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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10198
THE SAN FRANCISCO COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 94-3071255
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Montgomery Street, 10th Floor
San Francisco, California 94111
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (415) 781-7810
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
Class A Common Stock, $0.01 Par Value None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant on February 29, 2000, was
$23,450,000 computed by reference to the higher of the bid price or
the price at the last sale of the Class A Common Stock as reported
by First Security Van Kasper, the sole market maker of such stock.
The Registrant had 29,317,558 shares of Class A Common Stock
outstanding on February 29, 2000.
page
THE SAN FRANCISCO COMPANY
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENT
PART I
Page
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders. . . . 8
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters. . . . . . . . . . . . . . . . . . . . 8
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 11
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 8. Financial Statements and Supplementary Data. . . . . . . . 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures . . . . . . . . . . . 56
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . 56
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . 56
Item 13. Certain Relationships and Related Transactions . . . . . . 56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 56
page
PART I
ITEM 1 - BUSINESS
The Company and the Bank
The San Francisco Company (the "Company"), a Delaware
corporation, is a one-bank holding company registered under the
Bank Holding Company Act of 1956, for Bank of San Francisco (the
"Bank"), a California state chartered bank organized in 1978 whose
deposits are insured by the Federal Deposit Insurance Corporation
(the "FDIC"), subject to applicable limits. The Bank is the only
direct subsidiary of the Company and accounts for over 99% of the
consolidated assets of the Company. The Bank delivers its services
from its headquarters building, Bank of San Francisco Building, at
550 Montgomery Street (at Clay Street), San Francisco, California
94111, and its phone number is (415) 781-7810. The Bank's web-site
on the Internet is www.banksf.com.
The Company's Class A Common Stock, par value $0.01 per share
(the "Common Stock" or "Common Shares"), is not traded on an
exchange. The sole market maker of the Common Stock is First
Security Van Kasper.
The Bank specializes in providing private banking as well as
business banking for individuals, their businesses and other
businesses, primarily in the Northern California banking market.
See "-- Private and Business Banking." In addition, the Bank
provides specialized services related to homeowners associations
(see "-- Association Bank Services"), brokerage services (see "--
Stock Option Services") and escrow services (see "--Escrow
Services").
The Bank's primary market area, Northern California, has a
highly diversified economic base, including high technology
electronic manufacturing, scientific research, real estate
construction, retail and wholesale trade and transportation. Much
of the diversity in the economic base is attributable to the
service sector, including finance, accounting, insurance,
communications, law, consulting and tourism. While many of the
Bank's loans have been and continue to be collateralized by real
estate, the Bank's deposit and lending relationships are not
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 those individuals are associated. The Bank
has specialized in private banking since it began operations in
1979.
The Bank's marketing strategy focuses on establishing banking
relationships with privately and closely held businesses, and their
owners and operators whose financial needs require customized
banking programs. At December 31, 1999 and 1998, Private and
Business Banking customers deposits totaled $60.7 million and $41.2
million, representing 43.7% and 43.1% of the Bank's total deposits,
respectively. At December 31, 1999 and 1998, Private and Business
Banking customers loans totaled $93.4 million and $72.2 million,
representing 98.7% and 97.6% of the Bank's total loans,
respectively.
Association Bank Services
Established in 1987, Association Bank Services (the "ABS")
provides deposit and financial management services to homeowner and
community associations throughout California. The Bank offers its
ABS customers deposit accounts for operating funds and reserves,
loans, assessment collection services and investment services. In
addition, the Bank offers lockbox services, courier services,
expedited deposit processing and special handling of accounts.
Deposits from homeowner and community associations are a key
component of the Bank's core deposit base. At December 31, 1999
and 1998, ABS customers' deposits totaled $28.2 million and $19.2
million, representing 20.3% and 20.0% of the Bank's total deposits,
respectively. At December 31, 1999 and 1998, ABS customers loans
totaled $1.1 million and $1.5 million, representing 1.2% and 2.0%
of the Bank's total loans, respectively.
page 1
The Bank also offers to ABS and other 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, 1999, one account manager controlled less than 3% of
total deposits.
Stock Option Services
Begun in 1984, Stock Option Services provides a range of
discount brokerage services, combined with a program to facilitate
the exercise of stock options by employees of publicly held
companies.
The stock option exercise program offers employees the means
to exercise, hold or sell their option shares at a minimum cost.
In this program, the Bank makes loans to holders of stock options
of publicly traded companies for the purpose of enabling them to
exercise their options and sell all or a portion of the stock
acquired. The Bank works with stock transfer and employee benefits
officers to coordinate the payment of the option exercise price,
the provision for the payment of taxes related to the exercise of
such options, the issuance and subsequent sale of the underlying
stock and the distribution of the net sale proceeds. At
December 31, 1999 and 1998, the Bank had total stock option loans
outstanding of $99,600 and $253,000, respectively. Such amounts
can vary substantially based upon the timing of the exercise of
stock options as well as market conditions.
Approximately 17% of Stock Option Services' clients have
generated over 85% of the fee income from stock option
transactions. These transactions accounted for 60% of total
commission revenue in 1999. 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 $1.9 million, $1.1 million and $1.4 million for 1999,
1998 and 1997, respectively, representing 12.4%, 11.3%, and 12.4%
of the Company's gross revenue for the same periods, respectively.
The earnings generated by Stock Option Services is highly dependent
on the trading prices of the stock underlying the stock options of
its clients and the overall condition of the stock markets in which
they trade. Management considers the fee income produced by Stock
Option Services to be volatile, and there can be no guarantee that
income levels from this activity can be maintained at current
levels.
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 also markets its discount brokerage services to those clients
presently using stock option services.
Escrow Services
Begun in 1989, the Corporate Escrow Services Department (the
"Escrow") primarily 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, 1999
and 1998, Escrow deposits totaled $25.7 million and $19.2 million,
representing 18.5% and 20.1% of the Bank's total deposits,
respectively.
page 2
Trust Services
The Bank was granted trust powers in late 1989. The Bank
suspended its trust activities in 1996 because the trust activities
never achieved the size necessary to generate the revenues required
to cover direct costs. The Bank will consider the resumption of
trust activities in the future.
Financial Information Regarding the Operations of the Company
Financial information regarding the operations of the Company
and the Bank is disclosed in the Company's consolidated financial
statements.
Competition
The banking business in California, and specifically in the
market area served by the Bank, is highly competitive. The Bank
competes for loans and deposits with other commercial banks,
including some of the country's and the world's largest banks,
savings and loan associations, finance companies, money market
funds, brokerage houses, credit unions, insurance companies, and
non-financial institutions. By virtue of their larger amounts of
capital, many of the financial institutions with which the Bank
competes have significantly greater lending limits than the Bank
and perform certain functions, including corporate trust services
and international banking services, which are not presently offered
directly by the Bank (although such functions may be offered
indirectly by the Bank through correspondent institutions).
The Bank's strategy for meeting its competition has been to
concentrate on discrete segments of the market for financial
services, particularly small to medium-sized businesses and their
owners, professionals, corporate executives, affluent individuals,
and homeowner and community associations, by offering specialized
and personalized banking and brokerage services to such clients.
Competitive conditions continue to intensify as legislation is
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 purposes 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, 1999, the Company and the Bank employed 60
persons, consisting of 58 full-time and 2 part-time employees
compared to 56 employees consisting of 54 full-time and 2 part-time
at December 31, 1998.
Regulation and Supervision
On December 4, 1998, the Federal Reserve Board announced that
on November 30, 1998, Mr. Putra Masagung and PT Gunung Agung, the
beneficial owners of a majority of the Company's Common Stock
entered into a Voting Trust Agreement (the "Agreement"). Mr.
Masagung and PT Gunung Agung retained their respective beneficial
interests but collectively transferred voting control of the
Company's Common Stock to a Trustee under the terms of the
Agreement effective January 4, 1999 which has been filed with the
Securities and Exchange Commission (the "SEC"). Under the terms of
the Agreement, the Trustee shall dispose of the shares upon
instructions from Mr. Masagung and PT Gunung Agung on or before
July 4, 2001.
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 the statutes and regulations.
page 3
Financial Modernization
In late 1999, legislation was approved that is designed to
modernize the U. S. financial services industry by reducing
existing regulatory restrictions on the combination within the same
corporate group of commercial banking, investment banking and
insurance activities. Activities eligible for combinations include
all commercial banking products and services; underwriting,
brokering and dealing in most types of securities; passive
investments in any type of company via merchant banking and
insurance company investments; investment advice; and insurance
underwriting, agency, and brokerage. Additional activities may
become approved as permissible "financial activities" if incidental
to financial activities, if necessary or appropriate to respond to
existing or expected changes in financial services markets or
delivery technology or to compete effectively with other financial
services companies, if usual in connection with financial
operations aboard, or if complementary to financial activities and
not a danger to the safety of a depository institution or its
deposit insurance fund.
Other major changes made by this new legislation, officially
known as the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"),
include:
. creation of a new category of "financial services holding
company" ("FHC") to hold the newly-combined activities;
. adoption of "functional regulation" by which the SEC and state
insurance regulators would regulate activities under their
jurisdiction even if those functions are carried out within
banking organizations, thus ending most of the traditional
bank exemptions from federal securities regulation;
. enhancement of corporate organizational flexibility to allow
many current and newly authorized financial services
activities to be conducted by non-bank "financial
subsidiaries" of either a bank or a FHC; and
. establishment of a minimum federal law standard of individual
financial privacy, while expressly allowing state governments
and the U. S. Congress to add additional protections. In an
effort to avoid a competitive imbalance between large
financial conglomerates and smaller community institutions,
banks may disclose non-public customer financial information
to a third party under a joint marketing arrangement if
specific protective conditions are observed.
To avail itself of new powers and enhanced corporate
organizational flexibility made available under the GLB Act by
becoming a FHC, a banking organization must certify that all of its
insured depository institutions are well-managed, well-capitalized,
and rated satisfactory or higher under CRA. The Bank presently
meets these standards.
The precise impact of the GLB Act on the Company and the Bank
will not be fully known until the last of the GLB Act's phased
effective dates occur on November 12, 2004 and until regulatory
agencies complete the promulgation of administrative regulations
implementing many portions of the GLB Act. It is clear, however,
that the changes made by the GLB Act will increase competition in
commercial banking business by allowing securities and insurance
organizations to own and operate insured depository institutions
and thereby compete with the Bank and the Company. Should we
choose to do so, the Bank and the Company will, in turn, be able to
compete more fully for the securities and insurance business of its
existing and future customers.
The Company
The Company, as a bank holding company, is subject to
regulation under the U.S. Federal Bank Holding Company Act of 1956
(the "Holding Company Act"), as amended by among other statutes,
the GLB Act, and is registered with the Federal Reserve Board and
subject to the supervision of the Federal Reserve Bank of San
Francisco (collectively, the "FRB"). It is the policy of the FRB
that each bank holding company serve as a source of financial and
managerial strength to its subsidiary bank(s) and conduct its
operations in a safe or sound manner.
The Holding Company Act requires prior FRB approval for the
acquisition of control over another bank, and prior to the GLB Act
the Holding Company Act generally restricted 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
page 4
managing or controlling banks as to be a proper incident to banking.
Under the GLB Act, as a FHC the Company could directly and/or indirectly
engage in a much broader range of financial services including, for
example, insurance sales or underwriting, investment banking,
merchant banking, and real estate development. The Company and the
Bank are monitoring the promulgation of regulations under the GLB
Act, presently meet the GLB Act criteria, and may consider
exercising the GLB Act's self-certification option to be come a FHC
and/or create permissible financial subsidiaries of the Bank.
The Company and its subsidiaries are, with certain exceptions,
prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property
or provision of services. In recent years, the FRB has, however,
allowed pricing discounts conditioned upon the Bank customer
purchasing bundled groups of services. The GLB Act has
strengthened consumer protections against a bank's attempt to tie
the receipt of bank products and services to the consumer's
agreement to purchase insurance, brokerage or other services from
affiliated companies.
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 GLB Act calls for enhanced regulation of affiliate
transactions and creates certain new "firewalls" designed to
safeguard insured depository institutions within a financial
services holding company organization from risks arising from new
activities.
The Bank
The Bank is a California state-chartered bank and is subject
to regulation, supervision and periodic examination by the
California Department of Financial Institutions (the "DFI") and the
FDIC. The Bank is not a member of the Federal Reserve System, but
is nevertheless subject to certain regulations of the FRB. The
Bank's deposits are insured by the FDIC to the maximum amount
permitted by law, which is currently $100,000 per depositor in most
cases.
The regulations of state and federal bank regulatory agencies
govern many aspects of the Bank's business and operations,
including but not limited to, the scope of its business, its
investments, its reserves against deposits, the timing of the
availability of deposited funds, the payment of dividends, and
potential expansion. As noted, the GLB Act allows for expansion of
the Bank's scope of operations but may subject some of the Bank's
existing securities and other activities to functional regulation
by the SEC and other agencies.
The California banking laws, among other matters, regulate:
(a) the conduct of the banking business; (b) accounts, including
types of deposit accounts and claims made thereon; (c) loans,
including limitations on obligations to the bank by borrowers in
general and by the bank's insiders; and (d) mergers, consolidations
and conversions of banks, including changes in control of banks.
California interstate banking and branching law allows the
interstate acquisition of whole banks which have been in existence
for more than five years and authorizes expanded correspondent bank
agency relationships among affiliated and unaffiliated insured
banks. It can be expected that the DFI, and possibly also the
California state legislature, will act in response to the GLB Act
to authorize, among other things, engagement in expanded activities
by financial subsidiaries of California bank-chartered banks under
existing wild card parity statutes and/or amendment of the
California Financial Code. The GLB Act allows new financial
activities to be exercised through financial subsidiaries jointly
owned with other banks; this power may allow smaller banks to
compete with larger institutions.
The privacy provisions of the GLB Act require, among other
things, that any institution offering any financial activity
authorized to a FHC annually disclose its policies on the sharing
of non-public financial information, and that it allow its
customers to opt to prohibit that institution from sharing their
non-public data with unaffiliated third parties for marketing
purposes. As noted, these federal privacy protections do not
prohibit state governments from imposing more protective rules, and
a variety of such bills are currently pend in the California state
legislature. The Bank vigorously safeguards the financial privacy
of its customers, and neither the Bank nor the Company have ever
shared or sold non-public individual financial information with or
to unaffiliated third parties for marketing purposes; the Bank and
the Company thus do not anticipate that existing or future privacy
rules will adversely impact profitability or operations.
page 5
The Federal Reserve Act and FRB regulations, some of which are
applicable to state nonmember banks under regulations of the FDIC,
place limitations and conditions on loans or other extensions of
credit to: a bank's or bank holding company's executive officers,
directors and principal shareholders ("insiders"); any company
controlled by any such insiders; or any political or campaign
committee controlled by such insiders.
Effective January 1, 1999, the FDIC's rules limiting the non-
agency activities of state-chartered insured banks and their
subsidiaries to those activities permissible to national banks were
revised and liberalized. and these rules will undergo additional
changes under the GLB Act. Such activities, including real estate
investment and securities activities, are and will continue to be
subject to a variety of general and specific safety and soundness
restrictions.
In response to various business failures in the savings and
loan and commercial banking industries, Congress enacted the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"). Among other things, FDICIA requires prompt corrective
action by the federal bank regulatory agencies for troubled
institutions. FDICIA also places restrictions on the activities of
state-chartered institutions and on institutions failing to meet
minimum capital standards and provides enhanced enforcement
authority for the federal banking agencies.
FDICIA restricts the acceptance of brokered deposits by
insured depository institutions that are not well capitalized. It
also places restrictions on the interest rate payable on brokered
deposits and the solicitation of such deposits.
