THIS DOCUMENT IS A COPY OF THE 10-Q FILED ON AUGUST 16, 1994 PURSUANT TO A
RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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 June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-10198
The San Francisco Company
(Exact name of Registrant as specified in its charter)
Delaware 94-3071255
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Montgomery Street, San Francisco, California 94111
(Address of principal executive office) (Zip Code)
(415) 781-7810
(Registrant's telephone number, including area code)
The Bank of San Francisco Company Holding Company
(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 5,756,954 shares of Class A Common Stock
outstanding on August 10, 1994.
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The San Francisco Company and Subsidiaries
Quarterly Report on Form 10-Q
Table of Contents
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Part I - Financial Information
Item 1.Consolidated Statements of Financial Condition
At June 30, 1994 and December 31, 1993 . . . . . . . . . . . . . .1
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1994 and 1993. . . . .2
Consolidated Statements of Changes in Shareholders' Equity
For the Six Months Ended June 30, 1994 and 1993. . . . . . . . . .3
Consolidated Statements of Cash Flows
For the Three and Six Months Ended June 30, 1994 and 1993. . . . .4
Notes to Consolidated Financial Statements. . . . . . . . . . . . .5
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . .7
Part II - Other Information
Item 1.Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Item 2.Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 3.Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . 27
Item 4.Submission of Matters to a Vote of Security Holders . . . . . . . . . 28
Item 5.Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 6.Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 29
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 30
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The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
June 30, 1994 and December 31, 1993
(Unaudited)
June 30, December 31,
(Dollars in Thousands Except Per Share Data) 1994 1993
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Assets:
Cash and due from banks $ 9,455 $ 8,333
Federal funds sold 12,000 17,500
Cash and cash equivalents 21,455 25,833
Investment securities held-to-maturity
(Market: 1994, $8,184; 1993, $6,353) 8,200 6,351
Investment securities available-for-sale 4,091 14,940
Loans 126,068 149,740
Deferred loan fees (552) (550)
Allowance for loan losses (6,444) (8,050)
Loans, net 119,072 141,140
Other real estate owned 24,411 32,372
Real estate investments 3,295 3,643
Premises and equipment, net 3,378 3,592
Interest receivable 892 946
Other assets 2,475 2,204
Total Assets $187,269 $231,021
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 27,150 $ 34,859
Interest bearing deposits 140,931 175,252
Total deposits 168,081 210,111
Other borrowings 5,895 1,303
Other liabilities and interest payable 4,929 2,154
Total Liabilities 178,905 213,568
Shareholders' Equity:
Preferred stock (par value $0.01 per share) 116 18,116
Common stock (par value $0.01 per share; number of
shares outstanding 1994, 2,244,828; 1993, 444,871)(see Note 4.) 22 4
Additional paid-in capital 52,640 34,660
Deficit (44,321) (35,101)
Employee purchase and option plans (71) (166)
Unrealized loss on securities available-for-sale (22) (60)
Total Shareholders' Equity 8,364 17,453
Total Liabilities and Shareholders' Equity $187,269 $231,021
See accompanying notes to consolidated financial statements.
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The San Francisco Company and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1994 and 1993
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in Thousands Except
Per Share Data) 1994 1993 1994 1993
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Interest income:
Loans $ 2,920 $ 4,472 $ 5,886 $ 8,914
Investments 269 431 555 815
Dividends 14 19 25 19
Total interest income 3,203 4,922 6,466 9,748
Interest expense:
Deposits 1,199 1,734 2,466 3,643
Other borrowings 69 322 97 360
Total interest expense 1,268 2,056 2,563 4,003
Net interest income 1,935 2,866 3,903 5,745
Provision for loan losses 141 2,641 282 2,782
Net interest income after provision
for loan losses 1,794 225 3,621 2,963
Non-interest income:
Service charges and fees 99 45 219 203
Loan brokerage and servicing fees 83 81 164 153
Stock option commissions and fees 279 778 893 1,502
Other income 101 318 202 609
Loss on sale of assets, net (100) (38) (201) (57)
Total non-interest income 462 1,184 1,277 2,410
Non-interest expense:
Salaries and related benefits 1,677 2,101 3,676 4,367
Occupancy expense 613 815 1,228 1,555
Professional fees 982 399 1,591 699
FDIC insurance premiums 175 217 354 425
Data processing 96 80 197 238
Telephone 40 79 88 165
Other operating expenses 2,642 867 3,231 1,445
Total operating expenses 6,225 4,558 10,365 8,894
Net cost of real estate operations 2,028 842 3,686 2,972
Total non-interest expense 8,253 5,400 14,051 11,866
Loss before income taxes (5,997) (3,991) (9,153) (6,493)
Provision for income taxes 39 20 67 88
Net loss $(6,036) $(4,011) $(9,220) $(6,581)
Loss per common share:
Net loss $ (5.13) $ (9.01) $ (11.34) $ (14.79)
Weighted average
shares outstanding 1,176,718 444,981 812,816 444,981
See accompanying notes to consolidated financial statements.
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The San Francisco Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 1994 and 1993
(Unaudited)
Employee Unrealized
Purchase Loss on Total
Additional and Securities Share-
Preferred Common Paid-in Option Available -holders
(Dollars in Thousands) Stock Stock Capital Deficit Plans for-Sale Equity
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Balances at
January 1, 1993 $ 6,116$ 4$ 34,666$(24,846)$ (266) $ 15,674
Net change in employee stock
ownership plans -- -- -- -- 46 46
Net proceeds from
sale of stock 6,000 -- -- -- -- 6,000
Net loss (six months) -- -- -- (6,581) -- (6,581)
Balances at June 30, 1993 12,116 4 34,666(31,427) (220) 15,139
Net change in employee stock
ownerhip plans -- -- (6) -- 54 48
Net proceeds from
sale of stock 6,000 -- -- -- -- -- 6,000
Unrealized loss on securities
available-for-sale -- -- -- -- -- $ (60) (60)
Net loss (six months) -- -- -- (3,674) -- -- (3,674)
Balances at
December 31, 1993 18,116 4 34,660(35,101) (166) (60) 17,453
Net change in employee stock
ownership plans -- -- (2) -- 95 -- 93
Change in unrealized loss on securities
available-for-sale -- -- -- -- -- 38 38
Conversion of preferred stock
to common stock (18,000) 18 17,982 -- -- -- --
Net loss (six months) -- -- -- (9,220) -- -- (9,220)
Balances at
June 30, 1994 $ 116$ 22$ 52,640$(44,321)$ (71)$ (22)$ 8,364
See accompanying notes to consolidated financial statements.
