SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10198
THE SAN FRANCISCO COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 94-3071255
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Montgomery Street, 10th Floor
San Francisco, California 94111
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (415) 781-7810
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on
Which Registered
Class A Common Stock, $0.01 Par Value None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant on March 22, 1999, was $19,037,269
computed by reference to the higher of the bid price or the price
at the last sale of the Class A Common Stock as reported by First
Security Van Kasper, the sole market maker of such stock.
The Registrant had 31,728,782 shares of Class A Common Stock
outstanding on March 22, 1999.
PAGE
THE SAN FRANCISCO COMPANY
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENT
PART I
Page
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 6
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 6
Item 4. Submission of Matters to a Vote of Security Holders. . . 6
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters. . . . . . . . . . . . . . . . . . . . . . . . 7
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . 9
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 8. Financial Statements and Supplementary Data. . . . . . . 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures . . . . . . . . . . . . . . . 56
PART III
Item 10. Directors and Executive Officers of the Registrant . . . 56
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Item 13. Certain Relationships and Related Transactions . . . . . 56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
PAGE
PART I
ITEM 1 - BUSINESS
The Company and the Bank
The San Francisco Company (the "Company"), a Delaware
corporation, is a one-bank holding company registered under the
Bank Holding Company Act of 1956, for Bank of San Francisco (the
"Bank"), a California state chartered bank organized in 1978 whose
deposits are insured by the Federal Deposit Insurance Corporation
(the "FDIC"), subject to applicable limits. The Company was
organized in California in 1981 and reincorporated in Delaware in
1988. The Bank, which the Company acquired through a
reorganization in 1982, is the only direct subsidiary of the
Company and accounts for over 99% of the consolidated assets of the
Company. The Bank delivers its services from its headquarters
building, Bank of San Francisco Building, at 550 Montgomery Street
(at Clay Street), San Francisco, California 94111, and its phone
number is (415) 781-7810. The Bank's web-site on the Internet is
banksf.com.
The Company's Class A Common Stock, par value $0.01 per share
(the "Common Stock" or "Common Shares"), is not traded on an
exchange. The sole market maker of the Common Stock is First
Security Van Kasper. The bid price for the Common Stock as
reported by First Security Van Kasper on March 22, 1999 was $0.60
per share.
The Bank specializes in providing private banking as well as
business banking for individuals, their businesses and other
businesses, primarily in the Northern California banking market.
See "-- Private and Business Banking." In addition, the Bank
provides specialized services related to homeowners associations
(see "-- Association Bank Services"), brokerage services (see "--
Stock Option Services") and escrow services (see "--Escrow
Services").
The Bank's primary market area, Northern California, has a
highly diversified economic base, including high technology
electronic manufacturing, scientific research, real estate
construction, retail and wholesale trade and transportation. Much
of the diversity in the economic base is attributable to the
service sector, including finance, accounting, insurance,
communications, law, consulting and tourism. While many of the
Bank's loans have been and continue to be collateralized by real
estate, the Bank's deposit and lending relationships have not been
concentrated among borrowers within a specific trade, service or
industrial activity.
Private and Business Banking
Private and Business Banking combines highly personalized
service with an array of products to meet the complex needs of its
primary clients -- executives, professionals and high net worth or
high income individuals, and the private and closely held
businesses with which these individuals are associated. The Bank
has specialized in private banking since it began operations in
1979.
The Bank's marketing strategy focuses on establishing banking
relationships with privately and closely held businesses, and their
owners and operators whose financial needs require customized
banking programs. At December 31, 1998 and 1997, Private and
Business Banking customers deposits totaled approximately $41.2
million and $34.7 million, representing approximately 43.1% and
40.1% of the Bank's total deposits, respectively. At December 31,
1998 and 1997, Private and Business Banking customers loans totaled
approximately $72.2 million and $49.8 million, representing
approximately 97.6% and 96.0% of the Bank's total loans,
respectively.
Association Bank Services
Established in 1987, Association Bank Services (the "ABS")
provides deposit and financial management services to homeowner and
community associations throughout California. The Bank offers its
ABS customers deposit accounts for operating funds and reserves,
loans, assessment collection services and investment services. In
addition, the Bank offers lockbox services, courier services,
expedited deposit processing and special handling of accounts.
Deposits from homeowner and community associations are a key
component of the Bank's core deposit base. At December 31, 1998
and 1997, ABS customers' deposits totaled approximately
$19.2 million and $17.2 million, representing approximately 20.0%
and 19.9% of the Bank's total deposits, respectively. At
December 31, 1998 and 1997, ABS customers loans totaled
approximately $1.5 million and $1.6 million, representing
approximately 2.0% and 3.1% of the Bank's total loans,
respectively.
PAGE 1
The Bank also offers a certificate of deposit placement
service (the "CD Placement") designed to invest a customer's funds
in other insured financial institutions up to a maximum of $100,000
per institution (for which the Bank is paid a fee based on the
average CD Placement investments outstanding).
Although a substantial portion of the individual ABS deposit
accounts are fully insured and, therefore, could generally be
considered stable, a small number of ABS customer account managers
control significant numbers of such individual accounts, thus
concentrating control of such deposits in the discretionary
authority of a few individuals. Accordingly, a decision by several
such account managers to withdraw their business from the Bank
could have a significant impact on the Bank's core deposits. As of
December 31, 1998, no one account manager controlled more than 2%
of total deposits.
Stock Option Services
Begun in 1984, Stock Option Services provides a range of
discount brokerage services, combined with a program to facilitate
the exercise of stock options by employees of publicly held
companies.
The stock option exercise program offers employees the means
to exercise, hold or sell their option shares at a minimum cost.
In this program, the Bank makes loans to holders of stock options
of publicly traded companies for the purpose of enabling them to
exercise their options and sell all or a portion of the stock
acquired. The Bank works with stock transfer and employee benefits
officers to coordinate the payment of the option exercise price,
the provision for the payment of taxes related to the exercise of
such options, the issuance and subsequent sale of the underlying
stock and the distribution of the net sale proceeds. At
December 31, 1998 and 1997, the Bank had total stock option loans
outstanding of $253,000 and $500,000, respectively. Such amounts
can vary substantially based upon the timing of the exercise of
stock options as well as market conditions.
Historically, Stock Option Services has been a substantially
self-funding activity with associated deposit balances closely
tracking outstanding loan balances. Because Stock Option Services'
deposits are primarily non-interest bearing demand deposit
accounts, the Bank benefits from them by reducing its cost of
funds. Management believes that most of these clients are in
industries that continue to present growth opportunities.
Accordingly, stock option programs should represent a continuing
component of such clients' overall compensation programs. In
addition, the Bank is expanding its marketing efforts to diversify
its client base to increase revenue and reduce volatility. The
Bank is also marketing its discount brokerage services to those
clients presently using stock option services.
Historically, approximately 35% of Stock Option Services'
clients have generated over 90% of the fee income from stock option
transactions. These transactions accounted for 57% of total
commission revenue in 1998. These clients are the focus of Stock
Option Services' customer service activities; however, this
concentration of clients exposes the Bank to the possibility of
losing significant non-interest income if it loses some of these
clients. Total commission revenue generated by Stock Option
Services was $1.1 million, $1.4 million and $1.2 million for 1998,
1997 and 1996, respectively, representing 11.3%, 12.4%, and 16.1%
of the Company's gross revenue for the same periods, respectively.
The earnings generated by Stock Option Services is highly dependent
on the trading prices of the stock underlying the stock options of
its clients and the overall condition of the stock markets in which
they trade. Management considers the fee income produced by Stock
Option Services to be volatile, and there can be no guarantee that
income levels from this activity can be maintained at current
levels.
Escrow Services
Begun in 1989, the Corporate Escrow Services Department (the
"Escrow") provides primarily non-real estate escrow services,
including the temporary deposit and investment of funds, deposit of
securities, personal property and other assets by attorneys,
business brokers and clients for business transactions, disputes,
life care facilities, and court actions. Escrow services has
always made a modest contribution to operating profit and provided
deposits to fund other business activities. At December 31, 1998
and 1997, Escrow deposits totaled approximately $19.2 million and
$15.3 million, representing approximately 20.1% and 17.7% of the
Bank's total deposits, respectively.
PAGE 2
Trust Services
The Bank was granted trust powers in late 1989. The Bank
suspended its trust activities in 1996 because the trust activities
never achieved the size necessary to generate the revenues required
to cover direct costs. The Bank will consider the resumption of
trust activities in the future.
Financial Information Regarding the Operations of the Company
Financial information regarding the operations of the Company
and the Bank is disclosed in the Company's consolidated financial
statements.
Competition
The banking business in California, and specifically in the
market area served by the Bank, is highly competitive. The Bank
competes for loans and deposits with other commercial banks,
including some of the country's and the world's largest banks,
savings and loan associations, finance companies, money market
funds, brokerage houses, credit unions, insurance companies, and
non-financial institutions. By virtue of their larger amounts of
capital, many of the financial institutions with which the Bank
competes have significantly greater lending limits than the Bank
and perform certain functions, including corporate trust services
and international banking services, which are not presently offered
directly by the Bank (although such functions may be offered
indirectly by the Bank through correspondent institutions).
The Bank's strategy for meeting its competition has been to
concentrate on discrete segments of the market for financial
services, particularly small to medium-sized businesses and their
owners, professionals, corporate executives, affluent individuals,
and homeowner and community associations, by offering specialized
and personalized banking and brokerage services to such clients.
Competitive conditions continue to intensify as legislation is
proposed or enacted which has the effect of dissolving historical
barriers that limit participation in certain markets, increasing
the cost of doing business for banks, or affecting the competitive
balance between banks and other financial institutions.
Technological and economic factors can also be expected to have an
ongoing impact on competitive conditions. It is difficult to
predict the impact that these and other changes may have in the
future on commercial banking in general or on the business of the
Bank in particular.
Correspondent Banks
The Bank has correspondent relationships with twelve banks for
the purpose of check clearing, selling federal funds, buying and
selling investment securities, safekeeping of investment securities
and related record keeping, stock registration and stock transfer
services, and issuance of letters of credit.
Employees
At December 31, 1998, the Company and the Bank employed 56
persons, consisting of 54 full-time and 2 part-time employees.
Regulation and Supervision
Bank holding companies and banks are subject to extensive
supervision and regulation. The following summaries of certain
statutes and regulations affecting banks and bank holding companies
do not purport to be complete. Such summaries are qualified in
their entirety by reference to such statutes and regulations.
Various other legislation, including proposals to overhaul the
bank regulatory system and to limit the investments that a
depository institution may make with insured funds, is introduced
into Congress from time to time. Such legislation came close to
passage in 1998, and several such bills are presently pending. The
Company cannot determine the ultimate effect that any potential
legislation, if enacted, would have upon the financial condition or
operations of the Company and the Bank, but the general effect of
recent legislation has been to increase competition among various
types of financial institutions.
PAGE 3
On December 4, 1998, the Federal Reserve Board announced that
on November 30, 1998, Mr. Putra Masagung, the beneficial
owner of 45.5% of the Company's Common Stock and PT Gunung Agung,
the beneficial owner of 52.3% of the Company's Common Stock entered
into a Voting Trust Agreement. Mr. Masagung and PT Gunung Agung
retained their individual beneficial interest but collectively
transferred voting control of 97.8% of the Company's Common Stock
to a Trustee under the terms of a Voting Trust Agreement (the "Agreement")
effective January 4, 1999 which has been filed with the Securities and
Exchange Commission. Under the terms of the Agreement, the Trustee shall
dispose of the shares upon instructions from Mr. Masagung and PT Gunung
Agung.
Since February 11, 1999, the Company and the Bank have not
been operating under any regulatory orders or agreements.
The Company
The Company, as a bank holding company, is subject to
regulation under the U.S. Federal Bank Holding Company Act of 1956,
as amended (the "Holding Company Act"), and is registered with the
Federal Reserve Board and subject to the supervision of the Federal
Reserve Bank of San Francisco (collectively, the "FRB"). It is the
policy of the FRB that each bank holding company serve as a source
of financial and managerial strength to its subsidiary bank(s) and
conduct its operations in a safe or sound manner.
The Holding Company Act requires prior FRB approval for the
acquisition of control over another bank, and generally restricts
the Company from engaging in any business other than managing or
controlling banks or furnishing services to its subsidiaries.
Among the exceptions to such restrictions are certain activities
which, in the opinion of the FRB, are so closely related to banking
or to managing or controlling banks as to be a proper incident to
banking.
The Company and its subsidiaries are, with certain exceptions,
prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property
or provision of services. The FRB is, however, becoming
increasingly receptive to pricing discounts conditioned upon the
Bank customer purchasing bundled groups of services. In addition,
applicable federal law imposes certain restrictions on transactions
between the Bank and its affiliates. As an affiliate of the Bank,
the Company is subject, with certain exceptions, to the provisions
of federal law imposing limitations on, and requiring collateral
for, loans by the Bank to any affiliate.
The Bank
The Bank is a California state-chartered bank and is subject
to regulation, supervision and periodic examination by the
California Department of Financial Institutions (the "DFI") and the
FDIC. The Bank is not a member of the Federal Reserve System, but
is nevertheless subject to certain regulations of the FRB. The
Bank's deposits are insured by the FDIC to the maximum amount
permitted by law, which is currently $100,000 per depositor in most
cases.
The regulations of state and federal bank regulatory agencies
govern many aspects of the Bank's business and operations,
including but not limited to, the scope of its business, its
investments, its reserves against deposits, the timing of the
availability of deposited funds, the payment of dividends, and
potential expansion.
The Bank is subject to the California banking laws and to
regulation, supervision and periodic examination by the DFI. The
California banking laws, among other matters, regulate: (a) the
conduct of the banking business; (b) accounts, including types of
deposit accounts and claims made thereon; (c) loans, including
limitations on obligations to the bank by borrowers in general and
by the bank's insiders; and (d) mergers, consolidations and
conversions of banks, including changes in control of banks.
California interstate banking and branching law allows the
interstate acquisition of whole banks which have been in existence
for more than five years and authorizes expanded correspondent bank
agency relationships among affiliated and unaffiliated insured
banks.
The Federal Reserve Act and FRB regulations, some of which are
applicable to state nonmember banks under regulations of the FDIC,
place limitations and conditions on loans or other extensions of
credit to: a bank's or bank holding company's executive officers,
directors and principal shareholders ("insiders"); any company
controlled by any such insiders; or any political or campaign
committee controlled by such insiders.
PAGE 4
Effective January 1, 1999, the FDIC's rules limiting the non-
agency activities of state-chartered insured banks and their
subsidiaries to those activities permissible to national banks were
revised and liberalized. Such activities, including real estate
investment and securities activities, are subject to a variety of
notice or application procedures and general and specific safety
and soundness restrictions.
In response to various business failures in the savings and
loan and commercial banking industries, Congress enacted the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"). Among other things, FDICIA addresses prompt corrective
action by the federal bank regulatory agencies for troubled
institutions. FDICIA also places restrictions on the activities of
state-chartered institutions and on institutions failing to meet
minimum capital standards and provides enhanced enforcement
authority for the federal banking agencies.
FDICIA restricts the acceptance of brokered deposits by
insured depository institutions that are not well capitalized. It
also places restrictions on the interest rate payable on brokered
deposits and the solicitation of such deposits.
Under FDICIA, the FDIC has adopted a revised risk-based
assessment system for deposit insurance, under which depository
institutions are charged between 0 and 27 basis points for every
$100 in insured domestic deposits depending on such institution's
capital level and supervisory rating. The Bank's present
assessment is zero. The Bank is assessed a surcharge for the
Financing Corporations (the "FICO") bonds which were issued to help
fund the cost associated with the savings and loan crisis. The
Bank is presently assessed an annual FICO surcharge of
approximately 0.012% of average deposits through 1999 and 0.0243%
of average deposits from 2000 through 2017.
Compliance of the Bank and the Company with Year 2000 data
processing matters is discussed elsewhere in this document. The
Bank is monitoring the promulgation by the federal bank regulatory
agencies of "know your customer" guidelines.
Capital Adequacy Requirements
FDICIA establishes five capital categories for insured
depository institutions: (a) Well Capitalized; (b) Adequately
Capitalized; (c) Undercapitalized; (d) Significantly
Undercapitalized; and (e) Critically Undercapitalized. All insured
institutions (i.e., the Bank) are barred from making capital
distributions or paying management fees to a controlling person
(i.e., the Company) if to do so would cause the institution to fall
into any of the three undercapitalized categories.
FDICIA also provides that if a well or adequately capitalized
or undercapitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, its
capital category may be downgraded to achieve a higher level of
regulatory scrutiny and prompt corrective action.