Under FDICIA, the FDIC has adopted a revised risk-based
assessment system for deposit insurance, under which depository
institutions are charged between 0 and 27 basis points for every
$100 in insured domestic deposits depending on such institution's
capital level and supervisory rating. The Bank's present
assessment is zero. The Bank is assessed a surcharge for the
Financing Corporations (the "FICO") bonds which were issued to help
fund the cost associated with the savings and loan crisis. The
Bank is presently assessed an annual FICO surcharge of
approximately 0.012% of average deposits through 1999 and 0.0243%
of average deposits from 2000 through 2017. A marked increase in
the number of bank failures in 1999 has led the FDIC to review its
deposit insurance assessment system, and this review has and will
result in increased assessments for some insured depository
institutions.
Compliance of the Bank and the Company with Year 2000 data
processing matters is discussed elsewhere in this document. The
Bank is monitoring the promulgation by the federal bank regulatory
agencies of "know your customer" guidelines.
Capital Adequacy Requirements
FDICIA establishes five capital categories for insured
depository institutions: (a) Well Capitalized; (b) Adequately
Capitalized; (c) Undercapitalized; (d) Significantly
Undercapitalized; and (e) Critically Undercapitalized. All insured
institutions (i.e., the Bank) are barred from making capital
distributions or paying management fees to a controlling person
(i.e., the Company) if to do so would cause the institution to fall
into any of the three undercapitalized categories.
FDICIA also provides that if a well or adequately capitalized
or undercapitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, its
capital category may be downgraded to achieve a higher level of
regulatory scrutiny and prompt corrective action.
Minimum Leverage Ratio. The FRB and the FDIC have established
a minimum leverage ratio of 3.0% Tier 1 capital to total quarterly
average assets for companies that have received the highest
composite regulatory rating (a regulatory measurement of capital,
assets, management, earnings and liquidity) and that are not
anticipating or experiencing any significant growth. All other
institutions may be required to maintain a leverage ratio of at
least 100 to 200 basis points above the 3.0% minimum.
Risk-based Capital Ratio. The FRB and the FDIC have
established regulations that require companies to maintain a
minimum ratio of qualifying total capital to risk-weighted assets
of 8.0%. The risk-based capital ratio is calculated with reference
to risk-weighted assets, including both on and off-balance sheet
exposures, which are
page 6
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 FDIC has recently announced that it may require significantly
higher capital requirements of institutions whose quantity of
"subprime" loans is large. The Bank would not be affected by the
proposal as initially announced by the FDIC.
The Company and the Bank are in compliance with these capital
adequacy requirements. See "Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Capital" for a discussion regarding the Company's and Bank's
present capital condition.
Prompt Corrective Action. As noted above, FDICIA amended the
Federal Deposit Insurance Act (the "FDIA") to establish closer
monitoring of insured depository institutions and to enable prompt
corrective action by regulators when an institution begins to
experience difficulty. The general thrust of these provisions is
to impose greater and earlier scrutiny and more restrictions on
institutions as their requirements for additional capitalization
increases. Affected institutions may, for example, be required to:
sell additional capital, including voting shares; restrict
transactions with affiliates; restrict interest rates paid on
deposits; restrict asset growth or reduce total assets; terminate,
reduce or alter any risky activities; elect new directors and
install new management; cease accepting deposits from correspondent
depository institutions; or divest or liquidate certain
subsidiaries. A parent holding company of an undercapitalized bank
is expected to guarantee that the bank will comply with the bank's
capital restoration plan until the bank has been adequately
capitalized, on the average, for four (4) consecutive quarters. A
bank holding company may be required to divest itself of any
affiliate of the institution (other than another insured depository
institution) under certain conditions.
ITEM 2 - PROPERTIES
The following table sets forth certain information concerning
the Bank's sole real property lease commitment:
Rentable
Square Expiration of Renewal
Banking Offices Footage Current Lease Period(s)
550 Montgomery Street 89,000 2010 One option for an additional
San Francisco, CA 25 years
The Bank's headquarters at 550 Montgomery Street is an 89,000
square foot historically significant office building on Clay and
Montgomery Streets in San Francisco's Financial District. The
building serves as the administrative and banking headquarters of
the Company and the Bank. The Bank currently subleases 57,000
square feet.
As of December 31, 1999, the Company's premises and equipment,
net of accumulated amortization and depreciation, is comprised of
leasehold improvements totaling $4.8 million, lease interests
totaling $1.9 million, and furniture and equipment totaling
$462,000. Depreciation on furniture, fixtures and equipment is
computed on the straight-line method over the estimated useful life
of each type of asset. Estimated useful lives are from three to
seven years. Leasehold improvements are amortized over the term of
the applicable lease, including lease extensions, or their
estimated useful lives, whichever is shorter.
page 7
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 1999 Annual Meeting on May 19, 1999 at
10:00 am, at the Company's headquarters, 550 Montgomery Street,
11th floor, San Francisco, California. The 2000 Annual Meeting has
been set for May 24, 2000 at 10:00 am, at the Company's
headquarters, 550 Montgomery Street, 11th floor, San Francisco,
California.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Common Stock is not listed on any exchange or
the National Association of Securities Dealers' Automated Quotation
System. First Security Van Kasper of San Francisco, California is
the sole market maker in the Company's Common Stock. The following
table sets forth the high and low bid prices for the Common Stock
based upon information provided by First Security Van Kasper market
from January 1, 1998 to December 31, 1999. The last known trade of
the Common Stock occurred on December 17, 1999 for 800 shares at a
price of $0.70 per share.
1999 1998
Quarter High Low High Low
First $0.45 $0.45 $0.60 $0.45
Second 0.70 0.45 0.60 0.45
Third 0.70 0.70 0.60 0.45
Fourth 0.71 0.70 0.45 0.35
The Company's preferred stock is not listed on any exchange or
traded in any other public market.
On November 22, 1999, the Company redeemed and retired
2,802,769 shares or 8.7% of total Common Stock outstanding. The
redeemed shares were from the Trustee, Mr. Robb Evans, for the
benefit of PT Gunung Agung. The redemption price was $0.71 per
share totaling $2.0 million
Holders
As of December 31, 1999, the number of holders of record of
the Company's Common Stock and Series B Preferred Shares was 370
and nine (9), 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
page 8
The Bank is subject to certain regulatory restrictions
regarding payment of dividends to the Company as set forth in the
California Financial Code. In 1999, the Bank paid a dividend to
its majority shareholder, the Company, totaling $2.0 million.
The Company is subject to dividend restrictions under the
Delaware General Corporation Law and Federal regulations. The
Company's Series B Preferred Shares participate equally, share for
share, in cash dividends paid on the Common Shares in addition to
receiving the cash dividends to which they are entitled. The Board
of Directors declared a cash dividend on the Series B Preferred
Stock for stockholders of record on July 1, 1998 that was paid on
July 15, 1998 totaling $3.92 per share, for stockholders of record
on December 31, 1998 that was paid on February 26, 1999 totaling
$0.28 per share, for stockholders of record on June 30, 1999 that
was paid on July 15, 1999 totaling $0.28 per share, and for
stockholders of record on December 31, 1999 that was paid on
January 21, 2000 totaling $0.28 per share.
page 9
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated
financial data of the Company at and for the years ended December
31:
1999 1998 1997 1996 1995
(Dollars in
Thousands except
for per share data)
FINANCIAL CONDITION DATA:
Total assets $184,473 $140,136 $116,617 $104,001 $114,862
Total loans 94,612 73,980 51,924 43,762 53,208
Total securities
held-to-maturity 1,953 3,846 5,864 6,943 --
Total securities
available-for-sale 32,236 34,235 32,669 28,348 6,536
Total deposits 138,911 95,688 86,519 91,166 105,673
Other borrowings 20,000 20,000 10,000 -- --
Shareholders' equity 23,501 22,704 17,570 11,064 6,880
OPERATING DATA:
Total interest income $10,636 $8,782 $8,026 $7,242 $10,691
Total interest expense 3,986 3,411 2,890 3,127 4,415
Net interest income 6,650 5,371 5,136 4,115 6,276
Provision (adjustment)
for loan losses 100 (1,627) (2,820) -- 500
Net interest income
after provision
(adjustment)
for loan losses 6,550 6,998 7,956 4,115 5,776
Total non-interest income 5,331 3,891 3,502 3,327 5,014
Total non-interest exp. 8,748 6,907 7,509 6,998 10,301
Income before taxes 3,133 3,982 3,949 444 489
(Benefit) provision
for income taxes (732) (1,060) (1,494) (258) 153
Net income $3,865 $5,042 $5,443 $702 $336
OTHER DATA:
Return on average assets 2.5% 4.0% 5.0% 0.7% 0.3%
Return on average equity 16.4 26.7 45.2 7.9 6.8
Average equity to
average assets 15.1 15.0 11.0 8.3 3.7
Equity to assets 12.7 16.2 15.1 10.6 6.0
Interest rate spread 3.8 3.7 4.0 3.7 4.3
Net interest margin 4.7 4.7 5.1 4.4 5.0
Non-performing assets to
total assets 0.0 0.0 0.5 8.2 13.1
Average interest-earning
assets to average interest-
bearing liabilities 134.2 133.7 138.2 119.3 121.5
Non-interest expenses to
average assets 5.5 5.5 6.8 5.0 6.0
Net interest income, after
provision (adjustment)
for loan losses, to
non-interest expense 74.9 101.3 105.9 58.8 56.1
Loan charge-offs net of
(recoveries) as a percent
of average loans 0.2 (0.1) (0.8) 0.6 1.4
Allowance for loan
losses as a
percent of loans 1.6 2.2 6.2 12.9 11.1
PER SHARE DATA:
Common shares
outstanding,
end of period 29,317,558 31,728,782 31,723,782 28,775,995 5,765,978
Preferred shares
outstanding,
end of period 15,869 15,869 15,869 15,869 231,291
Common Shares:
Book value per
common share $0.80 $0.71 $0.55 $0.38 $0.43
Income per weighted
average common share
Basic 0.12 0.16 0.18 0.12 0.05
Diluted 0.12 0.15 0.17 0.03 0.03
page 10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This document contains forward-looking statements that are
made pursuant to the safe harbor provisions of the Securities
Litigation Reform Act of 1995. Such statements involve risks and
uncertainties, including, but not limited to, the Company's and
Bank's ability to implement their respective long-term business
plans, manage interest rate and operational risks, and utilize the
tax benefit of the net operating loss carryforwards. Other factors
involving risks and uncertainties include the economy in general,
the real estate market in California, the condition of stock
markets upon which the Company's stock brokerage business and fee
income is dependent, the impact of the enactment of the GLB Act on
operations and competition, the retention of key executives and
managers, and other factors beyond the Company's and Bank's
control. Such risks, uncertainties and factors, including those
discussed herein, could cause actual results to differ materially
from those indicated. Readers should not place undue reliance on
forward-looking statements, which reflect management's views only
as of the date hereof. The Company and the Bank undertake no
obligation to revise these forward-looking statements to reflect
subsequent events or circumstances. Readers are also encouraged to
review the Company's publicly available filings with the SEC.
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 $3.9 million for the year
ended December 31, 1999, following net income of $5.0 million in
1998 and $5.4 million in 1997. The net income in 1999 was
comprised primarily from two sources; core operating earnings and
the recognition of the tax benefit of certain deferred tax assets.
The net income in 1998 and 1997 was comprised primarily from four
sources; 1) core operating earnings, 2) gain on sale of assets, 3)
adjustments for loan loss provisions, and 4) the recognition of the
tax benefit of certain deferred tax assets.
Results of Operations - Years Ended December 31, 1999, 1998 and
1997
Net Interest Income
One of the fundamental measures of the Bank's results of
operations is net interest income. Net interest income is the
difference between the combined yield earned on interest earning
assets and the combined rate paid on interest bearing liabilities.
The following table presents the consolidated average balance
sheets of the Company, together with the total dollar amounts of
interest income and expense, and weighted average interest rates
for each of the years in the three year period ended December 31,
1999. Where possible, the average balances are calculated on a
daily average basis. When this information is not available,
average balances are calculated on a monthly basis.
page 11
1999 1998 1997
(Dollars
in Thou- Average Income/ Yield/ Average Income/Yield/ Average Income/ Yield/
sands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets
Interest-
earning
assets:
Federal
funds and
time
deposits $21,207 $1,064 5.0% $21,038 $1,133 5.4% $19,914 $1,114 5.6%
Investment
securities 33,196 1,958 5.9 37,404 2,262 6.0 38,434 2,345 6.1
Loans,
net (1) 85,660 7,614 8.9 56,225 5,387 9.6 42,389 4,567 10.8
Total
interest-
earning
assets 140,063 10,636 7.6 114,667 8,782 7.7 100,737 8,026 8.0%
Non-interest
earning
assets 16,690 10,956 9,134
Total
assets $156,753 $125,623 $109,871
Liabilities
and Equity
Interest-
bearing
liabilities:
Interest-
bearing
deposits $84,471 2,875 3.4% $75,146 $2,778 3.7 $72,299 2,798 3.9
Other
borrowings 19,912 1,111 5.6 10,644 633 6.0 575 34 6.0
Total
interest-
bearing
liab-
ilities 104,383 3,986 3.8 85,790 3,411 4.0 72,874 2,832 4.0
Series B
Preferred
Stock -- -- -- -- -- -- 111 58 52.3
Non-interest
bearing
lia-
bilities 28,771 20,982 24,959
Stock-
holders'
equity 23,599 18,851 11,927
Total
liab-
ilities
and
stock-
holders'
equity $156,753 $125,623 $109,871
Net
interest
income $6,650 $5,371 $5,136
Primary
interest
spread 3.8% 3.7% 4.0%
Margin as a percent
of earning assets:
Interest income 7.6% 7.7% 8.0%
Interest expense 2.8 3.0 2.9
Net interest margin 4.7% 4.7% 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 on 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
page 12
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.
1999 versus 1998 1998 versus 1997
(Dollars in Thousands) Rate Volume Net Rate Volume Net
Interest-earning assets:
Federal funds and time deposits $(78) 9 (69) $(42) $61 $19
Investment securities (56) (248) (304) (21) (62) (83)
Loans, net (412) 2,639 2,227 (550) 1,370 820
Total interest-earning assets (546) 2,400 1,854 (613) 1,369 756
Interest-bearing liabilities:
Interest-bearing deposits (269) 366 97 (59) 39 (20)
Other borrowings (42) 520 478 (83) 624 541
Total interest bearing lia-
bilities (311) 886 575 (142) 663 521
Change in net interest income $(235) $1,514 $1,279 $(471) $706 $235
The Company's interest income increased during 1999 from 1998
and during 1998 from 1997 primarily as a result of the increase in
loans outstanding. Interest income and dividends on Federal funds
sold and investment securities was $3.0 million in 1999, $3.4
million in 1998 compared to $3.4 million in 1997. Average
portfolio balances were $54.4 million in 1999, $58.4 million in
1998 compared to $58.3 million in 1997, and average portfolio
yields were 5.6%, 5.8%, and 5.9% in 1999, 1998, and 1997,
respectively.
Interest expense for 1999 was $4.0 million compared to $3.4
million in 1998 and $2.9 million for 1997. The 1999 increase
compared to 1998 was primarily attributable to an increase in
average interest bearing deposits to $84.5 million from $75.1
million. The increase in interest expense in 1998 compared to 1997
was primarily attributable to an increase in average other
borrowings to $20.0 million at the end of 1998 from $10.0 million
at the end of 1997. The average cost of deposits and borrowings
for 1999 was 3.8% as compared to 4.0% for both 1998 and 1997.