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The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three and Six Months Ended June 30, 1994 and 1993
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in Thousands) 1994 1993 1994 1993
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Cash Flows from Operating Activities:
Net loss $ (6,036) $ (4,011) $ (9,220) $ (6,581)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Provision for loan losses 141 2,641 282 2,782
Depreciation and amortization expense 115 197 238 402
Net loss on other real estate owned and
real estate investment 1,094 380 2,228 1,986
Purchase of investment
securities held-for-sale -- -- -- (1,310)
Sale of investment
securities held-for-sale -- 17,119 -- 19,706
Net loss on investment
securities held-for-sale -- 46 -- 63
Loss on sale of investment
securities available-for-sale 87 -- 187 --
Loss on sale of investment
securities held to maturity 14 -- 14 --
Net decrease (increase) in
interest receivable (11) 363 54 432
Net inc/(dec) in interest payable 142 420 (30) 292
Net dec/(inc) in deferred loan fees 108 (79) 2 (87)
Net cash flows (used in)
provided by operating activities (4,346) 17,076 (6,245) 17,685
Cash Flows from Investing Activities:
Proceeds from sale of investment
securities held-to-maturity 1,812 -- 1,812 --
Proceeds from maturities of
investment securities held-to-maturity 271 -- 3,570 1,500
Purchase of investment
securities held to maturity -- (24,972) (7,901) (26,421)
Sale of investment
securities available-for-sale 2,900 -- 17,921 --
Purchase of investment
securities available-for-sale (2,000) -- (6,565) --
Net decrease in loans 18,860 12,114 24,030 33,935
Recoveries of loans
previously charged off 97 18 184 26
Purchases of premises
and equipment, net (30) (14) (24) (34)
Sale of other real estate owned 2,053 1,003 4,086 2,663
Acquisition of other real estate owned -- (303) (435) (2,395)
Net (increase) decrease in other assets (17) 548 (271) 254
Net cash provided by
investing activities 23,946 (11,606) 36,407 9,528
Cash Flows from Financing Activities:
Net increase (decrease) in deposits (29,002) 25,726 (42,030) 9,559
Net increase (decrease)
in other borrowings 4,692 (14,934) 4,685 (15,053)
Net increase in other liabilities 2,316 572 2,805 1,492
Net proceeds from sale of
preferred stock -- -- -- 6,000
Net cash (used in) provided by
financing activities (21,994) 11,364 (34,540) 1,998
Increase (decrease) in
cash and cash equivalents (2,394) 16,834 (4,378) 29,211
Cash and cash equivalents
at beginning of period 23,849 31,974 25,833 19,597
Cash and cash equivalents
at end of period $ 21,455 $ 48,808 $21,455 $48,808
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,126 $ 1,521 $ 2,593 $ 3,558
Supplemental Schedule of Noncash Investing and Financing Activities:
Net transfer of loans
to other real estate owned 2,430 88 2,430 517
Conversion of subordinated
debt to common stock -- -- -- 4,367
See accompanying notes to consolidated financial statements.
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The San Francisco Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Organization
The San Francisco Company, formerly 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 financial
condition, results of operations and cash flows in conformity with
generally accepted accounting principles.
The financial statements as of June 30, 1994 and for the three
and six months ended June 30, 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
and six months ending June 30, 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, Bank
of San Francisco Realty Investors, Inc. (BSFRI), formerly BSF
Equities. All material intercompany transactions have been
eliminated in consolidation.
Note 3 - Shareholders' Equity
On May 23, 1994, the holder of the Company's Series C
Preferred Stock converted each share of his Preferred Stock into 40
shares of Class A Common Stock and 40 warrants, with each warrant
granting the right to purchase an additional share of Class A
Common Stock, exercisable at $0.50 per share (before the reverse
stock split). The warrants have not been exercised. In addition
to the conversion, the Company effected a 1-for-20 reverse stock
split of the Company's Class A Common Stock and changed the
authorized number of shares to 40,000,000. As of June 30, 1994,
the total Class A Common Shares and Series B Preferred Shares
outstanding are 2,244,828 and 16,591, respectively. As a result of
the reverse stock split, the Company repurchased the fractional
shares which totaled 119 new shares. There were no Series C
Preferred Shares outstanding at June 30, 1994.
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On July 25, 1994, the Company issued 3,512,126 shares of Class
A Common Stock, and warrants to purchase an additional 3,512,126
shares with an exercise price for each share of $10.00 to its
principal stockholder in its first closing of the private stock
offering for $20.0 million in capital. The price per unit was
$5.68. Each unit sold under the present private placement offering
includes a Risk Protection Right (RPR). Under the RPR, additional
Class A Common Stock will be issued to the holder of each RPR if a
net loss is incurred on certain specified assets or as the result
of losses incurred related to certain litigation actions. See
"Risk Protection Rights."
Note 4 - Loss Per Common Share
Loss per common share is calculated using the weighted average
number of common shares outstanding during the period giving effect
to the reverse stock split including the repurchase of fractional
shares as of the beginning of the period divided into net loss. In
addition, the second quarter and first half of 1994 loss-per common
share are calculated using the weighted average number of common
shares outstanding during the period giving effect to the
conversion of the Series C Preferred shares into Class A Common
shares as of May 24, 1994. The warrants are not included as common
stock equivalents due to the anti-dilutive effect on per common
share calculations of operating losses.
If the loss per common share were calculated giving effect to
the conversion of the Series C Preferred shares as of the beginning
of 1994, the loss per Class A Common share would have been $2.69
and $4.11 for the second quarter and first half of 1994,
respectively. The average Class A Common shares outstanding would
have been 2,244,969 and 2,244,979 for the second quarter and first
half of 1994, respectively.
Note 5. - 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 participated
equally, share for share, in cash dividends paid by the Class A
Common Shares in additional to receiving the cash dividends to
which they are entitled. During the third quarter of 1991, 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
The San Francisco Company is a one-bank holding company
incorporated 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 financial
statements and related data, reflect primarily the activities of
the Bank.
In February 1994, the Company issued a Private Placement
Memorandum offering for sale the Company's Class A Common Stock,
warrants to purchase additional shares of common stock, and certain
RPR (the Offering). As of July 25, 1994, $20.0 million had been
raised pursuant to the offering from the Company's principal
stockholder and the Company is seeking to raise as much as $10.0
million additional capital by September 30, 1994. Even if the
Company was to receive the maximum amount under this Offering, the
Bank would still not be in compliance with the Capital Impairment
Orders (the Orders) discussed later. See "Regulatory Directives
and Orders -- Capital Impairment Orders."
