ITEM 1 - BUSINESS
The Company and the Bank
The San Francisco Company (the "Company"), a Delaware corporation, is a one-bank holding company registered under the Bank Holding Company Act of 1956, for Bank of San Francisco (the "Bank"), a California state chartered bank organized in 1978 whose deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"), subject to applicable limits. The Company was organized in California in 1981 and reincorporated in Delaware in 1988. The Bank, which the Company acquired through a reorganization in 1982, is the only direct subsidiary of the Company and accounts for over 99% of the consolidated assets of the Company. The Bank delivers its services from its headquarters building, Bank of San Francisco Building, at 550 Montgomery Street (at Clay Street), San Francisco, California 94111, and its phone number is (415) 781-7810. The E-mail address for the Bank's Stock Option Exercise and Discount Brokerage Services department (the "Stock Option Services") is bsftrade@sprynet.com.
The Company's Class A Common Stock, par value $0.01 per share (the "Common Stock" or "Common Shares"), is sold "over-the- counter". The closing price for the Common Stock on March 21, 1997 was $0.40.
The Bank currently specializes in providing private banking as well as business banking for individuals, their businesses and other businesses, primarily in the Northern California banking market. See "-- Private and Business Banking." In addition, the Bank provides specialized services related to homeowners associations (see "-- Association Bank Services"), brokerage services (see "-- Stock Option Services") and escrow services (see "--Escrow Services").
The Bank's primary market area, Northern California, has a highly diversified economic base, including high technology electronic manufacturing, scientific research, real estate construction, retail and wholesale trade and transportation. Much of the diversity in the economic base is attributable to the service sector, including finance, accounting, insurance, communications, law, consulting and tourism. While many of the Bank's loans have been and continue to be collateralized by real estate, and a significant portion of the Bank's clients' net worth has historically consisted of real estate holdings, the Bank's deposit and lending relationships have not been concentrated among borrowers within a specific trade, service or industrial activity.
Private and Business Banking
Private and Business Banking combines highly personalized service with an array of products to meet the complex needs of its primary clients -- executives, professionals and high net worth or high income individuals, and the private and closely held businesses with which these individuals are associated. The Bank has specialized in private banking since it began operations in 1979.
The Bank seeks to concentrate on establishing banking relationships with privately and closely held businesses, and their owners and operators whose financial needs require customized banking programs. At December 31, 1996 and 1995, Private and Business Banking customers deposits totaled approximately $36.4 million and $38.0 million, representing approximately 40.0% and 36.0% of the Bank's total deposits, respectively. At December 31, 1996 and 1995, Private and Business Banking customers loans totaled approximately $36.1 million and $39.8 million, representing approximately 82.5% and 74.8% of the Bank's total loans, respectively.
Association Bank Services
Established in 1987, Association Bank Services (the "ABS") operates throughout California and is a major provider of deposit and financial management services to homeowner and community associations in the State. The Bank offers its ABS customers deposit accounts for operating funds and reserves, loans, assessment collection services and investment services. In addition, the Bank offers lockbox and courier services, expedited deposit processing and special handling of accounts to simplify banking operations. Deposits from homeowner and community associations are a key component of the Bank's core deposit base. At December 31, 1996 and 1995, ABS customers deposits totaled approximately $19.9 million and $22.9 million, representing approximately 21.8% and 21.7% of the Bank's total deposits, respectively. At December 31, 1996 and 1995, ABS customers loans totaled approximately $2.4 million and $3.2 million, representing approximately 5.5% and 6.1% of the Bank's total loans, respectively.
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The Bank also offers its ABS customers a certificate of deposit placement service (the "CD Placement") designed to invest a customer's funds in other insured financial institutions up to a maximum of $100,000 per institution (for which the Bank is paid a fee based on the average CD Placement investments outstanding).
Although a substantial portion of the individual ABS deposit accounts are fully insured and, therefore, could generally be considered stable, a small number of ABS customer account managers control significant numbers of such individual accounts, thus concentrating control of such deposits in the discretionary authority of a few individuals. Accordingly, a decision by several such account managers to withdraw their business from the Bank could have a significant impact on the Bank's core deposits. As of December 31, 1996, no one account manager controlled more than 7% of total ABS deposits.
Stock Option Services
Begun in 1984, Stock Option Services provides a range of discount brokerage services, combined with a program to facilitate the exercise of stock options by employees of publicly held companies.
The stock option exercise program offers employees the means to exercise, hold or sell their option shares at a minimum cost. In this program, the Bank makes loans to holders of stock options of publicly traded companies for the purpose of enabling them to exercise their options and sell all or a portion of the stock acquired. The Bank works with stock transfer and employee benefits officers to coordinate the payment of the option exercise price, the provision for the payment of taxes related to the exercise of such options, the issuance and subsequent sale of the underlying stock and the distribution of the net sale proceeds. At December 31, 1996 and 1995, the Bank had total stock option loans outstanding of $1.7 million and $1.2 million, respectively. Such amounts can vary substantially based upon the timing of the exercise of stock options as well as market conditions.
Historically, Stock Option Services has been a substantially self-funding activity with associated deposit balances closely tracking outstanding loan balances. Because Stock Option Services' deposits are primarily non-interest bearing demand deposit accounts, the Bank benefits from them by reducing its cost of funds. Management believes that most of these clients are in industries that continue to present growth opportunities. Accordingly, stock option programs should represent a continuing component of such clients' overall compensation programs. In addition, the Bank is expanding its marketing efforts to diversify its client base to increase revenue and reduce volatility. The Bank is also marketing its discount brokerage services to those clients presently using stock option services.
Historically, approximately 35% of Stock Option Services' clients have generated over 90% of the fee income of Stock Option Services. These clients are the focus of Stock Option Services' customer service activities; however, this concentration of clients exposes the Bank to the possibility of losing significant non- interest income if it loses some of these clients. Total commission revenue generated by Stock Option Services was $1.2 million, $1.5 million and $1.6 million for 1996, 1995 and 1994, respectively, representing 20.8%, 16.9%, and 15.7% of the Company's gross revenue for the same periods, respectively. The earnings generated by Stock Option Services is highly dependent on the trading prices of the stock underlying the stock options of its clients and the overall condition of the stock markets in which they trade. Management considers the fee income produced by Stock Option Services to be highly volatile, and there can be no guarantee that income levels from this activity can be maintained at current levels.
Escrow Services
Begun in 1989, the Corporate Escrow Services Department (the "Escrow") provides non-real estate escrow services, including the temporary deposit and investment of funds, deposit of securities, personal property and other assets by attorneys, business brokers and clients for business transactions, disputes, life care facilities, and court actions. Escrow services has always made a modest contribution to operating profit and provided deposits to fund other business activities. At December 31, 1996 and 1995, Escrow deposits totaled approximately $10.0 million and $8.0 million, representing approximately 11.0% and 7.6% of the Bank's total deposits, respectively.
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Trust Services
The Bank was granted trust powers in late 1989. The trust activities never achieved the size necessary to generate the revenues required to cover its direct costs. As a result the Bank suspended its trust activities during 1996. The Bank plans to consider the resumption of trust activities in the future when the Bank has achieved a net income level sufficient to support the investment required to realize trust fee revenues at a self sustaining level.
Competition
The banking business in California, and specifically in the market area served by the Bank, is highly competitive. The Bank competes for loans and deposits with other commercial banks, including some of the country's and the world's largest banks, savings and loan associations, finance companies, money market funds, brokerage houses, credit unions, insurance companies, and non-financial institutions. By virtue of their larger amounts of capital, many of the financial institutions with which the Bank competes have significantly greater lending limits than the Bank and perform certain functions, including corporate trust services and international banking services, which are not presently offered directly by the Bank (although such functions may be offered indirectly by the Bank through correspondent institutions).
The Bank's strategy for meeting its competition has been to concentrate on discrete segments of the market for financial services, particularly small to medium-sized businesses and their owners, professionals, corporate executives, affluent individuals, and homeowners and community associations, by offering specialized and personalized banking and brokerage services to such clients.
Competitive conditions continue to intensify as legislation is proposed or enacted which has the effect of dissolving historical barriers that limit participation in certain markets, increasing the cost of doing business for banks, or affecting the competitive balance between banks and other financial institutions. Technological and economic factors can also be expected to have an ongoing impact on competitive conditions. It is difficult to predict the impact that these and other changes may have in the future on commercial banking in general or on the business of the Bank in particular.
Correspondent Banks
The Bank has correspondent relationships with twelve banks for the purpose of check clearing, selling federal funds, buying and selling investment securities, safekeeping of investment securities and related record keeping, stock registration and stock transfer services, and issuance of letters of credit.
Employees
At December 31, 1996, the Company and the Bank employed 52 persons, consisting of 49 full-time and 3 part-time employees.
Regulatory Agreement and Orders
Federal Reserve Board Written Agreement
On December 16, 1994, the Company and the Federal Reserve Bank (the "FRB") entered into a Written Agreement (the "Agreement") that superseded the previous FRB directive dated April 20, 1992. The Agreement prohibits the Company, without prior approval of the FRB, from: (a) paying any cash dividends to its shareholders; (b) directly or indirectly, acquiring or selling any interest in any entity, line of business, problem or other assets; (c) executing any new employment, service, or severance contracts, or renewing or modifying any existing contracts with any executive officer; (d) engaging in any transactions with the Bank that exceeds an aggregate of $20,000 per month; (e) engaging in any cash expenditures with any individual or entity that exceeds $25,000 per month; (f) increasing fees paid to any directors for attendance at board or committee meetings, or paying any bonuses to any executive officers; (g) incurring any new debt or increasing existing debt; and (h) repurchasing any outstanding stock of the Company. The Company is required to submit a progress report to the FRB on a quarterly basis.
The Company was also required to submit to the FRB an acceptable written plan to improve and maintain an adequate capital position, a comprehensive business plan concerning current and proposed business activities, a comprehensive operating budget for the Bank and the consolidated Company, and an acceptable written plan designed to enhance the Board of Directors' supervision of the operations and management of the consolidated organization.
Management was notified by the FRB at its 1996 examination that the Company is in full compliance with the Agreement.
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Cease and Desist Orders
On August 18, 1993, the Bank, without admitting or denying any alleged charges, stipulated to Cease and Desist Orders (the "Orders") issued by the FDIC and the State Banking Department (the "SBD") that became effective August 29, 1993 (the "Orders Effective Date"). The Orders directed, among other things, that the Bank: (a) achieve and maintain a 7% leverage capital ratio on and after September 30, 1993; (b) pay no dividends without the prior written consent of the FDIC and the California Superintendent of Banks (the "Superintendent"); (c) reduce the $88.6 million in assets classified "Substandard" or "Doubtful" as of November 30, 1992 (the date of the then most recent full-scope FDIC and SBD Report of Examination of the Bank), to no more than $40.0 million by September 30, 1994; (d) have and retain management whose qualifications and experience are commensurate with their duties and responsibilities to operate the Bank in a safe and sound manner, notify the FDIC and the Superintendent at least 30 days prior to adding or replacing any new director or senior executive officer, and comply with certain restrictions in compensation of senior executive officers; (e) maintain an adequate reserve for loan losses; (f) not extend additional credit to, or for the benefit of, any borrower who had a previous loan from the Bank that was charged off or classified "Loss" in whole or in part; (g) develop and implement a plan to reduce its concentrations of construction and development loans; (h) not increase the amount of its brokered deposits above the amount outstanding on the Orders Effective Date ($20.0 million) and submit a written plan for eliminating reliance on brokered deposits; (i) revise or adopt, and implement, certain plans and policies to reduce the Bank's concentration of construction and land development loans, reduce the Bank's dependency on brokered deposits and out of area deposits, and to improve internal routines and controls; (j) reduce the Bank's volatile liability dependency ratio to not more than 15% by March 31, 1994; (k) eliminate or correct all violations of law set out in the most recent Report of Examination, and take all necessary steps to ensure future compliance with all applicable laws and regulations; and (l) establish a committee of three independent directors to monitor compliance with the Orders and report to the FDIC and the Superintendent on a quarterly basis.
As of December 31, 1996, management believes that the Bank is in substantial compliance with the requirements of the Orders. The Bank believes that the findings of the FDIC and SBD most recent examination which commenced on January 28, 1997 will be that the Bank is in substantial compliance with the requirements of the Orders; however, no Report of Examination has been received to date.
Capital Impairment Orders
Under California law, if a bank's deficit retained earnings exceed 40% of its contributed capital, its capital is deemed to be impaired, and the bank is required to levy an assessment on its shares to correct the impairment. The SBD has issued twelve impairment orders to the Bank, with the most recent dated February 14, 1997 (the "Impairment Orders"). At December 31, 1996, the Bank had contributed capital of $74.5 million and deficit retained earnings of $63.5 million.
The Impairment Orders require the Bank to correct the impairment within 60 days by levying an assessment on the Company as the Bank's sole shareholder. The Bank has not levied an assessment against its shares nor has it otherwise corrected the impairment, and, therefore, is in violation of this law. In addition, the SBD has specifically reserved the right to take such other action as the Superintendent may deem appropriate or necessary, which may include taking possession of the Bank's property and business, including ultimately liquidating the business and affairs of the Bank. Management believes, however, that the Superintendent has never exercised his bank takeover powers under Section 134 solely on the basis that a bank's capital is impaired under the standards set forth in Section 134.
The Company plans to correct the Bank's capital impairment by requesting the SBD to approve a quasi-reorganization of the Bank. In a quasi-reorganization, the Bank's retained deficit would be reduced or eliminated by netting the retained deficit against contributed capital. Management believes that approval for such a quasi-reorganization would only be granted by the SBD upon the Bank demonstrating the ability to sustain profitable operations and meet all of its regulatory capital requirements in the future.
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No assurance can be given that the Bank's capital condition will not deteriorate prior to any such quasi-reorganization as a result of operating losses. In addition, because a quasi- reorganization requires that the Bank adjust its assets and liabilities to market value at the time of the reorganization, the Bank's capital could be further reduced from its present level. Finally, there can be no assurance given that, following a correction of the Bank's capital impairment, whether through a quasi-reorganization or otherwise, the Bank's capital position will not erode through future operating losses. See "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation - Capital" for a discussion regarding the Company's and Bank's present capital condition.
Regulation and Supervision
Bank holding companies and banks are subject to extensive supervision and regulation. The following summaries of certain statutes and regulations affecting banks and bank holding companies do not purport to be complete. Such summaries are qualified in their entirety by reference to such statutes and regulations.
Various other legislation, including proposals to overhaul the bank regulatory system and to limit the investments that a depository institution may make with insured funds, is introduced into Congress from time to time and is presently pending at this time. The Company cannot determine the ultimate effect that any potential legislation, if enacted, would have upon the financial condition or operations of the Company and the Bank.
The Company
The Company, as a bank holding company, is subject to regulation under the U.S. Federal Bank Holding Company Act of 1956, as amended (the "Holding Company Act"), and is registered with and subject to the supervision of the FRB. It is the policy of the FRB that each bank holding company serve as a source of financial and managerial strength to its subsidiary banks and conduct its operations in a safe or sound manner.
