SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10198
THE SAN FRANCISCO COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 94-3071255
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
550 Montgomery Street, 10th Floor
San Francisco, California 94111
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (415) 781-7810
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
Class A Common Stock, $0.01 Par Value None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant on March 21, 1997, was $11,510,000
computed by reference to the closing sales price of the Class A
Common Stock as reported by Van Kasper & Company, the sole market
maker of such stock.
The Registrant had 28,775,995 shares of Class A Common Stock
outstanding on March 21, 1997.
page
THE SAN FRANCISCO COMPANY
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENT
PART I
Page
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders. 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . .10
Item 6. Selected Financial Data. . . . . . . . . . . . . . .12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . .13
Item 8. Financial Statements and Supplementary Data. . . . .28
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . .55
PART III
Item 10. Directors and Executive Officers of the Registrant .56
Item 11. Executive Compensation . . . . . . . . . . . . . . .58
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . .65
Item 13. Certain Relationships and Related Transactions . . .65
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . .67
page
PART I
ITEM 1 - BUSINESS
The Company and the Bank
The San Francisco Company (the "Company"), a Delaware
corporation, is a one-bank holding company registered under the
Bank Holding Company Act of 1956, for Bank of San Francisco (the
"Bank"), a California state chartered bank organized in 1978 whose
deposits are insured by the Federal Deposit Insurance Corporation
(the "FDIC"), subject to applicable limits. The Company was
organized in California in 1981 and reincorporated in Delaware in
1988. The Bank, which the Company acquired through a
reorganization in 1982, is the only direct subsidiary of the
Company and accounts for over 99% of the consolidated assets of the
Company. The Bank delivers its services from its headquarters
building, Bank of San Francisco Building, at 550 Montgomery Street
(at Clay Street), San Francisco, California 94111, and its phone
number is (415) 781-7810. The E-mail address for the Bank's Stock
Option Exercise and Discount Brokerage Services department (the
"Stock Option Services") is bsftrade@sprynet.com.
The Company's Class A Common Stock, par value $0.01 per share
(the "Common Stock" or "Common Shares"), is sold "over-the-
counter". The closing price for the Common Stock on March 21, 1997
was $0.40.
The Bank currently specializes in providing private banking as
well as business banking for individuals, their businesses and
other businesses, primarily in the Northern California banking
market. See "-- Private and Business Banking." In addition, the
Bank provides specialized services related to homeowners
associations (see "-- Association Bank Services"), brokerage
services (see "-- Stock Option Services") and escrow services (see
"--Escrow Services").
The Bank's primary market area, Northern California, has a
highly diversified economic base, including high technology
electronic manufacturing, scientific research, real estate
construction, retail and wholesale trade and transportation. Much
of the diversity in the economic base is attributable to the
service sector, including finance, accounting, insurance,
communications, law, consulting and tourism. While many of the
Bank's loans have been and continue to be collateralized by real
estate, and a significant portion of the Bank's clients' net worth
has historically consisted of real estate holdings, the Bank's
deposit and lending relationships have not been concentrated among
borrowers within a specific trade, service or industrial activity.
Private and Business Banking
Private and Business Banking combines highly personalized
service with an array of products to meet the complex needs of its
primary clients -- executives, professionals and high net worth or
high income individuals, and the private and closely held
businesses with which these individuals are associated. The Bank
has specialized in private banking since it began operations in
1979.
The Bank seeks to concentrate on establishing banking
relationships with privately and closely held businesses, and their
owners and operators whose financial needs require customized
banking programs. At December 31, 1996 and 1995, Private and
Business Banking customers deposits totaled approximately $36.4
million and $38.0 million, representing approximately 40.0% and
36.0% of the Bank's total deposits, respectively. At December 31,
1996 and 1995, Private and Business Banking customers loans totaled
approximately $36.1 million and $39.8 million, representing
approximately 82.5% and 74.8% of the Bank's total loans,
respectively.
Association Bank Services
Established in 1987, Association Bank Services (the "ABS")
operates throughout California and is a major provider of deposit
and financial management services to homeowner and community
associations in the State. The Bank offers its ABS customers
deposit accounts for operating funds and reserves, loans,
assessment collection services and investment services. In
addition, the Bank offers lockbox and courier services, expedited
deposit processing and special handling of accounts to simplify
banking operations. Deposits from homeowner and community
associations are a key component of the Bank's core deposit base.
At December 31, 1996 and 1995, ABS customers deposits totaled
approximately $19.9 million and $22.9 million, representing
approximately 21.8% and 21.7% of the Bank's total deposits,
respectively. At December 31, 1996 and 1995, ABS customers loans
totaled approximately $2.4 million and $3.2 million, representing
approximately 5.5% and 6.1% of the Bank's total loans,
respectively.
page
The Bank also offers its ABS customers a certificate of
deposit placement service (the "CD Placement") designed to invest
a customer's funds in other insured financial institutions up to a
maximum of $100,000 per institution (for which the Bank is paid a
fee based on the average CD Placement investments outstanding).
Although a substantial portion of the individual ABS deposit
accounts are fully insured and, therefore, could generally be
considered stable, a small number of ABS customer account managers
control significant numbers of such individual accounts, thus
concentrating control of such deposits in the discretionary
authority of a few individuals. Accordingly, a decision by several
such account managers to withdraw their business from the Bank
could have a significant impact on the Bank's core deposits. As of
December 31, 1996, no one account manager controlled more than 7%
of total ABS deposits.
Stock Option Services
Begun in 1984, Stock Option Services provides a range of
discount brokerage services, combined with a program to facilitate
the exercise of stock options by employees of publicly held
companies.
The stock option exercise program offers employees the means
to exercise, hold or sell their option shares at a minimum cost.
In this program, the Bank makes loans to holders of stock options
of publicly traded companies for the purpose of enabling them to
exercise their options and sell all or a portion of the stock
acquired. The Bank works with stock transfer and employee benefits
officers to coordinate the payment of the option exercise price,
the provision for the payment of taxes related to the exercise of
such options, the issuance and subsequent sale of the underlying
stock and the distribution of the net sale proceeds. At
December 31, 1996 and 1995, the Bank had total stock option loans
outstanding of $1.7 million and $1.2 million, respectively. Such
amounts can vary substantially based upon the timing of the
exercise of stock options as well as market conditions.
Historically, Stock Option Services has been a substantially
self-funding activity with associated deposit balances closely
tracking outstanding loan balances. Because Stock Option Services'
deposits are primarily non-interest bearing demand deposit
accounts, the Bank benefits from them by reducing its cost of
funds. Management believes that most of these clients are in
industries that continue to present growth opportunities.
Accordingly, stock option programs should represent a continuing
component of such clients' overall compensation programs. In
addition, the Bank is expanding its marketing efforts to diversify
its client base to increase revenue and reduce volatility. The
Bank is also marketing its discount brokerage services to those
clients presently using stock option services.
Historically, approximately 35% of Stock Option Services'
clients have generated over 90% of the fee income of Stock Option
Services. These clients are the focus of Stock Option Services'
customer service activities; however, this concentration of clients
exposes the Bank to the possibility of losing significant non-
interest income if it loses some of these clients. Total
commission revenue generated by Stock Option Services was $1.2
million, $1.5 million and $1.6 million for 1996, 1995 and 1994,
respectively, representing 20.8%, 16.9%, and 15.7% of the Company's
gross revenue for the same periods, respectively. The earnings
generated by Stock Option Services is highly dependent on the
trading prices of the stock underlying the stock options of its
clients and the overall condition of the stock markets in which
they trade. Management considers the fee income produced by Stock
Option Services to be highly volatile, and there can be no
guarantee that income levels from this activity can be maintained
at current levels.
Escrow Services
Begun in 1989, the Corporate Escrow Services Department (the
"Escrow") provides non-real estate escrow services, including the
temporary deposit and investment of funds, deposit of securities,
personal property and other assets by attorneys, business brokers
and clients for business transactions, disputes, life care
facilities, and court actions. Escrow services has always made a
modest contribution to operating profit and provided deposits to
fund other business activities. At December 31, 1996 and 1995,
Escrow deposits totaled approximately $10.0 million and
$8.0 million, representing approximately 11.0% and 7.6% of the
Bank's total deposits, respectively.
page
Trust Services
The Bank was granted trust powers in late 1989. The trust
activities never achieved the size necessary to generate the
revenues required to cover its direct costs. As a result the Bank
suspended its trust activities during 1996. The Bank plans to
consider the resumption of trust activities in the future when the
Bank has achieved a net income level sufficient to support the
investment required to realize trust fee revenues at a self
sustaining level.
Competition
The banking business in California, and specifically in the
market area served by the Bank, is highly competitive. The Bank
competes for loans and deposits with other commercial banks,
including some of the country's and the world's largest banks,
savings and loan associations, finance companies, money market
funds, brokerage houses, credit unions, insurance companies, and
non-financial institutions. By virtue of their larger amounts of
capital, many of the financial institutions with which the Bank
competes have significantly greater lending limits than the Bank
and perform certain functions, including corporate trust services
and international banking services, which are not presently offered
directly by the Bank (although such functions may be offered
indirectly by the Bank through correspondent institutions).
The Bank's strategy for meeting its competition has been to
concentrate on discrete segments of the market for financial
services, particularly small to medium-sized businesses and their
owners, professionals, corporate executives, affluent individuals,
and homeowners and community associations, by offering specialized
and personalized banking and brokerage services to such clients.
Competitive conditions continue to intensify as legislation is
proposed or enacted which has the effect of dissolving historical
barriers that limit participation in certain markets, increasing
the cost of doing business for banks, or affecting the competitive
balance between banks and other financial institutions.
Technological and economic factors can also be expected to have an
ongoing impact on competitive conditions. It is difficult to
predict the impact that these and other changes may have in the
future on commercial banking in general or on the business of the
Bank in particular.
Correspondent Banks
The Bank has correspondent relationships with twelve banks for
the purpose of check clearing, selling federal funds, buying and
selling investment securities, safekeeping of investment securities
and related record keeping, stock registration and stock transfer
services, and issuance of letters of credit.
Employees
At December 31, 1996, the Company and the Bank employed 52
persons, consisting of 49 full-time and 3 part-time employees.
Regulatory Agreement and Orders
Federal Reserve Board Written Agreement
On December 16, 1994, the Company and the Federal Reserve Bank
(the "FRB") entered into a Written Agreement (the "Agreement") that
superseded the previous FRB directive dated April 20, 1992. The
Agreement prohibits the Company, without prior approval of the FRB,
from: (a) paying any cash dividends to its shareholders; (b)
directly or indirectly, acquiring or selling any interest in any
entity, line of business, problem or other assets; (c) executing
any new employment, service, or severance contracts, or renewing or
modifying any existing contracts with any executive officer; (d)
engaging in any transactions with the Bank that exceeds an
aggregate of $20,000 per month; (e) engaging in any cash
expenditures with any individual or entity that exceeds $25,000 per
month; (f) increasing fees paid to any directors for attendance at
board or committee meetings, or paying any bonuses to any executive
officers; (g) incurring any new debt or increasing existing debt;
and (h) repurchasing any outstanding stock of the Company. The
Company is required to submit a progress report to the FRB on a
quarterly basis.
The Company was also required to submit to the FRB an
acceptable written plan to improve and maintain an adequate capital
position, a comprehensive business plan concerning current and
proposed business activities, a comprehensive operating budget for
the Bank and the consolidated Company, and an acceptable written
plan designed to enhance the Board of Directors' supervision of the
operations and management of the consolidated organization.
Management was notified by the FRB at its 1996 examination
that the Company is in full compliance with the Agreement.
page
Cease and Desist Orders
On August 18, 1993, the Bank, without admitting or denying any
alleged charges, stipulated to Cease and Desist Orders (the
"Orders") issued by the FDIC and the State Banking Department (the
"SBD") that became effective August 29, 1993 (the "Orders Effective
Date"). The Orders directed, among other things, that the Bank:
(a) achieve and maintain a 7% leverage capital ratio on and after
September 30, 1993; (b) pay no dividends without the prior written
consent of the FDIC and the California Superintendent of Banks (the
"Superintendent"); (c) reduce the $88.6 million in assets
classified "Substandard" or "Doubtful" as of November 30, 1992 (the
date of the then most recent full-scope FDIC and SBD Report of
Examination of the Bank), to no more than $40.0 million by
September 30, 1994; (d) have and retain management whose
qualifications and experience are commensurate with their duties
and responsibilities to operate the Bank in a safe and sound
manner, notify the FDIC and the Superintendent at least 30 days
prior to adding or replacing any new director or senior executive
officer, and comply with certain restrictions in compensation of
senior executive officers; (e) maintain an adequate reserve for
loan losses; (f) not extend additional credit to, or for the
benefit of, any borrower who had a previous loan from the Bank that
was charged off or classified "Loss" in whole or in part;
(g) develop and implement a plan to reduce its concentrations of
construction and development loans; (h) not increase the amount of
its brokered deposits above the amount outstanding on the Orders
Effective Date ($20.0 million) and submit a written plan for
eliminating reliance on brokered deposits; (i) revise or adopt, and
implement, certain plans and policies to reduce the Bank's
concentration of construction and land development loans, reduce
the Bank's dependency on brokered deposits and out of area
deposits, and to improve internal routines and controls; (j) reduce
the Bank's volatile liability dependency ratio to not more than 15%
by March 31, 1994; (k) eliminate or correct all violations of law
set out in the most recent Report of Examination, and take all
necessary steps to ensure future compliance with all applicable
laws and regulations; and (l) establish a committee of three
independent directors to monitor compliance with the Orders and
report to the FDIC and the Superintendent on a quarterly basis.
As of December 31, 1996, management believes that the Bank is
in substantial compliance with the requirements of the Orders. The
Bank believes that the findings of the FDIC and SBD most recent
examination which commenced on January 28, 1997 will be that the
Bank is in substantial compliance with the requirements of the
Orders; however, no Report of Examination has been received to
date.
Capital Impairment Orders
Under California law, if a bank's deficit retained earnings
exceed 40% of its contributed capital, its capital is deemed to be
impaired, and the bank is required to levy an assessment on its
shares to correct the impairment. The SBD has issued twelve
impairment orders to the Bank, with the most recent dated February
14, 1997 (the "Impairment Orders"). At December 31, 1996, the Bank
had contributed capital of $74.5 million and deficit retained
earnings of $63.5 million.
The Impairment Orders require the Bank to correct the
impairment within 60 days by levying an assessment on the Company
as the Bank's sole shareholder. The Bank has not levied an
assessment against its shares nor has it otherwise corrected the
impairment, and, therefore, is in violation of this law. In
addition, the SBD has specifically reserved the right to take such
other action as the Superintendent may deem appropriate or
necessary, which may include taking possession of the Bank's
property and business, including ultimately liquidating the
business and affairs of the Bank. Management believes, however,
that the Superintendent has never exercised his bank takeover
powers under Section 134 solely on the basis that a bank's capital
is impaired under the standards set forth in Section 134.
The Company plans to correct the Bank's capital impairment by
requesting the SBD to approve a quasi-reorganization of the Bank.
In a quasi-reorganization, the Bank's retained deficit would be
reduced or eliminated by netting the retained deficit against
contributed capital. Management believes that approval for such a
quasi-reorganization would only be granted by the SBD upon the Bank
demonstrating the ability to sustain profitable operations and meet
all of its regulatory capital requirements in the future.
page
No assurance can be given that the Bank's capital condition
will not deteriorate prior to any such quasi-reorganization as a
result of operating losses. In addition, because a quasi-
reorganization requires that the Bank adjust its assets and
liabilities to market value at the time of the reorganization, the
Bank's capital could be further reduced from its present level.
Finally, there can be no assurance given that, following a
correction of the Bank's capital impairment, whether through a
quasi-reorganization or otherwise, the Bank's capital position will
not erode through future operating losses. See "Item 7
Management's Discussion and Analysis of Financial Condition and
Results of Operation - Capital" for a discussion regarding the
Company's and Bank's present capital condition.
Regulation and Supervision
Bank holding companies and banks are subject to extensive
supervision and regulation. The following summaries of certain
statutes and regulations affecting banks and bank holding companies
do not purport to be complete. Such summaries are qualified in
their entirety by reference to such statutes and regulations.
Various other legislation, including proposals to overhaul the
bank regulatory system and to limit the investments that a
depository institution may make with insured funds, is introduced
into Congress from time to time and is presently pending at this
time. The Company cannot determine the ultimate effect that any
potential legislation, if enacted, would have upon the financial
condition or operations of the Company and the Bank.
The Company
The Company, as a bank holding company, is subject to
regulation under the U.S. Federal Bank Holding Company Act of 1956,
as amended (the "Holding Company Act"), and is registered with and
subject to the supervision of the FRB. It is the policy of the FRB
that each bank holding company serve as a source of financial and
managerial strength to its subsidiary banks and conduct its
operations in a safe or sound manner.
The Holding Company Act generally restricts the Company from
engaging in any business other than managing or controlling banks
or furnishing services to its subsidiaries. Among the exceptions
to such restrictions are certain activities which, in the opinion
of the FRB, are so closely related to banking or to managing or
controlling banks as to be a proper incident to banking. The
Company also is generally prohibited from acquiring direct or
indirect ownership or control of more than 5% of any class of
voting shares of any company unless that company is engaged in
activities permissible for bank holding companies and the Company
receives the prior approval of the FRB.
The Company and its subsidiaries are prohibited from engaging
in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or provision of services. For
example, with certain exceptions, the Bank is not permitted to
condition an extension of credit on a customer obtaining other
services provided by it or the Company, or on a promise by the
customer not to obtain other services from a competitor of the
Bank. The FRB is, however, becoming increasingly receptive to
pricing discounts conditioned upon the Bank customer purchasing
bundled groups of services. In addition, applicable federal law
imposes certain restrictions on transactions between the Bank and
its affiliates. As an affiliate of the Bank, the Company is
subject, with certain exceptions, to the provisions of federal law
imposing limitations on, and requiring collateral for, loans by the
Bank to any affiliate.
The Holding Company Act also requires the Company to obtain
the prior approval of the FRB before acquiring all or substantially
all of the assets of any bank or ownership or control of the voting
shares of any bank if, after giving effect to such acquisition, the
Company would own or control, directly or indirectly, more than 5%
of any class of voting shares of such bank.
Finally, the Company is subject to restrictions on its
operations imposed by the Agreement. See "-- Regulatory Agreement
and Orders -- Federal Reserve Board Written Agreement."
page
The Bank
The Bank is a California state-chartered bank and is subject
to regulation, supervision and periodic examination by the SBD and
the FDIC. The Bank is not a member of the Federal Reserve System,
but is nevertheless subject to certain regulations of the FRB. The
Bank's deposits are insured by the FDIC to the maximum amount
permitted by law, which is currently $100,000 per depositor in most
cases.
The regulations of state and federal bank regulatory agencies
govern most aspects of the Bank's business and operations,
including but not limited to, the scope of its business, its
investments, its reserves against deposits, the timing of the
availability of deposited funds, the payment of dividends,
potential expansion, and the maximum rates of interest allowed on
certain deposits.
The Bank is subject to the California banking laws and to
regulation, supervision and periodic examination by the SBD. The
California banking laws, among other matters, regulate: (a) the
conduct of the banking business, including banking days, banking
offices, preservation and disposal of records, borrowing by the
bank and pledges of assets; (b) accounts, including types of
deposit accounts and claims made thereon; (c) loans, including
limitations on obligations to the bank by borrowers in general and
by the bank's officers, directors and employees; and (d) mergers,
consolidations and conversions of banks, including changes in
control of banks.
California interstate banking and branching law allows the
interstate acquisition of whole banks which have been in existence
for more than five years and authorizes expanded correspondent bank
agency relationships among affiliated and unaffiliated insured
banks. This legislation may both increase competition and increase
the number of buyers of California banking franchises.
The Federal Reserve Act and FRB regulations, some of which are
applicable to state nonmember banks under regulations of the FDIC,
place limitations and conditions on loans or extensions of credit
to: a bank's or bank holding company's executive officers,
directors and principal shareholders; any company controlled by any
such executive officer, director or shareholder; or any political
or campaign committee controlled by such executive officer,
director or principal shareholder. Loans extended to any such
persons must comply with loans-to-one-borrower limits, require
prior full board approval when aggregate extensions of credit to
such person exceed specified amounts, must be made on substantially
the same terms (including interest rates and collateral) as, and
following credit-underwriting procedures that are not less
stringent than, those prevailing at the time for comparable
transactions with non-insiders, and must not involve more than the
normal risk of repayment or present other unfavorable features.
FDIC regulations generally prohibit an insured state bank from
directly engaging as principal in any activity that is not
permissible for a national bank, and also prohibit majority-owned
subsidiaries of an insured state bank from engaging in any activity
that is not permissible for a subsidiary of a national bank, unless
the bank meets and continues to meet applicable minimum capital
standards and the FDIC determines that the conduct of the activity
by the bank and/or its majority-owned subsidiary will not pose a
significant risk to the deposit insurance funds.
These regulations also impose restrictions on real estate
investments, requiring that undercapitalized banks with
subsidiaries holding impermissible equity investments in real
estate ceased such activity and divest the subsidiary or the real
estate investments owned by the subsidiary. State banks also must
obtain the prior consent of the FDIC before making real estate
loans other than in compliance with guidelines established for
national banks.
Securities activities of state non-member banks, as well as
their subsidiaries and affiliates, are governed by FDIC
regulations. The FDIC has issued guidelines to state non-member
banks which recommend, among other things, establishing a
compliance and audit program to monitor bank's mutual funds sales
activities and compliance with applicable federal securities laws,
providing full disclosure to customers about the risks of such
investments (including the possibility of loss of principal
investment), conducting securities activities of bank subsidiaries
or affiliates in separate and distinct locations, and prohibiting
bank employees involved in deposit-taking activities from selling
investment products or from giving investment advice. Banks are
also required to establish qualitative standards for the selection
and marketing of the investments offered by the bank and maintain
appropriate documentation regarding suitability of investments
recommended to bank customers.
page
In response to various business failures in the savings and
loan industry and more recently in the banking industry, Congress
enacted significant banking legislation entitled Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "FDICIA").