On July 25, 1994, the Company issued 3,512,126 shares of Class
A Common Stock, warrants attached to purchase an additional
3,512,126 Class A Common shares at an exercise price of $10.00, and
RPR securities in its first closing of the Offering. The price per
unit was $5.68 for an aggregate consideration of $20.0 million.
As a result of the capital infusion, the Company believes that
it will be able to complete Phase I of its three-phase
implementation plan, which focuses on recapitalization and
stabilization. The remainder of Phase I requires that the Company
continue its goals to dispose of the Bank's problem assets,
increase core deposits, reduce funding costs, and continue to
reduce both interest and non-interest expenses. These goals are
critical to the Company's future plans and significant progress
must be made prior to the implementation of the Company's Phase II
and III plans for redirection and expansion into new business
strategies and geographical markets. See "The Company's 1993 FORM
10-K -- The Company and the Bank."
The Company recorded a net loss of $6.0 million, or $5.13 per
common share, for the three months ended June 30, 1994, compared to
$4.0 million, or $9.01 per common share for the same period in
1993. Net losses for the six months ended June 30, 1994 totaled
$9.2 million, or $11.34 per common share compared to a loss of $6.6
million or $14.79 per common share for the same period in 1993.
The increase in the Company's second quarter 1994 net loss compared
to 1993 net loss was from decreases in net interest income of
$931,000 and lower other revenue of $722,000, and increases in net
cost of real estate operations of $1.2 million and total operating
expenses of $1.7 million, partially offset by a decrease in loan
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first half 1994 net loss compared to 1993 net loss was from
decreases in net interest income of $1.8 million and lower other
revenue of $1.1 million, and increases in net cost of real estate
operations of $714,000 and total operating expenses of $1.5
million, partially offset by a decrease in loan loss provision of
$2.5 million.
At June 30, 1994, total assets were $187.3 million, a decline
of $43.7 million, or 18.9% from $231.0 million at December 31,
1993. Total loans were $126.1 million, a decrease of $23.6
million, or 15.8% from the $149.7 million at December 31, 1993.
Total deposits were $168.1 million at June 30, 1994, compared to
$210.1 million at December 31, 1993. These decreases continue to
reflect the strategy of the Company to reduce assets in order to
meet regulatory capital adequacy requirements. The decline in
total deposits is primarily the result of continued customer
concern over the financial condition of the Bank.
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
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 directors and officers who have been submitted to the
FRB for approval have been approved as the new management team. As
a result of the management change discussed under "Item 5. Other
Information", additional officers and directors may be submitted
for regulatory 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"
(the C&D Assets) as of November 30, 1992, 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
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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 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 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 June 30, 1994, the Bank was not in compliance with some
regulatory capital requirements and failed to meet the 7% leverage
capital ratio imposed by the Orders. This failure was the result
of continued losses suffered through the second quarter of 1994.
On July 27, 1994, the Company contributed $13.5 million in capital
to the Bank. If the Bank had raised the capital as of June 30,
1994, the Bank would have been in compliance with the minimum
capital requirement of the Orders and minimum regulatory
requirements. As of June 30, 1994, the Bank's volatile liability
dependency ratio was 38.2% compared to 15% as required by the
Orders. On July 25, 1994, as a result of the capital infusion, the
Bank's volatile liability dependency ratio was reduced to 17.7%.
See "Financial Condition -- Liquidity and Capital Resources".
As of June 30, 1994, the Bank's C&D Assets were $45.3 million
as compared to the March 31, 1994 Orders requirement of no more
than $50.0 million. Based on comments from the FDIC and SBD
regarding certain requirements of the Orders, the Bank is revising
some of its policies and procedures and reinforcing the
implementation process. 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 be used 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. The FDIC and the SBD did not object
to the Bank's basic strategies outlined in the business plan during
their recent examination. However, the Bank will update its<PAGE>
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business and profit plan to reflect the present condition of the
Bank's balance sheet. In the short-term, the plan will provide for
a less aggressive approach to developing the Asia and capital
management strategies. Management believes that the Bank will be
able to take the actions contemplated by such plan without need for
further FDIC approval, subject to the general requirement that the
Bank return to profitability and be operated safely and soundly.
In response to the recent examination by the FDIC which was
completed in the second quarter of 1994, the Bank restated its
September 30, 1993, December 31, 1993 and March 31, 1994 FDIC
Quarterly Call reports to reflect certain transactions in an
earlier period. The restatement has no material effect on the
Bank's consolidated statement of financial condition as of March
31, and June 30, 1994.
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
his or her 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, in his or her
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, 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.
If the Bank had raised the additional $13.5 million in capital
as of June 30, 1994, the Bank would have had contributed capital of
$62.7 million and deficit retained earning of $40.8 million, or
approximately 65.1% of contributed capital, within the meaning of
Section 134(b) of the Financial Code. If the capital had been
raised on June 30, 1994, the Bank's contributed capital would have
been impaired in the amount of approximately $15.7 million. On
November 6, 1992, February 17, 1993, November 16, 1993, February 7,<PAGE>
<PAGE>
1994, May 9, 1994, and August 4, 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 August 4, 1994 order requiring the Bank to
correct its impaired capital 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
continued cooperation as the Company completes the 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 June 30, 1994 adjusted for the capital raised in July
1994, the Bank would have been required to raise $39.4 million in
additional 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
Private Placement alone will not be sufficient to correct the
Bank's capital impairment. However, the Bank believes that with
the proceeds of the Private Placement 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 deficit retained earnings 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 its analysis regarding a quasi-
reorganization. It is the policy of the Superintendent not to
grant a 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.
<PAGE>
<PAGE>
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 from $5.7 million
for the first half of 1993, compared to $3.9 million for the first
half of 1994, a decline of $1.8 million or 32.1%. The decrease was
the result of the reductions in both the interest-earning assets
and interest bearing liabilities and a slight increase in the
Bank's interest margin. Average interest-earning assets declined
$78.5 million or 32.5% to $163.1 million for the period ending June
30, 1994 from $247.1 million for the period ending June 30, 1993.
Average interest bearing liabilities declined $79.7 million or
32.9% for the period ending June 30, 1994 from $242.1 million for
the period ending June 30, 1993. The average interest rate margin
increased slightly to 4.83% for the first half of 1994 compared to
4.81% for the first half of 1993.