The Holding Company Act generally restricts the Company from engaging in any business other than managing or controlling banks or furnishing services to its subsidiaries. Among the exceptions to such restrictions are certain activities which, in the opinion of the FRB, are so closely related to banking or to managing or controlling banks as to be a proper incident to banking. The Company also is generally prohibited from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any company unless that company is engaged in activities permissible for bank holding companies and the Company receives the prior approval of the FRB.
The Company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or provision of services. For example, with certain exceptions, the Bank is not permitted to condition an extension of credit on a customer obtaining other services provided by it or the Company, or on a promise by the customer not to obtain other services from a competitor of the Bank. The FRB is, however, becoming increasingly receptive to pricing discounts conditioned upon the Bank customer purchasing bundled groups of services. In addition, applicable federal law imposes certain restrictions on transactions between the Bank and its affiliates. As an affiliate of the Bank, the Company is subject, with certain exceptions, to the provisions of federal law imposing limitations on, and requiring collateral for, loans by the Bank to any affiliate.
The Holding Company Act also requires the Company to obtain the prior approval of the FRB before acquiring all or substantially all of the assets of any bank or ownership or control of the voting shares of any bank if, after giving effect to such acquisition, the Company would own or control, directly or indirectly, more than 5% of any class of voting shares of such bank.
Finally, the Company is subject to restrictions on its operations imposed by the Agreement. See "-- Regulatory Agreement and Orders -- Federal Reserve Board Written Agreement."
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The Bank
The Bank is a California state-chartered bank and is subject to regulation, supervision and periodic examination by the SBD and the FDIC. The Bank is not a member of the Federal Reserve System, but is nevertheless subject to certain regulations of the FRB. The Bank's deposits are insured by the FDIC to the maximum amount permitted by law, which is currently $100,000 per depositor in most cases.
The regulations of state and federal bank regulatory agencies govern most aspects of the Bank's business and operations, including but not limited to, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds, the payment of dividends, potential expansion, and the maximum rates of interest allowed on certain deposits.
The Bank is subject to the California banking laws and to regulation, supervision and periodic examination by the SBD. The California banking laws, among other matters, regulate: (a) the conduct of the banking business, including banking days, banking offices, preservation and disposal of records, borrowing by the bank and pledges of assets; (b) accounts, including types of deposit accounts and claims made thereon; (c) loans, including limitations on obligations to the bank by borrowers in general and by the bank's officers, directors and employees; and (d) mergers, consolidations and conversions of banks, including changes in control of banks.
California interstate banking and branching law allows the interstate acquisition of whole banks which have been in existence for more than five years and authorizes expanded correspondent bank agency relationships among affiliated and unaffiliated insured banks. This legislation may both increase competition and increase the number of buyers of California banking franchises.
The Federal Reserve Act and FRB regulations, some of which are applicable to state nonmember banks under regulations of the FDIC, place limitations and conditions on loans or extensions of credit to: a bank's or bank holding company's executive officers, directors and principal shareholders; any company controlled by any such executive officer, director or shareholder; or any political or campaign committee controlled by such executive officer, director or principal shareholder. Loans extended to any such persons must comply with loans-to-one-borrower limits, require prior full board approval when aggregate extensions of credit to such person exceed specified amounts, must be made on substantially the same terms (including interest rates and collateral) as, and following credit-underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with non-insiders, and must not involve more than the normal risk of repayment or present other unfavorable features.
FDIC regulations generally prohibit an insured state bank from directly engaging as principal in any activity that is not permissible for a national bank, and also prohibit majority-owned subsidiaries of an insured state bank from engaging in any activity that is not permissible for a subsidiary of a national bank, unless the bank meets and continues to meet applicable minimum capital standards and the FDIC determines that the conduct of the activity by the bank and/or its majority-owned subsidiary will not pose a significant risk to the deposit insurance funds.
These regulations also impose restrictions on real estate investments, requiring that undercapitalized banks with subsidiaries holding impermissible equity investments in real estate ceased such activity and divest the subsidiary or the real estate investments owned by the subsidiary. State banks also must obtain the prior consent of the FDIC before making real estate loans other than in compliance with guidelines established for national banks.
Securities activities of state non-member banks, as well as their subsidiaries and affiliates, are governed by FDIC regulations. The FDIC has issued guidelines to state non-member banks which recommend, among other things, establishing a compliance and audit program to monitor bank's mutual funds sales activities and compliance with applicable federal securities laws, providing full disclosure to customers about the risks of such investments (including the possibility of loss of principal investment), conducting securities activities of bank subsidiaries or affiliates in separate and distinct locations, and prohibiting bank employees involved in deposit-taking activities from selling investment products or from giving investment advice. Banks are also required to establish qualitative standards for the selection and marketing of the investments offered by the bank and maintain appropriate documentation regarding suitability of investments recommended to bank customers.
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In response to various business failures in the savings and loan industry and more recently in the banking industry, Congress enacted significant banking legislation entitled Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"). FDICIA primarily addresses the safety and soundness of the deposit insurance fund, supervision of and accounting by insured depository institutions and prompt corrective action by the federal bank regulatory agencies for troubled institutions. FDICIA gives the FDIC, in its capacity as federal insurer of deposits, broad authority to promulgate regulations to assure the viability of the deposit insurance fund including regulations concerning safety and soundness standards. FDICIA also places restrictions on the activities of state-chartered institutions and on institutions failing to meet minimum capital standards and provides enhanced enforcement authority for the federal banking agencies. FDICIA has strengthened FRB regulations regarding insider transactions.
FDICIA restricts the acceptance of brokered deposits by insured depository institutions that are not well capitalized. It also places restrictions on the interest rate payable on brokered deposits and the solicitation of such deposits.
FDICIA adds grounds to the previously existing list of reasons for appointing a conservator or receiver for an insured depository institution including but not limited to a substantial dissipation of assets or earnings due to an unsafe or unsound practice or any violation of law or regulation, any willful violation of a cease and desist order or concealment of assets or records, the likely inability of the institution to meet obligations in the normal course of business, or having substantially insufficient capital.
As required by FDICIA, the FDIC adopted a revised risk-based assessment system for deposit insurance premiums which became effective January 1, 1996. Under this system, depository institutions are charged between 0 and 27 basis points for every $100 in insured domestic deposits depending on such institution's capital level and supervisory rating. During 1996, as a part of the Budget Act to recapitalize the Savings Associations Insurance Fund, a surcharge was approved for the Financing Corporations (the "FICO") bonds which were issued to help fund the cost associated with the savings and loan crisis. Effective January 1, 1997, a surcharge will be assessed to repay the FICO bonds. The Bank believes that, in the absence of a change in applicable, it will be assessed an annual FICO surcharge of approximately .013% of average deposits from 1997 through 1999 and .0243% of average deposits from 2000 through 2017.
Pursuant to the requirements of FDICIA, recent FDIC and FRB regulations provide safety and soundness standards for insured non- member banks and bank holding companies. The Interagency Guidelines for Establishing Standards for Safety and Soundness set out a series of criteria for a financial institution's own policies, procedures, and systems in the areas of internal controls and information systems, internal audit systems, loan documentation, credit underwriting, and interest rate exposure. In addition, criteria are provided as to what may constitute excessive compensation.
In June 1996, the federal banking agencies adopted a joint agency policy statement to provide guidance on managing interest rate risk. The policy statement provides that the adequacy and effectiveness of a bank's interest rate risk management process and the level of its interest rate exposures are critical factors in the evaluation of the bank's capital adequacy. A bank with material weaknesses in its risk management process or high levels of exposure relative to its capital will be directed by the federal banking agencies to take corrective action. Such actions may include recommendations or directions to raise additional capital, strengthen management expertise, improve management information and measurement systems, reduce levels of exposure, or some combination thereof depending upon the individual institution's circumstances. This policy statement augments the August 1995 regulations adopted by the federal bank agencies which addressed risk-based capital standards for interest rate risk.
Capital Adequacy Requirements
FDICIA establishes five capital categories for insured depository institutions: (a) Well Capitalized; (b) Adequately Capitalized; (c) Undercapitalized; (d) Significantly Undercapitalized; and (e) Critically Undercapitalized. All insured institutions (i.e., the Bank) are barred from making capital distributions or paying management fees to a controlling person (i.e., the Company) if to do so would cause the institution to fall into any of the three undercapitalized categories.
FDICIA also provides that if a well or adequately capitalized or undercapitalized institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice, its capital category may be downgraded to achieve a higher level of regulatory scrutiny and prompt corrective action.
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Minimum Leverage Ratio. The FRB and the FDIC have established a minimum leverage ratio of 3% Tier 1 capital to total quarterly average assets for companies that have received the highest composite regulatory rating (a regulatory measurement of capital, assets, management, earnings and liquidity) and that are not anticipating or experiencing any significant growth. All other institutions may be required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum.
Risk-based Capital Ratio. The FRB and the FDIC have established regulations that require companies to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.00%. The risk-based capital ratio is calculated with reference to risk-weighted assets, including both on and off- balance sheet exposures, which are multiplied by certain risk weights as defined by regulation. At least one-half of the qualifying capital must be in the form of Tier 1 capital.
In certain circumstances, the agencies which regulate financial institutions may determine that the capital ratios for a financial institution must be maintained at levels which are higher than the minimum levels required by the guidelines. A financial institution that does not achieve and maintain the required capital levels may be issued a capital directive by the regulatory authorities to ensure the maintenance of required capital levels.
The Company and the Bank are in compliance with these capital adequacy requirements. See "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation - Capital" for a discussion regarding the Company's and Bank's present capital condition.
Prompt Corrective Action FDICIA amended the Federal Deposit Insurance Act (the "FDIA") to establish a format for closer monitoring of insured depository institutions and to enable prompt corrective action by regulators when an institution begins to experience difficulty. The general thrust of these provisions is to impose greater and earlier scrutiny and more restrictions on institutions as their requirements for additional capitalization increases. Undercapitalized institutions are subject to several mandatory supervisory actions, including increased monitoring and periodic review of the institution's efforts to restore its capital, submitting an acceptable capital restoration plan, restricted asset growth, and limits on acquisitions, new branches or new lines of business. A parent holding company of an undercapitalized bank is expected to guarantee that the bank will comply with the bank's capital restoration plan until the bank has been adequately capitalized, on the average, for four (4) consecutive quarters. Such guarantee is limited to the lesser of 5% of the bank's total assets at the time it became undercapitalized or the amount necessary to bring the bank into full capital compliance.
Significantly undercapitalized institutions and undercapitalized institutions that fail to submit and implement adequate capital restoration plans are subject to the mandatory provisions applicable to undercapitalized institutions and, in addition, may be required to: sell additional capital, including voting shares; restrict transactions with affiliates; restrict interest rates paid on deposits; restrict asset growth or reduce total assets; terminate, reduce or alter any risky activities; elect new directors and install new management; cease accepting deposits from correspondent depository institutions; or divest or liquidate certain subsidiaries. A bank holding company may be required to divest itself of any affiliate of the institution (other than another insured depository institution) under certain conditions.
In addition, significantly undercapitalized institutions will be prohibited from paying any bonus or raise to a senior executive officer without prior agency approval. No such approval will be granted to an institution which is required to but has failed to submit an acceptable capital restoration plan.
Critically undercapitalized institutions are required to enter into a written agreement to increase Tier I leverage capital to such level as the FDIC deems appropriate or the institution may be subject to termination of insurance action by the FDIC. The written agreement would require the immediate efforts by the institution to acquire the required capital.
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ITEM 2

ITEM 2 - PROPERTIES
The following table sets forth certain information concerning the Bank's sole real property lease commitment: Square Expiration of Renewal Banking Offices Footage Current Lease Period(s)
550 Montgomery Street 89,000 2010 One option for an additional San Francisco, CA 25 years
The Bank's headquarters at 550 Montgomery Street is an 89,000 square foot historically significant office building on Clay and Montgomery Streets in San Francisco's Financial District. The building serves as the administrative and banking headquarters of the Company and the Bank. The Bank currently subleases or has available for sublease 57,000 square feet.
During the third quarter of 1995, the Bank acquired all of the outside limited partnership interests in Bank of San Francisco Building Company (the "BSFBC") for a total of $3.3 million. The purchase price in excess of book value of $525,000 is being amortized over the life of the underlying lease, including extensions, through 2035 using the straight line method. Effective January 1, 1997, BSFBC was dissolved, and its assets, including its interest in the lease, and liabilities were assigned to the Bank. The Company's occupancy costs totaled $288,000 in 1996 a decline of $912,000 from $1.2 million in 1995. The Company's occupancy costs declined $921,000 in 1995 from $2.1 million in 1994. The declines were primarily the result of the acquisition of BSFBC in 1995 which enabled the Company to reduce facilities operating costs and increase sublease income.
The acquisition was accounted for by the purchase method. The Company's consolidated statement of condition and operating results include the operations of BSFBC beginning July 1, 1995. As of that date, the assets included leasehold improvements and leasehold interests totaling $5.5 million and cash equivalent investment securities totaling $1.3 million. The liabilities included other borrowings which were used to finance the acquisition of the leasehold interests in 1986. The borrowings were repaid on October 31, 1995.
As of December 31, 1996, the Company's premises and equipment, net of accumulated amortization and depreciation, is comprised of leasehold improvements totaling $5.3 million, lease interests totaling $1.8 million, premium paid to acquire BSFBC totaling $485,000, and furniture and equipment totaling $446,000.
ITEM 3

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

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1996 Annual Meeting (the "Annual Meeting") on December 18, 1996. Several matters were submitted to a vote of security holders at the Annual Meeting. The stockholders elected nine directors, authorized the amendment to the Certificate of Incorporation to increase the number of authorized shares of Common Stock to 100,000,000, authorized the conversion of the Series D Preferred Stock into Common Stock at a rate of 1 to 59, approved the Amended and Restated 1993 Stock Option Plan and the grant of options pursuant to such plan to certain directors, and ratified the Board of Directors' selection of KPMG Peat Marwick LLP, independent public accountants, as the independent accounting firm for the Company during the fiscal years ending December 31, 1997, 1996 and 1995. See Part III, Item 10 "Directors and Executive Officers of the Registrant".
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The following schedule sets forth each matter voted upon at the Annual Meeting and the number of votes casts for, against or withheld including a tabulation with respect to each nominee for director.
Proposal/Nominee Votes For Votes Against Votes Withheld/ Abstentions Proposal 1: Election of Directors James E. Gilleran 5,505,578 -- 1,919 Gordon B. Swanson 5,505,578 -- 1,919 Peter Foo 5,505,578 -- 1,919 Steven R. Champion 39,452 -- 5,078,045 Kent D. Price 5,504,953 -- 2,544 Nicholas Unkovic 5,505,578 -- 1,919 Jackson Schultz 5,505,578 -- 1,919 Willard D. Sharpe 5,505,578 -- 1,919 Gary Williams 5,505,578 -- 1,919 John McGrath 5,466,126 -- 1,919
Proposal 2: Authorize the increase of the number of authorized shares to 100,000,000 and the conversion of the Series D Preferred Stock. 5,505,388 1,926 183
Proposal 3: Approve of the Amended and Restated 1993 Stock Option Plan and the grant of options to certain directors pursuant to such plan. 5,499,466 7,633 398
Proposal 4: Ratify the selection of KPMG Peat Marwick LLP as the Company's independent accounting firm for 1995, 1996, and 1997. 5,507,309 83 105
PART II
ITEM 5

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Common Stock is traded over-the-counter. Van Kasper and Company of San Francisco, California is the sole market maker in the Company's Common Stock. Prior to April 12, 1995, the Company's Common Stock was traded on the American Stock Exchange (the "AMEX") under the symbol "SFH". The following table sets forth the high and low closing sale prices for the Common Stock on the AMEX from January 1994 to April 1995, and in the "over-the- counter" market from November 1995 to December 31, 1996.