Minimum Leverage Ratio. The FRB and the FDIC have established
a minimum leverage ratio of 3.0% Tier 1 capital to total quarterly
average assets for companies that have received the highest
composite regulatory rating (a regulatory measurement of capital,
assets, management, earnings and liquidity) and that are not
anticipating or experiencing any significant growth. All other
institutions may be required to maintain a leverage ratio of at
least 100 to 200 basis points above the 3.0% minimum.
Risk-based Capital Ratio. The FRB and the FDIC have
established regulations that require companies to maintain a
minimum ratio of qualifying total capital to risk-weighted assets
of 8.0%. The risk-based capital ratio is calculated with reference
to risk-weighted assets, including both on and off-balance sheet
exposures, which are multiplied by certain risk weights as defined
by regulation. At least one-half of the qualifying capital must be
in the form of Tier 1 capital.
In certain circumstances, the agencies which regulate
financial institutions may determine that the capital ratios for a
financial institution must be maintained at levels which are higher
than the minimum levels required by the guidelines. A financial
institution that does not achieve and maintain the required capital
levels may be issued a capital directive by the regulatory
authorities to ensure the maintenance of required capital levels.
PAGE 5
The Company and the Bank are in compliance with these capital
adequacy requirements. See "Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Capital" for a discussion regarding the Company's and Bank's
present capital condition.
Prompt Corrective Action. As noted above, FDICIA amended the
Federal Deposit Insurance Act (the "FDIA") to establish closer
monitoring of insured depository institutions and to enable prompt
corrective action by regulators when an institution begins to
experience difficulty. The general thrust of these provisions is
to impose greater and earlier scrutiny and more restrictions on
institutions as their requirements for additional capitalization
increases. Affected institutions may, for example, be required to:
sell additional capital, including voting shares; restrict
transactions with affiliates; restrict interest rates paid on
deposits; restrict asset growth or reduce total assets; terminate,
reduce or alter any risky activities; elect new directors and
install new management; cease accepting deposits from correspondent
depository institutions; or divest or liquidate certain
subsidiaries. A parent holding company of an undercapitalized bank
is expected to guarantee that the bank will comply with the bank's
capital restoration plan until the bank has been adequately
capitalized, on the average, for four (4) consecutive quarters. A
bank holding company may be required to divest itself of any
affiliate of the institution (other than another insured depository
institution) under certain conditions.
ITEM 2 - PROPERTIES
The following table sets forth certain information concerning
the Bank's sole real property lease commitment:
Rentable
Square Expiration of Renewal
Banking Offices Footage Current Lease Period(s)
550 Montgomery Street 89,000 2010 One option for an additional
San Francisco, CA 25 years
The Bank's headquarters at 550 Montgomery Street is an 89,000
square foot historically significant office building on Clay and
Montgomery Streets in San Francisco's Financial District. The
building serves as the administrative and banking headquarters of
the Company and the Bank. The Bank currently subleases or has
available for sublease 57,000 square feet.
As of December 31, 1998, the Company's premises and equipment,
net of accumulated amortization and depreciation, is comprised of
leasehold improvements totaling $5.0 million, lease interests
totaling $2.0 million, and furniture and equipment totaling
$500,000. 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, including lease extensions, or their
estimated useful lives, whichever is shorter.
ITEM 3 - LEGAL PROCEEDINGS
Litigation
Because of the nature of its business, the Company and its
subsidiaries, including the Bank, are from time-to-time a party to
legal actions. Based upon information available to the Company and
the Bank, and its review of such outstanding claims to date,
management believes the ultimate liability relating to these
actions, if any, will not have a material adverse effect on the
Company's liquidity, consolidated financial condition or results of
operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a 1998 Annual Meeting. The 1999
Annual Meeting has been set for May 19, 1999, 10:00 am, at the
Company's headquarters, 550 Montgomery Street, 11th floor, San
Francisco, California.
PAGE 6
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Common Stock is not listed on any exchange or
the National Association of Securities Dealers' Automated Quotation
System. First Security Van Kasper of San Francisco, California is
the sole market maker in the Company's Common Stock. The following
table sets forth the high and low bid prices for the Common Stock
based upon information provided by First Security Van Kasper market
from January 1997 to December 31, 1998. The last known trades of
the Common Stock occurred on December 11, 1998 for 40,000 shares at
a price of $0.35 per share.
1998 1997
Quarter High Low High Low
First $0.60 $0.45 $0.40 $0.40
Second 0.60 0.45 0.40 0.40
Third 0.60 0.45 0.40 0.40
Fourth 0.45 0.35 0.55 0.40
None of the Company's preferred stock was listed on any
exchange or traded in any other public market since 1988.
Holders
As of December 31, 1998, the number of holders of record of
the Company's Common Stock and Series B Preferred Shares was 405
and 11, respectively, which management believes is in each case
less than the number of actual beneficial owners because of the
number of shares held by known nominees.
Dividends
The Bank is subject to certain regulatory restrictions
regarding payment of dividends to the Company as set forth in the
California Financial Code.
The Company is subject to dividend restrictions under the
Delaware General Corporation Law and Federal regulations. The
Company's Series B Preferred Shares participate equally, share for
share, in cash dividends paid on the Common Shares in addition to
receiving the cash dividends to which they are entitled. The Board
of Directors declared a cash dividend on the Series B Preferred
Stock for stockholders of record on July 1, 1998 that was paid on
July 15, 1998 totaling $3.92 per share and for stockholders of
record on December 31, 1998 that was paid on February 26, 1999
totaling $0.28 per share.
PAGE 7
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated
financial data of the Company at and for the years ended December
31:
1998 1997 1996 1995 1994
(Dollars in
Thousands except
for per share data)
FINANCIAL CONDITION DATA:
Total assets $140,136 $116,617 $104,001 $114,862 $156,780
Total loans 73,980 51,924 43,762 53,208 106,452
Total securities
held-to-maturity 3,846 5,864 6,943 -- 7,859
Total securities
available-for-sale 34,235 32,669 28,348 6,536 2,211
Total deposits 95,688 86,519 91,166 105,673 147,148
Other borrowings 20,000 10,000 -- -- 4,070
Shareholders' equity 22,704 17,570 11,064 6,880 2,129
OPERATING DATA:
Total interest income $8,782 $8,026 $7,242 $10,691 $12,651
Total interest expense 3,411 2,890 3,127 4,415 4,863
Net interest income 5,371 5,136 4,115 6,276 7,788
Provision (adjustment)
for loan loses (1,627) (2,820) -- 500 3,799
Net interest income after
provision (adjustment)
for loan losses 6,998 7,956 4,115 5,776 3,989
Total non-interest income 3,891 3,502 3,327 5,014 2,135
Total non-interest exp. 6,907 7,509 6,998 10,301 39,018
Income(loss) before taxes 3,982 3,949 444 489 (32,894)
Provision (benefit) for
income taxes (1,060) (1,494) (258) 153 142
Net income (loss) $5,042 $5,443 $702 $336 $(33,036)
OTHER DATA:
Return on average assets 4.0% 5.0% 0.7% 0.3% (16.8)%
Return on average equity 26.7 45.2 7.9 6.8 (183.0)
Average equity to
average assets 15.0 11.0 8.3 3.7 9.2
Equity to assets 16.2 15.1 10.6 6.0 1.4
Interest rate spread 3.7 4.0 3.7 4.3 5.0
Net interest margin 4.7 5.1 4.4 5.0 5.1
Non-performing assets
to total assets 0.0 0.5 8.2 13.1 12.8
Average interest-earning
assets to average interest-
bearing liabilities 133.7 138.2 119.3 121.5 105.1
Non-interest expenses
to average assets 5.5 6.8 5.0 6.0 19.8
Net interest income, after
provision (adjustment)
for loan losses, to
non-interest expense 101.3 105.9 58.8 56.1 10.2
Loan charge-offs net of
(recoveries) as a percent
of average loans (0.1) (0.8) 0.6 1.4 4.4
Allowance for loan
losses as a
percent of loans 2.2 6.2 12.9 11.1 6.2
PER SHARE DATA:
Common shares
outstanding,
end of period 31,728,782 31,723,782 28,775,995 5,765,978 5,766,008
Preferred shares
outstanding,
end of period 15,869 15,869 15,869 231,291 16,291
Common Shares:
Book value per
common share $0.71 $0.55 $0.38 $0.43 $0.37
Income (loss) per
weighted average
common share
Basic 0.16 0.18 0.12 0.05 (10.73)
Diluted 0.15 0.17 0.03 0.03 (10.73)
PAGE 8
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This document contains forward-looking statements that are
subject to risks and uncertainties, including, but not limited to,
the Company's and Bank's ability to implement their respective
long-term business plan, the economy in general and the condition
of stock markets upon which the Company's stock brokerage business
and fee income is dependent, the continued services of the
Company's and Bank's key executives and managers, the real estate
market in California and other factors beyond the Company's and
Bank's control. Such risks, uncertainties and factors, including
those discussed herein, could cause actual results to differ
materially from those indicated. Readers should not place undue
reliance on forward-looking statements, which reflect management's
views only as of the date hereof. The Company and the Bank
undertake no obligation to revise these forward-looking statements
to reflect subsequent events or circumstances. Readers are also
encouraged to review the Company's publicly available filings with
the Securities and Exchange Commission.
Overview
The following discussion relates to information about the
financial condition and results of operations of the Company and
the Bank that might not otherwise be apparent from a review of the
financial statements contained under ITEM 8 - FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA. In addition to historical information,
this discussion and analysis includes certain forward-looking
statements regarding events and trends which may affect the
Company's future results. Such statements are subject to risks and
uncertainties including, but not limited to, those described in
this discussion and analysis, as well as those described in ITEM 1
- - BUSINESS section of this report that could cause actual results
to differ.
The Company recorded net income of $5.0 million for the year
ended December 31, 1998, following net income of $5.4 million in
1997 and $702,000 in 1996. The net income in 1998 and 1997 was
comprised primarily from four sources; 1) core operating earnings,
2) gain on sale of assets, 3) an adjustment for loan loss
provision, and 4) the recognition of the tax benefit of certain
deferred tax assets. The net income in 1996 resulted primarily
from the sale of problem assets.
Results of Operations - Years Ended December 31, 1998, 1997 and
1996
Net Interest Income
One of the fundamental measures of the Bank's results of
operations is net interest income. Net interest income is the
difference between the combined yield earned on interest earning
assets and the combined rate paid on interest bearing liabilities.
The following table presents the consolidated average balance
sheets of the Company, together with the total dollar amounts of
interest income and expense, and weighted average interest rates
for each of the years in the three year period ended December 31,
1998. Where possible, the average balances are calculated on a
daily average basis. When this information is not available,
average balances are calculated on a monthly basis.
PAGE 9
1998 1997 1996
(Dollars
in Thou- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
sands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets
Interest-
earning
assets:
Federal
funds and
time
deposits $21,038 $1,133 5.4% $19,914 $1,114 5.6% $22,452 $1,248 5.6%
Investment
securi-
ties 37,404 2,262 6.0 38,434 2,345 6.1 29,128 1,752 6.0
Loans,
net (1) 56,225 5,387 9.6 42,389 4,567 10.8 42,012 4,242 10.1
Total
interest-
earning
assets 114,667 8,782 7.7 100,737 8,026 8.0 93,592 7,242 7.7%
Non-interest
earning
assets 10,956 9,134 13,365
Total
assets $125,623 $109,871 $106,957
Liabilities
and Equity
Interest-
bearing
liabilities:
Interest-
bearing
deposits $75,146 2,778 3.7% $72,299 $2,798 3.9 $78,403 3,124 4.0
Other
borrow-
ings 10,644 633 6.0 575 34 6.0 38 3 7.9
Total
interest-
bearing
liabil-
ities 85,790 3,411 4.0 72,874 2,832 4.0 78,441 3,127 4.0
Series B
Preferred
Stock 111 58 52.3 -- -- --
Non-interest
bearing
lia-
bilities 20,982 24,959 19,660
Stock-
holders'
equity 18,851 11,927 8,856
Total
lia-
bilities
and
stock-
holders'
equity $125,623 $109,871 $106,957
Net
interest
income $5,371 $5,136 $4,115
Primary
interest spread 3.7% 4.0% 3.7%
Margin as a percent
of earning assets:
Interest income 7.7% 8.0% 7.7%
Interest expense 3.0 2.9 3.3
Net interest margin 4.7% 5.1% 4.4%
(1) Non-performing loans have been included in the average loan
balances. Interest income is included on non-accrual loans only to
the extent to which cash payments have been received and full
principal repayment is probable.
Net interest income is dependent on the average balances of
interest earning assets and interest bearing liabilities and the
rates earned on interest sensitive assets and the rates paid on
interest sensitive liabilities. See "Asset Liability Management"
for more discussion of the management of net interest income.
The dollar amount of interest income and interest expense
fluctuates depending on changes in the respective interest rates
and on changes in the respective amounts (volume) of the Bank's
earning assets and interest bearing liabilities. For each category
of interest earning asset and interest bearing liability,
information is provided in the following table for changes
attributable to (i) changes due to volume (change in average
balance multiplied by prior year's rate), and (ii) changes in rate
(changes in rates multiplied by prior year's average balances).
Changes attributable to the combined impact of volumes and rates
have been allocated pro-rata to each category.
PAGE 10
1998 versus 1997 1997 versus 1996
(Dollars in Thousands) Rate Volume Net Rate Volume Net
Interest-earning assets:
Federal funds and time deposits $(42) 61 19 $8 $(142) $(134)
Investment securities (21) (62) (83) 26 567 593
Loans, net (550) 1,370 820 286 39 325
Total interest-earning assets (613) 1,369 756 320 464 784
Interest-bearing liabilities:
Interest-bearing deposits (59) 39 (20) (92) (234) (326)
Other borrowings (83) 624 541 1 88 89
Total interest bearing lia-
bilities (142) 663 521 (91) (146) (237)
Change in net interest income $(471) $706 $235 $411 $610 $1,021
The Company's interest income increased during 1998 from 1997
primarily as a result of the increase in loans outstanding.
Interest income and dividends on Federal funds sold and investment
securities was $3.4 million in 1998 compared to $3.4 million in
1997 and $3.0 million in 1996. Average portfolio balances were
$58.4 million in 1998 compared to $58.3 million in 1997 and $51.6
million in 1996, and average portfolio yields were 5.8%, 5.9%, and
5.8% in 1998, 1997, 1996, respectively.
The Company's interest income increased during 1997 from 1996
primarily as a result of the increase in interest-bearing
investment securities, increase in the yield on loans from an
increase in earning loans, and a decrease in interest-bearing
liabilities.
Interest expense for 1998 was $3.4 million compared to $2.9
million for 1997 and to $3.1 million for 1996. The increase was
primarily attributable to an increase in average other borrowings
to $20.0 million at the end of 1998 from $10.0 million at the end
of 1997 and zero at the end of 1996. The average cost of deposits
and borrowings for 1998 was 4.0% as compared to 4.00% for both 1997
and 1996.
Provision (Adjustment) for Loan and Lease Losses
During 1998, 1997, and 1996, the Bank reduced the allowance
for loan and lease losses by $1.6 million, $2.8 million, and zero,
respectively. The adjustment in 1998 reduced the total allowance
for loan and lease losses as a percent of total loans to 2.2% at
the end of 1998 from 6.2% at the end of 1997. The adjustment in
1997 reduced the total allowance for loan and lease losses as a
percent of total loans to 6.2% at the end of 1997 from 12.9% at the
end of 1996. The reduction in the Company's allowance for loan and
lease losses to a level that management believes is adequate was
based on many factors that are more fully discussed under "Loans --
Allowance for Loan and Lease Losses".
Non-Interest Income
Non-interest income increased $389,000 or 11.1% in 1998 as
compared to 1997, primarily as a result of the reinstatement of a
note receivable related to a loan previously charged-off as other
income. Income from real estate rental income increased in 1998
compared to 1997 as a result of the increase in the rental of
available space in the Bank's headquarter building. In addition,
other services charges and fees increased as a result of higher
volumes transaction volumes. The net increase in non-interest
income in 1998 compared to 1997 included a decline in brokerage
commissions as a result of a decline in transaction volumes due
primarily to the decline in stock values during the second half of
1998.
Non-interest income increased $175,000 or 5.3% in 1997 as
compared to 1996, primarily as a result of an increase in stock
option and brokerage fees, other service charges and fees and other
income. Real estate rental income and gain on sale of assets were
lower in 1997 than in 1996 due primarily to lower other real estate
owned assets.
PAGE 11
The following table provides a detail of non-interest income
for the years ended December 31:
(Dollars in Thousands) 1998 1997 1996
Stock option commissions and brokerage fees $1,051 $1,416 $1,201
Real estate rental income 1,114 896 1,028
Service charges and fees 683 603 444
Other income 563 116 14
Loss on sale of investment securities, net -- (6) --
Gain on sale of other assets, net 480 477 640
Total non-interest income $3,891 $3,502 $3,327
Non-Interest Expense
For the year ended December 31, 1998, non-interest expenses
decreased $602,000, or 8.0%, from the year ended December 31, 1997.