The Company's net interest income decreased from $2.9 million
for the second quarter of 1993, compared to $1.9 million for the
second quarter of 1994, a decline of $931,000 million or 32.5%.
Average interest-earning assets declined by $97.3 million or 39.0%
to $153.9 million for the quarter ending June 30, 1994 compared to
$251.4 million for the same period in 1993. Average interest
bearing liabilities declined by $86.8 million or 35.7% to $156.2
million for the quarter ending June 30, 1994 compared to $243.0
million for the same period in 1993. The average margin increased
to 5.05% for the second quarter of 1994, from 4.76% for the second
quarter of 1993 as a result of rates earned on loans increasing
faster than rates paid on deposits in 1994.
Non-Interest Income
Non-interest income decreased $1.1 million, from $2.4 million
for the first half of 1993 compared to $1.3 million for the first<PAGE>
half of 1994. Stock option commissions and fees decreased
$609,000, or 40.5% primarily as a result of lower stock prices
which reduced activities by holders of stock options. In addition,
the Bank has experienced some reduction in stock option commission
volume as a result of the Bank no longer being on certain companies
recommended broker listing due to the Bank's financial condition.
Other income was $551,000 lower than the previous period partially
due to a non-recurring refund on a split life insurance policy of
a Bank executive of $53,000 in 1993, loss on sale of securities of
$201,000 in 1994 as a result of liquidating certain mortgage-backed
securities in an effort limit the Bank's losses in a rising rate
environment and generally, lower volume. Other service charges and
fees increased by $27,000, or 7.6%.
Non-interest income decreased $722,000, from $1.2 million for
the second quarter of 1993 compared to $462,000 for the second
quarter of 1994. Service charges and fees increased by $56,000, or
44.4%. Stock option commissions and fees decreased $499,000, or
64.1% as a result of reduced activities by holders of stock
options. Other income was $279,000 lower than the previous period
in 1993 partly as a result of the loss on sale of securities in
1994 of $100,000.
Due to the increases in the interest rates and the volatility
of the stock market during the first and second quarter of 1994,
which are expected to continue during the third quarter of 1994,
the Bank is experiencing a significant reduction in stock option
lending activities. The activities are usually tied to the
performance of each stock option holder's company. With large
movements in the price of many company's stock, many of these stock
option holders are not exercising their options. These decreases
in transactions, consequently, are expected to reduce the amount of
commissions and fees realized in the third quarter of 1994.
Non-Interest Expense
Operating Expenses
Operating costs increased by $1.5 million or 16.5%, from $8.9
million for the first half of 1993 to $10.4 million for the first
half of 1994. The increase is primarily the result of two lawsuits
that were settled during the first half of 1994 for a total cost of
$2.3 million. See "Part II -- Other Information -- Legal
Proceedings." Professional fees increased by $892,000 from
$699,000 for the first half of 1993 compared to $1.6 million for
the first half of 1994 as a result of contracting for specialized
services related to problem asset resolution, litigation settlement
and legal support, and to supplement existing staff. The increase
in professional fees is partially offset by the decrease in
salaries and related benefits of $691,000 from $4.4 million for the
first half of 1993 compared to $3.7 million for the first half of
1994. All other operating costs increased by $1.3 million as a
result of the $2.3 million contingency reserve for litigation
settlement in 1994, partially offset by the loss on sale of the
Sacramento Regional office in 1993 of $425,000. Lower loan and
deposit volumes resulted in lower cost levels and cost savings as
a result of the cost program initiated in the second quarter of
1993.
<PAGE>
<PAGE>
Operating costs increased by $1.6 million or 36.6%, from $4.6
million for the second quarter of 1993 to $6.2 million for the
second quarter of 1994. The increase is primarily the result of
the settlement of one lawsuit in the second quarter of 1994 for a
total cost of $2.0 million. See "Part II -- Other Information --
Legal Proceedings." Professional fees increased by $583,000 from
$399,000 for the second quarter of 1993 compared to the second
quarter of 1994 of $1.0 million. The increase in professional fees
is partially offset by the decrease in salaries and related
benefits of $424,000 from $2.1 million for the second quarter of
1993 compared to $1.7 million for the second quarter of 1994.
Other operating costs are higher in the second quarter of 1994
compared to 1993 as a result of the $2.0 million litigation
settlement discussed earlier, partially offset by the loss on sale
of the Sacramento Regional office of $425,000 in the same period in
1993.
Net Cost of Real Estate Operations
Net cost of real estate operations increased $714,000 from
$3.0 million for the first half of 1993 compared to $3.7 million
for the first half of 1994. The increase is attributed to write-
downs on real estate owned and real estate investment in 1994 of
$2.3 million compared to $1.9 in 1993. Other costs related to real
estate operations increased by $260,000 to $1.4 million for the
first half of 1994 compared to $1.1 million for the first half of
1993 as a result of costs related to analyzing the potential for
selling problem assets as a pool of assets to a single buyer.
Net cost of real estate operations increased $1.2 from
$842,000 for the second quarter of 1993 compared to $2.0 million
for the second quarter of 1994. The increase is attributed to
write-downs on real estate owned in second quarter of 1994 of $1.4
million offset by net gain on sale of real estate owned of $246,000
compared to write-downs of $817,000 offset by net gains on sale of
real estate owned of $563,000 in second quarter of 1993. Costs
related to real estate operations are $879,000 for the second
quarter of 1994 compared to $588,000 for the same period in 1993.
During second quarter of 1994, the Bank incurred certain costs
totaling $225,000 related to the analysis selling a pool of special
assets and additional legal expenses incurred related to problem
asset renegotiations and litigation issues.
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short term
investments, totaled $33.7 million, or 18.0% of total assets, at
June 30, 1994, a decrease of $13.4 million from $47.1 million, or
20.4% of total assets, at December 31, 1993. The decrease was the
result of net outflows in deposits of $42.0 million and operating
losses of $9.2 partially offset by net loan repayments of $22.0
million, real estate owned reduction of $6.6 million, and borrowing
from the Federal Home Loan Bank (the FHLB) of $4.7 million during
the first half of 1994.
<PAGE>
<PAGE>
The Bank presently has a short-term line of credit at the
discount window with the Federal Reserve Bank of up to $2.5 million
secured by loans in the Bank's portfolio. As of June 30, 1994, the
Bank had not drawn on its line of credit with the Federal Reserve
Bank. As of June 30, 1994, the Bank had pledged loans and
securities enabling the Bank to borrow up to $4.7 million from the
FHLB of San Francisco. The Bank has drawn $4.7 million on this
line of credit.