FDICIA primarily addresses the safety and soundness of the deposit
insurance fund, supervision of and accounting by insured depository
institutions and prompt corrective action by the federal bank
regulatory agencies for troubled institutions. FDICIA gives the
FDIC, in its capacity as federal insurer of deposits, broad
authority to promulgate regulations to assure the viability of the
deposit insurance fund including regulations concerning safety and
soundness standards. FDICIA also places restrictions on the
activities of state-chartered institutions and on institutions
failing to meet minimum capital standards and provides enhanced
enforcement authority for the federal banking agencies. FDICIA has
strengthened FRB regulations regarding insider transactions.
FDICIA restricts the acceptance of brokered deposits by
insured depository institutions that are not well capitalized. It
also places restrictions on the interest rate payable on brokered
deposits and the solicitation of such deposits.
FDICIA adds grounds to the previously existing list of reasons
for appointing a conservator or receiver for an insured depository
institution including but not limited to a substantial dissipation
of assets or earnings due to an unsafe or unsound practice or any
violation of law or regulation, any willful violation of a cease
and desist order or concealment of assets or records, the likely
inability of the institution to meet obligations in the normal
course of business, or having substantially insufficient capital.
As required by FDICIA, the FDIC adopted a revised risk-based
assessment system for deposit insurance premiums which became
effective January 1, 1996. Under this system, depository
institutions are charged between 0 and 27 basis points for every
$100 in insured domestic deposits depending on such institution's
capital level and supervisory rating. During 1996, as a part of
the Budget Act to recapitalize the Savings Associations Insurance
Fund, a surcharge was approved for the Financing Corporations (the
"FICO") bonds which were issued to help fund the cost associated
with the savings and loan crisis. Effective January 1, 1997, a
surcharge will be assessed to repay the FICO bonds. The Bank
believes that, in the absence of a change in applicable, it will be
assessed an annual FICO surcharge of approximately .013% of average
deposits from 1997 through 1999 and .0243% of average deposits from
2000 through 2017.
Pursuant to the requirements of FDICIA, recent FDIC and FRB
regulations provide safety and soundness standards for insured non-
member banks and bank holding companies. The Interagency
Guidelines for Establishing Standards for Safety and Soundness set
out a series of criteria for a financial institution's own
policies, procedures, and systems in the areas of internal controls
and information systems, internal audit systems, loan
documentation, credit underwriting, and interest rate exposure. In
addition, criteria are provided as to what may constitute excessive
compensation.
In June 1996, the federal banking agencies adopted a joint
agency policy statement to provide guidance on managing interest
rate risk. The policy statement provides that the adequacy and
effectiveness of a bank's interest rate risk management process and
the level of its interest rate exposures are critical factors in
the evaluation of the bank's capital adequacy. A bank with
material weaknesses in its risk management process or high levels
of exposure relative to its capital will be directed by the federal
banking agencies to take corrective action. Such actions may
include recommendations or directions to raise additional capital,
strengthen management expertise, improve management information and
measurement systems, reduce levels of exposure, or some combination
thereof depending upon the individual institution's circumstances.
This policy statement augments the August 1995 regulations adopted
by the federal bank agencies which addressed risk-based capital
standards for interest rate risk.
Capital Adequacy Requirements
FDICIA establishes five capital categories for insured
depository institutions: (a) Well Capitalized; (b) Adequately
Capitalized; (c) Undercapitalized; (d) Significantly
Undercapitalized; and (e) Critically Undercapitalized. All insured
institutions (i.e., the Bank) are barred from making capital
distributions or paying management fees to a controlling person
(i.e., the Company) if to do so would cause the institution to fall
into any of the three undercapitalized categories.
FDICIA also provides that if a well or adequately capitalized
or undercapitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, its
capital category may be downgraded to achieve a higher level of
regulatory scrutiny and prompt corrective action.
page
Minimum Leverage Ratio. The FRB and the FDIC have established
a minimum leverage ratio of 3% Tier 1 capital to total quarterly
average assets for companies that have received the highest
composite regulatory rating (a regulatory measurement of capital,
assets, management, earnings and liquidity) and that are not
anticipating or experiencing any significant growth. All other
institutions may be required to maintain a leverage ratio of at
least 100 to 200 basis points above the 3% minimum.
Risk-based Capital Ratio. The FRB and the FDIC have
established regulations that require companies to maintain a
minimum ratio of qualifying total capital to risk-weighted assets
of 8.00%. The risk-based capital ratio is calculated with
reference to risk-weighted assets, including both on and off-
balance sheet exposures, which are multiplied by certain risk
weights as defined by regulation. At least one-half of the
qualifying capital must be in the form of Tier 1 capital.
In certain circumstances, the agencies which regulate
financial institutions may determine that the capital ratios for a
financial institution must be maintained at levels which are higher
than the minimum levels required by the guidelines. A financial
institution that does not achieve and maintain the required capital
levels may be issued a capital directive by the regulatory
authorities to ensure the maintenance of required capital levels.
The Company and the Bank are in compliance with these capital
adequacy requirements. See "Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operation - Capital"
for a discussion regarding the Company's and Bank's present capital
condition.
Prompt Corrective Action FDICIA amended the Federal Deposit
Insurance Act (the "FDIA") to establish a format for closer
monitoring of insured depository institutions and to enable prompt
corrective action by regulators when an institution begins to
experience difficulty. The general thrust of these provisions is
to impose greater and earlier scrutiny and more restrictions on
institutions as their requirements for additional capitalization
increases. Undercapitalized institutions are subject to several
mandatory supervisory actions, including increased monitoring and
periodic review of the institution's efforts to restore its
capital, submitting an acceptable capital restoration plan,
restricted asset growth, and limits on acquisitions, new branches
or new lines of business. A parent holding company of an
undercapitalized bank is expected to guarantee that the bank will
comply with the bank's capital restoration plan until the bank has
been adequately capitalized, on the average, for four (4)
consecutive quarters. Such guarantee is limited to the lesser of
5% of the bank's total assets at the time it became
undercapitalized or the amount necessary to bring the bank into
full capital compliance.
Significantly undercapitalized institutions and
undercapitalized institutions that fail to submit and implement
adequate capital restoration plans are subject to the mandatory
provisions applicable to undercapitalized institutions and, in
addition, may be required to: sell additional capital, including
voting shares; restrict transactions with affiliates; restrict
interest rates paid on deposits; restrict asset growth or reduce
total assets; terminate, reduce or alter any risky activities;
elect new directors and install new management; cease accepting
deposits from correspondent depository institutions; or divest or
liquidate certain subsidiaries. A bank holding company may be
required to divest itself of any affiliate of the institution
(other than another insured depository institution) under certain
conditions.
In addition, significantly undercapitalized institutions will
be prohibited from paying any bonus or raise to a senior executive
officer without prior agency approval. No such approval will be
granted to an institution which is required to but has failed to
submit an acceptable capital restoration plan.
Critically undercapitalized institutions are required to enter
into a written agreement to increase Tier I leverage capital to
such level as the FDIC deems appropriate or the institution may be
subject to termination of insurance action by the FDIC. The
written agreement would require the immediate efforts by the
institution to acquire the required capital.
page
ITEM 2 - PROPERTIES
The following table sets forth certain information concerning
the Bank's sole real property lease commitment:
Square Expiration of Renewal
Banking Offices Footage Current Lease Period(s)
550 Montgomery Street 89,000 2010 One option for
an additional
San Francisco, CA 25 years
The Bank's headquarters at 550 Montgomery Street is an 89,000
square foot historically significant office building on Clay and
Montgomery Streets in San Francisco's Financial District. The
building serves as the administrative and banking headquarters of
the Company and the Bank. The Bank currently subleases or has
available for sublease 57,000 square feet.
During the third quarter of 1995, the Bank acquired all of the
outside limited partnership interests in Bank of San Francisco
Building Company (the "BSFBC") for a total of $3.3 million. The
purchase price in excess of book value of $525,000 is being
amortized over the life of the underlying lease, including
extensions, through 2035 using the straight line method. Effective
January 1, 1997, BSFBC was dissolved, and its assets, including its
interest in the lease, and liabilities were assigned to the Bank.
The Company's occupancy costs totaled $288,000 in 1996 a decline of
$912,000 from $1.2 million in 1995. The Company's occupancy costs
declined $921,000 in 1995 from $2.1 million in 1994. The declines
were primarily the result of the acquisition of BSFBC in 1995 which
enabled the Company to reduce facilities operating costs and
increase sublease income.
The acquisition was accounted for by the purchase method. The
Company's consolidated statement of condition and operating results
include the operations of BSFBC beginning July 1, 1995. As of that
date, the assets included leasehold improvements and leasehold
interests totaling $5.5 million and cash equivalent investment
securities totaling $1.3 million. The liabilities included other
borrowings which were used to finance the acquisition of the
leasehold interests in 1986. The borrowings were repaid on October
31, 1995.
As of December 31, 1996, the Company's premises and equipment,
net of accumulated amortization and depreciation, is comprised of
leasehold improvements totaling $5.3 million, lease interests
totaling $1.8 million, premium paid to acquire BSFBC totaling
$485,000, and furniture and equipment totaling $446,000.
ITEM 3 - LEGAL PROCEEDINGS
Litigation
Because of the nature of its business, the Company and its
subsidiaries, including the Bank, are from time-to-time a party to
legal actions. Based upon information available to the Company and
the Bank, and its review of such outstanding claims to date,
management believes the ultimate liability relating to these
actions, if any, will not have a material adverse effect on the
Company's liquidity, consolidated financial condition or results of
operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1996 Annual Meeting (the "Annual
Meeting") on December 18, 1996. Several matters were submitted to
a vote of security holders at the Annual Meeting. The stockholders
elected nine directors, authorized the amendment to the Certificate
of Incorporation to increase the number of authorized shares of
Common Stock to 100,000,000, authorized the conversion of the
Series D Preferred Stock into Common Stock at a rate of 1 to 59,
approved the Amended and Restated 1993 Stock Option Plan and the
grant of options pursuant to such plan to certain directors, and
ratified the Board of Directors' selection of KPMG Peat Marwick
LLP, independent public accountants, as the independent accounting
firm for the Company during the fiscal years ending December 31,
1997, 1996 and 1995. See Part III, Item 10 "Directors and
Executive Officers of the Registrant".
page
The following schedule sets forth each matter voted upon at
the Annual Meeting and the number of votes casts for, against or
withheld including a tabulation with respect to each nominee for
director.
Proposal/Nominee Votes For Votes Against Votes Withheld/
Abstentions
Proposal 1: Election of Directors
James E. Gilleran 5,505,578 -- 1,919
Gordon B. Swanson 5,505,578 -- 1,919
Peter Foo 5,505,578 -- 1,919
Steven R. Champion 39,452 -- 5,078,045
Kent D. Price 5,504,953 -- 2,544
Nicholas Unkovic 5,505,578 -- 1,919
Jackson Schultz 5,505,578 -- 1,919
Willard D. Sharpe 5,505,578 -- 1,919
Gary Williams 5,505,578 -- 1,919
John McGrath 5,466,126 -- 1,919
Proposal 2: Authorize the
increase of the number
of authorized shares to
100,000,000 and the
conversion of the Series
D Preferred Stock. 5,505,388 1,926 183
Proposal 3: Approve of
the Amended and Restated
1993 Stock Option Plan
and the grant of options
to certain directors
pursuant to such plan. 5,499,466 7,633 398
Proposal 4: Ratify the
selection of KPMG Peat
Marwick LLP as the
Company's independent
accounting firm for
1995, 1996, and 1997. 5,507,309 83 105
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Common Stock is traded over-the-counter. Van
Kasper and Company of San Francisco, California is the sole market
maker in the Company's Common Stock. Prior to April 12, 1995, the
Company's Common Stock was traded on the American Stock Exchange
(the "AMEX") under the symbol "SFH". The following table sets
forth the high and low closing sale prices for the Common Stock on
the AMEX from January 1994 to April 1995, and in the "over-the-
counter" market from November 1995 to December 31, 1996.
1996 1995
Quarter High Low High Low
First $0.35 $0.34 $6.75 $4.50
Second (through April 12, 1995) 0.35 0.34 4.50 4.50
Third 0.35 0.34 -- --
Fourth 0.40 0.35 0.25 0.25
page
None of the Company's preferred stock was listed on any
exchange or traded in any other public market since 1988.
Holders
As of December 31, 1996, the number of holders of record of
the Company's Common Stock and Series B Preferred Shares was 415
and eleven (11) , respectively, which management believes is in
each case less than the number of actual beneficial owners because
of the number of shares held by known nominees.
Dividends
The Company is subject to dividend restrictions pursuant to
the Agreement, under the Delaware General Corporation Law and
regulations, and policies of the FRB. The Company's Series B
Preferred Shares participate equally, share for share, in cash
dividends paid on the Common Shares in addition to receiving the
cash dividends to which they are entitled. The Board of Directors
suspended the dividend on the Common Shares and the Series B
Preferred Shares. The Bank is subject to certain regulatory
restrictions regarding payment of dividends to the Company as set
forth in the California Financial Code. See "-- Regulatory
Agreement and Orders" for a discussion of these restrictions.
page
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated
financial data of the Company (derived from the audited consolidated
financial statements of the Company) at and for the years ended
December 31:
1996 1995 1994 1993 1992
(Dollars in Thousands except for per share data)
FINANCIAL CONDITION DATA:
Total assets $104,001 $114,862 $156,780 $231,021 $319,155
Total loans 43,762 53,208 106,452 149,740 236,076
Total securities
held-to-maturity 6,943 -- 7,859 5,078 3,683
Total securities
available-for-sale 28,348 6,536 2,211 14,940 --
Total securities
held-for-sale -- -- -- -- 18,731
Total deposits 91,166 105,673 147,148 210,111 285,685
Other borrowings -- -- 4,070 1,303 15,308
Shareholders' equity 11,064 6,880 2,129 17,455 15,676
OPERATING DATA:
Total interest income $ 7,242 $ 10,691 $ 12,651 $ 18,155 $ 23,885
Total interest expense 3,127 4,415 4,863 7,420 11,295
Net interest income 4,115 6,276 7,788 10,735 12,590
Provision for loan losses -- 500 3,799 3,554 9,828
Net interest income after
provision for
loan losses 4,115 5,776 3,989 7,181 2,762
Total non-interest
income 1,657 2,521 2,135 4,497 4,368
Total non-interest
expense 5,328 7,808 39,018 21,764 29,697
Income (loss) before
taxes 444 489 (32,894) (10,086) (22,567)
Provision (benefit) for
income taxes (258) 153 142 169 (390)
Net income (loss) $ 702 $ 336 $(33,036) $(10,255) $(22,177)
OTHER DATA:
Return on average assets 0.7% 0.3% (16.8)% (3.5)% (6.2)%
Return on average equity 7.9 6.8 (183.0) (57.5) (153.0)
Average equity to
average assets 8.3 3.7 9.2 6.1 4.1
Equity to assets at
period end 10.6 6.0 1.4 7.6 4.9
Interest rate spread
for period 3.7 4.3 5.0 4.4 4.6
Net interest margin 4.4 5.0 5.1 4.6 4.5
Non-performing assets
to total assets 8.2 13.1 12.8 18.8 16.8
Average interest-earning
assets to average interest-
bearing liabilities 119.3 121.5 105.1 103.5 96.6
Non-interest expenses
to average assets 5.0 6.0 19.8 7.6 8.9
Net interest income,
after provision for loan
losses, to non-interest
expense 77.3 72.2 10.2 32.4 9.2
Net loan charge-offs as
a percent of
average loans 0.6 1.4 4.4 2.0 3.9
Allowance for loan losses
as a percent of loans 12.9 11.1 6.2 5.4 3.6
PER SHARE DATA:
Common shares outstanding,
end of period 28,775,995 5,765,978 5,766,008 444,990 445,100
Preferred shares outstanding,
end of period 15,869 231,291 16,291 916,591 316,591
Common Shares:
Book value per
common share $0.38 $0.43 $0.37 $(1.60) $21.60
Income (loss) per
weighted average common share
Primary 0.12 0.05 (10.73) (23.00) (83.60)
Fully diluted 0.03 0.03 (10.73) (23.00) (83.60)
page
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion relates to information about the
financial condition and results of operations of the Company and
the Bank that might not otherwise be apparent from a review of the
financial statements contained under ITEM 8 - FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA. In addition to historical information,
this discussion and analysis includes certain forward-looking
statements regarding events and trends which may affect the
Company's future results. Such statements are subject to risks and
uncertainties including, but not limited to, those described in
this discussion and analysis, as well as those described in ITEM 1
- - - BUSINESS section of this report that could cause actual results
to differ.
The Company recorded net income of $702,000 for the year ended
December 31, 1996, following net income of $336,000 in 1995 and a
net loss of $33.0 million in 1994. The net income in 1996 and 1995
resulted primarily from the sale of problem assets. As the Bank
continues to reduce its problem assets, the related expenses and
income are expected to decline. The net losses in 1994 were
principally due to the high level of the provision for loan and
real estate owned losses, and declines in net interest income. In
addition, in 1994, the Company's non-interest expense reached
extremely high levels at 263.9% of total revenues.
Results of Operations - Years Ended December 31, 1996, 1995 and 1994
Net Interest Income
One of the fundamental measures of the Bank's results of
operations is net interest income. Net interest income is the
difference between the combined yield earned on interest earning
assets and the combined rate paid on interest bearing liabilities.
page
The following table presents the consolidated average balance
sheets of the Company, together with the total dollar amounts of
interest income and expense, and weighted average interest rates
for each of the years in the three year period ended December 31,
1996. Where possible, the average balances are calculated on a
daily average basis. When this information is not available,
average balances are calculated on a monthly basis.
1996 1995 1994
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets
Interest-earning assets:
Federal funds and time deposits
$ 22,452 $1,248 5.6 $ 35,184 $1,790 5.1% $17,326 $ 740 4.3%
Investment securities
29,128 1,752 6.0 7,786 449 5.8 14,539 653 4.5
Loans, net (1)
42,012 4,242 10.1 81,080 8,452 10.4 120,991 11,258 9.3
Total earning assets
93,592 7,242 7.7 124,050 10,691 8.6 152,857 12,651 8.3
Non-interest earning assets
13,365 7,688 43,761
Total assets
$106,957 $131,738 $196,618
Liabilities and Equity
Interest-bearing liabilities:
Interest-bearing deposits
$78,403 $3,124 4.0% $100,357 4,244 4.2% $142,775 4,694 3.3%
Other borrowings
38 3 7.9% 1,752 171 9.8% 2,710 169 6.5%
Total interest-bearing liabilities
78,441 3,127 4.0% 102,109 4,415 4.3% 145,485 4,863 3.3%
Non-interest bearing liabilities
19,660 24,699 33,079
Stockholders' equity
8,856 4,930 18,054
Total liabilities and
stockholders' equity
$106,957 $131,738 $196,618
Net interest income
$4,115 $6,276 $7,788
Primary interest rate spread
3.7% 4.3% 5.0%
Margin as a percent of earning assets:
Interest income 7.7% 8.6% 8.3%
Interest expense 3.3 3.6 3.2
Net interest margin 4.4% 5.0% 5.1%
(1) Non-performing loans have been included in the average loan
balances. Interest income is included on non-accrual loans only to
the extent to which cash payments have been received and full
principal repayment is probable.
Net interest income is dependent on the average balances of
interest earning assets and interest bearing liabilities and the
rates earned on interest sensitive assets and the rates paid on
interest sensitive liabilities. See "Asset Liability Management"
for more discussion of the management of net interest income.
The dollar amount of interest income and interest expense
fluctuates depending on changes in the respective interest rates
and on changes in the respective amounts (volume) of the Bank's
earning assets and interest bearing liabilities. For each category
of interest earning asset and interest bearing liability,
information is provided in the following table for changes
attributable to (i) changes due to volume (change in average
balance multiplied by prior year's rate), and (ii) changes in rate
(changes in rates multiplied by prior year's average balances).
Changes attributable to the combined impact of volumes and rates
have been allocated pro-rata to each category.
page
1996 versus 1995 1995 versus 1994
(Dollars in Thousands) Rate Volume Net Rate Volume Net
Interest-earning assets:
Federal funds and
time deposits $ 113 $ (655) $ (542) $ 164 $ 886 $ 1,050
Investment securities 24 1,279 1,303 154 (358) (204)
Loans, net (273) (3,937) (4,210) 1,235 (4,041) (2,806)
Total interest-
earning assets (136) (3,313) (3,449) 1,553 (3,513) (1,960)
Interest-bearing liabilities:
Interest-
bearing deposits (1,024) (96) (1,120) 1,147 (1,598) (451)
Other borrowings (102) (66) (168) 76 (73) 3
Total interest bearing
liabilities (1,126) (162) (1,288) 1,223 (1,671) (448)
Change in net
interest income $ 990 $(3,151) $(2,161) $330 $(1,842) $(1,512)
The Company's interest income decreased during the three year
period ended December 31, 1996, due mainly to a 65.3% decrease in
average loans during that same period. The decrease in the loan
portfolio primarily resulted from a decision to reduce the size of
the Company's assets through the non-renewal of loans to comply
with regulatory capital requirements. The weighted average yield
on loans decreased in 1996 compared to 1995 as a result of a
reduction in the Bank's prime rate from an average prime rate of
8.8% in 1995 to an average 8.3% during 1996. During 1994, the
Bank's average prime rate was 7.1%.
