UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10198
Bank of San Francisco Company Holding Company
(Exact name of Registrant as specified in its charter)
Delaware 94-3071255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
550 Montgomery Street, San Francisco, California 94111
(Address of principal executive office) (Zip Code)
(415) 781-7810
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
The Registrant had 8,899,566 shares of Class A Common Stock
outstanding on May 11, 1994.
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Bank of San Francisco Company Holding Company and Subsidiaries
Quarterly Report on Form 10-Q
Table of Contents
Page
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Part I - Financial Information
Item 1. Consolidated Statements of Financial Condition
At March 31, 1994 and December 31, 1993 . . . . . . . . . . .1
Consolidated Statements of Operations
For the Three Months Ended March 31, 1994 and 1993. . . . . . .2
Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 1994 and 1993 . . . . . .3
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1994 and 1993. . . . . . .4
Notes to Consolidated Financial Statements . . . . . . . . . . .5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . .6
Part II - Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 20
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 21
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 21
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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Bank of San Francisco Company Holding Co
Consolidated Statements of Financial Condition
March 31, 1994 and December 31, 1993
(Unaudited)
March 31 December 31
(Dollars in Thousands Except Per Share Data) 1994 1993
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Assets:
Cash and due from banks $ 6,849 $ 8,333
Federal funds sold 17,000 17,500
Cash and cash equivalents 23,849 25,833
Investment securities held-to-maturity
(Market: 1994, $11,327; 1993, $6,353) 10,939 6,351
Investment securities available-for-sale 4,418 14,940
Loans 142,890 149,740
Deferred loan fees (444) (550)
Allowance for loan losses (6,598) (8,050)
Loans, net 135,848 141,140
Other real estate owned 29,753 32,372
Real estate investments 3,530 3,643
Premises and equipment, net 3,463 3,592
Interest receivable 881 946
Other assets 2,458 2,204
Total Assets $215,139 $231,021
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 35,427 $ 34,859
Interest bearing deposits 161,656 175,252
Total deposits 197,083 210,111
Other borrowings 1,203 1,303
Other liabilities and interest payable 2,469 2,152
Total Liabilities 200,755 213,566
Shareholders' Equity:
Preferred Stock (par value $0.01 per share) 18,116 18,116
Common stock (par value $0.01 per share; number of 89 89
shares outstanding 1994, 8,899,566; 1993, 8,899,801)
Additional paid-in capital 34,577 34,577
Deficit (38,285) (35,101)
Employee purchase and option plans (73) (166)
Unrealized loss on securities available-for-sale (40) (60)
Total shareholders' equity 14,384 17,455
Total Liabilities and Shareholders' Equity $215,139 $231,021
See accompanying notes to unaudited consolidated financial statements.
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Bank of San Francisco Company Holding Company and Subsidiaries
Consolidated Statements of Operations
Three Months Ended March 31, 1994 and 1993
(Unaudited)
March 31,
(Dollars in Thousands Except Per Share Data) 1994 1993
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Interest income:
Loans $ 2,966 $ 4,442
Investments 286 384
Dividends 11 --
Total interest income 3,263 4,826
Interest expense:
Deposits 1,267 1,909
Other borrowings 28 38
Total interest expense 1,295 1,947
Net interest income 1,968 2,879
Provision for loan losses 141 141
Net interest income after provision for loan losses 1,827 2,738
Non-interest income:
Service charges and fees 120 158
Loan brokerage and servicing fees 81 72
Stock option commissions and fees 614 724
Other income 101 291
Loss on sale of investment securities and
other assets, net (101) (19)
Total non-interest income 815 1,226
Non-interest expense:
Salaries and related benefits 1,999 2,266
Occupancy expense 615 740
Professional fees 609 300
FDIC insurance premiums 179 208
Data processing 101 158
Telephone 48 86
Other operating expenses 589 578
Total operating expenses 4,140 4,336
Net cost of real estate operations 1,658 2,130
Total non-interest expense 5,798 6,466
Loss before income taxes (3,156) (2,502)
Provision for income taxes 28 68
Net loss $(3,184) $(2,570)
Loss per common share:
Net loss $ (0.36) $ (0.29)
Weighted average shares outstanding 8,899,798 8,901,994
See accompanying notes to unaudited consolidated financial statements.
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Bank of San Francisco Company Holding Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 1994 and 1993
(Unaudited)
EmployeeUnrealized
Purchase Loss on Total
AdditionalRetained andSecuritiesShare-
Preferred Common Paid-inEarnings OptionAvailableholders'
(Dollars in Thousands) Stock Stock Capital(Deficit) Plansfor-Sale Equity
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Balances at Jan. 1, 1993 $ 6,116$ 89$ 34,583$(24,846)$ (266) $ 15,676
Net change in employee stock
ownership plans -- -- -- -- 23 23
Net proceeds from sale
of stock 6,000 -- -- -- -- 6,000
Net loss (three months) -- -- -- (2,570) -- (2,570)
Balances at Mar. 31, 1993 12,116 89 34,583(27,416) (243) 19,129
Net change in employee stock
ownership plans -- -- (6) -- 77 71
Net proceeds from sale
of stock 6,000 -- -- -- -- 6,000
Unrealized loss on securities
available-for-sale -- -- -- -- -- $ (60) (60)
Net loss (nine months) -- -- -- (7,685) -- -- (7,685)
Balances at Dec. 31, 1993 18,116 89 34,577(35,101) (166) (60) 17,455
Net change in employee stock
ownership plans -- -- -- 93 -- 93
Unrealized gain on securities
available-for-sale -- -- -- -- -- 20 20
Net loss (three months) -- -- -- (3,184) -- -- (3,184)
Balances at Mar. 31, 1994 $18,116$ 89$34,577$(38,285)$ (73)$ (40)$ 14,384
See accompanying notes to unaudited consolidated financial statements.