1996 1995 Quarter High Low High Low
First $0.35 $0.34 $6.75 $4.50 Second (through April 12, 1995) 0.35 0.34 4.50 4.50 Third 0.35 0.34 -- -- Fourth 0.40 0.35 0.25 0.25
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None of the Company's preferred stock was listed on any exchange or traded in any other public market since 1988.
Holders
As of December 31, 1996, the number of holders of record of the Company's Common Stock and Series B Preferred Shares was 415 and eleven (11) , respectively, which management believes is in each case less than the number of actual beneficial owners because of the number of shares held by known nominees.
Dividends
The Company is subject to dividend restrictions pursuant to the Agreement, under the Delaware General Corporation Law and regulations, and policies of the FRB. The Company's Series B Preferred Shares participate equally, share for share, in cash dividends paid on the Common Shares in addition to receiving the cash dividends to which they are entitled. The Board of Directors suspended the dividend on the Common Shares and the Series B Preferred Shares. The Bank is subject to certain regulatory restrictions regarding payment of dividends to the Company as set forth in the California Financial Code. See "-- Regulatory Agreement and Orders" for a discussion of these restrictions.
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ITEM 6

ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data of the Company (derived from the audited consolidated financial statements of the Company) at and for the years ended December 31:
1996 1995 1994 1993 1992 (Dollars in Thousands except for per share data)
FINANCIAL CONDITION DATA: Total assets $104,001 $114,862 $156,780 $231,021 $319,155 Total loans 43,762 53,208 106,452 149,740 236,076 Total securities held-to-maturity 6,943 -- 7,859 5,078 3,683 Total securities available-for-sale 28,348 6,536 2,211 14,940 -- Total securities held-for-sale -- -- -- -- 18,731 Total deposits 91,166 105,673 147,148 210,111 285,685 Other borrowings -- -- 4,070 1,303 15,308 Shareholders' equity 11,064 6,880 2,129 17,455 15,676
OPERATING DATA: Total interest income $ 7,242 $ 10,691 $ 12,651 $ 18,155 $ 23,885 Total interest expense 3,127 4,415 4,863 7,420 11,295 Net interest income 4,115 6,276 7,788 10,735 12,590 Provision for loan losses -- 500 3,799 3,554 9,828 Net interest income after provision for loan losses 4,115 5,776 3,989 7,181 2,762 Total non-interest income 1,657 2,521 2,135 4,497 4,368 Total non-interest expense 5,328 7,808 39,018 21,764 29,697 Income (loss) before taxes 444 489 (32,894) (10,086) (22,567) Provision (benefit) for income taxes (258) 153 142 169 (390) Net income (loss) $ 702 $ 336 $(33,036) $(10,255) $(22,177)
OTHER DATA: Return on average assets 0.7% 0.3% (16.8)% (3.5)% (6.2)% Return on average equity 7.9 6.8 (183.0) (57.5) (153.0) Average equity to average assets 8.3 3.7 9.2 6.1 4.1 Equity to assets at period end 10.6 6.0 1.4 7.6 4.9 Interest rate spread for period 3.7 4.3 5.0 4.4 4.6 Net interest margin 4.4 5.0 5.1 4.6 4.5 Non-performing assets to total assets 8.2 13.1 12.8 18.8 16.8 Average interest-earning assets to average interest- bearing liabilities 119.3 121.5 105.1 103.5 96.6 Non-interest expenses to average assets 5.0 6.0 19.8 7.6 8.9 Net interest income, after provision for loan losses, to non-interest expense 77.3 72.2 10.2 32.4 9.2 Net loan charge-offs as a percent of average loans 0.6 1.4 4.4 2.0 3.9 Allowance for loan losses as a percent of loans 12.9 11.1 6.2 5.4 3.6
PER SHARE DATA: Common shares outstanding, end of period 28,775,995 5,765,978 5,766,008 444,990 445,100 Preferred shares outstanding, end of period 15,869 231,291 16,291 916,591 316,591
Common Shares: Book value per common share $0.38 $0.43 $0.37 $(1.60) $21.60 Income (loss) per weighted average common share Primary 0.12 0.05 (10.73) (23.00) (83.60) Fully diluted 0.03 0.03 (10.73) (23.00) (83.60)
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ITEM 7

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion relates to information about the financial condition and results of operations of the Company and the Bank that might not otherwise be apparent from a review of the financial statements contained under ITEM 8

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Financial Condition, December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Operations, . . . . . . . . . . . . . . . . . 31 Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity,. . . . . . . 32 Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows, . . . . . . . . . . . . . . . . . 33 Years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 35
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REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of The San Francisco Company:
We have audited the accompanying consolidated statements of financial condition of The San Francisco Company and subsidiaries (the "Company") as of December 31, 1996 and 1995 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The San Francisco Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
February 21, 1997 San Francisco, California
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The San Francisco Company Consolidated Statements of Financial Condition December 31, 1996 and 1995
(Dollars in Thousands Except Per Share Data) Notes 1996 1995
Assets: Cash and due from banks $ 3,701 $ 4,814 Federal funds sold 11,925 38,000 Cash and cash equivalents 15,626 42,814
Investment securities held-to-maturity (Market value: 1996 - $6,848) 3 6,943 -- Investment securities available-for-sale 3 28,348 6,536 Federal Home Loan Bank stock, at par 3 670 632
Loans 4 43,762 53,208 Deferred loan fees 4 (190) (180) Allowance for loan losses 5 (5,663) (5,912) Loans, net 37,909 47,116
Other real estate owned 6 5,133 7,514 Real estate investments -- 236 Premises and equipment, net 7 8,059 8,689 Interest receivable 7 58 527 Other assets 555 798 Total assets $104,001 $114,862
Liabilities and Shareholders' Equity: Non-interest bearing deposits $ 16,505 $ 20,365 Interest bearing deposits 74,661 85,308 Total deposits 8 91,166 105,673
Other borrowings 9 -- -- Other liabilities and interest payable 1,771 2,309 Total liabilities 92,937 107,982
Commitments and contingencies 15
Shareholders' Equity: 11 Preferred stock (par value $0.01 per share) Series B - Authorized - 437,500 shares Issued and outstanding - 1996 - 15,869 and 1995 - 16,591 shares 111 114 Series D - Authorized - 750,000 shares Issued and outstanding - 1995 - 215,000 -- 4,300 Common stock (par value $0.01 per share) Class A - Authorized - 100,000,000 shares Issued and outstanding - 1996 - 28,775,995 and 1995 - 5,765,978 shares 288 58 Additional paid in capital 77,841 70,168 Retained deficit (67,099) (67,801) Unrealized (loss) gain on securities available-for-sale (77) 41 Total shareholders' equity 11,064 6,880 Total liabilities and shareholders' equity $104,001 $114,862
The accompanying notes are an integral part of the consolidated financial statements.
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The San Francisco Company Consolidated Statements of Operations Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands Except Per Share Data) Notes 1996 1995 1994
Interest income: Loan $ 4,242 $ 8,452 $11,258 Fed funds sold 1,248 1,771 702 Investments 1,714 423 627 Dividends 38 45 64 Total interest income 7,242 10,691 12,651
Interest expense: Deposits 8 3,124 4,244 4,694 Other borrowings 3 171 169 Total interest expense 3,127 4,415 4,863
Net interest income 4,115 6,276 7,788 Provision for loan losse 5 -- 500 3,799 Net interest income after provision for loan losses 4,115 5,776 3,989
Non-interest income: Stock option commissions and fees 1,201 1,486 1,562 Service charges and fees 444 629 799 Other income 14 175 295 Results of operations from limited partnership 16 -- 48 (264) Loss on sale of investment securities, net -- -- (279) Gain (loss) on sale of assets, net (2) 183 22 Total non-interest income 1,657 2,521 2,135
Non-interest expense: Salaries and related benefits 3,252 4,279 7,330 Professional fees 499 876 3,071 Equipment expense 345 417 564 Insurance premiums 319 374 189 Data processing 304 526 439 Occupancy expense 7 288 1,200 2,121 FDIC insurance premiums 204 457 633 Litigation settlement and reserve 200 (158) 3,601 Telephone 104 116 155 Marketing 58 86 369 Other operating expenses 248 559 1,419 Total operating expenses 5,821 8,732 19,891
Net (income from) cost of real estate operations
( 493) (924) 19,127 Total non-interest expense 5,328 7,808 39,018 Income (loss) before income taxes 444 489 (32,894) Provision (benefit) for income taxes 10 (258) 153 142 Net Income (loss) $ 702 $336 $(33,036)
Income (loss) per share: Primary: Weighted average shares outstanding 5,829,035 5,765,985 3,078,303 Net income (loss) $0.12 $0.05 $(10.73) Fully diluted: Weighted average shares outstanding 23,773,101 9,411,046 3,078,303 Net income (loss) $0.03 $0.03 $(10.73)
The accompanying notes are an integral part of the consolidated financial statements.
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The San Francisco Company Consolidated Statements of Changes in Shareholders' Equity Years Ended December 31, 1996, 1995 and 1994
Unrealized (Dollars in Thousand) Employee Gain Purchase (Loss) on Total Additional and Securities Share- Preferred Common Paid-in Retained Option Available- Holders Stock Stock Capital Deficit Plans for-Sale Equity
Balances at January 1, 1994
$ 18,116 $ 4 $34,662 $ (35,101) $ (166) $ (60) $17,455
Net change in employee stock ownership plans
-- -- -- -- 96 -- 96
Conversion of preferred stock to common stock
(18,002) 18 17,984 -- -- -- --
Net proceeds from sale of stock
-- 36 17,524 -- -- -- 17,560
Redemption of fractional shares
-- -- (2) -- -- -- (2)
Appreciation in market value of securities available-for-sale
-- -- -- -- -- 56 56
Net loss
-- -- -- (33,036) -- -- (33,036)
Balances at December 31, 1994
114 58 70,168 (68,137) (70) (4) 2,129
Net change in employee stock ownership plans
-- -- -- -- 70 70
Net proceeds from sale of stock
4,300 -- -- -- -- 4,300
Appreciation in market value of securities available-for-sale
-- -- -- -- -- 45 45
Net income
-- -- -- 336 -- -- 336
Balances at December 31, 1995
4,414 58 70,168 (67,801) -- 41 6,880
Net proceeds from sale of stock
3,500 -- -- -- -- -- 3,500
Conversion of preferred stock to common stock
(7,803) 230 7,573 -- -- -- --
Other
-- -- 100 -- -- -- 100
Unrealized loss on securities available-for-sale
-- -- -- -- -- (118) (118)
Net income
-- -- -- 702 -- -- 702
Balances at December 31, 1996
$ 111 $ 288 $77,841 $(67,099) $ -- $ (77) $ 11,064
The accompanying notes are an integral part of the consolidated financial statements.
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The San Francisco Company Consolidated Statements of Cash Flows For the Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands) 1996 1995 1994
Cash Flows from Operating Activities: Net income (loss) $ 702 $ 336 $(33,036) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses -- 500 3,799 Depreciation and amortization expense 671 581 660 Net gain on sale of real estate owned and investment (643) (2,058) (190) Provision for other real estate owned and real estate investment -- 506 17,074 Loss on sale of investment securities available for sale -- -- 265 Loss on sale of investment securities held-to-maturity prior to maturity -- -- 14 Decrease in interest receivable and other assets 12 532 1,291 (Decrease) increase in other liabilities and interest payable (438) (1,055) 1,283 Increase (decrease) in deferred loan fees 10 (208) (162) Net cash flows provided by (used in) operating activities 314 (866) (9,002)
Cash Flows from Investing Activities: Proceeds from maturities of investment securities held-to-maturity 865 7,859 7,516 Redemption of Federal Home Loan Bank stock, net -- 705 2,344 Purchase of investment securities held-to-maturity (7,846) -- (12,719) Proceeds from sales of investment securities available-for-sale -- -- 19,402 Purchase of investment securities available-for-sale (29,321) (8,414) (8,492) Proceeds from maturities of investment securities available-for-sale 7,390 4,134 1,610 Capital expenditures for real estate owned -- (855) (575) Net decrease in loans 7,422 49,132 39,101 Recoveries of loans previously charged off 397 1,707 1,347 Acquisition of leasehold interest -- BSFBC -- (4,471) -- Purchases of premises and equipment (41) (120) (64) Proceeds from sales of real estate owned and investment 4,639 6,601 4,890 Net cash (used in) provided by investing activities (16,495) 56,278 54,360
Cash Flows from Financing Activities: Net decrease in deposits (14,507) (41,475) (62,963) Net (decrease) increase in other borrowings -- (4,070) 2,859 Net proceeds from sale of preferred stock 3,500 4,300 -- Net proceeds from sale of common stock -- -- 17,560 Net cash used in financing activities (11,007) (41,245) (42,544)
(Decrease) increase in cash and cash equivalents (27,188) 14,167 2,814 Cash and cash equivalents at beginning of year 42,814 28,647 25,833 Cash and cash equivalents at end of year $15,626 $42,814 $28,647
The accompanying notes are an integral part of the consolidated financial statements. (continued)
The San Francisco Company Consolidated Statements of Cash Flows For the Years Ended December 31, 1996, 1995 and 1994 (continued)
(Dollars in Thousands) 1996 1995 1994
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for: Interest $ 3,167 $ 4,450 $5,006 Income taxes 5 153 142
Supplemental Schedule of Noncash Investing and Financing
Activities:
Net transfer of loans to other real estate owned 1,378 1,197 587
The accompanying notes are an integral part of the consolidated financial statements.
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The San Francisco Company Notes to Consolidated Financial Statements December 31, 1996 and 1995
Note 1: Statement of Accounting Policies
The accounting and reporting policies of The San Francisco Company (the "Company") and its subsidiaries are in accordance with generally accepted accounting principals and practices within the banking industry.
Organization
The Company is a Delaware corporation and a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was organized in 1981 under the laws of the State of California, and in July, 1988, the Company reincorporated in Delaware. Bank of San Francisco (the "Bank"), a state chartered bank, was organized as a California banking corporation in 1978 and became a wholly owned subsidiary of the Company through a reorganization in 1982. The Bank specializes in providing private banking and business banking for such professional individuals, their business and other business primarily in the Northern California banking market. The Bank's wholly owned subsidiary, Bank of San Francisco Realty Investors (the "BSFRI"), invested in real estate investment properties from 1985 to 1996. During 1996, BSFRI disposed of all of its real estate investment properties.
Prior to 1995, the Bank and BSFRI had partnership interests of 34.5% and 2.5%, respectively, in Bank of San Francisco Building Company (the "BSFBC"), a California limited partnership which holds the leasehold interest in the Company's headquarters building located at 550 Montgomery Street, San Francisco, California. During 1995, the Bank acquired 100% of the outside limited partnership interests in BSFBC.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company, the Bank, and the Bank's wholly owned subsidiary, BSFRI. BSFRI is no longer active in real estate investment activities.
