARS(#) ($) (4)
- - -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (i)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Chairman/CEO 1994 51,681 0 7,936(1) 0 313,369(6) 0
1993 0 0 0 0 0 0
James E. Gilleran 1992 0 0 0 0 0 0
- - -----------------------------------------------------------------------------------------------------------------------------------
EVP 1994 150,000 0 0 0 0 0
1993 25,096 0 17,692(1) 0 0 0
Stephen V. R. Spaulding 1992 0 0 0 0 0 0
- - -----------------------------------------------------------------------------------------------------------------------------------
EVP/CCO 1994 125,000 8,624 0 0 0 0
1993 125,000 63,097 3,000(3) 0 0 1,014
C. William Criss, Jr. 1992 77,724 0 13,560 0 0 507
- - -----------------------------------------------------------------------------------------------------------------------------------
Vice Chairman/CFO - 1994 184,708 0 0 0 125,348(5) 4,650
Former 1993 55,000 0 5,000(1) 0 0 0
Steven R. Champion 1992 0 0 0 0 0 0
- - -----------------------------------------------------------------------------------------------------------------------------------
President/COO - Former 1994 190,512 0 0 0 0 204,250
1993 178,077 0 4,180(3) 0 0 759
Rodney D. Freed 1992 0 0 0 0 0 0
- - -----------------------------------------------------------------------------------------------------------------------------------
Chairman/CEO - Former 1994 128,333 0 0 0 62,674(5) 1,886
1993 55,000 0 31,026(1) 0 0 170
Kent D. Price 1992 0 0 0 0 0 0
===================================================================================================================================
</TABLE>
(1) "Other annual compensation" consists solely of consulting fees paid for
consulting services prior to formal appointment into designated positions.
(2) Consists solely of auto allowance expense of $500 per month. All auto
allowances were eliminated as of July 1, 1993.
(3) During the 1993 fiscal year Mr. Freed's "Other annual compensation"
consisted primarily of allowances for an auto allowance at a rate of $500
per month. All auto allowances were eliminated as of July 1, 1993. Mr.
Freed was also reimbursed for moving costs related to his relocation from
Singapore.
(4) "All other compensation" consists of group term life insurance coverage and
severance expenses related to the termination of employment.
(5) These options were granted pursuant to separation agreements described
below.
(6) These options were granted pursuant to Mr. Gilleran's employment described
below.
(7) The options granted are out-of-the-money.
-37-
<PAGE> 40
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
EMPLOYMENT AGREEMENT OF MR. GILLERAN. The Company and the Bank entered
into an employment agreement with Mr. Gilleran dated October 1, 1994 which
provided, among other things, for Mr. Gilleran to receive an annual salary of at
least $250,000 per year, payable in accordance with the Bank's usual payment
practices. Mr. Gilleran's annual base salary will be increased to $300,000 upon
the conclusion of the Company's third consecutive profitable quarter, subject to
regulatory approval. In addition, the employment agreement provides for an
annual cash performance bonus of between 0% and 100% of base salary, and a
special incentive one-time bonus of $150,000 at such time that the condition of
the Company and Bank are deemed satisfactory. The employment contract expires on
September 30, 1998.
The agreement provides that the Board of Directors shall grant Mr.
Gilleran options under the 1993 Executive Stock Option plan to acquire shares of
the Company's Class A Common Stock equal to 5% of the fully-diluted shares of
Common Stock, with additional options to be granted in the future as necessary
to maintain the 5% interest. For purposes of determining the number of
fully-diluted shares, Warrants would not be counted until they become
exercisable. Effective October 1, 1994, options to acquire 313,369 shares of
Common Stock were granted to Mr. Gilleran pursuant to his employment agreement.
The exercise price of these options is $5.68 per share. The options granted to
Mr. Gilleran vest over a three-year period, with one-third vesting on the each
anniversary of the employment agreement. The exercise price of subsequent
anti-dilution options would be the then-current fair market value of the Common
shares or the price per share for shares issued to others prior to a public
offering.
Under the employment agreement, Mr. Gilleran is indemnified by the
Company and the Bank from any liability or expense arising as a result of
actions taken by the Company or the Bank, or events relating to the business of
the Company or the Bank, occurring prior to the execution of the employment
agreement. Subject to certain limitations, Mr. Gilleran is also indemnified by
the Company and the Bank from any liability or expense arising as a result of
actions taken by the Company or the Bank, or events relating to the business of
the Company or the Bank, occurring after the execution of the employment
agreement, unless such liability or expense is due to the officer's bad faith or
gross negligence.