During 1992, 1993, and 1994, the Company's principal source of
liquidity has been new capital from the issuance of its capital
stock. At July 25, 1994, the Company's liquidity increased by
$20.0 million as a result of raising additional capital. On July
27, 1994, a majority of the capital, $13.5 million, was contributed
to the Bank with the remainder to be retained by the Company for
operational expenses, expenses of the offering, and potential
acquisition of certain Bank assets as discussed later.
Capital
At June 30, 1994, shareholders' equity was $8.4 million,
compared to $17.5 million at December 31, 1993, primarily as a
result of the $9.2 million net operating loss. At June 30, 1994,
the Company and the Bank's Tier I capital was $8.4 million. 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 June 30, 1994, the
Company and the Bank were not in compliance with the minimum Tier
II Risk-based capital requirements and the Bank was not in
compliance with the minimum leverage ratio of 7% mandated by the
Orders. The decline in the Company's and Bank's ratios during the
first half of 1994 are primarily the result of operating losses.
The following table reflects both the Company's and the Bank's
capital ratios with respect to minimum capital requirements in
effect as of June 30, 1994:
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
<S> <C> <C> <C> <C>
Leverage ratio 4.17% 4.17% 4.0% 7.0%
Tier 1 risk-based capital 4.90 4.89 4.0 N/A
Total risk-based capital 6.31 6.30 8.0 N/A
</TABLE>
On July 25, 1994, the Company issued units including
additional shares of Class A Common Stock, warrants, and RPR
securities for $20.0 million in capital. The total cost of the
offering is estimated to be $2.8 million. The net capital
contribution to the Company is $17.2 million. On July 27, 1994,
the Company contributed $13.5 million in capital to the Bank. The<PAGE>
<PAGE>
following table reflects both the Company's and the Bank's capital
ratios with respect to minimum capital requirements in effect as of
June 30, 1994 giving effect to the capital raised in July 1994:
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
<S> <C> <C> <C> <C>
Leverage ratio 12.73% 10.89% 4.0% 7.0%
Tier 1 risk-based capital 14.72 12.56 4.0 N/A
Total risk-based capital 16.38 14.16 8.0 N/A
</TABLE>
Investment Activities
At June 30, 1994, the Company's investment securities,
including Federal funds, totaled $24.3 million, or 13.0% of total
assets, compared to $38.8 million, or 16.8% of total assets, at
December 31, 1993.
At June 30, 1994, investment securities held-to-maturity
totaled $8.2 million, compared to $6.4 million at December 31,
1993, and are carried at amortized cost. At June 30, 1994, the
Company held $4.1 million defined as investment securities
available-for-sale, and $22,000 was charged against equity to
reflect the unrealized loss 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. As
of June 30, 1994, the investment securities available-for-sale
primarily consisted of floating rate mortgage-backed securities and
other medium term debt securities. 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.
The Bank's investment strategy regarding investment securities
held-to-maturity was re-evaluated during the second quarter of
1994. During the second quarter, the Bank sold an investment
security classified as held-to-maturity at a loss of $14,000 which
had a contractual term to maturity of more than one year and
transferred one investment security totaling $656,000 from held-to-
maturity to available-for- sale. The remaining investment
securities held-to-maturity purchased have contractual maturities
of one year or less.
Loans
During the first half of 1994, total loans decreased by $23.7
million, from $149.7 million at December 31, 1993 to $126.1 million
at June 30, 1994. The reduction resulted primarily from loan<PAGE>
<PAGE>
repayments and loan charge-offs. The composition of the Bank's
loan portfolio at June 30, 1994 and December 31, 1993 is summarized
as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Commercial and financial $ 91,241 $ 109,008
Real estate construction 13,413 14,023
Real estate mortgage 21,250 26,479
Net lease financing 164 230
126,068 149,740
Deferred fees and discounts, net (552) (550)
Allowance for possible loan losses (6,444) (8,050)
Total loans, net $ 119,072 $ 141,140
</TABLE>
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. The
table below outlines the Bank's classified assets at June 30, 1994
and December 31, 1993:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Loans - performing $ 17,183 $ 11,847
Non-accrual loans 10,371 11,086
Other real estate owned 24,411 32,372
Real estate investments 1,107 1,468
Total classified assets $ 53,072 $ 56,773
</TABLE>
Classified loans decreased to $53.1 million as of June 30,
1994 compared to $56.8 million at December 31, 1993. During the
first quarter of 1994, the Bank reclassified $11.1 million in loans
that were previously identified as special mention. Special
mention loans are defined as loans that currently do not 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. Based on
comments from the FDIC examiners, the bank redefined its criteria
for all classified assets. During the first half of 1994, a total
of $14.8 million in classified assets was resolved as a result of
repayments, credit quality improvements and charge-offs.
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 June 30,
1994, the Bank was in compliance with the Orders with $45.3 million
in such assets.<PAGE>
<PAGE>
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 Bank's statement of financial
condition. Moreover, the Bank has been incurring substantial
asset-carrying expenses, such as maintaining and operating
properties included among 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.
During the third quarter of 1994, the Bank will be analyzing
its classified asset portfolio to determine appropriate asset-by-
asset resolution strategies such as short-term liquidation,
development and construction and long-term holding. In conjunction
with the asset strategies, the Company and the Bank are analyzing
the possibility of selling certain of the Bank's problem assets to
the Company. The value of any assets sales between the Bank and
the Company would be based on market value and qualify as an arms
length transaction. A change in resolution strategy could result
in additional losses during the third quarter of 1994.
Non-Performing Assets
Non-performing assets are comprised of non-accrual loans, in-
substance foreclosed assets and real estate foreclosures.
Non-performing assets were $34.8 million at June 30, 1994, down
$8.7 million or 20.0 % from $43.5 million at the end of 1993.
During the first half of 1994, $3.5 million in loans were
transferred to non-accrual status as a result of certain credit
quality weaknesses. The reduction of $12.2 million in non-
performing assets was primarily the result of OREO sales of $5.4
million, write-downs of $2.5 million, cash repayment of $2.2
million and charge-offs of $2.1 million.
At June 30, 1994 and December 31, 1993, other real estate
owned, including in-substance foreclosed loans, was $24.4 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 foreclosure 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 June 30, 1994 and December
31, 1993, in-substance foreclosed loans were $13.9 million and<PAGE>
<PAGE>
$19.1 million, respectively. As of June 30, 1994 and December 31,
1993, all other real estate owned (OREO) and real estate
investments were adversely classified.