During 1995, the Bank acquired controlling interest in BSFBC. The Consolidated Statement of Financial Condition includes the accounts of BSFBC as of December 31, 1996 and 1995, and the Consolidated Statements of Operations and Cash Flow include the accounts of BSFBC beginning July 1, 1995, approximately the date of acquisition. All material intercompany transactions have been eliminated in consolidation. Prior to the acquisition, the Company accounted for its investment in BSFBC using the equity method. BSFBC was dissolved effective January 1, 1997 and all of its assets and liabilities were assumed by the Bank.
Cash and Cash Equivalents and Statements of Cash Flows
Cash equivalents are defined as short-term, highly liquid investments both readily convertible to known amounts of cash and so near maturity that there is insignificant risk of change in value because of changes in interest rates. Generally, only investments with maturities of three months or less at the time of purchase qualify as cash equivalents. Cash and cash equivalents include cash and due from banks, time deposits with other financial institutions, and Federal funds sold.
The Bank is required to maintain non-interest bearing cash reserves equal to a percentage of certain deposits. In 1996 and 1995, the average reserve balances outstanding were $1.0 million and $1.5 million, respectively. Generally, the Bank does not maintain compensating balance arrangements.
Investment Securities
The Company classifies its debt and equity securities into one of two categories; held-to-maturity or available-for-sale. The investments classified as held-to-maturity are carried at amortized cost because management has both the intent and ability to hold these investments to maturity. Investments classified as available-for-sale are carried at fair value with any unrealized gains and loss included as a separate component of shareholders' equity.
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Investment securities include both debt and equity securities. Any discounts or premiums are accreted or amortized to income over the expected term of the investment considering prepayment assumptions, if applicable. Discounts or premiums are adjusted periodically to reflect actual prepayment experience. The gain or loss on all investment securities sold is determined based on the specific identification method. The estimated fair value is based on quoted market prices and/or third party dealer quotes.
Loans Receivable
Loans are stated at the principal amount outstanding, net of the allowance for loan losses, deferred fees and unearned discount, if any. The Bank holds loans receivable primarily for investment purposes. A significant portion of the Bank's loan portfolio is comprised of adjustable rate loans.
Interest on loans is calculated using the simple interest method on the daily balances of the principal amount outstanding. The accrual of interest is discontinued and any accrued and unpaid interest is charged against current income when the payment of principal or interest is 90 days past due, unless the loan is well-secured and in the process of collection. When the ability to fully collect non-accrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected. Generally, loans with temporarily impaired values and loans to borrowers experiencing financial difficulties are placed on non-accrual status even though the borrowers continue to repay the loans as scheduled. Interest received on such loans is recognized as interest income when received. A non-accrual loan is restored to an accrual basis when principal and interest payments are being paid currently and full payment of principal and interest is probable.
Loan Fees
The Bank charges nonrefundable fees for originating loans. Loan origination fees, net of the direct costs of underwriting and closing the loans, are deferred and amortized to interest income using the interest method. Unamortized net fees and costs on loans sold or paid in full are recognized as income. Other loan fees and charges, which represent income from delinquent payment charges, and miscellaneous loan services, are recognized as interest income when collected.
Allowance for Loan Losses
The Company records a provision for estimated losses on loans receivable considering both specifically identified problem loans and credit risks not specifically identified in the loan portfolio. The allowance for loan losses takes into consideration numerous factors including the financial condition of the borrowers, the fair value of the collateral prior to the anticipated date of sale, collateral concentrations and past loss experience. These allowances are subjective and may be adjusted in the future depending on economic conditions. In addition, regulatory examiners may require the Company to provide additional allowances based on their judgements of the information regarding problem loans and credit risks available to them at the time of their examinations.
Losses are recognized as charges to the allowance when the loan or a portion of the loan is considered uncollectible or at the time of foreclosure. Recoveries on loans receivable previously charged off are credited to allowance for loan losses.
Premises and Equipment
Premises and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation on furniture, fixtures and equipment is computed on the straight-line method over the estimated useful life of each type of asset. Estimated useful lives are from three to seven years. Leasehold improvements are amortized over the term of the applicable lease, including lease extensions, or their estimated useful life, whichever is shorter.
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Other Real Estate Owned
Other real estate owned (the "OREO") includes loans receivable that have been repossessed in settlement of debt (foreclosures). At the date of transfer, OREO is recorded at fair value net of estimated selling costs.
The Company provides a charge against current earnings for estimated losses on foreclosed property when the carrying value of the property exceeds its fair value net of estimated selling expenses. The Bank obtains an appraisal or market valuation analysis on all other real estate owned. If the periodic valuation indicates a decline in the fair value below recorded carrying value, an allowance for OREO losses is established. Fair value is based on current market conditions, appraisals, and estimated sales values of similar properties.
Impairment of Long-lived Assets
Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards (the "SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes indicate that the carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying value of an asset to future net cash flows expected to be generated by that asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets.
As of December 31, 1996, the Company determined that no events or changes occurred during 1996 that would indicate that the carrying value of any long-lived assets may not be recoverable. Adoption of this statement did not have any impact on the Company's financial position, results of operations or liquidity.
Income Taxes
The Company uses the asset and liability method to account for income taxes. Under such method, deferred tax assets and liabilities are recognized for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (temporary differences). Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period of enactment.
The Company has provided a valuation allowance for net deferred tax assets because an estimate of the utilization of the underlying benefits cannot be determined.
Stock-based Compensation
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 permits a company to choose either a new fair value based method of accounting for its stock-based compensation (stock options) or the current Accounting Principles Board (the "APB") Opinion No. 25 intrinsic value based method of accounting for its stock-based compensation. SFAS No. 123 requires pro-forma disclosures of net income and earnings per share computed as if the fair value based method had been applied in financial statements of companies that continue to follow APB No. 25. The Company has elected to use the current APB No. 25 intrinsic value based method of accounting for its stock-based compensation and to disclose its stock-based compensation in accordance with SFAS No. 123.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishing of Liabilities" which provides guidance for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 is effective January 1997 and is to be applied prospectively. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125", which defers certain provisions of SFAS No. 125 for one year. Management does not expect that the adoption of SFAS No. 125 or No. 127 will have a material impact on the Company's financial condition.
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Non-Interest Income
Fees for other customer services represent fees earned for the brokerage of certificates of deposit and escrow services, and commissions earned in connection with the Bank's stock option lending program and other banking services. Fees for services are recorded as income when the services are performed.
Earnings (loss) per Share
Primary earnings (loss) per share is calculated using the weighted average number of common shares outstanding divided into net income (loss). In 1995 and 1996, fully diluted earnings per share is calculated using the weighted average number of shares outstanding assuming the common stock equivalent of the Series D Preferred Stock divided into net income. In 1994, the conversion of certain preferred stock were included in the calculation of loss per share effective from the date of conversion, but were not considered common stock equivalent securities prior to conversion as the effect was anti-dilutive and options were not included in the calculations as they did not have a dilutive effect.
Use of Estimates
The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of recognized and contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in the prior years' consolidated financial statements to conform to the current year presentation.
Note 2: Regulatory Orders
The Company
On December 16, 1994, the Company and the Federal Reserve Bank of San Francisco (the "FRB") entered into a Written Agreement (the "Agreement"). The Agreement prohibits the Company, without prior approval of the FRB, from: (a) paying any cash dividends to its shareholders; (b) directly or indirectly, acquiring or selling any interest in any entity, line of business, problem or other assets; (c) executing any new employment, service, or severance contracts, or renewing or modifying any existing contracts with any executive officer; (d) engaging in any transactions with the Bank that exceeds an aggregate of $20,000 per month; (e) engaging in any cash expenditures with any individual or entity that exceeds $25,000 per month; (f) increasing fees paid to any directors for attendance at board or committee meetings, or paying any bonuses to any executive officers; (g) incurring any new debt or increasing existing debt; and (h) repurchasing any outstanding stock of the Company. The Company is required to submit a progress report to the FRB on a quarterly basis.
The Company was also required to submit to the FRB an acceptable written plan to improve and maintain adequate capital position, a comprehensive business plan concerning current and proposed business activities, a comprehensive operating budget at the Bank and the consolidated organization, and an acceptable written plan designed to enhance Board supervision of the operations and management of the consolidated organization. The Company has filed all of the required submissions with the FRB in accordance with the Agreement. The FRB confirmed the Company's full compliance with the Agreement at its 1996 examination.
The Bank
Orders to Cease and Desist
On August 18, 1993, the Bank stipulated to Orders to Cease and Desist (the "Orders") issued jointly by the Federal Deposit Insurance Corporations (the "FDIC") and the State Banking Department (the "SBD"), whereby the Bank agreed to correct alleged unsafe and unsound practices disclosed in the FDIC and SBD Reports of Examination as of November 30, 1992.
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The Orders, which became effective on August 29, 1993, require that the Bank: (a) achieve and maintain a 7% leverage capital ratio on and after September 30, 1993; (b) pay no dividends without the prior written consent of the FDIC and the California Superintendent of Banks (the "Superintendent"); (c) reduce the $88.6 million in assets classified "Substandard" or "Doubtful" as of November 30, 1992 (the date of the most recent full-scope FDIC and SBD Report of Examination of the Bank), to no more than $40.0 million by September 30, 1994; (d) have and retain management whose qualifications and experience are commensurate with their duties and responsibilities to operate the Bank in a safe and sound manner, notify the FDIC and the Superintendent at least 30 days prior to adding or replacing any new director or senior executive officer and comply with certain restrictions in compensation of senior executive officers; (e) maintain an adequate reserve for loan losses; (f) not extend additional credit to, or for the benefit of, any borrower who had a previous loan from the Bank that was charged off or classified "Loss" in whole or in part; (g) develop and implement a plan to reduce its concentrations of construction and development loans; (h) not increase the amount of its brokered deposits above the amount outstanding on the Orders Effective Date ($20.0 million) and submit a written plan for eliminating reliance on brokered deposits; (i) revise or adopt, and implement, certain plans and policies to reduce the Bank's concentration of construction and land development loans, reduce the Bank's dependency on brokered deposits and out of area deposits, and to improve internal routines and controls; (j) reduce the Bank's volatile liability dependency ratio to not more than 15% by March 31, 1994; (k) eliminate or correct all violations of law set out in the most recent Report of Examination, and take all necessary steps to ensure future compliance with all applicable laws and regulations; and (l) establish a committee of three independent directors to monitor compliance with the Orders and report to the FDIC and the Superintendent on a quarterly basis.
As of December 31, 1996, management believes that the Bank is in substantial compliance with the requirements of the Orders. The Bank believes that the findings of the FDIC and SBD most recent examination which commenced January 28, 1997 will be that the Bank is in substantial compliance with the requirements of the Orders; however, no Report of Examination has been received to date.
Impairment Orders
Under California law, if a bank's deficit retained earnings exceed 40% of its contributed capital, its capital is deemed to be impaired, and the bank is required to levy an assessment on its shares to correct the impairment. The SBD has issued twelve impairment orders to the Bank, with the most recent dated February 14, 1997 (the "Impairment Orders"). At December 31, 1996, the Bank had contributed capital of $74.5 million and deficit retained earnings of $63.5 million.
The Impairment Orders require the Bank to correct the impairment within 60 days by levying an assessment on the Company as the Bank's sole shareholder. The Bank has not levied an assessment against its shares nor has it otherwise corrected the impairment, and, therefore, is in violation of this law. In addition, the SBD has specifically reserved the right to take such other action as the Superintendent may deem appropriate or necessary, which may include taking possession of the Bank's property and business, including ultimately liquidating the business and affairs of the Bank.
The Company plans to correct the Bank's capital impairment by requesting the SBD to approve a quasi-reorganization of the Bank. In a quasi-reorganization, the Bank's retained deficit would be reduced or eliminated by netting the retained deficit against contributed capital. Management believes that approval for such a quasi-reorganization would only be granted by the SBD upon the Bank demonstrating the ability to sustain profitable operations and meet all of its regulatory capital requirements in the future.
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No assurance can be given that the Bank's capital condition will not deteriorate prior to any such quasi-reorganization as a result of operating losses. In addition, because a quasi- reorganization requires that the Bank adjust its assets and liabilities to market value at the time of the reorganization, the Bank's capital could be further reduced from its present level. Finally, there can be no assurance given that, following a correction of the Bank's capital impairment, whether through a quasi-reorganization or otherwise, the Bank's capital position will not erode through future operating losses.
Note 3: Investment Securities
The amortized cost and estimated market values of investment securities held-to-maturity at December 31 are as follows:
Amortized Unrealized Unrealized Market (Dollars in Thousands) Cost Gains Losses Value
1996: Mortgage-backed securities $6,943 $ -- $ (95) $6,848 Total $6,943 $ -- $ (95) $6,848
The amortized cost and estimated market values of investment securities available-for-sale at December 31 are as follows:
Amortized Unrealized Unrealized Market (Dollars in Thousands) Cost Gains Losses Value 1996: Adjustable rate mortgage- backed securities $ 4,746 $24 -- $ 4,770 U.S. Treasury and agency securities 23,679 -- $101 23,578 Total $28,425 $24 $101 $28,348
1995: U.S. Treasury and agency securities $6,495 $ 41 $ -- $6,536 Total $6,495 $ 41 $ -- $6,536
For 1996 and 1995, the Company included a net unrealized loss of $77,000 and an unrealized gain of $41,000, respectively, as a separate component of stockholders' equity. During 1996 and 1995, the Company recorded no gains or losses on sale of investment securities.
As of December 31, 1996 and 1995, the Bank's investment in Federal Home Loan Bank (the "FHLB") stock totaled $670,000 and $632,000 and is stated at par. During 1995, the Bank redeemed 7,500 shares at $750,000. The FHLB stock has no term to maturity.
The amortized cost and estimated market value of securities at December 31, 1996 by contractual maturity, are shown below: Securities Available Securities for Sale Held to Maturity Amortized Estimated Amortized Estimated (Dollars in Thousands) Cost Market Value Cost Market Value
1 year or less $ 1,999 $ 2,003 $ -- $ -- 1 to 5 years 21,680 21,575 -- -- subtotal 23,679 23,578 -- -- Mortgage-backed securities 4,746 4,770 6,943 6,848 Total $28,425 $28,348 $6,943 $6,848
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The average yield on investments securities was 6.0% and 6.1% during 1996 and 1995, respectively. The U.S. Treasury and agency securities held by the Company had effective maturities of less than three years. Expected maturities of mortgage-backed securities can differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties. Factors such as prepayments and interest rates may affect the yield and carrying value of mortgage-backed and callable agency securities. As of December 31, 1996 and 1995, the Company had no derivative financial instruments.
At December 31, 1996 and 1995, $810,000 and $1.4 million, respectively, of securities were pledged as collateral for treasury, tax, loan deposits, public agency, bankruptcy and trust deposits. At December 31, 1996 and 1995, the Company had no securities sold under agreements to repurchase.
