<PAGE>
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 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-18440
BURLINGAME BANCORP
------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2921417
---------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
350 Primrose Road, Burlingame, California 94010
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(415) 348-2500
--------------
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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
----- -----
The aggregate market value on March 11, 1996 of the common stock held by non-
affiliates of the Registrant based on the average of the bid and asked price of
such stock was $10.625.
-------
The number of shares of Registrant's common stock outstanding as of March 29,
1996, equaled 576,974.
Documents Incorporated by Reference: Part III - Items 10, 11, 12 and 13 are
incorporated by reference from the Registrant's definitive proxy statement
relating to its 1996 Annual Meeting of Shareholders.
<PAGE>
PART I
ITEM 1. BUSINESS
--------
Acquisition of the Company by The Pacific Bank
----------------------------------------------
On January 25, 1996, the holders of a majority of the outstanding
Common Stock of Burlingame Bancorp (the "Company") approved and adopted an
Agreement and Plan of Reorganization dated as of October 10, 1995 by and among
The Pacific Bank ("Pacific"), the Company and Burlingame Bank & Trust Co. (the
"Bank") (the "Merger Agreement") which provides for the merger of a newly formed
subsidiary of Pacific with and into the Company with the Company as the
surviving corporation, followed by the merger of the Company into the Bank with
the Bank as the surviving corporation, and finally the merger of the Bank with
and into Pacific with Pacific as the surviving corporation (collectively, the
"Merger").
Pursuant to the Merger Agreement, at the effective time of the Merger
(the "Effective Time"), each outstanding share of the Company's no par value
common stock (the "Common Stock"), exclusive of shares held by holders of Common
Stock who perfect their dissenters' rights, will be converted into the right to
receive a cash payment in an amount equal to 1.223 time the consolidated book
value of the Company as of a date within three days preceding the Effective
Time, determined in accordance with generally accepted accounting principles,
subject to adjustment as set forth in the Merger Agreement. Based on currently
available information, it is anticipated that the cash payment per share to the
Company's shareholders, which is subject to adjustment as set forth in the
Merger Agreement, will be between $11.50 and $12.50.
The Merger is presently expected to occur on April 2, 1996. For
further information about the transaction with Pacific, please see the Company's
Proxy Statement which was mailed to the Company's shareholders on or about
January 8, 1996.
General Development of Business
-------------------------------
The following description of the Company's business should be read in
light of the pending acquisition of the Company by Pacific described above. See
ITEM 1, BUSINESS -- Acquisition of the Company by The Pacific Bank.
The Company was incorporated under the laws of the State of California
on October 26, 1983, to coordinate and direct the activities necessary to
organize the Bank. The Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") has authorized the Company to act as a bank holding
company pursuant to the Bank Holding Company Act of 1956, as amended. The
Company owns one hundred percent (100%) of the shares of the Bank. Except for
activities related to its status as holding company of the Bank, the Company has
not engaged in any other business.
2
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On October 10, 1995 Burlingame Bancorp announced the signing of a
definitive agreement for Burlingame Bancorp to be acquired by The Pacific Bank
of San Francisco. This agreement was approved by the Shareholders on January
25, 1996. Upon closing of the transaction, Burlingame Bancorp and its wholly
owned subsidiary, Burlingame Bank & Trust Co., will be merged into The Pacific
Bank. The cash purchase price will be 1.223 of adjusted book value at the time
of closing.
Description of Business
-----------------------
The Bank commenced business on March 28, 1985 and has engaged in the
commercial banking business since that date with offices located at 350 Primrose
Road in Burlingame, California. The Bank provides banking services primarily to
residents of Burlingame, Hillsborough and San Mateo, California, and serves
business clients throughout San Mateo County and, to a lesser extent, San
Francisco, Santa Clara, and Alameda counties.
The Bank's primary focus is to engage in commercial banking, serving
small to medium-sized businesses, professionals and high net-worth individuals.
Rather than concentrate on any specific industry, the Bank has solicited and
attracted customers from a wide variety of light manufacturing, wholesaling,
contracting, real estate development and service businesses, as well as
professionals of every type, including attorneys, accountants, and physicians.
Either alone or in concert with correspondent banks, the Bank offers a
wide variety of credit and deposit services to its clients. Management believes
that its current and prospective clients favorably respond to the
individualized, tailored banking services that the Bank provides. Deposit
services which the Bank offers include personal and business checking accounts,
money market accounts, savings accounts, and time certificates of deposit. The
Bank is a member of Star and Plus, automatic teller machine networks, which
offer their clients 24-hour access to their checking accounts at over 100,000
locations nationwide and another 120,000 outside the United States. The Bank
has regulatory approval to offer trust services, however, it does not offer
these services at the present time.
The Bank has developed relationships with a network of correspondent
banks through which it is able to offer its clients and prospective clients a
variety of commercial and international banking services which it is otherwise
unable to offer by itself. The Bank has successfully developed these
relationships with several correspondent banks which have participated in
providing credit for a portion of the Bank's clients' borrowing needs while the
Bank remains the bank of record for the clients.
The Bank provides a variety of credit facilities for individuals and
businesses including accounts receivable and inventory lines of credit,
equipment loans, personal lines of credit and real estate construction loans.
Consumer lending is oriented primarily to deposit clients of the Bank. Real
estate loans are generally of a short-term nature for residential and commercial
property purposes. The
3
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Bank does not normally provide permanent real estate loans; however, the Bank
acts as an intermediary in securing permanent financing for its clients'
residential real estate loan needs. The Bank receives a percentage of the
mortgage brokerage fee for this service.
The Bank offers a Visa Gold Card account for individuals and a Visa
Card account for businesses. It is not the Bank's intention to actively promote
the credit card, but rather to have it available as an accommodation to existing
and potential clients. Approvals of credit lines are consistent with the Bank's
existing lending policies.
The Bank is licensed by the California State Banking Department for
insurance agency powers to sell Fire & Casualty and Life & Disability products.
The Bank's insurance agency business was inactive during 1995, as the Bank
emphasized more traditional banking business.
Additionally, the Bank provides loans through the Small Business
Administration ("SBA") to eligible borrowers in its primary service area and
throughout the greater Bay Area. SBA offers full faith and credit guarantees of
80% on loans up to $100,000 and 75% on larger loans, to a maximum guaranty
amount of $750,000. The Bank offers SBA loans to eligible retail, wholesale,
manufacturing and service businesses to provide working capital to expand, funds
to buy equipment and fixtures, cash to purchase inventory or to refinance
existing short term debt, and to finance commercial real estate.
4
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Competition
-----------
In California and in the Bank's primary service area, major banks
dominate the banking industry. Among the advantages which these major banks
have over the Bank are their ability to finance wide-ranging advertising
campaigns and to allocate their investment assets, including loans, to regions
of higher yield and demand. By virtue of their larger amounts of capital, such
institutions have substantially greater lending limits than the Bank and perform
certain functions, including international banking, which are offered only
indirectly by the Bank through correspondent institutions.
The Bank's primary service area includes the cities of Burlingame, San
Mateo, and Hillsborough, California, and extends throughout San Mateo County.
While there are no financial institutions in the Town of Hillsborough, there are
34 competitive commercial banking offices, including the Bank, in Burlingame and
San Mateo. At June 30, 1993, amounts reported by state and federal agencies
indicated that these offices held approximately $2,449,416,000 in deposits for
an average of approximately $72,042,000 per office. As of June 30, 1993 the
cities of Burlingame and San Mateo also had 23 offices of savings and loan
associations holding approximately $1,355,325,000 in deposits for an average of
approximately $58,927,000 per office.
Other entities, both governmental and in private industry, seeking to
raise capital through the issuance and sale of debt securities, also provide
competition for the Bank in the acquisition of deposits. The Bank also competes
with money market funds and other money market instruments which are not subject
to withdrawal limitations as are the Bank's money market savings accounts.
From time to time, legislation is proposed or enacted which would have
or has the effect of increasing the cost of doing business, limiting permissible
activities or affecting the competitive balance between banks and other
financial institutions. It is impossible to predict the competitive impact
these and other changes in legislation will have on commercial banking in
general or on the business of the Bank in particular. See Item 1, "BUSINESS --
Supervision and Regulation -- Legislation and Court Decisions."
Employees
---------
As of December 31, 1995 the Bank had 33 full-time officers and
employees and 3 part-time officers and employees for a total of 34.5 full-time
equivalents. This compares to 30 full-time and 3 part-time, or 32 full-time
equivalents as of December 31, 1994.
Supervision and Regulation
- --------------------------
The Company. The Company, as a bank holding company, is subject to
-----------
regulation under the Bank Holding Company Act of 1956, as amended, and is
registered with and subject to the
5
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supervision of the Federal Reserve Board. The Company is required to obtain the
prior approval of the Federal Reserve Board before it may acquire all or
substantially all of the assets of any bank, or ownership or control of the
voting shares of any bank if, after giving effect to such acquisition, the
Company would own or control, directly or indirectly more than 5% of the voting
shares of such bank. Effective September 29, 1995, the Bank Holding Company Act
permits the Company to acquire a bank located in another state, regardless of
whether the transaction is prohibited under the laws of any state.
Under the Bank Holding Company Act, the Company may not engage in any
business other than managing or controlling banks or furnishing services to its
subsidiaries, except that it may engage in certain activities which, in the
opinion of the Federal Reserve Board, are so closely related to banking or to
managing or controlling banks as to be a proper incident thereto. In making
such determinations the Federal Reserve Board considers whether the performance
of such activities by a bank holding company would offer advantages to the
public which outweigh possible adverse effects. Although the future scope of
permitted activities is uncertain and cannot be predicted, the major nonbanking
activities that have been permitted to bank holding companies, with certain
limitations, are: making or acquiring loans; operating industrial loan
companies; servicing loans; leasing real and personal property; selling money
orders; performing trust services; providing securities brokerage services,
investment and financial advice, real estate appraisals, data processing
services, tax services, certain insurance services, courier services and
management consulting advice to depository institutions; arranging commercial
real estate equity financing; underwriting and dealing in government
obligations, certain money market instruments and, to a limited extent, other
securities; private placement of debt and equity securities; providing foreign
exchange advisory and transactional services; acting as a futures commissions
merchant; and operating a collection agency. The Company is also prohibited,
with certain exceptions, from acquiring direct or indirect ownership or control
of more than 5% of the voting shares of any company unless that company is
engaged in such activities. The Federal Reserve Board's approval must be
obtained before the shares of any such company can be acquired.
The Company's primary prospective source of income is the receipt of
dividends from the Bank. The Bank's ability to make such payments to the
Company is subject to statutory and regulatory restrictions.
As a bank holding company, the Company is required to file reports
with the Federal Reserve Board and to provide such additional information as the
Federal Reserve Board may require. The Federal Reserve Board also has the
authority to examine the Company and each of its subsidiaries with the cost
thereof to be borne by the Company.
A bank holding company and its subsidiaries, other than the Bank, are
affiliates of the Bank and are subject to certain restrictions which limit the
extent to which a bank can supply funds to the holding company or to its other
affiliates. Subject to certain exceptions set forth in the Federal Reserve Act,
a bank can loan or extend credit to an affiliate, purchase or invest in the
securities of an affiliate, purchase assets from an affiliate, accept securities
of an affiliate as collateral security for a loan or extension of credit to any
person or company or issue a guarantee, acceptance, or letter of credit on
6
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behalf of an affiliate only if the aggregate amount of the above transactions of
the Bank and its subsidiaries does not exceed 10% of the Bank's capital stock
and surplus on a per affiliate basis, or 20% of the Bank's capital stock and
surplus on an aggregate affiliate basis. In addition, such transactions must be
on terms and conditions that are consistent with safe and sound banking
practices and a bank and its subsidiaries generally may not purchase a low-
quality asset, as that term is defined in Section 23A(b)(10) of the Federal
Reserve Act, from an affiliate. Such restrictions also prevent a holding
company and its other affiliates from borrowing from a bank subsidiary of the
holding company unless the loans are secured by marketable collateral of
designated amounts.
The Company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, sale or
lease of property or furnishing of services. For example, with certain
exceptions, the Bank may not condition an extension of credit on a client
obtaining other services provided by it, the Company or any other subsidiary or
on a promise by the client not to obtain other services from a competitor.
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by and may be required to file reports
with the California Superintendent of Banks. Regulations have not yet been
adopted to implement the Superintendent's powers under this statute.
Other Regulatory Matters. On August 25, 1992, the Bank entered into
------------------------
an agreement with the Federal Deposit Insurance Corporation pursuant to which
the Bank agreed to the entry of an order by the FDIC which requires the Bank to
refrain from engaging in certain banking practices and to take affirmative
action to improve its condition and operations. In a related matter, on August
24, 1992, the Company entered into a Memorandum of Understanding with the
Federal Reserve Bank of San Francisco.