Interest income and dividends on Federal funds sold and
investment securities was $3.0 million in 1996 compared to $2.2
million in 1995. Average portfolio balances were $51.6 million in
1996 compared to $43.0 million in 1995 and average portfolio yields
were 5.8% in 1996 compared to 5.2% in 1995. Interest income on
investment securities was $1.4 million in 1994. In 1994, the
average portfolio balance was $31.9 million and average portfolio
yield was 4.4%. The higher average yields in 1996 reflect the
overall increase in market interest rates and the higher average
yield realized from reinvestment as a result of a more diversified
investment portfolio.
Interest expense for 1996 was $3.1 million, a decrease of $1.3
million, or 29.2%, from $4.4 million in 1995. The decrease was
primarily attributable to a decrease in average interest bearing
liabilities of $23.7 million to $78.4 million, or 23.2%, as
compared to 1995 and a decline in the cost of funds of 30 basis
points as a result of a lower interest rate environment in 1996
compared to 1995. The average cost of deposits and borrowings for
1996 was 4.0% as compared to 4.3% for 1995. Interest expense for
1995 was $4.4 million, a decrease of $448,000, or 9.2% during 1995,
as compared to 1994. This decrease was primarily attributable to
a decrease in average interest bearing liabilities of $43.4 million
to $102.1 million, or 29.8%, as compared to 1994. The average cost
of deposits and borrowings for 1995 was 4.3% as compared to 3.3%
for 1994 which reflected the rising interest rate environment.
Provision for Loan Losses
During 1996, 1995, and 1994, the Bank provided zero, $500,000,
and $3.8 million, respectively, to its allowance for loan losses.
The decrease in the loan loss provision in 1996 as a percentage of
average loans to zero from 0.6% in 1995 was the result of the lower
level of charge-offs required in 1996 compared to 1995, and
reflects management's assessment that the loan loss allowance
adequately provides for the risk in the Bank's loan portfolio. The
loan loss provision declined in 1995 as a percentage of average
loans to 0.6% from 3.1% in 1994 as a result of the lower level of
charge-offs required in 1995 compared to 1994. The Company's loan
loss provisions were for loan loss reserves allocated to specific
classified and non-performing loans. See "-- Allowance for Loan
Losses" herein.
page
Non-Interest Income
Non-interest income decreased $864,000 or 34.3% in 1996 as
compared to 1995, primarily as a result of lower commissions on
stock option transactions of $285,000 in 1996 due to a lower volume
of stock option exercises, a gain on sale of other assets in 1995
of $183,000 compared to a loss on sale of $2,000 in 1996, and
income from BSFBC of $48,000 for the first half of 1995 whereas in
1996 BSFBC is accounted for on a consolidated basis.
Non-interest income increased $386,000 or 18.1% in 1995 as
compared to 1994, primarily as a result of a gain on sale of other
assets in 1995 of $183,000 compared to a loss on sale of $257,000
in 1994, and income from BSFBC of $48,000 in 1995 compared to an
operating loss from results of operations of BSFBC of $264,000 in
1994.
The following table provides a detail of non-interest income
for the years ended December 31:
(Dollars in Thousands) 1996 1995 1994
Stock option commissions and fees $1,201 $1,486 $1,562
Service charges and fees 444 629 799
Other income 14 175 295
Results of operations from limited partnership -- 48 (264)
Loss on sale of investment securities, net -- -- (279)
Gain/(loss) on sale of assets, net (2) 183 22
Total non-interest income $1,657 $2,521 $2,135
Non-Interest Expense
For the year ended December 31, 1996, non-interest expenses
decreased $2.5 million, or 31.8%, from the year ended December 31,
1995. The reduction was attributed primarily to lower compensation
related expenses and lower occupancy costs. Generally, all
expenses declined in 1996 compared to 1995 as a result of the lower
level of problem assets and lower volumes of deposits and loans
requiring less administrative support and related costs.
For the year ended December 31, 1995, non-interest expenses
decreased $31.2 million, or 80.0%, from the year ended December 31,
1994. The reduction was attributed primarily to a lower level of
costs related to asset and credit quality, lower compensation
related expenses, and lower level of legal and consulting costs
related to the Company's loan collection and recapitalization
efforts.
The following table provides a detail of non-interest expense
for the years ended December 31:
(Dollars in Thousands) 1996 1995 1994
Salaries and related benefits $3,252 $4,279 $7,330
Professional fees 499 876 3,071
Equipment expense 345 417 564
Insurance premiums 319 374 189
Data processing 304 526 439
Occupancy expense 288 1,200 2,121
FDIC insurance premiums 204 457 633
Litigation settlement and reserve 200 (158) 3,601
Telephone 104 116 155
Marketing 58 86 369
Other operating expenses 248 559 1,419
Total operating expenses 5,821 8,732 19,891
Net (income)cost of real estate operations (493) (924) 19,127
Total non-interest expense $5,328 $7,808 $39,018
page
The decrease in compensation related expenses of $1.0 million
in 1996 to $3.3 million, or 24.0%, compared to 1995 and the
decrease of $3.0 million in 1995 to $4.3 million, or 41.6% from the
1994 level, resulted from lower staffing levels, lower severance
costs, and lower incentive compensation paid. The compensation
expense included performance-based incentives of $17,000, $5,000,
and $755,000 for 1996, 1995 and 1994, respectively.
The Company's expenses for professional services were $499,000
in 1996 compared to $876,000 in 1995, a reduction of $377,000, or
43%, and the reduction in 1995 compared to 1994 was $2.2 million or
71%. The Company includes in professional fees the costs of legal,
accounting, and management consulting services. Professional
service expenses declined in 1996 from 1995 and in 1995 from 1994
primarily as a result of a lower level of professional services
required to manage problem assets, the reduction in litigation
matters, lower costs related to the analysis and preliminary
activities required to establish various international business
strategies, and the reduction in activities related to regulatory
concerns and recapitalization.
The Company's occupancy costs totaled $288,000 in 1996 a
decline of $912,000 from $1.2 million in 1995. The Company's
occupancy costs declined $921,000 in 1995 from $2.1 million in
1994. The declines were primarily the result of the acquisition of
BSFBC in 1995 which enabled the Company to reduce facilities
operating costs and increase sublease income.
The decline in other operating costs of $311,000 in 1996 to
$248,000 and the decline of $860,000 in 1995 from $1.4 million in
1994 resulted primarily from cost reduction initiatives in
miscellaneous expenses and customer service related expenses.
Net income from real estate operations declined by $431,000 to
$493,000 in 1996 compared to $924,000 in 1995 as a result of lower
gains on sale of problem assets of $1.5 million. As the Bank
continues to decrease its other real estate owned, gains are
expected to continue to decline. The improvement in the net
income(cost) of real estate operations in 1995 compared to 1994 of
$20.1 million resulted from the decline in the real estate owned
portfolio, a lower level of provisions required to write the
properties down to market value, and gain on sale of real estate
owned.
In 1996, the Bank did not record any loss provisions on other
real estate owned properties compared to a loss provision totaling
$87,000 in 1995 and compared to $16.5 million in 1994. In addition
to the provisions, the Bank recognized a loss on sale of $18,000 on
other real estate owned property in 1996 compared to no losses on
sale real estate owned properties in 1995 and compared to losses of
$73,300 in 1994. The Bank recognized recoveries and gains on sale
of other real estate owned totaling $576,000 in 1996, compared to
$2.1 million in 1995 and $253,000 in 1994. Gains and losses are
netted in the accompanying income statement.
The Bank recorded gains on sale of its remaining real estate
investment properties of $85,000 in 1996. As of December 31, 1996,
the Bank does not own any real estate investment properties. The
Bank recorded a loss provision of $419,000 in 1995 for real estate
investment properties compared to a loss provision of $513,500 in
1994. The Bank did not recognize a gain or loss on sale in 1995
compared to a gain on sale of real estate investments totaling
$10,000 in 1994 on one property.
Provision for Income Taxes
The income tax benefit was $258,000 for 1996 compared to a
provision of $153,000 in 1995, which resulted in a reduction in tax
expense of $411,000. The reduction resulted from utilizing an
acceptable alternative method of calculating the Company's Delaware
franchise tax which resulted in a refund of the 1994 and 1995
franchise taxes of $270,000 and a reduction in current period taxes
of $141,000. The Company did not have any Federal or California
income taxes in 1995 and 1996 as a result of tax operating loss
carryforwards from losses in previous years. The effective tax
rates for the years ended December 31, 1996, 1995 and 1994, were
(58.1)%, 31.3% and 0.4%, respectively. For each of the years ended
December 31, 1996, 1995 and 1994, the federal statutory tax rate
applicable to the Company was 34%. The actual benefit rate of the
tax loss carryforwards may be less than the current statutory rate
due to tax differentials and the alternative minimum tax. As of
December 31, 1996, the Company had net operating loss carryforwards
for federal tax purposes of approximately $56.0 million which begin
expiring in 2007, and for California tax purposes of approximately
$46.8 million, which begin expiring in 1997 through 2002. As of
December 31, 1996, the Company had rehabilitation tax credit
carryforwards for federal tax purposes of approximately $213,000,
which expire in 2004 and 2005, and other tax credits of
approximately $276,000 which have no expiration. Utilization of
the net operating loss carryforwards, and rehabilitation and
minimum tax credit carryforwards may be limited on an annual basis
under current tax law due to possible changes in ownership in
future years.
page
Financial Condition
Total Assets
The Company's total assets were $104.0 million as of December
31, 1996 a decline of 9.5% compared to $114.9 million at December
31, 1995 and compared to $156.8 million at December 31, 1994.
During 1996, the Company achieved its goal of reducing total assets
and significantly reducing problem assets. In 1995 and 1996,
management's strategy was to pursue an aggressive loan work-out
program to reduce the level of the real estate related and other
problem loans. In 1996, management also began to implement a
strategy to rebuild the Bank's loan portfolio.
Liquidity
Liquidity is the Bank's ability to meet the present and future
needs of its clients for loans and deposit withdrawals. The Bank's
liquidity generally increases or decreases as a result of
fluctuations in the Bank's loans and other assets, and deposits.
The Bank maintains liquid assets of cash and cash equivalents, such
as federal funds sold, at levels management believes are sufficient
to meet the liquidity needs of its deposit customers. At December
31, 1996, the Company's cash and cash equivalents were $15.6
million or 17.1% of total deposits and 94.5% of non-interest
bearing deposits. At December 31, 1995, the Company's cash and
cash equivalents were $42.8 million or 40.5% of total deposits and
209.8% of non-interest bearing deposits.
In 1996 and 1995, the Company's principal source of liquidity
had been repayment of loans and new capital from the issuance of
its capital stock. Generally, the Bank has various sources of
liquidity including core deposits, money desk deposits, other
borrowings, sale of securities, loan participations and sales, loan
repayments, and the sale of problem assets. The Bank's access to
some of these sources of liquidity may be limited as a result of
the contractual maturities of performing loans, and/or the
inability of borrowers to repay loans according to the contractual
terms.
Investment Activities
The Company adopted the Statement of Financial Accounting
Standards (the "SFAS") No. 115, "Accounting for Certain Investments
in Debt & Equity Securities" which requires that all securities be
classified, at acquisition, into one of three categories: held-to-
maturity securities, trading securities, and available-for-sale
securities. The Bank determines the classification of all
securities at the time of acquisition. In classifying securities
as being held-to-maturity, trading, or available-for-sale, the Bank
considers its collateral needs, asset/liability management
strategies, liquidity needs, interest rate sensitivity and other
factors in determining its intent and ability to hold the
securities to maturity.
Investment securities held-to-maturity may include United
States Treasury and Federal agency securities, investments in
certificates of deposit, and mortgage-backed securities. The
objectives of these investments are to increase portfolio yield,
and to provide collateral to pledge for federal, state and local
government deposits and other borrowing facilities. The
investments held-to-maturity have an average term to maturity of 43
months at December 31, 1996 and are carried at amortized cost. At
December 31, 1996, the investment securities held-to-maturity
portfolio includes $6.9 million in fixed rate balloon mortgage-
backed security investments. The Bank did not hold any investments
held-to-maturity as of December 31, 1995.
Investment securities available-for-sale may include United
States Treasury and Federal agency securities, mutual funds,
mortgage-backed securities, and collateralized mortgage
obligations. These securities are typically used to supplement the
Bank's liquidity portfolio with the objective of increasing yield.
Investment securities available-for-sale are accounted for at fair
value. Unrealized gains and losses are recorded as an adjustment
to equity and are not reflected in the current earnings of the
Bank. If the security is sold any gain or loss is recorded as a
charge to earnings and the equity adjustment is reversed. At
December 31, 1996 and 1995, the Bank held $28.3 million and $6.5
million as investments available-for-sale, respectively. At
December 31, 1996, $77,000 was charged against equity, and at
December 31, 1995, $41,000 was shown as an increase in equity to
reflect the net market value adjustment to the securities
available-for-sale.
The tables below sets forth certain information regarding the
carrying value and the weighted average yields of the Bank's
investment securities portfolio by maturity at December 31, 1996:
Available for Sale
Total
Within One to Mortgage- Investment
One Year Five Years backed Securities
(Dollars in Thousands)
U.S. Treasury $1,003 -- -- $1,003
Average yield 6.1% -- -- 6.1%
Agency securities $1,000 $21,575 -- $22,575
Average yield 5.4% 6.0% -- 5.9%
Mortgage-backed securities -- -- $4,770 $4,770
Average yield -- -- 6.8% 6.8%
Total $2,003 $21,575 $4,770 $28,348
Average yield 5.8% 6.0% 6.8% 6.1%
Held to Maturity
Total
One to Investment
Five Years Securities
(Dollars in Thousands)
Mortgage-backed securities $6,943 $6,943
Average yield 6.5% 6.5%
The Bank held $4.7 million in adjustable rate mortgage-backed
securities that had a final maturity of more than five years as of
December 31, 1996. As of December 31, 1996, the Bank held 6,698
shares of stock in the Federal Home Loan Bank of San Francisco (the
"FHLB") as a membership requirement with a carrying and market
value of $670,000. The FHLB stock has no term to maturity. As of
December 31, 1996 and 1995, the Company and the Bank had no
derivative financial instruments.
Loans
The Bank's primary lending activities are in commercial and
financial loans made primarily to individuals and businesses in the
San Francisco bay area and, to some extent, in the Sacramento
metropolitan area. The Bank also enters into loan participations
agreements with other bank's in Northern California and has begun
a program of lending pursuant to the Small Business
Administration's 504 Certified Development Company Program (the
"SBA 504 Program"). The Bank has and may continue to provide
financing to qualifying borrowers for the sale of other real estate
owned. The Bank also provides financing for the exercise of
employee stock options. The Bank offers credit ranging from
$100,000 to $3.5 million depending on the loan characteristics such
as type, collateral, and terms.
At December 31, 1996 and 1995, the Bank had net loans out-
standing of $37.9 million and $47.1 million, respectively, which
represented approximately 41.6% and 44.6% of the Bank's total
deposits at those dates and approximately 36.4% and 41.0% of the
total assets of the Company. During 1996, the Bank originated
$22.0 million of new loans, compared with $32.3 million of new
loans during 1995. The interest rates charged on the Bank's loans
have varied with the degree of risk, maturity, market interest
rates, funds availability, and governmental regulations, and have
been subject to competitive pressures. Approximately 76.2% of the
Bank's performing loans have interest rates that either adjust with
the Bank's prime rate or mature within 90 days.
page
In its lending operations, the Bank continues to take steps to
strengthen its credit management practices and to improve the
overall quality of the loan portfolio. Such steps include
instituting more stringent underwriting standards and emphasizing
lending to small businesses, corporations and individuals for cash
flow, inventory funding and other investments. As a result of the
desire to reduce concentrations of high risk real estate loans, the
Bank has substantially eliminated its origination of land
acquisition and development loans other than lending pursuant to
the SBA 504 Program.
Real Estate Secured Loans The Bank's real estate mortgage
loans typically are secured by first or second deeds of trust on
either commercial or residential property, and have original
maturities of three years or more. Such loans have been non-
revolving and generally have had maturities that do not exceed ten
years. Repayment terms generally include principal amortization
over a negotiated term, with balloon principal payments due upon
maturity of the loans. The typical purpose of these loans is the
acquisition or re-financing of real property securing the loan.
The primary sources of repayment have been the properties' cash
flow in the case of commercial real estate loans and the borrowers'
cash flow in the case of residential real estate. The secondary
source of repayment is the sale of the real property securing the
loan. The Bank's real estate secured loans typically bear a
floating rate of interest based on the prime rate, but the Bank
will consider and has made fixed rate loans.
Included in real estate secured loans are the SBA 540 Program
loans. Generally, the SBA 540 Program provides an SBA-backed
debenture for long-term (up to 20 years), permanent, fixed-rate
financing for real estate acquisition and development with a
maximum project cost of $2.5 million. The financing of an SBA 504
Program project includes a private-sector senior loan for up to 50%
of the value of the project, a junior lien to a maximum of 40% of
the value of the project which is guaranteed by the SBA, and the
borrower providing 10% equity. The Bank's SBA 504 Program loans
include construction and permanent financing. The Bank provides
the financing during the construction of the project where the
borrower has qualified for permanent financing under the SBA 504
Program. The Bank provides the permanent financing when
construction is complete by providing the private-sector senior
loan for up to 50% of the value of the project.
Loans collateralized by real estate represent the Bank's
largest loan concentration. As of December 31, 1996 and 1995,
approximately 64.0% and 70.0%, respectively, of the Bank's total
loan portfolio was secured by real estate. The Bank mitigates
concentration risk by diversifying the type of real estate. The
largest concentration of real estate loans is collateralized by
commercial real estate which is 37.2% of total loans. The largest
real estate secured loan was approximately 3.8% of total assets as
of December 31, 1996. As of December 31, 1996, the Bank's real
estate loan portfolio consists primarily of loans with principal
amounts of between $100,000 and $4.0 million and generally have
terms of between one and ten years.
Secured Commercial and Financial Loans. The Bank offers a
variety of commercial and financial lending services including
revolving lines of credit, working capital loans, homeowners'
association loans, and letters of credit. In addition, the Bank
may purchase participations in agricultural loans. These loans are
typically secured by cash deposits, accounts receivable,
homeowners' association due assessments, equipment, inventories,
agricultural crop production, investments, and securities. In
underwriting commercial and financial loans, the Bank focuses on
the net worth, income, liquidity and cash flows of the borrower or
borrowers and the value of the collateral. The Bank's commercial
and financial loans typically bear a floating rate of interest
based on the prime rate. The Bank's commercial and financial loans
are primarily in principal amounts of at least $100,000 and
generally have terms of one year or less.
As of December 31, 1996 and 1995, the Bank had secured
commercial and financial loans outstanding of $6.2 million and $7.4
million constituting approximately 14.2% and 13.9% of the Bank's
total loan portfolio, respectively. As of December 31, 1996,
approximately 44.9% of the Bank's gross secured commercial and
financial loans were scheduled to mature within one year. As of
December 31, 1996, the largest secured commercial and financial
loan accounted for approximately 1.0% of the Bank's total assets.
Unsecured Loans. The Bank offers a variety of unsecured loans
including commercial and financial loans and loans to individuals.
The purpose of unsecured loans includes revolving lines of credit
for personal investing or cash flow management, home or business
improvements, working capital loans, and letters of credit. In
underwriting unsecured loans, the Bank focuses on the net worth,
income, liquidity and cash flows of the borrower. The Bank's
unsecured loans typically bear a floating rate of interest based on
the prime rate. The Bank's unsecured loans are primarily in prin-
cipal amounts of at least $100,000 and generally have terms of one
year or less.
page
As of December 31, 1996 and 1995, the Bank's unsecured loans
totaled $7.8 million and $7.6 million and were 17.8% and 14.3%,
respectively, of the Bank's total loan portfolio. The Bank's
largest unsecured loan accounted for approximately 2.3% of total
assets as of December 31, 1996.
Other Loans. The Bank offers a variety of other loans a
majority of which are stock option loans. These loans typically
bear a floating rate of interest based on the prime rate and have
a term of less than 30 days. See "-- Stock Option Services." As
of December 31, 1996 and 1995, the Bank's other loans totaled $1.7
million and $1.2 million and were 3.9% and 2.2%, respectively, of
the Bank's total loan portfolio.
Lending Policies and Procedures The Bank's lending policies
are established by the Bank's senior management and approved by the
Board of Directors of the Bank and its Loan and Investment
Committee. The Bank is required by regulation to limit its maximum
outstanding balance to any one borrower to 25% of capital and
reserves on secured loans and to 15% of capital and reserves on
unsecured loans. Secured loans are defined as loans secured by a
first deed of trust or possessory collateral. Of the $22.0 million
in loans originated and participations purchased during 1996, a
total of $14.1 million exceeded $1.0 million each. Generally, any
new or renewed loan for over $500,000 requires the approval of the
Loan and Investment Committee of the Board and any new or renewed
loan under $500,000 can be approved by senior management.
The Bank assesses the lending risks, economic conditions and
other relevant factors related to the quality of the Bank's loan
portfolio in order to identify possible credit quality risks. The
Bank has engaged a third party professional firm to perform certain
agreed upon procedures relating to credit quality and loan
classification. These credit review consultants review a sample of
loans periodically and report the results of their findings to the
Audit Committee of the Bank's Board of Directors. Results of
reviews by the credit review consultants as well as examination of
the loan portfolio by state and federal regulators are also
considered by management in determining the level of the allowance
for loan losses.
The Bank may restructure loans as a result of a borrower's
inability to service the obligation under the original terms of the
loan agreement. Restructures are executed only when the Bank
expects to realize more from a restructured loan than from allowing
the loan to be foreclosed or pursuing other forms of collection.
