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 September 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)
n/a
(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 5,766,008 shares of Class A Common Stock
outstanding on November 08, 1994.<PAGE>
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The San Francisco 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 September 30, 1994 and December 31, 1993 . . . . . . . . . . .1
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1994 and 1993. .2
Consolidated Statements of Changes in Shareholders' Equity
For the Nine Months Ended September 30, 1994 and 1993. . . . . . .3
Consolidated Statements of Cash Flows
For the Three and Nine Months Ended September 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. . . . . . . . . . . . . . . . . . . . .6
Part II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . 24
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 24
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 24
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
September 30, 1994 and December 31, 1993
(Unaudited)
September 30, December 31,
(Dollars in Thousands Except Per Share Data) 1994 1993
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Assets:
Cash and due from banks $ 7,923 $ 8,333
Federal funds sold 20,000 17,500
Cash and cash equivalents 27,923 25,833
Investment securities held-to-maturity
(Market: $7,745, 1994, $; 1993, $6,353) 9,082 6,351
Investment securities available-for-sale 4,431 14,940
Loans 113,551 149,740
Deferred loan fees (517) (550)
Allowance for loan losses (6,132) (8,050)
Loans, net 106,902 141,140
Other real estate owned 22,123 32,372
Real estate investments 3,085 3,643
Premises and equipment, net 2,417 3,592
Interest receivable 703 946
Other assets 1,183 2,204
Total Assets $177,849 $231,021
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 30,095 $ 34,859
Interest bearing deposits 113,933 175,252
Total deposits 144,028 210,111
Other borrowings 9,851 1,303
Other liabilities and interest payable 3,664 2,154
Total Liabilities 157,543 213,568
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, 5,765,995;1993, 444,984)(see Note 4) 58 4
Additional paid-in capital 70,166 34,660
Deficit (49,939) (35,101)
Employee purchase and option plans (71) (166)
Unrealized loss on securities available-for-sale (24) (60)
Total Shareholders' Equity 20,306 17,453
Total Liabilities and Shareholders' Equity $177,849 $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 Nine Months Ended September 30, 1994 and 1993
(Unaudited)
(Dollars in Thousands Three Months Ended Nine Months Ended
Except Per Share Data) 1994 1993 1994 1993
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Interest income:
Loans $ 2,749 $ 4,148 $ 8,635 $ 13,062
Investments 394 285 949 1,100
Dividends 21 12 46 31
Total interest income 3,164 4,445 9,630 14,193
Interest expense:
Deposits 1,142 1,800 3,608 5,443
Other borrowings 30 45 127 405
Total interest expense 1,172 1,845 3,735 5,848
Net interest income 1,992 2,600 5,895 8,345
Provision for loan losses 141 618 423 3,400
Net interest income after provision
for loan losses 1,851 1,982 5,472 4,945
Non-interest income:
Service charges and fees 82 125 301 329
Loan brokerage and servicing fees 96 87 260 239
Stock option commissions and fees 339 763 1,232 2,265
Other income (303) 353 (101) 962
Gain (loss) on sale of assets, net 21 (16) (180) (73)
Total non-interest income 235 1,312 1,512 3,722
Non-interest expense:
Salaries and related benefits 1,749 2,200 5,425 6,567
Occupancy expense 813 727 2,041 2,282
Professional fees 849 495 2,440 1,194
FDIC insurance premiums 147 213 501 638
Data processing 110 269 307 507
Telephone 34 82 122 247
Other operating expenses 836 441 4,067 1,886
Total operating expenses 4,538 4,427 14,903 13,321
Net cost of real estate operations 3,128 812 6,814 3,784
Total non-interest expense 7,666 5,239 21,717 17,105
Loss before income taxes (5,580) (1,960) (14,733) (8,438)
Provision for income taxes 38 15 105 103
Net loss $(5,618) $(1,960) $(14,838) $(8,541)
Loss per common share:
Net loss $ (1.16) $ (4.40) $ (6.83) $ (19.19)
Weighted average shares outstanding 4,847,501 445,060 2,172,565 445,083
See accompanying notes to consolidated financial statements.
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The San Francisco Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 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 -- -- (6) -- 75 -- 69
Net proceeds from
sale of stock 12,000 -- -- -- -- -- 12,000
Net loss (Nine months) -- -- -- (8,541) -- -- (8,541)
Balances at
September 30, 1993 18,116 4 34,660 (33,387) (191) -- 19,202
Net change in employee stock
ownership plans -- -- -- -- 25 -- 25
Unrealized loss on securities
available-for-sale -- -- -- -- -- $ (60) (60)
Net loss (Three months) -- -- -- (1,714) -- -- (1,714)
Balances at
December 31, 1993 18,116 4 34,660 (35,101) (166) (60) 17,453
Net change in employee stock
ownership plans -- -- -- -- 95 -- 95
Change in unrealized loss on securities
available-for-sale -- -- -- -- -- 36 36
Conversion of preferred stock
to common stock (18,000) 18 17,982 -- -- -- --
Net proceeds from sale
of common stock -- 36 17,524 -- -- -- 17,560
Net loss (Nine months) -- -- -- (14,838) -- -- (14,838)
Balances at
September 30, 1994$ 116 $ 58 $70,166$(49,939)$ (71)$ (24)$20,306
See accompanying notes to consolidated financial statements.