The reduction was primarily attributed to an adjustment to the
accrual for legal related costs that reduced other operating
expenses, lower professional fees, and lower costs related to
problem assets.
For the year ended December 31, 1997, non-interest expenses
increased $511,000, or 7.3%, from the year ended December 31, 1996.
The increase was primarily attributed to higher salaries and
related benefits which was partially offset by reductions in other
costs related to credit quality, professional fees, equipment
expense, and insurance.
The following table provides a detail of non-interest expense
for the years ended December 31:
(Dollars in Thousands) 1998 1997 1996
Salaries and related benefits $4,272 $4,203 $3,252
Occupancy expense 1,142 1,192 1,165
Data processing 403 431 304
Professional fees 398 530 629
Insurance premiums 218 228 319
Equipment expense 176 198 345
FDIC insurance premiums 24 98 204
Other operating expenses 274 629 780
Total non-interest expense $6,907 $7,509 $6,998
The increase in salaries and related expenses in 1998 of
$69,000 compared to 1997 was primarily the result of an increase in
staffing levels. The increase in salaries and related expenses in
1997 of $951,000 to $4.2 million from $3.3 million in 1996 was
primarily the result of increases in incentive compensation
accruals. The incentive compensation accruals increased based on
the Company's strong financial performance in 1997. The
compensation expense included incentives costs of $960,000,
$970,000, and $17,000 for 1998, 1997 and 1996, respectively.
The Company's expenses for professional services were $398,000
in 1998 compared to $530,000 in 1997, and $629,000 in 1996. The
Company includes in professional fees the costs of legal,
accounting, and management consulting services. Professional
service expenses declined in 1998, 1997 and 1996 primarily as a
result of a lower level of professional services required to manage
problem assets, the reduction in litigation matters, and the
reduction in activities related to regulatory concerns and
recapitalization.
The decline in other operating costs of $355,000 in 1998
compared to 1997 resulted primarily from the reduction of $225,000
in an accrual for legal related costs and a reduction in costs
related to non-performing assets by $248,000 due primarily to a
write-down of certain other real estate owned (the "OREO")
properties in 1997. The decline in other operating costs of
$151,000 in 1997 resulted primarily from reductions in real estate
owned property tax expense and provisions for declines in the
market value of other real estate owned assets.
PAGE 12
Provision (Benefit) for Income Taxes
The income tax benefit was $1,060,000 for 1998 compared to
$1.5 million for 1997 and to $258,000 in 1996. The 1998 income tax
benefit was related to the Company's recognition of additional net
deferred tax asset and a federal income tax refund for taxes paid
in prior periods. In 1997, the Company recognized a net deferred
tax asset resulting in the tax benefit in the income statement of
$1.5 million. The income tax benefit in 1996 resulted from
utilizing an acceptable alternative method of calculating the
Company's Delaware franchise tax which resulted in a refund of the
1994 and 1995 franchise taxes of $270,000 and a reduction in 1996
period taxes of $141,000.
As required by SFAS No. 109, the realizability of deferred tax
assets is reevaluated and the valuation allowance is adjusted so
that the resulting level of deferred tax asset will, more likely
than not, be realized. As of December 31, 1998, the total net
deferred tax asset was $2.1 million. The resulting adjustments to
the amount of realizable deferred tax assets of $600,000 in 1998
and $1.5 million in 1997 were made based on a determination that
the Company is more likely than not able to utilize deferred tax
assets that had previously been reserved.
The Company did not have any current Federal income tax
expense in 1998, 1997 and 1996 as a result of tax operating loss
carryforwards from losses in previous years. The effective tax
rates for the years ended December 31, 1998, 1997 and 1996, were
(26.6)%, (37.8)% and (58.1)%, respectively. For each of the years
ended December 31, 1998, 1997 and 1996, the federal statutory tax
rate applicable to the Company was 34%.
As of December 31, 1998, the Company had temporary differences
and net operating loss carryforwards for federal tax purposes of
approximately $48.2 million which begin expiring in 2007, and for
California tax purposes of approximately $17.5 million, which began
expiring in 1998. As of December 31, 1998, the Company had
rehabilitation tax credit carryforwards for federal tax purposes of
approximately $213,000, which expire in 2004 and 2005, and other
tax credits of approximately $276,000 which have no expiration.
Utilization of the net operating loss carryforwards, and
rehabilitation and minimum tax credit carryforwards may be limited
on an annual basis under current tax law due to possible changes in
ownership in future years.
Financial Condition
Total Assets
The Company's total assets were $140.1 million as of December
31, 1998 an increase of $23.5 million or 20.2% compared to $116.6
million at December 31, 1997 and compared to $104.0 million at
December 31, 1996. In 1997 and 1998, management continued its
strategy to build the Bank's loan portfolio.
Liquidity
Liquidity is the Bank's ability to meet the present and future
cash needs of its clients for loans and deposit withdrawals. The
Bank's liquidity generally increases or decreases as a result of
fluctuations in the Bank's loans and deposits. The Bank maintains
liquid assets of cash and cash equivalents, such as federal funds
sold, at levels management believes are sufficient to meet the
liquidity needs of its deposit customers. At December 31, 1998,
the Company's cash and cash equivalents were $14.9 million or 15.6%
of total deposits and 81.7% of non-interest bearing deposits. At
December 31, 1997, the Company's cash and cash equivalents were
$17.0 million or 19.7% of total deposits and 86.3% of non-interest
bearing deposits.
In 1998, the Company's principal source of liquidity was
repayment of loans, loan participations and sales, maturity or sale
of investment securities, new core deposits, long and short-term
secured borrowing, and earnings. The Bank's access to some of
these sources of liquidity may be limited for various reasons
including some contractual maturities of more than two years, the
inability of borrowers to repay loans according to the contractual
terms, and limited collateral available to pledge under other
borrowing arrangements.
PAGE 13
Investment Activities
The Company adopted the Statement of Financial Accounting
Standards (the "SFAS") No. 115, "Accounting for Certain Investments
in Debt & Equity Securities" which requires that all securities be
classified, at acquisition, into one of three categories: held-to-
maturity securities, trading securities, and available-for-sale
securities. The Bank determines the classification of all
securities at the time of acquisition. In classifying securities
as being held-to-maturity, trading, or available-for-sale, the Bank
considers its collateral needs, asset/liability management
strategies, liquidity needs, interest rate sensitivity and other
factors in determining its intent and ability to hold the
securities to maturity.
Investment securities held-to-maturity may include United
States Treasury and Federal agency securities, investments in
certificates of deposit, and mortgage-backed securities. The
objectives of these investments are to increase portfolio yield,
and to provide collateral to pledge for federal, state and local
government deposits and other borrowing facilities. The
investments held-to-maturity have an average term to maturity of 19
and 31 months at December 31, 1998 and 1997, respectively, and are
carried at amortized cost. At December 31, 1998 and 1997, the
investment securities held-to-maturity portfolio includes $3.8
million and $5.9 million, respectively, in fixed rate balloon
mortgage-backed security investments.
Investment securities available-for-sale may include United
States Treasury and Federal agency securities, mutual funds,
mortgage-backed securities, and collateralized mortgage
obligations. These securities are typically used to supplement the
Bank's liquidity portfolio with the objective of increasing yield.
Investment securities available-for-sale are accounted for at fair
value. Unrealized gains and losses are recorded as a component of
accumulated other comprehensive income under shareholders' equity
and are not reflected in the current earnings of the Bank. If the
security is sold any gain or loss is recorded as a charge to
earnings and reclassified from other accumulated comprehensive
income. At December 31, 1998 and 1997, the Bank held $34.2 million
and $32.7 million as investments available-for-sale, respectively.
At December 31, 1998, other accumulated comprehensive income was
increased by $79,000, and at December 31, 1997, $16,000 was charged
against other accumulated comprehensive income to reflect the
market value adjustment net of taxes to the securities available-
for-sale.
PAGE 14
The tables below sets forth certain information regarding the
carrying value and the weighted average yields of the Bank's
investment securities portfolio by final contractual maturity at
December 31, 1998:
Available for Sale
Total
Within One to More than- Investment
One Year Five Years Five years Securities
(Dollars in Thousands)
U.S. Treasury -- $302 -- $302
Average yield -- 5.1% -- 5.1%
Agency securities -- $13,060 $8,000 $21,060
Average yield -- 5.9% 6.0% 6.0%
Mortgage-backed securities $2,360 $6,671 $3,842 $12,873
Average yield 6.7% 5.9% 5.8% 6.0%
Total $2,360 $20,033 $11,842 $34,235
Average yield 6.7% 5.9% 6.0% 6.0%
Held to Maturity
Total
One to Investment
Five Years Securities
(Dollars in Thousands)
Mortgage-backed securities $3,846 $3,846
Average yield 5.4% 5.4%
Expected maturities of mortgage-backed securities can differ
from final contractual maturities because borrowers have the right
to prepay obligations with or without prepayment penalties, and the
expected maturity of agency securities can differ from final
contractual maturity because the issuer may have the right to
prepay the obligation prior to final contractual maturity.
As of December 31, 1998 and 1997, the Bank held 19,710 and
14,986 shares, respectively of stock in the Federal Home Loan Bank
of San Francisco (the "FHLB") as a membership requirement with a
carrying and market value of $2.0 million and $1.5 million,
respectively. The FHLB stock has no term to maturity. As of
December 31, 1998 and 1997, the Company and the Bank had no
derivative financial instruments.
Loans
The Bank's primary lending activities are in commercial and
financial loans made primarily to individuals and businesses in the
nine counties surrounding the San Francisco bay area and, to some
extent, in the Sacramento metropolitan area. The Bank purchases
whole loans and enters into loan participation agreements with
other banks in Northern California. The Bank also provides
financing for the exercise of employee stock options. The Bank
offers credit ranging from $25,000 to $4.0 million depending on
loan characteristics such as type, collateral, and terms.
At December 31, 1998 and 1997, the Bank had net loans out-
standing of $72.2 million and $48.7 million, respectively, which
represented approximately 75.5% and 56.3% of the Bank's total
deposits at those dates and approximately 51.5% and 41.8% of the
total assets of the Company. During 1998, the Bank originated,
purchased and participated in loans outstanding totaling $35.0
million, compared with $24.9 million during 1997. The interest
rates charged on the Bank's loans have varied with the degree of
risk, maturity, market interest rates, funds availability, and
governmental regulations, and have been subject to competitive
pressures. Approximately 45.0% of the Bank's loans have interest
rates that either adjust quarterly, or more frequently, based on
the Bank's prime rate, the eleventh district cost of funds, or the
one-year treasury constant maturity, or mature within 90 days.
PAGE 15
At December 31, 1998, the Bank had no direct loans to foreign
borrowers. Based on the best information available at this time,
management does not believe that the uncertainties and volatility
in the Asian financial markets will have a direct negative impact
on the credit quality of the Bank's assets.
Real Estate Secured Loans The Bank's real estate mortgage
loans typically are secured by first or second deeds of trust on
either commercial or residential property, and have original
maturities of three years or more. Such loans have been non-
revolving and generally have had maturities that do not exceed ten
years. Repayment terms generally include principal amortization
over a negotiated term, with balloon principal payments due upon
maturity of the loans. The typical purpose of these loans is the
acquisition or re-financing of real property securing the loan.
The primary sources of repayment have been the properties' cash
flow in the case of commercial real estate loans and the borrowers'
cash flow in the case of residential real estate. The secondary
source of repayment is the sale of the real property securing the
loan. The Bank's real estate secured loans typically bear a
floating rate of interest based on either the prime rate, eleventh
district cost of funds, or a treasury constant maturity index. The
Bank has made and will continue to consider fixed rate loans.
Loans collateralized by real estate represent the Bank's
largest loan concentration. As of December 31, 1998 and 1997,
approximately 68.7% and 72.8%, respectively, of the Bank's total
outstanding loan portfolio was secured by real estate. The Bank
mitigates concentration risk by diversifying the type of real
estate and the geographic location of the collateral. The largest
concentration of real estate loans is collateralized by commercial
real estate which is 53.0% of total outstanding loans. The largest
concentration of commercial real estate loans by type of underlying
collateral is commercial office properties which total $15.2
million or 10.9% of total assets. The largest geographic
concentration in San Francisco totals $18.7 million, or 13.4% of
total assets. The largest real estate secured loan was
approximately 2.8% of total assets as of December 31, 1998. As of
December 31, 1998, the Bank's real estate loan portfolio consists
primarily of loans with principal amounts of between $100,000 and
$4.0 million which generally have terms of maturity of between one
and fifteen years.
Secured Commercial and Financial Loans The Bank offers a
variety of commercial and financial lending services including
revolving lines of credit, working capital loans, homeowners'
association loans, and letters of credit. In addition, the Bank
may purchase participations in agricultural and other types of
loans. These loans are typically secured by cash deposits,
accounts receivable, homeowners' association due assessments,
equipment, inventories, agricultural crop production, investments,
and securities. In underwriting commercial and financial loans,
the Bank focuses on the net worth, income, liquidity and cash flows
of the borrower or borrowers and the value of the collateral. The
Bank's commercial and financial loans typically have a floating
rate of interest based on the prime rate. The Bank's commercial
and financial loans are primarily in principal amounts of at least
$100,000 and generally have terms of one year or less.
As of December 31, 1998 and 1997, the Bank had secured
commercial and financial loans outstanding of $10.1 million and
$4.9 million constituting approximately 13.6% and 9.5% of the
Bank's total outstanding loan portfolio, respectively. As of
December 31, 1998, approximately 37.6% of the Bank's gross secured
commercial and financial loan commitments were scheduled to mature
within one year. As of December 31, 1998, the largest secured
commercial and financial loan commitment accounted for less than 2%
of the Bank's total assets.
Unsecured Loans The Bank offers a variety of unsecured loans
including commercial and financial loans and loans to individuals.
The purpose of unsecured loans includes revolving lines of credit
for personal investing or cash flow management, home or business
improvements, working capital loans, and letters of credit. In
underwriting unsecured loans, the Bank focuses on the net worth,
income, liquidity and cash flows of the borrower. The Bank's
unsecured loans typically have a floating rate of interest based on
the prime rate. The Bank's unsecured loans are primarily in prin-
cipal amounts of at least $100,000 and generally have terms of one
year or less. In addition, the Bank will extend unsecured credit
under a credit card arrangement as an accommodation for qualifying
borrowers. As of December 31, 1998, the Bank had credit card
commitments totaling $511,000 with outstanding balances of
$163,000.
As of December 31, 1998 and 1997, the Bank's unsecured loan
commitments totaled $22.7 million and $15.6 million and had
outstanding balances totaling $11.8 million and $8.6 million and
were 15.9% and 16.6%, respectively, of the Bank's total outstanding
loan portfolio. The Bank's largest unsecured loan accounted for
less than 2.0% of total assets as of December 31, 1998.
PAGE 16
Other Loans and Leases The Bank offers a variety of other
loans and leases including stock option loans and lease financing.
The stock option loans typically have a floating rate of interest
based on the prime rate and have a term of less than 30 days. See
"Stock Option Services." As of December 31, 1998 and 1997, stock
option loans totaled $253,000 and $553,000 and were 0.4% and 1.0%,
respectively, of the Bank's total loan portfolio. The lease
financing receivables totaled $893,000 at December 31, 1998.
Lending Policies and Procedures The Bank's lending policies
are established by the Bank's senior management and approved by the
Board of Directors of the Bank and its Loan, Investment and Special
Assets Committee. The Bank is required by regulation to limit its
maximum outstanding balance to any one borrower to 25% of capital
and reserves on secured loans and to 15% of capital and reserves on
unsecured loans. Secured loans are defined as loans secured by a
first deed of trust or possessory collateral. Of the $47.0 million
in loan commitments added in 1998, a total of $18.7 million were to
borrowers that each have loan commitments from the Bank of $1.0
million or more. Generally, any new or renewing loan where the
Bank's total borrower credit exposure is over $1.0 million requires
the approval of the Loan, Investment and Special Assets Committee
of the Board. All other loans where the total borrower exposure is
$1.0 million and less can be approved by executive management.
The Bank assesses the lending risks, economic conditions and
other relevant factors related to the quality of the Bank's loan
portfolio in order to identify possible credit quality risks. The
Bank has engaged a third party professional firm to perform certain
agreed upon procedures relating to credit quality and loan
classification. These credit review consultants review a sample of
loans periodically and report the results of their findings to the
Audit Committee of the Bank's Board of Directors. Results of
reviews by the credit review consultants as well as examination of
the loan portfolio by state and federal regulators are also
considered by management in determining the level of the allowance
for loan and lease losses.