Note 4: Loans Receivable
The Bank's loan portfolio at December 31 is summarized as follows:
(Dollars in Thousands) 1996 1995
Real estate mortgage $28,022 $37,049 Secured commercial and financial 6,229 7,379 Unsecured 7,800 7,604 Other 1,711 1,176 Total loans 43,762 53,208 Deferred fees (190) (180) Allowance for loan losses (5,663) (5,912) Total loans, net $37,909 $47,116
At December 31, 1996 and 1995, non-accrual loans totaled $3.4 million and $7.5 million, respectively, and there were no loans past due 90 days or more and still accruing. For the years ended December 31, 1996, 1995 and 1994, interest income foregone on non- accrual loans was $29,000, $177,000, and $918,000, respectively. Restructured loans totaled $4.1 million and $5.9 million at December 31, 1996 and 1995, respectively. For the years ended December 31, 1996, 1995 and 1994, interest income foregone on restructured loans were zero, $24,000 and $18,000, respectively.
There were $9.3 million of fixed rate loans at December 31, 1996 with a weighted average yield of 9.0%. Total fixed rate loans, most of which will mature within eight years, comprised approximately 21% of the Bank's loan portfolio at December 31, 1996.
Effective January 1, 1995, the Company adopted SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan- Income Recognition and Disclosures". In accordance with SFAS No. 114, a loan is considered impaired when, based on certain events and information, it is "probable" that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. At December 31, 1996, the Company measured the impairment of all impaired loans, totaling $3.4 million, using the collateral value method, and, at December 31, 1995, measured the impairment of $7.2 million using the collateral value method and $307,000 using the discounted cashflow method. For the year ended December 31, 1996 and 1995, the weighted average impaired loans outstanding was $3.7 million and $16.6 million, respectively. Total interest recognized on impaired loans during 1996 and 1995 was $170,000 and $430,000, respectively. At December 31, 1996 and 1995, the allowance for loan loss related to impaired loans totaled $717,000 and $1.1 million, respectively.
The Company makes loans secured by real estate, which are principally located in Northern California. At December 31, 1996, loans secured by deeds of trust on property located in these areas represented 98% of the Bank's real estate collateralized loans. The primary source of repayment of real estate loans is the borrower's or property's debt service capacity while the secondary source of repayment is the underlying real estate collateral.
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Note 5. Allowance for Loan Losses
Changes in the Company's allowance for loan losses for the years ended December 31 were as follows:
(Dollars in Thousands) 1996 1995 1994
Balances at beginning of the year $5,912 $6,576 $8,050 Provision for loan losses -- 500 3,799 Loans charged off (646) (2,871) (6,620) Recoveries of loans charged off 397 1,707 1,347 Balances at end of the year $5,663 $5,912 $6,576
Note 6: Other Real Estate Owned
Other real estate owned at December 31 consist of the following:
(Dollars in Thousands) 1996 1995
Real Estate: Residential $ -- $ 399 Residential development 2,313 4,134 Commercial development 1,758 1,808 Raw land 10,173 13,164 Subtotal 14,244 19,505 Allowance for losses (9,111) (11,991) Total $5,133 $7,514
As of December 31, 1996, the largest single property totaled $2.6 million, net.
The following table summarizes the other real estate owned loss experience of the Bank for the periods shown:
(Dollars in Thousands) 1996 1995 1994
Balance of allowance for losses - beginning $11,991 $ 19,404 $ 2,986 Charge-offs (2,880) (7,500) (33) Provision -- 87 16,451 Balance of allowance for losses - ending $9,111 $11,991 $ 19,404
Note 7: Premises and Equipment
Premises and equipment at December 31 consist of the following:
(Dollars in Thousands) 1996 1995
Leasehold $ 3,701 $ 3,741 Leasehold improvements 8,503 8,482 Furniture and equipment 1,534 5,187 Subtotal 13,738 17,410 Less: Accumulated depreciation and amortization (5,679) (8,721) Total $ 8,059 $ 8,689
During 1996, the Company disposed of certain fully depreciated unused furniture and equipment with an original cost of $3.6 million. The amount of depreciation and amortization included in non-interest expense was $671,000, $581,000, and $660,000 in 1996, 1995 and 1994, respectively. Total rental and other occupancy expenses net of sublease income for the Company's premises were $288,000, $1.2 million and $2.1 million in 1996, 1995 and 1994.
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At December 31, 1996, the approximate future minimum rental payments under a non-cancelable operating lease, with a remaining term of fourteen years, for the Company's premise are as follows:
(Dollars in Thousands) Amount
1997 $ 134 1998 134 1999 134 2000 134 2001 134 Thereafter 1,184 Total $ 1,854
The lease payment is fixed until the expiration of the lease on October 31, 2010. During 1996, 1995 and 1994, the Company received $877,000, $435,000 and $169,000 of sublease income, respectively. The total future minimum rent payments to be received under noncancellable operating subleases at December 31, 1996 were approximately $600,000. These payments are not reflected in the above table.
Note 8: Deposits
Deposit balances and average interest rates paid by the Bank at December 31 are as follows:
1996 1995 Average Average (Dollars in Thousands) Balance Rate Balance Rate
Demand deposit accounts $ 16,505 0.0% $ 20,365 0.0% Savings and NOW accounts 19,638 2.1 25,411 2.4 Money market accounts 17,376 2.1 16,185 2.8 Time accounts 37,647 5.8 43,712 6.1 Total $91,166 3.2% $105,673 3.5%
Total deposit balances averaged $98.1 million and $125.1 million during 1996 and 1995, respectively, with average interest rates of 3.2% and 3.5%, respectively. The weighted average stated rates on deposits as of December 31, 1996 and 1995 were 3.2% and 3.5%, respectively.
Domestic time deposits in amounts of $100,000 or more by time remaining to maturity at December 31 are as follows:
(Dollars in Thousands) 1996 1995
Three months or less $ 4,490 $ 3,157 Three months to six months 2,699 1,371 Six months to one year 904 1,373 Between one and two years 400 515 Total $ 8,493 $ 6,416
Interest expense on time deposits in amounts of $100,000 or more was $304,000, $353,000 and $935,000 in 1996, 1995, and 1994, respectively. Time deposit accounts in amounts of $100,000 or more averaged $5.8 million and $6.9 million during 1996 and 1995, respectively, with weighted average rates of 5.3% and 5.1%, respectively. The weighted average stated interest rate on such deposits at December 31, 1996 and 1995 was 5.1% and 5.4%, respectively.
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The Company had no brokered deposits as of December 31, 1996 and $3.4 million as of December 31, 1995, and money desk deposits totaled $21.0 million and $28.0 million at December 31, 1996 and 1995, respectively.
Note 9: Other Borrowings
Other borrowings at December 31 are as follows:
Maximum Balance Stated Average Average Balance (Dollars in Thousands) Outstanding Rate Balance Rate Outstanding
1996: Other borrowings - FHLB line of credit -- -- $ 38 6.3% $ 2,000 Total -- -- $ 38 6.3% $ 2,000
1995: Borrowings for employee stock ownership plan -- -- $ 18 8.3% $ 70 Mortgage indebtedness -- -- 432 9.5 2,198 Other borrowings - FHLB line of credit -- -- 1,297 9.7 6,000 Total -- -- $ 1,747 9.6% $ 8,268
The Bank has a line of credit for up to 5% to total assets, or $5.2 million as of December 31, 1996, with the FHLB. At December 31, 1996 and 1995, $8.5 million and $4.3 million of loans and securities are pledged as collateral against other borrowings. The Bank is required to hold FHLB stock as a condition for maintaining its membership in the FHLB.
The Bank has access to the discount window at the FRB for a total borrowing facility of $1.8 million. At December 31, 1996, $2.2 million of securities are pledged as collateral for the FRB facility.
In 1995, the Bank's other borrowings included a loan on the Bank's premise. The borrowing was repaid in 1995.
Note 10: Income Taxes
The (benefit) provision for state franchise taxes consists of:
(Dollars in Thousands) 1996 1995 1994
Current: Federal $ -- $ -- $ -- State (258) 153 142 Total current (258) 153 142
Deferred: Federal -- -- -- State -- -- -- Total deferred -- -- -- Total (benefit) provision for income taxe $ (258) $ 153 $ 142
The provision for state taxes for 1996, 1995 and 1994 consists of the minimum amount of franchise taxes due net of refunds. In 1996, the Company utilized an acceptable alternative method of calculating the Delaware Franchise tax which resulted in a refund for 1994 and 1995 Delaware Franchise tax and a reduction in the 1996 Delaware Franchise tax.
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The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
(Dollars in Thousands) 1996 1995 Deferred Tax Assets: Book loan loss reserve in excess of tax $ 1,898 $ 1,967 Other provisions 156 58 Provision for losses for real estate 3,777 5,569 Net operating losses 16,563 17,591 Tax credits 489 489 Net tax value of premises in excess of book 120 294 Other 403 344 Total deferred tax assets 23,406 26,312 Valuation allowance (23,006) (25,873) Total deferred tax assets, net 400 439
Deferred Tax Liabilities: Loan origination costs (33) (56) Taxable income in excess of book for rehabilitation credit (367) (383) Total deferred tax liabilities (400) (439) Net deferred taxes $ -- $ --
The Bank provided a valuation allowance for deferred tax assets because an estimate of the utilization of the underlying benefits cannot be determined. The utilization of the net operating loss carryforwards and rehabilitation and minimum tax credit carryforwards may be limited on an annual basis under current tax law due to the change in ownership in 1992 and possible changes in ownership in future years.
The total tax provision (benefit) differs from the statutory Federal rates for the reasons shown in the following table:
1996 1995 1994
Tax expense (benefit) at the statutory federal rate 34.0% 34.0% 34.0% Utilization of prior taxable loss (34.2) (34.6) (34.0) State income taxes (refund), net of federal tax benefit (58.1) 31.3 0.4 Non-deductible expenditures and non-taxable income 0.2 0.6 -- Total effective tax (benefit) provision rate (58.1)% 31.3% 0.4%
Because the Company has utilized most of its ability to carryback net operating losses, the losses incurred from 1991 to 1994 must be carried forward to offset future net operating income, if any. In addition, the actual benefit rate may be less than the current statutory rate due to tax differentials and the alternative minimum tax. As of December 31, 1996, the Company has net operating loss carryforwards for federal tax purposes of approximately $56.0 million which begin expiring in 2007, and for California tax purposes of approximately $46.8 million, which begin expiring in 1997 through 2002. As of December 31, 1996, the Company had rehabilitation tax credit carryforwards for federal tax purposes of approximately $213,000, which expire in 2004 and 2005, and minimum tax credits of approximately $276,000 which have no expiration.
Note 11: Shareholders' Equity
The capital infusion by the Company's controlling stockholder in 1996, 1995, and 1994 was $3.5 million, $4.3 million, and $20.0 million, respectively. The capital in 1996 was raised by the issuance of 175,000 shares of Series D Preferred Stock at $20.00 per share. The capital in 1995 was raised by the issuance of 215,000 shares of Series D Preferred Stock at $20.00 per share. The capital for 1994 was raised from the issuance of 3,521,126 shares of Class A Common Stock (the "Common Stock" or "Common Shares") at $5.68 per share. The Series D Preferred Shares were converted into Common Shares in 1996.
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Description of Capital Stock
The authorized capital stock of the Company consists of 100,000,000 Common Shares, par value $0.01 per share and 5,000,000 shares of preferred stock, par value $0.01 per share, of which 437,500 are designated as Series B Preferred Shares. The remainder are not designated.
In accordance with the Agreement and the Orders, the Company and the Bank are prohibited from paying dividends without the prior written consent or approval of the FDIC, the Superintendent of Banks and the Federal Reserve Bank of San Francisco.
Description of Common Stock
As of December 31, 1996, there were 28,775,995 Common Shares outstanding out of a total of 100,000,000 shares authorized. The Series B Preferred Shares, which were convertible into shares of the Class B Common Stock at the option of the holders thereof are now convertible to Common Stock. The reclassification is not deemed by the Company to alter or change any of the relative powers, preferences or special rights of the holders of the Class B Preferred shares.
Dividends
Subject to the rights and preferences of any preferred stock outstanding, each share of Common Stock is entitled to receive dividends if, as and when declared by the Board of Directors of the Company. Subject to the rights of the Series B Preferred Shares, dividends must be paid on the Common Stock, together with the Series B Preferred Shares, at any time that dividends are paid on either. Any dividend so declared and payable in cash, capital stock of the Company or other property will be paid equally, share for share, on the Common Stock, Series B Preferred Shares, and on any other participating series of preferred stock issued in the future; provided, however, that the Company may issue dividends consisting solely of its Common Shares on the Common Stock.
Liquidation Rights
In the event of the liquidation, dissolution or winding up of the Company, holders of the Common Stock are entitled to share equally, share for share, in the assets available for distribution, subject to the liquidation preferences of the Series B Preferred Shares and the rights of any other class or series of preferred stock then outstanding.
Description of Preferred Stock
The Board of Directors of the Company is authorized by the Certificate of Incorporation to provide for the issuance of one or more series of preferred stock. The Board of Directors has the power to fix various terms with respect to each such series, including voting powers, designations, preferences, dividend rates, conversion and exchange provisions, redemption provisions, and the amounts which holders are entitled to receive upon any liquidation, dissolution, or winding up of the Company. At December 31, 1996, the Board of Directors authorized only the issuance of the Series B Preferred Shares. The Company's Certificate of Incorporation provides that additional securities, including additional shares of any class of preferred stock, can be issued only if unanimously approved by the Board of Directors or by stockholders holding a majority of the voting power of the Company.
Voting Rights
Holders of Common Stock (when and if issued) are entitled to one vote per share. Except as described below, holders of Common Stock vote together with holders of the Company's Series B Preferred Shares, on all matters including the election of directors. The Board of Directors is presently authorized to have nine (9) members. The Board of Directors is a classified Board with staggered terms providing for a maximum of three classes of directors, which are as nearly equal in number as possible, and with one class elected each year for a maximum term of three years. Holders of Common Stock are not entitled to vote cumulatively for the election of directors.
The holders of Common Stock are entitled to vote as separate classes on any modification to the rights of either class of stock and as otherwise required by law.
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Description of Series B Preferred Stock
The Company issued the Series B Preferred Shares during 1988. As of December 31, 1996, there were 15,869 Series B Preferred Shares outstanding.
Dividends
Holders of the Series B Preferred Shares are entitled to receive, when funds of the Company are legally available for payment, an annual cash dividend of Fifty-Six Cents ($0.56) per share, payable quarterly in January, April, July and October of each year. Dividends on the Series B Preferred Shares are cumulative. Cumulative unpaid dividends on the Series B Preferred Stock at December 31, 1996 total approximately $49,000.
Payment of dividends on the Series B Preferred Shares shall be junior to payment of dividends at the stated rate of all other series of preferred stock that the Company may issue in the future and that are designated senior to the Series B Preferred Shares. Dividends on the Series B Preferred Shares will be declared and paid or set apart for payment in full for all previous dividend periods (i) before the payment or setting apart of any funds or assets for the payment of any dividends on the Common Stock or any other class of stock, except preferred stock ranking on a parity with or senior to the Series B Preferred Shares, and (ii) before any purchase or other acquisition for value of any Common Stock or any future class of stock except preferred stock ranking on a parity with or senior to the Series B Preferred Shares; provided, however, that the Company may issue dividends consisting of its Common Shares on the Common Shares.