When a borrower fails to make a required payment on a loan,
the loan is categorized as delinquent. If the delinquency is not
cured, workout procedures are generally commenced. If workout
proceedings are not successful, collection procedures, which may
include collection demands, negotiated restructures, foreclosures
and suits for collection, are initiated. In general, loans are
placed on non-accrual status after being contractually delinquent
for more than 90 days, or earlier if management believes full
collection of future principal and interest on a timely basis is
unlikely. When a loan is placed on non-accrual status, all interest
accrued but not received is charged against interest income. When
the ability to fully collect non-accrual loan principal is in
doubt, cash payments received are applied against the principal
balance of the loan until such time as full collection of the
remaining recorded balance is expected. Generally, loans with
temporarily impaired values and loans to borrowers experiencing
financial difficulties are placed on non-accrual status even though
the borrowers continue to repay the loans as scheduled. Such loans
are categorized as performing non-accrual loans and are reflected
in non-performing assets. Interest received on such loans is
recognized as interest income when received. A non-accrual loan is
restored to an accrual basis when principal and interest payments
are paid current and full payment of principal and interest is
probable. Loans that are well secured and in the process of
collection remain on accrual status.
Generally, the Bank's method of analyzing the adequacy of its
allowance for loan losses is based on the evaluation of fair value
of the underlying collateral, known risks, trends, and other
factors. The fair value of the underlying collateral is based on
current market conditions, appraisals, and estimated sales values
of similar properties, less an estimated discount for selling and
other expenses. In addition, the Bank establishes a specific loss
allowance based on the asset classification and credit quality
grade. This specific loss allowance is utilized to ensure that
allowances are allocated based on the credit quality grading to
capture inherent risks. In addition, the Bank carries an
"unallocated" loan loss allowance to provide for losses that may
occur in the future in loans that are not presently classified,
based on present economic conditions, trends, and related
uncertainties. The Bank continues to refine the allowance
methodology to ensure that all known risks, trends, and facts are
utilized in determining the adequacy of the allowance for loan
losses.
page
The Bank charges current earnings with provisions for
estimated losses on loans receivable and other real estate owned.
The provisions take into consideration specifically identified
problem loans, the financial condition of the borrowers, the fair
value of the collateral, recourse to guarantors, and other factors.
See "Valuation Allowances."
Composition of Loan Portfolio The composition of the Bank's loan
portfolio at December 31 is summarized as follows:
At December 31,
(Dollars in Thousands) 1996 1995 1994 1993 1992
Real estate mortgage $28,022 $37,049 $71,153 $ 96,426 $127,758
Secured commercial and financial 6,229 7,379 20,906 31,457 49,238
Unsecured 7,800 7,604 12,052 20,109 32,910
Other 1,711 1,176 2,341 1,749 26,170
43,762 53,208 106,452 149,740 236,076
Deferred fees and discounts, net (190) (180) (388) (550) (863)
Allowance for possible loan losses (5,663) (5,912) (6,576) (8,050) (8,400)
Total loans, net $37,909 $47,116 $99,488 $141,140 $226,813
The following table presents the loan portfolio at December
31, 1996 based upon various contractually scheduled principal
payments allocated into maturity categories. This table does not
reflect anticipated prepayment of loans.
One to After
Within Five Five
(Dollars in Thousands) One Year Years Years Total
Real estate mortgage $ 8,185 $13,731 $6,106 $28,022
Secured commercial and financial 3,414 2,761 54 6,229
Unsecured 4,707 3,093 -- 7,800
Other 1,711 -- -- 1,711
Total loans $18,017 $19,585 $6,160 $43,762
Loans due in one year or more include $9.3 million with fixed
interest rates and $16.4 million with floating or adjustable rates
based on prime rate.
Problem Assets The Bank monitors the credit quality of its
assets by periodically reviewing market conditions, reviewing
borrower performance trends, obtaining updated financial and
appraisal information, and by inspecting the collateral, if any,
using defined grading standards. The Bank categorizes the assets
into credit quality grades based on risk characteristics resulting
in certain assets receiving adverse grades. Assets that are
assigned a grade or rating of "substandard" or "doubtful" are
identified as Problem Assets. Assets assigned a grade or rating of
"Loss" are immediately charged or written off. Problem Assets
include non-performing assets such as non-accrual loans, real
estate investment (the "REI"), other real estate owned (the
"OREO"), and performing loans that exhibit certain credit quality
weaknesses.
Effective January 1, 1995, the Company adopted SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" as amended by
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures". A loan is considered impaired
when, based on certain events and information, it is "probable"
that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. At December 31,
1996, the Company measured the impairment of all impaired loans
using the collateral value method. Total interest recognized on
impaired loans during 1996 was $170,000 and the related allowance
for loan losses totaled $717,000 at December 31, 1996.
Real estate acquired through foreclosure is recorded at fair
value at the time of transfer to OREO. The Bank periodically
obtains either an appraisal or market valuation analysis on all
OREO. If the valuation analysis indicates a decline in the market
value of the property, a specific loss allowance is established.
The Bank provides a charge against current earnings for estimated
losses on foreclosed property when the carrying value of the
property exceeds its fair value net of estimated selling expenses.
Fair value is based on current market conditions, appraisals, and
estimated sales values of similar properties, net of an estimated
discount for selling and other expenses.
page
In 1996, the Bank reduced its non-performing asset portfolio
by $6.8 million, from $15.3 million to $8.5 million, through
resolutions, asset sales, charge offs and improvements in loan
quality. Of the $8.5 million of non-performing assets in the
Bank's portfolio at December 31, 1996, properties classified by the
Bank as OREO comprised 60.0% of the total value of the non-
performing asset portfolio and 40.0% was held on a non-accrual
basis. Based upon information presently available, management
believes that the Bank has made sufficient provision to its
allowance for possible loan losses and specific reserves to absorb
possible losses that might result from the Bank's current
strategies to resolve the non-performing assets.
The table below outlines the Bank's classified assets as of
December 31:
(Dollars in Thousands) 1996 1995 1994 1993 1992
Non-accrual loans $ 3,400 $ 7,511 $ 9,377 $ 11,086 $ 17,811
Other real estate owned, net 5,133 7,514 10,021 32,372 35,457
Real estate investment, net -- 236 682 1,468 1,891
Total non-performing assets 8,533 15,261 20,080 44,926 55,159
Loans - performing 10,391 17,800 15,580 11,847 34,394
Total classified assets $ 18,924 $33,061 $ 35,660 $ 56,773 $ 89,553
Non-performing assets as a percentage
of total loans, OREO and REI
outstanding 17.4% 24.7% 16.7% 23.9% 19.7%
Loans past due 90 days or more
and accrual -- -- $ 940 -- $ 182
Loans restructured and in compliance
with modified terms 4,109 4,126 6,317 1,967 --
In addition to the loans disclosed in the foregoing table, the
Bank had approximately $212,000 in loans on December 31, 1996 that
were between 31 and 89 days delinquent. All of these loans were
brought current subsequent to December 31, 1996. For the years
ended December 31, 1996, 1995, and 1994, interest income foregone
on restructured loans was zero, $24,000, and $18,000, respectively.
The amount of gross interest income that would have been collected
for non-accrual loans if all such loans had been performing in
accordance with their original terms was $29,000, $177,000, and
$918,000, in 1996, 1995 and 1994, respectively.
The Bank's strategies continue to include the reduction of
non-performing assets through individual sales and workout plans.
Management expects that such efforts are not likely to entail
further write downs of the non-performing assets but there can be
no assurance that will be the case.
Allowance for Loan Losses The following table summarizes the
loan loss experience of the Bank for the years ended December 31:
(Dollars in Thousands) 1996 1995 1994 1993 1992
Balance of allowance for loan
losses at beginning of period $ 5,912 $ 6,576 $ 8,050 $ 8,400 $ 8,411
Loans charged off:
Commercial, financial and
unsecured (4) (427) (3,888) (2,407) (6,315)
Real estate (642) (2,444) (2,732) (1,254) (3,750)
Sale of Sacramento loans -- -- -- (402) --
Subtotal (646) (2,871) (6,620) (4,063) (10,065)
Recoveries of previous losses:
Commercial and financial 397 1,565 1,181 148 221
Real estate construction -- 142 166 6 5
Net lease financing -- -- -- 5 --
Subtotal 397 1,707 1,347 159 226
Net loans charged off (249) (1,164) (5,273) (3,904) (9,839)
Provision for loan losses -- 500 3,799 3,554 9,828
Balance of allowance for loan
losses at end of period $ 5,663 $ 5,912 $ 6,576 $ 8,050 $ 8,400
Ratio of the allowance to
total loans 12.9% 11.1% 6.2% 5.4% 3.6%
Ratio of the allowance to
non-accrual loans 166.6 78.7 70.1 72.6 47.2
Ratio of net charge-offs to
average loans 0.6 1.4 4.4 2.0 3.9
Allocation of the allowance for loan losses by collateral type
at December 31 are as follows:
1996 1995 1994
(Dollars in Thousands)
Balance Percent(1) Balance Percent(1) Balance Percent(1)
Real estate
mortgage $2,456 64.0% $1,613 69.6% $2,322 66.9%
Secured commercial
and financial 250 14.2 1,207 13.9 1,522 19.6
Unsecured 483 17.8 1,872 14.3 2,359 11.3
Other 36 4.0 -- 2.2 -- 2.2
Unallocated 2,438 -- 1,220 -- 373 --
Total $5,663 100.0% $5,912 100.0% $6,576 100.00%
1993 1992
Balance Percent(1) Balance Percent(1)
Real estate mortgage $2,707 64.4% $6,219 54.1%
Secured commercial and financial 999 21.0 747 20.9
Unsecured 1,549 13.4 1,158 13.9
Other -- 1.2 2 11.1
Unallocated 2,795 -- 274 --
Total $8,050 100.0% $8,400 100.0%
(1) Percent refers to the percent of loans in each category to
total loans.
page
Deposits
The Bank had total deposits of $91.2 million and
$105.7 million at December 31, 1996 and 1995, respectively. As of
December 31, 1996, deposits consisted of demand deposits totaling
$16.5, money market and savings accounts totaling $18.7 million,
NOW accounts totaling $18.3 million and time deposits totaling
$37.6 million. As of December 31, 1996, the Bank had a total of
2,484 deposit accounts consisting of 607 demand deposit accounts
with an average balance of approximately $27,182 each, 531 savings
and money market accounts with an average balance of approximately
$35,216 each, approximately 805 NOW accounts with an average
balance of approximately $22,732 each and 541 time accounts with an
average balance of approximately $69,500. The Bank's deposits and,
correspondingly, its liquidity, are largely dependent upon four
sources of funds: deposits acquired through its ABS function,
Private and Business Banking, Escrow Services, and deposits
solicited through the Bank's money desk. These sources of deposits
comprised 86.0% of the Bank's total deposits at December 31, 1996.
Certificates of deposit having a balance of at least $100,000
represented approximately 9.4% of the Bank's total deposits as of
December 31, 1996 compared to 6.1% as of December 31, 1995. As of
December 31, 1996, $4.5 million of the Bank's certificates of
deposit of at least $100,000 mature in 90 days or less and $3.6
million mature between 91 days and one year. The aggregate average
maturity of all of the Bank's certificates of deposit of at least
$100,000 was four months as of December 31, 1996, and the aggregate
amount of all such certificates of deposit as of December 31, 1996
was $8.5 million.
The Bank solicits money desk deposits principally from other
financial institutions and municipalities outside of the Bank's
market area. As of December 31, 1996 and 1995, the Bank had
outstanding money desk deposits of $21.0 million or 23.1% of total
Bank's total deposits and $28.0 million or 26.5% of Bank's total
deposits, respectively. During 1996, the money desk deposits
averaged $24.2 million, with a high balance of $27.8 million. As
of December 31, 1996, money desk deposits had a remaining weighted
average maturity of approximately eight months.
Management believes that the Bank can reduce its reliance on
money desk and volatile liabilities through local deposit marketing
efforts. Money desk deposits presently comprise over 23.0% of the
Bank's total deposits. No assurance can be given that the Bank
will be able to successfully implement its plans to increase core
deposits.
The following table sets forth the maturities, as of
December 31, 1996, of the Bank's interest-bearing deposits and
other interest-bearing liabilities:
Over 3 Over More Than
3 Months Months to 6 Months 1 Year to
(Dollars in Thousands) or Less 6 Months to 1 Year 5 Years Total
Interest-bearing liabilities:
Money market accounts $17,376 -- -- -- $17,376
Savings and NOW accounts 19,638 -- -- -- 19,638
Time deposits 14,142 $9,757 $10,213 $ 3,535 37,647
Total interest-bearing
liabilities $51,156 $9,757 $10,213 $ 3,535 $74,661
Other Borrowings
The Bank has other borrowing facilities which include advances
from the FHLB and access to the discount window at the FRB. No
other borrowings were outstanding at December 31, 1996, or 1995.
The Bank's short term line of credit with the FRB of up to
$1.8 million is secured by pledged securities totaling $2.2 million
and the line of credit with the FHLB of up to $5.2 million is
secured by pledged securities and loans totaling $8.5 million.
During 1996 and 1995, the Bank did not borrow at the discount
window at the Federal Reserve Bank. In the second and third
quarters of 1996, the Bank activated its FHLB borrowing. These
borrowings were repaid in the third and fourth quarters of 1996.
page
Asset and Liability Management
Banking is a business which depends on rate differentials. In
general, the difference between the interest rate paid by the Bank
on its deposits and its other borrowings and the interest rate
received by the Bank on loans extended to its customers and
securities held in the Bank's portfolio comprises a major portion
of the Bank's earnings. These rates are highly sensitive to many
factors which are beyond the control of the Bank. Accordingly, the
earnings and growth of the Bank are subject to the influence of
domestic economic conditions, including inflation, recession and
unemployment.
The most important component of the Bank's net interest income
is the difference between the rates earned on its interest
sensitive assets as compared to the rates paid on its interest
sensitive liabilities. The difference between the amount of assets
and the amount of liabilities which are subject to interest rate
risk is referred to as the "gap." The gap represents the risk and
the opportunity inherent in mismatching asset and liability
interest rate changes. If more assets than liabilities are
interest rate sensitive at a given time in a rising interest rate
environment, net interest income increases. In a declining
interest rate environment with the same "gap", net interest income
decreases. If more liabilities change rates than assets, the same
scenarios produce the opposite effects.
The Bank's risk management policies are established by the
Asset Liability Committee (the "ALCO"). The ALCO meets
periodically to formulate the Bank's strategies. The
responsibilities of the ALCO include the management of interest
rate risk, liquidity, funding, and asset and liability products.
The Bank's approach is to measure interest rate risk, assess and
determine if the risk level is acceptable and to develop strategies
to either reduce excessive risk or recognize the trade-offs between
risk and return.
The following table shows the repricing opportunities for the
Bank's interest-earning assets and interest-bearing liabilities at
December 31, 1996:
(Dollars in Thousand) Over 3 Over More Than
3 Months Months to 6 Months 1 Year to Over
or Less 6 Months to 1 Year 5 Years 5 Years Total
Interest-Earning Assets:
Investment securities and
certain cash equivalents
$ 20,362 $ 8,026 $ 4,007 $ 15,790 -- $48,185
Loans (1) 30,745 232 1,403 4,408 $ 3,574 40,362
Total interest-
earning assets 51,107 8,258 5,410 20,198 3,574 88,547
Interest-Bearing Liabilities:
Interest-bearing deposits
51,156 9,757 10,213 3,535 -- 74,661
Other borrowings -- -- -- -- -- --
Total interest-
bearing liabilities
51,156 9,757 10,213 3,535 -- 74,661
Interest bearing
assets over (under)
interest bearing
liabilities $(49) $(1,499) $(4,803) $16,663 $ 3,574 $ 13,886
Cumulative
primary gap $(49) $(1,548) $(6,351) $10,312 $13,886
Gap as a percentage
of total assets 0.0% (1.5)% (6.1)% 9.9% 13.3%
(1) Excludes non-accrual loans.
The repricing terms of the table above represent the principal
cash flow available for repricing or expected to be available for
repricing during the various terms rather than the contractual
maturity dates. The repricing table only partially depicts the
dynamics of the Bank's sensitivity to interest rate changes. Such
an analysis does not fully describe the complexity of relationships
between product features and pricing, market rates and future
management of the balance sheet mix. For example, assets and
liabilities indicated as repricing within the same period may in
fact reprice at different times and different rates. These factors
may cause the cumulative primary gap position above to indicate a
greater degree of liability sensitivity than management believes
may actually exist. The Company's net interest margins on average
earnings assets for the years ended December 31, 1996, 1995 and
1994, were 4.4%, 5.0% and 5.1%, respectively.
Capital
Shareholders' equity totaled $11.1 million at December 31,
1996, an increase of $4.2 million from $6.9 million at December 31,
1995. The Company's majority shareholder contributed additional
capital of $3.5 million during 1996. During 1996 and 1995, the
Company issued 175,000 and 215,000 shares, respectively, of 9%
Series D Perpetual Preferred Stock (the "Series D Preferred Stock")
at a price of $20.00 per share to its majority shareholder. The
shares of Series D Preferred Stock converted into Common Stock at
a conversion ratio of 1 to 59 and the Company issued 23,010,000
shares of Common Stock on December 31, 1996.
The Company and its majority shareholder entered into an
agreement on February 26, 1996, pursuant to which the shareholder
subscribed to the purchase of $4.5 million in capital. The
agreement further provided that the Company would grant options to
acquire additional shares when the majority shareholder contributed
$4.5 million in capital by December 31, 1996. The Company's
majority shareholder contributed $3.5 million in capital as of
December 31, 1996, and, therefore, the options were not granted.
The Company and the Bank are subject to general regulations
issued by the FRB, FDIC, and SBD which require maintenance of a
certain level of capital and the Bank is under specific capital
requirements as a result of the Orders. The Company is also
subject to a Letter Agreement dated April 21, 1989, with the FRB
which requires that the Company maintain a minimum leverage capital
ratio of 5.5%. As of December 31, 1996, the Company was in
compliance with all minimum capital requirements and the Bank was
in compliance with all minimum capital ratio requirements including
the minimum leverage ratio of 7.0% required by the Orders.
The following table reflects both the Company's and the Bank's
capital ratios with respect to the minimum capital requirements in
effect as of December 31, 1996.
Minimum
Capital
Company Bank Requirement Orders
Leverage ratio 10.5% 10.3% 4.0% 7.0%
Tier 1 risk-based capital 15.7 15.3 4.0 N/A
Total risk-based capital 18.2 17.8 8.0 N/A
Under California law, if a bank's deficit retained earnings
exceed 40% of its contributed capital, its capital is deemed to be
impaired, and the bank is required to levy an assessment on its
shares to correct the impairment. See "-- Regulatory Directives and
Orders" for more discussion on the Bank's impairment of capital
including dividend restrictions.
page
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Financial Condition,
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Operations, . . . . . . . . . . . . . . . . . 31
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity,. . . . . . . 32
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows, . . . . . . . . . . . . . . . . . 33
Years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 35
page
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of
The San Francisco Company:
We have audited the accompanying consolidated statements of
financial condition of The San Francisco Company and subsidiaries
(the "Company") as of December 31, 1996 and 1995 and the related
consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of The San Francisco Company and subsidiaries as of
December 31, 1996 and 1995, and the results of their operations and
their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
February 21, 1997
San Francisco, California
page
The San Francisco Company
Consolidated Statements of Financial Condition
December 31, 1996 and 1995
(Dollars in Thousands Except Per Share Data)
Notes 1996 1995
Assets:
Cash and due from banks $ 3,701 $ 4,814
Federal funds sold 11,925 38,000
Cash and cash equivalents 15,626 42,814
Investment securities held-to-maturity
(Market value: 1996 - $6,848) 3 6,943 --
Investment securities available-for-sale 3 28,348 6,536
Federal Home Loan Bank stock, at par 3 670 632
Loans 4 43,762 53,208
Deferred loan fees 4 (190) (180)
Allowance for loan losses 5 (5,663) (5,912)
Loans, net 37,909 47,116
Other real estate owned 6 5,133 7,514
Real estate investments -- 236
Premises and equipment, net 7 8,059 8,689
Interest receivable 7 58 527
Other assets 555 798
Total assets $104,001 $114,862
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 16,505 $ 20,365
Interest bearing deposits 74,661 85,308
Total deposits 8 91,166 105,673
Other borrowings 9 -- --
Other liabilities and interest payable 1,771 2,309
Total liabilities 92,937 107,982
Commitments and contingencies 15
Shareholders' Equity: 11
Preferred stock (par value $0.01 per share)
Series B - Authorized - 437,500 shares
Issued and outstanding - 1996 - 15,869 and
1995 - 16,591 shares 111 114
Series D - Authorized - 750,000 shares
Issued and outstanding - 1995 - 215,000 -- 4,300
Common stock (par value $0.01 per share)
Class A - Authorized - 100,000,000 shares
Issued and outstanding - 1996 - 28,775,995 and
1995 - 5,765,978 shares 288 58
Additional paid in capital 77,841 70,168
Retained deficit (67,099) (67,801)
Unrealized (loss) gain on securities available-for-sale (77) 41
Total shareholders' equity 11,064 6,880
Total liabilities and shareholders' equity $104,001 $114,862
The accompanying notes are an integral part of the consolidated
financial statements.