Provision (Adjustment) for Loan and Lease Losses
During 1999, the Bank increased to the allowance for loan and
lease losses by $100,000 based on an estimate of loan and lease
losses. As of December 31, 1999, the allowance for loan and lease
losses totaled $1.5 million, or 1.6% of total loans and leases
compared to $1.6 million, or 2.2% of total loans and leases at
December 31, 1998. During 1998 and 1997, the Bank reduced the
allowance for loan and lease losses by $1.6 million and $2.8
million, respectively. The adjustment in 1998 reduced the total
allowance for loan and lease losses as a percent of total loans to
2.2% at the end of 1998 from 6.2% at the end of 1997. The 1998 and
1997 reductions in the Company's allowance for loan and lease
losses to a level that management believes is adequate was based on
many factors that are more fully discussed under "Loans --
Allowance for Loan and Lease Losses".
Non-Interest Income
Non-interest income increased $1.4 million, or 37.0%, in 1999
as compared to 1998, primarily as a result of an increase in
brokerage commissions and fees, and revenue from operating leases.
Brokerage commissions and fees were higher due to higher stock
option exercise and trading volume. Operating lease income
totaling $1.0 million was received in 1999 compared to none in
1998. Income from real estate rental income increased in 1999
compared to 1998 as a result of higher rental rates on the sublease
of certain office space in the Bank's headquarter building. In
addition, other services charges and fees increased as a result of
higher transaction volumes.
Non-interest income increased $389,000 or 11.1% in 1998 as
compared to 1997, primarily as a result of the reinstatement as
other income of a note receivable related to a loan previously
charged-off. Income from real estate rental income increased in
1998 compared to 1997 as a result of the increase in the rental
rates on available space in the Bank's headquarter building. In
addition, other services charges and fees increased as a result of
higher volumes transaction volumes. The net increase in non-
interest income in 1998 compared to 1997 included a decline
page 13
in brokerage commissions as a result of a decline in transaction
volumes due primarily to the decline in stock values during the
second half of 1998.
The following table provides a detail of non-interest income
for the years ended December 31:
(Dollars in Thousands) 1999 1998 1997
Stock option commissions and brokerage fees $1,860 $1,051 $1,416
Real estate rental income 1,241 1,114 896
Operating lease income 1,022 -- --
Service charges and fees 870 683 603
Other income 268 563 116
Loss on sale of investment securities, net -- -- (6)
Gain on sale of other assets, net 70 480 477
Total non-interest income $5,331 $3,891 $3,502
Non-Interest Expense
For the year ended December 31, 1999, non-interest expenses
increased $1.8 million, or 26.7%, from the year ended December 31,
1998. The increase was primarily attributed to the incremental
cost of increasing loan and deposit activities, and depreciation
related to equipment under operating leases.
For the year ended December 31, 1998, non-interest expenses
decreased $602,000, or 8.0%, from the year ended December 31, 1997.
The reduction was primarily attributed to an adjustment to the
accrual for legal related costs that reduced other operating
expenses, lower professional fees, and lower costs related to
problem assets.
The following table provides a detail of non-interest expense
for the years ended December 31:
(Dollars in Thousands) 1999 1998 1997
Salaries and related benefits $5,017 $4,272 $4,203
Occupancy expense 1,190 1,142 1,192
Depreciation - operating lease equipment 595 -- --
Data processing 482 403 431
Professional fees 304 398 530
Insurance premiums 251 218 228
Equipment expense 190 176 198
FDIC insurance premiums 11 24 98
Other operating expenses 708 274 629
Total non-interest expense $8,748 $6,907 $7,509
The increase in salaries and related expenses in 1999 of
$745,000 compared to 1998 was primarily the result of an increase
in staffing levels including temporary personnel and incentive
compensation accruals. The incentive compensation accruals
increased based on the Company's strong financial performance in
1999. The increase in salaries and related expenses in 1998 of
$69,000 compared to 1997 was primarily the result of an increase in
staffing levels. The compensation expense included incentives
costs of $1,325,000, $960,000, and $970,000 for 1999, 1998 and
1997, respectively.
The increase in depreciation expense from equipment under
operating leases of $595,000 compared to none in 1998 was the
result of the purchase and lease of equipment from December 31,
1998 to March 31, 1999 totaling $4.9 million. The equipment is
depreciated over 68 months using the straight-line method.
The Company's expenses for professional services were $304,000
in 1999 compared to $398,000 in 1998, and $530,000 in 1997. The
Company includes in professional fees the costs of legal,
accounting, and management consulting services. Professional
service expenses declined in 1999, 1998 and 1997 primarily as a
result of a lower
page 14
level of professional services required to manage problem assets,
the reduction in litigation matters, and the reduction in activities
related to regulatory matters.
Other operating costs were higher in 1999 than 1998 by
$434,000 primarily related to a one-time reduction of accruals for
legal and non-performing assets costs in 1998. The decline in other
operating costs of $355,000 in 1998 compared to 1997 resulted
primarily from the reduction of $225,000 in an accrual for legal
related costs and a reduction in costs related to non-performing
assets by $248,000 due primarily to a write-down of certain other
real estate owned (the "OREO") properties in 1997.
Provision (Benefit) for Income Taxes
The net income tax benefit was $732,000 for 1999 compared to
$1.1 million for 1998 and to $1.5 million in 1997. The 1999, 1998
and 1997 income tax benefit related primarily to the Company's
recognition of additional net deferred tax assets and a 1998 and
1997 income tax refund for taxes paid in prior periods.
As required by SFAS No. 109, the realizability of the deferred
tax assets is reevaluated periodically and the valuation allowance
is adjusted so that the resulting level of deferred tax asset is,
more likely than not, to be realized. As of December 31, 1999, the
total net deferred tax asset was $2.1 million. The resulting
decrease in the amount of realizable deferred tax assets of
$800,000 in 1999, $600,000 in 1998, and $1.5 million in 1997 were
made based on a determination that the Company is, more likely than
not, able to utilize deferred tax assets that had previously been
reserved.
In 1999, the Company had current Federal income tax expense
based on the alternative minimum tax calculation. The Company did
not have any current Federal income tax expense in 1998 and 1997 as
a result of tax operating losses in those years. The effective tax
rates for the years ended December 31, 1999, 1998 and 1997, were
(23.3)%, (26.6)% and (37.8)%, respectively. For each of the years
ended December 31, 1999, 1998 and 1997, the federal statutory tax
rate applicable to the Company was 34%.
As of December 31, 1999, the Company had temporary differences
and net operating loss carryforwards for federal tax purposes of
approximately $44.8 million which begin expiring in 2007, and for
California franchise tax purposes of approximately $10.8 million,
which began expiring in 2000. As of December 31, 1999, the Company
had rehabilitation tax credit carryforwards for federal tax
purposes of approximately $213,000, which expire in 2004 and 2005,
and other tax credits of approximately $276,000, which have no
expiration. Utilization of the net operating loss carryforwards,
and rehabilitation and minimum tax credit carryforwards may be
limited on an annual basis under current tax law due to possible
changes in ownership in future years.
Financial Condition
Total Assets
The Company's total assets were $184.5 million as of December
31, 1999 an increase of $44.4 million or 31.7% compared to $140.1
million at December 31, 1998. In 1999 and 1998, management
continued its strategy to build the Bank's loan portfolio.
Liquidity
Liquidity is the Bank's ability to meet the present and future
cash needs of its clients for loans and deposit withdrawals. The
Bank's liquidity generally increases or decreases as a result of
fluctuations in the Bank's loans and deposits. The Bank maintains
liquid assets of cash and cash equivalents, such as federal funds
sold, at levels management believes are sufficient to meet the
liquidity needs of its deposit customers. At December 31, 1999,
the Company's cash and cash equivalents were $39.5 million or 28.4%
of total deposits and 120.9% of non-interest bearing deposits. At
December 31, 1998, the Company's cash and cash equivalents were
$14.9 million or 15.6% of total deposits and 81.7% of non-interest
bearing deposits.
In 1999, the Company's principal source of liquidity was from
repayment of loans, maturity or sale of investment securities, new
core deposits, long and short-term secured borrowing, and earnings.
The Bank's access to some of these sources of liquidity may be
limited for various reasons including some contractual maturities
of
page 15
more than two years, the inability of borrowers to repay loans
according to the contractual terms, and limited borrowing capacity
under existing borrowing arrangements.
Investment Activities
All securities are 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 7
and 19 months at December 31, 1999 and 1998, respectively, and are
carried at amortized cost. At December 31, 1999 and 1998, the
investment securities held-to-maturity portfolio includes $2.0
million and $3.8 million, respectively, in fixed rate balloon
mortgage-backed security investments.
Investment securities available-for-sale may include United
States Treasury and Federal agency securities, mutual funds,
mortgage-backed securities, and collateralized mortgage
obligations. These securities are typically used to supplement the
Bank's liquidity portfolio with the objective of increasing yield.
Investment securities available-for-sale are accounted for at fair
value. Unrealized gains and losses are recorded as a component of
accumulated other comprehensive income under shareholders' equity
and are not reflected in the current earnings of the Bank. If the
security is sold any gain or loss is recorded as a charge to
earnings and reclassified from other accumulated comprehensive
income. At December 31, 1999 and 1998, the Bank held $32.2 million
and $34.2 million as investments available-for-sale, respectively.
In 1999, the charge against other accumulated comprehensive income
to reflect the market value adjustment net of taxes to the
securities available-for-sale was $1.2 million.
page 16
The tables below sets forth certain information regarding the
carrying value and the weighted average yields of the Bank's
investment securities portfolio at December 31, 1999 by final
contractual maturity:
Available for Sale
Total
Within One to More than- Investment
One Year Five Years Five years Securities
(Dollars in Thousands)
U.S. Treasury $300 -- -- $300
Average yield 5.1% -- -- 5.1%
Agency securities -- $13,499 $4,789 $18,288
Average yield -- 6.0% 6.1% 6.0%
Mortgage-backed securities $940 $9,159 $3,549 $13,648
Average yield 5.8% 6.2% 7.0% 6.4%
Total $1,240 $22,658 $8,338 $32,236
Average yield 5.6% 6.1% 6.5% 6.2%
Held to Maturity
Total
One to Investment
Five Years Securities
(Dollars in Thousands)
Mortgage-backed securities $1,953 $1,953
Average yield 5.8% 5.8%
Expected maturities of mortgage-backed securities can differ
from final contractual maturities because borrowers have the right
to prepay obligations with or without prepayment penalties, and the
expected maturity of agency securities can differ from final
contractual maturity because the issuer may have the right to
prepay the obligation prior to final contractual maturity.
As of December 31, 1999 and 1998, the Bank held 20,770 and
19,710 shares, respectively, of stock in the Federal Home Loan Bank
of San Francisco (the "FHLB") as a membership requirement with a
carrying and market value of $2.1 million and $2.0 million,
respectively. The FHLB stock has no term to maturity. As of
December 31, 1999 and 1998, the Company and the Bank had no
derivative financial instruments.
Loans
The Bank's primary lending activities are in commercial and
financial loans made primarily to individuals and businesses in the
nine counties surrounding the San Francisco Bay Area and, to some
extent, in the Sacramento metropolitan area. The Bank purchases
whole loans and enters into loan participation agreements with
other banks in Northern California. In addition, the Bank also
provides financing for the exercise of employee stock options. The
Bank offers credit ranging from $25,000 to $4.0 million depending
on loan characteristics such as type, collateral, and terms.
At December 31, 1999 and 1998, the Bank had net loans out-
standing of $94.6 million and $72.7 million, respectively, which
represented 68.1% and 75.5% of the Bank's total deposits at those
dates and 51.3% and 51.5% of the total assets of the Company.
During 1999, the Bank originated, purchased and participated in
loans outstanding totaling $29.4 million, compared with $35.0
million during 1998. The interest rates charged on the Bank's
loans vary with the degree of risk, maturity, market interest
rates, funds availability, and governmental regulations, and have
been subject to competitive pressures. Approximately 35.0% of the
Bank's loans have interest rates that either adjust quarterly, or
more frequently, based on the Bank's prime rate, the FHLB eleventh
district cost of funds ("Cofi"), or the one-year treasury constant
maturity, or mature within 90 days.
At December 31, 1999, the Bank had no direct loans to foreign
borrowers.
page 17
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. The typical purpose of these loans is the acquisition or
re-financing of real property securing the loan. The primary
sources of repayment have been the properties' cash flow in the
case of commercial real estate loans and the borrowers' cash flow
in the case of residential real estate. The secondary source of
repayment is the sale of the real property securing the loan. The
Bank's real estate secured loans typically bear a floating rate of
interest based on either the prime rate, Cofi, or a treasury
constant maturity index. The Bank has made and will continue to
consider fixed rate loans.
Loans collateralized by real estate represent the Bank's
largest loan concentration. As of December 31, 1999 and 1998,
71.8% and 68.7%, respectively, of the Bank's total outstanding loan
portfolio was secured by real estate. The Bank mitigates
concentration risk by diversifying the type of real estate and the
geographic location of the collateral. The largest concentration
of real estate loans is collateralized by commercial real estate
which is 54.9% of total outstanding loans. The largest
concentration of commercial real estate loans by type of underlying
collateral are in retail properties which total $16.2 million or
8.9% of total assets. The largest geographic concentration in San
Francisco totals $25.2 million, or 13.7% of total assets. The
largest real estate secured loan was 2.1% of total assets as of
December 31, 1999. As of December 31, 1999, the Bank's real estate
loan portfolio consists primarily of loans with principal amounts
of between $100,000 and $4.0 million which generally have terms of
maturities of between one and fifteen years.
Secured Commercial and Financial Loans The Bank offers a
variety of commercial and financial lending services including
revolving lines of credit, working capital loans, homeowners'
association loans, and letters of credit. In addition, the Bank
may purchase participations in agricultural and other types of
loans. These loans are typically secured by cash deposits,
accounts receivable, homeowners' association dues assessments,
equipment, inventories, agricultural crop production, investments,
and securities. In underwriting commercial and financial loans,
the Bank focuses on the net worth, income, liquidity and cash flows
of the borrower or borrowers and the value of the collateral. The
Bank's commercial and financial loans typically have a floating
rate of interest based on the prime rate. The Bank's commercial
and financial loans are primarily in principal amounts of at least
$100,000 and generally have terms of one year or less.
As of December 31, 1999 and 1998, the Bank had secured
commercial and financial loans outstanding of $9.4 million and
$10.1 million constituting 9.9% and 13.6% of the Bank's total
outstanding loan portfolio, respectively. As of December 31, 1999,
68.0% of the Bank's gross secured commercial and financial loan
commitments were scheduled to mature within one year. As of
December 31, 1999, the largest secured commercial and financial
loan commitment accounted for less than 2% of the Bank's total
assets.
Unsecured Loans The Bank offers a variety of unsecured loans
including commercial and financial loans and loans to individuals.
The purpose of unsecured loans includes revolving lines of credit
for personal investing or cash flow management, home or business
improvements, working capital loans, and letters of credit. In
underwriting unsecured loans, the Bank focuses on the net worth,
income, liquidity and cash flows of the borrower. The Bank's
unsecured loans typically have a floating rate of interest based on
the prime rate. The Bank's unsecured loans are primarily in prin-
cipal amounts of at least $100,000 and generally have terms of one
year or less. In addition, the Bank will extend unsecured credit
under a credit card arrangement as an accommodation for qualifying
borrowers. As of December 31, 1999, the Bank had credit card
commitments totaling $654,000 with outstanding balances of
$170,000.
As of December 31, 1999 and 1998, the Bank's unsecured loan
commitments totaled $28.2 million and $22.7 million and had
outstanding balances totaling $13.3 million and $11.8 million and
were 14.6% and 15.9%, respectively, of the Bank's total outstanding
loan portfolio. The Bank's largest unsecured loan accounted for
less than 2.0% of total assets as of December 31, 1999.
Other Loans and Leases The Bank offers a variety of other
loans and leases including stock option loans and lease financing.