Non-performing loans secured by first deeds of trust totaled
$5.7 million as of June 30, 1994. Of the $13.9 million in other
real estate owned that was classified as in-substance foreclosure,
one property totaling $700,000 was secured by a subordinate deed of
trust. Restructured loans totaled $1.9 million at June 30, 1994
and December 31, 1993.
The following table provides information on all non-performing
assets at June 30, 1994 and December 31, 1993:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Non-accrual loans $ 10,371 $ 11,086
Other real estate owned 24,411 32,372
Total non-performing assets $ 34,782 $ 43,458
As a percentage of total loans and OREO outstanding 23.1% 23.9%
</TABLE>
In addition to the loans disclosed in the foregoing table, the
Bank had approximately $2.3 million in loans at June 30, 1994 that
were between 31 and 89 days delinquent. Approximately $1.5 million
of the loans delinquent between 31 and 89 days are secured by first
or subordinate deeds of trust on real estate. In the opinion of
management, the loans delinquent between 31 and 89 days have a
greater than ordinary risk that the borrowers may not be able to
perform under the terms of their contractual arrangements.
However, these loans did not demonstrate weaknesses that warranted
non-accrual status as of June 30, 1994. As of June 30, 1994, all
non-accrual loans are more than 90 days delinquent.
During 1993, the Bank transferred a loan with a carrying value
of $1.6 million collateralized by commercial real estate to in-
substance foreclosure. 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 recent
regulatory examination, $600,000 was charged-off at March 31, 1994,
reducing the carrying value to $1.0 million. During the second
quarter of 1994, a reserve of $1.0 million was established to
reflect a contingency reserve related to the possible cost of
correcting the property's deficiencies.
The Bank is no longer exploring the possible sale of part or
all of the problem asset portfolio to a single buyer, other than
the Company as discussed previously. However, management is
exploring other means of expediting the sale of the problem assets
on an asset by asset basis. Such sales would likely entail further
write-downs of the problem assets sold in recognition of the
administrative expenses and holding cost incurred by the buyer,
together with the rate of return expected by the buyer for such a<PAGE>
<PAGE>
transaction.
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). One of 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 elected not to implement SFAS No. 114 for
the period ended June 30, 1994. 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
considerations specifically identified problem loans, the financial
condition of the borrowers, the fair value of the collateral,
recourse to guarantors and other factors.
The Bank establishes a specific loss allowance based on the
asset classification and credit quality grade. Specific loss
allowance is utilized to ensure that allowances are allocated based
on the credit quality grading to capture inherent risks. In
addition, the Bank carries an "unallocated" loan loss allowance to
provide for losses that may occur in the future in loans that are
not presently classified, based on present economic conditions,
trends, and related uncertainties.
The following table summarizes the loan loss experience of
the Bank for the two quarters ended June 30, 1994:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994
<S> <C>
Beginning balance of allowance for loan losses $ 8,050
Charge-offs (2,072)
Recoveries 184
Provision 282
Ending balance of allowance for loan losses $ 6,444
</TABLE>
For the first half of 1994, the Company charged-off $650,000
in real estate related loans, $745,000 in commercial loans and
$677,000 in unsecured loans. The charge-offs were primarily
allocated loan loss allowances on specific loans. Unallocated loan
loss allowances are $1.3 million as of June 30, 1994 compared to
$2.8 million as of December 31, 1993.
<PAGE>
<PAGE>
Allowance for Losses on Other Real Estate Owned
The following table summarizes the other real estate owned
loss experience of the Bank for the two quarters ended June 30,
1994:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994
<S> <C>
Beginning balance of allowance for losses $ 2,986
Charge-offs (57)
Provision 2,404
Ending balance of allowance for losses $ 5,333
</TABLE>
The Bank recorded a net gain on sale of other real estate
owned totaling $243,000 in the first half of 1994. The gain was
related to two properties. The Bank recorded a net loss on sale of
other real estate owned totaling $73,000 in the first half of 1994.
The loss was also related to one property. The OREO properties are
shown net of allowance for losses.
Allowance for Losses on Real Estate Investments
The following table summarizes the real estate investments
loss experience of the Bank for the two quarters ended June 30,
1994:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994
<S> <C>
Beginning balance of allowance for losses $ 712
Charge-off (202)
Provision 124
Ending balance of allowance for losses $ 634
</TABLE>
During the first half of 1994, one real estate investment
property was sold. A gain of $10,200 was recorded. As of June 30,
1994, the remaining two properties totaled $1.1 million.
Deposits
The Bank had total deposits of $168.1 million at June 30,
1994, compared to $210.1 million at December 31, 1993, a decrease
of $42.0 million.
<PAGE>
<PAGE>
A summary of deposits at June 30, 1994 and December 31, 1993
are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Demand deposits $ 27,150 $ 34,859
NOW 36,977 48,908
Money market 30,268 35,051
Savings 3,764 7,544
Total deposits with no stated maturity 98,159 126,362
Time deposits:
Less than $100,000 39,643 51,481
$100,000 and greater 30,279 32,268
Total time deposits 69,922 83,749
Total deposits $ 168,081 $ 210,111
</TABLE>
A summary of deposits by customer bases at June 30, 1994 and
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Private Banking $ 66,480 $ 80,372
Association Bank Services 36,636 45,100
Trust and Investment Services 9,628 16,336
Money Desk Deposits 28,370 41,543
Brokered Deposits 26,967 26,760
Total deposits $ 168,081 $ 210,111
</TABLE>
The Bank's primary focus is in private and business banking,
with deposits totaling $66.5 million, or 39.6% of total deposits,
at June 30, 1994, compared to $80.4 million, or 38.3% of total
deposits, at December 31, 1993.
The Bank is dependent upon other sources for deposits.
Deposits acquired through its Association Bank Services function
totaled $36.6 million, or 21.8% of total deposits at June 30, 1994,
compared to $45.1 million, or 21.5% of total deposits at December
31, 1993. Deposits acquired through its Trust and Investment
function totaled $9.6 million, or 5.7% of total deposits at June
30, 1994, compared to $16.3 million, or 7.8% of total deposits at
December 31, 1993.
Customer concerns over the financial condition of the Bank
contributed to the decline. As a result of the first closing of
the Offering which was completed in July 1994, the Bank will
implement a program in the third quarter 1994 to build existing and
former client relations and reestablish their relationship with the
Bank, particularly their depository relationships.