page
The San Francisco Company
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands Except Per Share Data)
Notes 1996 1995 1994
Interest income:
Loan $ 4,242 $ 8,452 $11,258
Fed funds sold 1,248 1,771 702
Investments 1,714 423 627
Dividends 38 45 64
Total interest income 7,242 10,691 12,651
Interest expense:
Deposits 8 3,124 4,244 4,694
Other borrowings 3 171 169
Total interest expense 3,127 4,415 4,863
Net interest income 4,115 6,276 7,788
Provision for loan losse 5 -- 500 3,799
Net interest income after
provision for loan losses
4,115 5,776 3,989
Non-interest income:
Stock option commissions and fees 1,201 1,486 1,562
Service charges and fees 444 629 799
Other income 14 175 295
Results of operations from
limited partnership 16 -- 48 (264)
Loss on sale of investment
securities, net -- -- (279)
Gain (loss) on sale of assets, net (2) 183 22
Total non-interest income 1,657 2,521 2,135
Non-interest expense:
Salaries and related benefits 3,252 4,279 7,330
Professional fees 499 876 3,071
Equipment expense 345 417 564
Insurance premiums 319 374 189
Data processing 304 526 439
Occupancy expense 7 288 1,200 2,121
FDIC insurance premiums 204 457 633
Litigation settlement and reserve 200 (158) 3,601
Telephone 104 116 155
Marketing 58 86 369
Other operating expenses 248 559 1,419
Total operating expenses 5,821 8,732 19,891
Net (income from) cost of
real estate operations
( 493) (924) 19,127
Total non-interest expense 5,328 7,808 39,018
Income (loss) before income taxes 444 489 (32,894)
Provision (benefit) for income taxes
10 (258) 153 142
Net Income (loss) $ 702 $336 $(33,036)
Income (loss) per share:
Primary: Weighted average
shares outstanding 5,829,035 5,765,985 3,078,303
Net income (loss) $0.12 $0.05 $(10.73)
Fully diluted: Weighted average
shares outstanding 23,773,101 9,411,046 3,078,303
Net income (loss) $0.03 $0.03 $(10.73)
The accompanying notes are an integral part of the consolidated
financial statements.
page
The San Francisco Company
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1996, 1995 and 1994
Unrealized
(Dollars in Thousand) Employee Gain
Purchase (Loss) on Total
Additional and Securities Share-
Preferred Common Paid-in Retained Option Available- Holders
Stock Stock Capital Deficit Plans for-Sale Equity
Balances at January 1, 1994
$ 18,116 $ 4 $34,662 $ (35,101) $ (166) $ (60) $17,455
Net change in employee stock
ownership plans
-- -- -- -- 96 -- 96
Conversion of preferred stock
to common stock
(18,002) 18 17,984 -- -- -- --
Net proceeds from sale of stock
-- 36 17,524 -- -- -- 17,560
Redemption of fractional shares
-- -- (2) -- -- -- (2)
Appreciation in market value of
securities available-for-sale
-- -- -- -- -- 56 56
Net loss
-- -- -- (33,036) -- -- (33,036)
Balances at December 31, 1994
114 58 70,168 (68,137) (70) (4) 2,129
Net change in employee stock
ownership plans
-- -- -- -- 70 70
Net proceeds from sale of stock
4,300 -- -- -- -- 4,300
Appreciation in market value of
securities available-for-sale
-- -- -- -- -- 45 45
Net income
-- -- -- 336 -- -- 336
Balances at December 31, 1995
4,414 58 70,168 (67,801) -- 41 6,880
Net proceeds from sale of stock
3,500 -- -- -- -- -- 3,500
Conversion of preferred stock
to common stock
(7,803) 230 7,573 -- -- -- --
Other
-- -- 100 -- -- -- 100
Unrealized loss on securities
available-for-sale
-- -- -- -- -- (118) (118)
Net income
-- -- -- 702 -- -- 702
Balances at December 31, 1996
$ 111 $ 288 $77,841 $(67,099) $ -- $ (77) $ 11,064
The accompanying notes are an integral part of the consolidated
financial statements.
page
The San Francisco Company
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands) 1996 1995 1994
Cash Flows from Operating Activities:
Net income (loss) $ 702 $ 336 $(33,036)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Provision for loan losses -- 500 3,799
Depreciation and amortization expense 671 581 660
Net gain on sale of real estate owned
and investment (643) (2,058) (190)
Provision for other real estate owned
and real estate investment -- 506 17,074
Loss on sale of investment securities
available for sale -- -- 265
Loss on sale of investment securities
held-to-maturity prior to maturity -- -- 14
Decrease in interest receivable and
other assets 12 532 1,291
(Decrease) increase in other liabilities
and interest payable (438) (1,055) 1,283
Increase (decrease) in deferred loan fees 10 (208) (162)
Net cash flows provided by (used in)
operating activities 314 (866) (9,002)
Cash Flows from Investing Activities:
Proceeds from maturities of investment
securities held-to-maturity 865 7,859 7,516
Redemption of Federal Home Loan
Bank stock, net -- 705 2,344
Purchase of investment securities
held-to-maturity (7,846) -- (12,719)
Proceeds from sales of investment
securities available-for-sale -- -- 19,402
Purchase of investment securities
available-for-sale (29,321) (8,414) (8,492)
Proceeds from maturities of
investment securities
available-for-sale 7,390 4,134 1,610
Capital expenditures for real
estate owned -- (855) (575)
Net decrease in loans 7,422 49,132 39,101
Recoveries of loans previously
charged off 397 1,707 1,347
Acquisition of leasehold
interest -- BSFBC -- (4,471) --
Purchases of premises and equipment (41) (120) (64)
Proceeds from sales of real estate
owned and investment 4,639 6,601 4,890
Net cash (used in) provided by
investing activities (16,495) 56,278 54,360
Cash Flows from Financing Activities:
Net decrease in deposits (14,507) (41,475) (62,963)
Net (decrease) increase in
other borrowings -- (4,070) 2,859
Net proceeds from sale of
preferred stock 3,500 4,300 --
Net proceeds from sale of common stock -- -- 17,560
Net cash used in financing activities (11,007) (41,245) (42,544)
(Decrease) increase in cash and
cash equivalents (27,188) 14,167 2,814
Cash and cash equivalents at
beginning of year 42,814 28,647 25,833
Cash and cash equivalents at end of year $15,626 $42,814 $28,647
The accompanying notes are an integral part of the consolidated
financial statements. (continued)
The San Francisco Company
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
(continued)
(Dollars in Thousands) 1996 1995 1994
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the year for:
Interest $ 3,167 $ 4,450 $5,006
Income taxes 5 153 142
Supplemental Schedule of Noncash
Investing and Financing
Activities:
Net transfer of loans to other
real estate owned 1,378 1,197 587
The accompanying notes are an integral part of the consolidated
financial statements.
page
The San Francisco Company
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
Note 1: Statement of Accounting Policies
The accounting and reporting policies of The San Francisco
Company (the "Company") and its subsidiaries are in accordance with
generally accepted accounting principals and practices within the
banking industry.
Organization
The Company is a Delaware corporation and a bank holding
company registered under the Bank Holding Company Act of 1956, as
amended. The Company was organized in 1981 under the laws of the
State of California, and in July, 1988, the Company reincorporated
in Delaware. Bank of San Francisco (the "Bank"), a state chartered
bank, was organized as a California banking corporation in 1978 and
became a wholly owned subsidiary of the Company through a
reorganization in 1982. The Bank specializes in providing private
banking and business banking for such professional individuals,
their business and other business primarily in the Northern
California banking market. The Bank's wholly owned subsidiary,
Bank of San Francisco Realty Investors (the "BSFRI"), invested in
real estate investment properties from 1985 to 1996. During 1996,
BSFRI disposed of all of its real estate investment properties.
Prior to 1995, the Bank and BSFRI had partnership interests of
34.5% and 2.5%, respectively, in Bank of San Francisco Building
Company (the "BSFBC"), a California limited partnership which holds
the leasehold interest in the Company's headquarters building
located at 550 Montgomery Street, San Francisco, California.
During 1995, the Bank acquired 100% of the outside limited
partnership interests in BSFBC.
Principles of Consolidation
The accompanying financial statements include the accounts of
the Company, the Bank, and the Bank's wholly owned subsidiary,
BSFRI. BSFRI is no longer active in real estate investment
activities.
During 1995, the Bank acquired controlling interest in BSFBC.
The Consolidated Statement of Financial Condition includes the
accounts of BSFBC as of December 31, 1996 and 1995, and the
Consolidated Statements of Operations and Cash Flow include the
accounts of BSFBC beginning July 1, 1995, approximately the date of
acquisition. All material intercompany transactions have been
eliminated in consolidation. Prior to the acquisition, the Company
accounted for its investment in BSFBC using the equity method.
BSFBC was dissolved effective January 1, 1997 and all of its assets
and liabilities were assumed by the Bank.
Cash and Cash Equivalents and Statements of Cash Flows
Cash equivalents are defined as short-term, highly liquid
investments both readily convertible to known amounts of cash and
so near maturity that there is insignificant risk of change in
value because of changes in interest rates. Generally, only
investments with maturities of three months or less at the time of
purchase qualify as cash equivalents. Cash and cash equivalents
include cash and due from banks, time deposits with other financial
institutions, and Federal funds sold.
The Bank is required to maintain non-interest bearing cash
reserves equal to a percentage of certain deposits. In 1996 and
1995, the average reserve balances outstanding were $1.0 million
and $1.5 million, respectively. Generally, the Bank does not
maintain compensating balance arrangements.
Investment Securities
The Company classifies its debt and equity securities into one
of two categories; held-to-maturity or available-for-sale. The
investments classified as held-to-maturity are carried at amortized
cost because management has both the intent and ability to hold
these investments to maturity. Investments classified as
available-for-sale are carried at fair value with any unrealized
gains and loss included as a separate component of shareholders'
equity.
page
Investment securities include both debt and equity securities.
Any discounts or premiums are accreted or amortized to income over
the expected term of the investment considering prepayment
assumptions, if applicable. Discounts or premiums are adjusted
periodically to reflect actual prepayment experience. The gain or
loss on all investment securities sold is determined based on the
specific identification method. The estimated fair value is based
on quoted market prices and/or third party dealer quotes.
Loans Receivable
Loans are stated at the principal amount outstanding, net of
the allowance for loan losses, deferred fees and unearned discount,
if any. The Bank holds loans receivable primarily for investment
purposes. A significant portion of the Bank's loan portfolio is
comprised of adjustable rate loans.
Interest on loans is calculated using the simple interest
method on the daily balances of the principal amount outstanding.
The accrual of interest is discontinued and any accrued and unpaid
interest is charged against current income when the payment of
principal or interest is 90 days past due, unless the loan is
well-secured and in the process of collection. When the ability to
fully collect non-accrual loan principal is in doubt, cash payments
received are applied against the principal balance of the loan
until such time as full collection of the remaining recorded
balance is expected. Generally, loans with temporarily impaired
values and loans to borrowers experiencing financial difficulties
are placed on non-accrual status even though the borrowers continue
to repay the loans as scheduled. Interest received on such loans
is recognized as interest income when received. A non-accrual loan
is restored to an accrual basis when principal and interest
payments are being paid currently and full payment of principal and
interest is probable.
Loan Fees
The Bank charges nonrefundable fees for originating loans.
Loan origination fees, net of the direct costs of underwriting and
closing the loans, are deferred and amortized to interest income
using the interest method. Unamortized net fees and costs on loans
sold or paid in full are recognized as income. Other loan fees and
charges, which represent income from delinquent payment charges,
and miscellaneous loan services, are recognized as interest income
when collected.
Allowance for Loan Losses
The Company records a provision for estimated losses on loans
receivable considering both specifically identified problem loans
and credit risks not specifically identified in the loan portfolio.
The allowance for loan losses takes into consideration numerous
factors including the financial condition of the borrowers, the
fair value of the collateral prior to the anticipated date of sale,
collateral concentrations and past loss experience. These
allowances are subjective and may be adjusted in the future
depending on economic conditions. In addition, regulatory
examiners may require the Company to provide additional allowances
based on their judgements of the information regarding problem
loans and credit risks available to them at the time of their
examinations.
Losses are recognized as charges to the allowance when the
loan or a portion of the loan is considered uncollectible or at the
time of foreclosure. Recoveries on loans receivable previously
charged off are credited to allowance for loan losses.
Premises and Equipment
Premises and equipment are stated at historical cost less
accumulated depreciation and amortization. Depreciation on
furniture, fixtures and equipment is computed on the straight-line
method over the estimated useful life of each type of asset.
Estimated useful lives are from three to seven years. Leasehold
improvements are amortized over the term of the applicable lease,
including lease extensions, or their estimated useful life,
whichever is shorter.
page
Other Real Estate Owned
Other real estate owned (the "OREO") includes loans receivable
that have been repossessed in settlement of debt (foreclosures).
At the date of transfer, OREO is recorded at fair value net of
estimated selling costs.
The Company provides a charge against current earnings for
estimated losses on foreclosed property when the carrying value of
the property exceeds its fair value net of estimated selling
expenses. The Bank obtains an appraisal or market valuation
analysis on all other real estate owned. If the periodic valuation
indicates a decline in the fair value below recorded carrying
value, an allowance for OREO losses is established. Fair value is
based on current market conditions, appraisals, and estimated sales
values of similar properties.
Impairment of Long-lived Assets
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (the "SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes indicate that
the carrying value of an asset may not be recoverable.
Recoverability of long-lived assets is measured by a comparison of
the carrying value of an asset to future net cash flows expected to
be generated by that asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceed the fair value of
the assets.
As of December 31, 1996, the Company determined that no events
or changes occurred during 1996 that would indicate that the
carrying value of any long-lived assets may not be recoverable.
Adoption of this statement did not have any impact on the Company's
financial position, results of operations or liquidity.
Income Taxes
The Company uses the asset and liability method to account for
income taxes. Under such method, deferred tax assets and
liabilities are recognized for the future tax consequences of
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
(temporary differences). Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rate is recognized in
income in the period of enactment.
The Company has provided a valuation allowance for net
deferred tax assets because an estimate of the utilization of the
underlying benefits cannot be determined.
Stock-based Compensation
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 permits a
company to choose either a new fair value based method of
accounting for its stock-based compensation (stock options) or the
current Accounting Principles Board (the "APB") Opinion No. 25
intrinsic value based method of accounting for its stock-based
compensation. SFAS No. 123 requires pro-forma disclosures of net
income and earnings per share computed as if the fair value based
method had been applied in financial statements of companies that
continue to follow APB No. 25. The Company has elected to use the
current APB No. 25 intrinsic value based method of accounting for
its stock-based compensation and to disclose its stock-based
compensation in accordance with SFAS No. 123.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishing of Liabilities"
which provides guidance for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings.
SFAS No. 125 is effective January 1997 and is to be applied
prospectively. In December 1996, the FASB issued SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of SFAS No.
125", which defers certain provisions of SFAS No. 125 for one year.
Management does not expect that the adoption of SFAS No. 125 or No.
127 will have a material impact on the Company's financial
condition.
page
Non-Interest Income
Fees for other customer services represent fees earned for the
brokerage of certificates of deposit and escrow services, and
commissions earned in connection with the Bank's stock option
lending program and other banking services. Fees for services are
recorded as income when the services are performed.
Earnings (loss) per Share
Primary earnings (loss) per share is calculated using the
weighted average number of common shares outstanding divided into
net income (loss). In 1995 and 1996, fully diluted earnings per
share is calculated using the weighted average number of shares
outstanding assuming the common stock equivalent of the Series D
Preferred Stock divided into net income. In 1994, the conversion
of certain preferred stock were included in the calculation of loss
per share effective from the date of conversion, but were not
considered common stock equivalent securities prior to conversion
as the effect was anti-dilutive and options were not included in
the calculations as they did not have a dilutive effect.
Use of Estimates
The preparation of these financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of recognized and contingent assets and liabilities at the date of
the financial statements and the reporting amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications
Certain reclassifications have been made in the prior years'
consolidated financial statements to conform to the current year
presentation.
Note 2: Regulatory Orders
The Company
On December 16, 1994, the Company and the Federal Reserve Bank
of San Francisco (the "FRB") entered into a Written Agreement (the
"Agreement"). The Agreement prohibits the Company, without prior
approval of the FRB, from: (a) paying any cash dividends to its
shareholders; (b) directly or indirectly, acquiring or selling any
interest in any entity, line of business, problem or other assets;
(c) executing any new employment, service, or severance contracts,
or renewing or modifying any existing contracts with any executive
officer; (d) engaging in any transactions with the Bank that
exceeds an aggregate of $20,000 per month; (e) engaging in any cash
expenditures with any individual or entity that exceeds $25,000 per
month; (f) increasing fees paid to any directors for attendance at
board or committee meetings, or paying any bonuses to any executive
officers; (g) incurring any new debt or increasing existing debt;
and (h) repurchasing any outstanding stock of the Company. The
Company is required to submit a progress report to the FRB on a
quarterly basis.
The Company was also required to submit to the FRB an
acceptable written plan to improve and maintain adequate capital
position, a comprehensive business plan concerning current and
proposed business activities, a comprehensive operating budget at
the Bank and the consolidated organization, and an acceptable
written plan designed to enhance Board supervision of the
operations and management of the consolidated organization. The
Company has filed all of the required submissions with the FRB in
accordance with the Agreement. The FRB confirmed the Company's
full compliance with the Agreement at its 1996 examination.
The Bank
Orders to Cease and Desist
On August 18, 1993, the Bank stipulated to Orders to Cease and
Desist (the "Orders") issued jointly by the Federal Deposit
Insurance Corporations (the "FDIC") and the State Banking
Department (the "SBD"), whereby the Bank agreed to correct alleged
unsafe and unsound practices disclosed in the FDIC and SBD Reports
of Examination as of November 30, 1992.
page
The Orders, which became effective on August 29, 1993, require
that the Bank: (a) achieve and maintain a 7% leverage capital
ratio on and after September 30, 1993; (b) pay no dividends without
the prior written consent of the FDIC and the California
Superintendent of Banks (the "Superintendent"); (c) reduce the
$88.6 million in assets classified "Substandard" or "Doubtful" as
of November 30, 1992 (the date of the most recent full-scope FDIC
and SBD Report of Examination of the Bank), to no more than $40.0
million by September 30, 1994; (d) have and retain management whose
qualifications and experience are commensurate with their duties
and responsibilities to operate the Bank in a safe and sound
manner, notify the FDIC and the Superintendent at least 30 days
prior to adding or replacing any new director or senior executive
officer and comply with certain restrictions in compensation of
senior executive officers; (e) maintain an adequate reserve for
loan losses; (f) not extend additional credit to, or for the
benefit of, any borrower who had a previous loan from the Bank that
was charged off or classified "Loss" in whole or in part;
(g) develop and implement a plan to reduce its concentrations of
construction and development loans; (h) not increase the amount of
its brokered deposits above the amount outstanding on the Orders
Effective Date ($20.0 million) and submit a written plan for
eliminating reliance on brokered deposits; (i) revise or adopt, and
implement, certain plans and policies to reduce the Bank's
concentration of construction and land development loans, reduce
the Bank's dependency on brokered deposits and out of area
deposits, and to improve internal routines and controls; (j) reduce
the Bank's volatile liability dependency ratio to not more than 15%
by March 31, 1994; (k) eliminate or correct all violations of law
set out in the most recent Report of Examination, and take all
necessary steps to ensure future compliance with all applicable
laws and regulations; and (l) establish a committee of three
independent directors to monitor compliance with the Orders and
report to the FDIC and the Superintendent on a quarterly basis.
As of December 31, 1996, management believes that the Bank is
in substantial compliance with the requirements of the Orders. The
Bank believes that the findings of the FDIC and SBD most recent
examination which commenced January 28, 1997 will be that the Bank
is in substantial compliance with the requirements of the Orders;
however, no Report of Examination has been received to date.
Impairment Orders
Under California law, if a bank's deficit retained earnings
exceed 40% of its contributed capital, its capital is deemed to be
impaired, and the bank is required to levy an assessment on its
shares to correct the impairment. The SBD has issued twelve
impairment orders to the Bank, with the most recent dated February
14, 1997 (the "Impairment Orders"). At December 31, 1996, the Bank
had contributed capital of $74.5 million and deficit retained
earnings of $63.5 million.
The Impairment Orders require the Bank to correct the
impairment within 60 days by levying an assessment on the Company
as the Bank's sole shareholder. The Bank has not levied an
assessment against its shares nor has it otherwise corrected the
impairment, and, therefore, is in violation of this law. In
addition, the SBD has specifically reserved the right to take such
other action as the Superintendent may deem appropriate or
necessary, which may include taking possession of the Bank's
property and business, including ultimately liquidating the
business and affairs of the Bank.
The Company plans to correct the Bank's capital impairment by
requesting the SBD to approve a quasi-reorganization of the Bank.
In a quasi-reorganization, the Bank's retained deficit would be
reduced or eliminated by netting the retained deficit against
contributed capital. Management believes that approval for such a
quasi-reorganization would only be granted by the SBD upon the Bank
demonstrating the ability to sustain profitable operations and meet
all of its regulatory capital requirements in the future.
page
No assurance can be given that the Bank's capital condition
will not deteriorate prior to any such quasi-reorganization as a
result of operating losses. In addition, because a quasi-
reorganization requires that the Bank adjust its assets and
liabilities to market value at the time of the reorganization, the
Bank's capital could be further reduced from its present level.
Finally, there can be no assurance given that, following a
correction of the Bank's capital impairment, whether through a
quasi-reorganization or otherwise, the Bank's capital position will
not erode through future operating losses.
Note 3: Investment Securities
The amortized cost and estimated market values of investment
securities held-to-maturity at December 31 are as follows:
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
1996:
Mortgage-backed securities $6,943 $ -- $ (95) $6,848
Total $6,943 $ -- $ (95) $6,848
The amortized cost and estimated market values of investment
securities available-for-sale at December 31 are as follows:
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
1996:
Adjustable rate mortgage-
backed securities $ 4,746 $24 -- $ 4,770
U.S. Treasury and agency
securities 23,679 -- $101 23,578
Total $28,425 $24 $101 $28,348
1995:
U.S. Treasury and agency
securities $6,495 $ 41 $ -- $6,536
Total $6,495 $ 41 $ -- $6,536
For 1996 and 1995, the Company included a net unrealized loss
of $77,000 and an unrealized gain of $41,000, respectively, as a
separate component of stockholders' equity. During 1996 and 1995,
the Company recorded no gains or losses on sale of investment
securities.