The stock option loans typically have a floating rate of interest
based on the prime rate and have a term of less than 30 days. See
"Stock Option Services." As of December 31, 1999 and 1998, stock
option
page 18
loans totaled $99,000 and $253,000 and were 0.1% and 0.4%,
respectively, of the Bank's total loan portfolio. The lease
financing receivables totaled $3,530,000 and $893,000 at December
31, 1999 and 1998, respectively.
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. As of December 31,
1999, thirty-two customers each had total commitments from the Bank
that exceeded $1.0 million. The commitments to these customers
totaled $64.8 million, or 54.0%, of total commitments outstanding,
and had outstanding balances of $50.3 million, or 53.2% of total
loans outstanding. Generally, any new or renewing loan where the
Bank's total borrower credit exposure is over $1.0 million requires
the approval of the Loan and Investment Committee of the Board.
All other loans where the total borrower exposure is $1.0 million
and less can be approved by executive management.
The Bank assesses the lending risks, economic conditions and
other relevant factors related to the quality of the Bank's loan
portfolio in order to identify possible credit quality risks. The
Bank has engaged a third party professional firm to perform certain
agreed upon procedures relating to credit quality and loan
classification. These credit review consultants review a sample of
loans periodically and report the results of their findings to the
Audit Committee of the Bank's Board of Directors. Results of
reviews by the credit review consultants as well as examination of
the loan portfolio by state and federal regulators are also
considered by management and the Board in determining the level of
the allowance for loan and lease losses.
The Bank may restructure loans as a result of a borrower's
inability to service the obligation under the original terms of the
loan agreement. Restructures are executed only when the Bank
expects to realize more from a restructured loan than from allowing
the loan to be foreclosed or pursuing other forms of collection.
When a borrower fails to make a required payment on a loan,
the loan is categorized as delinquent. If the delinquency is not
cured, workout procedures are generally commenced. If workout
proceedings are not successful, collection procedures, which may
include collection demands, negotiated restructures, foreclosures
and suits for collection, are initiated. In general, loans are
placed on non-accrual status after being contractually delinquent
for more than 90 days, or earlier if management believes full
collection of future principal and interest on a timely basis is
unlikely. When a loan is placed on non-accrual status, all interest
accrued but not received is charged against interest income. When
the ability to fully collect non-accrual loan principal is in
doubt, cash payments received are applied against the principal
balance of the loan until such time as full collection of the
remaining recorded balance is expected. Generally, loans with
temporarily impaired values and loans to borrowers experiencing
financial difficulties are placed on non-accrual status even though
the borrowers continue to repay the loans as scheduled. Such loans
are categorized as performing non-accrual loans and are reflected
in non-performing assets. Interest received on such loans is
recognized as interest income when received. A non-accrual loan is
restored to an accrual basis when principal and interest payments
are paid current and full payment of principal and interest is
probable. Loans that are well secured and in the process of
collection remain on accrual status.
page 19
Composition of Loan and Lease Portfolio The composition of the
Bank's loan portfolio at December 31, is summarized as follows:
(Dollars in Thousands) 1999 1998 1997 1996 1995
Real estate mortgage $67,914 $50,845 $37,826 $28,022$ 37,049
Secured commercial and financial 9,386 10,054 4,912 6,229 7,379
Unsecured 13,344 11,771 8,633 7,800 7,604
Other loans and leases 3,968 1,310 553 1,711 1,176
94,612 73,980 51,924 43,762 53,208
Deferred fees, net (140) (144) (61) (190) (180)
Allowance for possible loan and
lease losses (1,525) (1,625) (3,200) (5,663) (5,912)
Total loans and leases, net $92,947 $72,211 $48,663 $37,909 $47,116
The following table presents the loan portfolio at December
31, 1999 based upon the final contractual maturity date allocated
into maturity categories. This table does not reflect anticipated
prepayment of loans.
One to After
Within Five Five
(Dollars in Thousands) One Year Years Years Total
Real estate mortgage $2,201 $18,328 $47,385 $67,914
Secured commercial and financial 4,360 4,916 110 9,386
Unsecured 6,813 4,318 2,213 13,344
Other 201 3,300 568 3,968
Total loans $13,575 $30,761 $50,276 $94,612
Adjustable rate loans total $61.3 million, or 64.8% of total
loans, including $25.4 million with rates that adjust immediately
based on prime rate. Fixed rate loans and loans with next
adjustment dates beyond two years total $33.3 million, or 35.2% of
the Bank's total loan portfolio, have a weighted average yield of
8.5% and an average final maturity date of within 10 years. As of
December 31, 1999, fixed rate loans with pre-payment penalties
totaled $19.2 million. Generally, the prepayment penalty
provisions are effective for the first one to three years from the
date of origination.
As of December 31, 1999, there were $10.0 million in loans, or
10.6% of total loans, that adjust at least annually based on Cofi
which have a weighted average yield of 8.2% and a weighted average
term to final maturity of approximately 9 years, as of December 31,
1999. Generally, these loans have a weighted average annual
interest rate change limit of 2.00% and a life-time interest rate
floor and cap of 6.5% and 14.4%, respectively. The Bank also held
$21.6 million in loans, or 22.8% of total loans, that have an
initial fixed term of two years and then adjust quarterly based on
the one-year treasury constant maturity index. As of December 31,
1999, the yield on these loans was 8.4% and the average term to
final maturity was approximately 8 years.
Non-performing Assets
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, 1999 and 1998, the Bank had no
impaired loans. For the year ended December 31, 1999 and 1998, the
weighted average impaired loans outstanding was $35,000 and
$34,000, respectively. Total interest recognized on impaired loans
during 1999 was zero compared to $3,000 in 1998.
OREO is recorded at fair value at the time of acquisition.
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 20
In 1999, the Bank reduced its non-performing asset portfolio
by $51,000, or 100% at December 31, 1998 through asset sales.
Based upon information presently available, management believes
that the Bank has made sufficient provision to its allowance for
possible loan losses and specific reserves to absorb possible
losses.
The table below outlines the Bank's non-performing assets as of
December 31:
(Dollars in Thousands) 1999 1998 1997 1996 1995
Non-accrual loans -- -- $171 $3,400 $7,511
Other real estate owned, net -- $51 410 5,133 7,514
Real estate investment, net -- -- -- -- 236
Total non-performing assets -- $51 $581 $8,533 $15,261
Non-performing assets as a percentage
of total loans, OREO outstanding -- 0.1% 1.1% 17.4% 24.7%
Loans past due 90 days or more and
accrual -- -- -- -- --
Loans restructured and in compliance
with modified terms -- -- -- 4,109 4,126
At December 31, 1999, the Bank had no loans that were
delinquent 31 days or more. For each of the years ended December
31, 1999, 1998, and 1997, interest income foregone on restructured
loans was zero. The amount of gross interest income that would
have been collected for non-accrual loans if all such loans had
been performing in accordance with their original terms was zero,
zero,and $2,000, in 1999, 1998 and 1997, respectively.
Allowance for Loan and Lease Losses Generally, the Bank's
method of analyzing the adequacy of its allowance for loan and
lease losses is based on the evaluation of fair value of the
underlying collateral, known risks, trends, and other factors. The
fair value of the underlying collateral is based on current market
conditions, appraisals, and estimated sales values of similar
properties. In addition, the Bank establishes a specific loss
allowance based on the asset classification and credit quality
grade. This specific loss allowance is utilized to ensure that
allowances are allocated based on the credit quality grading to
capture inherent risks. In addition, the Bank carries an
"unallocated" allowance for loan and lease losses to provide for
losses that may occur in the future in loans that are not presently
classified, based on present economic conditions, trends, and
related uncertainties. The Bank continues to refine the allowance
methodology to ensure that all known risks, trends, and facts are
utilized in determining the adequacy of the allowance for loan and
lease losses.
Generally, the Bank charges current earnings with provisions
for estimated losses on loans receivable. However, the Bank will
record an allowance for loan and lease loss adjustment if the total
allowance for loan and lease losses exceeds the amount of estimated
losses. The provision or adjustment takes into consideration the
adequacy of the total allowance for loan and lease losses giving
due consideration to specifically identified problem loans, the
financial condition of the borrowers, the fair value of the
collateral, recourse to guarantors, and other factors. See
"Provision (Adjustment) for Loan and Lease Losses" for additional
discussion on allowance for loan and lease losses.
page 21
The following table summarizes the loan and lease loss experience
of the Bank for the years ended December 31:
(Dollars in Thousands) 1999 1998 1997 1996 1995
Balance of allowance for loan and lease
losses at beginning of period $1,625 $3,200 $5,663 $5,912 $6,576
Loans charged off:
Commercial, financial and unsecured (200) -- (5) (4) (427)
Real estate -- -- (35) (642) (2,444)
Sale of loans -- -- -- -- --
Subtotal (200) -- (40) (646) (2,871)
Recoveries of previous losses:
Commercial and financial -- -- 320 397 1,565
Real estate -- 52 77 -- 142
Net lease financing -- -- -- -- --
Subtotal -- -- 397 397 1,707
Net loans recovery/(charged off) (200) 52 357 (249) (1,164)
Provision (adjustment) for loan and
lease losses 100 (1,627) (2,820) -- 500
Balance of allowance for loan and lease
losses at end of period 1,525 $1,625 $3,200 $5,663 $5,912
Ratio of the allowance to total
loans and leases 1.6% 2.2% 6.2% 12.9% 11.1%
Ratio of the allowance to
non-accrual loans -- -- 1,871.3 166.6 78.7
Ratio of net (recoveries)/charge-offs
to average loans 0.2 (0.1) (0.8) 0.6 1.4
Allocation of the allowance for loan and lease losses by
collateral type as of December 31 is as follows:
1999 1998 1997
(Dollars in Balance Percent(1) Balance Percent(1) Balance Percent(1)
Thousands)
Real estate mortgage $839 71.8% $939 68.7% $1,460 72.8%
Secured commercial
and financial 113 9.9 129 13.6 97 9.6
Unsecured 177 14.1 137 15.9 214 16.6
Other loans and leases 38 4.2 11 1.8 2 1.0
Unallocated 358 -- 409 -- 1,427 --
Total $1,525 100.0% $1,625 100.0% $3,200 100.00%
1996 1995
Balance Percent(1) Balance Percent(1)
Real estate mortgage $2,456 64.0% $1,613 69.6%
Secured commercial and financial 250 14.2 1,207 13.9
Unsecured 483 17.8 1,872 14.3
Other loans and leases 36 4.0 -- 2.2
Unallocated 2,438 -- 1,220 --
Total $5,663 100.0% $5,912 100.0%
(1) Percent refers to the percent of loans and leases in each
category to total loans.
Deposits
The Bank had total deposits of $138.9 million and
$95.7 million at December 31, 1999 and 1998, respectively. As of
December 31, 1999, deposits consisted of demand deposits totaling
$32.7 million, money
page 22
market and savings accounts totaling $38.4 million, NOW accounts totaling
$27.6 million and time deposits totaling $40.2 million. As of December 31,
1999, the Bank had a total of 2,576 deposit accounts consisting of 685 demand
deposit accounts with an average balance of approximately $48,000
each, 600 savings and money market accounts with an average balance
of approximately $64,000 each, 906 NOW accounts with an average
balance of approximately $30,000 each and 385 time accounts with an
average balance of approximately $105,000. The Bank's deposits
and, correspondingly, its liquidity, are largely dependent upon
four sources of funds: deposits acquired through its ABS function,
Private and Business Banking, Escrow Services, and deposits
solicited through the Bank's money desk.
Certificates of deposit, including $2.9 million of money desk
deposits discussed below, having a balance of at least $100,000
represented approximately 17.4% of the Bank's total deposits as of
December 31, 1999 compared to 22.0% as of December 31, 1998. As of
December 31, 1999, $19.1 million of the Bank's certificates of
deposit of at least $100,000 mature in 90 days or less and $6.0
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 three months as of December 31, 1999, and the aggre-
gate amount of all such certificates of deposit as of December 31,
1999 was $25.5 million with a weighted average stated rate of
4.29%.
The Bank solicits money desk certificates of deposit with
balances between $90,000 and $2.0 million principally from other
financial institutions and municipalities outside of the Bank's
market area. As of December 31, 1999 and 1998, the Bank had
outstanding money desk deposits of $9.7 million or 6.9% of total
Bank's total deposits and $12.3 million or 12.8% of Bank's total
deposits, respectively. During 1999, the money desk deposits
averaged $12.0 million, with a high balance of $13.1 million. As
of December 31, 1999, money desk deposits had a remaining weighted
average maturity of approximately eight months.
The following table sets forth the maturities, as of
December 31, 1999, of the Bank's interest-bearing deposits and
other interest-bearing liabilities:
Over 3 Over
3 Months Months to 6 Months 1 Year to
(Dollars in Thousands) or Less 6 Months to 1 Year 5 Years Total
Interest-bearing liabilities:
Now accounts $27,555 -- -- -- $27,555
Money market and
savings accounts 38,354 -- -- -- 38,354
Time deposits including
money desk deposits 24,578 $3,104 $10,809 $1,835 40,326
Total interest-bearing
liabilities $90,487 $3,104 $10,809 $1,835 $106,235
Other Borrowings
The Bank has other borrowing facilities which include advances
from the FHLB and access to the discount window at the FRB. During
1999 and 1998, the Bank borrowed $20.0 million from the FHLB under
this borrowing facility. The following table sets forth the
maturities, as of December 31, 1999, of the borrowings:
Over More Than
Less than 1 Year 4 Years to
(Dollars in Thousands) 1 year to 3 Years 5 Years Total
Fixed rate borrowing $5,000 $5,000 $5,000 $ 15,000
Adjustable rate borrowing -- -- 5,000 5,000
Total interest-bearing
liabilities $5,000 $5,000 $10,000 $20,000
page 23
The Bank's short term line of credit with the FRB of up to
$2.8 million is available upon the pledge of securities. The
borrowing from the FHLB of $20.0 million is secured by pledged
securities and loans totaling $55.5 million. As of December 31,
1999, the Bank had $2.4 million available under its line of credit
with the FHLB. During 1999 and 1998, the Bank did not borrow at
the discount window at the Federal Reserve Bank.
Capital
Shareholders' equity totaled $23.5 million at December 31,
1999, an increase of $797,000 from $22.7 million at December 31,
1998. The increase in equity in 1999 was primarily from earnings
of $3.9 million partially offset by the redemption of Common Stock
totaling $2.0 million and the comprehensive loss on investment
securities totaling $1.1 million.
The Company and the Bank are subject to general regulations
issued by the FRB, FDIC, and DFI which require maintenance of a
certain level of capital. As of December 31, 1999, the Company and
the Bank were in compliance with all minimum capital requirements.
The following table reflects both the Company's and the Bank's
capital ratios with respect to the minimum capital requirements in
effect as of December 31, 1999.
Minimum
Capital
Company Bank Requirement
Leverage ratio 13.9% 13.8% 4.0%
Tier 1 risk-based capital 18.1 18.0 4.0
Total risk-based capital 19.3 19.1 8.0
Year 2000 Disclosure
The Bank implemented a plan to identify, assess, and address
issues related to the Year 2000 problem (the "Y2K Plan"). The Y2K
problem was a computer programming issue that occurred as a result
of many computer systems being programmed to use a two digit code
to identify the year. For example, the year 1998 would be
signified as "98", and, therefore, the year 2000 may be mis-
recognized as 1900. This could have resulted in the miscalculation
of financial data and/or result in processing errors in
transactions or functions that are date sensitive.
Generally, the Bank's Y2K business risks could have come from
internal sources such as the Bank's own computer systems and from
external sources such as borrowers whose businesses might be
adversely impacted by the Y2K problem, deposit customers whose
transactions are transmitted electronically, and other third
parties such as institutions, vendors, and governmental agencies
whose computer systems may have a direct or indirect adverse impact
on the Bank or the Bank's customers.