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The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 1994 and 1993
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands) 1994 1993 1994 1993
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Cash Flows from Operating Activities:
Net loss $ (5,618) $ (1,960) $ (14,838) $ (8,541)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Provision for loan losses 141 618 423 3,400
Depreciation and amortization expense 307 195 545 597
Net loss on other real estate owned and
real estate investment 3,118 381 5,346 2,367
Purchase of investment
securities held-for-sale -- -- -- (1,310)
Sale of investment securities held-for-sale -- 259 -- 19,965
Net loss on investment
securities held-for-sale -- 13 -- 76
Loss on sale of investment
securities available-for-sale -- -- 187 --
Loss on sale of investment
securities held to maturity -- -- 14 --
Net decrease in interest receivable 189 21 243 3
Net decrease in interest payable (198) (638) (228) (341)
Net decrease in deferred loan fees (35) (1) (33) (87)
Net cash flows (used in) provided
by operating activities (2,096)( 1,112) (8,341) 16,129
Cash Flows from Investing Activities:
Proceeds from sale of investment
securities held-to-maturity -- -- 1,812 --
Proceeds from maturities of
investment securities held-to-maturity 4,574 26,700 8,144 28,200
Purchase of investment
securities held to maturity (4,800) -- (12,701) (26,421)
Sale of investment
securities available-for-sale 12,617 -- 30,538 --
Purchase of investment
securities available-for-sale (13,615) -- (20,180) --
Net decrease in loans 11,336 6,285 35,366 40,220
Recoveries of loans previously charged off 728 60 912 86
Purchases of premises and equipment, net (14) (59) (38) (93)
Sale of other real estate owned -- 3,685 4,142 6,348
Acquisition of other real estate owned (8) (6,394) (443) (8,789)
Net decrease in other assets 1,348 40 1,021 743
Net cash provided
by investing activities 12,166 30,317 48,573 40,294
Cash Flows from Financing Activities:
Net decrease in deposits (24,053) (35,711) (66,083) (26,152)
Net increase (decrease)
in other borrowings 3,956 -- 8,641 (15,053)
Net (decrease) increase
in other liabilities (1,065) 591 1,740 2,078
Net proceeds from sale of common stock 17,560 -- 17,560 --
Net proceeds from sale of preferred stock -- 6,000 -- 12,000
Net cash (used in) provided
by financing activities (3,602) (29,120) (38,142) (27,127)
Increase (decrease) in cash
and cash equivalents 6,468 85 2,090 29,296
Cash and cash equivalents
at beginning of period 21,455 48,808 25,833 19,597
Cash and cash equivalents
at end of period $ 27,923 $ 48,893 $27,923 $48,893
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,370 $ 2,437 $ 3,963 $ 5,990
Supplemental Schedule of Noncash Investing and Financing Activities:
Net transfer of loans to
other real estate owned -- 6,891 2,430 7,408
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 September 30, 1994 and for the
three and nine months ended September 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 nine months ending September 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 September 30,
1994, the total Class A Common Shares and Series B Preferred Shares
outstanding are 5,765,995 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 September 30, 1994.
On July 25, 1994, the Company issued 3,521,126 shares of Class
A Common Stock, and warrants to purchase an additional 3,521,126
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<PAGE>
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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 third quarter and year to date 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 $1.16
and $4.75 for the third quarter and year to date 1994,
respectively. The average Class A Common shares outstanding would
have been 4,847,501 and 3,122,016 for the third quarter and first
nine months 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). On July 25, 1994, $20.0 million was raised
pursuant to the offering from the Company's principal stockholder
and the Company is seeking to raise between $10.0 million and $15.0
million of additional capital by December 31, 1994. Even if the
Company was to receive the additional capital, 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 3,521,126 shares of Class
A Common Stock, warrants attached to purchase an additional
3,521,126 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.
With the capital infusion, the Company continues with 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 to solidify the position of
the Company and the Bank 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 $5.6 million, or $1.16 per
common share, for the three months ended September 30, 1994,
compared to a net loss of $2.0 million, or $4.40 per common share
for the same period in 1993. Net losses for the nine months ended
September 30, 1994 totaled $14.8 million, or $6.83 per common share
compared to $8.5 million or $19.19 per common share for the same
period in 1993. The increase in the Company's third quarter 1994
net loss compared to 1993 net loss was from decreases in net
interest income of $608,000 and lower other revenue of $1.1
million, increases in net cost of real estate operations of $2.3
million, and an increase in total operating expenses of $111,000
partially offset by an improvement in provision for loan losses of
$477,000. The increase in the Company's net loss for the nine
months ended September 30, 1994 of $6.3 million compared to the net
loss for the same period in 1993 of $8.5 million was from decreases
in net interest income of $2.5 million and lower other revenue of
$2.2 million, and increases in net cost of real estate operations
of $3.0 million and total operating expenses of $1.6 million,
partially offset by a decrease in loan loss provision of $3.0
million.