As a result of overall improvement in the Bank's condition, during
April 1995 the FDIC lifted the 1992 order and entered into a Memorandum of
Understanding.
The Bank. As a California state-licensed bank, the Bank is subject to
--------
regulation, supervision and regular examination by the California State Banking
Department. In addition, the Bank is subject to regulation, supervision and
regular examination by the Federal Deposit Insurance Corporation (the "FDIC").
The Bank's deposits are insured by the FDIC to the maximum amount permitted by
law, which is currently $100,000 for each insured deposit.
The regulations of these various agencies govern most aspects of the
Bank's business, including required reserves on deposits, investments, loans,
certain of its check clearing activities, issuance of securities, payment of
dividends, opening of branches and numerous other areas.
7
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Various requirements and restrictions under the laws of the United
States and the State of California affect the operation of the Bank. Federal
regulations include requirements to maintain noninterest-bearing reserves
against deposits, limitations on the nature and amount of loans which may be
made and restrictions on payment of dividends. The California Superintendent
of Banks (the "Superintendent") regulates the number and locations of the branch
offices of banks. California law exempts banks from the usury laws.
Dividends. The Board of Directors of a California licensed commercial
---------
bank, like the Bank, may declare a cash dividend, subject to California law
which restricts the amount available for cash dividends by banks to the lesser
of retained earnings or the bank's net income for its last three fiscal years
(less any distributions to shareholders made during such period). Where the
above test is not met, cash dividends may be paid out of net income for such
bank's last preceding fiscal year upon the prior approval of the Superintendent.
Under the Financial Institutions Supervisory Act, the FDIC also has
authority to prohibit a bank from engaging in business practices which it
considers to be unsafe or unsound. As stipulated to in the Company's Memorandum
of Understanding with the Federal Reserve Bank of San Francisco, the Company may
not declare or pay any shareholder cash dividends without 15 days prior notice
to the Reserve Bank. Similarly, the Bank, under its regulatory order, agreed to
seek approval of the FDIC prior to declaring dividends. See Other Regulatory
----------------
Matters, page 6.
- -------
In light of the pending merger with Pacific, no cash dividends by the
Bank to the Company are anticipated.
Impact of Monetary Policies. Banking is a business which depends on
---------------------------
interest rate differentials. In general, the difference between the interest
rate paid by the Bank on its deposits and its other borrowings and the interest
rate received by the Bank on loans extended to its clients and on securities
held in the Bank's portfolio comprises the major portion of the Bank's earnings.
The earnings and growth of the Bank are affected not only by general
economic conditions, both domestic and foreign, but also by the monetary and
fiscal policies of the United States and its agencies, particularly the Federal
Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
open market operations in United States Government securities and adjustments to
the discount rates applicable to borrowings by banks from the Federal Reserve
System. The actions of the Federal Reserve Board in these areas influence the
growth of bank loans, investments and deposits. The nature and impact that
future changes in fiscal or monetary policies or economic controls may have on
the Bank's business and earnings cannot be predicted.
8
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Legislation and Court Decisions. From time to time new legislation is
-------------------------------
adopted or a court case decided, which increases the cost of doing business,
limits or expands permissible activities, or affects the competitive balance
between banks and other financial institutions.
Within the past five years, court decisions have been made, and a
number of laws passed which have had the effect of lessening the distinctions
between financial institutions and increasing competition in the financial
services market place.
In addition to legislative actions which have resulted in the
equalization of competitive advantages among financial institutions, the federal
agencies have acknowledged that the banking environment is rapidly changing and
the lines of demarcation between banking, commerce and financial services have
become increasingly ill-defined.
Because of the limited experience under the new laws and court
decisions, it is impossible to predict with any degree of accuracy the
competitive impact which they will have on banking in general and the business
of the Bank and the Company in particular. However, if the limited experience
is any indication, there appears to be a lessening of the historical distinction
between the services offered by financial institutions and other businesses
offering financial services, and it is anticipated that banks will experience
increased competition for deposits and loans and increases in their cost of
funds.
Effective January 1, 1991, California law authorized any out-of-state
bank holding company to acquire a California bank provided similar rights are
accorded to California bank holding companies. The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act")
extends the right of a bank holding company to purchase out-of-state banks to
all states as of September 29, 1995. It also permits banks to merge with banks
in another state and operate the offices in the other state as branches
beginning June 1, 1997, unless both states opt out of interstate branching. The
Interstate Banking Act also eliminates any federal prohibition against states
that pass legislation to permit banks to establish new branches across state
lines, effective June 1, 1997. In the event that many large out-of-state bank
holding companies take advantage of this law, and acquire California banks, it
could further increase the competition for deposits and loans which the Bank
currently faces.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was signed into law. FDICIA is intended to
reform the financial services system in terms of safety and soundness (providing
for several supervisory and accounting changes), customer and consumer
protection, and FDIC supervision and regulation. FDICIA also required the
federal banking agencies to revise risk-based capital standards to ensure that
those standards take adequate account of interest rate risk, concentration of
credit risk, and the risks of non-traditional activities. Several regulations
were implemented regarding these items during the past year, and others are
anticipated in the future.
Some of the methods of evaluating risk as implemented by regulations during the
past year are qualitative, including a bank's ability to manage concentration of
credit risk, thus causing some
9
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uncertainty in evaluations of risk by federal agencies. The changes required by
FDICIA are expected to increase the costs of the Bank's operations and possibly
to restrict activities in which the Bank might otherwise engage. The overall
impact of these changes on the Bank cannot be predicted, however.
The Community Development Banking and Financial Institutions Act of
1994 (the "Development Act"), effective January 1, 1995, provides for Deposit
insurance credits for certain loans and technical assistance to, and equity
investments in, Community Development Financial Institutions. It also regulates
closed-end home equity loans for which the annual interest rate exceeds certain
rates, or where points and fees exceed certain amounts. These loans are subject
to additional reporting and disclosure requirements. The Development Act also
addresses the creation of markets in small business debt, requirements regarding
the deduction and reporting of money laundering, and the reduction of regulatory
burdens. The changes required by the Development Act are expected to increase
the costs of the Bank's operations; the overall impact cannot be predicted,
however.
Regulations promulgated under existing legislation have been recently
adopted or amended which could affect the business of the Company or the Bank
including the placing of limits on investment activities of federally insured
state chartered banks and the implementation of risk-based insurance premiums.
Other regulations which could affect the business of the Company or the Bank
have been adopted including regulations regarding a reduction in the scope of
deposit insurance for certain pension and other employee benefit plan accounts,
a requirement for federally insured state chartered banks that would limit their
ability to engage in any activity not permitted for national banks, subject to
certain exceptions, and a requirement for state banks to pay fees for federal
examinations. Legislation was enacted as part of the Omnibus Budget
Reconciliation Act of 1993 which establishes requirements for certain banks to
value loans held for resale in the secondary market at their fair market values.
In connection with these requirements, the Internal Revenue Service has
promulgated regulations which may subject banks involved in selling loans in the
secondary market to increased reporting and disclosure requirements. The
overall impact of these changes on the Bank cannot be predicted.
Other legislation has been or may be proposed by the United States
Congress and the California Legislature which could affect the business of the
Company or the Bank. Proposals are presently pending before the United States
Congress which call for reforms to be made to the financial institutions
regulatory framework, the consolidation of regulatory agencies, the merger of
banking and commerce activities through financial services holding companies,
and Community Reinvestment Act revisions and regulations related to the
Community Reinvestment Act. It cannot be predicted whether any proposed
legislation or regulations will be adopted or the effect such legislation or
regulations may have on the business of the Company or the Bank.
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ITEM 2. PROPERTIES
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The Company and the Bank share principal offices in a modern six story
office building at 350 Primrose Road, Burlingame, California. The premises are
leased by the Bank and primarily consist of approximately 9,300 square feet of
ground floor interior space and 2,800 square feet of exterior space for client
parking. The lease for this space expires in the year 2002. The Bank will have
the option to extend the term of the lease for three additional ten year periods
upon the expiration of its original term at a monthly rent based on fair rental
value. Additionally, the Bank leases approximately 300 square feet of space on
the third floor at 330 Primrose Road, Burlingame, which houses certain files and
records, on a month to month tenancy, with a 30 day written termination notice.
The Company believes that its facilities are well maintained and are
adequate to meet its current space requirement.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Neither the Company nor the Bank is involved in any litigation which
it believes will materially and adversely affect its financial condition or
results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
11
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
----------------------------------------------------------------
MATTERS
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There is no established public trading market for the Company's common
stock. Prudential Securities, Inc. and Hoefer & Arnett, Inc. act as market
makers for the common stock for such occasional trades as may occur. Based on
information gathered by the Company from a variety of sources, which information
the Company believes to be accurate, the following table sets forth the range of
high and low bids for the common stock for 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
Quarter ended High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
March 31 $ 5.25 $ 4.75 $4.50 $4.00
June 30 6.25 5.50 4.00 4.00
September 30 10.00 6.75 4.25 4.00
December 31 10.25 10.00 4.75 4.50
</TABLE>
The information described above reflects inter-dealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
As of December 31, 1995 there were 228 holders of record of the common
stock of the Company. There are no other classes of common equity outstanding.
The Company has neither declared nor paid any cash dividends to date. The
Company's ability to pay cash dividends is restricted. See ITEM 1, "BUSINESS --
Supervision and Regulation". While the historical policy of the Bank and the
Company has been not to pay cash dividends, stockholders of the Company will
receive a cash payment in exchange for their shares in the Company upon the
Merger with Pacific. See Item 1, "BUSINESS -- Acquisition of the Company by
The Pacific Bank."
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following table presents a summary of selected consolidated
financial data for the Company for the five years in the period ended December
31, 1995. This information should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this report.
During 1993, the banking regulatory agencies issued a joint statement which
permits the reclassification of in-substance foreclosures to loans.
Accordingly, $1,063,000 of in-substance foreclosures classified as Other Real
Estate Owned at December 31, 1992 were reclassified to Loans. No adjustment to
net income for the period ended December 31, 1992 was required.
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<TABLE>
<CAPTION>
(Dollars in Thousands
Except Per Share Data)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Results of Operations
Interest income $ 5,913 $ 4,801 $ 5,387 $ 7,505 $ 9,218
Interest expense (2,029) (1,284) (1,547) (2,535) (4,252)
-------- -------- -------- -------- --------
Net interest income 3,884 3,517 3,840 4,970 4,966
Provision for credit losses 68 0 (2,295) (1,850) (207)
Other income 569 666 1,014 793 524
Other expense (3,670) (3,939) (4,170) (3,838) (3,533)
-------- -------- -------- -------- --------
Income (loss) before tax(1) 851 244 (1,611) 75 1,750
Income taxes (133) (100) 443 (34) (724)
Cumulative effect of
change in accounting method 0 0 33 0 0
-------- -------- -------- -------- --------
Net income (loss) $ 718 $ 144 $ (1,135) $ 41 $ 1,026
======== ======== ======== ======== ========
Income (loss) Per Common Share
and Common Share Equivalents
Primary:
Income (loss) before $ 1.19 $ 0.25 $ (2.03) $ 0.07 $ 1.69
cumulative effect of
change in accounting
method
Cumulative effect of change
in accounting method .00 .00 .06 .00 .00
-------- -------- -------- -------- --------
Net Income (loss) per share $ 1.19 $ 0.25 $ (1.97) $ 0.07 $ 1.69
======== ======== ======== ======== ========
Fully diluted:
Income (loss) before $ 1.14 $ 0.25 $ (2.03) $ 0.07 $ 1.69
cumulative effect of
change in accounting
method
Cumulative effect of change
in accounting method .00 .00 .06 .00 .00
-------- -------- -------- -------- --------
Net Income (loss) per share $ 1.14 $ 0.25 $ (1.97) $ 0.07 $ 1.69
======== ======== ======== ======== ========
Average common shares and
common share equivalents
outstanding (primary) 603,904 576,974 576,974 573,841 606,312
Average common shares and
common share equivalents
outstanding (fully diluted) 630,602 576,974 576,974 573,841 606,312
<CAPTION>
(Dollars in Thousands)
Balances at December 31 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets $ 76,075 $ 64,681 $ 75,608 $ 91,509 $ 94,165
Loans, net 46,723 38,571 42,913 63,181 77,824
Deposits 68,665 58,209 69,285 84,152 84,520
Shareholders' equity 6,690 5,935 5,864 7,027 6,949
Average Daily Balances
Assets $ 70,994 $ 71,707 $ 82,044 $ 91,858 $ 89,293
Loans, net 41,828 39,049 52,814 73,079 77,118
Deposits 63,932 65,383 74,681 84,207 82,315
Shareholders' equity 6,336 5,943 6,771 7,134 6,204
</TABLE>
(1) Income (loss) before tax and cumulative effect of a change in accounting
method in 1993.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion and analysis should be read in light of the
pending merger in which the Company and the Bank will cease to exist and Pacific
will survive. See ITEM 1, "Business --Acquisition of the Company by The Pacific
Bank."