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Bank of San Francisco Company Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1994 and 1993
(Unaudited)
(Dollars in Thousands) 1994 1993
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Cash Flows from Operating Activities:
Net loss $(3,184) $(2,570)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for loan losses 141 141
Depreciation and amortization expense 123 205
Net loss on other real estate owned and real estate investment 1,200 1,606
Purchase of investment securities held-for-sale -- (1,310)
Sale of investment securities held-for-sale -- 2,620
Gain on sale of investment securities held-for-sale -- (17)
Loss on sale of investment securities available-for-sale 100 --
Decrease in interest receivable 65 69
Decrease in interest payable (172) (128)
Decrease in deferred loan fees (106) (7)
Net cash flows (used in) provided by operating activities (1,833) 609
Cash Flows from Investing Activities:
Proceeds from maturities of investment
securities held-to-maturity 3,299 1,500
Purchase of investment securities (7,887) (1,449)
Sale of investment securities available-for-sale 15,020 --
Purchase of investment securities available-for-sale (4,579)
Net decrease in loans 5,170 20,859
Recoveries of loans previously charged off 87 8
Purchases of premises and equipment -- (20)
Sale of other real estate owned 1,978 1,657
Acquisition of other real estate owned (445) (1,659)
Net (increase) decrease in other assets (248) 238
Net cash provided by investing activities $ 12,395 $ 21,134
Cash Flows from Financing Activities:
Net decrease in deposits $(13,028)$(16,167)
Net decrease in other borrowings (7) (119)
Net increase in other liabilities 489 920
Net proceeds from sale of preferred stock -- 6,000
Net cash (used in) provided by financing activities (12,546) 9,366
(Decrease) increase in cash and cash equivalents (1,984) 12,377
Cash and cash equivalents at beginning of period 25,833 19,597
Cash and cash equivalents at end of period $ 23,849 $ 31,974
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,467 $ 2,037
Supplemental Schedule of Noncash Investing and Financing Activities:
Payment of income taxes 67 40
Net transfer of loans to other real estate owned -- 429
Conversion of subordinated debt to common stock -- 4,367
See accompanying notes to unaditied consolidated financial statements.
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Bank of San Francisco Company Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Organization
The Bank of San Francisco Company Holding Company (the "Company")
is a Delaware corporation and a bank holding company registered under
the Bank Holding Company Act of 1956. 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.
Note 2 - Principles of Consolidation and Presentation
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with the instructions pursuant
to Form 10-Q Quarterly Report and Articles 9 and 10 of Regulation S-X,
and therefore, do not include all the information and footnotes
necessary to present the consolidated financial condition, results of
operations and cash flows in conformity with generally accepted
accounting principles.
The data as of March 31, 1994 and December 31, 1993, and for the
three months ended March 31, 1994 and 1993 are unaudited, but in the
opinion of management, reflect all accruals and adjustments of a
normally recurring nature necessary for fair presentation of the
Company's financial condition and operations. Certain amounts in the
1993 consolidated financial statements have been reclassified for
comparative purposes. The results of operations for the three months
ending March 31, 1994 are not necessarily indicative of the results to
be expected for the entire year of 1994. This report should be read in
conjunction with the Company's 1993 Annual Report on Form 10-K.
The accompanying financial statements include the accounts of the
Company, the Bank, and the Bank's wholly owned subsidiary, BSFRI,
formerly BSF Equities. All material intercompany transactions have been
eliminated in consolidation.
Note 3 - Loss Per Common Share
Loss per common share is calculated using the weighted average
number of common shares outstanding divided into net loss. The
potential conversion of the Series C Preferred Shares and warrants are
not included as common stock equivalents due to the dilutive effect on
per common share calculations of operating losses.
Note 4 - Dividend Restrictions
The Company is subject to dividend restrictions 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 Class A Common Shares in addition
to receiving the cash dividends to which they are entitled. The Board
of Directors suspended the dividend on the Class A Common Shares and the
Series B Preferred Shares.
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Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Bank of San Francisco Company Holding Company is a one-bank holding
company registered in Delaware under the Bank Holding Company Act of
1956. The principal activity of the Company is to serve as the holding
company for Bank of San Francisco, a California chartered bank organized
in 1978, with deposits insured by the Federal Deposit Insurance
Corporation's Bank Insurance Fund. The information set forth in this
report, including unaudited interim financial statements and related
data, relates primarily to the Bank.
The Company recorded a net loss of $3.2 million, or $0.36 per
common share, for the three months ended March 31, 1994, compared to a
net loss of $2.6 million, or $0.29 per common share for the same period
in 1993. The increase in the Company's net loss of $614,000 was from
lower net interest income of $911,000 and other non-interest income of
$411,000 which were partially offset by declines in total operating
expenses of $196,000, lower cost of real estate operations of $472,000,
and lower income tax expense of $40,000.
The Company's total non-interest expenses decreased slightly as a
result of an operating expenses control program instituted by the
Company in the second half of 1993, including expenses associated with
managing its high levels of non-performing assets. Offsetting some of
these improvements, professional fees consisting of legal, accounting
and consulting expenses related to the Company's regulatory examination
and related to the Company's 1994 Annual Meeting of Shareholders,
increased $309,000 from $300,000 in the first quarter of 1993. Total
non-interest expense decreased $668,000 from the same period in 1993.
At March 31, 1994, total assets were $215.1 million, a decline of
$15.9 million, or 6.9% from $231.0 million at December 31, 1993. Total
loans were $142.9 million, a decrease of $6.8 million, or 4.5% from the
$149.7 million at December 31, 1993. Total deposits were 197.1 million
at March 31, 1994, compared to $210.1 million at December 31, 1993.
In February 1994, the Company issued a Private Placement Memorandum
offering (the "Offering) to sell the Company's Class A Common Stock
including warrants to purchase additional shares of common stock, and
certain risk-protection rights. This Offering is expected to raise up
to $26.0 million, before the estimated expenses of the Offering, and to
be completed in the second quarter of 1994. The price has been set at
$0.32 per share. The price was derived from a Class A Common Stock book
value based on 44,599,500 shares of Class A Common Stock outstanding,
which assumes conversion of certain preferred stock, as of March 31,
1994.
Regulatory Directives and Orders
Federal Reserve Board Directive
As a result of the Federal Reserve Bank of San Francisco's (the
"FRB") examination of the Company as of June 30, 1991, the FRB on
April 20, 1992 issued a letter (the "Directive") prohibiting the
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Company, without the FRB's prior approval, from (i) paying any cash
dividends to its shareholders, (ii) incurring any new debt or increasing
existing debt, (iii) repurchasing any outstanding stock of the Company
or (iv) acquiring or entering into an agreement to acquire any entities
or portfolios. The Company has been notified that it is in a "troubled
condition" for purposes of Section 914 of the Financial Institutions
Recovery, Reform and Enforcement Act ("FIRREA"). Accordingly, the
Company must notify the FRB 30 days in advance of adding or replacing
any director or senior executive officer. All existing directors and
officers have been approved by the FRB. Additional directors have been
identified for approval.