As of December 31, 1999, the Bank had implemented mission
critical system upgrades for all of its core banking hardware and
software including vendor supported hardware and software. The
Bank, the Bank's third party vendors, and the Bank's customers have
not experienced any material date sensitive systems failures.
The cost associated with executing the Y2K Plan and completing
the Y2K modification and testing totaled $265,000 including
approximately $175,000 for acquired hardware which is being
amortized over its estimated useful life. The funds for the
modification and testing were from general working capital. These
costs, exclusive of the cost of replacement systems that are being
capitalized and amortized in accordance with the Bank's policies,
were expensed as incurred. No significant information technology
projects have been deferred as a result of the Y2K efforts.
page 24
Item 7A - Quantitative and Qualitative Disclosure About Market Risk
Market Risk Management
Market risk includes risks that arise from changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices, and other market changes that affect market sensitive
instruments. The Company's primary market rate risk is interest
rate risk. The Company does not have any significant direct risks
related to foreign currency exchange rates, commodity prices,
equity prices, or other market changes that affect market sensitive
instruments.
Generally, interest rate risk occurs as a result of interest
sensitive assets and liabilities not repricing at the same time and
by the same amount. The Company's interest rate risk is a
combination of several risk factors including interest, liquidity,
price, and compliance. These risk factors are influenced by many
circumstances including changes in the economic environment and
competitive pressures.
The oversight responsibility for the Company's interest rate
risk management is performed by the Bank's Asset Liability
Committee (the "ALCO"). The interest rate risk management policies
are approved by the Board of Directors. The Company's approach to
managing interest rate risk is to periodically measure the amount
of interest rate risk based on estimated cashflows assuming
multiple interest rate scenarios. The results of the measurement
are evaluated and alternate strategies, if needed, are implemented
to reduce the interest rate risk exposure. The strategies the
Company uses to manage interest rate risk include adjustments to
the composition of the investment securities portfolio, and new
loan and deposit product terms. The Company's policies permit the
use of off-balance sheet derivative instruments to control interest
rate risk. However, as of December 31, 1999, no such instruments
were outstanding.
Using a simulation model, the Company measures interest rate
sensitivity on a quarterly basis. The simulation model takes into
consideration the potential volatility in projected results that
can occur as the interest rate environment changes over time.
Management believes that this provides a dynamic assessment of
interest rate sensitivity. For example, callable agency securities
have a final maturity but also have a call feature that could
result in a security being repaid prior to final maturity in a
declining interest rate environment, and, due to competitive
pressures, a reduction in interest rates on deposits may not be
possible without increasing liquidity risk. These and other
factors may increase or decrease the amount of volatility in
projected results.
A simplified method of measuring interest rate sensitivity is
a "gap" analysis. A gap analysis assesses the difference between
the amount of assets and the amount of liabilities which are
subject to interest rate repricing at set intervals as of a
specific date. If more assets than liabilities are interest rate
sensitive at a given time in a rising interest rate environment,
net interest income increases. In a declining interest rate
environment with the same "gap", net interest income decreases. If
more liabilities change rates than assets, the same scenarios
produce the opposite effects. Gap analysis only partially depicts
the Company's sensitivity to interest rate changes at a specific
date. Such an analysis does not fully describe the complexity of
relationships between product features and pricing, market rates
and future management of the asset and liability mix.
page 25
The following table illustrates the repricing opportunities
for the Company's interest-earning assets and interest-bearing
liabilities at December 31, 1999:
Over 3 Over More Than No stated
3 Months Months to 6 Months 1 Year to and/or Over
(Dollars in or Less 6 Months to 1 Year 5 Years 5 Years Total
Thousands)
Interest-
Earning
Assets:
Investment
securities
and certain
cash
equivalents $35,595 -- $1,040 $20,792 $13,063 $70,490
Operating
leases -- -- -- 4,406 -- 4,406
Loans and
leases 34,525 $12,438 7,551 30,444 9,654 94,612
Total
interest-
earning assets 70,120 12,438 8,591 55,642 22,717 169,508
Liabilities and
Equity:
Interest-
bearing
deposits 91,194 3,024 10,440 1,577 -- 106,235
Other
borrowings 7,000 -- -- 13,000 -- 20,000
Portion of
non-interest
bearing
liabilities and
equity -- -- -- -- 43,273 43,273
Portion of
liabilities
and equity 98,194 3,024 10,440 14,577 43,273 169,508
Interest
bearing assets
over (under)
liabilities
and equity $(28,074) $9,414 $(1,849) $41,065 $20,556 --
Cumulative
primary gap $(28,074) $(18,660) $(20,509) $20,556 --
Gap as a
percentage of
total
interest-
earning assets (16.6)% (11.0)% (12.1)% 12.1% 0.0%
The Company's simulation model estimates the changes in
earnings as a result of changes in interest rate sensitive assets
and liabilities which would occur as a result of an instantaneous
and sustained increase or decrease in interest rates of 200 basis
points, and the resulting effect on the Company's net interest
margin, net income and capital over a one and two year period. The
Company has established policy guidelines regarding maximum
negative variances in net interest margin of 15%, in net income of
50%, and in capital of 10% in the event of an instantaneous and
sustained increase or decrease in market rates of 200 basis points.
As of December 31, 1999, the Company's sensitivity to changes on
interest rates was within policy guidelines.
The following table presents the Company's hypothetical
changes in the Company's net interest income, net income and
capital, measured for the one-year period beginning January 1,
2000, based on the December 31, 1999 ending balance sheet.
Change in Estimated Increase/(Decrease) in
Interest Rates Net interest income Net income Capital
(basis points) Amount Percent Amount Percent Amount Percent
+ 200 $ 576 7.2% $ 565 14.9% $(895) (3.3)%
no change - - - - - -
- 200 $(418) (5.2)% $(409) (10.8)% $441 1.6%
The table above illustrates that in an increasing interest
rate environment, the Company's net interest income and earnings
would be expected to increase slightly due to an increase in yield
on loans and investments at a faster pace than the increase in the
cost of deposits. However, capital would be expected to decline
due to an estimated decline in the market value primarily related
to investment securities. In a declining interest rate
environment, the Company's net interest margin and earnings would
be expected to decline primarily as a result
page 26
of lower interest income on loans and investments. Net interest income
would decline due to lower reinvestment yields on the accelerated maturity
of certain fixed rate callable securities, prepayment of fixed rate
loans, and the decline of interest on adjustable rate loans and
investments, and the lag in the decline of the cost of interest
bearing deposits. Capital would be expected to increase due to a
projected increase in the value of the investment portfolio.
The simulation model includes key assumptions regarding
cashflows including projections of new and renewing loans and
deposits, prepayment assumptions for certain investment securities
and loans, and assumptions of estimated competitive pressures on
the pricing of loan and deposit products.
The simulation model does not contemplate all interest rate
scenarios or all of the actions the Company may undertake in
response to changes in market interest rates. Also, the model does
not capture the change in value for certain balance sheet assets,
which may reduce the effect of changes in interest rates or the
impact of stock market fluctuations on the Stock Option Services
revenue. For example, in a 2% falling rate scenario, the model
will not reflect additional interest income on certain loans that
have reached annual or life-time floors and/or have pre-payment
penalties; however, those floors and/or prepayment penalties may
result in a significant increase in value.
The projections provided herein contain estimates that are
based on certain assumption that may or may not occur, are subject
to uncertainties that could cause actual results to differ
materially, and any method of analyzing interest rate risk has
certain inherent shortcomings. For example, although certain
assets and liabilities have similar repricing characteristics, they
may react in different degrees to changes in market interest rates,
certain categories of assets and/or liabilities may precede, or lag
behind, changes in market interest rates, and the shift in the
slope of the yield curve could result in different estimates.
Also, actual rates of prepayments on loans and investments could
vary significantly from the estimates used in the projections.
Accordingly, results in the preceding tables should not be relied
upon as indicative of actual results in the event of changing
market interest rates and are not intended to represent, and should
not be construed to represent, the underlying value of the Company.
page 27
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Financial Condition,
December 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Operations, . . . . . . . . . . . . . . . . . 31
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income,. . . . . . . . . . . . . . . . . . . . . . . . . . 32
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows, . . . . . . . . . . . . . . . . . 33
Years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 35
page 28
INDEPENDENT AUDITORS' REPORT
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, 1999 and 1998 and the related
consolidated statements of operations, changes in shareholders'
equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1999. 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, 1999 and 1998, and the results of their operations and
their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
February 10, 2000
San Francisco, California
page 29
The San Francisco Company
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
(Dollars in Thousands Except Per Share Data) Notes 1999 1998
Assets:
Cash and due from banks $ 5,265 $ 5,908
Federal funds sold 34,224 9,000
Cash and cash equivalents 39,489 14,908
Investment securities available-for-sale 2 32,236 34,235
Investment securities held-to-maturity
(Market value: 1999 - $1,904 and 1998 - $3,851) 2 1,953 3,846
Federal Home Loan Bank stock, at par 2 2,077 1,971
Loans and leases 3 94,612 73,980
Deferred fees, net 3 (140) (144)
Allowance for loan and lease losses 4 (1,525) (1,625)
Loans, net 92,947 72,211
Other real estate owned 5 -- 51
Premises and equipment, net 6 7,151 7,546
Operating lease equipment 7 4,306 2,000
Interest receivable 867 748
Other assets 3,447 2,620
Total assets $184,473 $140,136
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 32,676 $18,237
Interest bearing deposits 106,235 77,451
Total deposits 8 138,911 95,688
Other borrowings 9 20,000 20,000
Other liabilities and interest payable 2,061 1,744
Total liabilities 160,972 117,432
Commitments and contingencies 15
Shareholders' Equity: 11
Convertible preferred stock
(par value $0.01 per share)
Series B - Authorized - 437,500 shares
Issued and outstanding - 1999 - 15,869 and
1998 - 15,869 shares 111 111
Common stock (par value $0.01 per share)
Class A - Authorized - 100,000,000 shares
Issued and outstanding - 1999 -
29,317,558 and 1998 - 31,728,782 shares 293 317
Additional paid in capital 76,963 78,816
Retained deficit (52,766) (56,619)
Accumulated other comprehensive (loss) income (1,100) 79
Total shareholders' equity 23,501 22,704
Total liabilities and shareholders' equity $184,473 $140,136
The accompanying notes are an integral part of the consolidated
financial statements.
page 30
The San Francisco Company
Consolidated Statements of Operations
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands
Except Per Share Data) Notes 1999 1998 1997
Interest income:
Loans $7,614 $5,387 $4,567
Federal funds sold 1,064 1,133 1,103
Investments 1,852 2,172 2,311
Dividends 106 90 45
Total interest income 10,636 8,782 8,026
Interest expense:
Deposits 8 2,875 2,778 2,798
Other borrowings 1,111 633 92
Total interest expense 3,986 3,411 2,890
Net interest income 6,650 5,371 5,136
Provisions (adjustment) for
loan and lease losses 4 100 (1,627) (2,820)
Net interest income after
provisions (adjustment) for loan and
lease losses 6,550 6,998 7,956
Non-interest income:
Stock option commissions and
brokerage fees 1,860 1,051 1,416
Real estate rental income 6 1,241 1,114 896
Operating lease revenue 7 1,022 -- --
Service charges and fees 870 683 603
Other income 268 563 116
Loss on sale of investment securities, net -- -- (6)
Gain on sale of other assets, net 70 480 477
Total non-interest income 5,331 3,891 3,502
Non-interest expense:
Salaries and related benefits 5,017 4,272 4,203
Occupancy expense 6 1,190 1,142 1,192
Depreciation of operating
lease equipment 7 595 -- --
Data processing 482 403 431
Professional fees 304 398 530
Insurance premiums 251 218 228
Equipment expense 190 176 198
FDIC insurance premiums 11 24 98
Other operating expenses 708 274 629
Total non-interest expense 8,748 6,907 7,509
Income before income taxes 3,133 3,982 3,949
Benefit for income taxes 10 (732) (1,060) (1,494)
Net Income $3,865 $5,042 $5,443
Income per share:
Basic: Weighted average
shares outstanding 31,541,826 31,727,138 30,393,679
Net income $0.12 $0.16 $0.18
Diluted: Weighted average
shares outstanding 33,185,999 33,062,713 30,644,487
Net income $0.12 $0.15 $0.17
The accompanying notes are an integral part of the consolidated
financial statements.
page 31
The San Francisco Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
Accum-
ulated
Other
(Dollars in Addit- Other Compre- Total
Thousands) ional Compre- Retained hensive Share-
Preferred Common Paid-in hensive Earnings Income/ holders'
Stock Stock Capital Income (Deficit) (Loss) Equity
Balances at
January 1, 1997 $111 $288 $77,841 $(67,099) $(77) $11,064
Net proceeds
from the
sale of stock -- 29 971 -- -- 1,000
Net proceeds from
the exercise of
stock options -- -- 2 -- -- 2
Other comprehensive
income
Unrealized holding
gains arising
during the
period, net
Plus:
reclassification
adjustment
for losses
included in net income $6
Net unrealized income 55
Other compre-
hensive income 61 -- 61 61
Net income 5,443 5,443 -- 5,443
Comprehensive income $5,504
Balances at
December 31, 1997 111 317 78,814 (61,656) (16) 17,570
Net proceeds from
the exercise of
stock options -- -- 2 -- -- 2
Dividend on
Preferred Stock -- -- -- (5) -- (5)
Other comprehensive
income
Net unrealized gains $95 -- 95 95
Other
comprehensive income 95
Net income 5,042 5,042 -- 5,042
Comprehensive income $5,137
Balances at
December 31, 1998 111 317 78,816 (56,619) 79 22,704
Net proceeds from
the exercise of
stock options -- 4 128 -- -- 132
Redemption of
Common Stock -- (28) (1,981) -- -- (2,009)
Dividend on
Preferred Stock -- -- -- (12) -- (12)
Other
comprehensive
income
Net unrealized
losses $(1,179) -- (1,179) (1,179)
Other comprehensive loss (1,179)
Net income 3,865 3,865 -- 3,865
Comprehensive income $2,686
Balances at
December 31, 1999 $111 $293 $76,963 $(52,766)$(1,100) $23,501
The accompanying notes are an integral part of the consolidated
financial statements.
page 32
The San Francisco Company
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands 1999 1998 1997
Cash Flows from Operating Activities:
Net income $3,865 $5,042 $5,442
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision (adjustment) for loan losses 100 (1,627) (2,820)
Benefit for income taxes (800) (600) (1,500)
Depreciation and amortization expense 1,161 533 535
Net gain on sale of real estate owned and
other assets (70) (480) (477)
Provision for other real estate owned and
real estate investment -- -- 182
Loss on sale of investment
securities available for sale -- -- 6
(Increase) decrease in interest
receivable and other assets (46) (34) 79
Increase (decrease) in other
liabilities and interest payable 317 (726) 757
Increase (decrease) in deferred loan fees (4) 83 (129)
Net cash flows provided by operating activities 4,523 2,191 2,076
Cash Flows from Investing Activities:
Purchase of Federal Home Loan Bank stock, net (106) (472) (829)
Proceeds from maturities of
investment securities held-to-maturity 1,893 2,018 1,079
Proceeds from sales of investment
securities available-for-sale -- -- 9,120
Purchase of investment
securities available-for-sale (12,671)(32,562)(18,600)
Proceeds from maturities of
investment securities available-for-sale 13,491 31,091 5,214
Capital expenditures for real estate owned -- -- 28
Net increase in loans (20,632)(22,056) (8,162)
Net (charge-offs) recoveries of
loans previously charged off (200) 52 397
Purchases of premises and equipment (173) (288) (267)
Purchase of equipment under operating lease (2,901) (2,000) --
Proceeds from sales of real
estate owned and investment, and other assets 23 839 4,952
Net cash used in investing activities (21,276)(23,378) (7,068)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits 43,223 9,169 (4,647)
Net increase in other borrowings -- 10,000 10,000
Cash dividend on Series B Preferred Stock (12) (63) --
Redemption of Class A Common Stock (2,009) -- --
Net proceeds from sale of stock 132 2 1,000
Net cash provided by financing activities 41,334 19,108 6,353
Increase (decrease) in cash and cash equivalents 24,581 (2,079) 1,361
Cash and cash equivalents at beginning of year 14,908 16,987 15,626
Cash and cash equivalents at end of year $39,489 $14,908 $16,987
The accompanying notes are an integral part of the consolidated
financial statements. (continued)
page 33
The San Francisco Company
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
(continued)
(Dollars in Thousands) 1999 1998 1997
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $4,002 $3,386 $2,811
Income taxes 65 21 6
The accompanying notes are an integral part of the consolidated
financial statements.
page 34
The San Francisco Company
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 1: Statement of Accounting Policies
The accounting and reporting policies of The San Francisco
Company (the "Company") and its subsidiaries are in accordance with
generally accepted accounting principles and practices within the
banking industry.