The Bank may restructure loans as a result of a borrower's
inability to service the obligation under the original terms of the
loan agreement. Restructures are executed only when the Bank
expects to realize more from a restructured loan than from allowing
the loan to be foreclosed or pursuing other forms of collection.
When a borrower fails to make a required payment on a loan,
the loan is categorized as delinquent. If the delinquency is not
cured, workout procedures are generally commenced. If workout
proceedings are not successful, collection procedures, which may
include collection demands, negotiated restructures, foreclosures
and suits for collection, are initiated. In general, loans are
placed on non-accrual status after being contractually delinquent
for more than 90 days, or earlier if management believes full
collection of future principal and interest on a timely basis is
unlikely. When a loan is placed on non-accrual status, all interest
accrued but not received is charged against interest income. When
the ability to fully collect non-accrual loan principal is in
doubt, cash payments received are applied against the principal
balance of the loan until such time as full collection of the
remaining recorded balance is expected. Generally, loans with
temporarily impaired values and loans to borrowers experiencing
financial difficulties are placed on non-accrual status even though
the borrowers continue to repay the loans as scheduled. Such loans
are categorized as performing non-accrual loans and are reflected
in non-performing assets. Interest received on such loans is
recognized as interest income when received. A non-accrual loan is
restored to an accrual basis when principal and interest payments
are paid current and full payment of principal and interest is
probable. Loans that are well secured and in the process of
collection remain on accrual status.
PAGE 17
Composition of Loan and Lease Portfolio The composition of the
Bank's loan portfolio at December 31, is summarized as follows:
(Dollars in Thousands) 1998 1997 1996 1995 1994
Real estate mortgage $50,845 $37,826 $28,022 $37,049$ 71,153
Secured commercial and financial 10,054 4,912 6,229 7,379 20,906
Unsecured 11,771 8,633 7,800 7,604 12,052
Other loans and leases 1,310 553 1,711 1,176 2,341
73,980 51,924 43,762 53,208 106,452
Deferred fees, net (144) (61) (190) (180) (388)
Allowance for possible
loan and lease losses (1,625) (3,200) (5,663) (5,912) (6,576)
Total loans and leases, net $72,211 $48,663 $37,909 $47,116 $99,488
The following table presents the loan portfolio at December
31, 1998 based upon the final contractual maturity date allocated
into maturity categories. This table does not reflect anticipated
prepayment of loans.
One to After
Within Five Five
(Dollars in Thousands) One Year Years Years Total
Real estate mortgage $4,920 $15,204 $30,721 $50,845
Secured commercial and financial 3,759 6,251 43 10,054
Unsecured 8,372 2,776 623 11,771
Other 417 -- 894 1,310
Total loans $17,468 $24,231 $32,281 $73,980
Adjustable rate loans total $49.9 million, or 67.4% of total
loans, including $28.6 million with rates that adjust immediately
based on prime rate. Fixed rate loans and loans with next
adjustment dates beyond two years total $24.1 million, or 32.6% of
the Bank's total loan portfolio, have a weighted average yield of
8.7% and an average final maturity date of within 8.5 years. As of
December 31, 1998, fixed rate loans with pre-payment penalties
totaled $9.9 million. Generally, the prepayment penalty provisions
are effective for the first one to three years from the date of
origination.
There were $9.5 million in loans, or 12.8% of total loans,
that adjust at least annually based on the FHLB eleventh district
cost of funds index ("Cofi") which have a weighted average yield of
8.3% and a weighted average term to final maturity of approximately
10.3 years, as of December 31, 1998. Generally, these loans have
a weighted average annual interest rate change limit of 2.00% and
a life-time interest rate floor and cap of 6.3% and 14.6%,
respectively. The Bank also held $11.1 million in loans, or 15.0%
of total loans, that have an initial fixed term of two years and
then adjust quarterly based on the one-year treasury constant
maturity index. As of December 31, 1998, the yield on these loans
was 8.5% and the average term to final maturity was approximately
9.1 years.
Non-performing Assets
Effective January 1, 1995, the Company adopted SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" as amended by
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures". A loan is considered impaired
when, based on certain events and information, it is "probable"
that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. At December 31,
1998, the Bank had no impaired loans. At December 31, 1997, the
Company measured the impairment of all impaired loans totaling
$171,000 using the collateral value method. For the year ended
December 31, 1998 and 1997, the weighted average impaired loans
outstanding was $34,000 and $924,000, respectively. Total interest
recognized on impaired loans during 1998 was $3,000 compared to
$13,000 in 1997, and the related allowance for loan losses totaled
$26,000 at December 31, 1997.
PAGE 18
Real estate acquired through foreclosure is recorded at fair
value at the time of transfer to OREO. The Bank periodically
obtains either an appraisal or market valuation analysis on all
OREO. If the valuation analysis indicates a decline in the market
value of the property, a specific loss allowance is established.
The Bank provides a charge against current earnings for estimated
losses on foreclosed property when the carrying value of the
property exceeds its fair value net of estimated selling expenses.
Fair value is based on current market conditions, appraisals, and
estimated sales values of similar properties, net of an estimated
discount for selling and other expenses.
In 1998, the Bank reduced its non-performing asset portfolio
by $530,000, from $581,000 as of December 31, 1997 to $51,000 as of
December 31, 1998, through asset sales, and loan repayments. Based
upon information presently available, management believes that the
Bank has made sufficient provision to its allowance for possible
loan losses and specific reserves to absorb possible losses.
The table below outlines the Bank's non-performing assets as of
December 31:
(Dollars in Thousands) 1998 1997 1996 1995 1994
Non-accrual loans -- $171 $3,400 $7,511 $9,377
Other real estate owned, net $51 410 5,133 7,514 10,021
Real estate investment, net -- -- -- 236 682
Total non-performing assets $51 $581 $8,533 $15,261 $20,080
Non-performing assets as a percentage
of total loans, OREO outstanding 0.1% 1.1% 17.4% 24.7% 16.7%
Loans past due 90 days or more and accrual -- -- -- -- $ 940
Loans restructured and in compliance
with modified terms -- -- 4,109 4,126 6,317
At December 31, 1998, the Bank had no loans that were
delinquent 31 days or more. For each of the years ended December
31, 1998, 1997, and 1996, interest income foregone on restructured
loans was zero. The amount of gross interest income that would
have been collected for non-accrual loans if all such loans had
been performing in accordance with their original terms was zero,
$2,000, and $29,000, in 1998, 1997 and 1996, respectively.
Allowance for Loan and Lease Losses Generally, the Bank's
method of analyzing the adequacy of its allowance for loan and
lease losses is based on the evaluation of fair value of the
underlying collateral, known risks, trends, and other factors. The
fair value of the underlying collateral is based on current market
conditions, appraisals, and estimated sales values of similar
properties. In addition, the Bank establishes a specific loss
allowance based on the asset classification and credit quality
grade. This specific loss allowance is utilized to ensure that
allowances are allocated based on the credit quality grading to
capture inherent risks. In addition, the Bank carries an
"unallocated" allowance for loan and lease losses to provide for
losses that may occur in the future in loans that are not presently
classified, based on present economic conditions, trends, and
related uncertainties. The Bank continues to refine the allowance
methodology to ensure that all known risks, trends, and facts are
utilized in determining the adequacy of the allowance for loan and
lease losses.
Generally, the Bank charges current earnings with provisions
for estimated losses on loans receivable. However, the Bank will
record an allowance for loan and lease loss adjustment if the total
allowance for loan and lease losses exceeds the amount of estimated
losses. The provision or adjustment takes into consideration the
adequacy of the total allowance for loan and lease losses giving
due consideration to specifically identified problem loans, the
financial condition of the borrowers, the fair value of the
collateral, recourse to guarantors, and other factors. See
"Provision (Adjustment) for Loan and Lease Losses" for additional
discussion on allowance for loan and lease losses.
PAGE 19
The following table summarizes the loan and lease loss experience
of the Bank for the years ended December 31:
(Dollars in Thousands) 1998 1997 1996 1995 1994
Balance of allowance for loan and lease
losses at beginning of period $3,200 $5,663 $5,912 $6,576 $8,050
Loans charged off:
Commercial, financial and unsecured -- (5) (4) (427) (3,888)
Real estate -- (35) (642) (2,444) (2,732)
Sale of loans -- -- -- -- --
Subtotal -- (40) (646) (2,871) (6,620)
Recoveries of previous losses:
Commercial and financial -- 320 397 1,565 1,181
Real estate 52 77 -- 142 166
Net lease financing -- -- -- -- --
Subtotal -- 397 397 1,707 1,347
Net loans recovery/(charged off) 52 357 (249) (1,164) (5,273)
Provision (adjustment) for
loan and lease losses (1,627) (2,820) -- 500 3,799
Balance of allowance for loan and lease
losses at end of period 1,625 $3,200 $5,663 $5,912 $6,576
Ratio of the allowance to
total loans and leases 2.2% 6.2% 12.9% 11.1% 6.2%
Ratio of the allowance to
non-accrual loans -- 1,871.3 166.6 78.7 70.1
Ratio of net (recoveries)/charge-offs
to average loans (0.1) (0.8) 0.6 1.4 4.4
Allocation of the allowance for loan and lease losses by
collateral type at December 31 are as follows:
1998 1997 1996
(Dollars in
Thousands) Balance Percent(1) Balance Percent(1) Balance Percent(1)
Real estate mortgage $939 68.7% $1,460 72.8% $2,456 64.0%
Secured commercial
and financial 129 13.6 97 9.6 250 14.2
Unsecured 137 15.9 214 16.6 483 17.8
Other loans and leases 11 1.8 2 1.0 36 4.0
Unallocated 409 -- 1,427 -- 2,438 --
Total $1,625 100.0% $3,200 100.0% $5,663 100.00%
1995 1994
Balance Percent(1) Balance Percent(1)
Real estate mortgage $1,613 69.6% $2,322 66.9%
Secured commercial and financial 1,207 13.9 1,522 19.6
Unsecured 1,872 14.3 2,359 11.3
Other loans and leases -- 2.2 -- 2.2
Unallocated 1,220 -- 373 --
Total $5,912 100.0% $6,576 100.0%
(1) Percent refers to the percent of loans and leases in each
category to total loans.
PAGE 20
Deposits
The Bank had total deposits of $95.7 million and $86.5 million
at December 31, 1998 and 1997, respectively. As of December 31,
1998, deposits consisted of demand deposits totaling $18.2 million,
money market and savings accounts totaling $20.0 million, NOW
accounts totaling $17.8 million and time deposits totaling
$39.6 million. As of December 31, 1998, the Bank had a total of
2,234 deposit accounts consisting of 549 demand deposit accounts
with an average balance of approximately $33,000 each, 461 savings
and money market accounts with an average balance of approximately
$44,000 each, approximately 794 NOW accounts with an average
balance of approximately $22,000 each and 430 time accounts with an
average balance of approximately $92,000. The Bank's deposits and,
correspondingly, its liquidity, are largely dependent upon four
sources of funds: deposits acquired through its ABS function,
Private and Business Banking, Escrow Services, and deposits
solicited through the Bank's money desk. These sources of deposits
comprised 96.8% of the Bank's total deposits at December 31, 1998.
Certificates of deposit having a balance of at least $100,000
represented approximately 22% of the Bank's total deposits as of
December 31, 1998 compared to 18.0% as of December 31, 1997. As of
December 31, 1998, $15.7 million of the Bank's certificates of
deposit of at least $100,000 mature in 90 days or less and $2.9
million mature between 91 days and one year. The aggregate average
maturity of all of the Bank's certificates of deposit of at least
$100,000 was 3.6 months as of December 31, 1998, and the aggregate
amount of all such certificates of deposit as of December 31, 1998
was $21.2 million with a weighted average stated rate of 4.4%.
The Bank solicits money desk deposits principally from other
financial institutions and municipalities outside of the Bank's
market area. As of December 31, 1998 and 1997, the Bank had
outstanding money desk deposits of $12.3 million or 12.8% of total
Bank's total deposits and $11.7 million or 13.5% of Bank's total
deposits, respectively. During 1998, the money desk deposits
averaged $10.6 million, with a high balance of $12.7 million. As
of December 31, 1998, money desk deposits had a remaining weighted
average maturity of approximately 11 months.
The following table sets forth the maturities, as of
December 31, 1998, of the Bank's interest-bearing deposits and
other interest-bearing liabilities:
Over 3 Over More Than
3 Months Months to 6 Months 1 Year to
(Dollars in Thousands) or Less 6 Months to 1 Year 5 Years Total
Interest-bearing
liabilities:
Now accounts $17,838 -- -- -- $17,838
Money market and
savings accounts 19,998 -- -- -- 19,998
Time deposits 21,268 $4,537 $7,613 $6,197 39,615
Total interest-bearing
liabilities $59,104 $4,537 $7,613 $6,197 $77,451
Other Borrowings
The Bank has other borrowing facilities which include advances
from the FHLB and access to the discount window at the FRB. During
1998 and 1997, the Bank borrowed $20.0 million from the FHLB under
this borrowing facility. The following table sets forth the
maturities, as of December 31, 1998, of the borrowings:
Over More Than
Less than 1 Year 4 Years to
(Dollars in Thousands) 1 year to 3 Years 5 Years Total
Fixed rate borrowing -- $8,000 $5,000 $ 13,000
Adjustable rate borrowing $2,000 -- 5,000 7,000
Total interest-bearing
liabilities $2,000 $8,000 $10,000 $20,000
PAGE 21
The Bank's short term line of credit with the FRB of up to
$1.9 million is available upon the pledge of securities. The long-
term borrowing from the FHLB of $20.0 million is secured by pledged
securities and loans totaling $25.0 million. As of December 31,
1998, the Bank had $8.0 million available under its line of credit
with the FHLB. During 1998 and 1997, the Bank did not borrow at
the discount window at the Federal Reserve Bank.
Capital
Shareholders' equity totaled $22.7 million at December 31,
1998, an increase of $5.1 million from $17.6 million at December
31, 1997. The increase in equity in 1998 was primarily from
earnings of $5.0 million. During 1997, the Company issued
2,941,176 shares of Class A Common Stock in exchange for $1.0
million in capital.
The Company and the Bank are subject to general regulations
issued by the FRB, FDIC, and DFI which require maintenance of a
certain level of capital. The Company is subject to a Letter
Agreement dated April 21, 1989, with the FRB which requires that
the Company maintain a minimum leverage capital ratio of 5.5%. As
of December 31, 1998, the Company and the Bank were in compliance
with all minimum capital requirements.
The following table reflects both the Company's and the Bank's
capital ratios with respect to the minimum capital requirements in
effect as of December 31, 1998.
Minimum
Capital
Company Bank Requirement
Leverage ratio 16.3% 16.1% 4.0%
Tier 1 risk-based capital 21.6 21.4 4.0
Total risk-based capital 23.0 22.8 8.0
Year 2000 Readiness Disclosure
The Bank has adopted and is implementing a plan to identify,
assess, and address issues related to the Year 2000 problem (the
"Y2K Plan"). The Year 2000 (the "Y2K") problem is a computer
programming issue that has occurred as a result of many computer
systems being programmed to use a two digit code to identify the
year. For example, the year 1998 would be signified as "98", and,
therefore, the year 2000 may be mis-recognized as 1900. This could
result in the miscalculation of financial data and/or result in
processing errors in transactions or functions that are date
sensitive.
The following discussion of the implications of the Y2K
problem for the Bank contains numerous forward-looking statements
based on inherently uncertain information. The cost of the project
and the date on which the Y2K Plan specifies the Bank will complete
the modifications are based on several assumptions of future events
including the continued availability of internal and external
resources, third party modifications and other factors. However,
there can be no guarantee that the Y2K Plan and the Bank's
remediation efforts will be achieved and actual results could
differ. Moreover, the Y2K Plan specifies that the Company will be
able to make the necessary modifications in advance, there can be
no guarantee that failure to modify the systems would not have a
material adverse affect on the Bank. There also can be no
guarantee that the failure of other third parties to modify their
systems would not have a material adverse affect on the Company and
the Bank.
Generally, the Bank's business risks come from internal
sources such as the Bank's own computer systems and from external
sources such as borrowers whose businesses might be adversely
impacted by the Y2K problem, deposit customers whose transactions
are transmitted electronically, and other third parties such as
institutions, vendors, and governmental agencies whose computer
systems may have a direct or indirect adverse impact on the Bank or
the Bank's customers. The Bank maintains much of its computer
hardware on the premises of third party vendors, uses software
under licensing agreements with vendors, and has outsourced its
data processing requirements to outside vendors. As a result, the
Bank is highly reliant on vendors to upgrade many of the Bank's
systems to be Y2K compliant in the timeframe specified by the Y2K
Plan.