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 Federal Deposit Insurance Corporation (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 most recent full-scope FDIC and SBD Report of Examination of the
Bank), to no more than $75.0 million by October 31, 1993, with further
reductions to no more than $60.0 million by December 31, 1993, no more
than $50.0 million by March 31, 1994 and 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 Order's Effective
Date 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 25% by
December 31, 1993, and not more than 15% by April 30, 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 March 31, 1994, the Bank met all industry-wide capital
requirements but failed to meet the 7% leverage capital ratio imposed by
the Orders. This failure is the result of continued losses suffered
through the first quarter of 1994. The Bank also failed to reduce its
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volatile liability dependency ratio to not more than 15% by April 30,
1994. The Bank presently has outstanding $20.0 million of brokered
deposits, which mature on September 30, 1994, that it is permitted to
accept only as a result of the waiver granted by the FDIC of an
otherwise applicable prohibition against the Bank's acceptance of
brokered deposits. In connection with the regulatory examination,
certain questions at the field examination level have been raised
relating to the Bank's solicitation and acceptance of certain other
deposits placed in the Bank by certain money managers. The aggregate
amount of such deposits were approximately $7.0 million at March 31,
1994. If the FDIC ultimately concludes that such deposits constitute
brokered deposits, the Bank would be required to seek a further waiver
from the FDIC to increase the amount of brokered deposits the Bank is
permitted to accept, which also would affect the Bank's volatile
liability dependency ratio. The Bank expects that if it is able to
complete the Offering, no action will be taken by the FDIC or the SBD
with respect to such non-compliance. No assurances, however, can be
given that no action will be taken with respect to such non-compliance
or that the waiver will be extended after September 1994. The Bank
believes that it is substantially in compliance with the other
requirements of the Orders and Restoration Plan. No assurance can be
given that capital, in addition to that raised pursuant to the Offering,
can be raised if the Bank requires such additional capital to remain in
compliance with capital adequacy requirements or to pursue the new
strategic focus of the Bank and the Company. In addition, because of
its asset quality, operating losses, volatile liability dependency and
liquidity problems, the Bank is potentially subject to further
regulatory sanctions that are generally applicable to banks that are not
adequately capitalized.
In response to the Orders, management has submitted a business plan
to the FDIC and the SBD for approval. Management expects that the basic
strategic actions contemplated in the business plan will be
substantially approved by the FDIC and the SBD after the present
regulatory examination is completed. Management also expects, however,
that the FDIC and SBD will require that the business plan be modified to
address any brokered deposit and liquidity concerns with more specific
plans. Management is presently developing such specific plans and
believe that the Bank will be able to take the basic strategic actions
contemplated in the business plan without need for further regulatory
approval, subject to the requirement that the Bank return to
profitability and be operated safely and soundly.
Capital Impairment Orders
The California Financial Code (the "Financial Code") requires the
Superintendent to order any bank whose contributed capital is impaired
to correct such impairment within 60 days of the date of such order.
Under Section 134(b) of the Financial Code, the "contributed capital,"
defined as all shareholders' equity other than retained earnings, of a
bank is deemed to be impaired whenever such bank has deficit retained
earnings in an amount exceeding 40% of such contributed capital. Under
Section 662 of the Financial Code, the Superintendent has the authority
and discretion to take certain appropriate regulatory action with
respect to a bank having impaired contributed capital, including
possible seizure of such bank's assets. A bank that has deficit
retained earnings may, subject to the approval of its shareholders and
of the Superintendent, readjust its accounts in a quasi-reorganization,
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which may include eliminating its deficit retained earnings, under
Section 663 of the Financial Code. However, a bank that is not able to
effect such a quasi-reorganization or otherwise to correct an impairment
of its contributed capital within 60 days of an order to do so from the
Superintendent must levy and collect an assessment on its common shares
pursuant to Section 423 of the California Corporations Code.
A bank is required to levy such an assessment within 60 days of the
Superintendent's order; the assessment becomes a lien upon the shares
assessed from the time of service or publication of such notice of
assessment. Within 60 days of the date on which the assessment becomes
delinquent, a bank subject to the Superintendent's order must sell or
cause to be sold to the highest bidder for cash as many shares of each
delinquent holder of the assessed shares as may be necessary to pay the
assessment and charges thereon.
As of March 31, 1994, the Bank had contributed capital of
$49.2 million and deficit retained earnings of $34.8 million, or
approximately 70.7% of contributed capital, within the meaning of
Section 134(b) of the Financial Code. Thus, under Section 134(b) of the
Financial Code, the Bank's contributed capital was impaired as of that
date in the approximate amount of $15.1 million. On November 6, 1992,
February 17, 1993, November 16, 1993 and February 7, 1994, the
Superintendent issued orders to the Bank to correct the impairment of
its contributed capital within 60 days. The Bank has not complied with
these orders. As the sole shareholder of the Bank, the Company (not the
Company's shareholders) will receive any notices of assessment issued by
the Bank. The Bank is in violation of this California law requiring it
to assess the shares of the Bank (which are all held by the Company) in
order to correct the impairment of the Bank's capital.
In response to the February 7, 1994 order requiring the Bank to
correct its impaired within 60 days, the Bank notified the SBD in
writing that it did not believe it will be in a position to comply with
the order within 60 days and requested the SBD's cooperation as the
Company implements its plan for an Offering.
The Bank's capital impairment may be corrected through earnings, by
raising additional capital or by a quasi-reorganization, subject to the
approval of the SBD, in which the Bank's deficit retained earnings would
be reduced or eliminated by a corresponding reduction in the Bank's
contributed capital.
As of March 31, 1994, the Bank would have been required to raise
$38.0 million in new capital in order to correct its impaired
contributed capital (because the ratio of deficit retained earnings to
contributed capital may not exceed 40%, $2.50 of new capital must be
raised for every dollar of impairment). The proceeds of the Offering
alone will not be sufficient to correct the Bank's capital impairment.