Deposits acquired through the money desk operations totaled
$28.4 million, or 16.9% of total deposits at June 30, 1994,
compared to $41.5 million, or 19.8% of total deposits at December
31, 1993. The decline in money desk deposits is partially the
result of the Bank's decision to reduce its level of volatile<PAGE>
<PAGE>
deposits as required by the Orders as well as from an uncompetitive
rate environment. Depositors view other investments as more
attractive because of the increase in interest rates for those
types of investments compared to the interest rates the Bank can
offer for money desk deposits.
The Bank has an agreement with a major retail brokerage firm
for the placement of the Bank's certificates of deposit. At June
30, 1994 and December 31, 1993, the Bank had outstanding certifi-
cates of deposit placed through this brokerage firm of $20.0
million. As December 31, 1993, the Bank's brokered deposits
totalling $20.0 million matured in March 1994 and were renewed for
a term of six months to September 1994. In addition, as a result
of the recent regulatory examination, certain money market accounts
totaling approximately $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 16.1% of total deposits, at June 30,
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 prohibi-
tion granted by the FDIC which expires in September 1994. An
application to waive the prohibition has been submitted to the FDIC
for the $7.0 million in deposits recently reclassified. No
assurance can be given that the additional waiver will be granted
or that the FDIC will extend its waiver in September 1994 for any
of the brokered deposits.
Concentrations of brokered deposits and deposits acquired
through the money desk operations have been classified by bank
regulators as volatile liabilities with which certain risks are
associated, 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 plan includes increased emphasis in the
development and marketing of new and existing deposit programs.
The Bank's volatile liability dependency ratio at June 30,
1994 was 38.2%. As of June 30, 1994, total volatile liabilities
were $70.3 million or 39.3% of total liabilities compared to $80.6
million or 37.7% of total liabilities as of December 31, 1993
(including the deposits reclassified to brokered deposits during
the first quarter of 1994). The Bank can manage the volatile
liabilities dependency ratio by decreasing volatile deposits
without decreasing short-term investments or by increasing short-
term investments without increasing volatile deposits. On July 25,
1994, as a result of the capital infusion, short-term investments
increased thereby reducing the Bank's volatile liability dependency
ratio to 17.7%. Prior to the reclassification, and with the
additional capital from the Offering, the Bank had expected to meet<PAGE>
<PAGE>
the conditions imposed by the Orders. The Bank is exploring other
alternatives to reduce the volatile dependency ratio including
increasing core deposits and raising additional capital.
The Bank presently offers a placement service for certificates
of deposit designed to invest customer funds in other financial
institutions. During the recent examination, the FDIC examiners
concluded that these activities constitute deposit brokerage
activity which requires prior written notice to the FDIC. The Bank
filed the requisite notice with the FDIC during the second quarter
of 1994. It is possible that the Bank could be subject to
regulatory sanctions for engaging in the activities mentioned in
this section, although the FDIC has not advised the Bank that any
such action is contemplated.
Asset and Liability Management
The Bank's risk management policies are established by the
Asset/Liability Management Committee (the ALCO). The ALCO meets
semi-monthly to formulate the Bank's strategies. The basic
responsibilities of the ALCO include the management of interest
rate risk, liquidity, funding, and asset and liability products.
The Bank's approach is to measure interest rate risk, assess and
determine if the risk level is acceptable and to develop strategies
to either reduce excessive risk or compensate for the trade-offs
between risk and return.
The ALCO recently approved a contingency funding plan which
addresses potential funding and liquidity problems in a rational
and timely manner. This plan provides for an early warning system
that monitors trends in the Bank's cash flow in addition to
identifying sources of additional funds. While this is not
indicative of the Bank's current position, it provides a safeguard
should the need arise.
The Bank of San Francisco Building Company Limited Partnership
During the second quarter of 1994, the Company and the Bank
tendered an offer to limited partners of the Bank of San Francisco
Building Company (BSFBC), a California limited partnership to
purchase as many limited partnership interests in BSFBC as possible
in exchange for stock and cash once regulatory approval is granted.
The tender offer has been deferred pending accounting review and
regulatory approval. The Company and the Bank are seeking to close
the tender offer by September 30, 1994.
<PAGE>
<PAGE>
Presently, the Bank accounts for its interest in the limited
partnership using the equity method. The Company and the Bank are
examining the appropriate lease accounting treatment should a
majority interest in the partnership be acquired. A reserve for
impairment may be required if it is determined that a change in
accounting treatment is required.
Risk Protection Rights
Each unit sold under the present Offering includes RPR
securities. The purpose of the RPR is to protect the investors
(New Investors) purchasing shares in the Offering, to a defined
extent, for losses and related expenses incurred in the
administration, carrying and resolution of certain problem assets
and certain litigation settlements. The RPR will effectuate this
risk allocation by compensating the New Investors with additional
shares of Class A Common Stock (Adjustment Shares) up to a maximum
number of shares per RPR without payment of additional
consideration by the New Investors. This compensation will be
effected through the periodic distribution of Adjustment Shares.
Adjustment Shares will be issued to compensate for net losses, net
charge-offs and expenses on certain specified assets (Specified
Assets) and the lawsuit that was settled for $2.0 million during
July 1994 up to a cumulative amount of $16.0 million. The
Adjustment Shares will have a dilutive effect on the existing
outstanding shares.
The effective date of the initial distribution of Adjustment
Shares was June 30, 1994. However, the adjustment formula does not
require any Adjustment Shares to be issued as of June 30, 1994.
The next interim date of distribution is December 31, 1994. The
final distribution will be made on December 31, 1996.
Other
The Bank has had and expects to continue to have banking
transactions with directors and executive officers of the Company
and the Bank (collectively Insiders). Loans made to insiders are
made in the ordinary course of business on substantially the same
terms and conditions as non-insiders, subject to regulatory
restrictions for loans to insiders. Generally, these loans have
not involved more than the normal risk of collection or presented
other unfavorable features. During the fourth quarter 1993, the
Bank charged-off two loans that were held by a former director, who
resigned earlier in 1993, for a total of $900,000.
<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 June 30, 1994, the Company and/or the Bank are
defendants or cross-defendants in certain lawsuits, for which the
damages sought are substantial.
The Bank, or its subsidiary BSFRI, is presently the defendant
or cross-defendant in five such lawsuits for which the damages
sought are substantial, of which two were brought by former
employees of the Bank in the 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 the 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 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.