PAGE 22
The purpose of the Y2K Plan is to manage and mitigate the
business risks associated with the Y2K problem. The Y2K Plan
involves a five step process; identification, assessment,
renovation, testing, and implementation. Presently, the Bank is in
the testing phase of the process. A project team, staffed by Bank
employees, is responsible for monitoring the Y2K Plan progress
including vendor commitments, and periodically reporting such
progress to the Bank Audit and Regulatory Committee of the Board.
The Bank's internal audit function periodically performs a review
of the Y2K Plan progress.
As of December 31, 1998, the Bank has implemented mission
critical system upgrades for all of its core banking hardware and
software. Testing to the mission critical systems is expected to
be completed by March 31, 1999. The Bank has requested
certification of testing compliance from all vendors and intends to
test the compliance of all major systems. The Bank will attempt to
obtain a certification of testing compliance of all major systems
from an independent third party where possible. The Bank has sent
notification to all loan and deposit customers apprising them of
the potential problems and requesting that they assess the
compliance of their computer systems. The Bank's lending policies
have been revised to require an assessment of a borrower's risks to
the Y2K problem, and the assessment has been incorporated into the
credit review process. In addition, the Y2K Plan includes
provisions that provide for the Bank's use of manual processes, for
a limited period of time, if the Bank's systems are not
operational, and that ensure that additional liquidity is available
in the event of a limited disruption of customer cashflows.
The Y2K Plan includes a contingency plan if certain tasks are
not successfully completed by specified trigger dates. If the
Bank's mission critical systems are not compliant by March 31,
1999, the Bank will take the necessary steps to correct the
deficiency by implementing the contingency plan phase of the Y2K
Plan which includes engaging alternate vendors who are Y2K
compliant. If the Bank implements the contingency phase,
additional costs are likely to be incurred.
The cost associated with executing the Y2K Plan and completing
the Y2K modifications were estimated to be approximately $250,000,
for 1997 and 1998, including approximately $160,000 for acquired
hardware which is being amortized over its estimated useful life.
Additional costs, estimated to be a maximum of $100,000, may be
incurred in the future. The funds for these modifications are from
general working capital. These costs, exclusive of the cost of
replacement systems that are being capitalized and amortized in
accordance with the Bank's policies, are being expensed as
incurred. As of December 31, 1998, approximately $247,000 of Y2K
costs have been incurred. No significant information technology
projects have been deferred as a result of the Y2K efforts. There
can be no assurance that the cost to replace or modify the Bank's
date sensitive systems will not exceed the Bank's present estimate
or that all business risks and related exposure have been
identified.
If the Bank's date sensitive systems or the systems of those
third parties who have material business relationships with the
Bank are not Y2K compliant by January 1, 2000, the Bank's business
and results of operations may be materially and adversely affected.
The Bank could experience time delays in its daily operations and
increased processing costs due to the required shift to manual
processes, and the Bank may not be able to provide customers with
timely and pertinent information regarding their accounts which may
negatively affect customer relations and lead to the potential loss
of customers. In addition, the Bank's clients may experience
liquidity problems which may result in the Bank needing to increase
its liquidity by obtaining funds from other more expensive sources
including money desk deposits, or borrowing from the FHLB or FRB.
The Bank believes that the greatest risk for disruption to its
business may result from Y2K noncompliance of third parties that
have major business relationships with the Bank. The possible
consequences of noncompliance by third parties include, among other
things, delays in processing daily deposits and withdrawals, and an
increase in loan delinquencies from potential business failures.
These risks are inherent in the industry and not specific to the
Bank. The Bank is unable to estimate the potential financial
impact of the scenarios described above. However, the Bank
believes that its Y2K Plan should reduce any material adverse
effect that any such disruption may have.
Item 7A - Quantitative and Qualitative Disclosure About Market Risk
Market Risk Management
Market risk includes risks that arise from changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices, and other market changes that affect market sensitive
instruments. The Company's primary market rate risk is interest
rate risk. The Company does not have any significant direct risks
related to foreign currency exchange rates, commodity prices,
equity prices, or other market changes that affect market sensitive
instruments.
PAGE 23
Generally, interest rate risk occurs as a result of interest
sensitive assets and liabilities not repricing at the same time and
by the same amount. The Company's interest rate risk is a
combination of several risk factors including interest, liquidity,
price, and compliance. These risk factors are influenced by many
circumstances including changes in the economic environment and
competitive pressures.
The oversight responsibilities for the Company's interest rate
risk management is performed by the Bank's Asset Liability
Committee (the "ALCO"). The interest rate risk management policies
are approved by the Board of Directors. The Company's approach to
managing interest rate risk is to periodically measure the amount
of interest rate risk based on estimated cashflows assuming
multiple interest rate scenarios. The results of the measurement
are evaluated and alternate strategies, if needed, are implemented
to reduce the interest rate risk exposure. The strategies the
Company uses to manage interest rate risk include adjustments to
the composition of the investment securities portfolio, and new
loan and deposit product terms. The Company's policies permit the
use of off-balance sheet derivative instruments to control interest
rate risk. However, as of December 31, 1998, no such instruments
were outstanding.
Using a simulation model, the Company measures interest rate
sensitivity on a quarterly basis. The simulation model takes into
consideration the potential volatility in projected results that
can occur as the interest rate environment changes over time. This
provides a dynamic assessment of interest rate sensitivity. For
example, callable agency securities have a final maturity but also
have a call feature that would result in the possibility of a
security being repaid prior to final maturity in a declining
interest rate environment, and, due to competitive pressures, a
reduction in interest rates on deposits may not be possible without
increasing liquidity risk. These and other factors may increase or
decrease the amount of volatility in projected results.
A simplified method of measuring interest rate sensitivity is
a "gap" analysis. A gap analysis assesses the difference between
the amount of assets and the amount of liabilities which are
subject to interest rate repricing at set intervals as of a
specific date. If more assets than liabilities are interest rate
sensitive at a given time in a rising interest rate environment,
net interest income increases. In a declining interest rate
environment with the same "gap", net interest income decreases. If
more liabilities change rates than assets, the same scenarios
produce the opposite effects. Gap analysis only partially depicts
the Company's sensitivity to interest rate changes at a specific
date. Such an analysis does not fully describe the complexity of
relationships between product features and pricing, market rates
and future management of the asset and liability mix.
PAGE 24
The following table illustrates the repricing opportunities
for the Company's interest-earning assets and interest-bearing
liabilities at December 31, 1998:
Over 3 Over More Than No stated
(Dollars in 3 Months Months to 6 Months 1 Year to and/or Over
Thousands) or Less 6 Months to 1 Year 5 Years 5 Years Total
Interest-
Earning
Assets:
Investment
securities
and
certain
cash
equivalents $10,032 -- $1,328 $23,880 $13,812 $49,052
Operating
leases -- -- -- -- 2,000 2,000
Loans and
leases 34,176 $3,972 6,852 27,097 1,883 73,980
Total
interest-
earning
assets 44,208 3,972 8,180 50,977 17,695 125,032
Liabilities
and Equity:
Interest-
bearing
deposits 59,667 4,456 7,404 5,924 -- 77,451
Other
borrowings 7,000 -- -- 13,000 -- 20,000
Portion of
non-interest
bearing
liabilities
and equity -- -- -- -- 27,581 27,581
Portion of
liabilities
and equity 66,667 4,456 7,404 18,924 27,581 125,032
Interest
bearing
assets
over (under)
liabilities
and equity $(22,459) $(484) $776 $32,053 $(9,886) --
Cumulative
primary gap $(22,459)$(22,943) $(22,167) $9,886 --
Gap as a
percentage
of total
interest-
earning assets (18.0)% (18.3)% (17.7)% 7.9% 0.0%
The Company's simulation model estimates the changes in
earnings as a result of changes in interest rate sensitive assets
and liabilities which would occur as a result of an instantaneous
and sustained increase or decrease in interest rates of 200 basis
points, and the resulting effect on the Company's net interest
margin, net income and capital over a one and two year period. The
Company has established policy guidelines regarding maximum
negative variances in net interest margin of 15%, in net income of
50%, and in capital of 10% in the event of an instantaneous and
sustained increase or decrease in market rates of 200 basis points.
As of December 31, 1998, the Company's sensitivity to changes on
interest rates was within policy guidelines.
The following table presents the Company's hypothetical
changes in the Company's net interest income, net income and
capital, measured for the one-year period beginning January 1,
1999, based on the December 31, 1998 beginning balance sheet.
Change in Estimated Increase/(Decrease)in
Interest Rates Net interest income Net income Capital
(basis points) Amount Percent Amount Percent Amount Percent
+ 200 $146 0.2% $146 5.5% $(940) (3.7)%
no change - - - - - -
- 200 $(557) (8.6)% $(557) (21.0)% $(537) (2.1)%
The table above illustrates that in an increasing interest
rate environment, the Company's net interest income and earnings
would be expected to increase slightly due to an increase in yield
on loans and investments at a faster pace than the increase in the
cost of deposits. However, capital would be expected to decline
due to an estimated decline in the market value primarily related
to investment securities. In a declining interest rate
environment, the Company's net interest margin, earnings, and
capital would be expected to decline primarily as a result of net
interest income. Net interest income would decline due to lower
reinvestment yields on the accelerated maturity of certain fixed
rate callable securities, prepayment of fixed rate loans, and the
decline of interest on adjustable rate loans and investments, and
the lag in the decline of the cost of interest bearing deposits.
The simulation model includes key assumptions regarding
cashflows including projections of new and renewing loans and
deposits, prepayment assumptions for certain investment securities
and loans, and assumptions of estimated competitive pressures on
the pricing of loan and deposit products.
The simulation model does not contemplate all interest rate
scenarios or all of the actions the Company may undertake in
response to changes in market interest rates. Also, the model does
not capture the change in value for certain balance sheet assets,
which may reduce the effect of changes in interest rates. For
example, in a 2% falling rate scenario, the model will not reflect
additional interest income on certain loans that have reached
annual or life-time floors and/or have pre-payment penalties;
however, those floors and/or prepayment penalties may result in a
significant increase in value.
The projections provided herein contain estimates that are
based on certain assumption that may or may not occur, are subject
to uncertainties that could cause actual results to differ
materially, and any method of analyzing interest rate risk has
certain inherent shortcomings. For example, although certain
assets and liabilities have similar repricing characteristics, they
may react in different degrees to changes in market interest rates,
certain categories of assets and/or liabilities may precede, or lag
behind, changes in market interest rates, and the shift in the
slope of the yield curve could result in different estimates.
Also, actual rates of prepayments on loans and investments could
vary significantly from the estimates used in the projections.
Accordingly, results in the preceding tables should not be relied
upon as indicative of actual results in the event of changing
market interest rates and are not intended to represent, and should
not be construed to represent, the underlying value of the Company.
PAGE 26
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Financial Condition,
December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Operations, . . . . . . . . . . . . . . . . . 30
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income,. . . . . . . . . . . . . . . . . . . . . . . . . . 31
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows, . . . . . . . . . . . . . . . . . 32
Years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 34
page 27
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, 1998 and 1997 and the related
consolidated statements of operations, changes in shareholders'
equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of The San Francisco Company and subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted
accounting principles.
KPMG LLP
February 11, 1999
San Francisco, California
page 28
The San Francisco Company
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
(Dollars in Thousands Except Per Share Data) Notes 1998 1997
Assets:
Cash and due from banks $ 5,908 $ 2,837
Federal funds sold 9,000 14,150
Cash and cash equivalents 14,908 16,987
Investment securities held-to-maturity
(Market value: 1998-$3,851 and 1997-$5,822) 2 3,846 5,864
Investment securities available-for-sale 2 34,235 32,669
Federal Home Loan Bank stock, at par 2 1,971 1,499
Loans and leases 3 73,980 51,924
Deferred fees, net 3 (144) (61)
Allowance for loan and lease losses 4 (1,625) (3,200)
Loans, net 72,211 48,663
Other real estate owned 5 51 410
Premises and equipment, net 6 7,546 7,791
Interest receivable 748 720
Other assets 4,620 2,014
Total assets $140,136 $116,617
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 18,237 $19,691
Interest bearing deposits 77,451 66,828
Total deposits 7 95,688 86,519
Other borrowings 8 20,000 10,000
Other liabilities and interest payable 1,744 2,528
Total liabilities 117,432 99,047
Commitments and contingencies 14
Shareholders' Equity: 10
Convertible preferred stock
(par value $0.01 per share)
Series B - Authorized - 437,500 shares
Issued and outstanding - 1998 - 15,869
and 1997 - 15,869 shares 111 111
Common stock (par value $0.01 per share)
Class A - Authorized - 100,000,000 shares
Issued and outstanding - 1998 - 31,728,782
and 1997 - 31,723,782 shares 317 317
Additional paid in capital 78,816 78,814
Retained deficit (56,619) (61,656)
Accumulated other comprehensive income (loss) 79 (16)
Total shareholders' equity 22,704 17,570
Total liabilities and shareholders' equity $140,136 $116,617
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 29
The San Francisco Company
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands
Except Per Share Data) Notes 1998 1997 1996
Interest income:
Loans $5,387 $4,567 $4,242
Fed funds sold 1,133 1,103 1,248
Investments 2,172 2,311 1,714
Dividends 90 45 38
Total interest income 8,782 8,026 7,242
Interest expense:
Deposits 7 2,778 2,798 3,124
Other borrowings 633 92 3
Total interest expense 3,411 2,890 3,127
Net interest income 5,371 5,136 4,115
Adjustment for loan and
lease losses 4 (1,627) (2,820) --
Net interest income after
adjustment for loan and
lease losses 6,998 7,956 4,115
Non-interest income:
Stock option commissions and
brokerage fees 1,051 1,416 1,201
Real estate rental income 6 1,114 896 1,028
Service charges and fees 683 603 444
Other income 563 116 14
Loss on sale of
investment securities, net -- (6) --
Gain on sale of other assets, net 480 477 640
Total non-interest income 3,891 3,502 3,327
Non-interest expense:
Salaries and related benefits 4,272 4,203 3,252
Occupancy expense 6 1,142 1,192 1,165
Data processing 403 431 304
Professional fees 398 530 629
Insurance premiums 218 228 319
Equipment expense 176 198 345
FDIC insurance premiums 24 98 204
Other operating expenses 274 629 780
Total non-interest expense 6,907 7,509 6,998
Income before income taxes 3,982 3,949 444
Benefit for income taxes 9 (1,060) (1,494) (258)
Net Income $5,042 $5,443 $702
Income per share:
Basic:
Weighted average shares outstanding 31,727,138 30,393,679 5,829,035
Net income $0.16 $0.18 $0.12
Diluted:
Weighted average shares outstanding 33,062,713 30,644,487 23,773,101
Net income $0.15 $0.17 $0.03
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 30
The San Francisco Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income
Years Ended December 31, 1998, 1997 and 1996
(Unaudited)
Accum-
ulated
(Dollars in Other
Thousands) Addit- Compre- Total
ional Compre- Retained hensive Share-
Preferred Common Paid-in hensive Earnings Income/ holders'
Stock Stock Capital Income (Deficit) (Loss) Equity
Balances at
January 1, 1996 $4,414 $58 $70,168 $(67,801) $41 $6,880
Net proceeds on
sale of stock 3,500 -- -- -- -- 3,500
Conversion of
preferred stock
to Common Stock (7,803) 230 7,573 -- -- --
Other -- -- 100 -- -- 100
Other comprehensive
loss, net of tax
Net unrealized loss
arising during
the period $(118) -- (118) (118)
Other comprehensive
loss (118)
Net income 702 702 -- 702
Comprehensive income $584
Balances at
December 31, 1996 111 288 77,841 (67,099) (77) 11,064
Net proceeds from
the sale of stock -- 29 971 -- -- 1,000
Net proceeds from
the exercise of
stock options -- -- 2 -- -- 2
Other comprehensive
income, net of tax
Unrealized holding
gains arising during
the period, net
Plus: reclassification
adjustment for losses
included in net income $6
Net unrealized losses 55
Other comprehensive loss 61 -- 61 61
Net income 5,443 5,443 -- 5,443
Comprehensive income $5,504
Balances at
December 31, 1997 111 317 78,814 (61,656) (16) 17,570
Net proceeds from
the exercise of
stock options -- -- 2 -- -- 2
Dividend on
Preferred Stock -- -- -- (5) -- (5)
Other comprehensive
income, net of tax
Net unrealized gains $95 -- 95 95
Other compre-
hensive income 95
Net income 5,042 5,042 -- 5,042
Comprehensive income $5,137
Balances at
December 31, 1998 $111 $317 $78,816 $(56,619) $79 $22,704
See accompanying notes to unaudited consolidated financial
statements.