After payment of dividends at the stated rate on all series of preferred stock that the Company may issue in the future and that are designated senior to the Series B Preferred Shares and on any other preferred stock of the Company that is on a parity with the Series B Preferred Shares, and payment of dividends at the stated rate on the Series B Preferred Shares, holders of the Series B Preferred Shares will participate pro rata with the holders of Common Stock, on the basis of number of shares owned, in all other dividends by the Company to its stockholders, except that, as noted above, the Company may issue dividends consisting solely of its Common Shares on the Common Shares.
Liquidation Rights
In the event of any liquidation, dissolution, receivership, bankruptcy, or winding up of the Company, voluntarily or involuntarily, the holders of the Series B Preferred Shares are entitled to receive the sum of Seven Dollars ($7.00) per share, plus any accrued and unpaid dividends thereon, before any distributions will be made to the holders of the Common Stock or any other class of stock junior in preference upon liquidation, but after or concurrent with distributions to be made at the stated rate on preferred stock of any series ranking on a parity with or senior in preference upon liquidation to the Series B Preferred Shares, and will be entitled to no other distribution.
Conversion
The holders of Series B Preferred Shares are entitled at any time to convert their Series B Preferred Shares into Common Stock of the Company at the conversion ratio of one Series B Preferred Share convertible into one-tenth of one share of Common Stock, upon payment of a conversion fee of Seven Dollars ($7.00) per share, subject to adjustment under certain conditions.
Voting Rights
The holders of the Series B Preferred Shares are entitled to one vote per Series B Preferred Share on all matters on which shareholders are entitled to vote. Holders of the Series B Preferred Shares have full voting rights and powers equal to the voting rights and powers of the holders of the Common Stock. Holders of the Series B Preferred Shares are entitled to vote generally for the election of directors and vote with the holders of the Common Stock, except that the holders of the Series B Preferred Shares are entitled to vote as a class on any modification to the rights of the Series B Preferred Shares and otherwise as required by law.
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Note 12: Stock Option Plan
During 1996, the Company's stockholders approved the Amended and Restated 1993 Stock Option Plan (the "Plan"). Pursuant to the Plan, options may be granted to directors and key employees of the Company and its subsidiaries. The shares of Common Stock reserved for the Plan total 9,000,000 shares. The number of shares granted may be subject to adjustment as determined by a Committee of the Board of Directors. The exercise price of options must be at least the fair market value of the shares of the Company's Common Stock as of the date the option is granted. The expiration date of the options is ten years from the effective date that the options were granted. None of the options granted have been exercised. The agreements for certain executive officers and former executive officers provide that options shall be granted to acquire shares of Common Stock under the Plan equal to 9% of the fully-diluted shares of the Company's Common Stock, with additional shares to be issued in the future to maintain the 9% ratio.
The Company did not grant any stock options during 1995. The weighted-average fair value of stock options granted and vested during 1996 was $163,000 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
Expected dividend yield 0.0% Risk-free interest rate 6.17% Expected life 5 yrs Volatility factor 0.01 Fair value of options granted $0.09
The Company has not recognized any compensation costs for the stock options in the financial statements. The proforma net income reflects only options granted and vested in 1996. Had the Company determined compensation cost based on fair value at the date of grant for its stock options, the Company's net income would have been the proforma amounts indicated below: 1996 1995 Net income - as reported (dollars in thousands) $ 702 $ 336 proforma 539 336
Earnings per share - primary $0.12 $0.05 fully diluted 0.03 0.03
Proforma per share - primary $0.09 $0.05 fully diluted 0.02 0.03
The following table provides the stock option activity:
Number of Weighted-Average Shares Exercise Price Balance at December 31, 1994 511,822 $ 5.68 Granted -- -- Expired 2,500 5.68 Balance at December 31, 1995 509,322 5.68 Granted 2,522,678 .35 Expired 2,500 5.68 Balance at December 31, 1996 3,029,500 $1.24
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At December 31, 1996, the range of exercise prices and remaining contractual life of outstanding options was $0.34 and $5.68 and seven (7) years and ten (10) years, respectively. The following table provides stock option information as of December 31, for each of the periods shown:
1996 1995 Weighted-average remaining contractual life of total options 9.5 years 8.75 years
Number of options exercisable 2,212,464 296,479
Weighted-average price of options presently exercisable $1.32 $5.68
Note 13: Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, that if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgements by the regulators regarding the Bank's capital components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios, as set forth below, of total and Tier I capital, as defined by regulations, to risk weighted assets, and Tier I capital to average assets.
The Bank is also subject to the Orders and the Impairment Order. The Orders provide that the Bank must maintain a minimum leverage ratio of 7%. The Impairment Order is a California law which provides that if a bank's deficit retained earnings exceed 40% of its contributed capital, its capital is deemed to be impaired, and the bank is required to levy an assessment on its shares to correct the impairment. At December 31, 1996, the Bank had contributed capital of $74.5 million and deficit retained earnings of $63.5 million resulting in the Bank's contributed capital impairment of approximately $31.3 million. See Note 2: Regulatory Orders for more information regarding capital requirements.
The Company is also subject to a Letter Agreement dated April 21, 1989 with the FRB which requires that the Company maintain a minimum leverage capital ratio of 5.5%.
As of December 31, 1996, the most recent notification from the FDIC categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the highest capital category, a bank must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth below and must not be subject to any certain regulatory orders, agreements or directives. There are no conditions or events since that notification that management believes have changed the Bank's category.
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The following table sets forth the Bank's capital amounts and ratios as of December 31, for each of the periods shown:
To be Well (dollars in thousands) Capitalized Under For Capital Prompt Corrective Actual Adequacy purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio 1996: Total capital $11,777 17.8% $5,293 8.0% $6,616 10.0% Tier 1 capital 10,890 15.3 2,838 4.0 4,270 6.0 Leverage capital 10,890 10.3 4,242 4.0 5,302 5.0
1995: Total capital $7,891 10.4% $6,046 8.0% 7,588 10.0% Tier 1 capital 6,885 8.6 3,219 4.0 4,803 6.0 Leverage capital 6,885 6.0 4,623 4.0 5,779 5.0
The following table sets forth the Company's and Bank's capital ratios compared to minimum capital ratio requirements as of December 31, 1996 and the requirements contained in the Orders:
Minimum Capital Company Bank Requirement Orders
Leverage 10.5% 10.3% 4.0% 7.0% Tier 1 risk-based capital 15.7 15.3 4.0 N/A Total risk-based capital 18.2 17.8 8.0 N/A
Note 14: Employee Benefit Plans
Employee 401K Plan
The Company provides a 401k plan for its employees. The Company provides matching contributions up to 2% of the employees qualifying earnings. During 1996, 1995, and 1994, the Company contributed $31,000, $40,000 and $42,000, respectively, to the 401k Plan.
Employee Stock Ownership Plan
The Company terminated its Employee Stock Ownership Plan (the "ESOP") on December 1, 1995. During 1995 and 1994, the Company made contributions to the ESOP of $77,000 and $130,000, respectively.
Note 15: Commitments and Contingencies
Lending and Letter of Credit Commitments
In the normal course of its business, the Bank has entered into various commitments to extend credit which are not reflected in the consolidated financial statements. Over 90% of such commitments consist of the undisbursed balance on personal and commercial lines of credit and of undisbursed funds on construction and development loans. At December 31, 1996 and 1995, the Bank had outstanding loan commitments, which had primarily adjustable rates, totaling approximately $9.6 million and $5.9 million, respectively. In addition, the Bank had outstanding letters of credit, which represent guarantees of obligations of Bank customers, totaling $9.6 million and $9.8 million at December 31, 1996 and 1995, respectively. The actual liquidity needs or the credit risk that the Company will experience will be lower than the contractual amount of commitments to extend credit because a significant portion of these commitments are expected to expire without being drawn upon. The Bank's outstanding loan commitments are made using the same underwriting standards as comparable outstanding loans. The credit risk associated with these commitments is considered in management's determination of the allowance for loan losses.
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Litigation
Because of the nature of its business, the Company and its subsidiaries, including the Bank, are from time-to-time a party to legal actions. Based upon information available to the Company and the Bank, and its review of such outstanding claims to date, management believes the ultimate liability relating to these actions, if any, will not have a material adverse effect on the Company's liquidity, consolidated financial condition or results of operations.
Note 16: Related Party Transactions
Loans
In the ordinary course of business, the Bank may extend credit to directors, officers, shareholders and their associates on substantially the same terms, including interest rates and collateral, as in comparable loan transactions with unaffiliated persons, and such loans do not involve more than the normal risk of collection. As of December 31, 1996, there were no loans outstanding to such individuals, and, as of December 31, 1995, there were $5,000 of loans outstanding to such individuals.
Bank of San Francisco Building Company (BSFBC)
During the third quarter of 1995, the Bank acquired all of the outside limited partnership interests in BSFBC for a total of $3.3 million. The purchase price of those interests in excess of book value was $525,000 and is being amortized over the life of the underlying lease, including extensions, through 2035 using the straight line method.
The acquisition was accounted for by the purchase method. The consolidated financial statements include the accounts of BSFBC. The Company's consolidated operating results include the operations of BSFBC beginning July 1, 1995. As of the acquisition date, the assets included leasehold improvements and leasehold interest totaling $5.5 million and cash equivalents and investment securities totaling $1.3 million. The liabilities included other borrowings which were used to finance the acquisition of the leasehold interest in 1986. The borrowings were repaid on October 31, 1995.
As of December 31, 1996, the Company's premises and equipment, net of accumulated amortization and depreciation, is comprised of leasehold improvements totaling $5.3 million, leasehold interest totaling $1.8 million, premium paid to acquire BSFBC totaling $485,000, and furniture and equipment totaling $446,000.
Prior to 1995, the Company accounted for its investment in BSFBC using the equity method. The Bank's equity in the operating results of BSFBC in 1995 and 1994 were earnings of $48,000 and a loss of $264,000, respectively. Such income is included in the Bank's other income in the Company's Consolidated Financial Statements.
Note 17: Fair Value of Financial Instruments
The following disclosures of the estimated fair value of financial instruments are made in accordance with the requirements of SFAS No. 107. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgement is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
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The carrying amount and estimated fair values of the Company's financial instruments at December 31 are as follows:
1996 1995 Carrying Fair Carrying Fair (Dollars in Thousands) Amount Value Amount Value
Financial Assets: Cash and cash equivalents $ 15,626 $ 15,626 $42,814 $42,814 Investment securities 35,961 35,866 7,168 7,168 Loans, net 37,909 40,030 47,116 48,642
Financial Liabilities: Deposits 91,166 91,166 105,673 105,673
The following methods and assumptions were used to estimate the fair value of each major classification of financial instruments at December 31, 1996 and 1995:
Cash and Cash Equivalents: Current carrying amounts approximate estimated fair value. Due to the short term nature of time deposits with other financial institutions (original maturities of 90 days or less), current carrying amounts approximate market.
Investment Securities Held-to-Maturity and Available-for-Sale: For securities held-to-maturity and available-for-sale, quoted market prices and/or third party dealer quotes were used to determine fair value.
Loans Receivable: The carrying amount of loans is net of unearned fee income and allowance for loan losses. The fair value of loans was calculated by discounting cash flows expected to be received through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The credit and interest rate risk inherent in the loans, was estimated by segmenting the portfolio into categories based on collateral type, fixed or adjustable interest rate, maturity, estimated credit risk, and accrual status. The estimate of maturity is based on the Bank's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending factors.
Deposit Liabilities: The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings and NOW accounts, and money market and checking accounts, is equal to the amount payable on demand as of December 31, 1996. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Off Balance Sheet Instruments: The estimated fair value of off balance sheet instruments, principally letters of credit and loan commitments, is approximately the face value of commitment fees collected.
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Note 18: The San Francisco Company
Condensed statements of financial condition and operations of the Company at December 31 are as follows:
Condensed Statements of Financial Condition
(Dollars in Thousands) 1996 1995
Assets: Cash and short term investments $ 304 $ 157 Investment in subsidiary 10,813 6,885 Other assets 2 70 Total assets $ 11,119 $ 7,112
Liabilities: Other liabilities $ 55 $ 232 Total liabilities 55 232
Stockholders' equity 11,064 6,880 Total liabilities and shareholders' equity $ 11,119 $ 7,112
Condensed Statements of Operations
(Dollars in Thousands) 1996 1995 1994
Income: Interest earned $ 4 $ 9 $ 51 Other Income -- 1 33 Total income 4 10 84
Expense: Other expense 6 69 109 Total expense 6 69 109 Franchise taxes (benefit) (258) 153 142
Income (loss) before equity in undistributed net income (loss) of subsidiary 256 (212) (167) Equity in undistributed net income (loss) of subsidiary 446 548 (32,869) Net income (loss) $ 702 $ 336 $(33,036)
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Condensed Statements of Cash Flows
(Dollars in Thousands) 1996 1995 1994
Cash Flows from Operating Activities: Net income (loss) $ 702 $ 336 $(33,036) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed net (income) loss of subsidiary (446) (548) 32,869 Net cash flows provided by (used in) operating activities 256 (212) (167)
Cash Flows used in investing activities: Investment in Bank (3,500) (4,700) (17,000) Proceeds from sale of other real estate owned -- 85 -- Net decrease in other assets 68 61 136 Net cash used in investing activities (3,432) (4,554) (16,864)
Cash Flows provided by financing activities: Proceeds from sale of Preferred Stock 3,500 4,300 -- Proceeds from sale of Common Stock -- -- 17,560 Net decrease in other liabilities (177) (33) (122) Net cash provided by financing activities 3,323 4,267 17,438
Increase (decrease) in cash and cash equivalents 147 (499) 407 Cash and cash equivalents at beginning of year 157 656 249 Cash and cash equivalents at end of year $ 304 $ 157 $ 656
Note 19: Quarterly Information (Unaudited)
The following table sets forth the condensed operating results of the Company for each quarter of the two year periods ending December 31, 1996, and is qualified in its entirety by the more detailed information and financial statements contained elsewhere in this report:
(Dollars in Thousands Except Per Share data)
1996 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
Interest income $1,853 $1,820 $1,759 $1,809 Interest expense 865 782 748 732 Net interest income 988 1,038 1,011 1,077
Non-interest income 463 432 308 454 Non-interest expense 1,339 1,268 1,288 1,433 Income before income taxes 112 202 31 98 Provision (benefit) for taxes 4 6 (272) 3 Net income $ 108 $ 196 $ 303 $ 95
Earnings per common share: Primary $0.02 $0.03 $0.05 $0.02 Fully diluted 0.01 0.01 0.01 0.00
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(Dollars in Thousands Except Per Share data)
1995 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
Interest income $2,902 $2,776 $2,722 $2,291 Interest expense 1,097 1,152 1,161 1,005 Net interest income 1,805 1,624 1,561 1,286
Provision for loan losses -- 500 -- -- Non-interest income 771 789 562 399 Non-interest expense 2,470 1,753 1,962 1,623 Income before income taxes 106 160 161 62 Provision for taxes 38 40 37 38 Net income $ 68 $ 120 $ 124 $ 24
Earnings per common share: Primary $0.01 $0.02 $0.02 $0.00 Fully-diluted 0.01 0.01 0.01 0.00
ITEM 9

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
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PART III
ITEM 10

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following is a list of directors of the Company, their occupations for the previous five years, ages and their lengths of service as a director. Except as stated below, no director of the Company is a director of any company with a class of securities registered pursuant to section 12 of the Securities Exchange Act of 1934, as amended, or subject to the requirements of section 15(d) of such Act or of any company registered as an investment company under the Investment Company Act of 1940, as amended. Except for the Bank, none of the corporations or organizations discussed below is an affiliate of the Company. No director or executive officer of the Company or the Bank has any family relationship with any other director or executive officer of the Company or director or executive officer of the Bank.