The following discussion and analysis should also be read in
conjunction with the consolidated financial statements, the notes to the
consolidated financial statements and the selected financial data contained
elsewhere in this report. Operating results for 1995 are compared here to the
results for 1994. Results for 1994 are compared to the results for 1993.
Summary of Financial Results
- --------------------------------------------------------------------------------
Net income for 1995 was $718,000 compared to net income for 1994 of
$144,000. Net income for 1994 was $144,000 compared to a net loss of $1,135,000
in 1993.
Net income per common share was $1.14 (fully diluted) in 1995,
compared with net income per common share of $0.25 in 1994, and net loss per
share of $1.97 in 1993. 1993 net loss was favorably affected by $33,000, or
$0.06 per share, due to the cumulative effect of a change in accounting method
as a result of adopting Statement of Financial Accounting Standard #109
"Accounting for Income Taxes" on January 1, 1993.
The return on average total assets was 1.01% in 1995 compared with
0.20% in 1994 and (1.38%) in 1993. Return on average shareholders' equity was
11.33% on average equity of $6,336,000 in 1995 compared with 2.42% on average
equity of $5,943,000 in 1994 and (16.8%) on average equity of $6,771,000 in
1993.
The improvement in earnings in 1995 was due to improved loan quality
and its impact on the provision for credit losses, reduction in the effective
tax rate due to the realizability of certain deferred tax assets, increases in
net interest margin, and rising interest rates and economic conditions within
the Bank's market area. The 1993 net loss was primarily due to loan losses as a
result of the weak economy in the Bank's service area. Additional factors
affecting net income are non-interest income and non-interest expenses. A more
detailed discussion of these factors follows.
Net Interest Income
- --------------------------------------------------------------------------------
Net interest income, the difference between interest earned on loans
(including loan fees) and investments, and interest paid on deposits and
borrowings, is the principal component of the Bank's earnings. The primary
factors to be considered in analyzing net interest income are the nature and
volume of earning assets held during the year, the rates earned on such assets,
the mix of interest-bearing liabilities which fund earning assets and the rates
paid on them, and the amounts of non-interest bearing assets and liabilities.
14
<PAGE>
Net interest income was $3,884,000 in 1995, up 10.4% from $3,517,000
in 1994. Net interest income in 1994 was $3,517,000, down 8.4% from $3,840,000
in 1993. The increase in net interest income in 1995 was due to rising interest
rates and an increase in earning assets and the decrease in net interest income
in 1994 was due to a decrease in earning assets from 1993.
The average yield on earning assets decreased from 7.38% in 1993, to
7.36% in 1994, and increased to 9.01% in 1995, generally following market rates.
The average rate paid on interest bearing liabilities declined from 2.53% during
1993, to 2.44% during 1994, and increased to 3.92% during 1995. The net yield
on earning assets, defined as net interest income divided by average earning
assets, increased from 5.26% in 1993, to 5.39% in 1994, and 5.92% in 1995.
The following tables detail the principal components of the change in
net interest income. The first table presents information concerning the
Company's average balances (computed using daily balances) and the related
yields earned and rates paid on those balances, for the years ended December 31,
1995, 1994 and 1993. The second table presents the impact of the changes in the
volume of balances and the changes in the rates on net interest income for 1995
compared with 1994, and 1994 compared with 1993. Changes due to a combination of
volume and rate changes have been allocated to the rate and volume categories
based upon the respective changes in average balances and average rates.
15
<PAGE>
Average Balance Sheet, Interest Income/Expense, and Yields
(Dollars in Thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
1995 1994 1993
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------------------------------- --------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning Assets:
Federal Funds sold
and short term investments $6,879 $396 5.76% $5,462 $214 3.91% $5,929 $173 2.92%
Interest-earnings
deposits in other
financial institutions 0 0 N/A 195 5 2.69% 500 16 3.20%
Investment securities
(taxable) 15,369 794 5.17% 18,711 809 4.32% 12,320 475 3.86%
Municipal securities
(non-taxable) 184 9 5.14% 184 9 5.14% 86 4 5.15%
Loans (1)(2) 43,200 4,714 10.91% 40,722 3,764 9.24% 54,171 4,719 8.71%
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Total Interest-Earning
Assets $65,632 $5,913 9.01% $65,274 $4,801 7.35% $73,006 $5,387 7.38%
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Allowance for Credit Loss (1,372) (1,673) (1,357)
Cash and Due From Banks 3,821 5,434 6,743
Premises and Equipment 1,013 1,256 1,283
Other Real Estate Owned 216 175 906
Other 1,684 1,241 1,463
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Total Average Assets $70,994 $71,707 $82,044
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Interest-bearing
Liabilities:
Demand deposits $8,985 $207 2.30% $13,028 $219 1.68% $11,255 $232 2.06%
Savings deposits 25,155 912 3.63% 27,214 712 2.62% 33,897 918 2.71%
Time deposits 17,615 908 5.15% 12,413 353 2.84% 15,951 397 2.49%
Other Borrowings 23 2 5.57% 0 0 N/A 0 0 N/A
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Total Interest-Bearing
Liabilities $51,778 $2,029 3.92% $52,655 $1,284 2.44% $61,103 $1,547 2.53%
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Demand Deposits $12,154 $12,728 $13,578
Other Liabilities 726 381 592
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Total Liabilities 64,658 65,764 75,273
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Shareholders' Equity 6,336 5,943 6,771
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Total Average
Liabilities & Equity $70,994 $71,707 $82,044
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Net Interest Income
and Margin $3,884 5.92% $3,517 5.39% $3,840 5.26%
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- --------
</TABLE>
(1) Average loans include nonaccrual loans and are net of average deferred loan
fees of $367,000, $230,000, and $180,000, in 1995, 1994, and 1993
respectively.
(2) Loan interest income includes amortization of loan fees of $112,000,
$135,000, and $204,000 in 1995, 1994, and 1993, respectively.
16
<PAGE>
Change in Interest Income and Interest Expense
(Dollars in Thousands)
<TABLE>
<CAPTION>
Increase(Decrease) Increase(Decrease)
1995 vs 1994 1994 vs 1993
--------------------------------------------------------------
Volume Rate Total Volume Rate Total
-------- ------ ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Federal Funds Sold
and short term investments $64 $118 $182 ($14) $55 $41
Interest earning deposits (5) 0 (5) (11) 0 (11)
Investment securities (149) 134 (15) 276 58 334
Municipal securities 0 0 0 5 0 5
Loans, including fees 239 711 950 (1,243) 288 (955)
--- --- --- ------- --- -----
$149 $963 $1,112 ($987) $401 ($586)
---- ---- ------ ------ ---- ------
Interest-bearing Liabilities:
Federal Funds purchased $2 $0 $2 $0 $0 $0
Demand deposits (69) 57 (12) 34 (47) (13)
Savings deposits (54) 254 200 (175) (31) (206)
Time deposits 180 375 555 (95) 51 (44)
--- --- --- ---- -- ----
$59 $686 $745 ($236) ($27) ($263)
--- ---- ---- ------ ----- ------
Net interest income $90 $277 $367 ($751) $428 ($323)
--- ---- ---- ------ ---- ------
</TABLE>
17
<PAGE>
Earning Assets
- --------------------------------------------------------------------------------
Loans: The largest component of interest-earning assets, average
-----
total loans, increased $2,478,000 in 1995, decreased $13,449,000 in 1994, and
decreased $20,279,000 in 1993. The decrease in net interest income in 1994 and
1993 was primarily related to the reduced volume of earning assets. Average
interest-earning assets (consisting of loans, federal funds, and other
investments) increased in 1995 to $65,632,000 compared to $65,274,000 in 1994
and $73,006,000 in 1993. The average rate on interest earning assets declined
from 7.38% in 1993, to 7.36% in 1994, and increased to 9.01% in 1995.
The Bank's portfolio is centered in commercial lending to small and
medium-sized businesses and, to a lesser degree, residential real estate
construction loans. The Bank's loan clients are located primarily in
Burlingame, San Mateo, and Hillsborough, and throughout San Mateo County. Real
estate construction loans represented 13% of total loans at December 31, 1995,
all of which were for residential projects. In addition, 4% of the Bank's loans
were real estate mortgage loans secured by residential properties, and 3% were
installment loans. Although 68% of the Bank's portfolio were commercial loans,
the Bank's loans are not materially concentrated in any particular industry.
SBA loans at December 31, 1995 represented 12% of the portfolio and were
primarily real estate secured. Generally, real estate loans were secured by real
property, and commercial and other loans were secured by business or personal
assets. Repayment is generally expected from the sale of the related property
for real estate construction loans, and from the cash flow of the borrower for
commercial and other loans.
The following table presents the composition of the loan portfolio at
the end of each of the last five years:
18
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993 1992 1991
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial $32,377 $25,237 $31,896 $44,912 $51,421
Real Estate-const. 6,385 5,915 5,611 13,469 21,377
Real Estate-mortgage 1,653 2,513 3,525 2,995 4,116
Installment loans to 1,531 1,158 892 415 731
individuals
SBA-held for sale 0 1,098 0 1,103 644
SBA-held for invest 5,710 4,255 2,738 1,267 656
- ------------------------------------------------------------------------------
Total loans 47,656 40,176 44,662 64,161 78,945
Allowance for
credit losses (933) (1,605) (1,749) (980) (1,121)
- ------------------------------------------------------------------------------
Loans - net $46,723 $38,571 $42,913 $63,181 $77,824
==============================================================================
</TABLE>
Average loans increased $2,478,000 during 1995, compared to a decrease
of $13,449,000 during 1994. The increase in 1995 reflected the Bank's success
in obtaining new loan clients and an increase loan demand in the Bank's market
area. The decrease in 1994 reflected the Bank's success in obtaining
payoff/paydown of loans which the Bank deemed not worthy of renewal or extension
and a reduced loan demand in the Bank's market area. Average commercial loans
decreased $940,000 during 1995 and $9,150,000 during 1994, and constituted 61%
of average total loans for 1995 and 68% during 1994. In 1993, average
commercial loans decreased $15,801,000, and represented 68% of average total
loans for the year. Average real estate construction loans increased $1,824,000
in 1995 compared to decreases of $5,514,000 in 1994 and $6,572,000 in 1993.
Construction loans represented 14% of average total loans in 1995, compared to
10% in 1994, and 18% in 1993. These loans are concentrated in residential
construction, and typically involve higher loan fees and shorter terms than
other types of loans. Real estate mortgage loans decreased $2,332,000 on
average in 1995, compared to a decreases of $746,000 on average in 1994 and an
increase of $1,306,000 during 1993, representing 5%, 11% and 9% of average total
loans, respectively. Average SBA loans grew $3,475,000 in 1995 over 1994,
$1,400,000 in 1994 over 1993, and $977,000 in 1993, and represented 17% of
average total loans in 1995, 9% of average total loans in 1994 and 4% of average
total loans in 1993. Other categories of loans decreased somewhat from 1993 to
1994 to 1995, as the Bank continued a shift to increased lending to commercial
businesses.
Average loans as a percentage of average earning assets was 66% in
1995, compared to 62% in 1994, and 74% in 1993. The yield on average total
loans was 10.91% in 1995, compared with 9.24% in 1994, and 8.71% in 1993. The
majority of the Bank's loans were tied to the Bank's base rate, which typically
followed the prime lending rates of major banks. Market interest rates rose
five times during 1994 from 6.50% to 9.00%. Market interest rates increased
once and decreased twice during 1995. The Bank's average base rate was 9.33%
during 1995 compared with 7.64% during 1994 and 6.50% during 1993.
19
<PAGE>
The following table sets forth the interest rate sensitivity and the
maturity schedule for the loan portfolio as of December 31, 1995:
<TABLE>
<CAPTION>
(Dollars in thousands) Total
- --------------------------------------------------
<S> <C>
One Year or less:
Floating rate $44,821
Fixed rate 1,683
Two to five years:
Floating rate 93
Fixed rate 1,046
After five years:
Floating rate 0
Fixed rate 13
Total $47,656
==================================================
</TABLE>
Investments: The average balance of Federal Funds sold, other short-term
-----------
investments, and investment securities was $22,432,000 in 1995 compared with
$24,552,000 in 1994 and $18,835,000 in 1993. These investments are maintained to
meet the Bank's liquidity needs, as well as for pledging requirements on
bankruptcy and public deposits, where the Bank is required to maintain
collateral on those deposits over $100,000. The average balance of these
earning assets as a percentage of average total earning assets decreased to 34%
during 1995, compared with 38% during 1994, and 26% during 1993. The yield on
the Bank's investments was 5.35% in 1995, compared with 4.22% in 1994, and 3.55%
in 1993, generally following the trend of market interest rates described above.