However, the Bank believes that with the proceeds of the Offering and,
if a quasi-reorganization is permitted by the SBD, permitting the Bank
to reclassify (among other adjustments) the Bank's shareholder's equity
by reducing its retained deficit by a corresponding charge to the Bank's
contributed capital in excess of par value, the Bank, then, would not
have impaired contributed capital.
The Company continues discussions with SBD staff regarding a quasi-
reorganization. It is the policy of the Superintendent not to grant a
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quasi-reorganization unless a Bank can establish that (a) it has
adequate capital, (b) the problems that created past losses and the
impairment of capital have been corrected and (c) it is currently
operating on a profitable basis and will continue to do so in the
future. Management believes, although it cannot assure, that the Bank
will be able to so demonstrate at such time as the Bank's problem assets
are substantially resolved, and that it will then be possible for the
Bank to effect a quasi-reorganization. Management also believes that,
because it is anticipated that the Bank will have high leverage and
risk-based capital ratios after the Private Placement, it is unlikely
that the Superintendent would seek to take action solely on the basis of
impaired capital under Section 134 definition. There can be no
assurance, however, that other circumstances such as insufficient
liquidity or further operating issues could not arise that would provide
incentive to the superintendent to utilize the powers granted by Section
134.
No assurance can be given that the Bank's capital condition will
not deteriorate further as a result of operating losses prior to a
quasi-reorganization. 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 as a result of such a reduction in the
market value of the Bank's assets over its liabilities. Finally, there
can be no assurance that, following a correction of the Bank's capital
impairment, whether through a quasi-reorganization or an infusion of
sufficient capital, the Bank's capital position will not continue to
erode through future operating losses. As long as the Bank's
contributed capital is impaired, the Superintendent is authorized to
take possession of the property and business of the Bank, or to order
the Bank to comply with the legal requirement and levy an assessment on
the shares of the Bank held by the Company sufficient to correct the
impairment. As the Company is the sole shareholder of the Bank, the
assessment would be made on the Company. The Company does not have the
funds to satisfy such an assessment. 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.
Results of Operations
Net Interest Income
The Company's net interest income decreased to $2.0 million from
$2.9 million in the quarter ended March 31, 1994 from the same quarter
in 1993, respectively, a decline of $911,000 or 31.4%. The decrease was
the result of reductions in both interest-earning assets and a slight
decrease in the Bank's interest margin. Both interest-earning assets
and interest bearing liabilities decreased 30.3% for the quarter ended
March 31, 1994 compared to the quarter ended March 31, 1993. The
average margin decreased 0.24% from 4.87% for the quarter ended March
31, 1993, to 4.63% for the quarter ended March 31, 1994 primarily as a
result of a change in the mix of deposit and loan types from the same
period in 1993.
As of March 31, 1994, the certificates of deposit were $79.8
million or 40.0% of total deposits and borrowings compared to $91.2
million or 32.0% of total deposits and borrowings for the same period in
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1993. During first quarter of 1994, the average stock option loans were
lower and fees related to loans were lower than in the same period in
1993.
Non-Interest Income
Non-interest income decreased $411,000, from $1,226,000 at March
31, 1993 to $815,000 at March 31, 1994. The reduction in the Company's
earning assets contributed to the decrease in service charges and fees
of $38,000, or 24.1%. Stock option commissions and fees decreased
$110,000, or 15.2% as a result of reduced activities by holders of stock
options. Other income was $190,000 lower than the previous
corresponding period partially due to a non-recurring split dollar life
insurance policy refund in 1993, lower miscellaneous income related to
brokerage activities, and lower income from operating lease. Decrease
in gain (loss) on sale of assets was attributable to a $100,000 loss on
the redemption of mutual funds discussed later. See "Investments."
Due to the increases in the interest rates and the volatility of
the stock market during the first quarter of 1994, which are expected to
continue during the second quarter of 1994, the Bank is experiencing a
significant reduction in stock option activities. The activities are
usually tied to the performance of each stock option holder's company.
With large movements in the price of the stock of many companies, many
stock option holders are not exercising their options. The decrease in
transactions is expected to reduce the amount of commission and fee
revenue earned and the transaction related costs incurred by the Bank in
the second quarter of 1994.
Non-Interest Expense
Operating Expenses
The Company's operating expenses decreased by $196,000 during the
first quarter of 1994 compared to the same period in 1993 primarily as
a result of an operating expenses control program instituted by the
Company in the second half of 1993 and as a result of lower costs
related to lower loan and deposit volumes. Offsetting some of these
improvements certain expenses increased including professional fees
consisting of legal, accounting and consulting expenses. The expense
increases related to the Company's regulatory examination,
implementation costs related to improvements required in the Orders,
legal costs for the Company's 1994 Annual Meeting of Shareholders, costs
related to implementation of the Bank's business strategies, and certain
other one time costs.
The one time costs include a $300,000 payment for the settlement of
a lawsuit, an accrual of costs related to out-sourcing certain functions
related to the Bank's data processing operations, and an accrual for
costs related to certain bonuses under an incentive plan that has been
cancelled. See "Part II -- Other Information -- Legal Proceedings."
The Bank expects professional service related costs to continue to
exceed prior year levels during the second quarter 1994. These costs
will relate to the finalization of the regulatory examinations, to the
preparation of the Annual Meeting, to the implementation of new business
strategies, and the exploration of possible solutions related to the
liquidation of problem assets.
<PAGE>
<PAGE>
Net Cost of Real Estate Operations
Net cost of real estate operations decreased $472,000 from $2.1
million at March 31, 1994 to $1.6 million at March 31, 1994. The
decrease is attributed to a reduction in the Bank's provision for losses
and losses on sale of other real estate owned, totaling $1.2 million for
the quarter ended March 31, 1994, compared to $1.7 million for the
quarter ended March 31, 1993. In part, the decrease was due to a
reduction in foreclosed properties and smaller write-downs of existing
properties which may indicate a reduction in credit quality weaknesses.
The loss on sale and real estate loss provisions recognized during
the first quarter 1994 related to seven properties.
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which includes cash and short term
investments totaled $39.2 million, or 18.2% of total assets, at March
31, 1994, a decrease of $7.9 million, from $47.1 million, or 20.4% of
total assets, at December 31, 1993. The decrease was the result of net
reduction in deposits of $13.0 million during the first quarter of 1994.
See "Deposits."