JAMES E. GILLERAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Gilleran has served as the Chairman and Chief Executive Officer of the Company and the Bank since October 1994. He served as Superintendent of Banks for the state of California from 1989 to 1994. At December 31, 1996, Mr. Gilleran was 63 years of age and he had been serving as a director of the Company and the Bank since 1994.
JOHN McGRATH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. McGrath has served as President, Chief Operating Officer and Chief Credit Officer of the Bank since November 1995 and as President of the Company since January 1997. He served as President and Chief Executive Officer of Sacramento First National Bank from 1982 to 1995. At December 31, 1996, Mr. McGrath was 54 years of age and had been serving as a director and officer of the Bank since 1995 and as a director of the Company since January 1997.
PETER FOO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Foo has been the President of Peninsula Holdings Inc. since 1993. He was co-owner of Ampac Trading (USA) Co. from 1980 to 1993. At December 31, 1996, Mr. Foo was 49 years of age and he had been serving as a director of the Company since August 1996 and the Bank since February 1996.
KENT D. PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Price has served as Executive Vice President of IBM since September 1994. Mr. Price was the Chairman and Chief Executive Officer of the Company and the Bank from September 1993 to August 1994. He served as Executive Vice President, Private Banking and Corporate Development of Bank of America from 1991 to 1993; and Chief Financial Officer and Executive Vice President of Bank of New England Corporation from 1990 to 1991. At December 31, 1996, Mr. Price was 53 years of age and he had been serving as a director of the Company since 1993. Mr. Price was also a director of the Bank from 1993 to 1994.
JACKSON SCHULTZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Schultz is a retired banker who has provided consulting services to Wells Fargo Bank for more than five years through 1996. Prior to consulting, Mr. Schultz served as a Senior Vice President of Wells Fargo Bank. At December 31, 1996, Mr. Schultz was 71 years of age and he had been serving as a director of the Company and the Bank since February 1996.
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WILLARD D. SHARPE. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Sharpe is a retired economist who, at the time of his retirement in 1987, served as a Vice President of Chase Manhattan Bank and as that bank's chief economist for Asia. In addition, since 1993, Mr. Sharpe has been a Vice President of two privately held companies involved in efforts to explore prospects for investment in Vietnam. At December 31, 1996, Mr. Sharpe was 73 years of age and he had been serving as a director of the Company and the Bank since 1993.
GORDON B. SWANSON . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Swanson has been Vice President of Real Estate with Levi Strauss & Company since 1993. He served as President of G. B. Swanson & Co., a real estate advisory firm from 1991 to 1992. Mr. Swanson has served as Director Emeritus of the San Francisco Chamber of Commerce since 1986 and served as Managing Director of Jones Lang Wootton U.S.A., a commercial real estate investment company, from 1989 to 1991. At December 31, 1996, Mr. Swanson was 52 years of age and he had been serving as a director of the Company and the Bank since 1985.
NICHOLAS UNKOVIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Unkovic has been a partner of the law firm of Graham & James, LLP for more than five years. At December 31, 1996, Mr. Unkovic was 45 years of age and he had been serving as a director of the Company since 1994 and as a director of the Bank since May 1996.
GARY WILLIAMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Williams has served as the Dean of the McLaren School of Business at the University of San Francisco since 1986. At December 31, 1996, Mr. Williams was 64 years of age and he had served as a director of the Company since April 1996 and the Bank since March 1996.
Executive Officers and Other Significant Officers (the "Named Executives")
Each executive officer is selected annually by the Board of Directors pursuant to provisions of the bylaws of the Company and the Bank. In addition, the Company and the Bank periodically enter into employment agreements with certain executive officers. See "Employment and Separation Agreement" below. The following is a list of executive officers of the Company and/or the Bank (the "Named Executives"), their occupations for the previous five years, ages and the lengths of service as an officer.
JAMES E. GILLERAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(See position description of Mr. Gilleran's position with the Company and the Bank, and his background under the heading "Directors").
JOHN McGRATH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(See position description of Mr. McGrath's position with the Company and the Bank, and his background under the heading "Directors").
JOANNE GREENWOOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ms. Greenwood has served as Executive Vice President and Chief Administrative Officer of the Bank, and Secretary of the Bank and the Company since March 1996. She served as Executive Vice President and Chief Financial Officer of Sacramento First National Bank from 1982 to 1995. At December 31, 1996, Ms. Greenwood was 55 years of age.
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KEARY COLWELL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ms. Colwell has served as Executive Vice President and Chief Financial Officer of the Bank since April 1996 and of the Company since January 1997. Ms. Colwell had held other senior positions with the Company and the Bank since 1992. Prior to joining the Company and the Bank, she served as Vice President at First Nationwide Bank from 1988 to 1992. At December 31, 1996, Ms. Colwell was 37 years of age.
Compliance with Reporting Requirements of Section 16
Under Section 16(a) of the Securities Exchange Act of 1934, the Company's directors, executive officers and any persons holding ten percent (10%) or more of the Company's Common Stock are required to report their ownership of any class of stock and any changes in that ownership to the Securities and Exchange Commission (the "SEC") and to furnish the Company with copies of such reports. Specific due dates for these reports have been established, and the Company is required to report any failure to file on a timely basis by such persons. Based solely upon a review of copies of reports filed with the SEC during and with respect to the fiscal year ended December 31, 1996, all reporting persons filed reports on a timely basis, except that a Form 4, Statement of Changes in Beneficial Ownership, from Mr. Putra Masagung, the Company's majority shareholder, with respect to the purchase of 75,000 shares of Series D Preferred Stock in June 1996 which was filed ten (10) days late, and a Form 4 and Form 5, Annual Statement of Changes in Beneficial Ownership, from Mr. Steven Champion, a former director, with respect to options to acquire 517,687 shares of Common Stock with a weighted average exercise price of $0.34 granted pursuant to the 1993 Amended and Restated Stock Option Plan in December 1996, which the Company has no record of being filed.
ITEM 11

ITEM 11 - EXECUTIVE COMPENSATION
Executive Compensation
Decisions on the compensation of the Company's and the Bank's executives are generally made by the four-member Personnel/Compensation Committee. The members of the Personnel/Compensation Committee are members of the Board of Directors of the Company and/or Executive Officers. All decisions by the Personnel/Compensation Committee relating to the compensation of the Company's and the Bank's executive officers are reviewed by the Company's and the Bank's full Boards of Directors, except for decisions about awards under certain of the Company's stock-based compensation plans, which are made solely by the Committee in order for the grants or awards under such plans to satisfy Rule 16b-3 under the Securities Exchange Act of 1934, as amended. Set forth below is a report of the Personnel/Compensation Committee addressing the Company's compensation policies for 1996 as they affected the Named Executives of the Company and the Bank serving at the end of 1996, whose compensation in 1996 is shown in the "Executive Compensation Tables" below.
Compensation Committee Interlocks and Insider Participation in Compensation Decisions
The voting members of the Company's Personnel/Compensation Committee, which during 1996 consisted of Mr. Schultz, Mr. Unkovic, Mr. Williams, and Mr. Sharpe, make decisions with respect to the compensation of the Named Executives. There are no director interlocks.
Board of Directors' Fees
The Company and the Bank pay director fees to each non- employee Director for attendance at Board meetings and Committee meetings which are held monthly. The combined fee for attendance at a Board meeting of the Company and the Bank is $750 per meeting. The Chairman of each committee receives $300 and each member receives $200 for each committee meeting attended.
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Compensation Philosophy
The Company and the Bank experienced significant financial losses from 1991 to 1994, and during 1995 and 1996 were in the midst of a turnaround. In connection therewith, the Named Executives were required to devote a substantial and unusual amount of time and effort in dealing with non-performing assets, raising new capital, responding to regulatory concerns and implementing changes in operating systems and controls. Consequently, the use of traditional corporate performance measures such as earnings per share or increases in book value to determine executive compensation was not considered to be in the Company's best interests. Therefore, there was no direct relationship in 1995 or 1996 between executive compensation and the Company's financial performance, either as compared to the Company's prior performance or as compared to the banking companies with which the Company competes for executive talent. Instead, the 1995 and 1996 executive compensation programs of the Bank were designed to provide compensation which would allow the Bank to attract and retain talented and experienced executives necessary for management of the Bank's turnaround program. The focus of the executive compensation program was on base salary, although some effort was made to provide longer term incentives through the grant of stock options. See "Employment and Separation Agreements" below for additional discussion on employment contracts. None of the Named Executives received a cash bonus, while serving as an executive, in 1995 or 1996.
The voting members of the Personnel/Compensation Committee either approved or recommended to the Board of Directors payment amounts and award levels for all executives of the Bank including the Named Executives.
Going forward, in addition to the philosophies described above, the Committee will also be guided by the terms of the Orders in setting executive compensation. The Orders provides that, without the prior written approval of the FDIC, the Bank may not (a) pay a bonus to an executive officer, or (b) provide compensation to an executive officer at a rate exceeding his or her average rate of compensation (excluding bonuses, stock options and profit-sharing) during the 12 calendar months preceding the months in which the Bank first became undercapitalized.
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Executive Compensation Tables
Summary of 1994-1996 Compensation. The following table sets forth the annual compensation, long-term compensation and other compensation paid to each of the Named Executives. Compensation is listed as of December 31, 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
Annual compensation Long term compensation Awards
Other All annual Restricted other compen- stock compen Name and Salary Bonus sation award(s) Options/ -sation principal position Year ($) ($) ($)(1) ($) SARs(#)(2) ($) (a) (b) (c) (d) (e) (f) (g) (i) Chairman/CEO James 1996 235,425 0 0 0 1,276,637 0 E. 1995 262,507 0 0 0 0 0 Gilleran 1994 51,681 0 7,936 0 313,639 0
President/ 1996 169,209 0 14,756 0 318,055 0 COO/CCO-Bank 1995 0 0 11,308 0 0 0 John McGrath 1994 0 0 0 0 0 0
EVP/CAO 1996 90,000 0 29,078 0 0 0 Joanne 1995 0 0 0 0 0 0 Greenwood 1994 0 0 0 0 0 0
EVP/CFO 1996 127,000 0 0 0 0 0 Keary 1995 120,000 0 0 0 0 0 Colwell 1994 85,105 0 0 0 0 0
(1) "Other annual compensation" consists solely of consulting fees paid for consulting services prior to formal appointment into designated positions.
(2) These options were granted pursuant to the employment agreements described below. The options have an exercise price range of between $0.34 and $5.68, the fair market value of the underlying stock at the time of grant.
Employment and Separation Agreements
Employment Agreement of Mr. Gilleran. The Company and the Bank entered into an employment agreement with Mr. Gilleran dated October 1, 1994 which provided, among other things, for Mr. Gilleran to receive an annual salary of at least $250,000 per year, payable in accordance with the Bank's usual payment practices. Mr. Gilleran's annual base salary will be increased to $300,000 upon the conclusion of the Company's third consecutive profitable quarter (which has occurred), subject to regulatory approval (which has not yet been obtained). In addition, the employment agreement provides for an annual cash performance bonus of between 0% and 100% of base salary, and a special incentive one- time bonus of $150,000 at such time as the condition of the Company and the Bank are deemed satisfactory. The employment contract expires on September 30, 1998.
The agreement provides that the Board of Directors shall grant Mr. Gilleran options under the Amended and Restated 1993 Stock Option Plan (formerly the 1993 Executive Stock Option Plan) to acquire shares of the Company's Class A Common Stock (the "Common Stock") equal to 5% of the fully-diluted shares of the Common Stock, with additional anti-dilution options to be granted in the future as necessary to maintain the 5% interest until after the next public offering of the Company's Common Stock. The exercise price of subsequent anti-dilution options would be at then-current fair market value per share of the Common Stock or the price per share for the Common Stock issued to others in a public offering of the Company's Common Stock.
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As of December 31, 1996, Mr. Gilleran holds options to purchase 313,639 shares of the Common Stock with an exercise price of $5.68 per share, options to purchase 184 shares of the Commons Stock with an exercise price of $4.50 per share, and options to purchase 1,276,453 shares of the Common Stock with an exercise price of $0.34 per share. Except for certain anti-dilution options, the options granted to Mr. Gilleran, vest over a three-year period, with one-third vesting on each anniversary date of the employment agreement except that if the Company closes a public offering of Common Stock all options will vest. As of December 31, 1996, his options are 66.6% vested.
Under the employment agreement, Mr. Gilleran is indemnified by the Company and the Bank from any liability or expense arising as a result of actions taken by the Company or the Bank, or events relating to the business of the Company or the Bank, occurring prior to the execution of the employment agreement. Subject to certain limitations, Mr. Gilleran is also indemnified by the Company and the Bank from any liability or expense arising as a result of actions taken by the Company or the Bank, or events relating to the business of the Company or the Bank, occurring after the execution of the employment agreement, unless such liability or expense is due to his bad faith or gross negligence.
Employment Agreement of Mr. McGrath. The Bank entered into an employment agreement with Mr. McGrath dated November 27, 1995 which provides, among other things, for Mr. McGrath to receive an annual salary of at least $170,000 per year, payable in accordance with the Bank's usual payment practices. In addition, the employment agreement provides for an annual cash performance bonus of between 0% and 50% of base salary. The employment contract expires on November 27, 1998.
The agreement provides that the Board of Directors shall grant Mr. McGrath options under the Amended and Restated 1993 Stock Option Plan (formerly the 1993 Executive Stock Option Plan) to acquire shares of the Company's Common Stock equal to 1% of the fully-diluted shares of the Common Stock, with additional anti- dilution options to be granted in the future as necessary to maintain the 1% interest until after the next public offering of the Company's Common Stock. The exercise price of subsequent anti-dilution options would be at then-current fair market value per share of the Common Stock or the price per share of the Common Stock issued to others in a public offering of the Company's Common Stock.
As of December 31, 1996, Mr. McGrath holds options to purchase 318,055 shares of the Common Stock with an exercise price of $0.34 per share. Except for certain anti-dilution options, the options granted to Mr. McGrath, vest over a three-year period, with one- third vesting on each anniversary date of the employment agreement except that if the Company closes a public offering of Common Stock all options will vest. As of December 31, 1996, one third of his options are vested.
Under the employment agreement, Mr. McGrath is indemnified by the Bank from any liability or expense arising as a result of actions taken by the Bank or the Company, or events relating to the business of the Bank or the Company, occurring prior to the execution of the employment agreement. Subject to certain limitations, Mr. McGrath is also indemnified by the Bank from any liability or expense arising as a result of actions taken by the Bank or the Company, or events relating to the business of the Bank or the Company, occurring after the execution of the employment agreement, unless such liability or expense is due to the his bad faith or gross negligence.