PAGE 31
The San Francisco Company
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in Thousands) 1998 1997 1996
Cash Flows from Operating Activities:
Net income $5,042 $5,443 $702
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Adjustment for loan losses (1,627) (2,820) --
Deferred income tax benefit (600) (1,500) --
Depreciation and amortization expense 533 535 671
Net gain on sale of real estate
owned and other assets (480) (477) (643)
Provision for other real estate
owned and real estate investment -- 182 --
Loss on sale of investment
securities available for sale -- 6 --
(Increase) decrease in interest
receivable and other assets (34) 79 12
(Decrease) increase in other
liabilities and interest payable (726) 757 (438)
Increase (decrease) in deferred loan fees 83 (129) 10
Net cash flows provided by operating activities 2,191 2,076 314
Cash Flows from Investing Activities:
Purchase of Federal Home Loan Bank stock, net (472) (829) --
Proceeds from maturities of investment
securities held-to-maturity 2,018 1,079 865
Purchase of investment securities held-to-maturity -- -- (7,846)
Proceeds from sales of investment
securities available-for sale -- 9,120 --
Purchase of investment securities
available-for-sale (32,562) (18,600) (29,321)
Proceeds from maturities of
investment securities available-for-sale 31,091 5,214 7,390
Capital expenditures for real estate owned -- 28 --
Net (increase) decrease in loans (22,056) (8,162) 7,422
Recoveries of loans previously charged off 52 397 397
Purchases of premises and equipment (288) (267) (41)
Purchase of equipment under operating lease (2,000) -- --
Proceeds from sales of real estate
owned and investment, and other assets 839 4,952 4,639
Net cash used in investing activities (19,378) (7,068) (16,495)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits 9,169 (4,647) (14,507)
Net increase in other borrowings 10,000 10,000 --
Cash dividend on Series B Preferred stock (63) -- --
Net proceeds from sale of stock 2 1,000 3,500
Net cash provided by (used in) financing activities 19,108 6,353 (11,007)
(Decrease) increase in cash and cash equivalents (2,079) 1,361 (27,188)
Cash and cash equivalents at beginning of year 16,987 15,626 42,814
Cash and cash equivalents at end of year $14,908 $16,987 $15,626
The accompanying notes are an integral part of the consolidated
financial statements. (continued)
PAGE 32
The San Francisco Company
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
(continued)
(Dollars in Thousands) 1998 1997 1996
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $3,386 $2,811 $3,167
Income taxes 21 6 5
Supplemental Schedule of Noncash Investing and Financing
Activities:
Net transfer of loans to other real estate owned -- -- 1,378
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 33
The San Francisco Company
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Note 1: Statement of Accounting Policies
The accounting and reporting policies of The San Francisco
Company (the "Company") and its subsidiaries are in accordance with
generally accepted accounting principles and practices within the
banking industry.
Organization
The 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, and in July, 1988, the Company reincorporated
in Delaware. Bank of San Francisco (the "Bank"), a state chartered
bank, was organized as a California banking corporation in 1978 and
became a wholly owned subsidiary of the Company through a
reorganization in 1982. The Bank specializes in providing private
banking and business banking for such professional individuals,
their business and other business primarily in the Northern
California banking market. The Bank's wholly owned subsidiary,
Bank of San Francisco Realty Investors (the "BSFRI"), invested in
real estate investment properties from 1985 to 1996. During 1996,
BSFRI disposed of all of its real estate investment properties.
Principles of Consolidation
The accompanying financial statements include the accounts of
the Company, the Bank, and the Bank's wholly owned subsidiary,
BSFRI. BSFRI is no longer active in real estate investment
activities. All material intercompany transactions have been
eliminated in consolidation.
Cash and Cash Equivalents and Statements of Cash Flows
Cash equivalents are defined as short-term, highly liquid
investments both readily convertible to known amounts of cash and
so near maturity that there is insignificant risk of change in
value because of changes in interest rates. Generally, only
investments with maturities of three months or less at the time of
purchase qualify as cash equivalents. Cash and cash equivalents
include cash and due from banks, time deposits with other financial
institutions, and Federal funds sold.
The Bank is required to maintain non-interest bearing cash
reserves equal to a percentage of certain deposits. In 1998 and
1997, the average reserve balances outstanding were $879,000 and
$1.0 million, respectively. Generally, the Bank does not maintain
compensating balance arrangements.
Investment Securities
The Company classifies its investment securities into one of
two categories: held-to-maturity 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 losses included as a component of accumulated other
comprehensive income under shareholders' equity.
Investment securities include debt securities and Federal Home
Loan Bank (the "FHLB") Stock. Any discounts or premiums are
accreted or amortized to income over the expected term of the
investment considering prepayment assumptions, if applicable.
Discounts or premiums are adjusted periodically to reflect actual
prepayment experience. The gain or loss on all investment
securities sold is determined based on the specific identification
method. The estimated fair value is based on quoted market prices
and/or third party dealer quotes. FHLB stock is recorded at cost
and is redeemable at par value.
PAGE 34
Loans and Leases
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 loan is
well-secured and in the process of collection. When the ability to
fully collect non-accrual loan principal is in doubt, cash payments
received are applied against the principal balance of the loan
until such time as full collection of the remaining recorded
balance is expected. Generally, loans with temporarily impaired
values and loans to borrowers experiencing financial difficulties
are placed on non-accrual status even though the borrowers continue
to repay the loans as scheduled. Interest received on such loans
is recognized as interest income when received. A non-accrual loan
is restored to an accrual basis when principal and interest
payments are being paid currently and full payment of principal and
interest is probable.
Lease financing receivables, net of unearned income, are
included in loans. Unearned income related to lease financing
receivables is 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 and Lease Losses
Generally, the Bank charges current earnings with provisions
for estimated losses on loans receivable. However, the Bank will
record an allowance for loan and lease loss adjustment if the total
allowance for loan and lease losses exceeds the amount of estimated
losses. The provision or adjustment takes into consideration the
adequacy of the total allowance for loan and lease losses giving
due consideration to specifically identified problem loans, the
financial condition of the borrowers, the fair value of the
collateral, recourse to guarantors, and other factors. At December
31, 1998 and 1997, the Company reduced the allowance for loan and
lease losses to a level that management believes adequately
reflects the credit risks in the loan and lease portfolio.
The allowance for loan and lease losses takes into
consideration numerous factors including the financial condition of
the borrowers, the fair value of the collateral prior to the
anticipated date of sale, collateral concentrations and past loss
experience. These allowances are subjective and may be adjusted in
the future depending on economic conditions. In addition,
regulatory examiners may require the Company to provide additional
allowances based on their judgements of the information regarding
problem loans and credit risks available to them at the time of
their examinations.
Losses are recognized as charges to the allowance when the
loan or a portion of the loan is considered uncollectible or at the
time of foreclosure. Recoveries on loans receivable previously
charged off are credited to allowance for loan and lease losses.
PAGE 35
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,
including lease extensions, or their estimated useful lives,
whichever is shorter.
Other Real Estate Owned
Other real estate owned (the "OREO") includes loans receivable
that have been repossessed in settlement of debt (foreclosures).
At the date of transfer, OREO is recorded at fair value net of
estimated selling costs.
The Company provides a charge against current earnings for
estimated losses on foreclosed property when the carrying value of
the property exceeds its fair value net of estimated selling
expenses. The Bank obtains an appraisal or market valuation
analysis on all other real estate owned. 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.
Impairment of Long-lived Assets
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (the "SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes indicate that
the carrying value of an asset may not be recoverable.
Recoverability of long-lived assets is measured by a comparison of
the carrying value of an asset to future net cash flows expected to
be generated by that asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceed the fair value of
the assets.
As of December 31, 1998, the Company determined that no events
or changes occurred during 1998 that would indicate that the
carrying value of any long-lived assets may not be recoverable.
Adoption of this statement did not have any impact on the Company's
financial position, results of operations or liquidity.
Other Assets
Other assets included equipment owned by the Bank and deferred
tax assets discussed below. The equipment is leased to a third
party under an operating lease agreement which is stated at cost
net of accumulated depreciation. Depreciation is computed using a
straight line method over five (5) years. Lease payments are
recognized as other income net of depreciation expense.
Income Taxes
The Company uses the asset and liability method to account for
income taxes. Under such method, 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.
A valuation allowance is established to the extent that it is
not more likely than not that the benefits associated with the
deferred tax assets will be realized.
PAGE 36
Stock-based Compensation
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 permits a
company to choose either a new fair value based method of
accounting for its stock-based compensation (stock options) or the
current Accounting Principles Board (the "APB") Opinion No. 25
intrinsic value based method of accounting for its stock-based
compensation. SFAS No. 123 requires pro-forma disclosures of net
income and earnings per share computed as if the fair value based
method had been applied in financial statements of companies that
continue to follow APB No. 25. The Company has elected to use the
current APB No. 25 intrinsic value based method of accounting for
its stock-based compensation and to disclose its stock-based
compensation in accordance with SFAS No. 123.
Non-Interest Income
Fees for other customer services represent fees earned for the
brokerage of certificates of deposit and escrow services, 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.
Earnings per Share (the "EPS")
The Company has adopted SFAS No. 128, "Earnings Per Share,"
effective with these financial statements and has applied it to all
prior periods. SFAS No. 128 establishes simplified standards for
computing and presenting EPS, and replaces the presentation of
primary EPS with "basic EPS" and modifies the fully diluted EPS
calculation which is designated diluted EPS. It also requires a
dual presentation of basic EPS and diluted EPS on the face of the
income statement, and requires disclosure of the calculation of
basic EPS compared to diluted EPS in the footnotes to the financial
statements.
Basic EPS is calculated dividing net income by the weighted
average number of common shares outstanding. The dilutive EPS is
calculated giving effect to all potentially dilutive common shares,
such as certain stock options, that were outstanding during the
period.
PAGE 37
The following tables present a reconciliation of the amounts
used in calculating basic and diluted EPS for each of the periods
shown.
(dollars in thousands except Per-share amounts)
Per-share
1998 Income Shares amount
Basic EPS $5,034 31,727,138 $0.16
Effect of dilutive securities:
Series B Preferred Stock 8 793
Stock options -- 1,334,781
Diluted EPS $5,042 33,062,713 $0.15
Per-share
1997 Income Shares amount
Basic EPS $5,443 30,393,679 $0.18
Effect of dilutive securities:
Series B Preferred Stock 58 793
Stock options -- 250,015
Diluted EPS $5,501 30,644,487 $0.17
Per-share
1996 Income Shares amount
Basic EPS $702 5,829,035 $0.12
Effect of dilutive securities:
Series D Preferred Stock -- 17,944,066
Stock options -- --
Diluted EPS $702 23,773,101 $0.03
Use of Estimates
The preparation of these financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of recognized and contingent assets and liabilities at the date of
the financial statements and the reporting amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Recent Accounting Pronouncements
In October 1998, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise, an amendment of FASB
Statement No. 65". This statement is to conform the subsequent
accounting for securities retained after the securitization of
mortgage loans by mortgage banking enterprises with that of non-
mortgage banking enterprises. This statement is effective for the
first quarter beginning after December 15, 1998. As of December
31, 1998, the Company did not have any mortgage-backed securities
retained after the securitization of mortgage loans held for sale.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which standardizes
the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring
that an entity recognize those items as assets or liabilities in
the statement of financial position and measure them at fair value.
This statement is effective for all quarters of fiscal years
beginning after June 15, 1999. As of December 31, 1998, the
Company did not have any derivative instruments or engage in
hedging activities.
PAGE 38
In February 1998, the FASB issued SFAS No. 132, "Accounting
for Pensions and Other Post- Retirement Benefit Plans", which
revises and standardizes the disclosure requirements for pension
and other post retirement benefit plans. The Company does not have
any pension or post retirement benefit plans that require
disclosure in accordance with SFAS No. 132.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information", which requires
that a public company report financial and descriptive information
about its reportable operating segments on the basis that is used
internally for evaluating segment performance and deciding how to
allocate resources to segments. This statement is effective for
year-end 1998 financial statements. The Company evaluated its
business activities in accordance with the provisions of SFAS No.
131 and determined that its operating segments have similar
economic characteristics such as products and services, production
process, customers, methods used to distribute products and
services, and regulatory environment resulting in their
aggregation.
Regulatory
On December 4, 1998, the Federal Reserve Board announced that
on November 30, 1998, Mr. Putra Masagung, the beneficial
owner of 45.5% of the Company's Common Stock and PT Gunung Agung,
the beneficial owner of 52.3% of the Company's Common Stock entered
into a Voting Trust Agreement. Mr. Masagung and PT Gunung Agung
retained their individual beneficial interest but collectively
transferred voting control of 97.8% of the Company's Common Stock
to a Trustee under the terms of a Voting Trust Agreement ("the agreement")
effective January 4, 1999 which has been filed with the Securities and
Exchange Commission. Under the terms of the Agreement, the Trustee shall
dispose of the shares upon instructions from Mr. Masagung and PT Gunung
Agung.
As of February 11, 1999, the Company and the Bank were not
operating under any regulatory orders.
Reclassifications
Certain reclassifications have been made in the prior years'
consolidated financial statements to conform to the current year
presentation.
Note 2: Investment Securities
The amortized cost and estimated market values of investment
securities held-to-maturity at December 31 are as follows:
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
1998:
Mortgage-backed securities $3,846 $6$ (1) $3,851
Total $3,846 $6$ (1) $3,851
1997:
Mortgage-backed securities $5,864 -- $(42) $5,822
Total $5,864 -- $(42) $5,822
PAGE 39
The amortized cost and estimated market values of investment
securities available-for-sale at December 31 are as follows:
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
1998:
Fixed rate mortgage-
backed securities $12,810 $67 $(4) $12,873
U.S. Treasury and
agency securities 21,346 26 (10) 21,362
Total $34,156 $93 $(14) $34,235
1997:
Fixed rate mortgage-
backed securities $7,133 $7 $(17) $7,123
U.S. Treasury and
agency securities 25,552 26 (32) 25,546
Total $32,685 $33 $(49) $32,669
For 1998 and 1997, the Company included a net unrealized gain
of $79,000 and a net unrealized loss of $16,000, respectively, as
a component of accumulated other comprehensive income under
shareholders' equity. The Company recorded a loss of $6,000 on
sale of securities in 1997 and no gains or losses on sale of
investment securities during 1998.
As of December 31, 1998 and 1997, the Bank's investment in
FHLB stock totaled $2.0 million and $1.5 million and is stated at
par.
The amortized cost and estimated market value of securities at
December 31, 1998 by contractual final maturity, are shown below:
Securities Available Securities
for Sale Held to Maturity
Amortized Estimated Amortized Estimated
(Dollars in Thousands) Cost Market Value Cost Market Value
1 to 5 years $13,346 $13,362 -- --
More than 5 years 8,000 8,000 -- --
Subtotal 21,346 21,362 -- --
Mortgage-backed securities 12,810 12,873 $3,846 $3,851
Total $34,156 $34,235 $3,846 $3,851
The average yield on investments securities was 6.0% and 6.1%
during 1998 and 1997, respectively. The U.S. Treasury and agency
securities held by the Company had effective maturities of less
than three years. Expected maturities of mortgage-backed
securities can differ from contractual maturities because borrowers
have the right to prepay obligations with or without prepayment
penalties. Factors such as prepayments and interest rates may
affect the yield and carrying value of mortgage-backed and callable
agency securities. As of December 31, 1998 and 1997, the Company
had no derivative financial instruments.
At December 31, 1998 and 1997, $600,000 and $1.6 million,
respectively, of securities were pledged as collateral for
treasury, tax, loan deposits, public agency, bankruptcy and trust
deposits. At December 31, 1998, $23.7 million of investment
securities and $1.3 million of loans were pledged as collateral for
the $20.0 million FHLB borrowing. At December 31, 1998 and 1997,
the Company had no securities sold under agreements to repurchase.
At December 31, 1998, the Bank had an unsecured $1.0 million
letter of credit from an independent third party bank for the
purpose of issuing international trade finance letters of credit on
behalf of the Bank's clients.
PAGE 40
Note 3: Loans and Leases
The Bank's loan and lease portfolio at December 31 is
summarized as follows:
(Dollars in Thousands) 1998 1997
Real estate mortgage $50,845 $37,826
Secured commercial and financial 10,054 4,912
Unsecured 11,771 8,633
Other loans and leases 1,310 553
Total loans and leases 73,980 51,924
Deferred fees (144) (61)
Allowance for loan and lease losses (1,625) (3,200)
Total loans and leases, net $72,211 $48,663
At December 31, 1998 and 1997, non-accrual loans totaled zero
and $171,000, respectively, and there were no loans past due 90
days or more and still accruing. For the years ended December 31,
1998, 1997 and 1996 interest income foregone on non-accrual loans
was zero, $2,000, and $29,000, respectively. Restructured loans
totaled zero at December 31, 1998 and 1997, respectively. For the
years ended December 31, 1998, 1997 and 1996, no interest income
was foregone on restructured.