As of March 31, 1994, the Bank had pledged loans and securities
enabling the Bank to borrow up to $4.0 million from the Federal Home
Loan Bank of San Francisco (FHLB). The Bank had not drawn on this line
of credit during the first quarter of 1994. The Bank expects that it
will utilize the FHLB line of credit during the second quarter of 1994
to manage its liquidity position through short-term borrowings. In the
future, long and short term borrowings from the FHLB will be used as an
on-going source of liquidity and funding.
The Bank currently has a short-term line of credit at the discount
window with the Federal Reserve Bank of up to $3.2 million secured by
loans in the Bank's portfolio. As of March 31, 1994, the Bank had not
drawn on its line of credit with the Federal Reserve Bank.
The Bank recently implemented a contingency funding plan which
addresses possible funding and liquidity problems. This plan provides
for early warning system that monitors trends in the Bank's cash flow in
addition to identifying sources of additional funds.
During 1992 and 1993, the Company's principal source of liquidity
has been new capital from the issuance of its capital stock. As of
March 31, 1994, the Company (not the Bank) will not be able to meet its
short-term liabilities without an additional capital infusion or through
short-term borrowings.
Capital
At March 31, 1994, shareholders' equity was $14.4 million, compared
to $17.5 million at December 31, 1993, primarily as a result of the $3.2
million net operating loss. At March 31, 1994, the Company and the
Bank's Tier I capital were $14.4 million and $14.3 million,
<PAGE>
<PAGE>
respectively. Tier I capital is generally defined as the sum of the
core capital elements less goodwill and certain intangibles.
The Company and the Bank are subject to general regulations issued
by the FRB, FDIC, and SBD which require maintenance of a certain level
of capital and the Bank is under specific capital requirements as a
result of the Orders. As of March 31, 1994, the Company was in
compliance with all minimum capital requirements and the Bank was in
compliance with all minimum capital requirements, except for the minimum
leverage ratio of 7% mandated by the Orders. The decline in the Company
and Bank's leverage ratio during the first quarter was primarily the
result of the first quarter operating loss.
The following table reflects both the Company's and the Bank's
capital ratios with respect to minimum capital requirements in effect as
of March 31, 1994:
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
<S> <C> <C> <C> <C>
Leverage ratio 6.4% 6.4% 4.0% 7.0%
Tier 1 risk-based capital 7.4 7.4 4.0 N/A
Total risk-based capital 8.8 8.8 8.0 N/A
</TABLE>
The Company and the Bank must raise additional capital in order to
obtain greater assurance that the Company and the Bank will be able to
meet their minimum capital requirements on an ongoing basis and to
pursue perceived opportunities and management's new strategic
initiatives. However, if the Company were to receive the maximum amount
under the Offering, the Bank would still not be in compliance with the
Capital Impairment Orders discussed earlier. See "Regulatory Directives
and Orders -- Capital Impairment Orders."
Investment Activities
At March 31, 1994, the Company's investment securities, including
Fed funds sold, totaled $32.4 million, or 15.2% of total assets,
compared to $38.8 million, or 16.8% of total assets, at December 31,
1993.
At March 31, 1994, investment securities held-to-maturity totaled
$10.9 million, compared to $6.4 million at December 31, 1993, and are
carried at amortized cost. At March 31, 1994, the Company held $4.4
million defined as securities available-for-sale and an unrealized loss
of $40,000 is included as a separate component of shareholder's equity
to reflect the current market value of these securities. Investment
securities available-for-sale are accounted for at fair value.
Unrealized gains and losses are recorded as an adjustment to equity and
are not reflected in the current earnings of the Company.
Investment securities available-for-sale of $14.9 million at
December 31, 1993, consisting of mutual funds, were liquidated during
the first quarter of 1994 in order to shorten the maturity of the
investment portfolio, allow better control over interest rate risk in
<PAGE>
<PAGE>
the investment portfolio, and take advantage of the improved yields of
owning individual debt securities versus a pool of securities as in a
mutual fund portfolio. The investments purchased include treasury
securities, adjustable rate mortgage backed securities and
collateralized mortgage backed securities. A loss of $100,000 was
recorded on the sale a securities available for sale.
The increase in investment securities held-to-maturity of $4.6
million resulted primarily from the liquidation of the mutual funds
discussed earlier. The remaining funds were used to purchase securities
available-for-sale of $4.4 million and to paydown certain deposit
liabilities. All investment securities held-to-maturity purchased
during the first quarter of 1994 have maturities or principal
amortization of one year or less.
Loans
During the first quarter of 1994, total loans decreased by $6.2
million, from $149.7 million at December 31, 1993 to $142.9 million at
March 31, 1994. The reduction resulted primarily from loan repayments
and loan charge-offs. The composition of the Bank's loan portfolio at
March 31, 1994 and December 31, 1993 is summarized as follows:
<TABLE>
<CAPTION>
March 31 December 31
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Commercial and financial $ 104,527 $ 109,008
Real estate construction 14,040 14,023
Real estate mortgage 24,121 26,479
Net lease financing 202 230
142,890 149,740
Deferred fees and discounts, net (444) (550)
Allowance for possible loan losses (6,598) (8,050)
Total loans, net $ 135,848 $ 141,140
</TABLE>
Included in new loan fundings are loans to facilitate the sale of
the Bank's other real estate owned and real estate investment
properties. Typically, these loans are purchased from the Bank with
certain minimum financing terms. The terms vary on a case-by-case
basis, but depend heavily on the down payment and the financial strength
of the new borrower. The Bank's loans to facilitate the sale of other
real estate owned and real estate investment were $22.7 million at March
31, 1994 compared to $21.6 million at December 31, 1993. The Bank
expects that it may continue to provide loans to facilitate as it
liquidates its problem asset portfolio.
Classified Assets
Classified assets include non-accrual loans, other real estate
owned, real estate investments and performing loans that exhibit credit
quality weaknesses. Certain loans identified as in-substance foreclosed
are included in other real estate owned.
<PAGE>
<PAGE>
The table below outlines the Bank's classified assets at March 31, 1994
and December 31, 1993:
<TABLE>
<CAPTION>
March 31 December 31
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Loans - performing $ 18,060 $ 11,847
Non-accrual loans 12,117 11,086
Other real estate owned 29,753 32,372
Real estate investments 1,352 1,468
Total classified assets $ 61,282 $ 56,773
</TABLE>
Classified loans increased to $61.3 million as of March 31, 1994
compared to $56.8 million at December 31, 1993. Based on comments
received from the FDIC and SBD field examiners during the present
examination, the Bank refined its loan grading and classification
process. The Bank reclassified $11.1 million in loans that were
previously identified as special mention loans. Special mention loans
are defined as loans that do not presently expose the Bank to a
sufficient degree of risk to warrant a more adverse classification, but
possess certain credit deficiencies or potential weaknesses deserving
management's attention.