During the fourth quarter of 1994, Community Assets Management, Inc.
liquidated the U.S. Government Money Market Fund ("Fund"), in which the Bank had
invested $2,000,000. As of December 31, 1994, shareholders of the Fund,
including the Bank, had received $0.961 for each $1.00 invested in the Fund.
The Bank's loss in principal amounted to approximately $69,000, which was
charged to other expense.
20
<PAGE>
Information regarding the book value of investment securities as of
December 31, 1995 and 1994 is set forth in Note 3 of the Company's financial
statements. The following table summarizes the maturity and weighted average
yield on investment securities at December 31, 1995:
<TABLE>
<CAPTION>
Book Weighted
(Dollars in thousands) Value Average Yield
- ------------------------------------------------
<S> <C> <C>
U.S Treasury
Within one year $10,084 5.29
One to two years 1,997 4.90
Two to five years
Municipal
Over 10 years 184 5.10
Mutual Funds
Within one year 2,209 5.59
Total $14,474 5.24
================================================
</TABLE>
Funding
- --------------------------------------------------------------------------------
Interest and non-interest bearing deposits represent the Bank's
primary source of funds. In 1995 and 1994, total demand deposits, money market
checking and savings deposits decreased on average over the prior year, while
time deposits increased. In 1992, all categories of deposits, except time
deposits, increased on average. Total average deposits decreased in 1995 to
$63,932,000 from $65,383,000 in 1994, and decreased in 1994 from $74,681,000 in
1993. The following table sets forth the average amount of and average rate
paid on deposits during 1995 and 1994:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
- ------------------------------------------------------------
Average Average
Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Non-interest
bearing demand $12,154 n/a $12,728 n/a
Interest bearing
demand 8,985 2.30% 13,028 1.68%
Savings 25,155 3.63% 27,214 2.62%
Time 17,615 5.15% 12,413 2.84%
Other Borrowings 23 5.57% 0 n/a
- ------------------------------------------------------------
Total $63,932 $65,383
============================================================
</TABLE>
21
<PAGE>
The Bank's internal policy does not permit the purchase of brokered
deposits, but focuses instead on developing an overall banking relationship with
its clients. Substantially all of the Bank's deposits originate in San Mateo
County and surrounding communities. Other than bankruptcy deposits, no material
portion of the Bank's deposits has been obtained from a single source. The
Bank's bankruptcy deposits increased during 1994 to $10,300,000 by year-end, or
17% of total deposits, and increased during 1995 to $15,246,000, or 21% of total
deposits by December 31, 1995. On average, bankruptcy deposits constituted 14.4%
during 1994 and 18.5% during 1995. The following table summarizes the maturities
of certificates of deposit of $100,000 or more outstanding at December 31, 1995:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ----------------------------------------------------------
<S> <C>
Three months or less $ 6,553
Three to six months 3,489
Six to twelve months 400
Over twelve months 0
- ----------------------------------------------------------
Total $10,442
==========================================================
</TABLE>
Non-interest bearing demand deposits on average represented 19%, 19%,
and 18% of total average deposits for the years ending December 31, 1995, 1994,
and 1993, respectively. At December 31, 1995, non-interest bearing demand
deposits were 20% of total deposits.
Net Yield
- --------------------------------------------------------------------------------
The net yield on average earning assets was 5.92% in 1995, compared
with 5.39% in 1994, and 5.26% in 1993. The increase from 1994 to 1995 and the
increase from 1993 to 1994 followed the general trend in overall market interest
rates. As previously discussed, a majority of the Bank's loans reprice
immediately with a change in the Bank's base rate, which generally follows prime
rate changes. However, the impact of rate changes on deposits is spread over
several months, as they reprice over a longer time period, and are more subject
to competitive pressures. The sensitivity of the earnings of the Bank to
interest rates is discussed in more detail in the section entitled "Interest
Rate Sensitivity".
22
<PAGE>
Credit Quality
- --------------------------------------------------------------------------------
The responsibility for the loan policy of the Bank resides with the
Bank's Senior Credit Officer under the supervision of the President and the
Directors' Loan Committee. The Senior Credit Officer is responsible for
ensuring that the loan portfolio is maintained in compliance with the written
loan policy, and all relevant regulations and statutes. He reviews all loans
approved by individual account officers to ensure compliance with Bank loan
policy and supervises all loans classified adversely by the regulatory
examiners, or those considered to be a problem by an account officer.
Management strives to control the level of loan charge-offs through
its emphasis on credit quality in the loan approval process as well as active
credit administration and monitoring. The Bank has contracted the services of
an outside loan review consultant to periodically grade new loans and to review
the existing loan portfolio. Problem loans are actively followed by senior
management.
Management's evaluation of the adequacy of the allowance for credit
losses is based on an ongoing review of the loan portfolio, an assessment of the
impact of forecasted economic conditions, and other relevant factors.
Management believes that the allowance is adequate to absorb losses that may
arise from the loan portfolio; however, subsequent changes in facts or
circumstances could result in credit losses which could be significant in
relation to the amount of the allowance.
23
<PAGE>
The table which follows summarizes the activity in the allowance for
credit losses for the last five years:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1 $ 1,605 $ 1,749 $ 980 $ 1,121 $ 908
Charge-offs:
Commercial (184) (108) (1,576) (1,786) (165)
Real Estate-const 0 0 (115) (270) (28)
Real Estate-mortgage (426) (133) 0 0 0
Installment loans to
individuals (56) 0 (60) 0 (3)
SBA (43) (2) 0 (33) 0
-------------------------------------------------
(709) (243) (1,751) (2,089) (196)
-------------------------------------------------
Recoveries:
Commercial 50 56 218 91 196
Real Estate-const 0 0 2 0 0
Real Estate-mortgage 52 36 0 7 0
Installment loans to
individuals 0 5 5 0 6
SBA 3 2 0 0 0
-------------------------------------------------
105 99 225 98 202
-------------------------------------------------
Net (charge-offs) recoveries (604) (144) (1,526) (1,991) 6
Provision for credit losses (68) 0 2,295 1,850 207
- -------------------------------------------------------------------------------
Balance, December 31 $ 933 $ 1,605 $ 1,749 $ 980 $ 1,121
===============================================================================
Average amount of loans
outstanding $43,200 $40,722 $54,171 $74,450 $78,104
Total loans as of
December 31 47,656 40,176 44,662 64,161 78,945
Net charge-offs as a
% of average loans 1.40% 0.35% 2.82% 2.67% (.01%)
Allowance for credit loss
as % of year-end loans 1.96% 3.99% 3.92% 1.53% 1.42%
Allowance for credit loss
as % of Impaired Assets 89.54% 76.10% 50.99% 33.42% 351.41%
</TABLE>
The Bank reduced its allowance for credit loss by $68,000 with a
corresponding reduction in the provision for loan losses due to substantial
improvement in the asset quality in the loan portfolio. The Bank provided
$2,295,000, and $1,850,000, in 1993 and 1992, respectively, because several of
the Bank's borrowers, especially those in the real estate industry, experienced
adverse effects from the lengthy recession.
24
<PAGE>
Potential impaired loans are identified by management as part of its
ongoing evaluation and review of the loan portfolio. Management generally
places loans on nonaccrual status when they become 90 days past due except when
well secured and in the process of collection. Loans are charged off when in
the opinion of management, collection appears unlikely. Restructured loans are
those where management has granted a concession on the interest rate or original
payment schedule to the borrower, due to financial difficulties of the borrower.
During 1995, the additional interest income that would have been recorded on
impaired loans if these loans had been current the entire year was $161,000.
The interest income that was recognized on these loans in 1995 was $0. The
following table summarizes nonaccrual loans, loans past due 90 days and still
accruing, and restructured loans at each year end:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,042 $2,005 $3,430 $2,932 $ 319
Accruing loans past due
90 days or more 0 104 926 786 300
Restructured loans 0 0 11 21 32
- ----------------------------------------------------------------
Total $1,042 $2,109 $4,367 $3,739 $ 651
================================================================
</TABLE>
As of year-end 1995 the $1,042,000 of impaired loans was comprised of
one construction real estate loan. During 1994 $1,758,000, or 88% was one
construction real estate loan, $100,000, or 5%, was one loan secured by other
real estate, and $147,000, or 7%, was one unsecured loan.
It is the policy of management to maintain the allowance for credit
losses at a level which management believes adequate for known and future risks
inherent in the loan portfolio. Management believes that the provision for
credit losses during 1995, and the allowance for credit losses at December 31,
1995, are prudent and warranted, based on information then available. However,
no prediction of the ultimate level of loans charged off in future years can be
made with any certainty. Although management evaluates the adequacy of the
allowance for credit losses on an overall basis, the following table presents an
estimated allocation by specific categories of loans at December 31, 1995 and
1994:
25
<PAGE>
<TABLE>
<CAPTION>
1995 1994
--------------------------------------------------------
Allocation Loans As A Allocation Loans As A
of Allowance Percent of of Allowance Percent of
Type of Loan Balance Total Loans Balance Total Loans
- ------------ ------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Commercial 91,000 68% $ 613,000 63%
Real estate
- construction 156,000 13 264,000 15
- mortgage 135,000 4 35,000 6
Installment loans
to individuals 35,000 3 20,000 3
SBA loans 87,000 12 93,000 13
Unallocated 429,000 - 580,000 -
- --------------------------------------------------------------------------
Total $933,000 100% $1,605,000 100%
==========================================================================
</TABLE>
Other Real Estate Owned
- --------------------------------------------------------------------------------
At any given time, the Bank may hold real estate acquired from
borrowers through foreclosures. Prior to recording such a foreclosure, the Bank
provides for any expected loss in its allowance for credit losses. At the time
the Bank records a property as foreclosed, any difference between the loan
balance and the estimated net realizable value (defined as, fair value less
estimated selling costs) of the acquired property is charged to the allowance
for credit losses. Also, at that time, the estimated net realizable value of
the acquired property is reclassified to other real estate owned. Any subsequent
decline in the estimated net realizable value would be charged directly to other
expense. The estimated net realizable value of Other Real Estate Owned as of
December 31, 1995 was $32,000, as well as $32,000 as of December 31, 1994.
26
<PAGE>
Other Income and Expenses
- --------------------------------------------------------------------------------
Other income consists of service charges on deposit accounts and other
related services, gains on sale of SBA loans, gains on sales of investment
securities, and other miscellaneous income. In 1993, other income and expenses
reflected non-recurring income of $101,000 and expense recovery of $54,000 in
connection with the sale of a note formerly held as collateral.
Total other income decreased to $569,000 in 1995 compared with
$666,000 in 1994, and $1,014,000 in 1993. The major components of other income
include the following: gains on SBA loan sales in 1995 of $265,000 compared to
$334,000 in 1994 and $590,000 in 1993, reflecting management's decision not to
sell the guaranteed portion of SBA loans in the 4th quarter of 1994, and less
gross SBA loans sold during 1995; service fees on SBA loans increased to
$145,000 in 1995, compared to $117,000 in 1994, and $51,000 in 1993; service
charges on deposit accounts was $72,000 in 1995, down from $111,000 in 1994,
and $138,000 in 1993, reflecting management's decision to eliminate analysis
service charges. Gains on sales of investment securities during 1995 was
$12,000 compared to $0 in 1994, and $42,000 in 1993.
As a percentage of average earning assets, other expenses were 5.6% in
1995, down from 6.0% in 1994, and 5.7% in 1993. The decreases were due
primarily to expenses associated with certain non-performing loan workouts,
regulatory fees and occupancy. In addition, in 1994 and in 1993 the increase
was also due to a decrease in average earning assets. The major components of
other expenses are presented in the following table in dollars and as a
percentage of average earning assets:
<TABLE>
<CAPTION>
1995 1994 1993
(Dollars in thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries/Benefits $1,937 3.0% $1,938 3.0% $2,105 2.9%
Occupancy 541 0.8 556 0.8 586 0.8
Professional Services 405 0.6 532 0.8 421 0.6
Telphone/Postage/Supplies 120 0.2 153 0.2 156 0.2
Marketing/Promotion 180 0.3 130 0.2 141 0.2
Data Processing 131 0.2 129 0.2 170 0.2
Regulatory Fees 111 0.2 205 0.3 243 0.3
Other 245 0.3 296 0.5 348 0.5
- ------------------------------------------------------------------------------
Total $3,670 5.6% $3,939 6.0% $4,170 5.7%
==============================================================================
</TABLE>
27
<PAGE>
Income Taxes
- --------------------------------------------------------------------------------
The Company's effective tax rate was 16.0% in 1995, 40.9% in 1994, and
(27.5%)% in 1993. The decrease in the effective tax rate from 1994 to 1995
reflects management's conclusion that certain deferred tax assets, which were
previously not recognizable, are more likely than not to be realized. See Note
7 of the Company's consolidated financial statements.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes" effective January 1, 1993. The
cumulative effect of adopting SFAS No. 109 on the Company's financial statements
was to reduce 1993 net loss by $33,000, or $0.06 per share.