As of December 31, 1996 and 1995, the Bank's investment in
Federal Home Loan Bank (the "FHLB") stock totaled $670,000 and
$632,000 and is stated at par. During 1995, the Bank redeemed
7,500 shares at $750,000. The FHLB stock has no term to maturity.
The amortized cost and estimated market value of securities at
December 31, 1996 by contractual maturity, are shown below:
Securities Available Securities
for Sale Held to Maturity
Amortized Estimated Amortized Estimated
(Dollars in Thousands) Cost Market Value Cost Market Value
1 year or less $ 1,999 $ 2,003 $ -- $ --
1 to 5 years 21,680 21,575 -- --
subtotal 23,679 23,578 -- --
Mortgage-backed
securities 4,746 4,770 6,943 6,848
Total $28,425 $28,348 $6,943 $6,848
page
The average yield on investments securities was 6.0% and 6.1%
during 1996 and 1995, respectively. The U.S. Treasury and agency
securities held by the Company had effective maturities of less
than three years. Expected maturities of mortgage-backed
securities can differ from contractual maturities because borrowers
have the right to prepay obligations with or without prepayment
penalties. Factors such as prepayments and interest rates may
affect the yield and carrying value of mortgage-backed and callable
agency securities. As of December 31, 1996 and 1995, the Company
had no derivative financial instruments.
At December 31, 1996 and 1995, $810,000 and $1.4 million,
respectively, of securities were pledged as collateral for
treasury, tax, loan deposits, public agency, bankruptcy and trust
deposits. At December 31, 1996 and 1995, the Company had no
securities sold under agreements to repurchase.
Note 4: Loans Receivable
The Bank's loan portfolio at December 31 is summarized as
follows:
(Dollars in Thousands) 1996 1995
Real estate mortgage $28,022 $37,049
Secured commercial and financial 6,229 7,379
Unsecured 7,800 7,604
Other 1,711 1,176
Total loans 43,762 53,208
Deferred fees (190) (180)
Allowance for loan losses (5,663) (5,912)
Total loans, net $37,909 $47,116
At December 31, 1996 and 1995, non-accrual loans totaled $3.4
million and $7.5 million, respectively, and there were no loans
past due 90 days or more and still accruing. For the years ended
December 31, 1996, 1995 and 1994, interest income foregone on non-
accrual loans was $29,000, $177,000, and $918,000, respectively.
Restructured loans totaled $4.1 million and $5.9 million at
December 31, 1996 and 1995, respectively. For the years ended
December 31, 1996, 1995 and 1994, interest income foregone on
restructured loans were zero, $24,000 and $18,000, respectively.
There were $9.3 million of fixed rate loans at December 31,
1996 with a weighted average yield of 9.0%. Total fixed rate
loans, most of which will mature within eight years, comprised
approximately 21% of the Bank's loan portfolio at December 31,
1996.
Effective January 1, 1995, the Company adopted SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" as amended by
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures". In accordance with SFAS No.
114, a loan is considered impaired when, based on certain events
and information, it is "probable" that a creditor will be unable to
collect all amounts due according to the contractual terms of the
loan agreement. At December 31, 1996, the Company measured the
impairment of all impaired loans, totaling $3.4 million, using the
collateral value method, and, at December 31, 1995, measured the
impairment of $7.2 million using the collateral value method and
$307,000 using the discounted cashflow method. For the year ended
December 31, 1996 and 1995, the weighted average impaired loans
outstanding was $3.7 million and $16.6 million, respectively.
Total interest recognized on impaired loans during 1996 and 1995
was $170,000 and $430,000, respectively. At December 31, 1996 and
1995, the allowance for loan loss related to impaired loans totaled
$717,000 and $1.1 million, respectively.
The Company makes loans secured by real estate, which are
principally located in Northern California. At December 31, 1996,
loans secured by deeds of trust on property located in these areas
represented 98% of the Bank's real estate collateralized loans.
The primary source of repayment of real estate loans is the
borrower's or property's debt service capacity while the secondary
source of repayment is the underlying real estate collateral.
page
Note 5. Allowance for Loan Losses
Changes in the Company's allowance for loan losses for the
years ended December 31 were as follows:
(Dollars in Thousands) 1996 1995 1994
Balances at beginning of the year $5,912 $6,576 $8,050
Provision for loan losses -- 500 3,799
Loans charged off (646) (2,871) (6,620)
Recoveries of loans charged off 397 1,707 1,347
Balances at end of the year $5,663 $5,912 $6,576
Note 6: Other Real Estate Owned
Other real estate owned at December 31 consist of the
following:
(Dollars in Thousands) 1996 1995
Real Estate:
Residential $ -- $ 399
Residential development 2,313 4,134
Commercial development 1,758 1,808
Raw land 10,173 13,164
Subtotal 14,244 19,505
Allowance for losses (9,111) (11,991)
Total $5,133 $7,514
As of December 31, 1996, the largest single property totaled
$2.6 million, net.
The following table summarizes the other real estate owned
loss experience of the Bank for the periods shown:
(Dollars in Thousands) 1996 1995 1994
Balance of allowance
for losses - beginning $11,991 $ 19,404 $ 2,986
Charge-offs (2,880) (7,500) (33)
Provision -- 87 16,451
Balance of allowance for losses - ending $9,111 $11,991 $ 19,404
Note 7: Premises and Equipment
Premises and equipment at December 31 consist of the
following:
(Dollars in Thousands) 1996 1995
Leasehold $ 3,701 $ 3,741
Leasehold improvements 8,503 8,482
Furniture and equipment 1,534 5,187
Subtotal 13,738 17,410
Less: Accumulated depreciation
and amortization (5,679) (8,721)
Total $ 8,059 $ 8,689
During 1996, the Company disposed of certain fully depreciated
unused furniture and equipment with an original cost of $3.6
million. The amount of depreciation and amortization included in
non-interest expense was $671,000, $581,000, and $660,000 in 1996,
1995 and 1994, respectively. Total rental and other occupancy
expenses net of sublease income for the Company's premises were
$288,000, $1.2 million and $2.1 million in 1996, 1995 and 1994.
page
At December 31, 1996, the approximate future minimum rental
payments under a non-cancelable operating lease, with a remaining
term of fourteen years, for the Company's premise are as follows:
(Dollars in Thousands) Amount
1997 $ 134
1998 134
1999 134
2000 134
2001 134
Thereafter 1,184
Total $ 1,854
The lease payment is fixed until the expiration of the lease
on October 31, 2010. During 1996, 1995 and 1994, the Company
received $877,000, $435,000 and $169,000 of sublease income,
respectively. The total future minimum rent payments to be
received under noncancellable operating subleases at December 31,
1996 were approximately $600,000. These payments are not reflected
in the above table.
Note 8: Deposits
Deposit balances and average interest rates paid by the Bank
at December 31 are as follows:
1996 1995
Average Average
(Dollars in Thousands) Balance Rate Balance Rate
Demand deposit accounts $ 16,505 0.0% $ 20,365 0.0%
Savings and NOW accounts 19,638 2.1 25,411 2.4
Money market accounts 17,376 2.1 16,185 2.8
Time accounts 37,647 5.8 43,712 6.1
Total $91,166 3.2% $105,673 3.5%
Total deposit balances averaged $98.1 million and $125.1
million during 1996 and 1995, respectively, with average interest
rates of 3.2% and 3.5%, respectively. The weighted average stated
rates on deposits as of December 31, 1996 and 1995 were 3.2% and
3.5%, respectively.
Domestic time deposits in amounts of $100,000 or more by time
remaining to maturity at December 31 are as follows:
(Dollars in Thousands) 1996 1995
Three months or less $ 4,490 $ 3,157
Three months to six months 2,699 1,371
Six months to one year 904 1,373
Between one and two years 400 515
Total $ 8,493 $ 6,416
Interest expense on time deposits in amounts of $100,000 or
more was $304,000, $353,000 and $935,000 in 1996, 1995, and 1994,
respectively. Time deposit accounts in amounts of $100,000 or more
averaged $5.8 million and $6.9 million during 1996 and 1995,
respectively, with weighted average rates of 5.3% and 5.1%,
respectively. The weighted average stated interest rate on such
deposits at December 31, 1996 and 1995 was 5.1% and 5.4%,
respectively.
page
The Company had no brokered deposits as of December 31, 1996
and $3.4 million as of December 31, 1995, and money desk deposits
totaled $21.0 million and $28.0 million at December 31, 1996 and
1995, respectively.
Note 9: Other Borrowings
Other borrowings at December 31 are as follows:
Maximum
Balance Stated Average Average Balance
(Dollars in Thousands) Outstanding Rate Balance Rate Outstanding
1996:
Other borrowings -
FHLB line of credit -- -- $ 38 6.3% $ 2,000
Total -- -- $ 38 6.3% $ 2,000
1995:
Borrowings for employee
stock ownership plan -- -- $ 18 8.3% $ 70
Mortgage indebtedness -- -- 432 9.5 2,198
Other borrowings -
FHLB line of credit -- -- 1,297 9.7 6,000
Total -- -- $ 1,747 9.6% $ 8,268
The Bank has a line of credit for up to 5% to total assets, or
$5.2 million as of December 31, 1996, with the FHLB. At December
31, 1996 and 1995, $8.5 million and $4.3 million of loans and
securities are pledged as collateral against other borrowings. The
Bank is required to hold FHLB stock as a condition for maintaining
its membership in the FHLB.
The Bank has access to the discount window at the FRB for a
total borrowing facility of $1.8 million. At December 31, 1996,
$2.2 million of securities are pledged as collateral for the FRB
facility.
In 1995, the Bank's other borrowings included a loan on the
Bank's premise. The borrowing was repaid in 1995.
Note 10: Income Taxes
The (benefit) provision for state franchise taxes consists of:
(Dollars in Thousands) 1996 1995 1994
Current:
Federal $ -- $ -- $ --
State (258) 153 142
Total current (258) 153 142
Deferred:
Federal -- -- --
State -- -- --
Total deferred -- -- --
Total (benefit) provision for income taxe $ (258) $ 153 $ 142
The provision for state taxes for 1996, 1995 and 1994 consists
of the minimum amount of franchise taxes due net of refunds. In
1996, the Company utilized an acceptable alternative method of
calculating the Delaware Franchise tax which resulted in a refund
for 1994 and 1995 Delaware Franchise tax and a reduction in the
1996 Delaware Franchise tax.
page
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax
liabilities at December 31, 1996 and 1995 are presented below:
(Dollars in Thousands) 1996 1995
Deferred Tax Assets:
Book loan loss reserve in excess of tax $ 1,898 $ 1,967
Other provisions 156 58
Provision for losses for real estate 3,777 5,569
Net operating losses 16,563 17,591
Tax credits 489 489
Net tax value of premises in excess of book 120 294
Other 403 344
Total deferred tax assets 23,406 26,312
Valuation allowance (23,006) (25,873)
Total deferred tax assets, net 400 439
Deferred Tax Liabilities:
Loan origination costs (33) (56)
Taxable income in excess of book
for rehabilitation credit (367) (383)
Total deferred tax liabilities (400) (439)
Net deferred taxes $ -- $ --
The Bank provided a valuation allowance for deferred tax
assets because an estimate of the utilization of the underlying
benefits cannot be determined. The utilization of the net
operating loss carryforwards and rehabilitation and minimum tax
credit carryforwards may be limited on an annual basis under
current tax law due to the change in ownership in 1992 and possible
changes in ownership in future years.
The total tax provision (benefit) differs from the statutory
Federal rates for the reasons shown in the following table:
1996 1995 1994
Tax expense (benefit) at the statutory federal rate 34.0% 34.0% 34.0%
Utilization of prior taxable loss (34.2) (34.6) (34.0)
State income taxes (refund), net of federal tax benefit (58.1) 31.3 0.4
Non-deductible expenditures and non-taxable income 0.2 0.6 --
Total effective tax (benefit) provision rate (58.1)% 31.3% 0.4%
Because the Company has utilized most of its ability to
carryback net operating losses, the losses incurred from 1991 to
1994 must be carried forward to offset future net operating income,
if any. In addition, the actual benefit rate may be less than the
current statutory rate due to tax differentials and the alternative
minimum tax. As of December 31, 1996, the Company has net
operating loss carryforwards for federal tax purposes of
approximately $56.0 million which begin expiring in 2007, and for
California tax purposes of approximately $46.8 million, which begin
expiring in 1997 through 2002. As of December 31, 1996, the
Company had rehabilitation tax credit carryforwards for federal tax
purposes of approximately $213,000, which expire in 2004 and 2005,
and minimum tax credits of approximately $276,000 which have no
expiration.
Note 11: Shareholders' Equity
The capital infusion by the Company's controlling stockholder
in 1996, 1995, and 1994 was $3.5 million, $4.3 million, and $20.0
million, respectively. The capital in 1996 was raised by the
issuance of 175,000 shares of Series D Preferred Stock at $20.00
per share. The capital in 1995 was raised by the issuance of
215,000 shares of Series D Preferred Stock at $20.00 per share.
The capital for 1994 was raised from the issuance of 3,521,126
shares of Class A Common Stock (the "Common Stock" or "Common
Shares") at $5.68 per share. The Series D Preferred Shares were
converted into Common Shares in 1996.
page
Description of Capital Stock
The authorized capital stock of the Company consists of
100,000,000 Common Shares, par value $0.01 per share and 5,000,000
shares of preferred stock, par value $0.01 per share, of which
437,500 are designated as Series B Preferred Shares. The remainder
are not designated.
In accordance with the Agreement and the Orders, the Company
and the Bank are prohibited from paying dividends without the prior
written consent or approval of the FDIC, the Superintendent of
Banks and the Federal Reserve Bank of San Francisco.
Description of Common Stock
As of December 31, 1996, there were 28,775,995 Common Shares
outstanding out of a total of 100,000,000 shares authorized. The
Series B Preferred Shares, which were convertible into shares of
the Class B Common Stock at the option of the holders thereof are
now convertible to Common Stock. The reclassification is not
deemed by the Company to alter or change any of the relative
powers, preferences or special rights of the holders of the Class
B Preferred shares.
Dividends
Subject to the rights and preferences of any preferred stock
outstanding, each share of Common Stock is entitled to receive
dividends if, as and when declared by the Board of Directors of the
Company. Subject to the rights of the Series B Preferred Shares,
dividends must be paid on the Common Stock, together with the
Series B Preferred Shares, at any time that dividends are paid on
either. Any dividend so declared and payable in cash, capital
stock of the Company or other property will be paid equally, share
for share, on the Common Stock, Series B Preferred Shares, and on
any other participating series of preferred stock issued in the
future; provided, however, that the Company may issue dividends
consisting solely of its Common Shares on the Common Stock.
Liquidation Rights
In the event of the liquidation, dissolution or winding up of
the Company, holders of the Common Stock are entitled to share
equally, share for share, in the assets available for distribution,
subject to the liquidation preferences of the Series B Preferred
Shares and the rights of any other class or series of preferred
stock then outstanding.
Description of Preferred Stock
The Board of Directors of the Company is authorized by the
Certificate of Incorporation to provide for the issuance of one or
more series of preferred stock. The Board of Directors has the
power to fix various terms with respect to each such series,
including voting powers, designations, preferences, dividend rates,
conversion and exchange provisions, redemption provisions, and the
amounts which holders are entitled to receive upon any liquidation,
dissolution, or winding up of the Company. At December 31, 1996,
the Board of Directors authorized only the issuance of the Series
B Preferred Shares. The Company's Certificate of Incorporation
provides that additional securities, including additional shares of
any class of preferred stock, can be issued only if unanimously
approved by the Board of Directors or by stockholders holding a
majority of the voting power of the Company.
Voting Rights
Holders of Common Stock (when and if issued) are entitled to
one vote per share. Except as described below, holders of Common
Stock vote together with holders of the Company's Series B
Preferred Shares, on all matters including the election of
directors. The Board of Directors is presently authorized to have
nine (9) members. The Board of Directors is a classified Board
with staggered terms providing for a maximum of three classes of
directors, which are as nearly equal in number as possible, and
with one class elected each year for a maximum term of three years.
Holders of Common Stock are not entitled to vote cumulatively for
the election of directors.
The holders of Common Stock are entitled to vote as separate
classes on any modification to the rights of either class of stock
and as otherwise required by law.
page
Description of Series B Preferred Stock
The Company issued the Series B Preferred Shares during 1988.
As of December 31, 1996, there were 15,869 Series B Preferred
Shares outstanding.
Dividends
Holders of the Series B Preferred Shares are entitled to
receive, when funds of the Company are legally available for
payment, an annual cash dividend of Fifty-Six Cents ($0.56) per
share, payable quarterly in January, April, July and October of
each year. Dividends on the Series B Preferred Shares are
cumulative. Cumulative unpaid dividends on the Series B Preferred
Stock at December 31, 1996 total approximately $49,000.
Payment of dividends on the Series B Preferred Shares shall be
junior to payment of dividends at the stated rate of all other
series of preferred stock that the Company may issue in the future
and that are designated senior to the Series B Preferred Shares.
Dividends on the Series B Preferred Shares will be declared and
paid or set apart for payment in full for all previous dividend
periods (i) before the payment or setting apart of any funds or
assets for the payment of any dividends on the Common Stock or any
other class of stock, except preferred stock ranking on a parity
with or senior to the Series B Preferred Shares, and (ii) before
any purchase or other acquisition for value of any Common Stock or
any future class of stock except preferred stock ranking on a
parity with or senior to the Series B Preferred Shares; provided,
however, that the Company may issue dividends consisting of its
Common Shares on the Common Shares.
After payment of dividends at the stated rate on all series of
preferred stock that the Company may issue in the future and that
are designated senior to the Series B Preferred Shares and on any
other preferred stock of the Company that is on a parity with the
Series B Preferred Shares, and payment of dividends at the stated
rate on the Series B Preferred Shares, holders of the Series B
Preferred Shares will participate pro rata with the holders of
Common Stock, on the basis of number of shares owned, in all other
dividends by the Company to its stockholders, except that, as noted
above, the Company may issue dividends consisting solely of its
Common Shares on the Common Shares.
Liquidation Rights
In the event of any liquidation, dissolution, receivership,
bankruptcy, or winding up of the Company, voluntarily or
involuntarily, the holders of the Series B Preferred Shares are
entitled to receive the sum of Seven Dollars ($7.00) per share,
plus any accrued and unpaid dividends thereon, before any
distributions will be made to the holders of the Common Stock or
any other class of stock junior in preference upon liquidation, but
after or concurrent with distributions to be made at the stated
rate on preferred stock of any series ranking on a parity with or
senior in preference upon liquidation to the Series B Preferred
Shares, and will be entitled to no other distribution.
Conversion
The holders of Series B Preferred Shares are entitled at any
time to convert their Series B Preferred Shares into Common Stock
of the Company at the conversion ratio of one Series B Preferred
Share convertible into one-tenth of one share of Common Stock, upon
payment of a conversion fee of Seven Dollars ($7.00) per share,
subject to adjustment under certain conditions.
Voting Rights
The holders of the Series B Preferred Shares are entitled to
one vote per Series B Preferred Share on all matters on which
shareholders are entitled to vote. Holders of the Series B
Preferred Shares have full voting rights and powers equal to the
voting rights and powers of the holders of the Common Stock.
Holders of the Series B Preferred Shares are entitled to vote
generally for the election of directors and vote with the holders
of the Common Stock, except that the holders of the Series B
Preferred Shares are entitled to vote as a class on any
modification to the rights of the Series B Preferred Shares and
otherwise as required by law.
page
Note 12: Stock Option Plan
During 1996, the Company's stockholders approved the Amended
and Restated 1993 Stock Option Plan (the "Plan"). Pursuant to the
Plan, options may be granted to directors and key employees of the
Company and its subsidiaries. The shares of Common Stock reserved
for the Plan total 9,000,000 shares. The number of shares granted
may be subject to adjustment as determined by a Committee of the
Board of Directors. The exercise price of options must be at least
the fair market value of the shares of the Company's Common Stock
as of the date the option is granted. The expiration date of the
options is ten years from the effective date that the options were
granted. None of the options granted have been exercised. The
agreements for certain executive officers and former executive
officers provide that options shall be granted to acquire shares of
Common Stock under the Plan equal to 9% of the fully-diluted shares
of the Company's Common Stock, with additional shares to be issued
in the future to maintain the 9% ratio.
The Company did not grant any stock options during 1995. The
weighted-average fair value of stock options granted and vested
during 1996 was $163,000 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average
assumptions:
1996
Expected dividend yield 0.0%
Risk-free interest rate 6.17%
Expected life 5 yrs
Volatility factor 0.01
Fair value of options granted $0.09
The Company has not recognized any compensation costs for the
stock options in the financial statements. The proforma net income
reflects only options granted and vested in 1996. Had the Company
determined compensation cost based on fair value at the date of
grant for its stock options, the Company's net income would have
been the proforma amounts indicated below:
1996 1995
Net income - as reported (dollars in thousands) $ 702 $ 336
proforma 539 336
Earnings per share - primary $0.12 $0.05
fully diluted 0.03 0.03
Proforma per share - primary $0.09 $0.05
fully diluted 0.02 0.03
The following table provides the stock option activity:
Number of Weighted-Average
Shares Exercise Price
Balance at December 31, 1994 511,822 $ 5.68
Granted -- --
Expired 2,500 5.68
Balance at December 31, 1995 509,322 5.68
Granted 2,522,678 .35
Expired 2,500 5.68
Balance at December 31, 1996 3,029,500 $1.24
page
At December 31, 1996, the range of exercise prices and
remaining contractual life of outstanding options was $0.34 and
$5.68 and seven (7) years and ten (10) years, respectively. The
following table provides stock option information as of December
31, for each of the periods shown:
1996 1995
Weighted-average remaining contractual
life of total options 9.5 years 8.75 years
Number of options exercisable 2,212,464 296,479
Weighted-average price of options
presently exercisable $1.32 $5.68
Note 13: Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory
capital requirements administered by federal and state banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary
actions by regulators, that if undertaken, could have a direct
material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgements by
the regulators regarding the Bank's capital components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios, as set forth below, of total and Tier
I capital, as defined by regulations, to risk weighted assets, and
Tier I capital to average assets.