The Bank was required by the Orders to reduce certain classified
assets to no more than $60.0 million by December 31, 1993, no more than
$50.0 million by March 31, 1994, and no more than $40.0 million by
September 30, 1994. See "Regulatory Directives and Orders -- Cease and
Desist Orders." At March 31, 1994, the Bank was not in compliance with
the Orders with $51.1 million in such assets. However, the Bank expects
that no regulatory action will be taken with respect to such deficiency
in light of its substantial compliance. The Bank expects that it will
meet the September 30, 1994 requirement of the Orders.
Management cannot foresee when the present weakness in the regional
real estate market will diminish, and a lengthy continuation of this
weakness could increase the amount of the Bank's classified or non-
performing assets and, in addition, could have an adverse effect on the
Bank's efforts to collect its non-performing loans or otherwise
liquidate its non-performing assets on terms that are favorable to the
Bank. Accordingly, there can be no assurance that the Bank will not
experience additional increases in the amount of its non-performing
assets or experience significant additional losses in attempting to
collect the non-performing loans or otherwise liquidate the non-
performing assets which are presently reflected on the Company's
statement of financial condition. Moreover, the Bank has been incurring
substantial asset-carrying expenses, such as maintaining and operating
properties included within the Bank's other real estate owned
classification, and the Bank may continue to incur asset-carrying
expenses in connection with such loans and assets until its non-
performing loans and assets are collected or liquidated.
The Bank continues to explore the possible sale of part or all of
the problem assets in its loan, other real estate owned, and real estate
investment portfolios. Management expects that any such sale would
likely entail further write-down of the problem assets sold in
recognition of the administrative expenses and holding cost incurred by
<PAGE>
<PAGE>
the buyer, together with the rate of return expected by the buyer for
such a transaction. Management anticipates that such a sale would be
undertaken, if at all, only in the event of the successful completion of
the Offering. The Bank expects that additional costs for professional
services will be incurred during the second quarter in order to properly
evaluate the potential for such a sale or other method of liquidating
the problem asset portfolio.
Non-Performing Assets
Non-performing assets are comprised of non-accrual loans, in-
substance foreclosed assets and real estate foreclosures.
Non-performing assets were $41.9 million at March 31, 1994, down
slightly from $43.5 million at the end of 1993.
During the first quarter 1994, the reduction of $1.6 million in
non-performing assets was primarily the result of OREO sales of $1.3
million, net of write-downs of $1.1 million. A total of $3.3 million in
loans were transferred to non-accrual status as a result of certain
credit quality weaknesses, $1.1 million in non-accrual loans was paid
off, and a total of $1.4 million in non-accrual loans were charge-off
during the first quarter of 1994.
At March 31, 1994 and December 31, 1993, other real estate owned,
including in-substance foreclosed loans, was $29.8 million and $32.4
million, respectively. In-substance foreclosed loans are those in which
the borrower has little or no equity in the collateral based on its fair
value, the borrower has effectively abandoned control of the collateral
so that many of the risks and rewards of ownership have been passed to
the lender, and repayment of the loan can only be expected from the
operation or sale of the collateral. An in-substance loan may be
returned to a performing loan status if the existing borrower can pay
all uncollected interest or provide for a principal reduction and can
demonstrate the financial ability to maintain cash flow to support the
loan for the foreseeable future. At March 31, 1994 and December 31,
1993, in-substance foreclosed loans were $17.8 million and $19.1
million, respectively. As of March 31, 1994 and December 31, 1993, all
other real estate owned (OREO) and real estate investments held for
development were classified.
Non-performing assets secured by subordinate deeds of trust totaled
$1.1 million as of March 31, 1994. Of the $17.8 million in other real
estate owned that was classified as in-substance foreclosure, $17.1
million of which are secured by first deeds of trust. Restructured
loans totaled $2.0 million at March 31, 1994 and December 31, 1993.
The following table provides information on all non-performing
assets at March 31, 1994 and December 31, 1993:
<TABLE>
<CAPTION>
March 31 December 31
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Non-accrual loans $ 12,117 $ 11,086
Other real estate owned 29,753 32,372
Total non-performing assets 41,870 $ 43,458
Percentage of total loans and OREO outstanding 24.2% 23.9%
</TABLE>
<PAGE>
<PAGE>
In addition to the loans disclosed in the foregoing table, the Bank
had approximately $3.2 million in loans on March 31, 1994 that were
between 31 and 89 days delinquent. In the opinion of management, these
loans have a greater than ordinary risk that the borrowers may not be
able to perform under the terms of their contractual arrangements. As
of March 31, 1994, $1.7 million in loans were less than 90 days
delinquent, but were transferred to non-accrual status. These loans had
demonstrated weaknesses that warranted non-accrual status.
Approximately $2.7 million of the loans delinquent between 31 and 89
days are secured by first or subordinate deeds of trust on real estate
and $500,000 were unsecured.
During 1993, the Bank transferred to in-substance foreclosure a
loan with a carrying value of $1.6 million collateralized by commercial
real estate. The collateral securing this loan may require seismic
upgrading and may be located on property containing hazardous materials.
The Bank may perform further testing and investigation on the property
to obtain additional information concerning the cost of the seismic
upgrades and the nature and extent of any contamination. In conjunction
with the current regulatory examination, $600,000 was charged-off at
March 31, 1994, reducing the carrying value to $1.0 million. The actual
losses the Bank may incur on this property have not been determined and
no assurances can be given that further charge-offs will not be
required.
Valuation Allowances
During 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114 "Accounting by
Creditors for Impairment of a Loan" (SFAS No. 114). Among the
requirements of SFAS No. 114 is that the value of an impaired loan be
measured based on the present value of expected future cash flows or at
the fair value of the collateral if the loan is real estate dependent.