New Accounting Pronouncements
- --------------------------------------------------------------------------------
The Company is required to adopt SFAS No. 123, "Accounting for Stock-
Based Compensation", in 1996. SFAS No. 123 establishes accounting and
disclosure requirements using a fair value-based method of accounting for stock-
based employee compensation plans. Under SFAS No. 123, the Company may either
adopt the new fair value-based accounting method or continue the intrinsic
value-based method and provide pro forma disclosures of net income and earnings
per share as if the accounting provisions of SFAS No. 123 had been adopted. The
Company plans to adopt only the disclosure requirements of SFAS No. 123;
therefore, such adoption will have no effect on the Company's consolidated net
earnings or cash flows.
In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," SFAS No. 121 is effective for fiscal years beginning
after December 15, 1995. This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an assets may not be recoverable. The financial statement
impact of adopting SFAS No. 121 is not expected to be material.
As required by SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments", the Company has estimated the fair value of its
financial instruments at December 31, 1995 and included such disclosure in Note
8 to the consolidated financial statements on page 48.
28
<PAGE>
Interest Rate Sensitivity
- --------------------------------------------------------------------------------
The Company's earnings may be affected by the degree to which the
Company's assets and liabilities are sensitive to fluctuations in interest
rates. Interest rate sensitivity, like liquidity, is directly affected by the
timing of the maturity of assets and liabilities. If assets and liabilities do
not reprice simultaneously and in equal volume, the Company is exposed to
possible favorable or unfavorable effects on income from changes in market
interest rates.
The table below sets forth the distribution of repricing of the
earning assets and interest-bearing liabilities included in the Company's
consolidated balance sheet at December 31, 1995:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(Dollars in thousands):
Assets & Liabilities Up to To 180 To one To five Over five
which mature or reprice 90 days days year years years
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $41,235 $43,474 $46,301 $47,440 $47,453
Other earning assets 12,249 12,249 19,343 21,340 21,524
- ------------------------------------------------------------------------------
Total $53,484 $55,723 $65,644 $68,780 $68,977
==============================================================================
Interest-bearing Liabilities:
Interest-bearing
deposits $48,671 $54,023 $54,899 $54,899 $54,899
Other borrowings 200 200 200 200 200
- ------------------------------------------------------------------------------
Total $48,871 $54,223 $55,099 $55,099 $55,099
==============================================================================
Net position of Assets
(Liabilities) $ 4,613 $ 1,500 $10,545 $13,681 $13,878
Ratio of rate sensitive
assets to rate sensitive
liabilities 1.09 1.03 1.19 1.25 1.25
</TABLE>
It is management's objective to maintain stability in the growth of
net interest income despite fluctuating market interest rates by maintaining an
appropriate mix of interest rate sensitive assets and liabilities. The
Company's short-term interest rate sensitive position at December 31, 1995 was
slightly asset sensitive; therefore, a change in market interest rates could
cause more assets to reprice sooner than liabilities. As a result, a general
decline in interest rates could cause a slight short-term decline in the spread
between the rates earned on assets and the rates paid on interest bearing
liabilities. Conversely, a rise in interest rates could result in a slight
short-term increase in the spread.
The Bank's interest rate sensitive position conforms to the Bank's
policy. Management believes that its asset/liability management policy protects
the Bank's earnings from significant adverse affects which could be caused by
changes in market interest rates.
29
<PAGE>
Liquidity
- --------------------------------------------------------------------------------
Liquidity management ensures that funds are available to meet normal
deposit transaction requirements and to provide funds for loans to clients. The
Company's liquidity ratio, defined as the percent of liquid assets to net
deposits, was 24%, 27%, 35%, and at December 31, 1995, 1994, and 1993,
respectively. During 1995, the liquidity ratio ranged from 21% to 35%. Liquid
assets include cash and deposits due from banks, short-term time deposits,
federal funds sold, mutual funds, and unpledged U. S. Government securities
maturing in less than one year. Additional sources of asset liquidity are
maturing loans and the sale of loans and investments available for sale. The
Bank also has an informal federal funds borrowing arrangement with correspondent
banks and access to a secured line of credit with the Federal Reserve Bank to
meet unforeseen loan demand or deposit outflows.
Capital
- --------------------------------------------------------------------------------
Management seeks to maintain adequate capital to support anticipated
asset growth and credit risks and to ensure that the Company meets all
regulatory capital guidelines. See Note 12 of the Company's consolidated
financial statements. The increase in capital for the Company for 1995 and 1994
was due to net operating income, and the reduction in capital for the Company
during 1993 was due to the net operating loss.
The Bank is subject to guidelines issued by the FDIC including the
maintenance of a minimum risk-based capital ratio of 9.0% and a minimum tier 1
leverage ratio of 6.0%. As of December 31, 1995, the Bank was in compliance
with a risk-based capital ratio of 11.32% and a tier 1 leverage ratio of 7.96%.
Future growth and earnings retention, as currently projected by
management, are expected to provide for the maintenance of capital ratios in
conformance with the requirements.
Effects of Inflation
- --------------------------------------------------------------------------------
The impact of inflation on a financial institution differs
significantly from that exerted on an industrial concern, primarily because its
assets and liabilities consist largely of monetary items. The most direct effect
of inflation is higher interest rates. However, the Bank's earnings are
affected by the spread between the yield on earning assets and rates paid on
interest-bearing liabilities rather than the absolute level of interest rates.
Additionally, there may be some upward pressure on the Company's operating
expenses, such as adjustments in staff expense and occupancy expense, based upon
consumer price indices. In the opinion of management, inflation has not had a
material effect on the consolidated results of operations.
30
<PAGE>
Commitments and Lines of Credit
- --------------------------------------------------------------------------------
In the normal course of business, there were $23,375,000 in
outstanding commitments to extend credit which are not reflected in the
financial statements, including $1,245,000 of standby letters of credit
outstanding at December 31, 1995. The Bank's exposure to credit loss is limited
to the amount of funds drawn. The Bank does not anticipate losses as a result
of these transactions.
Return on Equity and Assets
- --------------------------------------------------------------------------------
The following table presents selected financial ratios for the Company
for the years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
------ -----
<S> <C> <C>
Percentage of net income to:
Average shareholders' equity 11.33% 2.42%
Average total assets 1.01% 0.20%
Dividend Payout Ratio N/A N/A
Percentage of average shareholders'
equity to average total assets 8.92% 8.29%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
For consolidated financial statements of the Company, See ITEM 14,
"EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Pursuant to General Instruction G(3) to Form 10-K, the information
called for by this item of Form 10-K is incorporated herein by reference from
the definitive Proxy Statement of the Company to be filed not later than 120
days after December 31, 1995 pursuant to Regulation 14A involving the election
of directors.
31
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Pursuant to General Instruction G(3) to Form 10-K, the information
called for by this item of Form 10-K is incorporated herein by reference from
the definitive Proxy Statement of the Company to be filed not later than 120
days after December 31, 1995 pursuant to Regulation 14A involving the election
of directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
------------------------------------------------------
MANAGEMENT
- ----------
Pursuant to General Instruction G(3) to Form 10-K, the information
called for by this item of Form 10-K is incorporated herein by reference from
the definitive Proxy Statement of the Company to be filed not later than 120
days after December 31, 1995 pursuant to Regulation 14A involving the election
of directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Pursuant to General Instruction G(3) to Form 10-K, the information
called for by this item of Form 10-K is incorporated herein by reference from
the definitive Proxy Statement of the Company to be filed not later than 120
days after December 31, 1995 pursuant to Regulation 14A involving the election
of directors.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES, AND REPORTS
-----------------------------------------------------
ON FORM 8-K
-----------
(a) (1) and (2)--The following documents are filed as part of this report:
1. -- All consolidated financial statements and financial statement
schedules are submitted as a separate section of this report (See, "Index to
Financial Statements", page 33). All schedules have been omitted since the
required information is included in the consolidated financial statements or
notes thereto.
(a) (3) --Exhibits (See, "Exhibit Index", page 50).
(b) --Reports on Form 8-K. - None
32
<PAGE>
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.
BURLINGAME BANCORP
Date __________________ ------------------------------------------
Theodore H. Kruttschnitt, III
Chairman of the Board,
Chief Executive Officer
(Principal Executive Officer)
Date __________________ ------------------------------------------
Larry W. Woods
Interim Chief Financial Officer
(Principal Financial Officer & Principal
Accounting Officer)
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 and in the capacities and on the dates indicated.
Signature Date
--------- ----
- -----------------------------
David V. Campbell
Director
- -----------------------------
Michael L. Chandler
Director
- -----------------------------
Fred W. Concklin
Director
- -----------------------------
Quentin L. Cook
Director
- -----------------------------
Michael R. Harvey
Director
- -----------------------------
Theodore H. Kruttschnitt, III
Director
- -----------------------------
Ronald C. Wornick
Director
33
<PAGE>
BURLINGAME BANCORP AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 35
Consolidated Balance Sheets - December 31, 1995 and 1994 36
Consolidated Statements of Operations--For The Years Ended
December 31, 1995, 1994 and 1993 37
Consolidated Statements of Shareholders' Equity--For The
Years Ended December 31, 1995, 1994 and 1993 38
Consolidated Statements of Cash Flows--For the Years Ended
December 31, 1995, 1994, and 1993 39
Notes to Consolidated Financial Statements 40
34
<PAGE>
[LOGO OF DELOITTE & TOUCHE LLP APPEARS HERE]
---------------------------------------------------------------
50 Fremont Street Telephone: (415)247-4000
San Francisco, California 95105-2230 Facsimile: (415)247-4329
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Burlingame Bancorp:
We have audited the accompanying consolidated balance sheets of Burlingame
Bancorp and subsidiary (the "Company") as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Burlingame Bancorp and subsidiary
at December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for certain investments in debt and equity
securities effective January 1, 1994 and its method of accounting for income
taxes effective January 1, 1993 to conform with Statements of Financial
Accounting Standards No. 115 and No. 109, respectively.