SEPARATION AGREEMENTS WITH CERTAIN FORMER EXECUTIVE OFFICERS OF THE
BANK. During 1994 certain executive officers resigned from their employment with
the Bank. Effective September 16, 1994, Mr. Price resigned as Chairman and Chief
Executive Officer of the Bank and the Company. Effective November 1, 1994, Mr.
Champion resigned as Vice Chairman and Chief Financial Officer of the Bank and
the Company.
Separation agreements Messrs. Price and Champion provide for the
termination of prior employment agreements. In consideration for the termination
of such employment agreements, the Board of Director's granted each of Messrs.
Price and Champion options under the 1993 Executive Stock Option Plan to acquire
shares of the Company's Common Stock equal to 1% and 2%, respectively of the
fully-diluted shares of Common Stock, with additional options to be granted in
the future as necessary to maintain the 1% and 2% interest, respectively. For
purposes of determining the number of fully-diluted shares, Warrants would not
be counted until they become exercisable. As of December 31, 1994, the total
options granted to Messrs, Price and Champion are 62,674 and 125,348,
respectively. The exercise price of these options is $5.68 per share. The
options granted to Messrs. Price and Champion vest immediately. The exercise
price of subsequent anti-dilution options would be the then-current fair market
value of the Common shares or the price per share for shares issued to others
prior to a public offering.
DESCRIPTION OF BENEFIT PLANS
401(K) PROFIT SHARING PLAN. In 1986 the Company established a 401(k)
Profit Sharing Plan (the "Plan") which is intended to qualify under Sections
401(a) and 401(k) of the Internal Revenue Code. The Plan permits each
participating employee with six months of service to contribute to the Plan
through payroll deductions ("salary deferral contributions") of from 2% to 16%
of the participant's eligible compensation from the Company and its
subsidiaries, thereby deferring taxes on all or a portion of these amounts.
Under the Plan, the Company currently will match a participant's tax deferred
contributions by an amount equal to 100% of such contribution for each year,
except that the matching contribution by the Company for the participant may not
exceed 2% of the participant's eligible compensation for that year.
-38-
<PAGE> 41
The Company may also make additional contributions to the Plan in such
amounts as may be determined by the Company's Board of Directors. Any such
additional contributions are allocated among Plan participants based upon their
compensation levels. The Company's contribution vests 100% after a participant
has completed five years of participation in the Plan, with vesting of 20% per
year for each of years one through five. In addition, the Company's contribution
vests upon a participant's retirement at age 65 or upon a participant's death or
permanent disability. Participants are entitled to receive their salary deferral
contributions and vested benefits under the Plan upon termination of employment,
retirement, death or disability. Participants have the right to allocate their
salary deferral contributions among four different investment funds.
1993 EXECUTIVE STOCK OPTION PLAN. Awards under the Executive Plan will
be discretionary and will be based on the performance of the Company, the
officer's job performance, the importance of his or her position, and his or her
contribution to the organization's goals for the award period (which goals in
the short term are likely to focus more on capital raising, compliance with
regulatory requirements, and improvements in financial performance than on
financial performance comparative to other bank holding companies).
The following table shows outstanding grants made as of December 31,
1994 for the individuals and groups set forth below under the Executive Plan:
OPTIONS GRANTED UNDER THE
1993 EXECUTIVE STOCK OPTION PLAN
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CLASS A
COMMON STOCK UNDERLYING
NAME AND POSITION OPTIONS GRANTED THROUGH
----------------- 1994 (4)(5)
---------------------------
<S> <C>
James E. Gilleran (1) 313,369
Director of the Company and the Bank
Kent D. Price(3) 62,674
Director of the Company and the Bank
Stephen R. Champion(3) 125,348
Director of the Company and the Bank
Executive Officer Group 501,391
Non-Executive Officer Director Group 0
Non-Executive Officer Employee Group 0
</TABLE>
- - ---------------------
(1) The options granted effective October 1, 1994. See Employment Agreement -
Mr. Gilleran above.
(2) The options were granted in 1994 and are 100% vested.
(3) The table does not include all options to be granted for the additional
options required to be granted pursuant to the anti-dilution provisions of
the employment and/or separation agreements described above. All options
included are out-or-the-money with an exercise price of $5.68 per share.