In the fourth lawsuit, BSFRI is named as a defendant and has
been served with a cross-complaint for indemnity in a deficiency
judgement with respect to a first deed of trust on a property owned
by a limited partnership. The plaintiff under the cross compliant
are seeking damages in the amount of $5.0 million, and unspecified
punitive damages. BSFRI was once a limited partner in the
partnership but became a secured lender of the partnership under a
second deed of trust. The Bank believes it has meritorious
defenses to the cross-claim and will contest any allocation of
liability to it if defendants are found liable for any deficiency.
The Bank has denied 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
accompanying financial statements do not include any adjustments
that might result from the outcome of the uncertainties.
<PAGE>
<PAGE>
In the fifth lawsuit, the plaintiff, as conservator for an
insurance company, alleges that the Bank was fraudulent or
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 was
seeking damages of $11.0 million plus unspecified punitive damages.
The Bank settled this matter in July 1994 for a total of $2.0
million. A contingency reserve of $2.0 million is reflected in the
Bank's June 30, 1994 financial statements.
The Bank is also a defendant or cross-defendant in a number of
actions arising out of the collapse of the insurance company
mentioned above, alleging indemnity or other claims similar to
those set forth in the case discussed above. In each of these
actions the Bank has or will be asserting defenses, including
defenses arising out of the settlement discussed above.
Item 2 - Changes in Securities
The Stockholders, in the 1994 Annual Meeting, voted to
authorized the conversion of each outstanding share of the Series
C Preferred Stock into 40 shares of the Class A Common Stock and 40
warrants that would grant the holder the right to purchase
additional shares of Class A Common Stock at $0.50 per share or
$10.00 per share after the reverse stock split. In connection with
the conversion, the Stockholders also approved the increase in the
number of authorized shares of Class A Common Stock to 400,000,000,
and an increase in the number of authorized shares of Preferred
Stock to 5,000,000.
The Company's Class B Common Stock was reclassified as and
into Class A Common Stock as a result of the Stockholders'
authorization to amend and restate the Company's Certificate of
Incorporation.
The Stockholders approved the reduction in the number of
authorized shares of Class A Common Stock from 400,000,000 to
40,000,000 during the 1994 Annual Meeting.
Finally, the Stockholders authorized the issuance of
additional shares of Class A Common Stock in excess of twenty
percent (20%) of the number of shares outstanding following the
conversion, in the private placement offering, with the number of
shares, price and other terms to be determined by the Board of
Directors of the Company.
Item 3 - Defaults Upon Senior Securities
See "Note 5 -- Dividend Restrictions".
<PAGE>
<PAGE>
Item 4 - Submission of Matters to a Vote of Security Holders
The Company held its 1994 Annual Meeting of Stockholders on
May 23, 1994. There were present at the meeting in person or by
proxy, shareholders of the Company who were the holder of 6,453,071
shares of Class A Common Stock, 5,643 shares of the Series B
Preferred Stock, and 900,000 shares of the Series C Preferred Stock
entitled to vote. All matters for submission to a vote by Security
Holders were approved.
With respect to the authorization of the conversion of Series
C Preferred Stock and Amendment of Certificate of Incorporation to
increase the authorized number of shares of Class A Common Stock
and to require conversion of certain shares of Series C Preferred
stock, the votes in favor of the proposal were 6,280,561 from the
Class A Common Shares and 900,000 Series C Preferred shares. The
remaining votes regarding the proposal were 108,276 against, 25,687
abstaining, and 44,190 non-voting.
With respect to the authorization of Amendment of Certificate
of Incorporation to increase the authorized number of shares of
Preferred Stock, the votes in favor of the proposal were 7,176,673
from all classes of shares. The remaining votes regarding the
proposal were 113,564 against, 24,287 abstaining, and 44,190 non-
voting.
With respect to the authorization of Amendment and restatement
of Certificate of Incorporation, including the authorization of the
reverse stock split, the votes in favor of the proposal were
7,179,490 from all classes of shares. The remaining votes
regarding the proposal were 111,146 against, 23,888 abstaining, and
44,190 non-voting.
With respect to the authorization of additional shares of
Class A Common Stock, warrants and rights, the votes in favor of
the proposal were 7,196,223 from all classes of shares. The
remaining votes regarding the proposal were 103,594 against, 14,707
abstaining, and 44,190 non-voting.
With respect to the approval of the 1993 Executive Stock
Option Plan and the 1993 Nonemployee Directors' Stock Option Plan,
the votes in favor of the proposal were 7,149,502 from all classes
of shares. The remaining votes regarding the proposal were 150,142
against, 14,860 abstaining, and 44,210 non-voting.
With respect to the ratification of selection of KPMG Peat
Marwick as the Independent Accounting Firm for 1993 and 1994, the
votes in favor of the proposal were 7,245,773 from all classes of
shares. The remaining votes regarding the proposal were 51,575
against, 8,976 abstaining, and 52,390 non-voting.
In addition to the approvals granted in changes in securities
as set forth above, the Security Holders also elected five of the
nine authorized directors of the Company.<PAGE>
<PAGE>
The following table provides the number of votes regarding
each nominee for office:
<TABLE>
<CAPTION>
Nominee For Withheld
<S> <C> <C>
Kent D. Price 7,294,349 64,365
Steven R. Champion 7,288,702 70,012
Carl D. Gustavson 7,293,549 65,165
Rodney D. Freed 7,294,559 64,155
Willard D. Sharpe 7,293,501 65,213
</TABLE>
Mr. Kent D. Price, Steven R. Champion and Carl D. Gustavson
were elected to hold office for a term of two years, until the
Company's 1996 annual meeting. Rodney D. Freed and Willard D.
Sharpe were elected to hold office for a term of three years, until
the Company's 1997 annual meeting. Continuing in office are Donna
Miller Casey, David R. Holbrooke, and Gordon B. Swanson, whose
terms will expire at the Company's 1995 annual meeting.
Item 5 - Other Information
On July 27, 1994, the Company announced that Kent Price,
Chairman and Chief Executive Officer of the Company and the Bank
will resign from his day-to-day duties with the Bank as soon as a
successor is found. He will remain as Chairman of the Company.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
None
<PAGE>
<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
(Registrant)
Date: August 15, 1994 /s/ Kent D. Price
Kent D. Price
Chairman of the Board and
Chief Executive Officer
Date: August 15, 1994 /s/ Steven R. Champion
Steven R. Champion
Vice Chairman and
Chief Financial Officer