Organization
The Company is a Delaware corporation and a bank holding
company registered under the Bank Holding Company Act of 1956, as
amended. The Company was organized in 1981 under the laws of the
State of California, and in July, 1988, the Company reincorporated
in Delaware. Bank of San Francisco (the "Bank"), a state chartered
bank, was organized as a California banking corporation in 1978 and
became a wholly owned subsidiary of the Company through a
reorganization in 1982. The Bank specializes in providing private
banking and business banking for professional individuals, their
business and other businesses primarily in the Northern California
banking market. The Bank's wholly owned subsidiary, Bank of San
Francisco Realty Investors (the "BSFRI"), invested in real estate
investment properties from 1985 to 1996. During 1996, BSFRI
disposed of all of its real estate investment properties.
Principles of Consolidation
The accompanying financial statements include the accounts of
the Company, the Bank, and the Bank's wholly owned subsidiary,
BSFRI. BSFRI is no longer active in real estate investment
activities. All material intercompany transactions have been
eliminated in consolidation.
Cash and Cash Equivalents and Statements of Cash Flows
Cash equivalents are defined as short-term, highly liquid
investments both readily convertible to known amounts of cash and
so near maturity that there is insignificant risk of change in
value because of changes in interest rates. Generally, only
investments with maturities of three months or less at the time of
purchase qualify as cash equivalents. Cash and cash equivalents
include cash and due from banks, time deposits with other financial
institutions, and Federal funds sold.
The Bank is required to maintain non-interest bearing cash
reserves equal to a percentage of certain deposits. In 1999 and
1998, the average reserve balances outstanding were $1,103,000 and
$879,000, respectively. Generally, the Bank does not maintain
compensating balance arrangements.
Investment Securities
The Company classifies its investment securities into one of
two categories: held-to-maturity or available-for-sale. The
investments classified as held-to-maturity are carried at amortized
cost because management has both the intent and ability to hold
these investments to maturity. Investments classified as
available-for-sale are carried at fair value with any unrealized
gains and losses included as a component of accumulated other
comprehensive income in shareholders' equity.
Investment securities include debt securities and Federal Home
Loan Bank (the "FHLB") Stock. Any discounts or premiums are
accreted or amortized to income over the expected term of the
investment considering prepayment assumptions, if applicable.
Discounts or premiums are adjusted periodically to reflect actual
prepayment experience. The gain or loss on all investment
securities sold is determined based on the specific identification
page 35
method. The estimated fair value is based on quoted market prices
and/or third party dealer quotes. FHLB stock is recorded at cost
and is redeemable at par value.
Loans and Leases
Loans are stated at the principal amount outstanding, net of
the allowance for loan and lease losses, deferred fees and unearned
discount, if any. The Bank holds loans receivable primarily for
investment purposes. A significant portion of the Bank's loan
portfolio is comprised of adjustable rate loans.
Interest on loans is calculated using the simple interest
method on the daily balances of the principal amount outstanding.
The accrual of interest is discontinued and any accrued and unpaid
interest is charged against current income when the payment of
principal or interest is 90 days past due, unless the loan is
well-secured and in the process of collection. When the ability to
fully collect non-accrual loan principal is in doubt, cash payments
received are applied against the principal balance of the loan
until such time as full collection of the remaining recorded
balance is expected. Generally, loans with temporarily impaired
values and loans to borrowers experiencing financial difficulties
are placed on non-accrual status even though the borrowers continue
to repay the loans as scheduled. Interest received on such loans
is recognized as interest income when received. A non-accrual loan
is restored to an accrual basis when principal and interest
payments are being paid currently and full payment of principal and
interest is probable.
Lease financing receivables, net of unearned income, are
included in loans. Unearned income related to lease financing
receivables is recognized in income over the life of the lease
under a method that yields an approximately level rate of return on
the unrecovered lease investment.
Loan Fees
The Bank charges nonrefundable fees for originating loans.
Loan origination fees, net of the direct costs of underwriting and
closing the loans, are deferred and amortized to interest income
using the interest method. Unamortized net fees and costs on loans
sold or paid in full are recognized as income. Other loan fees and
charges, which represent income from delinquent payment charges,
and miscellaneous loan services, are recognized as interest income
when collected.
Allowance for Loan and Lease Losses
Generally, the Bank charges current earnings with provisions
for estimated losses on loans receivable. However, the Bank will
record an allowance for loan and lease loss adjustment if the total
allowance for loan and lease losses exceeds the amount of estimated
losses. The provision or adjustment takes into consideration the
adequacy of the total allowance for loan and lease losses giving
due consideration to specifically identified problem loans, the
financial condition of the borrowers, the fair value of the
collateral, recourse to guarantors, and other factors. At December
31, 1999 and 1998, the management believes the allowance for loan
and lease losses adequately reflects the credit risks in the loan
and lease portfolio.
The allowance for loan and lease losses takes into
consideration numerous factors including the financial condition of
the borrowers, the fair value of the collateral prior to the
anticipated date of sale, collateral concentrations and past loss
experience. These allowances are subjective and may be adjusted in
the future depending on economic conditions. In addition,
regulatory examiners may require the Company to provide additional
allowances based on their judgements of the information regarding
problem loans and credit risks available to them at the time of
their examinations.
Losses are recognized as charges to the allowance when the
loan or a portion of the loan is considered uncollectible or at the
time of foreclosure. Recoveries on loans receivable previously
charged off are credited to allowance for loan and lease losses.
page 36
Premises and Equipment
Premises and equipment are stated at historical cost less
accumulated depreciation and amortization. Depreciation on
furniture, fixtures and equipment is computed on the straight-line
method over the estimated useful life of each type of asset.
Estimated useful lives are from three to seven years. Leasehold
improvements are amortized over the term of the applicable lease,
including lease extensions, or their estimated useful lives,
whichever is shorter.
Operating Lease Equipment
Equipment is stated at cost net of accumulated depreciation
and is leased to third parties under lease agreements. The
equipment has an estimated useful life of 68 months and is
depreciated using a straight-line method. Lease payments are
recognized as non-interest income and the depreciation
expense is recognized as non-interest expense.
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
Long-lived assets and certain identifiable intangibles held
and used by the Company are reviewed for impairment whenever events
or changes indicate that the carrying value of the asset may not be
recoverable. Recoverability of long-lived assets is measured by a
comparison of the carrying value of the asset to future net
undiscounted cash flows expected to be generated by that asset. As
of December 31, 1999, the Company determined that no events or
changes occurred during 1999 that would indicate that the carrying
value of any long-lived assets may not be recoverable.
Other Assets
Other assets included operating lease equipment owned by the
Bank and deferred tax assets discussed below.
Income Taxes
The Company uses the asset and liability method to account for
income taxes. Under such method, deferred tax assets and
liabilities are recognized for the future tax consequences of
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
(temporary differences). Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rate is recognized in
income in the period of enactment.
A valuation allowance is established to the extent that it is
not more likely than not that the benefits associated with the
deferred tax assets will be realized.
page 37
Stock-based Compensation
The Company has elected to use the intrinsic value based
method of accounting under APB No. 25 for its stock-based
compensation and to provide supplemental disclosure of its stock-
based compensation.
Non-Interest Income
Fees for other customer services represent fees earned for the
brokerage of certificates of deposit and escrow services, and
commissions earned in connection with the Bank's stock option
lending program and other banking services. Fees for services are
recorded as income when the services are performed.
Earnings per Share (the "EPS")
Basic EPS is calculated dividing net income by the weighted
average number of common shares outstanding. The dilutive EPS is
calculated giving effect to all potentially dilutive common shares,
such as certain stock options, that were outstanding during the
period.
The following tables present a reconciliation of the amounts
used in calculating basic and diluted EPS for each of the periods
shown.
(dollars in thousands except Per-share amounts)
Per-share
1999 Income Shares amount
Basic EPS $3,857 31,541,826 $0.12
Effect of dilutive securities:
Series B Preferred Stock 8 793
Stock options -- 1,643,380
Diluted EPS $3,865 33,185,999 $0.12
Per-share
1998 Income Shares amount
Basic EPS $5,034 31,727,138 $0.16
Effect of dilutive securities:
Series B Preferred Stock 8 793
Stock options -- 1,334,782
Diluted EPS $5,042 33,062,713 $0.15
Per-share
1997 Income Shares amount
Basic EPS $5,443 30,393,679 $0.18
Effect of dilutive securities:
Series B Preferred Stock 58 793
Stock options -- 250,015
Diluted EPS $5,501 30,644,487 $0.17
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.
page 38
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which standardizes
the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring
that an entity recognize those items as assets or liabilities in
the statement of financial position and measure them at fair value.
Recently, SFAS No. 137 was issued amending the effective date of
SFAS No. 133 as the fiscal year beginning January 1, 2001. As of
December 31, 1999, the Company did not have any derivative
instruments or engage in hedging activities.
The Company has evaluated its business activities in
accordance with the provisions of SFAS No. 131 "Disclosure about
Segments of an Enterprise and Related Information" and determined
that its operating segments have similar economic characteristics
such as products and services, production process, customers,
methods used to distribute products and services, and regulatory
environment resulting in their aggregation. The adoption of this
statement effective for year-end 1998 financial statements did not
have a material impact on the Company's financial statements.
Regulatory
On December 4, 1998, the Federal Reserve Board announced that
Mr. Putra Masagung and PT Gunung Agung, the beneficial owners of
97.8% of the Company's outstanding Common Stock entered into a
Voting Trust Agreement (the "Agreement"). Mr. Masagung and PT
Gunung Agung retained their individual beneficial interest but
collectively transferred voting control the Company's Common Stock
to a Trustee under the terms of the Agreement effective January 4,
1999 which has been filed with the Securities and Exchange
Commission. Under the terms of the Agreement, the Trustee shall
dispose of the shares upon instructions from Mr. Masagung and PT
Gunung Agung by July 4, 2001.
Reclassifications
Certain reclassifications have been made in the prior years'
consolidated financial statements to conform to the current year
presentation.
Note 2: Investment Securities
The amortized cost and estimated market values of investment
securities held-to-maturity at December 31, are as follows:
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
1999:
Mortgage-backed securities $1,953 -- $(49) $1,904
Total $1,953 -- $(49) $1,904
1998:
Mortgage-backed securities $3,846 $6 $(1) $3,851
Total $3,846 $6 $(1) $3,851
page 39
The amortized cost and estimated market values of investment
securities available-for-sale at December 31 are as follows:
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
1999:
Fixed rate mortgage-
backed securities $13,972 -- $(324) $13,648
U.S. Treasury and
agency securities 19,364 -- (776) 18,588
Total $33,336 -- $(1,100) $32,236
1998:
Fixed rate mortgage-
backed securities $12,810 $67 $(4) $12,873
U.S. Treasury and
agency securities 21,346 26 (10) 21,362
Total $34,156 $93 $(14) $34,235
For 1999 and 1998, the Company included a net unrealized loss
of $1,100,000 and a net unrealized gain of $79,000, respectively,
as a component of accumulated other comprehensive income under
shareholders' equity. The Company recorded no gains or losses on
sale of investment securities during 1999 and 1998.
As of December 31, 1999 and 1998, the Bank's investment in
FHLB stock totaled $2.1 million and $2.0 million and is stated at
par.
The amortized cost and estimated market value of securities at
December 31, 1999 by contractual final maturity, are shown below:
Securities Available Securities
for Sale Held to Maturity
Amortized Estimated Amortized Estimated
(Dollars in Thousands) Cost Market Value Cost Market Value
1 to 5 years $14,268 $13,799 -- --
More than 5 years 5,096 4,789 -- --
Subtotal 19,364 18,588 -- --
Mortgage-backed securities 13,972 13,648 $1,953 $1,904
Total $33,336 $32,236 $1,953 $1,904
The average yield on investments securities was 6.0% during
1999 and 1998. The investment securities held by the Company had
weighted average maturities of less than three years. Weighted
average 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, 1999 and 1998, the Company had no derivative financial
instruments.
At December 31, 1999 and 1998, $600,000 of securities were
pledged as collateral for treasury, tax, loan deposits, public
agency, bankruptcy and trust deposits. At December 31, 1999, $23.9
million of investment securities and $31.6 million of loans were
pledged as collateral for the $20.0 million FHLB borrowing.
page 40
Note 3: Loans and Leases
The Bank's loan and lease portfolio at December 31, is
summarized as follows:
(Dollars in Thousands) 1999 1998
Real estate mortgage $67,914 $50,845
Secured commercial and financial 9,386 10,054
Unsecured 13,344 11,771
Other loans and leases 3,968 1,310
Total loans and leases 94,612 73,980
Deferred fees (140) (144)
Allowance for loan and lease losses (1,525) (1,625)
Total loans and leases, net $92,947 $72,211
At December 31, 1999 and 1998, non-accrual loans totaled zero,
and there were no loans past due 90 days or more and still
accruing. For the years ended December 31, 1999, 1998 and 1997
interest income foregone on non-accrual loans was $8,000, zero, and
$2,000, respectively. Restructured loans totaled zero at December
31, 1999 and 1998. For the years ended December 31, 1999, 1998 and
1997, no interest income was foregone on restructured loans.
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, 1999 and 1998, there were no
impaired loans outstanding. For the year ended December 31, 1999
and 1998, the weighted average impaired loans outstanding was
$35,000 and $34,000, respectively. Total interest income
recognized on impaired loans during 1999 and 1998 was zero and
$3,000, respectively.
The Company's business activities are with clients in Northern
California primarily the greater San Francisco Bay Area. As of
December 31, 1999, the Company had $73.3 million in loans secured
by real estate located in Northern California including 34.4%
located in San Francisco. The primary source of repayment of real
estate loans is the borrower's or property's debt service capacity
while the secondary source of repayment is the underlying real
estate collateral. As of December 31, 1999, the Company had $28.2
million in commitments on unsecured loans of which 47.3% were
outstanding. The primary source of repayment on the unsecured
loans is the borrowers net worth and cash flow.
Note 4. Allowance for Loan and Lease Losses
Changes in the Company's allowance for loan and lease losses
for the years ended December 31, were as follows:
(Dollars in Thousands) 1999 1998 1997
Balances at beginning of the year $1,625 $3,200 $5,663
Provision (adjustment) for loan and lease losses 100 (1,627) (2,820)
Loans charged off (200) -- (40)
Recoveries of loans charged off -- 52 397
Balances at end of the year $1,525 $1,625 $3,200
page 41
Note 5: Other Real Estate Owned
Other real estate owned at December 31, consist of the
following:
(Dollars in Thousands) 1999 1998
Real Estate:
Residential development -- $217
Commercial development -- --
Raw land -- --
Subtotal -- 217
Allowance for losses -- (166)
Total -- $51
In 1999, the Company sold OREO that had an original book value
of $217,000 and a net book value, at December 31, 1998, totaling
$51,000. In 1999 and 1998, the Company recorded net gains on sale
totaling $71,000 and $480,000, respectively.