-39-
<PAGE> 42
1993 NON-EMPLOYEE OPTION PLAN. The following table shows grants
outstanding as of December 31, 1994 for the individuals and groups set forth
below under the Directors Plan:
OPTIONS GRANTED UNDER THE
1993 NONEMPLOYEE DIRECTORS STOCK PLAN
THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CLASS A
COMMON STOCK UNDERLYING
OPTIONS GRANTED THROUGH
NAME AND POSITION DECEMBER 1994(1)
----------------- ---------------------------
<S> <C>
Donna Miller Casey 2,500
Former Director of the Company and Bank
Nicholas Unkovic --
Director of the Company
David R. Holbrooke 2,500
Former Director of the Company and Bank
Willard D. Sharpe 2,500
Director of the Company and Bank
Kent D. Price (2) --
Director of the Company
Steven R. Champion (2) --
Director of the Company and Bank
Gordon B. Swanson 2,500
Director of the Company and Bank
Executive Officer Group 0
Non-Executive Officer Director Group 10,000
Non-Executive Officer Employee Group 0
</TABLE>
- - ---------------------
(1) The options were granted effective April 1, 1994 and are currently
out-of-the-money. The options vest over a two-year period, with 50% vesting
on the expiration of one full year of service as a Nonemployee Director
following the date of the grant of such stock option, and the remaining 50%
vesting on the expiration of two full years of service as a Nonemployee
Director following the date of the grant of such option.
(2) Messrs Price and Champion are not eligible to participate under this plan.
-40-
<PAGE> 43
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth information regarding the beneficial ownership
of the Class A Common Stock by Mr. Putra Masagung and by all other shareholders
as December 31, 1994. The address of Mr. Masagung is 55 MH Thamrin, Jakarta,
Indonesia.
<TABLE>
<CAPTION>
Directors and
Mr. Putra Executive All
Masagung Officers Others
-------- ------------- ------
<S> <C> <C> <C>
Class A Common Shares 5,601,126 2,938 161,914
Percentage ownership 97.1% 0.0% 2.9%
</TABLE>
The following sets forth information regarding the beneficial ownership
of the Series B Preferred Stock as December 31, 1994.
<TABLE>
<CAPTION>
Number of Shares Percentage
of Beneficially of
Owned Class
---------------- ----------
<S> <C> <C>
Gordon Swanson 7,200 44.2%
John A. Beal 2,143 13.2
John Volckman 3,500 21.5
All directors and current executive
officers as a group 7,200 44.2
</TABLE>
The address of Mr. Beal is 101 Rock Cove Court, Folsom, California
95630 and Mr. Volckman is 127 Alta Vista, Atherton, California 94027, and the
address of Mr. Swanson for the purpose of his ownership of the Series B
Preferred stock is the principal executive office of the Company.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The Bank has had and expects to continue to have banking transactions
with many of the directors and executive officers of the Company and the Bank
(and their associates). Loans by the Bank to any director or executive officer
of the Company or any of its subsidiaries (or any associate of such persons)
have been made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, and, except as set forth in the
following paragraph, have not involved more than the normal risk of collection
or presented other unfavorable features. Loans by the Bank to any director,
executive officer or principal stockholder of the Company or any of its
subsidiaries (as such persons are defined by regulation) are subject to
limitations under California and federal law. Among other things, a loan by the
Bank to a director, executive officer, or principal stockholder of the Company
or any of its subsidiaries must be on non-preferential terms and, if all loans
to a given person exceed $25,000, such loans must be approved in advance by the
Bank's Board of Directors. The aggregate balance of such loans at December 31,
1994 was $238,000.
The Company entered into an indemnification agreement with Mr. Unkovic
and Graham & James, LLP dated December 16, 1994. The indemnification agreement
provides that Mr. Unkovic is indemnified from and against any and all
liabilities or expenses arising with respect to any action or inaction taken in
the course of his
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<PAGE> 44
duties as a director of the Company, and that Graham & James, LLP is indemnified
against any and all liabilities and expenses against Graham & James, LLP arising
by reason of Mr. Unkovic serving as a director of the Company. The
indemnification does not include legal services Mr. Unkovic or Graham & James,
LLP may render to the Company or its subsidiaries, affiliates, directors,
officers or stockholders.
Under his employment agreement, Mr. Gilleran would be indemnified by
the Company and/or the Bank from any liability or expense arising as a result of
actions taken by the Company or the Bank, or events relating to the business of
the Company or the Bank, occurring prior to the execution of the employment
agreements. See "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements" for additional information on indemnification
agreements.
The Bank entered into an indemnification agreement with Mr. Thayer
Prentice, former Chairman of the Board, President and Chief Executive Officer of
the Company and the Bank. The Bank obtained an irrevocable standby letter of
credit in the amount of $300,000 issued by Imperial Bank on December 30, 1994 on
behalf of Thayer T. Prentice as collateral for the Bank's obligations under its
indemnification agreement. The indemnification agreement expires August 31,
1997.
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<PAGE> 45
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
/s/ James E. Gilleran Chairman of the Board and May 17, 1996
- - --------------------- Chief Executive Officer ------------
James E. Gilleran (Principal Executive Officer)
/s/ Keary L. Colwell Senior Vice President May 17, 1996
- - -------------------- (Principal Accounting Officer) ------------
Keary L. Colwell
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