/s/ DELOITTE & TOUCHE LLP
March 26, 1996
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
35
<PAGE>
<TABLE>
<CAPTION>
BURLINGAME BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND EQUIVALENTS:
Cash and due from banks $ 4,363,000 $ 3,512,000
Federal funds sold 7,050,000 400,000
----------- -----------
Total cash and equivalents 11,413,000 3,912,000
INVESTMENT SECURITIES (Market value: 1995, $14,470,000; 1994, $19,331,000) 14,474,000 19,639,000
LOANS HELD FOR SALE 1,098,000
LOANS (Net of allowance for credit losses: 1995, $933,000; 1994, $1,605,000) 46,723,000 37,473,000
PREMISES AND EQUIPMENT - Net 882,000 1,132,000
OTHER REAL ESTATE OWNED 32,000 32,000
INTEREST RECEIVABLE AND OTHER ASSETS 2,551,000 1,395,000
----------- -----------
TOTAL $76,075,000 $64,681,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Interest-bearing $54,899,000 $46,151,000
Noninterest-bearing 13,766,000 12,058,000
----------- -----------
Total deposits 68,665,000 58,209,000
INTEREST PAYABLE AND OTHER LIABILITIES 720,000 537,000
----------- -----------
TOTAL LIABILITIES 69,385,000 58,746,000
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Preferred stock - no par value: authorized, 20,000,000 shares; none outstanding
Common stock - no par value: authorized, 20,000,000 shares; outstanding, 576,974 shares
in 1995 and 1994 4,567,000 4,567,000
Unrealized loss on investment securities available for sale,
net of taxes: 1995, $33,000; 1994, $51,000 (64,000) (101,000)
Retained earnings 2,187,000 1,469,000
----------- -----------
Total shareholders' equity 6,690,000 5,935,000
----------- -----------
TOTAL $76,075,000 $64,681,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
BURLINGAME BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- -----------------------------------------------------------------------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME:
Loans (including fees) $4,714,000 $3,764,000 $ 4,719,000
Federal funds sold and short-term investments 396,000 214,000 173,000
Investment securities 803,000 823,000 495,000
---------- ---------- -----------
Total interest income 5,913,000 4,801,000 5,387,000
INTEREST EXPENSE 2,029,000 1,284,000 1,547,000
---------- ---------- -----------
NET INTEREST INCOME 3,884,000 3,517,000 3,840,000
PROVISION FOR CREDIT LOSSES (68,000) 2,295,000
---------- ---------- -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 3,952,000 3,517,000 1,545,000
---------- ---------- -----------
OTHER INCOME:
Service charges on deposit accounts 72,000 111,000 138,000
Gain on sale of loans held for sale 265,000 334,000 590,000
Realized gain on sale of investment securities available-for-sale 12,000 42,000
Other 220,000 221,000 244,000
---------- ---------- -----------
Total other income 569,000 666,000 1,014,000
---------- ---------- -----------
OTHER EXPENSES:
Salaries and benefits 1,937,000 1,938,000 2,105,000
Occupancy 541,000 556,000 586,000
Professional services 405,000 532,000 421,000
Telephone, postage and supplies 120,000 153,000 156,000
Marketing and promotion 180,000 130,000 141,000
Data processing 131,000 129,000 170,000
Regulatory fees 111,000 205,000 243,000
Other 245,000 296,000 348,000
---------- ---------- -----------
Total other expenses 3,670,000 3,939,000 4,170,000
---------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING METHOD 851,000 244,000 (1,611,000)
INCOME TAXES 133,000 100,000 (443,000)
---------- ---------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
METHOD 718,000 144,000 (1,168,000)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD (33,000)
---------- ---------- -----------
NET INCOME (LOSS) $ 718,000 $ 144,000 $(1,135,000)
========== ========== ===========
INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT:
Primary:
Income (loss) before cumulative effect of change in accounting method $1.19 $0.25 $ (2.03)
Cumulative effect of change in accounting method 0.06
---------- ---------- -----------
Net income (loss) $1.19 $0.25 $ (1.97)
========== ========== ===========
Fully diluted:
Income (loss) before cumulative effect of change in accounting method $1.14 $0.25 $ (2.03)
Cumulative effect of change in accounting method 0.06
---------- ---------- -----------
Net income (loss) $1.14 $0.25 $ (1.97)
========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
<TABLE>
<CAPTION>
BURLINGAME BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Net
Unrealized
Losses on Unrealized
Investment Loss on
Common Stock Securities Marketable
------------------------- Available- Equity Retained Shareholders
Shares Amount for-Sale Securities Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1993 576,974 $4,567,000 $2,460,000 $7,027,000
UNREALIZED LOSS
ON MUTUAL FUND
INVESTMENT
SECURITIES $(28,000) (28,000)
NET LOSS (1,135,000) (1,135,000)
-------- ---------- -------- ---------- ----------
DECEMBER 31, 1993 576,974 4,567,000 (28,000) 1,325,000 5,864,000
UNREALIZED LOSS
ON INVESTMENT
SECURITIES
AVAILABLE-FOR-SALE,
JANUARY 1, 1994 (Note 1) $ (28,000) 28,000
NET CHANGE IN
UNREALIZED LOSSES
ON INVESTMENT
SECURITIES
AVAILABLE-FOR-SALE,
NET OF TAX (73,000) (73,000)
NET INCOME 144,000 144,000
-------- ---------- --------- -------- ---------- ----------
BALANCE,
DECEMBER 31, 1994 576,974 4,567,000 (101,000) 1,469,000 5,935,000
NET CHANGES IN
UNREALIZED LOSSES
ON INVESTMENT
SECURITIES
AVAILABLE-FOR-SALE,
NET OF TAX 37,000 37,000
NET INCOME 718,000 718,000
-------- ---------- --------- -------- ---------- ----------
BALANCE,
DECEMBER 31, 1995 576,974 $4,567,000 $ (64,000) $ - $2,187,000 $6,690,000
======== ========== ========= ======== ========== ==========
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
BURLINGAME BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ----------------------------------------------------------------------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 718,000 $ 144,000 $ (1,135,000)
Reconciliation to net cash provided by (used in)
operating activities:
Cumulative effect of change in accounting method (33,000)
Provision for credit losses (68,000) 2,295,000
Deferred income taxes 180,000 (58,000) (169,000)
Depreciation and amortization of premises and equipment 311,000 328,000 332,000
Amortization of deferred loan fees (212,000) (135,000) (204,000)
Amortization of investment security premiums (discounts) (135,000) (8,000) 161,000
Origination of loans held for sale (3,443,000) (7,117,000) (6,430,000)
Sales of loans held for sale 4,541,000 6,353,000 6,944,000
Realized gain on sale of investment securities available-for-sale (12,000) (42,000)
(Increase) decrease in interest receivable and other assets (1,355,000) 205,000 102,000
Increase in interest payable and other liabilities 183,000 78,000 129,000
------------ ------------ ------------
Net cash provided by (used in) operating activities 708,000 (210,000) 1,950,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Activities in securities held-to-maturity:
Purchases (14,201,000) (16,387,000)
Maturities 14,750,000 8,300,000
Activities in securities available-for-sale:
Purchases (1,623,000) (100,000)
Maturities 1,500,000
Sales 4,942,000
Purchases of investment securities (13,496,000)
Proceeds from maturing investment securities 6,006,000
Proceeds from sales of investment securities 5,484,000
Net increase in interest-bearing deposits with banks 500,000
Net loan originations, collections and principal repayments (8,970,000) 5,241,000 17,892,000
Purchases of premises and equipment (61,000) (144,000) (329,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities (3,663,000) (2,590,000) 15,557,000
------------ ------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in interest-bearing deposits 1,708,000 (10,329,000) (13,202,000)
Net increase (decrease) in noninterest-bearing deposits 8,748,000 (747,000) (1,665,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 10,456,000 (11,076,000) (14,867,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 7,501,000 (13,876,000) 2,640,000
CASH AND EQUIVALENTS:
Beginning of year 3,912,000 17,788,000 15,148,000
------------ ------------ ------------
End of year $ 11,413,000 $ 3,912,000 $ 17,788,000
============ ============ ============
OTHER CASH FLOW INFORMATION:
Interest paid $ 1,993,000 $ 1,285,000 $ 1,561,000
Taxes paid 83,000 108,000 212,000
NONCASH INVESTING AND FINANCING ACTIVITIES:
Loans transferred to other real estate owned 375,000 37,000
Investment securities transferred from held-to-maturity
to available-for-sale 4,930,000
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
BURLINGAME BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Burlingame Bancorp (the "Company") is a bank holding company
based in Burlingame, California. The Bank serves as the holding company for
Burlingame Bank and Trust (the "Bank"), a California state chartered
commercial bank. The Bank is community-oriented with one branch serving
primarily San Mateo County providing a wide range of financial services to
both consumers and smaller businesses. The Company's primary regulators are
the Federal Reserve Board (the "FRB"), the Federal Deposit Insurance
Corporation (the "FDIC") and the California State Banking Department. The
Company maintains insurance on its customer deposit accounts with the FDIC,
which requires quarterly payments of deposit insurance premiums.
Basis of Financial Statement Presentation - The consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles and with general practices within the banking
industry. In preparing such financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ significantly from
those estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the
allowance for credit losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection
with the determination of the allowance for credit losses and the valuation
of real estate owned, management obtains independent appraisals for
significant properties.
Basis of Consolidation - The accompanying consolidated financial statements
include Burlingame Bancorp (the "Company") and its wholly owned subsidiary,
Burlingame Bank & Trust Co. (the "Bank"). All intercompany amounts are
eliminated in consolidation.
Cash and due from banks include balances with the Federal Reserve Bank. The
Bank is required by federal regulations to maintain certain minimum average
balances with the Federal Reserve, based primarily on the Bank's average
daily deposit balances. At December 31, 1995, the Bank had compensating
balances with the Federal Reserve of $194,000 (1994, $480,000).
Cash and equivalents include cash on hand, amounts due from banks, short-
term investments (money market funds) and federal funds sold. Generally,
federal funds are sold for one-day periods. Cash equivalents have remaining
terms to maturity of three months or less from date of acquisition.
Investment Securities - Effective January 1, 1994, the Bank adopted
Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"),
Accounting for Certain Investments in Debt and Equity Securities, and
changed its accounting policy to classify investment securities as held to
maturity or available for sale. The effect of adopting SFAS No. 115 at
January 1, 1994 was not material.
Held to maturity securities are those securities which management has the
ability and intent to hold to maturity. These securities are stated at
cost, adjusted for amortization of premiums and accretion of discounts to
maturity using methods approximating the interest method.
40
<PAGE>
Securities available for sale are held for indefinite periods of time.
These securities are carried at market value, with unrealized gains and
losses, after applicable income taxes, recorded as a separate component of
stockholders' equity. Gains on the sale of securities available for sale,
determined on the specific cost identification basis, are recorded in other
income at the time of sale.
Prior to January 1, 1994, investment securities were so classified based on
the Bank's ability and intent to hold them to maturity. Investment
securities were carried at cost, adjusted for amortization of premium and
accretion of discount. Mutual fund investments were stated at the lower of
cost or market and unrealized losses, if any, were included in
shareholders' equity. The cost of investments sold was determined using the
specific identification method.
Loans held for sale consist of the guaranteed portion of Small Business
Administration ("SBA") loans and are stated at the lower of cost or market
applied on an aggregate basis, net of loan origination fees and related
direct costs. The allocation of recorded investment in loans partially
guaranteed by the SBA, between the guaranteed portion to be sold and the
unguaranteed portion retained, is based upon the relative fair values of
each portion at the date of sale. The servicing of SBA loans is retained by
the Company.
Loans and Loan Fees - Loans held for investment are reported at the
principal amount outstanding, net of unearned income, deferred fees and
costs, premiums and discounts, and the allowance for credit losses.
Interest on loans is calculated by using the simple-interest method on the
daily balance of the principal amount outstanding.
Loan origination and commitment fees and direct loan origination costs on
loans held for investment are deferred and amortized as an adjustment of
the related loan's yield over the contractual term of the related loan. For
loans held for sale, such fees and costs are included in the gain or loss
on sale of the loan.
On January 1, 1995, the Bank adopted SFAS No. 114 Accounting by Creditors
for Impairment of a Loan and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. These statements
address the accounting and reporting by creditors for impairment of certain
loans. In general, a loan is impaired when, based upon current information
and events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement. These
statements are applicable to all loans, uncollateralized as well as
collateralized, except large groups of smaller-balance homogeneous loans
that are collectively evaluated for impairment such as credit cards,
residential mortgage and consumer installment loans, loans that are
measured at fair value or at the lower of cost or fair value and leases.
Impairment is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, except that as a
practical expedient, the Company may measure impairment based on a loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Loans are measured for impairment as part of the
Company's normal internal asset review process. The effect of adopting SFAS
114 was not material to the Bank's 1995 financial position or results of
operations.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued either
when reasonable doubt exists as to the full and timely collection of
interest or principal or when a loan becomes contractually past due by 90
days or more with respect to interest or principal. When a loan is placed
on nonaccrual status, all interest previously accrued but not collected is
reversed against current period interest income. Payments received on
nonaccrual or impaired loans are credited to principal until such time as
the recovery of principal and interest is assured.
41
<PAGE>
Allowance for credit losses is maintained at a level deemed appropriate by
management to provide for known and inherent risks in the loan portfolio
and commitments to extend credit. The allowance is based upon management's
continuing assessment of various factors affecting the collectibility of
loans and commitments to extend credit, including current and projected
economic conditions, past credit experience and continuing review of the
loan portfolio. Loans deemed uncollectible are charged off and deducted
from the allowance; subsequent recoveries are credited to the allowance.
While management uses the best information available on which to base
estimates, future adjustments to the reserve may be necessary if economic
conditions, particularly in San Mateo County, differ substantially from the
assumptions used by management.
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-
line basis over the shorter of the estimated useful lives of the related
assets or the term of the lease as follows:
<TABLE>
<CAPTION>
<S> <C>
Lease rights and leasehold improvements 5-17 years
Furniture and equipment 3-10 years
</TABLE>
Other real estate owned consists of real estate acquired in settlement of
loans and carried at the lower of cost or net realizable value (defined as
fair value less estimated selling costs). Losses recognized at the time of
foreclosure in full or partial satisfaction of loans are charged against
the allowance for credit losses. The Bank charges current earnings with a
provision for losses on the anticipated sale of foreclosed property should
there be subsequent declines in net realizable value.
Financial Instruments with Off-Balance-Sheet Risk - The Bank is party to
financial instruments with off-balance-sheet risk in the normal course of
business and to meet the financial needs of its customers. Financial
instruments include commitments to extend credit and the issuance of
commercial and standby letters of credit. These instruments may involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement the
Bank has in a particular class of financial instrument.
The Bank generally uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments, which
may require that it obtain collateral that will reduce its exposure to
credit loss. The exposure to credit loss, in the event of nonperformance by
the counterparty to the financial instrument, for commitments to extent
credit and letters of credit, is represented by the difference between the
contractual commitment amount of those instruments and the estimated fair
market value of the collateral.