Effective January 1, 1995, the Company adopted SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" as amended by
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures". In accordance with SFAS No.
114, a loan is considered impaired when, based on certain events
and information, it is "probable" that a creditor will be unable to
collect all amounts due according to the contractual terms of the
loan agreement. At December 31, 1998, there were no impaired loans
outstanding. At December 31, 1997, the Company measured the
impairment of all impaired loans, totaling $171,000 using the
collateral value method. For the year ended December 31, 1998 and
1997, the weighted average impaired loans outstanding was $34,000
and $924,000, respectively. Total interest income recognized on
impaired loans during 1998 and 1997 was $3,000 and $13,000,
respectively. At December 31, 1997, the portion of the allowance
for loan losses assigned to impaired loans totaled $26,000.
The Company's business activities are with clients in Northern
California primarily the greater San Francisco Bay Area. As of
December 31, 1998, the Company had $50.8 million in loans secured
by real estate located in Northern California including 36.9%
located in San Francisco. The primary source of repayment of real
estate loans is the borrower's or property's debt service capacity
while the secondary source of repayment is the underlying real
estate collateral. As of December 31, 1998, the Company had $22.7
million in commitments on unsecured loans of which 51.8% were
outstanding. The primary source of repayment on the unsecured
loans is the borrowers net worth and cash flow.
Note 4. Allowance for Loan and Lease Losses
Changes in the Company's allowance for loan and lease losses
for the years ended December 31 were as follows:
(Dollars in Thousands) 1998 1997 1996
Balances at beginning of the year $3,200 $5,663 $5,912
Adjustment for loan and lease losses (1,627) (2,820) --
Loans charged off -- (40) (646)
Recoveries of loans charged off 52 397 397
Balances at end of the year $1,625 $3,200 $5,663
PAGE 41
Note 5: Other Real Estate Owned
Other real estate owned at December 31 consist of the
following:
(Dollars in Thousands) 1998 1997
Real Estate:
Residential development $217 $3,652
Commercial development -- --
Raw land -- --
Subtotal 217 3,652
Allowance for losses (166) (3,242)
Total $51 $410
In 1998, the Company sold OREO that had an original book value
of $3.4 million and a net book value, at December 31, 1997,
totaling $3.1 million. In 1997, the Company sold OREO that had an
original book value of $10.6 million and a net book value, at
December 31, 1996, totaling $4.9 million. In 1998 and 1997, the
Company recorded a net gains on sale totaling $480,000 and
$460,000, respectively.
The following table summarizes the changes in the allowance
for losses related to OREO for the periods shown:
(Dollars in Thousands) 1998 1997 1996
Balance of allowance for losses - beginning $3,242 $9,111 $11,991
Charge-offs (3,076) (6,051) (2,880)
Provision -- 182 --
Balance of allowance for losses - ending $166 $3,242 $9,111
Based upon information presently available, management
believes that the Bank has made sufficient provision to its
allowance for possible loan losses and specific reserves to absorb
possible losses that might result from the Bank's strategy to
divest the OREO.
Note 6: Premises and Equipment, net
Premises and equipment, net, at December 31 consist of the
following:
(Dollars in Thousands) 1998 1997
Leasehold $3,616 $3,701
Leasehold improvements 8,700 8,646
Furniture and equipment 1,747 1,541
Subtotal 14,063 13,888
Less: Accumulated depreciation and amortization (6,517) (6,097)
Total 7,546 $7,791
The amount of depreciation and amortization included in
non-interest expense was $533,000, $535,000, and $671,000 in 1998,
1997 and 1996, respectively. Total rental and other occupancy
expenses net of sublease income for the Company's premises were
$154,000, $326,000 and $288,000 in 1998, 1997 and 1996.
PAGE 42
At December 31, 1998, the approximate future minimum rental
payments under a non-cancelable operating lease, with a remaining
term of twelve years, for the Company's premise are as follows:
(Dollars in Thousands) Amount
1999 $134
2000 134
2001 134
2002 134
2003 134
Thereafter 916
Total $1,586
The lease payment is fixed until the expiration of the lease
on October 31, 2010. During 1998, 1997 and 1996, the Company
received $1,114,000, $864,000 and $877,000 of sublease income,
respectively. The total future minimum rent payments to be
received under noncancellable operating subleases over the next
five years aggregate $3.7 million. None of the noncancellable
operating subleases have a remaining term of more than five years.
These payments are not reflected in the above table.
Note 7: Deposits
Deposit balances and average interest rates paid by the Bank
at December 31 are as follows:
1998 1997
Average Average
(Dollars in Thousands) Balance Rate Balance Rate
Demand deposit accounts $18,237 0.0% $19,691 0.0%
Money market and
savings accounts 19,998 1.9 16,040 2.0
NOW accounts 17,838 2.2 15,986 2.3
Time accounts 39,615 4.8 34,802 5.4
Total $95,688 2.8% $86,519 2.9%
Total deposit balances averaged $94.0 million and $95.0
million during 1998 and 1997, respectively, with average interest
rates of 2.8% and 2.9%, respectively. The weighted average stated
rates on deposits as of December 31, 1998 and 1997 were 2.8% and
2.9%, respectively.
Domestic time deposits in amounts of $100,000 or more by time
remaining to maturity at December 31 are as follows:
(Dollars in Thousands) 1998 1997
Three months or less 15,774 $10,026
Three months to six months 953 2,925
Six months to one year 2,015 2,062
Between one and two years 2,500 605
Total $21,242 $15,618
Interest expense on time deposits in amounts of $100,000 or
more was $809,000, $589,000 and $304,000 in 1998, 1997, and 1996,
respectively. Time deposit accounts in amounts of $100,000 or more
averaged $16.7 million and $12.1 million during 1998 and 1997,
respectively, with weighted average rates of 4.8% and 4.9%,
respectively. The weighted average stated interest rate on such
deposits at December 31, 1998 and 1997 was 4.4% and 5.2%,
respectively.
PAGE 43
The Company had no brokered deposits as of December 31, 1998
and 1997, and money desk deposits totaled $12.3 million and $11.7
million at December 31, 1998 and 1997, respectively.
Note 8: Other Borrowings
Other borrowings at December 31 are as follows:
Maximum
Balance Stated Average Average Balance
(Dollars in Thousands) Outstanding Rate Balance Rate Outstanding
1998:
Other borrowings FHLB:
Long-term $18,000 5.6% $10,545 6.0% $18,000
Short-term 2,000 5.1 99 5.1 2,000
Total $20,000 5.5% $10,644 6.0% $20,000
1997:
Other borrowings FHLB:
Long-term $10,000 6.0% $575 6.0% $10,000
Total $10,000 6.0% $575 6.0% $10,000
The following table sets forth the maturities, as of December
31, 1998, of the borrowings:
Over More Than
Less than 1 Year 4 Years to
(Dollars in Thousands) 1 Year to 3 Years 5 Years Total
Fixed rate borrowing -- $8,000 $5,000 $ 13,000
Adjustable rate borrowing $2,000 -- 5,000 7,000
Total other borrowings $2,000 $8,000 $10,000 $20,000
The Bank has a credit facility available with the FHLB for up
to 20% to total assets, or $28.0 million as of December 31, 1998.
At December 31, 1998 and 1997, $25.0 million and $14.8 million of
loans and securities were pledged as collateral against other
borrowings. The Bank is required to hold FHLB stock as a condition
for maintaining its membership in the FHLB.
The Bank has access to the discount window at the Federal
Reserve Bank (the "FRB") for a total borrowing facility of $1.9
million upon the pledge of securities. At December 31, 1998, no
securities are pledged as collateral for the FRB facility.
PAGE 44
Note 9: Income Taxes
The (benefit) provision for income taxes consists of:
(Dollars in Thousands) 1998 1997 1996
Current:
Federal $(472) -- --
State $12 $6 $(258)
Total current (460) 6 (258)
Deferred:
Federal (680) (1,065) --
State 80 (435) --
Total deferred (600) (1,500) --
Total benefit for income taxes (1,060) $(1,494) $(258)
The provision for income taxes for 1998 consists of minimum
amounts due, federal tax refund, and recognition of the tax benefit
of certain deferred tax assets including temporary differences and
net operating loss carryforwards.
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax
liabilities at December 31, 1998 and 1997 are presented below:
(Dollars in Thousands) 1998 1997
Deferred Tax Assets:
Book loan loss allowance in excess of tax $45 $711
Other provisions 33 167
Provision for losses for real estate 68 1,334
Net operating losses 17,645 17,546
Tax credits 489 489
Net tax value of premises in excess of book 124 127
Other 272 395
Total deferred tax assets 18,676 20,769
Valuation allowance (16,140) (18,864)
Total deferred tax assets, net 2,536 1,905
Deferred Tax Liabilities:
Loan origination costs (101) (54)
Taxable income in excess of
book for rehabilitation credit (335) (351)
Total deferred tax liabilities (436) (405)
Net deferred taxes $2,100 $1,500
PAGE 45
As required by SFAS No. 109, the realizability of the deferred
tax assets is reevaluated and the valuation allowance is adjusted
so that the resulting level of deferred tax asset will, more likely
than not, be realized. During 1998 and 1997, an adjustment of
$600,000 and $1.5 million, respectively, to the amount of
realizable deferred tax assets was recorded based on a
determination that the Company is more likely than not able to
utilize deferred tax assets that had previously been reserved.
The total tax provision (benefit) differs from the statutory
federal rates for the reasons shown in the following table:
1998 1997 1996
Tax expense at the statutory federal rate 34.0% 34.0% 34.0%
Utilization of prior year taxable losses 0.0 (34.0) (34.2)
State income taxes (refund), net of federal tax benefit 8.5 0.2 (58.1)
Non-deductible expenditures and non-taxable income 0.5 0.0 0.2
Expiration of state net operating loss carryforwards 10.8 0.0 0.0
Realization of previously deferred tax benefits (12.0) 0.0 0.0
Change in valuation allowance (68.4) (38.0) 0.0
Total effective tax benefit rate (26.6)%(37.8)% (58.1)%
As of December 31, 1998, the Company has net operating loss
carryforwards for federal tax purposes of approximately $48.2
million which begin expiring in 2007, and for California tax
purposes of approximately $17.5 million, which began expiring in
1998. As of December 31, 1998, the Company had rehabilitation tax
credit carryforwards for federal tax purposes of approximately
$213,000, which expire in 2004 and 2005, and minimum tax credits of
approximately $276,000 which have no expiration.
Note 10: Shareholders' Equity
The capital contributions in 1998, 1997, and 1996 were zero,
$1.0 million, and $3.5 million, respectively. The capital in 1997
was raised by the issuance of 2,947,787 shares of Class A Common
Stock at $0.34 per share. The capital in 1996 was raised by the
issuance of 175,000 shares of Series D Preferred Stock at $20.00
per share. The Series D Preferred shares were converted into Class
A Common Stock in 1996.
Description of Capital Stock
The authorized capital stock of the Company consists of
100,000,000 Common Shares, par value $0.01 per share and 5,000,000
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.
Description of Common Stock
As of December 31, 1998, there were 31,728,782 Common Shares
outstanding out of a total of 100,000,000 shares authorized. 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 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 shares.
PAGE 46
Dividends
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, each share of Common Stock is entitled to
receive dividends if, as and when declared by the Board of
Directors of the Company. 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 Common Stock, Series B 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 Common Shares on the Common
Stock.
Liquidation Rights
In the event of the liquidation, dissolution or winding up of
the Company, holders of the Common Stock are entitled to share
equally, share for share, in the assets available for distribution,
subject to the liquidation preferences of the Series B Preferred
Shares and the rights of any other class or series of preferred
stock then outstanding.
Description of Preferred Stock
The Board of Directors of the Company is authorized by the
Certificate of Incorporation to provide for the issuance of one or
more series of preferred stock. The Board of Directors has the
power to fix various terms with respect to each such series,
including voting powers, designations, preferences, dividend rates,
conversion and exchange provisions, redemption provisions, and the
amounts which holders are entitled to receive upon any liquidation,
dissolution, or winding up of the Company. As of December 31,
1998, the Board of Directors authorized only the issuance of the
Series B Preferred Shares. The Company's Certificate of
Incorporation provides 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 Common Stock (when and if issued) are entitled to
one vote per share. Except as described below, holders of Common
Stock vote together with holders of the Company's Series B
Preferred Shares, on all matters including the election of
directors. The Board of Directors is presently authorized to have
nine (9) 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 Common Stock are not entitled to vote cumulatively for
the election of directors.
The holders of 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.
Description of Series B Preferred Stock
The Company issued the Series B Preferred Shares during 1988.
As of December 31, 1998, there were 15,869 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 8% per annum or Fifty-Six Cents
($0.56) per share, payable semi-annually in January, and July 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 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 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
Common Shares on the Common Shares.
PAGE 47
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
Common Stock, 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
Common Shares on the Common Shares.
Liquidation Rights
In the event of any liquidation, dissolution, receivership,
bankruptcy, or winding up of the Company, voluntarily or
involuntarily, the holders of the Series B Preferred Shares are
entitled to receive the sum of Seven Dollars ($7.00) per share,
plus any accrued and unpaid dividends thereon, before any
distributions will be made to the holders of the 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 Common Stock
of the Company at the conversion ratio of one Series B Preferred
Share convertible into one-tenth of one share of Common Stock, upon
payment of a conversion fee of Seven Dollars ($7.00) per share,
subject to adjustment under certain conditions.
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 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 Common Stock, 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.
Note 11: Stock Option Plan
During 1996, the Company's stockholders approved the Amended
and Restated 1993 Stock Option Plan (the "Plan"). Pursuant to the
Plan, options may be granted to directors and key employees of the
Company and its subsidiaries. The shares of Common Stock reserved
for the Plan total 4,325,069 shares. The number of shares granted
may be subject to adjustment as determined by a Committee of the
Board of Directors. The exercise price of options must be at least
the fair market value of the shares of the Company's Common Stock
as of the date the option is granted. The expiration date of the
options is ten years from the effective date that the options were
granted. As of December 31, 1998, 11,611 of the options granted
have been exercised. The agreements for certain executive officers
and former executive officers provide that options shall be granted
to acquire shares of Common Stock under the Plan equal to 9% of the
fully-diluted shares of the Company's Common Stock, with additional
shares to be issued in the future to maintain the 9% ratio.
PAGE 48
The following table provides the fair value of stock options granted in
1998 and 1997. The fair value was calculated using the following assumption
in the Black Scholes option-pricing model:
1998 1997
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 4.54% 5.35%
Expected life 2.5 yrs 2.75 yrs
Volatility factor 0.431 0.253
Fair value of options granted $0.08 $0.08
The Company has not recognized any compensation costs for the
stock options in the financial statements. The proforma net income
reflects only options granted and vested in 1998 and 1997. Had the
Company determined compensation cost based on fair value at the
date of grant for its stock options, the Company's net income would
have been the proforma amounts indicated below:
1998 1997 1996
Net income - as reported (dollars in thousands) $5,042 $5,443 $702
proforma 5,026 5,355 539
Earnings per share -Basic $0.16 $0.18 $0.12
Diluted 0.15 0.17 0.03
Proforma per share -Basic $0.16 $0.18 $0.09
Diluted 0.15 0.17 0.02
The following table provides the stock option activity for
each period presented:
December 31, 1998 December 31, 1997 December 31, 1996
Weighted Average Weighted Average Weighted Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
Balance at
beginning
of year 3,672,033 $1.08 3,029,500 $1.24 509,322 $5.68
Granted 646,425 0.45 668,971 0.34 2,522,678 0.35
Exercised 5,000 0.34 6,611 0.34 -- --
Expired -- -- 19,827 0.34 2,500 5.68
Balance at
end of year 4,313,458 $0.99 3,672,033 $1.08 3,029,500 $1.24
At December 31, 1998, the range of exercise prices and
remaining contractual life of outstanding options was $0.34 and
$5.68, respectively, and five (5) years and ten (10) years,
respectively. Generally, the stock options vest within three years.
The following table provides stock option information as of
December 31, 1998:
Options Outstanding Options Exercisable
Weighted-
average
Range of Number Remaining Weighted Number Weighted-
Exercise Out- Contract- average Exer- Exeris- average Exer-
price standing ual life cise Price able cise Price
$0.34-$0.45 3,802,965 8.70 years $0.36 2,954,064 $0.34
$4.50-$5.68 510,493 5.75 years $5.68 484,970 $5.68
Note 12: Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory
capital requirements administered by federal and state banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary
actions by regulators, that if undertaken, could have a direct
material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgements by
the regulators regarding the Bank's capital components, risk
weightings, and other factors.
page 49
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios, as set forth below, of total and Tier
I capital, as defined by regulations, to risk weighted assets, and
Tier I capital to average assets.