The Bank is also subject to the Orders and the Impairment
Order. The Orders provide that the Bank must maintain a minimum
leverage ratio of 7%. The Impairment Order is a California law
which provides that if a bank's deficit retained earnings exceed
40% of its contributed capital, its capital is deemed to be
impaired, and the bank is required to levy an assessment on its
shares to correct the impairment. At December 31, 1996, the Bank
had contributed capital of $74.5 million and deficit retained
earnings of $63.5 million resulting in the Bank's contributed
capital impairment of approximately $31.3 million. See Note 2:
Regulatory Orders for more information regarding capital
requirements.
The Company is also subject to a Letter Agreement dated April
21, 1989 with the FRB which requires that the Company maintain a
minimum leverage capital ratio of 5.5%.
As of December 31, 1996, the most recent notification from the
FDIC categorized the Bank as adequately capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the highest capital category, a
bank must maintain minimum total risk-based, Tier I risk-based,
Tier I leverage ratios as set forth below and must not be subject
to any certain regulatory orders, agreements or directives. There
are no conditions or events since that notification that management
believes have changed the Bank's category.
page
The following table sets forth the Bank's capital amounts and
ratios as of December 31, for each of the periods shown:
To be Well
(dollars in thousands) Capitalized Under
For Capital Prompt Corrective
Actual Adequacy purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
1996:
Total capital $11,777 17.8% $5,293 8.0% $6,616 10.0%
Tier 1 capital 10,890 15.3 2,838 4.0 4,270 6.0
Leverage capital 10,890 10.3 4,242 4.0 5,302 5.0
1995:
Total capital $7,891 10.4% $6,046 8.0% 7,588 10.0%
Tier 1 capital 6,885 8.6 3,219 4.0 4,803 6.0
Leverage capital 6,885 6.0 4,623 4.0 5,779 5.0
The following table sets forth the Company's and Bank's
capital ratios compared to minimum capital ratio requirements as of
December 31, 1996 and the requirements contained in the Orders:
Minimum
Capital
Company Bank Requirement Orders
Leverage 10.5% 10.3% 4.0% 7.0%
Tier 1 risk-based capital 15.7 15.3 4.0 N/A
Total risk-based capital 18.2 17.8 8.0 N/A
Note 14: Employee Benefit Plans
Employee 401K Plan
The Company provides a 401k plan for its employees. The
Company provides matching contributions up to 2% of the employees
qualifying earnings. During 1996, 1995, and 1994, the Company
contributed $31,000, $40,000 and $42,000, respectively, to the 401k
Plan.
Employee Stock Ownership Plan
The Company terminated its Employee Stock Ownership Plan (the
"ESOP") on December 1, 1995. During 1995 and 1994, the Company
made contributions to the ESOP of $77,000 and $130,000,
respectively.
Note 15: Commitments and Contingencies
Lending and Letter of Credit Commitments
In the normal course of its business, the Bank has entered
into various commitments to extend credit which are not reflected
in the consolidated financial statements. Over 90% of such
commitments consist of the undisbursed balance on personal and
commercial lines of credit and of undisbursed funds on construction
and development loans. At December 31, 1996 and 1995, the Bank had
outstanding loan commitments, which had primarily adjustable rates,
totaling approximately $9.6 million and $5.9 million, respectively.
In addition, the Bank had outstanding letters of credit, which
represent guarantees of obligations of Bank customers, totaling
$9.6 million and $9.8 million at December 31, 1996 and 1995,
respectively. The actual liquidity needs or the credit risk that
the Company will experience will be lower than the contractual
amount of commitments to extend credit because a significant
portion of these commitments are expected to expire without being
drawn upon. The Bank's outstanding loan commitments are made using
the same underwriting standards as comparable outstanding loans.
The credit risk associated with these commitments is considered in
management's determination of the allowance for loan losses.
page
Litigation
Because of the nature of its business, the Company and its
subsidiaries, including the Bank, are from time-to-time a party to
legal actions. Based upon information available to the Company and
the Bank, and its review of such outstanding claims to date,
management believes the ultimate liability relating to these
actions, if any, will not have a material adverse effect on the
Company's liquidity, consolidated financial condition or results of
operations.
Note 16: Related Party Transactions
Loans
In the ordinary course of business, the Bank may extend credit
to directors, officers, shareholders and their associates on
substantially the same terms, including interest rates and
collateral, as in comparable loan transactions with unaffiliated
persons, and such loans do not involve more than the normal risk of
collection. As of December 31, 1996, there were no loans
outstanding to such individuals, and, as of December 31, 1995,
there were $5,000 of loans outstanding to such individuals.
Bank of San Francisco Building Company (BSFBC)
During the third quarter of 1995, the Bank acquired all of the
outside limited partnership interests in BSFBC for a total of $3.3
million. The purchase price of those interests in excess of book
value was $525,000 and is being amortized over the life of the
underlying lease, including extensions, through 2035 using the
straight line method.
The acquisition was accounted for by the purchase method. The
consolidated financial statements include the accounts of BSFBC.
The Company's consolidated operating results include the operations
of BSFBC beginning July 1, 1995. As of the acquisition date, the
assets included leasehold improvements and leasehold interest
totaling $5.5 million and cash equivalents and investment
securities totaling $1.3 million. The liabilities included other
borrowings which were used to finance the acquisition of the
leasehold interest in 1986. The borrowings were repaid on October
31, 1995.
As of December 31, 1996, the Company's premises and equipment,
net of accumulated amortization and depreciation, is comprised of
leasehold improvements totaling $5.3 million, leasehold interest
totaling $1.8 million, premium paid to acquire BSFBC totaling
$485,000, and furniture and equipment totaling $446,000.
Prior to 1995, the Company accounted for its investment in
BSFBC using the equity method. The Bank's equity in the operating
results of BSFBC in 1995 and 1994 were earnings of $48,000 and a
loss of $264,000, respectively. Such income is included in the
Bank's other income in the Company's Consolidated Financial
Statements.
Note 17: Fair Value of Financial Instruments
The following disclosures of the estimated fair value of
financial instruments are made in accordance with the requirements
of SFAS No. 107. The estimated fair value amounts have been
determined by the Company using available market information and
appropriate valuation methodologies. However, considerable
judgement is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amount the
Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
page
The carrying amount and estimated fair values of the Company's
financial instruments at December 31 are as follows:
1996 1995
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
Financial Assets:
Cash and cash equivalents $ 15,626 $ 15,626 $42,814 $42,814
Investment securities 35,961 35,866 7,168 7,168
Loans, net 37,909 40,030 47,116 48,642
Financial Liabilities:
Deposits 91,166 91,166 105,673 105,673
The following methods and assumptions were used to estimate
the fair value of each major classification of financial
instruments at December 31, 1996 and 1995:
Cash and Cash Equivalents: Current carrying amounts approximate
estimated fair value. Due to the short term nature of time
deposits with other financial institutions (original maturities of
90 days or less), current carrying amounts approximate market.
Investment Securities Held-to-Maturity and Available-for-Sale: For
securities held-to-maturity and available-for-sale, quoted market
prices and/or third party dealer quotes were used to determine fair
value.
Loans Receivable: The carrying amount of loans is net of unearned
fee income and allowance for loan losses. The fair value of loans
was calculated by discounting cash flows expected to be received
through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in
the loan. The credit and interest rate risk inherent in the loans,
was estimated by segmenting the portfolio into categories based on
collateral type, fixed or adjustable interest rate, maturity,
estimated credit risk, and accrual status. The estimate of
maturity is based on the Bank's historical experience with
repayments for each loan classification, modified, as required, by
an estimate of the effect of current economic and lending factors.
Deposit Liabilities: The fair value of deposits with no stated
maturity, such as non-interest bearing demand deposits, savings and
NOW accounts, and money market and checking accounts, is equal to
the amount payable on demand as of December 31, 1996. The fair
value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining
maturities.
Off Balance Sheet Instruments: The estimated fair value of off
balance sheet instruments, principally letters of credit and loan
commitments, is approximately the face value of commitment fees
collected.
page
Note 18: The San Francisco Company
Condensed statements of financial condition and operations of
the Company at December 31 are as follows:
Condensed Statements of Financial Condition
(Dollars in Thousands) 1996 1995
Assets:
Cash and short term investments $ 304 $ 157
Investment in subsidiary 10,813 6,885
Other assets 2 70
Total assets $ 11,119 $ 7,112
Liabilities:
Other liabilities $ 55 $ 232
Total liabilities 55 232
Stockholders' equity 11,064 6,880
Total liabilities and shareholders' equity $ 11,119 $ 7,112
Condensed Statements of Operations
(Dollars in Thousands) 1996 1995 1994
Income:
Interest earned $ 4 $ 9 $ 51
Other Income -- 1 33
Total income 4 10 84
Expense:
Other expense 6 69 109
Total expense 6 69 109
Franchise taxes (benefit) (258) 153 142
Income (loss) before equity in undistributed
net income (loss) of subsidiary 256 (212) (167)
Equity in undistributed net
income (loss) of subsidiary 446 548 (32,869)
Net income (loss) $ 702 $ 336 $(33,036)
page
Condensed Statements of Cash Flows
(Dollars in Thousands) 1996 1995 1994
Cash Flows from Operating Activities:
Net income (loss) $ 702 $ 336 $(33,036)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Equity in undistributed net
(income) loss of subsidiary (446) (548) 32,869
Net cash flows provided by
(used in) operating activities 256 (212) (167)
Cash Flows used in investing activities:
Investment in Bank (3,500) (4,700) (17,000)
Proceeds from sale of other
real estate owned -- 85 --
Net decrease in other assets 68 61 136
Net cash used in investing activities (3,432) (4,554) (16,864)
Cash Flows provided by financing activities:
Proceeds from sale of Preferred Stock 3,500 4,300 --
Proceeds from sale of Common Stock -- -- 17,560
Net decrease in other liabilities (177) (33) (122)
Net cash provided by financing activities 3,323 4,267 17,438
Increase (decrease) in cash and
cash equivalents 147 (499) 407
Cash and cash equivalents at beginning of year 157 656 249
Cash and cash equivalents at end of year $ 304 $ 157 $ 656
Note 19: Quarterly Information (Unaudited)
The following table sets forth the condensed operating results
of the Company for each quarter of the two year periods ending
December 31, 1996, and is qualified in its entirety by the more
detailed information and financial statements contained elsewhere
in this report:
(Dollars in Thousands Except Per Share data)
1996 Quarters Ended
March 31 June 30 Sept. 30 Dec. 31
Interest income $1,853 $1,820 $1,759 $1,809
Interest expense 865 782 748 732
Net interest income 988 1,038 1,011 1,077
Non-interest income 463 432 308 454
Non-interest expense 1,339 1,268 1,288 1,433
Income before income taxes 112 202 31 98
Provision (benefit) for taxes 4 6 (272) 3
Net income $ 108 $ 196 $ 303 $ 95
Earnings per common share:
Primary $0.02 $0.03 $0.05 $0.02
Fully diluted 0.01 0.01 0.01 0.00
page
(Dollars in Thousands Except Per Share data)
1995 Quarters Ended
March 31 June 30 Sept. 30 Dec. 31
Interest income $2,902 $2,776 $2,722 $2,291
Interest expense 1,097 1,152 1,161 1,005
Net interest income 1,805 1,624 1,561 1,286
Provision for loan losses -- 500 -- --
Non-interest income 771 789 562 399
Non-interest expense 2,470 1,753 1,962 1,623
Income before income taxes 106 160 161 62
Provision for taxes 38 40 37 38
Net income $ 68 $ 120 $ 124 $ 24
Earnings per common share:
Primary $0.01 $0.02 $0.02 $0.00
Fully-diluted 0.01 0.01 0.01 0.00
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
page
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following is a list of directors of the Company, their
occupations for the previous five years, ages and their lengths of
service as a director. Except as stated below, no director of the
Company is a director of any company with a class of securities
registered pursuant to section 12 of the Securities Exchange Act of
1934, as amended, or subject to the requirements of section 15(d)
of such Act or of any company registered as an investment company
under the Investment Company Act of 1940, as amended. Except for
the Bank, none of the corporations or organizations discussed below
is an affiliate of the Company. No director or executive officer
of the Company or the Bank has any family relationship with any
other director or executive officer of the Company or director or
executive officer of the Bank.
JAMES E. GILLERAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Gilleran has served as the Chairman and Chief Executive
Officer of the Company and the Bank since October 1994. He
served as Superintendent of Banks for the state of California
from 1989 to 1994. At December 31, 1996, Mr. Gilleran was 63
years of age and he had been serving as a director of the
Company and the Bank since 1994.
JOHN McGRATH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. McGrath has served as President, Chief Operating Officer and
Chief Credit Officer of the Bank since November 1995 and as
President of the Company since January 1997. He served as
President and Chief Executive Officer of Sacramento First
National Bank from 1982 to 1995. At December 31, 1996, Mr.
McGrath was 54 years of age and had been serving as a director
and officer of the Bank since 1995 and as a director of the
Company since January 1997.
PETER FOO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Foo has been the President of Peninsula Holdings Inc. since
1993. He was co-owner of Ampac Trading (USA) Co. from 1980 to
1993. At December 31, 1996, Mr. Foo was 49 years of age and he
had been serving as a director of the Company since August 1996
and the Bank since February 1996.
KENT D. PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Price has served as Executive Vice President of IBM since
September 1994. Mr. Price was the Chairman and Chief Executive
Officer of the Company and the Bank from September 1993 to
August 1994. He served as Executive Vice President, Private
Banking and Corporate Development of Bank of America from 1991
to 1993; and Chief Financial Officer and Executive Vice
President of Bank of New England Corporation from 1990 to 1991.
At December 31, 1996, Mr. Price was 53 years of age and he had
been serving as a director of the Company since 1993. Mr. Price
was also a director of the Bank from 1993 to 1994.
JACKSON SCHULTZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Schultz is a retired banker who has provided consulting
services to Wells Fargo Bank for more than five years through
1996. Prior to consulting, Mr. Schultz served as a Senior Vice
President of Wells Fargo Bank. At December 31, 1996, Mr.
Schultz was 71 years of age and he had been serving as a
director of the Company and the Bank since February 1996.
page
WILLARD D. SHARPE. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Sharpe is a retired economist who, at the time of his
retirement in 1987, served as a Vice President of Chase
Manhattan Bank and as that bank's chief economist for Asia. In
addition, since 1993, Mr. Sharpe has been a Vice President of
two privately held companies involved in efforts to explore
prospects for investment in Vietnam. At December 31, 1996, Mr.
Sharpe was 73 years of age and he had been serving as a director
of the Company and the Bank since 1993.
GORDON B. SWANSON . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Swanson has been Vice President of Real Estate with Levi
Strauss & Company since 1993. He served as President of G. B.
Swanson & Co., a real estate advisory firm from 1991 to 1992.
Mr. Swanson has served as Director Emeritus of the San Francisco
Chamber of Commerce since 1986 and served as Managing Director
of Jones Lang Wootton U.S.A., a commercial real estate
investment company, from 1989 to 1991. At December 31, 1996,
Mr. Swanson was 52 years of age and he had been serving as a
director of the Company and the Bank since 1985.
NICHOLAS UNKOVIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Unkovic has been a partner of the law firm of Graham &
James, LLP for more than five years. At December 31, 1996, Mr.
Unkovic was 45 years of age and he had been serving as a
director of the Company since 1994 and as a director of the Bank
since May 1996.
GARY WILLIAMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Williams has served as the Dean of the McLaren School of
Business at the University of San Francisco since 1986. At
December 31, 1996, Mr. Williams was 64 years of age and he had
served as a director of the Company since April 1996 and the
Bank since March 1996.
Executive Officers and Other Significant Officers (the "Named
Executives")
Each executive officer is selected annually by the Board of
Directors pursuant to provisions of the bylaws of the Company and
the Bank. In addition, the Company and the Bank periodically enter
into employment agreements with certain executive officers. See
"Employment and Separation Agreement" below. The following is a
list of executive officers of the Company and/or the Bank (the
"Named Executives"), their occupations for the previous five years,
ages and the lengths of service as an officer.
JAMES E. GILLERAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(See position description of Mr. Gilleran's position with the
Company and the Bank, and his background under the heading
"Directors").
JOHN McGRATH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(See position description of Mr. McGrath's position with the
Company and the Bank, and his background under the heading
"Directors").
JOANNE GREENWOOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ms. Greenwood has served as Executive Vice President and Chief
Administrative Officer of the Bank, and Secretary of the Bank
and the Company since March 1996. She served as Executive Vice
President and Chief Financial Officer of Sacramento First
National Bank from 1982 to 1995. At December 31, 1996, Ms.
Greenwood was 55 years of age.
page
KEARY COLWELL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ms. Colwell has served as Executive Vice President and Chief
Financial Officer of the Bank since April 1996 and of the
Company since January 1997. Ms. Colwell had held other senior
positions with the Company and the Bank since 1992. Prior to
joining the Company and the Bank, she served as Vice President
at First Nationwide Bank from 1988 to 1992. At December 31,
1996, Ms. Colwell was 37 years of age.
Compliance with Reporting Requirements of Section 16
Under Section 16(a) of the Securities Exchange Act of 1934,
the Company's directors, executive officers and any persons holding
ten percent (10%) or more of the Company's Common Stock are
required to report their ownership of any class of stock and any
changes in that ownership to the Securities and Exchange Commission
(the "SEC") and to furnish the Company with copies of such reports.
Specific due dates for these reports have been established, and the
Company is required to report any failure to file on a timely basis
by such persons. Based solely upon a review of copies of reports
filed with the SEC during and with respect to the fiscal year ended
December 31, 1996, all reporting persons filed reports on a timely
basis, except that a Form 4, Statement of Changes in Beneficial
Ownership, from Mr. Putra Masagung, the Company's majority
shareholder, with respect to the purchase of 75,000 shares of
Series D Preferred Stock in June 1996 which was filed ten (10) days
late, and a Form 4 and Form 5, Annual Statement of Changes in
Beneficial Ownership, from Mr. Steven Champion, a former director,
with respect to options to acquire 517,687 shares of Common Stock
with a weighted average exercise price of $0.34 granted pursuant to
the 1993 Amended and Restated Stock Option Plan in December 1996,
which the Company has no record of being filed.
ITEM 11 - EXECUTIVE COMPENSATION
Executive Compensation
Decisions on the compensation of the Company's and the Bank's
executives are generally made by the four-member
Personnel/Compensation Committee. The members of the
Personnel/Compensation Committee are members of the Board of
Directors of the Company and/or Executive Officers. All decisions
by the Personnel/Compensation Committee relating to the
compensation of the Company's and the Bank's executive officers are
reviewed by the Company's and the Bank's full Boards of Directors,
except for decisions about awards under certain of the Company's
stock-based compensation plans, which are made solely by the
Committee in order for the grants or awards under such plans to
satisfy Rule 16b-3 under the Securities Exchange Act of 1934, as
amended. Set forth below is a report of the Personnel/Compensation
Committee addressing the Company's compensation policies for 1996
as they affected the Named Executives of the Company and the Bank
serving at the end of 1996, whose compensation in 1996 is shown in
the "Executive Compensation Tables" below.
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
The voting members of the Company's Personnel/Compensation
Committee, which during 1996 consisted of Mr. Schultz, Mr. Unkovic,
Mr. Williams, and Mr. Sharpe, make decisions with respect to the
compensation of the Named Executives. There are no director
interlocks.
Board of Directors' Fees
The Company and the Bank pay director fees to each non-
employee Director for attendance at Board meetings and Committee
meetings which are held monthly. The combined fee for attendance
at a Board meeting of the Company and the Bank is $750 per meeting.
The Chairman of each committee receives $300 and each member
receives $200 for each committee meeting attended.
page
Compensation Philosophy
The Company and the Bank experienced significant financial
losses from 1991 to 1994, and during 1995 and 1996 were in the
midst of a turnaround. In connection therewith, the Named
Executives were required to devote a substantial and unusual amount
of time and effort in dealing with non-performing assets, raising
new capital, responding to regulatory concerns and implementing
changes in operating systems and controls. Consequently, the use
of traditional corporate performance measures such as earnings per
share or increases in book value to determine executive
compensation was not considered to be in the Company's best
interests. Therefore, there was no direct relationship in 1995 or
1996 between executive compensation and the Company's financial
performance, either as compared to the Company's prior performance
or as compared to the banking companies with which the Company
competes for executive talent. Instead, the 1995 and 1996
executive compensation programs of the Bank were designed to
provide compensation which would allow the Bank to attract and
retain talented and experienced executives necessary for management
of the Bank's turnaround program. The focus of the executive
compensation program was on base salary, although some effort was
made to provide longer term incentives through the grant of stock
options. See "Employment and Separation Agreements" below for
additional discussion on employment contracts. None of the Named
Executives received a cash bonus, while serving as an executive, in
1995 or 1996.
The voting members of the Personnel/Compensation Committee
either approved or recommended to the Board of Directors payment
amounts and award levels for all executives of the Bank including
the Named Executives.