Loans historically classified as in-substance foreclosure will no longer
be included in other real estate owned, but rather will remain in the
loan portfolio. SFAS No. 114 is effective beginning in 1995, but,
earlier implementation is permitted. The Company anticipates
implementing SFAS No. 114 on January 1, 1995. The effect of SFAS No.
114 on the Company's financial statements is unknown at this time
because the complex analysis to implement this standard has not been
completed.
Allowance for Loan Losses
The Bank charges current earnings with provisions for estimated
losses on loans receivable. The provisions take into consideration
specifically identified problem loans, the financial condition of the
borrowers, the fair value of the collateral, recourse to guarantors and
other factors.
Specific loss allowances are established based on the asset
classification and credit quality grade. Specific loss allowances are
utilized to ensure that the allowance is allocated based on the credit
quality grading to capture inherent risks. In addition, the Bank
carries an "unallocated" loan loss allowance to provide for losses that
may occur in the future in loans that are not presently classified,
based on present economic conditions, trends, and related uncertainties.
<PAGE>
<PAGE>
The following table summarizes the loan loss experience of the Bank for
the quarter ended March 31, 1994:
<TABLE>
<CAPTION>
March 31
(Dollars in Thousands) 1994
<S> <C>
Beginning balance of allowance for loan losses $ 8,050
Charge-offs (1,680)
Recoveries 87
Provision 141
Ending balance of allowance for loan losses $ 6,598
</TABLE>
For the quarter ended March 31, 1994, the Company charged-off
$677,000 in real estate related loans, $334,000 in commercial loans and
$669,000 in unsecured loans. Recoveries were $87,000 relating to 15
loans. The charge-offs related primarily to loans with specific loan
loss allowances. In conjunction with the present regulatory
examinations, those loans that exhibited continued weakness or credit
quality deterioration were charged-off during the first quarter of 1994.
The unallocated portion of the allowance for loan loss totaled $789,600
at March 31, 1994 compared to $2.8 million at December 31, 1993. The
reduction in the unallocated allowance was primarily the result from the
refinement of the Bank's loan grading and classification process.
Allowance for Losses on Other Real Estate Owned
The following table summarizes the other real estate owned loss
experience of the Bank for the quarter ended March 31, 1994:
<TABLE>
<CAPTION>
March 31
(Dollars in Thousands) 1994
<S> <C>
Beginning balance of allowance for losses $ 2,986
Charge-offs (50)
Provision 1,010
Ending balance of allowance for losses $ 3,946
</TABLE>
The Bank recorded a net loss of $66,400 on sale of two OREO
properties. The OREO properties are shown net of allowance for losses.
The provision for loss on OREO during the first quarter of 1994 resulted
from the continuing review of the OREO portfolio. See "Results of
Operations -- Net Cost of Real Estate Operations."
<PAGE>
<PAGE>
Allowance for Losses on Real Estate Investments
The following table summarizes the real estate investments loss
experience of the Bank for the quarter ended March 31, 1994:
<TABLE>
<CAPTION>
March 31
(Dollars in Thousands) 1994
<S> <C>
Beginning balance of allowance for losses $ 712
Charge-off --
Provision 124
Ending balance of allowance for losses $ 836
</TABLE>
The provision for loss on real estate investments related to two
properties. The provision was required as a result of a reduction in
the fair value as of March 31, 1994.
Deposits
The Bank had total deposits of $197.1 million at March 31, 1994,
compared to $210.1 million at December 31, 1993, a decrease of $13.0
million. A summary of deposits at March 31, 1994 and December 31, 1993
is as follows:
<TABLE>
<CAPTION>
March 31 December 31
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Demand deposits $ 35,427 $ 34,859
NOW 41,549 48,908
Money market 34,377 35,051
Savings 5,921 7,544
Total deposits with no stated maturity 117,274 126,362
Time deposits:
Less than $100,000 49,081 51,481
$100,000 and greater 30,728 32,268
Total time deposits 79,809 83,749
Total deposits $ 197,083 $ 210,111
</TABLE>
The $13.0 million decline was attributed to decreases in private
banking customer deposits of $6.7 million, Association Bank Services
customer deposits of $5.7 million, and money desk deposits of $3.2
million which were partially offset by increases in deposits related to
stock option lending deposits of $2.9 million.
The Bank's primary focus is in private banking, with deposits
totaling $73.7 million, or 37.4% of total deposits, at March 31, 1994,
compared to $80.4 million, or 38.3% of total deposits, at December 31,
1993. Private banking customer deposits declined $6.7 million during
the first quarter of 1994 primarily as a result of customer concerns
over the financial condition of the Bank. Upon the completion of the
Offering, the Bank believes that existing and former clients of the
private banking group will increase and reestablish their relationship
with the Bank, particularly their depository relationships.
<PAGE>
<PAGE>
The Bank is dependent upon other sources for deposits. Deposits
acquired through its Association Bank Services function totaled $39.4
million, or 20.0% of total deposits at March 31, 1994, compared to $45.1
million, or 21.5% of total deposits at December 31, 1993. The decline
of $5.7 million during the first quarter of 1994 was due to the same
financial concerns discussed earlier with respect to the private banking
deposits. Deposits acquired through the money desk operations totaled
$38.3 million, or 19.4% of total deposits at March 31, 1994, compared to
$41.5 million, or 19.8% of total deposits at December 31, 1993. The
decline in money desk deposits reflected management's plan to reduce
these types of deposits through lower pricing. In the future, the Bank
expects to increase these deposits during the remainder of the year with
the intention of replacing some of the brokered deposits and to allow
for a more orderly reduction of dependence on volatile deposits.
The Bank has an agreement with a major retail brokerage firm for
the placement of the Bank's certificates of deposit. At March 31, 1994
and December 31, 1993, the Bank had outstanding certificates of deposit
placed through this brokerage firm of $20.0 million. All of the Bank's
brokered deposits mature in September 1994. In addition, as a result of
the current regulatory examination, certain money market accounts
totaling $7.0 million were reclassified as brokered deposits as of March
31, 1994. Most of these deposits have been on deposit in the Bank since
1989. As a result, brokered deposits totaled $27.0 million, or 13.7% of
total deposits, at March 31, 1994.