The Company is subject to a Letter Agreement dated April 21,
1989 with the FRB which requires that the Company maintain a
minimum leverage capital ratio of 5.5%.
As of December 31, 1998, the most recent notification from the
FDIC categorized the Bank as adequately capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the highest capital category, a
bank must maintain minimum total risk-based, Tier I risk-based,
Tier I leverage ratios as set forth below and must not be subject
to any certain regulatory orders, agreements or directives.
The following table sets forth the Bank's capital amounts and
ratios as of December 31, for each of the periods shown:
To be Well
(dollars in thousands) Capitalized Under
For Capital Prompt Corrective
Actual Adequacy purposes
Action Provisions
Amount Ratio Amount Ratio Amount Ratio
1998:
Total risk-
based capital $22,620 22.8% $7,945 8.0% 9,931 10.0%
Tier 1 capital 21,374 21.4 3,988 4.0 5,981 6.0
Leverage capital 21,374 16.1 5,296 4.0 6,621 5.0
1997:
Total risk-
based capital $16,877 21.6% $6,242 8.0% 7,803 10.0%
Tier 1 capital 15,875 19.8 3,209 4.0 4,814 6.0
Leverage capital 15,875 14.4 4,417 4.0 5,521 5.0
Note 13: Employee Benefit Plans
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 1998, 1997, and 1996, the Company
contributed $47,000, $41,000 and $31,000, respectively, to the 401k
Plan.
Note 14: Commitments and Contingencies
PAGE 50
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, 1998 and 1997, the Bank had
outstanding loan commitments, which had primarily adjustable rates,
totaling approximately $20.9 million and $10.7 million,
respectively. In addition, the Bank had outstanding letters of
credit, which represent guarantees of obligations of Bank
customers, totaling $1.1 million and $9.8 million at December 31,
1998 and 1997, 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 are 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. Based upon information available to the Company and
the Bank, and its review of such outstanding claims to date,
management believes the ultimate liability relating to these
actions, if any, will not have a material adverse effect on the
Company's liquidity, consolidated financial condition or results of
operations.
Note 15: Related Party Transactions
Loans
In the ordinary course of business, the Bank may extend credit
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. As of December 31, 1998 and 1997, there were no loans
outstanding to such individuals.
Note 16: Fair Value of Financial Instruments
The following disclosures of the estimated fair value of
financial instruments are made in accordance with the requirements
of 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.
The carrying amount and estimated fair values of the Company's
financial instruments at December 31, are as follows:
1998 1997
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
Financial Assets:
Cash and cash equivalents $14,908 $14,908 $16,987 $16,987
Investment securities 40,052 40,057 40,032 39,990
Loans, net 72,211 72,783 48,663 50,151
Financial Liabilities:
Deposits 95,688 95,877 86,519 86,519
Other borrowings 20,000 20,176 10,000 10,000
PAGE 51
The following methods and assumptions were used to estimate
the fair value of each major classification of financial
instruments at December 31, 1998 and 1997:
Cash and Cash Equivalents: Current carrying amounts approximate
estimated fair value. 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, and
FHLB Stock: For securities held-to-maturity and available-for-
sale, quoted market prices and/or third party dealer quotes were
used to determine fair value. FHLB stock is included at par value
which is fair value.
Loans Receivable: The carrying amount of loans is net of unearned
fee income and allowance for loan losses. The fair value of loans
was 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 credit and interest rate risk inherent in the loans,
was estimated by segmenting the portfolio into categories based on
collateral type, fixed or adjustable interest rate, maturity,
estimated credit risk, and accrual status. The estimate of
maturity is based on final maturity for each loan classification,
modified, as required, by an estimate of the effect of
amortization, and estimated prepayment based on 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 each period end. 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.
Other Borrowings: The fair value of other borrowings are
determined based on the actual cost of funds compared to the market
rate of similar borrowings published daily by the FHLB.
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.
Note 17: The San Francisco Company
Condensed statements of financial condition and operations of
the Company at December 31 are as follows:
Condensed Statements of Financial Condition
(Dollars in Thousands) 1998 1997
Assets:
Cash and short term investments $205 $307
Investment in subsidiary 22,503 17,359
Other assets 5 --
Total assets $22,713 $17,666
Liabilities:
Other liabilities $9 $96
Total liabilities 9 96
Stockholders' equity 22,704 17,570
Total liabilities and shareholders' equity $22,713 $17,666
PAGE 52
Condensed Statements of Operations
(Dollars in Thousands) 1998 1997 1996
Income:
Interest earned $5 $6 $4
Other income -- 24 --
Total income 5 30 4
Expense:
Other expense 3 67 6
Total expense 3 67 6
Franchise taxes (benefit) 9 3 (258)
(Loss) income before equity in undistributed
net income of subsidiary (7) (40) 256
Equity in undistributed net income of subsidiary 5,049 5,483 446
Net income $5,042 $5,443 $702
Condensed Statements of Cash Flows
(Dollars in Thousands) 1998 1997 1996
Cash Flows from Operating Activities:
Net income $5,042 $5,443 $702
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Equity in undistributed net
income of subsidiary (5,049) (5,483) (446)
Net cash flows (used in) provided
by operating activities (7) (40) 256
Cash Flows used in investing activities:
Investment in Bank -- (1,000) (3,500)
Net (increase) decrease in other assets (5) 2 68
Net cash used in investing activities (5) (998) (3,432)
Cash Flows provided by financing activities:
Proceeds from sale of Preferred Stock -- -- 3,500
Proceeds from sale of Common Stock 2 1,000 --
Series B Preferred stock cash dividend (63) -- --
Net (decrease) increase in other liabilities (29) 41 (177)
Net cash provided by financing activities (90) 1,041 3,323
(Decrease) increase in cash and cash equivalents (102) 3 147
Cash and cash equivalents at beginning of year 307 304 157
Cash and cash equivalents at end of year $205 $307 $304
PAGE 53
Note 18: Quarterly Information (Unaudited)
The following table sets forth the condensed operating results
of the Company for each quarter of the year ending December 31,
1998, and is qualified in its entirety by the more detailed
information and financial statements contained elsewhere in this
report:
(Dollars in Thousands Except Per Share data)
1998 Quarters Ended
March 31 June 30 Sept. 30 Dec. 31
Interest income $2,060 $2,093 $2,315 $2,314
Interest expense 803 795 932 881
Net interest income 1,257 1,298 1,383 1,433
Adjustment for loan losses (94) (308) (1,075) (150)
Non-interest income 697 776 731 1,687
Non-interest expense 1,746 1,795 1,678 1,688
Income before income taxes 302 587 1,511 1,582
Provision (benefit) for taxes -- 5 6 (1,071)
Net income $302 $582 $1,505 $2,653
Earnings per common share:
Basic $0.01 $0.02 $0.05 $0.08
Diluted 0.01 0.02 0.05 0.07
During 1998, the Bank provided an adjustment of $1.8 million
to its allowance for loan losses. Based on the significant
reduction in problem assets and the demonstrated performance on the
existing loans, management determined that a reduction of total
allowance for loan losses as a percent of total loans to 2.2% at
the end of 1998 from 6.2% at the end of 1997 was appropriate. The
adequacy of the allowance for loan losses gives consideration to
specifically identified problem loans, the financial condition of
the borrower, the fair value of the collateral, recourse to
guarantors, and other factors that are discussed under "Note 1:
Statement of Accounting Policies -- Allowance for Loan and Lease
Losses".
As required by SFAS No. 109, the realizability of the deferred
tax assets is reevaluated and the valuation allowance is adjusted
so that the resulting level of deferred tax asset will, more likely
than not, be realized. During 1998, an adjustment of $600,000 to
the amount of realizable deferred tax assets was recorded based on
a determination that the Company is more likely than not able to
utilize deferred tax assets that had previously been reserved. See
additional discussion under "Note 9: Income Taxes".
PAGE 54
The following table sets forth the condensed operating results
of the Company for each quarter of the year ending December 31,
1997, and is qualified in its entirety by the more detailed
information and financial statements contained elsewhere in this
report:
(Dollars in Thousands Except Per Share data)
1997 Quarters Ended
March 31 June 30 Sept. 30 Dec. 31
Interest income $1,881 $1,939 $2,197 $2,009
Interest expense 697 662 755 776
Net interest income 1,184 1,277 1,422 1,233
Provision (adjustment) for
loan losses -- -- -- (2,820)
Non-interest income 741 886 888 987
Non-interest expense 1,782 1,930 1,975 1,822
Income before income taxes 143 233 355 3,218
Provision (benefit) for taxes 5 2 (3) (1,498)
Net income $138 $231 $358 $4,716
Earnings per common share:
Basic $0.01 $0.01 $0.01 $0.15
Diluted 0.01 0.01 0.01 0.14
During 1997, the Bank provided an adjustment of $2.8 million
to its allowance for loan losses. Based on the significant
reduction in problem assets and the demonstrated performance on the
existing loans, management determined that a reduction of total
allowance for loan losses as a percent of total loans to 6.2% at
the end of 1997 from 12.9 % at the end of 1996 was appropriate.
The adequacy of the allowance for loan losses gives consideration
to specifically identified problem loans, the financial condition
of the borrower, the fair value of the collateral, recourse to
guarantors, and other factors that are discussed under "Note 1:
Statement of Accounting Policies -- Allowance for Loan and Lease
Losses".
As required by SFAS No. 109, the realizability of the deferred
tax assets is reevaluated and the valuation allowance is adjusted
so that the resulting level of deferred tax asset will, more likely
than not, be realized. During 1997, an adjustment of $1.5 million
to the amount of realizable deferred tax assets was recorded based
on a determination that the Company is more likely than not able to
utilize deferred tax assets that had previously been reserved. See
additional discussion under "Note 9: Income Taxes".
PAGE 55
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be furnished in the
Company's definitive Proxy Statement, to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission not
later than 120 days after December 31, 1998, and is incorporated by
reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item will be furnished in the
Company's definitive Proxy Statement, to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission not
later than 120 days after December 31, 1998, and is incorporated by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item will be furnished in the
Company's definitive Proxy Statement, to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission not
later than 120 days after December 31, 1998, and is incorporated by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be furnished in the
Company's definitive Proxy Statement, to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission not
later than 120 days after December 31, 1998, and is incorporated by
reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. All financial statements.
See Index to Financial Statements on page 27.
2. Financial Statement Schedules
All financial statement schedules are omitted because they are
not applicable or not required, or because the required
information is included in the Consolidated Financial
Statements or the notes thereto.
3. List of Exhibits (numbered in accordance with Item 601 of
Regulation S-K):
PAGE 56
Exhibit Number Exhibit
3.1 Certificate of Incorporation of Bank of San Francisco (Delaware)
Holding Company, dated June 23, 1988 (1)
3.2 Agreement and Plan of Merger of Bank of San Francisco (Delaware)
Holding Company, a Delaware corporation and Bank of San Francisco
Company Holding Company, a California Corporation, dated June 24,
1988 (1)
3.3 Certificate of Amendment of the Certificate of Incorporation of
Bank of San Francisco Company Holding Company, dated May 22, 1989
(1)
3.4 Certificate of Amendment of the Certificate of Incorporation of
Bank of San Francisco Company Holding Company, dated September 21,
1989 (1)
3.5 Bylaws of Bank of San Francisco (Delaware) Holding Company, dated
June 23, 1988 (1)
3.6 First Amendment to Bylaws of Bank of San Francisco Company Holding
Company, dated July 19, 1989 (1)
3.7 Second Amendment to Bylaws of Bank of San Francisco Company Holding
Company, dated June 6, 1990 (1)
3.8 Certificate of Amendment of the Certificate of Incorporation of
Bank of San Francisco Company Holding Company, dated May 23, 1994
(4)
3.9 Amended and Restated Certificate of Incorporation of The San
Francisco Company, dated May 23, 1994 (4)
3.10 Certificate of Amendment of Certificate of Incorporation or
The San Francisco Company, dated December 18, 1996(7)
4.1 Certificate of Designations of Rights, Preferences, Privileges and
Restrictions of 8% Series B Convertible Preferred Stock of Bank of
San Francisco Company Holding Company, dated July 28, 1988 (1)
4.2 Amended Certificate of Designations of Rights, Preferences,
Privileges and Restrictions of 7% Series B Convertible Preferred
Stock of Bank of San Francisco Company Holding Company, dated
October 7, 1988 (1)
4.3 Certificate of Correction of Certificate of Incorporation, dated
June 18, 1990 (1)
10.2 Lease dated November 1, 1960 between The Lurie Company and Bank of
America, with respect to premises at 550 Montgomery Street (2)
10.3 Consent to Assignment of Lease, dated October 8, 1986, between The
Lurie Company and Bank of San Francisco and Bank of San Francisco
Realty Investors, with respect to premises at 550 Montgomery Street
(2)
10.4 Assignment of Lease, dated October 17, 1986, by Bank of America to
Bank of San Francisco and Bank of San Francisco Realty Investors,
with respect to premises at 550 Montgomery Street (2)
10.7 Letter Agreement with the Board of Governors of the Federal Reserve
Board, dated April 21, 1989 (1)
10.9 Bank of San Francisco Company Holding Company 401(k) Profit Sharing
Plan (3)
10.18 Employment Agreements dated October 1, 1994 between Mr. Gilleran
and The San Francisco Company and the Bank of San Francisco. (5)
10.19 Employment Agreements dated November 27, 1995 between Mr. John
McGrath and the Bank of San Francisco(6)
10.20 Subscription Agreement dated as of February 26, 1996 between The
San Francisco Company and Putra Masagung (6)
10.21 Amended and Restated 1993 Stock Option Plan (7)
10.22 Employment Agreements dated April 22, 1998 between Mr. James E.
Gilleran and The San Francisco Company and the Bank of San
Francisco. (8)
10.23 Employment Agreements dated April 22, 1998 between Mr. John McGrath
and the Bank of San Francisco(8)
10.24 Employment Agreements dated April 22, 1998 between Ms. Keary
Colwell and The San Francisco Company and the Bank of San
Francisco. (8)
10.25 Employment Agreements dated April 22, 1998 between Ms. Joanne
Haakinson and the Bank of San Francisco(8)
21 Subsidiaries of registrant (3)
23.1* Consent of Independent Auditors
___________________________
Footnotes to List of Exhibits:
* Indicates filed herewith.
(1) Incorporated by reference from the Form S-2 (Registration No. 33-
34985).
(2) Incorporated by reference from the Form 10-K for the year ended
December 31, 1986.
(3) Incorporated by reference from Form 10-K for the year ended December
31, 1990.
(4) Incorporated by reference from Proxy Statement for the Special Meeting
of Stockholders' held on May 23, 1994.
(5) Incorporated by reference from Form 10-K for the year ended December
31, 1994.
(6) Incorporated by reference from Form 10-K for the year ended December
31, 1995.
(7) Incorporated by reference from Proxy Statement of the 1996 Annual
Meeting of Stockholders' held on December 18, 1996.
(8) Incorporated by reference from the Form 10-Q for the three and six
months ended June 30, 1998.
(b) Reports on Form 8-K filed in the fourth quarter of 1998:
A Form 8-K was filed in December 1998 regarding the announcement dated
December 4, 1998 of the transfer of voting control of the Company's Common
Stock.
PAGE 57
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 March 24, 1999
James E. Gilleran Chief Executive Officer
(Principal Executive Officer)
/s/ Keary L. Colwell Executive Vice President March 24, 1999
Keary L. Colwell Chief Financial Officer
(Principal Accounting Officer)
PAGE 58
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ James E. Gilleran Chairman of the Board and March 24, 1999
James E. Gilleran Chief Executive Officer
(Principal Executive Officer)
/s/ John McGrath President and March 24, 1999
John McGrath Director
/s/ Willard D. Sharpe Director March 24, 1999
Willard D. Sharpe
/s/ Gordon B. Swanson Director March 24, 1999
Gordon B. Swanson
/s/ Kent D. Price Director March 24, 1999
Kent D. Price
/s/ Nicholas C. Unkovic Director March 24, 1999
Nicholas C. Unkovic
/s/ Paul Erickson Director March 24, 1999
Paul Erickson
/s/ Gary Williams Director March 24, 1999
Gary Williams
/s/ Peter Foo Director March 24, 1999
Peter Foo
PAGE 59
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The San Francisco Company
We consent to the incorporation by reference in the registration statement on
Form S-8 (No. 333-24993) of The San Francisco Company and subsidiaries (the
"Company") of our report dated February 11, 1999, relating to the
Consolidated Statements of Financial Condition of The San Francisco Company
and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated Statements of Operations, Changes in Shareholders' Equity and
Comprehensive Income, and Cash Flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998
Form 10K of The San Francisco Company.
San Francisco, California
March 24, 1999
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<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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