The following table summarizes the changes in the allowance
for losses related to OREO for the periods shown:
(Dollars in Thousands) 1999 1998 1997
Balance of allowance for losses - beginning of the year $166 $3,242 $9,111
Charge-offs (166) (3,076) (6,051)
Provision -- -- 182
Balance of allowance for losses - end of the year -- $166 $3,242
Note 6: Premises and Equipment, net
Premises and equipment at December 31, consist of the
following:
(Dollars in Thousands) 1999 1998
Leasehold $3,616 $3,616
Leasehold improvements 8,784 8,700
Furniture and equipment 1,806 1,747
Subtotal 14,206 14,063
Less: Accumulated depreciation and amortization (7,055) (6,517)
Total $7,151 $7,546
The amount of depreciation and amortization included in
non-interest expense was $566,000, $533,000, and $535,000 in 1999,
1998 and 1997, respectively. Total rental and other occupancy
expenses net of sublease income for the Company's premises were
$67,000, $154,000 and $326,000 in 1999, 1998 and 1997.
page 42
At December 31, 1999, the approximate future minimum rental
expense payments under a non-cancelable operating lease, with a
remaining term of eleven years, for the Company's premise are as
follows:
(Dollars in Thousands) Amount
2000 $134
2001 134
2002 134
2003 134
2004 134
Thereafter 782
Total $1,452
The lease payment is fixed until the expiration of the lease
on October 31, 2010.
During 1999, 1998 and 1997, the Company received $1,241,000,
$1,114,000 and $864,000 of sublease income, respectively. The
sublease income payments in the following table are not reflected
in the table above. At December 31, 1999, the approximate future
minimum rental income payments under non-cancelable subleases, with
remaining terms over the next five years, of the Company's premise
are as follows:
(Dollars in Thousands) Amount
2000 $1,192
2001 1,056
2002 765
2003 257
2004 66
Thereafter --
Total $3,336
Note 7: Operating Lease Equipment
The following schedule provides an analysis of the Company's
investment in property on operating leases by major classes as of
December 31,:
(Dollars in Thousands) 1999 1998
Test equipment $4,901 $2,000
Less: Accumulated Depreciation (595) -
Total $4,306 $2,000
The test equipment has an estimated useful life of 68 months
and is leased under short-term rental agreements for periods
ranging from one week to six months. Rental revenue received in
1999 and 1998 totaled $1.0 million and zero, respectively.
page 43
Note 8: Deposits
Deposit balances and average interest rates paid by the Bank
at December 31, are as follows:
1999 1998
Average Average
(Dollars in Thousands) Balance Rate Balance Rate
Demand deposit accounts $32,676 0.0% $18,237 0.0%
Money market and savings accounts 38,354 2.9 19,998 1.9
NOW accounts 27,555 1.9 17,838 2.2
Time accounts 40,326 4.6 39,615 4.8
Total $138,911 2.5% $95,688 2.8%
Total deposit balances averaged $108.6 million and $94.0
million during 1999 and 1998, respectively, with average interest
rates of 2.5% and 2.8%, respectively. The weighted average stated
rates on deposits as of December 31, 1999 and 1998 were 2.5% and
2.8%, 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) 1999 1998
Three months or less $19,091 $15,774
Three months to six months 631 953
Six months to one year 5,364 2,015
Between one and two years 421 2,500
Total $25,507 $21,242
Interest expense on time deposits in amounts of $100,000 or
more was $900,000, $809,000 and $589,000 in 1999, 1998, and 1997,
respectively. Time deposit accounts in amounts of $100,000 or more
averaged $21.7 million and $16.7 million during 1999 and 1998,
respectively, with weighted average rates of 4.1% and 4.8%,
respectively. The weighted average stated interest rate on such
deposits at December 31, 1999 and 1998 was 4.3% and 4.4%,
respectively.
page 44
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
1999:
FHLB borrowings:
Long-term $15,000 5.7% $17,910 5.7% $18,000
Short-term 5,000 6.3 2,003 4.2 2,000
Total $20,000 5.9% $19,913 5.6% $20,000
1998:
FHLB borrowings:
Long-term $18,000 5.6% $10,545 6.0% $18,000
Short-term 2,000 5.1 99 5.1 $2,000
Total $20,000 5.5% $10,644 6.0% $20,000
The following table sets forth the maturities of the FHLB
borrowings, as of December 31, 1999, of the borrowings:
Over More Than
Less than 1 Year 4 Years to
(Dollars in Thousands) 1 Year to 3 Years 5 Years Total
Fixed rate borrowing $5,000 $5,000 $5,000 $ 15,000
Adjustable rate borrowing -- -- 5,000 5,000
Total other borrowings $5,000 $5,000 $10,000 $20,000
The Bank has a credit facility available with the FHLB for up
to $22.4 million as of December 31, 1999. At December 31, 1999 and
1998, $55.5 million and $25.0 million of loans and securities were
pledged as collateral against other borrowings. The Bank is
required to hold FHLB stock as a condition for maintaining its
membership in the FHLB.
The Bank has access to the discount window at the Federal
Reserve Bank (the "FRB") for a total borrowing facility of $2.8
million upon the pledge of securities. At December 31, 1999, no
securities are pledged as collateral for the FRB facility.
page 45
Note 10: Income Taxes
The (benefit) provision for income taxes for the years ended
December 31, consists of:
(Dollars in Thousands) 1999 1998 1997
Current:
Federal $49 $(472) --
State 19 12 $6
Total current 68 (460) 6
Deferred:
Federal (464) (680) (1,065)
State (336) 80 (435)
Total deferred (800) (600) (1,500)
Total benefit for income taxes $(732) $(1,060) $(1,494)
The provision for income taxes for 1999 consists of state tax
minimum amounts due, alternative minimum tax, and recognition of the tax
benefit of certain deferred tax assets including temporary
differences and net operating loss carryforwards.
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax
liabilities at December 31, 1999 and 1998 are presented below:
(Dollars in Thousands) 1999 1998
Deferred Tax Assets:
Net operating losses $15,982 $17,645
Tax credits 489 489
Unrealized loss on investment
securities available for sale 453 --
Allowance for loan and lease losses 75 45
Other provisions 51 33
Provision for losses on real estate -- 68
Net tax value of premises in excess of book -- 124
Other 354 272
Total deferred tax assets 17,404 18,676
Valuation allowance (14,042) (16,107)
Total deferred tax assets, net 3,362 2,569
Deferred Tax Liabilities:
Net book value of premises in excess of tax (47) --
Loan origination costs (97) (101)
Unrealized gain on investment
securities available for sale -- (33)
Taxable income in excess of
book for rehabilitation credit (318) (335)
Total deferred tax liabilities (462) (469)
Net deferred taxes $2,900 $2,100
page 46
As required by SFAS No. 109, the realizability of the deferred
tax assets is reevaluated and the valuation allowance is adjusted
so that the resulting level of deferred tax asset will, more likely
than not, be realized. During 1999 and 1998, an adjustment of
$800,000 and $600,000, respectively, to the amount of realizable
deferred tax assets was recorded based on a determination that the
Company is more likely than not able to utilize deferred tax assets
that had previously been reserved.
The total tax provision (benefit) rate differs from the
statutory federal rate for the reasons shown in the following
table:
1999 1998 1997
Tax expense at the statutory federal rate 34.0% 34.0% 34.0%
Utilization of prior year taxable losses 0.0 0.0 (34.2)
State income taxes (refund), net of federal tax benefit 7.3 8.5 0.2
Non-deductible expenditures and non-taxable income 3.4 0.5 0.0
Expiration of state net operating loss carryforwards 8.1 10.8 0.0
Realization of previously deferred tax benefits 0.0 (12.0) 0.0
Change in valuation allowance (76.1) (68.4) (38.0)
Total effective tax benefit rate (23.3) %(26.6)% (38.0)%
As of December 31, 1999, the Company has net operating loss
carryforwards for federal tax purposes of approximately $44.7
million which begin expiring in 2007, and for California tax
purposes of approximately $10.8 million, which began expiring in
1999. As of December 31, 1999, 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
In 1997, the Company received capital contributions totaling
$1.0 million resulting in the issuance of 2,947,787 shares of Class
A Common Stock (the "Common Stock") at $0.34 per share. In 1999,
the Company redeemed and retired 2,802,769 shares of Common Stock.
Description of Capital Stock
The authorized capital stock of the Company consists of
100,000,000 Common Shares, par value $0.01 per share and 5,000,000
shares of preferred stock, par value $0.01 per share, of which
437,500 are designated as Series B Preferred Shares. The remainder
are not designated.
Description of Common Stock
As of December 31, 1999, there were 29,317,558 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
After payment of dividends at the stated rate on all series of
preferred stock that the Company may issue in the future and that
are designated senior, each share of Common Stock is entitled to
receive dividends if, as and when declared by the Board of
Directors of the Company. Any dividend so declared and payable in
cash, capital stock of the Company or other property will be paid
equally, share for share, on the Common Stock, Series B Preferred
Shares, and on any other participating series of preferred stock
issued in the future; provided, however, that the Company may issue
dividends consisting solely of its Common Shares on the Common
Stock.
page 47
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.
Voting Rights
Holders of Common Stock are entitled to one vote per share.
Except as described below, holders of Common Stock vote together
with holders of the Company's Series B Preferred Shares, on all
matters including the election of directors. The Board of
Directors is presently authorized to have nine (9) members. The
Board of Directors is a classified Board with staggered terms
providing for a maximum of three classes of directors, which are as
nearly equal in number as possible, and with one class elected each
year for a maximum term of three years. Holders of Common Stock
are not entitled to vote cumulatively for the election of
directors.
The holders of Common Stock are entitled to vote as separate
classes on any modification to the rights of either class of stock
and as otherwise required by law.
Description of Preferred Stock
The Board of Directors of the Company is authorized by the
Certificate of Incorporation to provide for the issuance of one or
more series of preferred stock. The Board of Directors has the
power to fix various terms with respect to each such series,
including voting powers, designations, preferences, dividend rates,
conversion and exchange provisions, redemption provisions, and the
amounts which holders are entitled to receive upon any liquidation,
dissolution, or winding up of the Company. As of December 31,
1999, 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.
Description of Series B Preferred Stock
The Company issued the Series B Preferred Shares during 1988.
As of December 31, 1999, there were 15,869 Series B Preferred
Shares outstanding.
Dividends
Holders of the Series B Preferred Shares are entitled to
receive, when funds of the Company are legally available for
payment, an annual cash dividend of 8% per annum or Fifty-Six Cents
($0.56) per share, payable semi-annually in January, and July of
each year. Dividends on the Series B Preferred Shares are
cumulative.
Payment of dividends on the Series B Preferred Shares shall be
junior to payment of dividends at the stated rate of all other
series of preferred stock that the Company may issue in the future
and that are designated senior to the Series B Preferred Shares.
Dividends on the Series B Preferred Shares will be declared and
paid or set apart for payment in full for all previous dividend
periods (i) before the payment or setting apart of any funds or
assets for the payment of any dividends on the Common Stock or any
other class of stock, except preferred stock ranking on a parity
with or senior to the Series B Preferred Shares, and (ii) before
any purchase or other acquisition for value of any Common Stock or
any future class of stock except preferred stock ranking on a
parity with or senior to the Series B Preferred Shares; provided,
however, that the Company may issue dividends consisting of its
Common Shares on the Common Shares.
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
page 48
Series B Preferred Shares, holders of the Series B
Preferred Shares will participate pro rata with the holders of
Common Stock, on the basis of number of shares owned, in all other
dividends by the Company to its stockholders, except that, as noted
above, the Company may issue dividends consisting solely of its
Common Shares on the Common Shares.
Liquidation Rights
In the event of any liquidation, dissolution, receivership,
bankruptcy, or winding up of the Company, voluntarily or
involuntarily, the holders of the Series B Preferred Shares are
entitled to receive the sum of Seven Dollars ($7.00) per share,
plus any accrued and unpaid dividends thereon, before any
distributions will be made to the holders of the Common Stock or
any other class of stock junior in preference upon liquidation, but
after or concurrent with distributions to be made at the stated
rate on preferred stock of any series ranking on a parity with or
senior in preference upon liquidation to the Series B Preferred
Shares, and will be entitled to no other distribution.
Conversion
The holders of Series B Preferred Shares are entitled at any
time to convert their Series B Preferred Shares into Common Stock
of the Company at the conversion ratio of one Series B Preferred
Share convertible into one-tenth of one share of Common Stock, upon
payment of a conversion fee of Seven Dollars ($7.00) per share,
subject to adjustment under certain conditions.
Voting Rights
The holders of the Series B Preferred Shares are entitled to
one vote per Series B Preferred Share on all matters on which
shareholders are entitled to vote. Holders of the Series B
Preferred Shares have full voting rights and powers equal to the
voting rights and powers of the holders of the Common Stock.
Holders of the Series B Preferred Shares are entitled to vote
generally for the election of directors and vote with the holders
of the Common Stock, except that the holders of the Series B
Preferred Shares are entitled to vote as a class on any
modification to the rights of the Series B Preferred Shares and
otherwise as required by law.
Note 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 4,325,069 shares. The number of shares granted
may be subject to adjustment as determined by a Committee of the
Board of Directors. The exercise price of options must be at least
the fair market value of the shares of the Company's Common Stock
as of the date the option is granted. The expiration date of the
options is ten years from the effective date that the options were
granted. As of December 31, 1999, 403,278 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 following table provides the fair value of stock options
granted in 1998 and 1997. There were no stock options granted in
1999. The fair value was calculated using the following
assumptions in the Black Scholes option-pricing model:
1999 1998 1997
Expected dividend yield -- 0.0% 0.0%
Risk-free interest rate -- 4.54% 5.35%
Expected life -- 2.5 yrs 2.75 yrs
Volatility factor -- 0.431 0.253
Fair value of options granted -- $0.08 $0.08
page 49
The Company has not recognized any compensation costs for the
stock options in the financial statements. The proforma net income
reflects only options vested in 1999, 1998, and 1997. Had the
Company determined compensation cost based on fair value at the
date of grant for its stock options, the Company's net income would
have been the proforma amounts indicated below:
1999 1998 1997
Net income - as reported (dollars in thousands) $3,865 $5,042 $5,443
proforma 3,839 5,026 5,355
Earnings per share -Basic $0.12 $0.16 $0.18
Diluted 0.12 0.15 0.17
Proforma per share -Basic $0.12 $0.16 $0.18
Diluted 0.12 0.15 0.17
The following table provides the stock option activity for
each period presented:
December 31, 1999 December 31, 1998 December 31, 1997
Weighted Average Weighted Average Weighted Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
Balance at
beginning
of year 4,313,458 $0.99 3,672,033 $1.08 3,029,500 $1.24
Granted -- -- 646,425 0.45 668,971 0.34
Exercised 391,667 0.34 5,000 0.34 6,611 0.34
Expired 17,000 0.45 -- -- 19,827 0.34
Balance at
end of
year 3,904,791 $1.06 4,313,458 $0.99 3,672,033 $1.08
At December 31, 1999, the range of exercise prices and
remaining contractual life of outstanding options was $0.34 and
$5.68, respectively, and four (4) years and nine (9) years,
respectively. Generally, the stock options vest within a three
year period. The following table provides stock option information
as of December 31, 1999:
Options Outstanding Options Exercisable
Weighted- Weighted- Weighted-
average Remain- average Number average
Range of Number ing Contrac- Exercise Exer- Exercise
Exercise price Outstanding tual life Price cisable Price
$0.34 - $0.45 3,394,298 7.70 years $0.36 2,826,332 $0.34
$4.50 - $5.68 510,493 4.75 years $5.68 484,970 $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.
page 50
As of December 31, 1999, the most recent notification from the
FDIC categorized the Bank as Well Capitalized under the regulatory
framework for prompt corrective action.