If there is no collateral, or if the underlying collateral is determined to
have little or no value, or the Bank is unable to obtain possession of the
collateral, the maximum exposure to credit loss is represented by the
contractual commitment. The type and nature of collateral held will vary
and may include, but is not limited to, accounts receivable, inventory,
property, plant and equipment, income producing properties and real estate.
Standby letters of credit and commitments to extend credit generally have
fixed expiration dates or other termination clauses. Because many of the
standby letters of credit and commitments to extend credit are expected to
expire without being drawn upon, total guarantee and commitment amounts do
not necessarily represent future cash requirements.
42
<PAGE>
Fair Value of Financial Instruments - As required by SFAS No. 107,
Disclosures About Fair Value of Financial Instruments, the Company has
estimated the fair value of its financial instruments at December 31, 1995
and included such disclosure in Note 8.
Income Taxes - The Company and its subsidiary file consolidated tax
returns. In February 1992, the FASB issued SFAS No. 109, Accounting for
Income Taxes. The Company adopted this method of accounting for income
taxes effective January 1, 1993. Under the asset and liability method,
required by this statement, deferred tax liabilities and assets are
recorded for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of the Company's assets and
liabilities. Future tax benefits attributable to temporary differences are
recognized to the extent that realization of such benefits is more likely
than not. These future tax benefits are measured by applying currently
enacted tax rates. Prior to 1993, the Company's method of accounting for
income taxes was the deferred method previously required by Accounting
Principles Board Opinion No. 11. The cumulative effect of the change in
accounting method resulted in a tax benefit of $33,000 ($.06 per share).
Net income (loss) per common share is calculated using the weighted average
number of common shares outstanding during the period and the dilutive
effect of stock options using the treasury stock method. Weighted average
common shares and common share equivalents were 603,904 for primary and
630,602 for fully diluted in 1995. Weighted average common shares and
common share equivalents were 576,974 in both 1994 and 1993 as the effect
of stock options in those years was not dilutive.
New Accounting Pronouncements - The Company is required to adopt SFAS No.
123, Accounting for Stock-Based Compensation, in 1996. SFAS No. 123
establishes accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. Under
SFAS No. 123, the Company may either adopt the new fair value-based
accounting method or continue the intrinsic value-based method and provide
pro forma disclosures of net income and earnings per share as if the
accounting provisions of SFAS No. 123 had been adopted. The Company plans
to adopt only the disclosure requirements of SFAS No. 123; therefore, such
adoption will have no effect on the Company's consolidated net earnings or
cash flows.
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995. This Statement requires that long-lived
assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The financial statement impact of adopting SFAS No. 121 is not
expected to be material.
Reclassifications - Certain 1994 and 1993 amounts have been reclassified to
conform to the 1995 presentation.
2. SUBSEQUENT EVENT - PURCHASE AND SALE AGREEMENT
In January 1996, the Company's shareholders approved an Agreement and Plan
of Reorganization (the "Agreement") with another financial institution. The
Agreement calls for the purchase of all outstanding common stock of the
Company for cash at a price equal to 1.223 times consolidated book value as
of the closing date of the Agreement. Management anticipates the completion
of this transaction during the second quarter of 1996.
43
<PAGE>
3. INVESTMENT SECURITIES
As discussed in Note 1, effective January 1, 1994, the Bank adopted SFAS
No. 115 on a prospective basis. A summary comparison of amortized cost and
estimated fair value of held-to-maturity and available-for-sale investment
securities as of December 31, 1995, and of investment securities as of
December 31, 1994, by type, is illustrated below:
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
<S> <C> <C> <C> <C> <C>
Held-to-Maturity
Investment Securities:
U.S. Treasury $12,081,000 $ (5,000) $12,076,000 $12,081,000
Municipal Bonds 184,000 $ 1,000 185,000 184,000
Available-for-Sale
Investment Securities:
Mutual Funds - U.S.
Government Securities 2,306,000 (97,000) 2,209,000 2,209,000
----------- ------- --------- ----------- -----------
Total investments $14,571,000 $ 1,000 $(102,000) $14,470,000 $14,474,000
=========== ======= ========= =========== ===========
<CAPTION>
December 31, 1995
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
<S> <C> <C> <C> <C> <C>
Held-to-Maturity
Investment Securities:
U.S. Treasury $17,425,000 $(289,000) $17,136,000 $17,425,000
Municipal Bonds 184,000 (19,000) 165,000 184,000
Available-for-Sale
Investment Securities:
Mutual Funds - U.S.
Government Securities 2,182,000 (152,000) 2,030,000 2,030,000
----------- ------- --------- ----------- -----------
Total investments $19,791,000 $ - $(460,000) $19,331,000 $19,639,000
=========== ======= ========= =========== ===========
</TABLE>
The following table shows the amortized cost and approximate market value of
investment securities by contractual maturity at December 31, 1995:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
<S> <C> <C>
Investment securities held-to-maturity:
Within one year $10,084,000 $10,087,000
After one but within five years 1,997,000 1,989,000
After ten years 184,000 185,000
Investment securities available-for-sale:
Mutual funds 2,306,000 2,209,000
Total $14,571,000 $14,470,000
=========== ===========
</TABLE>
44
<PAGE>
Gross gains on sales of investment securities in 1995 and 1993 were $12,000
and $42,000, respectively. There were no sales of investment securities in
1994.
During 1995, the FASB issued a Special Report, "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities". The Special Report provided a one-time opportunity to reassess
the appropriateness of its designations of securities subject to the
accounting and reporting requirements of Statement 115, without calling
into question the intent to hold other debt securities to maturity in the
future. In accordance with this Special Report, in December 1995, the
Company transferred U.S. Treasury securities with an amortized cost of
$4,930,000 and an unrealized gain of $12,000 from Held-to-Maturity to
Available-for-Sale.
Investment securities pledged to collateralize deposits of public funds and
for other purposes required by law amounted to $11,600,000 and $9,597,000
at December 31, 1995 and 1994, respectively.
4. LOANS HELD FOR SALE
The Bank originates SBA loans with the general intent of selling the
guaranteed portion of such loans, usually at a price in excess of par, and
retaining the remaining unguaranteed portion in its loans held for
investment. When the Bank sells the guaranteed portion of such loans, it
transfers the SBA guarantee to the buyer and retains the servicing
function. The Bank allocates its recorded investment in such loans between
the portion sold and the portion retained, based upon approximations of
their relative fair values at the time of sale.
At December 31, 1995, the Bank was servicing the sold guaranteed portion of
SBA loans amounting to approximately $23,672,000 (1994, $21,316,000). These
loans are not reflected in the accompanying balance sheet. Servicing SBA
loans for other investors consists of collecting payments, disbursing
payments to investors and foreclosure processing. The Bank earns servicing
income over the life of the loans as it services such loans on behalf of
the investors. Loan servicing income is recorded on the accrual basis and
includes servicing fees from investors and certain charges from borrowers,
such as late payment fees.
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The loan portfolio at December 31 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Commercial $32,377,000 $25,237,000
Real estate - construction 6,385,000 5,915,000
Real estate - mortgage 1,653,000 2,513,000
Installment loans to individuals 1,531,000 1,158,000
SBA loans - retained for investment (unguaranteed) 5,710,000 4,255,000
----------- -----------
Total 47,656,000 39,078,000
Allowance for credit losses (933,000) (1,605,000)
----------- -----------
Net $46,723,000 $37,473,000
=========== ===========
</TABLE>
45
<PAGE>
Most of the Company's business is with customers in San Mateo County. The
Company's loan portfolio is comprised primarily of loans secured by
residential real estate, commercial property and business assets. At
December 31, 1995, approximately 60% of the portfolio is secured by real
estate primarily in San Mateo County, 20% is secured by collateral other
than real estate and 20% is unsecured.
At December 31, 1995, the Company's total recorded investment in impaired
loans, as defined in SFAS 114 was $1,042,000 for which there is a related
allowance for credit losses of $156,000. The average recorded investment in
impaired loans during 1995 was $1,524,000. At December 31, 1995, loans on
which accrual of interest has been discontinued or reduced amounted to
$1,042,000 (1994, $2,005,000). Interest income would have increased
approximately $161,000 in 1995 (1994, $235,000; 1993, $352,000) if the
contractual rate of interest on these loans had been accrued. There were no
significant commitments to lend additional funds to borrowers whose loans
are classified as nonaccrual or impaired at December 31, 1995.
Activity in the allowance for credit losses is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance, January 1 $1,605,000 $ 1,749,000 $ 980,000
Provision for credit losses (68,000) 2,295,000
Charge-offs (709,000) (243,000) (1,751,000)
Recoveries 105,000 99,000 225,000
---------- ----------- -----------
Balance, December 31 $ 933,000 $ 1,605,000 $ 1,749,000
---------- ----------- -----------
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Lease rights and leasehold improvements $ 1,205,000 $ 1,204,000
Furniture and equipment 1,689,000 1,629,000
----------- -----------
Total 2,894,000 2,833,000
Accumulated depreciation and amortization (2,012,000) (1,701,000)
----------- -----------
Net $ 882,000 $ 1,132,000
----------- -----------
</TABLE>
Depreciation and amortization expense for 1995 was $311,000 (1994, $328,000;
1993, $332,000).
46
<PAGE>
7. INCOME TAXES
As discussed in Note 1, the Company changed its method of accounting for
income taxes in 1993. The provision for taxes on income for the periods
ended December 31 consists of:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ (51,000) $156,000 $(256,000)
State 4,000 2,000 (18,000)
Deferred:
Federal 293,000 (82,000) (248,000)
State 98,000 28,000 (162,000)
Valuation allowance (211,000) (4,000) 241,000
--------- -------- ---------
Total $ 133,000 $100,000 $(443,000)
========= ======== =========
</TABLE>
At December 31, 1995, the Company had a net deferred tax asset of $358,000
(1994, $556,000) included in other assets. The following table details the
major components of deferred taxes at January 1, 1994 and December 31, 1994
and 1995 (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, January 1,
1995 1994 1994
<S> <C> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 174 $ 587 $ 582
Deferred loan fees and costs 184 164 77
Unrealized loss on investment securities
available-for-sale 33 51
Capital losses 26 29
Accumulated depreciation and amortization 38 26 30
Other, net 15 3 26
Valuation allowance (26) (237) (241)
Deferred tax liabilities:
Other, net (86) (67) (27)
----- ----- -----
Total $ 358 $ 556 $ 447
===== ===== =====
</TABLE>
A valuation allowance of $241,000 was recorded at December 31, 1993 as a
result of the 1993 net loss and its effect on the realizability of certain
deferred tax assets in future years. The valuation allowance decreased by
$211,000 in 1995 as a result of management's conclusion that such deferred
tax assets were more likely than not to be realized.
47
<PAGE>
The effective income tax rate differs from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Tax at the statutory rate 35.0% 35.0% (35.0)%
Increase (decrease) resulting from:
State tax, net of federal tax effect 8.0 7.6 (7.3)
Change in valuation allowance (25.0) (1.9) 15.0
Other (2.0) 0.2 (0.2)
------ ----- ------
Total 16.0% 40.9% (27.5)%
==== ==== ====
</TABLE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107.
The estimated fair value amounts have been determined by using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented are not
necessarily indicative of the amounts that could be realized in a current
market exchange. The use of different market assumptions and/or estimation
techniques may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------
Carrying Estimated
Amount Fair Value
(Dollars in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents (a) $11,413,000 $11,413,000
Investment securities (b) 14,474,000 14,470,000
Loans, net of allowance for credit losses (c) 46,723,000 46,704,000
Liabilities
Deposits: (d)
Non-interest bearing demand deposits 13,766,000 13,766,000
Interest bearing deposits without fixed maturity dates 35,595,000 35,595,000
Interest bearing deposits with fixed maturity dates 19,304,000 19,304,000
Off-balance-sheet instruments, (unrealized gains
and (losses) (e)
Commitments to extend credit 3,000
Standby letters of credit 3,000
</TABLE>
(a) Cash and cash equivalents:
The carrying amount is a reasonable estimate of fair value.
(b) Securities:
Fair values of investment securities are based on quoted market prices
or dealer quotes.
48
<PAGE>
(c) Loans, net of allowance for credit losses:
Fair values were estimated for portfolios of performing loans and
leases with similar financial characteristics. For certain performing
variable rate loans that reprice frequently, estimated fair values are
based on carrying values, adjusted for credit quality, if no
significant changes in credit standing have occurred since origination
and the interest rate adjustment characteristics of the loan
effectively adjust the interest rate to maintain a market rate of
return.
Fair values for certain commercial, construction, fixed real estate,
revolving credit and other loans and leases were estimated by
discounting the future cash flows using current rates at which similar
loans would be made to borrowers with similar credit ratings and
maturities, adjusted for the allowance for credit losses.