Separation Agreements with Certain Former Executive Officers of the Bank. During 1994, certain executive officers resigned from their employment with the Bank. Effective September 16, 1994, Mr. Price resigned as Chairman and Chief Executive Officer of the Bank and the Company. Effective November 1, 1994, Mr. Champion, a former director, resigned as Vice Chairman and Chief Financial Officer of the Bank and the Company.
The separation agreements with Messrs. Price and Champion provide for the termination of prior employment agreements with them. In consideration for the termination of such employment agreements, the Board of Directors granted each of Messrs. Price and Champion options under the Amended and Restated 1993 Stock Option Plan to acquire shares of the Company's Common Stock equal to 1% and 2%, respectively, of the fully-diluted shares of the Common Stock, with additional anti-dilution options to be granted in the future as necessary to maintain the 1% and 2% interest, respectively, until after the next public offering of the Company's Common Stock. The exercise price of subsequent anti-dilution options would be at the then-current fair market value per share of the Common Stock or the price per share of the Common Stock issued to others in a public offering of the Company's Common Stock.
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As of December 31, 1996, Mr. Price holds options to purchase 318,055 shares of the Common Stock with an exercise price of between $0.34 and $5.68 per share, and Mr. Champion holds options to purchase 636,109 shares of the Common Stock with an exercise price of between $0.34 and $5.68 per share. The options granted to Messrs. Price and Champion are fully vested.
Other Employee Benefit Plans
401(k) Profit Sharing Plan. In 1986, the Company established a 401(k) Profit Sharing Plan (the "Plan") which is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code. The Plan permits each participating employee with six months of service to contribute to the Plan through payroll deductions (the "salary deferral contributions") of from 2% to 16% of the participant's eligible compensation from the Company and its subsidiaries, thereby deferring taxes on all or a portion of these amounts. Under the Plan, the Company currently will match a participant's tax deferred contributions by an amount equal to 100% of such contribution for each year, except that the matching contribution by the Company for the participant may not exceed 2% of the participant's eligible compensation for that year.
The Company may also make additional contributions to the Plan in such amounts as may be determined by the Company's Board of Directors. Any such additional contributions are allocated among Plan participants based upon their compensation levels. The Company's contribution vests 100% after a participant has completed five years of participation in the Plan, with vesting of 20% per year for each of years one through five. In addition, the Company's contribution vests upon a participant's retirement at age 65 or upon a participant's death or permanent disability. Participants are entitled to receive their salary deferral contributions and vested benefits under the Plan upon termination of employment, retirement, death or disability. Participants have the right to allocate their salary deferral contributions among six different investment funds.
Amended and Restated 1993 Stock Option Plan. Awards under the Amended and Restated 1993 Stock Option Plan are made to both directors and officers. The awards for officers are discretionary and based on the performance of the Company, the officer's job performance, the importance of his or her position, and his or her contribution to the organization's goals for the award period. In 1996, grants totaling 2,522,689 were made. No grants were made in 1995. In 1994, grants totaling 511,822 were made.
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The following table shows grants under the Amended and Restated 1993 Stock Option Plan for the individuals and groups set forth below:
Name and Positions Number of Shares of the Common Stock Underlying Options Granted Through December 31, 1996
James E. Gilleran Director of the Company and the Bank 1,590,276
John McGrath Director of the Bank 318,055
Kent D. Price Director of the Company and the Bank 318,055
Peter Foo (1) Director of the Company and Bank 26,438
Nicholas Unkovic (1) Director of the Company and Bank 27,315
Willard D. Sharpe (1) Director of the Company and Bank 30,138
Gordon B. Swanson (1) Director of the Company and Bank 30,138
Jackson Schultz (1) Director of the Company and Bank 26,438
Gary G. Williams (1) Director of the Company and Bank 26,438
Named Executives Group (two persons) 1,908,331
Outside Director Group (seven persons) 484,960
_____________________ (1) Each outside director not covered by an existing contract has been granted options to acquire 26,438 shares of the Common Stock at a price of $0.34 effective October 1, 1996. These options will vest over three years based on seniority with Messrs. Swanson and Sharpe being fully vested, Mr. Unkovic 75% vested and Messrs. Foo, Schultz and Williams 25% vested.
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The following table sets forth the options granted to the Named Executives during 1996:
Number of % of Total Securities Options/SARs Name and Underlying Granted to Exercise or Grant Date principal Options/SARs Employees in Base Price Expiration Present position Granted(#) Fiscal Year ($/Share) Date Value ($)(1) (a) (b) (c) (d) (e) (f) Chairman/ 184 0.0% $4.50 4/1/2004 $0 CEO 3,452 0.2 0.34 11/27/2005 311 James E. 8,716 0.5 0.34 10/1/2006 784 Gilleran 1,264,285 79.3 0.34 12/18/2006 113,786
President/ 63,455 4.0 0.34 11/27/2005 5,711 COO/CCO-Bank 1,742 0.1 0.34 10/1/2006 157 John McGrath 252,858 15.9 0.34 12/18/2006 22,757
(1) The Company used the Black-Scholes option pricing model assuming a risk free interest rate of 6.17%, an expected life of five years, no expected dividend yield and a volatility factor of less than one.
The following table sets forth the unexercised options held as of December 31, 1996 and options exercised during 1996 by the Named Executives:
Number of Securities Value of Underlying Unexercised In- Unexercised the-Money Options/SARs at Options/SARs at Name and Shares Fiscal Year end Fiscal Year end($) principal Acquired on Value (Exercisable/Un- (Exercisable/Un- Position Exercise Realized($) exercisable)(#) exercisable)($) (a) (b) (c) (d) (e)
Chairman/ CEO - James -- -- 1,051,950/ $75,857/ E. Gilleran -- -- 538,326 39,024
President/ COO/CCO-Bank -- -- 105,438 $9,489/ John McGrath -- -- 212,617 19,136
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ITEM 12

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth information regarding the beneficial ownership of the Common Stock by Mr. Putra Masagung, executive officers and directors, and by all other shareholders as December 31, 1996. The address of Mr. Masagung is 55 MH Thamrin, Jakarta, Indonesia.
Directors and Mr. Putra Executive All Masagung Officers(1) Others Common Shares 28,086,126 2,938 686,931
Percentage ownership 97.6% 0.0% 2.4%
(1) Does not include options granted pursuant to the Amended and Restated 1993 Stock Option Plan (see "Item 11 - Executive Compensation - Other Employee Benefits"). If all such options were exercised, the shares held by such directors and executive officers would represent 9.5% of the outstanding shares of Common Stock.
The following sets forth information regarding the beneficial ownership of the Series B Preferred Stock as December 31, 1996.
Number of Shares Percentage Beneficially of Owned Class Gordon Swanson 7,200 45.4%
John Volckman 3,500 22.0
All directors and current executive officers as a group 7,200 45.4
The address of Mr. Volckman is 497 Walsh Road, Atherton, California 94027, and the address of Mr. Swanson for the purpose of his ownership of the Series B Preferred stock is the principal executive office of the Company.
ITEM 13

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions
The Bank has had and expects to continue to have banking transactions with many of the directors and executive officers of the Company and the Bank (and their associates). Loans by the Bank to any director or executive officer of the Company or any of its subsidiaries (or any associate of such persons) have been made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and should not involve more than the normal risk of collection or present other unfavorable features. Loans by the Bank to any director, executive officer or principal stockholder of the Company or any of its subsidiaries (as such persons are defined by regulation) are subject to limitations under California and federal law. Among other things, a loan by the Bank to a director, executive officer, or principal stockholder of the Company or any of its subsidiaries must be on non-preferential terms and, if all loans to a given person exceed $25,000, such loans must be approved in advance by the Bank's Board of Directors. The Bank had no such loans outstanding as of December 31, 1996.
The Company and the Bank have engaged the law firm of Graham & James, LLP to perform the function of General Counsel. Total fees paid to Graham & James, LLP in 1996 for legal services rendered were $150,672. Mr. Unkovic, a director of the Company and the Bank, is a partner with Graham & James, LLP.
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The Company entered into an indemnification agreement with Mr. Unkovic and Graham & James, LLP dated December 16, 1994. The indemnification agreement provides that Mr. Unkovic is indemnified from and against any and all liabilities or expenses arising with respect to any action or inaction taken in the course of his duties as a director of the Company, and that Graham & James, LLP is indemnified against any and all liabilities and expenses against Graham & James, LLP arising by reason of Mr. Unkovic serving as a director of the Company. The indemnification does not include legal services Mr. Unkovic or Graham & James, LLP may render to the Company or its subsidiaries, affiliates, directors, officers or stockholders.
Under their employment agreements, Messrs. Gilleran and McGrath would be indemnified by the Company and/or the Bank from any liability or expense arising as a result of actions taken by the Company or the Bank, or events relating to the business of the Company or the Bank, occurring prior to the execution of the employment agreements. See Item 11 - "Employment and Separation Agreements" for additional information on indemnification agreements.
In 1993, the Bank entered into an indemnification agreement with Mr. Thayer Prentice, former Chairman of the Board, President and Chief Executive Officer of the Company and the Bank. The Bank obtained an irrevocable standby letter of credit in the amount of $300,000 issued by Transpacific National Bank on behalf of Thayer T. Prentice as collateral for the Bank's obligations under its indemnification agreement. The indemnification agreement expires August 31, 1997.
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PART IV
ITEM 14

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. All financial statements.
See Index to Financial Statements on page 28.
2. Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or the notes thereto.
3. List of Exhibits (numbered in accordance with Item 601 of Regulation S-K):
Exhibit Number Exhibit
3.1 Certificate of Incorporation of Bank of San Francisco (Delaware) Holding Company, dated June 23, 1988 (1) 3.2 Agreement and Plan of Merger of Bank of San Francisco (Delaware) Holding Company, a Delaware corporation and Bank of San Francisco Company Holding Company, a California Corporation, dated June 24, 1988 (1) 3.3 Certificate of Amendment of the Certificate of Incorporation of Bank of San Francisco Company Holding Company, dated May 22, 1989 (1) 3.4 Certificate of Amendment of the Certificate of Incorporation of Bank of San Francisco Company Holding Company, dated September 21, 1989 (1) 3.5 Bylaws of Bank of San Francisco (Delaware) Holding Company, dated June 23, 1988 (1) 3.6 First Amendment to Bylaws of Bank of San Francisco Company Holding Company, dated July 19, 1989 (1) 3.7 Second Amendment to Bylaws of Bank of San Francisco Company Holding Company, dated June 6, 1990 (1) 3.8 Certificate of Amendment of the Certificate of Incorporation of Bank of San Francisco Company Holding Company, dated May 23, 1994 (4) 3.9 Amended and Restated Certificate of Incorporation of The San Francisco Company, dated May 23, 1994 (4) 3.10 Certificate of Amendment of Certificate of Incorporation or The San Francisco Company, dated December 18, 1996(7) 4.1 Certificate of Designations of Rights, Preferences, Privileges and Restrictions of 8% Series B Convertible Preferred Stock of Bank of San Francisco Company Holding Company, dated July 28, 1988 (1) 4.2 Amended Certificate of Designations of Rights, Preferences, Privileges and Restrictions of 7% Series B Convertible Preferred Stock of Bank of San Francisco Company Holding Company, dated October 7, 1988 (1) 4.3 Certificate of Correction of Certificate of Incorporation, dated June 18, 1990 (1) 10.2 Lease dated November 1, 1960 between The Lurie Company and Bank of America, with respect to premises at 550 Montgomery Street (2) 10.3 Consent to Assignment of Lease, dated October 8, 1986, between The Lurie Company and Bank of San Francisco and Bank of San Francisco Realty Investors, with respect to premises at 550 Montgomery Street (2) 10.4 Assignment of Lease, dated October 17, 1986, by Bank of America to Bank of San Francisco and Bank of San Francisco Realty Investors, with respect to premises at 550 Montgomery Street (2) 10.7 Letter Agreement with the Board of Governors of the Federal Reserve Board, dated April 21, 1989 (1) 10.9 Bank of San Francisco Company Holding Company 401(k) Profit Sharing Plan (3) 10.18 Employment Agreements dated October 1, 1994 between Mr. Gilleran and The San Francisco Company and the Bank of San Francisco. (5) 10.19 Employment Agreements dated November 27, 1995 between Mr. John McGrath and the Bank of San Francisco(6) 10.20 Subscription Agreement dated as of February 26, 1996 between The San Francisco Company and Putra Masagung (6) 10.21 Amended and Restated 1993 Stock Option Plan (7) 11.1 Computation of Earnings Per Share 21 Subsidiaries of registrant (3)
___________________________ Footnotes to List of Exhibits: * Indicates filed herewith. (1) Incorporated by reference from the Form S-2 (Registration No. 33-34985). (2) Incorporated by reference from the Form 10-K for the year ended December 31, 1986. (3) Incorporated by reference from Form 10-K for the year ended December 31, 1990. (4) Incorporated by reference from Proxy Statement for the Special Meeting of Stockholders' held on May 23, 1994. (5) Incorporated by reference from Form 10-K for the year ended December 31, 1994. (6) Incorporated by reference from Form 10-K for the year ended December 31, 1995. (7) Incorporated by reference from Proxy Statement of the 1996 Annual Meeting of Stockholders' held on December 18, 1996.
(b) Reports on Form 8-K filed in the fourth quarter of 1996:
None
page SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The San Francisco Company
/s/ James E. Gilleran Chairman of the Board and March 31, 1997 James E. Gilleran Chief Executive Officer (Principal Executive Officer)
/s/ Keary L. Colwell Executive Vice President March 31, 1997 Keary L. Colwell Chief Financial Officer (Principal Accounting Officer)
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ James E. Gilleran Chairman of the Board and March 31, 1997 James E. Gilleran Chief Executive Officer (Principal Executive Officer)
/s/ John McGrath President and March 31, 1997 John McGrath Director
/s/ Willard D. Sharpe Director March 31, 1997 Willard D. Sharpe
/s/ Gordon B. Swanson Director March 31, 1997 Gordon B. Swanson
/s/ Kent D. Price Director March 31, 1997 Kent D. Price
/s/ Nicholas C. Unkovic Director March 31, 1997 Nicholas C. Unkovic
/s/ Jackson L. Schultz Director March 31, 1997 Jackson L. Schultz
/s/ Gary Williams Director March 31, 1997 Gary Williams
/s/ Peter Foo Director March 31,1997 Peter Foo
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EXHIBIT 11.1
Calculation of Earnings Per Share
The following table provides the earnings per share calculations for the years ended December 31, for each of the periods shown:
1996 1995 1994
Primary earnings (loss) per share: Net income (loss) (in thousands) $ 702 $ 336 $(33,036)
Weighted average Common Shares outstanding 5,829,035 5,765,985 3,078,303
Net income (loss) per common and common equivalent share $0.12 $0.05 $(10.73)
Fully-diluted earnings (loss) per share: Net income (loss) (in thousands) $ 702 $ 336 $(33,036)
Weighted average Common Shares outstanding 5,829,035 5,765,985 3,078,303 Common stock equivalents - dilutive 17,944,066 3,645,061 -- Total weighted average common and common equivalent shares 23,773,101 9,411,046 3,078,303
Net income (loss) per Common and Common equivalent share $0.03 $0.03 $(10.73)