Going forward, in addition to the philosophies described
above, the Committee will also be guided by the terms of the Orders
in setting executive compensation. The Orders provides that,
without the prior written approval of the FDIC, the Bank may not
(a) pay a bonus to an executive officer, or (b) provide
compensation to an executive officer at a rate exceeding his or her
average rate of compensation (excluding bonuses, stock options and
profit-sharing) during the 12 calendar months preceding the months
in which the Bank first became undercapitalized.
page
Executive Compensation Tables
Summary of 1994-1996 Compensation. The following table sets
forth the annual compensation, long-term compensation and other
compensation paid to each of the Named Executives. Compensation is
listed as of December 31, 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
Annual compensation Long term compensation
Awards
Other All
annual Restricted other
compen- stock compen
Name and Salary Bonus sation award(s) Options/ -sation
principal
position Year ($) ($) ($)(1) ($) SARs(#)(2) ($)
(a) (b) (c) (d) (e) (f) (g) (i)
Chairman/CEO
James 1996 235,425 0 0 0 1,276,637 0
E. 1995 262,507 0 0 0 0 0
Gilleran 1994 51,681 0 7,936 0 313,639 0
President/ 1996 169,209 0 14,756 0 318,055 0
COO/CCO-Bank 1995 0 0 11,308 0 0 0
John McGrath 1994 0 0 0 0 0 0
EVP/CAO 1996 90,000 0 29,078 0 0 0
Joanne 1995 0 0 0 0 0 0
Greenwood 1994 0 0 0 0 0 0
EVP/CFO 1996 127,000 0 0 0 0 0
Keary 1995 120,000 0 0 0 0 0
Colwell 1994 85,105 0 0 0 0 0
(1) "Other annual compensation" consists solely of consulting fees
paid for consulting services prior to formal appointment into
designated positions.
(2) These options were granted pursuant to the employment
agreements described below. The options have an exercise
price range of between $0.34 and $5.68, the fair market value
of the underlying stock at the time of grant.
Employment and Separation Agreements
Employment Agreement of Mr. Gilleran. The Company and the
Bank entered into an employment agreement with Mr. Gilleran dated
October 1, 1994 which provided, among other things, for
Mr. Gilleran to receive an annual salary of at least $250,000 per
year, payable in accordance with the Bank's usual payment
practices. Mr. Gilleran's annual base salary will be increased to
$300,000 upon the conclusion of the Company's third consecutive
profitable quarter (which has occurred), subject to regulatory
approval (which has not yet been obtained). In addition, the
employment agreement provides for an annual cash performance bonus
of between 0% and 100% of base salary, and a special incentive one-
time bonus of $150,000 at such time as the condition of the Company
and the Bank are deemed satisfactory. The employment contract
expires on September 30, 1998.
The agreement provides that the Board of Directors shall grant
Mr. Gilleran options under the Amended and Restated 1993 Stock
Option Plan (formerly the 1993 Executive Stock Option Plan) to
acquire shares of the Company's Class A Common Stock (the "Common
Stock") equal to 5% of the fully-diluted shares of the Common
Stock, with additional anti-dilution options to be granted in the
future as necessary to maintain the 5% interest until after the
next public offering of the Company's Common Stock. The exercise
price of subsequent anti-dilution options would be at then-current
fair market value per share of the Common Stock or the price per
share for the Common Stock issued to others in a public offering of
the Company's Common Stock.
page
As of December 31, 1996, Mr. Gilleran holds options to
purchase 313,639 shares of the Common Stock with an exercise price
of $5.68 per share, options to purchase 184 shares of the Commons
Stock with an exercise price of $4.50 per share, and options to
purchase 1,276,453 shares of the Common Stock with an exercise
price of $0.34 per share. Except for certain anti-dilution
options, the options granted to Mr. Gilleran, vest over a
three-year period, with one-third vesting on each anniversary date
of the employment agreement except that if the Company closes a
public offering of Common Stock all options will vest. As of
December 31, 1996, his options are 66.6% vested.
Under the employment agreement, Mr. Gilleran is indemnified by
the Company and the Bank from any liability or expense arising as
a result of actions taken by the Company or the Bank, or events
relating to the business of the Company or the Bank, occurring
prior to the execution of the employment agreement. Subject to
certain limitations, Mr. Gilleran is also indemnified by the
Company and the Bank from any liability or expense arising as a
result of actions taken by the Company or the Bank, or events
relating to the business of the Company or the Bank, occurring
after the execution of the employment agreement, unless such
liability or expense is due to his bad faith or gross negligence.
Employment Agreement of Mr. McGrath. The Bank entered into an
employment agreement with Mr. McGrath dated November 27, 1995 which
provides, among other things, for Mr. McGrath to receive an annual
salary of at least $170,000 per year, payable in accordance with
the Bank's usual payment practices. In addition, the employment
agreement provides for an annual cash performance bonus of between
0% and 50% of base salary. The employment contract expires on
November 27, 1998.
The agreement provides that the Board of Directors shall grant
Mr. McGrath options under the Amended and Restated 1993 Stock
Option Plan (formerly the 1993 Executive Stock Option Plan) to
acquire shares of the Company's Common Stock equal to 1% of the
fully-diluted shares of the Common Stock, with additional anti-
dilution options to be granted in the future as necessary to
maintain the 1% interest until after the next public offering of
the Company's Common Stock. The exercise price of subsequent
anti-dilution options would be at then-current fair market value
per share of the Common Stock or the price per share of the Common
Stock issued to others in a public offering of the Company's Common
Stock.
As of December 31, 1996, Mr. McGrath holds options to purchase
318,055 shares of the Common Stock with an exercise price of $0.34
per share. Except for certain anti-dilution options, the options
granted to Mr. McGrath, vest over a three-year period, with one-
third vesting on each anniversary date of the employment agreement
except that if the Company closes a public offering of Common Stock
all options will vest. As of December 31, 1996, one third of his
options are vested.
Under the employment agreement, Mr. McGrath is indemnified by
the Bank from any liability or expense arising as a result of
actions taken by the Bank or the Company, or events relating to the
business of the Bank or the Company, occurring prior to the
execution of the employment agreement. Subject to certain
limitations, Mr. McGrath is also indemnified by the Bank from any
liability or expense arising as a result of actions taken by the
Bank or the Company, or events relating to the business of the Bank
or the Company, occurring after the execution of the employment
agreement, unless such liability or expense is due to the his bad
faith or gross negligence.
Separation Agreements with Certain Former Executive Officers
of the Bank. During 1994, certain executive officers resigned from
their employment with the Bank. Effective September 16, 1994,
Mr. Price resigned as Chairman and Chief Executive Officer of the
Bank and the Company. Effective November 1, 1994, Mr. Champion, a
former director, resigned as Vice Chairman and Chief Financial
Officer of the Bank and the Company.
The separation agreements with Messrs. Price and Champion
provide for the termination of prior employment agreements with
them. In consideration for the termination of such employment
agreements, the Board of Directors granted each of Messrs. Price
and Champion options under the Amended and Restated 1993 Stock
Option Plan to acquire shares of the Company's Common Stock equal
to 1% and 2%, respectively, of the fully-diluted shares of the
Common Stock, with additional anti-dilution options to be granted
in the future as necessary to maintain the 1% and 2% interest,
respectively, until after the next public offering of the Company's
Common Stock. The exercise price of subsequent anti-dilution
options would be at the then-current fair market value per share of
the Common Stock or the price per share of the Common Stock issued
to others in a public offering of the Company's Common Stock.
page
As of December 31, 1996, Mr. Price holds options to purchase
318,055 shares of the Common Stock with an exercise price of
between $0.34 and $5.68 per share, and Mr. Champion holds options
to purchase 636,109 shares of the Common Stock with an exercise
price of between $0.34 and $5.68 per share. The options granted to
Messrs. Price and Champion are fully vested.
Other Employee Benefit Plans
401(k) Profit Sharing Plan. In 1986, the Company established
a 401(k) Profit Sharing Plan (the "Plan") which is intended to
qualify under Sections 401(a) and 401(k) of the Internal Revenue
Code. The Plan permits each participating employee with six months
of service to contribute to the Plan through payroll deductions
(the "salary deferral contributions") of from 2% to 16% of the
participant's eligible compensation from the Company and its
subsidiaries, thereby deferring taxes on all or a portion of these
amounts. Under the Plan, the Company currently will match a
participant's tax deferred contributions by an amount equal to 100%
of such contribution for each year, except that the matching
contribution by the Company for the participant may not exceed 2%
of the participant's eligible compensation for that year.
The Company may also make additional contributions to the Plan
in such amounts as may be determined by the Company's Board of
Directors. Any such additional contributions are allocated among
Plan participants based upon their compensation levels. The
Company's contribution vests 100% after a participant has completed
five years of participation in the Plan, with vesting of 20% per
year for each of years one through five. In addition, the
Company's contribution vests upon a participant's retirement at age
65 or upon a participant's death or permanent disability.
Participants are entitled to receive their salary deferral
contributions and vested benefits under the Plan upon termination
of employment, retirement, death or disability. Participants have
the right to allocate their salary deferral contributions among six
different investment funds.
Amended and Restated 1993 Stock Option Plan. Awards under the
Amended and Restated 1993 Stock Option Plan are made to both
directors and officers. The awards for officers are discretionary
and based on the performance of the Company, the officer's job
performance, the importance of his or her position, and his or her
contribution to the organization's goals for the award period. In
1996, grants totaling 2,522,689 were made. No grants were made in
1995. In 1994, grants totaling 511,822 were made.
page
The following table shows grants under the Amended and
Restated 1993 Stock Option Plan for the individuals and groups set
forth below:
Name and Positions
Number of Shares of
the Common Stock
Underlying Options
Granted Through
December 31, 1996
James E. Gilleran
Director of the Company and the Bank 1,590,276
John McGrath
Director of the Bank 318,055
Kent D. Price
Director of the Company and the Bank 318,055
Peter Foo (1)
Director of the Company and Bank 26,438
Nicholas Unkovic (1)
Director of the Company and Bank 27,315
Willard D. Sharpe (1)
Director of the Company and Bank 30,138
Gordon B. Swanson (1)
Director of the Company and Bank 30,138
Jackson Schultz (1)
Director of the Company and Bank 26,438
Gary G. Williams (1)
Director of the Company and Bank 26,438
Named Executives Group (two persons) 1,908,331
Outside Director Group (seven persons) 484,960
_____________________
(1) Each outside director not covered by an existing contract has
been granted options to acquire 26,438 shares of the Common
Stock at a price of $0.34 effective October 1, 1996. These
options will vest over three years based on seniority with
Messrs. Swanson and Sharpe being fully vested, Mr. Unkovic 75%
vested and Messrs. Foo, Schultz and Williams 25% vested.
page
The following table sets forth the options granted to the
Named Executives during 1996:
Number of % of Total
Securities Options/SARs
Name and Underlying Granted to Exercise or Grant Date
principal Options/SARs Employees in Base Price Expiration Present
position Granted(#) Fiscal Year ($/Share) Date Value ($)(1)
(a) (b) (c) (d) (e) (f)
Chairman/ 184 0.0% $4.50 4/1/2004 $0
CEO 3,452 0.2 0.34 11/27/2005 311
James E. 8,716 0.5 0.34 10/1/2006 784
Gilleran 1,264,285 79.3 0.34 12/18/2006 113,786
President/ 63,455 4.0 0.34 11/27/2005 5,711
COO/CCO-Bank 1,742 0.1 0.34 10/1/2006 157
John McGrath 252,858 15.9 0.34 12/18/2006 22,757
(1) The Company used the Black-Scholes option pricing model
assuming a risk free interest rate of 6.17%, an expected life
of five years, no expected dividend yield and a volatility
factor of less than one.
The following table sets forth the unexercised options held as
of December 31, 1996 and options exercised during 1996 by the Named
Executives:
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Name and Shares Fiscal Year end Fiscal Year end($)
principal Acquired on Value (Exercisable/Un- (Exercisable/Un-
Position Exercise Realized($) exercisable)(#) exercisable)($)
(a) (b) (c) (d) (e)
Chairman/
CEO - James -- -- 1,051,950/ $75,857/
E. Gilleran -- -- 538,326 39,024
President/
COO/CCO-Bank -- -- 105,438 $9,489/
John McGrath -- -- 212,617 19,136
page
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following sets forth information regarding the beneficial
ownership of the Common Stock by Mr. Putra Masagung, executive
officers and directors, and by all other shareholders as December
31, 1996. The address of Mr. Masagung is 55 MH Thamrin, Jakarta,
Indonesia.
Directors and
Mr. Putra Executive All
Masagung Officers(1) Others
Common Shares 28,086,126 2,938 686,931
Percentage ownership 97.6% 0.0% 2.4%
(1) Does not include options granted pursuant to the Amended
and Restated 1993 Stock Option Plan (see "Item 11 - Executive
Compensation - Other Employee Benefits"). If all such options
were exercised, the shares held by such directors and
executive officers would represent 9.5% of the outstanding
shares of Common Stock.
The following sets forth information regarding the beneficial
ownership of the Series B Preferred Stock as December 31, 1996.
Number of Shares Percentage
Beneficially of
Owned Class
Gordon Swanson 7,200 45.4%
John Volckman 3,500 22.0
All directors and current
executive officers as a group 7,200 45.4
The address of Mr. Volckman is 497 Walsh Road, Atherton,
California 94027, and the address of Mr. Swanson for the purpose of
his ownership of the Series B Preferred stock is the principal
executive office of the Company.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions
The Bank has had and expects to continue to have banking
transactions with many of the directors and executive officers of
the Company and the Bank (and their associates). Loans by the Bank
to any director or executive officer of the Company or any of its
subsidiaries (or any associate of such persons) have been made in
the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and should not
involve more than the normal risk of collection or present other
unfavorable features. Loans by the Bank to any director, executive
officer or principal stockholder of the Company or any of its
subsidiaries (as such persons are defined by regulation) are
subject to limitations under California and federal law. Among
other things, a loan by the Bank to a director, executive officer,
or principal stockholder of the Company or any of its subsidiaries
must be on non-preferential terms and, if all loans to a given
person exceed $25,000, such loans must be approved in advance by
the Bank's Board of Directors. The Bank had no such loans
outstanding as of December 31, 1996.
The Company and the Bank have engaged the law firm of Graham
& James, LLP to perform the function of General Counsel. Total
fees paid to Graham & James, LLP in 1996 for legal services
rendered were $150,672. Mr. Unkovic, a director of the Company and
the Bank, is a partner with Graham & James, LLP.
page
The Company entered into an indemnification agreement with Mr.
Unkovic and Graham & James, LLP dated December 16, 1994. The
indemnification agreement provides that Mr. Unkovic is indemnified
from and against any and all liabilities or expenses arising with
respect to any action or inaction taken in the course of his duties
as a director of the Company, and that Graham & James, LLP is
indemnified against any and all liabilities and expenses against
Graham & James, LLP arising by reason of Mr. Unkovic serving as a
director of the Company. The indemnification does not include
legal services Mr. Unkovic or Graham & James, LLP may render to the
Company or its subsidiaries, affiliates, directors, officers or
stockholders.
Under their employment agreements, Messrs. Gilleran and
McGrath would be indemnified by the Company and/or the Bank from
any liability or expense arising as a result of actions taken by
the Company or the Bank, or events relating to the business of the
Company or the Bank, occurring prior to the execution of the
employment agreements. See Item 11 - "Employment and Separation
Agreements" for additional information on indemnification
agreements.
In 1993, the Bank entered into an indemnification agreement
with Mr. Thayer Prentice, former Chairman of the Board, President
and Chief Executive Officer of the Company and the Bank. The Bank
obtained an irrevocable standby letter of credit in the amount of
$300,000 issued by Transpacific National Bank on behalf of
Thayer T. Prentice as collateral for the Bank's obligations under
its indemnification agreement. The indemnification agreement
expires August 31, 1997.
page
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. All financial statements.
See Index to Financial Statements on page 28.
2. Financial Statement Schedules
All financial statement schedules are omitted because
they are not applicable or not required, or because the
required information is included in the Consolidated
Financial Statements or the notes thereto.
3. List of Exhibits (numbered in accordance with Item 601 of
Regulation S-K):
Exhibit Number Exhibit
3.1 Certificate of Incorporation of Bank of San Francisco
(Delaware) Holding Company, dated June 23, 1988 (1)
3.2 Agreement and Plan of Merger of Bank of San Francisco
(Delaware) Holding Company, a Delaware corporation and Bank of
San Francisco Company Holding Company, a California
Corporation, dated June 24, 1988 (1)
3.3 Certificate of Amendment of the Certificate of Incorporation
of Bank of San Francisco Company Holding Company, dated May
22, 1989 (1)
3.4 Certificate of Amendment of the Certificate of Incorporation
of Bank of San Francisco Company Holding Company, dated
September 21, 1989 (1)
3.5 Bylaws of Bank of San Francisco (Delaware) Holding Company,
dated June 23, 1988 (1)
3.6 First Amendment to Bylaws of Bank of San Francisco Company
Holding Company, dated July 19, 1989 (1)
3.7 Second Amendment to Bylaws of Bank of San Francisco Company
Holding Company, dated June 6, 1990 (1)
3.8 Certificate of Amendment of the Certificate of Incorporation
of Bank of San Francisco Company Holding Company, dated May
23, 1994 (4)
3.9 Amended and Restated Certificate of Incorporation of The San
Francisco Company, dated May 23, 1994 (4)
3.10 Certificate of Amendment of Certificate of Incorporation or
The San Francisco Company, dated December 18, 1996(7)
4.1 Certificate of Designations of Rights, Preferences, Privileges
and Restrictions of 8% Series B Convertible Preferred Stock of
Bank of San Francisco Company Holding Company, dated July 28,
1988 (1)
4.2 Amended Certificate of Designations of Rights, Preferences,
Privileges and Restrictions of 7% Series B Convertible
Preferred Stock of Bank of San Francisco Company Holding
Company, dated October 7, 1988 (1)
4.3 Certificate of Correction of Certificate of Incorporation,
dated June 18, 1990 (1)
10.2 Lease dated November 1, 1960 between The Lurie Company and
Bank of America, with respect to premises at 550 Montgomery
Street (2)
10.3 Consent to Assignment of Lease, dated October 8, 1986, between
The Lurie Company and Bank of San Francisco and Bank of San
Francisco Realty Investors, with respect to premises at 550
Montgomery Street (2)
10.4 Assignment of Lease, dated October 17, 1986, by Bank of
America to Bank of San Francisco and Bank of San Francisco
Realty Investors, with respect to premises at 550 Montgomery
Street (2)
10.7 Letter Agreement with the Board of Governors of the Federal
Reserve Board, dated April 21, 1989 (1)
10.9 Bank of San Francisco Company Holding Company 401(k) Profit
Sharing Plan (3)
10.18 Employment Agreements dated October 1, 1994 between Mr.
Gilleran and The San Francisco Company and the Bank of
San Francisco. (5)
10.19 Employment Agreements dated November 27, 1995 between Mr.
John McGrath and the Bank of San Francisco(6)
10.20 Subscription Agreement dated as of February 26, 1996
between The San Francisco Company and Putra Masagung (6)
10.21 Amended and Restated 1993 Stock Option Plan (7)
11.1 Computation of Earnings Per Share
21 Subsidiaries of registrant (3)
___________________________
Footnotes to List of Exhibits:
* Indicates filed herewith.
(1) Incorporated by reference from the Form S-2 (Registration No.
33-34985).
(2) Incorporated by reference from the Form 10-K for the year
ended December 31, 1986.
(3) Incorporated by reference from Form 10-K for the year ended
December 31, 1990.
(4) Incorporated by reference from Proxy Statement for the Special
Meeting of Stockholders' held on May 23, 1994.
(5) Incorporated by reference from Form 10-K for the year ended
December 31, 1994.
(6) Incorporated by reference from Form 10-K for the year ended
December 31, 1995.
(7) Incorporated by reference from Proxy Statement of the 1996
Annual Meeting of Stockholders' held on December 18, 1996.
(b) Reports on Form 8-K filed in the fourth quarter of 1996:
None
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.
The San Francisco Company
/s/ James E. Gilleran Chairman of the Board and March 31, 1997
James E. Gilleran Chief Executive Officer
(Principal Executive Officer)
/s/ Keary L. Colwell Executive Vice President March 31, 1997
Keary L. Colwell Chief Financial Officer
(Principal Accounting Officer)
page
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ James E. Gilleran Chairman of the Board and March 31, 1997
James E. Gilleran Chief Executive Officer
(Principal Executive Officer)
/s/ John McGrath President and March 31, 1997
John McGrath Director
/s/ Willard D. Sharpe Director March 31, 1997
Willard D. Sharpe
/s/ Gordon B. Swanson Director March 31, 1997
Gordon B. Swanson
/s/ Kent D. Price Director March 31, 1997
Kent D. Price
/s/ Nicholas C. Unkovic Director March 31, 1997
Nicholas C. Unkovic
/s/ Jackson L. Schultz Director March 31, 1997
Jackson L. Schultz
/s/ Gary Williams Director March 31, 1997
Gary Williams
/s/ Peter Foo Director March 31,1997
Peter Foo
page
EXHIBIT 11.1
Calculation of Earnings Per Share
The following table provides the earnings per share calculations
for the years ended December 31, for each of the periods shown:
1996 1995 1994
Primary earnings (loss) per share:
Net income (loss) (in thousands) $ 702 $ 336 $(33,036)
Weighted average Common Shares
outstanding 5,829,035 5,765,985 3,078,303
Net income (loss) per common
and common equivalent share $0.12 $0.05 $(10.73)
Fully-diluted earnings (loss) per share:
Net income (loss) (in thousands) $ 702 $ 336 $(33,036)
Weighted average Common Shares
outstanding 5,829,035 5,765,985 3,078,303
Common stock equivalents - dilutive 17,944,066 3,645,061 --
Total weighted average common
and common equivalent shares 23,773,101 9,411,046 3,078,303
Net income (loss) per Common
and Common equivalent share $0.03 $0.03 $(10.73)