(d) Deposits:
The fair value of noninterest-bearing and adjustable rate deposits is
the amount payable upon demand at the reporting date. The fair value
of fixed-rate interest-bearing deposits with fixed maturity dates is
estimated as the amount payable upon demand at the reporting date
since all such deposits have maturities of less than one year.
(e) Off-balance-sheet instruments:
The fair value of commitments to extend credit and standby letters of
credit are estimated based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present credit-worthiness of the counterparties.
9. TRANSACTIONS WITH SUBSIDIARY
The Bank is subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In
particular, the Company is prohibited from borrowing from the Bank unless
the loans are secured by specified types of collateral. Such secured loans
and other advances from the Bank are limited to 10% of the Bank's
shareholders' equity on a per affiliate basis. There were no such
extensions of credit by the Bank in 1995 or 1994.
10. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has made loans and advances
under lines of credit to directors and their related interests. These
transactions are on substantially the same terms as those prevailing at the
time for comparable transactions with unrelated parties and do not involve
more than normal risk or unfavorable features. Activity in loans and
advances to related parties during 1995 is as follows:
<TABLE>
<CAPTION>
Balance Balance
January 1, 1995 Additions Payments December 31, 1995
<S> <C> <C> <C>
$1,034,000 $1,500,000 $1,519,000 $1,015,000
</TABLE>
49
<PAGE>
11. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases its premises under noncancellable operating leases with
aggregate future minimum lease payments as follows, at December 31, 1995:
<TABLE>
<S> <C>
1996 $ 69,000
1997 69,000
1998 69,000
1999 69,000
2000 69,000
Thereafter 97,000
--------
Total $442,000
========
</TABLE>
Rent expense for 1995 was $98,000 (1994, $110,000; 1993, $113,000).
In the normal course of business, there are outstanding commitments to
extend credit of $23,375,000 (including $1,245,000 of standby letters of
credit) which are not reflected in the financial statements at December 31,
1995. The Bank's exposure to credit loss is limited to the amount of funds
drawn. The Bank does not anticipate losses as a result of these
transactions.
12. STOCK OPTION PLANS
During 1994 the Company adopted a Stock Option Plan (the "1994 Plan") which
provides for incentive and nonqualified options to purchase up to 168,750
shares of common stock, including options on 90,000 shares reserved for
non-employee directors of the Company (the "Director Options"). Employee
stock options under the 1994 Plan generally become exercisable in
installments over terms determined by the Board of Directors and expire ten
years from the date of grant. Director Options become exercisable for a
period of one year following the issuance of audited financial statements
for the immediately preceding calendar year, provided that the Bank
achieves a pre-tax return on equity (as defined) of 10% or more and is in
compliance with all regulatory agreements. At December 31, 1995, there were
20,000 options available for grant under the 1994 Plan. Outstanding options
at December 31, 1995 include 35,625 options issued under the Company's
prior stock option plan which have vesting and expiration terms similar to
the employee options under the 1994 Plan. All options are granted at
exercise prices equal to or greater than the fair market value of the
Company's common stock at the grant date. There were no options exercised
in 1995, 1994 or 1993.
Stock option activity was as follows for the periods ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
(Number of shares)
<S> <C> <C> <C>
Options outstanding, January 1 131,875 110,365 127,240
Granted 11,250 126,875 12,500
Cancelled (2,500) (105,365) (29,375)
------- -------- -------
Options outstanding, December 31 140,625 131,875 110,365
======= ======== =======
</TABLE>
50
<PAGE>
Outstanding options have exercise prices ranging from $6.00 to $12.50 per
share. At December 31, 1995, options for 10,002 shares were exercisable. As
provided for in the 1994 Plan, 117,500 options would become exercisable
upon a change in control (as defined).
13. RETIREMENT PLAN
In January 1989, the Company established a 401(k) employee retirement plan
(the "Plan") for all eligible employees. The Plan is a contributory,
defined contribution plan which provides for contributions from the Company
based on eligible compensation. The Company's contribution is determined at
the sole discretion of the Board of Directors. Company contributions
generally vest over five years from the date of the employee's eligibility
to participate. In 1995, the Board of Directors approved a contribution of
$39,000. No contributions were made for the two years ended December 31,
1994 and 1993.
14. REGULATORY MATTERS
On August 24, 1992, the Company entered into a written agreement with the
Federal Reserve Bank of San Francisco ("FRB") in the form of a Memorandum
of Understanding (the "MOU"). The agreement contains various provisions,
including maintenance of adequate levels of capital and seeking approval
prior to the declaration of dividends.
On August 25, 1992, the Bank entered into a written agreement with the
Federal Deposit Insurance Corporation ("FDIC") in the form of a regulatory
order (the "Order") which became effective September 4, 1992. The Bank
agreed to various provisions, including having Tier 1 (core) capital in an
amount equal to or exceeding 6.5% of average assets, maintaining total
capital in an amount equal to or exceeding 9.0% of the Bank's risk-weighted
assets and seeking approval of the FDIC prior to declaring dividends.
On May 25, 1995, the FDIC rescinded the Order and issued a MOU. The MOU
contains various provisions, including maintenance of a minimum Tier 1
(leverage) and total capital ratios of 6% and 9%, respectively, as well as
continued reductions in nonperforming assets and seeking approval prior to
declaring dividends.
As discussed above, quantitative measures established by the Order/MOU to
ensure capital adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table below) of Tier 1 capital (as defined in the
regulations) to total average assets (as defined), and minimum ratios of
Tier 1 and total capital (as defined) to risk-weighted assets (as defined).
The Company's actual capital amounts and ratios are also presented in the
following table:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
---------------------------------------------- ---------------------------------------------
Minimum Minimum
Actual Requirement* Actual Requirement*
---------------------- --------------------- --------------------- ---------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leverage $6,126,000 7.96% $4,633,000 6.00% $5,434,000 8.02% $4,423,000 6.50%
Tier 1 risk-based 6,126,000 10.07 2,442,000 4.00 5,434,000 11.53 1,886,000 4.00
Total risk-based 6,892,000 11.32 5,494,000 9.00 6,039,000 12.81 4,243,000 9.00
</TABLE>
*As defined in the Order/MOU
Management of the Company and the Bank believe that they are currently in
compliance with the requirements of the MOUs.
51
<PAGE>
15. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The financial position of Burlingame Bancorp (parent company only) at
December 31, 1995 and 1994 and the results of its operations and cash flows
for the three years in the period ended December 31, 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Financial position:
Assets:
Interest-earning deposits in the Bank $ 92,000 $ 180,000
Investment in the Bank 6,598,000 5,755,000
---------- -----------
Total $6,690,000 $ 5,935,000
========== ===========
Shareholders' equity:
Common stock $4,567,000 $ 4,567,000
Unrealized loss on investment
securities available-for-sale,
net of taxes (64,000) (101,000)
Retained earnings 2,187,000 1,469,000
---------- -----------
Total $6,690,000 $ 5,935,000
========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Results of operations:
Income - interest from
investments $ 7,000 $ 5,000 $ 6,000
Expenses - general and
administrative 69,000 37,000 19,000
--------- ---------- -----------
Loss before equity in pretax
income (loss) of the Bank (62,000) (32,000) (13,000)
--------- ---------- -----------
Equity in pretax income
(loss) of the Bank 913,000 276,000 (1,598,000)
--------- ---------- -----------
Income (loss) before income taxes
and cumulative effect of change
in accounting method 851,000 244,000 (1,611,000)
Income taxes 133,000 100,000 (433,000)
--------- ---------- -----------
Income (loss) before cumulative
effect of change in accounting
method 718,000 144,000 (1,168,000)
Cumulative effect of change in
accounting method (33,000)
--------- ---------- -----------
Net income (loss) $ 718,000 $ 144,000 $(1,135,000)
========= ========== ===========
Net income (loss) per common
share and common share
equivalent $ 1.24 $ 0.25 $ (1.97)
========= ========== ===========
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash flows:
Operating activities:
Net income (loss) $ 718,000 $ 144,000 $(1,135,000)
Reconciliation to cash
used in operating activities:
Decrease (increase) in equity
in undistributed net income
of Bank (806,000) (176,000) 1,122,000
Decrease in receivable from
Bank 33,000
(Decrease) increase in
miscellaneous liabilities (1,000)
--------- ---------- -----------
Cash provided by (used in)
operating activities (88,000) (32,000) 19,000
--------- ---------- -----------
Net increase (decrease) in
cash and equivalents (88,000) (32,000) 19,000
Cash and equivalents:
Beginning of year 180,000 212,000 193,000
--------- ---------- -----------
End of year $ 92,000 $ 180,000 $ 212,000
========= ========== ===========
</TABLE>
******
53
<PAGE>
INDEX TO EXHIBITS
Exhibit
Table Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
3.1 Amended Articles of Incorporation of
Burlingame Bancorp (included as
Exhibit 3.1 to Annual Report on
Form 10-K filed by Burlingame Bancorp Incorporated
on March 26, 1992) by Reference
3.2 Bylaws of Burlingame Bancorp (included
as Exhibit 3.2 to Registration State-
ment filed on Form S-18 by Burlingame Incorporated
Bancorp on December 31, 1983) by Reference
10.1 Agreement of Assignment of Lease
(included as Exhibit 10.2 to
Amendment No. 1 to Registration State-
ment filed on Form S-18 by Burlingame Incorporated
Bancorp on April 10, 1984) by Reference
10.2 Assignment of Lease (included as
Exhibit 10.2 to Annual Report on
Form 10-K filed by Burlingame Bancorp Incorporated
on March 27, 1985) by Reference
10.3 Consent of Landlord (included as
Exhibit 10.3 to Annual Report on
Form 10-K filed by Burlingame Bancorp Incorporated
on March 27, 1985) by Reference
10.4 Lease Agreement (included as
Exhibit 10.4 to Annual Report on
Form 10-K filed by Burlingame Bancorp Incorporated
on March 27, 1985) by Reference
10.5 1985 Stock Option Plan and Form of
Stock Option Agreement (included as
Exhibit 10.5 to Annual Report on
Form 10-K filed by Burlingame Bancorp Incorporated
on March 27, 1985) by Reference
54
<PAGE>
10.6 Lease Agreement (included as
Exhibit 10.6 to Annual Report on
Form 10-K filed by Burlingame Bancorp Incorporated
on March 28, 1990) by Reference
10.7 IBAA Bancard Financial Service Agreement
(included as Exhibit 10.7
to Annual Report on Form 10-K filed by Incorporated
Burlingame Bancorp on March 28, 1990) by Reference
10.8 Fiserv Agreement (included as Exhibit 10.8
to Annual Report on Form 10-K filed by Incorporated
Burlingame Bancorp on March 29, 1994) by Reference
22.1 Subsidiary of the Registrant 56
23.1 Independent Auditors' Consent 57
55
<PAGE>
EXHIBIT 22.1
------------
SUBSIDIARIES OF REGISTRANT
The only subsidiary of the Registrant is Burlingame Bank & Trust Co., a banking
corporation organized under the laws of the State of California. The subsidiary
is wholly owned.
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP APPEARS HERE]
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-35701 of Burlingame Bancorp on Form S-8 of our report dated March 22,
1996, appearing in this Annual report on Form 10-K of Burlingame Bancorp for the
year ended December 31, 1995.
/s/ Deloitte & Touche LLP
March 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS & CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,363,000
<INT-BEARING-DEPOSITS> 54,899,000
<FED-FUNDS-SOLD> 7,050,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,209,000
<INVESTMENTS-CARRYING> 12,265,000
<INVESTMENTS-MARKET> 12,260,000
<LOANS> 47,656,000
<ALLOWANCE> 933,000
<TOTAL-ASSETS> 76,075,000
<DEPOSITS> 68,665,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 720,000
<LONG-TERM> 0
0
0
<COMMON> 4,567,000
<OTHER-SE> 2,123,000
<TOTAL-LIABILITIES-AND-EQUITY> 76,075,000
<INTEREST-LOAN> 4,475,000
<INTEREST-INVEST> 1,199,000
<INTEREST-OTHER> 239,000
<INTEREST-TOTAL> 5,913,000
<INTEREST-DEPOSIT> 2,029,000
<INTEREST-EXPENSE> 2,029,000
<INTEREST-INCOME-NET> 3,884,000
<LOAN-LOSSES> (68,000)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,670,000
<INCOME-PRETAX> 851,000
<INCOME-PRE-EXTRAORDINARY> 851,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 718,000
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 5.92
<LOANS-NON> 1,042,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,605,000
<CHARGE-OFFS> 709,000
<RECOVERIES> 105,000
<ALLOWANCE-CLOSE> 933,000
<ALLOWANCE-DOMESTIC> 903,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 30,000
</TABLE>