The Bank's ability to accept brokered placements of deposits was
restricted in the first quarter of 1992 under FDICIA and FDIC
regulations that prohibit adequately capitalized banks from accepting or
renewing such deposits. The Bank is currently accepting brokered
deposits pursuant to a waiver of such prohibition which expires in
September 1994 for $20.0 million. An application has been submitted to
the FDIC to extend such waiver to include the $7.0 million in deposits
recently deemed to be brokered deposits. No assurance can be given that
the additional waiver will be granted and that the FDIC will extend its
waiver in September 1994 for any of the brokered deposits. In addition,
in the event that the Bank's total risk based capital ratio falls below
8.0%, no waiver can be granted by the FDIC to waive the restriction
against accepting or renewing brokered deposits.
Concentrations of brokered deposits and deposits acquired through
the money desk operations have been classified by bank regulators as
volatile liabilities associated with certain risks, including the risks
of reduced liquidity if a bank is unable to retain such deposits and
reduced margins if its interest costs are increased by a bank in order
to retain such deposits. As a result of the Orders, the Bank was
required to submit a plan to the FDIC and SBD to reduce the Bank's
volatile liability dependency ratio to not more than 25% by December 31,
1993, and not more than 15% by April 30, 1994.
The Bank's volatile dependency ratio at March 31, 1994 was 32.3%
including the recently identified brokered deposits discussed above.
The Bank is currently in discussions with the regulators regarding the
status of the Bank's progress in reducing its volatile dependency ratio.
However, because these brokered and money desk deposits comprise
approximately 33.1% of the Bank's total deposits, no assurance can be
given that these deposits, in the near future, can be replaced with
other core deposits. Prior to the reclassification of these brokered
deposits, and with the additional capital from the Offering, the Bank
<PAGE>
<PAGE>
was expected to meet the conditions imposed by the Orders. See
"Liquidity"
The Bank currently offers a CD Arbitrage program designed to invest
customer funds in other financial institutions. During the current
examination, the FDIC examiners suggested that these activities
constituted a deposit brokerage activity which requires prior written
notice to the FDIC. If the FDIC ultimately concludes that the Bank is
acting as a deposit broker, the Bank will need to provide the requisite
notice to the FDIC. Although, it is possible that the Bank could be
subject to regulatory sanctions for engaging in the activities mentioned
in this section, the FDIC has advised the Bank that it does not intend
to take any such action.
Other
The Bank and the Company contemplate making an offer to the limited
partners of the Bank of San Francisco Building Company Partnership to
purchase the limited partnership interest held by them. The Company
presently contemplates that such offer to the limited partners would be
composed of two parts. First, each limited partner who is an
"accredited investor" (as defined in Regulation D under the Securities
and Exchange Commission Act of 1934 as amended) would be able to
exchange each of his or her partnership interest for shares of the
Company's Class A Common Stock under pricing terms substantially
equivalent to that in the Offering, including, however, a portion in
cash. Second, each other limited partner would be able to exchange each
of his or her partnership interest for cash equivalent to such partner's
capital contribution to the partnership.
<PAGE>
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
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. At March 31, 1994, the Company and/or the Bank are
defendants in certain lawsuits for which the damages sought are
substantial as described below.
The Bank is currently involved in four lawsuits, two of which were
brought by former employees of the Bank in California Superior Court.
The first involves a former employee who alleged that the Bank and the
Bank's former Chief Executive Officer (at the time of his termination)
intentionally or negligently misrepresented their intentions regarding
his employment contract, and failed to pay monies due under the
employment contract, and that the Bank wrongfully terminated the
employment contract. The former employee has sought damages of
approximately $1.7 million under his contract claims. The second
involves another former employee who alleged that the Bank, and the
Bank's former Chief Executive and Chief Financial Officers (at the time
of that employee's termination) recruited the plaintiff with false
representations and fraudulent omissions with respect to the financial
condition of the Bank. The former employee claims to have resigned from
secure employment and was subsequently terminated. The former employee
has sought unspecified damages.
In the third lawsuit, the plaintiffs are seeking compensatory
damages in an amount of $6.0 million, and unspecified punitive damages.
The plaintiffs are claiming breach of an alleged joint venture
agreement, and of other duties owed to the plaintiffs, arising from the
Bank's foreclosure on a series of loans made to the plaintiffs by the
Bank in connection with the development of an 800 acre parcel of land.
The Bank was notified late in first quarter of 1994 of a fourth
pending litigation matter. In this lawsuit, the plaintiff, as
conservator for an insurance company, alleges that the Bank was
fraudulent or grossly negligent in accepting certain assets for deposit
with the Bank under a trust agreement, and issuing erroneous reports
with respect to such assets which were relied upon by others. The
complaint is seeking damages of $11.0 million plus unspecified punitive
damages. The defenses available to the Bank, however, include that the
Bank reasonably and properly relied upon a third party for the valuation
of the trust assets; that any report of such values was intended solely
as a report for the Bank's trust customer and was not intended by the
Bank as an assurance of such values or to be relied upon by third
parties; and that the standard imposed upon the Bank by the trust
documents limited the Bank's liability to conduct which is grossly
negligent or willful, which standard (even if the Bank would be held to
be negligent) was not breached by the Bank despite the claim to the
contrary in the compliant.
The Bank has denied or expects it will deny these allegations and
is vigorously defending these proceedings. The disposition of these
proceedings could have a material adverse effect on the Company's
financial position or results of operation, however, management cannot
predict the specific outcome of these actions. Accordingly, the
<PAGE>
<PAGE>
accompanying financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
Late in the first quarter of 1994 a lawsuit was brought by a former
borrower of the Bank seeking $3.3 million in connection with the Bank's
handling of certain transactions and was settled for $300,000 by the
Bank. The litigation settlement expense was reflected in other
operating costs.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
See "Note 1 -- Dividend Restrictions".
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
The Company and the Bank added in the first quarter two new
directors to its Board of Directors, Carl D. Gustavson and Willard
D. Sharpe. Mr. Gustavson is the former Chairman and Chief
Executive Officer of Hibernia Bank (San Francisco) and Jackson
County Bank (Oregon). Mr. Sharpe is the former Chief Asian
Economist for Chase Manhattan Bank and was an economist for the
United States State Department.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
None
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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.
Bank of San Francisco Company Holding Company
(Registrant)
Date: May 11, 1994 /s/ Kent D. Price
Kent D. Price
Chairman of the Board and
Chief Executive Officer
Date: May 11, 1994 /s/ Steven R. Champion
Steven R. Champion
Vice Chairman and
Chief Financial Officer