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
1999:
Total risk-based capital $24,506 19.1% $10,248 8.0% $12,810 10.0%
Tier 1 capital 22,981 18.0 5,121 4.0 7,682 6.0
Leverage capital 22,981 13.8 6,674 4.0 8,343 5.0
1998:
Total risk-based capital $22,620 22.8% $7,945 8.0% 9,931 10.0%
Tier 1 capital 21,374 21.4 3,988 4.0 5,981 6.0
Leverage capital 21,374 16.1 5,296 4.0 6,621 5.0
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 1999, 1998, and 1997, the Company
contributed $49,000, $47,000 and $41,000, respectively, to the 401k
Plan.
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, 1999 and 1998, the Bank had
outstanding loan commitments, which had primarily adjustable rates,
totaling approximately $25.3 million and $20.9 million,
respectively. In addition, the Bank had outstanding letters of
credit, which represent guarantees of obligations of Bank
customers, totaling $790,000 and $1.1 million at December 31, 1999
and 1998, respectively. The actual liquidity needs or the credit
risk that the Company will experience will be lower than the
contractual amount of commitments to extend credit because a
significant portion of these commitments are expected to expire
without being drawn upon. The Bank's outstanding loan commitments
are made using the same underwriting standards as comparable
outstanding loans. The credit risk associated with these
commitments is considered in management's determination of the
allowance for loan losses.
Litigation
Because of the nature of its business, the Company and its
subsidiaries, including the Bank, are from time-to-time a party to
legal actions. Based upon information available to the Company and
the Bank, and its review of such outstanding claims to date,
management believes the ultimate liability relating to these
actions, if any, will
page 51
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, 1999 and 1998, there were no loans
outstanding to such individuals.
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.
The carrying amount and estimated fair values of the Company's
financial instruments at December 31, are as follows:
1999 1998
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
Financial Assets:
Cash and cash equivalents $39,489 $39,489 $14,908 $14,908
Investment securities 36,266 36,217 40,052 40,057
Loans, net 92,947 92,600 72,211 72,783
Financial Liabilities:
Deposits 138,911 138,900 95,688 95,877
Other borrowings 20,000 19,625 20,000 20,176
The following methods and assumptions were used to estimate
the fair value of each major classification of financial
instruments at December 31, 1999 and 1998:
Cash and Cash Equivalents: Current carrying amounts approximate
estimated fair value. Due to the short term nature of time
deposits with other financial institutions (original maturities of
90 days or less), current carrying amounts approximate market.
Investment Securities Held-to-Maturity and Available-for-Sale, and
FHLB Stock: For securities held-to-maturity and available-for-
sale, quoted market prices and/or third party dealer quotes were
used to determine fair value. FHLB stock is included at par value
which is fair value.
Loans Receivable: The carrying amount of loans is net of unearned
fee income and allowance for loan losses. The fair value of loans
was calculated by discounting cash flows expected to be received
through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in
the loan. The
page 52
credit and interest rate risk inherent in the loans,
was estimated by segmenting the portfolio into categories based on
collateral type, fixed or adjustable interest rate, maturity,
estimated credit risk, and accrual status. The estimate of
maturity is based on final maturity for each loan classification,
modified, as required, by an estimate of the effect of
amortization, and estimated prepayment based on current economic
and lending factors.
Deposit Liabilities: The fair value of deposits with no stated
maturity, such as non-interest bearing demand deposits, savings and
NOW accounts, and money market and checking accounts, is equal to
the amount payable on demand as of each period end. The fair value
of time deposits is based on the discounted value of contractual
cash flows. The market rates are estimated using the rates
currently offered for deposits of similar remaining maturities.
Other Borrowings: The fair value of other borrowings are
determined based on the actual cost of funds compared to the market
rate of similar borrowings published daily by the FHLB.
Off Balance Sheet Instruments: The estimated fair value of off
balance sheet instruments, principally letters of credit and loan
commitments, is approximately the amount of commitment fees
collected.
Note 18: The San Francisco Company
Condensed statements of financial condition of the Company at
December 31, are as follows:
Condensed Statements of Financial Condition
(Dollars in Thousands) 1999 1998
Assets:
Cash and short term investments $181 $205
Investment in subsidiary 23,331 22,503
Other assets -- 5
Total assets $23,512 $22,713
Liabilities:
Other liabilities $11 $9
Total liabilities 11 9
Stockholders' equity 23,501 22,704
Total liabilities and shareholders' equity $23,512 $22,713
Condensed statements of operations and cash flows of the
Company for the period ended December 31, are as follows:
Condensed Statements of Operations
(Dollars in Thousands) 1999 1998 1997
Income:
Dividend income from subsidiary $2,050 -- --
Interest earned 2 $5 $6
Other income -- -- 24
Total income 2,052 5 30
Expense:
Other expense 177 3 67
Total expense 177 3 67
Franchise taxes 17 9 3
Income (loss) before equity in undistributed
net income of subsidiary 1,858 (7) (40)
Equity in undistributed net income of subsidiary 2,007 5,049 5,483
Net income $3,865 $5,042 $5,443
Condensed Statements of Cash Flows
(Dollars in Thousands) 1999 1998 1997
Cash Flows from Operating Activities:
Net income $3,865 $5,042 $5,443
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in undistributed net income of subsidiary (2,007)(5,049)(5,483)
Net cash flows provided by
(used in) operating activities 1,858 (7) (40)
Cash Flows (used in) investing activities:
Investment in Bank -- -- (1,000)
Net decrease (increase) in other assets 5 (5) 2
Net cash provided by (used in) investing activities 5 (5) (998)
Cash Flows (used in) provided by financing activities:
Proceeds from sale of Common Stock 132 2 1,000
Preferred stock cash dividend (12) (63) --
Redemption and retirement of Common Stock (2,009) -- --
Net increase (decrease) in other liabilities 2 (29) 41
Net cash (used in) provided by financing activities (1,887) (90) 1,041
(Decrease) increase in cash and cash equivalents (24) (102) 3
Cash and cash equivalents at beginning of year 205 307 304
Cash and cash equivalents at end of year $181 $205 $307
page 54
Note 19: Quarterly Information (Unaudited)
The following table sets forth the condensed operating results
of the Company for each quarter of the years ending December 31,
1999 and 1998, and is qualified in its entirety by the more
detailed information and financial statements contained elsewhere
in this report:
(Dollars in Thousands Except Per Share data)
1999 Quarters Ended
March 31 June 30 Sept. 30 Dec. 31
Interest income $2,468 $2,506 $2,730 $2,932
Interest expense 924 968 1,004 1,090
Net interest income 1,544 1,538 1,726 1,842
Adjustment for loan losses -- 100 -- --
Non-interest income 1,076 1,349 1,397 1,452
Non-interest expense 2,060 2,050 2,193 2,388
Income before income taxes 560 737 930 906
Provision (benefit) for taxes 3 20 17 (772)
Net income $557 $717 $913 $1,678
Earnings per common share:
Basic $0.02 $0.02 $0.03 $0.05
Diluted 0.02 0.02 0.03 0.05
1998 Quarters Ended
March 31 June 30 Sept. 30 Dec. 31
Interest income $2,060 $2,093 $2,315 $2,314
Interest expense 803 795 932 881
Net interest income 1,257 1,298 1,383 1,433
Adjustment for loan losses (94) (308) (1,075) (150)
Non-interest income 697 776 731 1,687
Non-interest expense 1,746 1,795 1,678 1,688
Income before income taxes 302 587 1,511 1,582
Provision (benefit) for taxes -- 5 6 (1,071)
Net income $302 $582 $1,505 $2,653
Earnings per common share:
Basic $0.01 $0.02 $0.05 $0.08
Diluted 0.01 0.02 0.05 0.07
The realizability of the deferred tax assets is reevaluated
and the valuation allowance is adjusted so that the resulting level
of deferred tax asset will, more likely than not, be realized.
During the fourth quarter of 1999 and 1998, an adjustment of
$800,000 and $600,000, respectively, to the amount of realizable
deferred tax assets was recorded based on a determination that the
Company is more likely than not able to utilize deferred tax assets
that had previously been reserved. See additional discussion under
"Note 9: Income Taxes".
During 1998, the Bank provided an adjustment of $1.6 million
to its allowance for loan losses. Based on the significant
reduction in problem assets and the demonstrated performance on the
existing loans, management determined that a reduction of total
allowance for loan losses as a percent of total loans to 2.2% at
the end of 1998
page 56
was appropriate. The adequacy of the allowance for
loan losses gives consideration to specifically identified problem
loans, the financial condition of the borrower, the fair value of
the collateral, recourse to guarantors, and other factors that are
discussed under "Note 1: Statement of Accounting Policies --
Allowance for Loan and Lease Losses".
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be furnished in the
Company's definitive Proxy Statement, to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission not
later than 120 days after December 31, 1999, and is incorporated by
reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item will be furnished in the
Company's definitive Proxy Statement, to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission not
later than 120 days after December 31, 1999, and is incorporated by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item will be furnished in the
Company's definitive Proxy Statement, to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission not
later than 120 days after December 31, 1999, and is incorporated by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be furnished in the
Company's definitive Proxy Statement, to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission not
later than 120 days after December 31, 1999, and is incorporated by
reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. All financial statements.
See Index to Financial Statements on page 27.
2. Financial Statement Schedules
All financial statement schedules are omitted because they are
not applicable or not required, or because the required
information is included in the Consolidated Financial
Statements or the notes thereto.
3. List of Exhibits (numbered in accordance with Item 601 of
Regulation S-K):
page 56
Exhibit Number Exhibit
3.1 Certificate of Incorporation of Bank of San Francisco (Delaware)
Holding Company, dated June 23, 1988 (1)
3.2 Agreement and Plan of Merger of Bank of San Francisco (Delaware)
Holding Company, a Delaware corporation and Bank of San Francisco
Company Holding Company, a California Corporation, dated June 24,
1988 (1)
3.3 Certificate of Amendment of the Certificate of Incorporation of
Bank of San Francisco Company Holding Company, dated May 22, 1989
(1)
3.4 Certificate of Amendment of the Certificate of Incorporation of
Bank of San Francisco Company Holding Company, dated September 21,
1989 (1)
3.5 Bylaws of Bank of San Francisco (Delaware) Holding Company, dated
June 23, 1988 (1)
3.6 First Amendment to Bylaws of Bank of San Francisco Company Holding
Company, dated July 19, 1989 (1)
3.7 Second Amendment to Bylaws of Bank of San Francisco Company Holding
Company, dated June 6, 1990 (1)
3.8 Certificate of Amendment of the Certificate of Incorporation of
Bank of San Francisco Company Holding Company, dated May 23, 1994
(4)
3.9 Amended and Restated Certificate of Incorporation of The San
Francisco Company, dated May 23, 1994 (4)
3.10 Certificate of Amendment of Certificate of Incorporation or The
San Francisco Company, dated December 18, 1996(7)
4.1 Certificate of Designations of Rights, Preferences, Privileges and
Restrictions of 8% Series B Convertible Preferred Stock of Bank of
San Francisco Company Holding Company, dated July 28, 1988 (1)
4.2 Amended Certificate of Designations of Rights, Preferences,
Privileges and Restrictions of 7% Series B Convertible Preferred
Stock of Bank of San Francisco Company Holding Company, dated
October 7, 1988 (1)
4.3 Certificate of Correction of Certificate of Incorporation, dated
June 18, 1990 (1)
10.2 Lease dated November 1, 1960 between The Lurie Company and Bank of
America, with respect to premises at 550 Montgomery Street (2)
10.3 Consent to Assignment of Lease, dated October 8, 1986, between The
Lurie Company and Bank of San Francisco and Bank of San Francisco
Realty Investors, with respect to premises at 550 Montgomery Street
(2)
10.4 Assignment of Lease, dated October 17, 1986, by Bank of America to
Bank of San Francisco and Bank of San Francisco Realty Investors,
with respect to premises at 550 Montgomery Street (2)
10.7 Letter Agreement with the Board of Governors of the Federal
Reserve Board, dated April 21, 1989 (1)
10.9 Bank of San Francisco Company Holding Company 401(k) Profit
Sharing Plan (3)
10.18 Employment Agreements dated October 1, 1994 between Mr. Gilleran
and The San Francisco Company and the Bank of San Francisco. (5)
10.19 Employment Agreements dated November 27, 1995 between Mr. John
McGrath and the Bank of San Francisco(6)
10.20 Subscription Agreement dated as of February 26, 1996 between The
San Francisco Company and Putra Masagung (6)
10.21 Amended and Restated 1993 Stock Option Plan (7)
10.22 Employment Agreements dated April 22, 1998 between Mr. James E.
Gilleran and The San Francisco Company and the Bank of San
Francisco. (8)
10.23 Employment Agreements dated April 22, 1998 between Mr. John McGrath
and the Bank of San Francisco(8)
10.24 Employment Agreements dated April 22, 1998 between Ms. Keary
Colwell and The San Francisco Company and the Bank of San
Francisco. (8)
10.25 Employment Agreements dated April 22, 1998 between Ms. Joanne
Haakinson and the Bank of San Francisco(8)
21 Subsidiaries of registrant (3)
23.1* Consent of Independent Auditors
___________________________
Footnotes to List of Exhibits:
* Indicates filed herewith.
(1) Incorporated by reference from the Form S-2 (Registration No. 33-
34985).
(2) Incorporated by reference from the Form 10-K for the year ended
December 31, 1986.
(3) Incorporated by reference from Form 10-K for the year ended December
31, 1990.
(4) Incorporated by reference from Proxy Statement for the Special Meeting
of Stockholders' held on May 23, 1994.
(5) Incorporated by reference from Form 10-K for the year ended December
31, 1994.
(6) Incorporated by reference from Form 10-K for the year ended December
31, 1995.
(7) Incorporated by reference from Proxy Statement of the 1996 Annual
Meeting of Stockholders' held on December 18, 1996.
(8) Incorporated by reference from the Form 10-Q for the three and six
months ended June 30, 1998.
(b) Reports on Form 8-K filed in the fourth quarter of 1999:
None.
page 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The San Francisco Company
/s/ James E. Gilleran Chairman of the Board and March 6, 2000
James E. Gilleran Chief Executive Officer
(Principal Executive Officer)
/s/ Keary L. Colwell Executive Vice President March 6, 2000
Keary L. Colwell Chief Financial Officer
(Principal Accounting Officer)
page 58
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ James E. Gilleran Chairman of the Board and March 6, 2000
James E. Gilleran Chief Executive Officer
(Principal Executive Officer)
/s/ John McGrath President and March 6, 2000
John McGrath Director
/s/ Paul Erickson Director March 6, 2000
Paul Erickson
/s/ Peter Foo Director March 6, 2000
Peter Foo
/s/ Kent D. Price Director March 6, 2000
Kent D. Price
/s/ Willard D. Sharpe Director March 6, 2000
Willard D. Sharpe
/s/ Gordon B. Swanson Director March 6, 2000
Gordon B. Swanson
/s/ Nicholas C. Unkovic Director March 6, 2000
Nicholas C. Unkovic
/s/ Gary Williams Director March 6, 2000
Gary Williams
page 59
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The San Francisco Company
We consent to the incorporation by reference in the registration statement on
Form S-8 (No. 333-24993) of The San Francisco Company and subsidiaries (the
"Company") of our report dated February 10, 2000, relating to the
Consolidated Statements of Financial Condition of The San Francisco Company
and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated Statements of Operations, Changes in Shareholders' Equity and
Comprehensive Income, and Cash Flows for each of the years in the three-year
period ended December 31, 1999, which report appears in the December 31, 1999
Form 10K of The San Francisco Company.
San Francisco, California
March 6, 2000
page 60