At September 30, 1994, total assets were $177.8 million, a
decline of $53.2 million, or 23.0% from $231.0 million at December
31, 1993. Total loans were $113.6 million, a decrease of $36.1
million, or 24.1% from the $149.7 million at December 31, 1993.
Total deposits were $144.0 million<PAGE>
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at September 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 subsequent to recapitalization. The decline
in total deposits is primarily the result of reductions in volatile
deposits and, to a lesser extent, 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 September 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. As a result of the management change discussed under
"Item 5. Other Information", additional officers and directors have
been or will 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
experience are commensurate with their duties and responsibilities
to operate the Bank in a safe and sound manner, notify the FDIC and
the Superintendent at least 30 days prior to adding or replacing
any new director or senior executive officer and comply with
certain restrictions in compensation of senior executive officers;
(e) maintain an adequate reserve for loan losses; (f) not extend
additional credit to, or for the benefit of, any borrower who had
a previous loan from the Bank that was charged off or classified
"Loss" in whole or in part; (g) develop and implement a plan to
reduce its concentrations of construction and development loans;
(h) not increase the amount of its brokered deposits above the
amount outstanding on the Orders Effective Date 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.<PAGE>
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However, as of September 30, 1994, the Bank was not in
compliance with certain requirements of the regulatory Orders. The
Bank did meet the 7% leverage capital ratio imposed by the Orders.
On July 27, 1994, the Company contributed $13.5 million in capital
to the Bank. As of September 30, 1994, the Bank's volatile
liability dependency ratio was 15.3% compared to 15% as required by
the Orders. See "Financial Condition -- Liquidity and Capital
Resources".
As of September 30, 1994, the Bank's C&D Assets were $42.3
million as compared to the September 30, 1994 Orders requirement of
no more than $40.0 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 ensuring that the
policies and procedures are effectively implemented.
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 in 1993 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 is presently
updating its 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
strategy. Management believes that the Bank will be able to take
the actions contemplated by such plan without need for further
regulatory 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 provisions and charge-
offs in earlier periods. The restatement has no material effect on
the Bank's consolidated statement of financial condition as of
September 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<PAGE>
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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 September 30, 1994, the Bank had contributed capital of
$62.7 million and deficit retained earning of $46.4 million, or
approximately 74.0% of contributed capital, within the meaning of
Section 134(b) of the Financial Code. On November 6, 1992,
February 17, 1993, November 16, 1993, February 7, 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 September 30, 1994, the Bank would have been required to
raise $53.3 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 approved 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, that the
Bank will be able 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 other adverse
operating issues might not arise that would result in the
Superintendent utilizing 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<PAGE>
<PAGE>
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 $8.3 million
for the nine months ended September 30, 1993, compared to $5.9
million for the same period in 1994, a decline of $2.4 million or
28.9%. 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 $85.0 million or 34.9% to $158.6 million
for the nine months ending September 30, 1994 from $243.6 million
for the same period ending September 30, 1993. Average interest
bearing liabilities declined $82.7 million or 34.9% for the nine
months ended September 30, 1994 from $236.4 million for the period
in 1993. The average interest rate margin increased slightly to
4.97% for the nine months ended September 30, 1994 compared to
4.69% for the same period in 1993.
The Company's net interest income decreased from $2.6 million
for the third quarter of 1993, compared to $2.0 million for the
third quarter of 1994, a decline of $608,000 or 23.4%. Average
interest-earning assets declined by $87.1 million or 36.8% to
$149.7 million for the quarter ending September 30, 1994 compared
to $236.8 million for the same period in 1993. Average interest
bearing liabilities declined by $93.6 million or 41.5% to $136.6
million for the quarter ending September 30, 1994 compared to
$225.3 million for the same period in 1993. The average margin
increased to 5.28% for the third quarter of 1994, from 4.43% for
the third 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 $2.2 million, from $3.7 million
for the nine months ended September 30, 1993 compared to $1.5
million for the same period in 1994. Stock option commissions and
fees decreased $1.0 million, or 45.6% 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 $1.1 million lower
than the previous period partially due to a non-recurring loss from
investment in Bank of San Francisco Building Company of $486,000
and loss on sale of securities of $201,000 in 1994 as a result of
liquidating certain mortgage-backed securities in an effort to
limit the Bank's losses in a rising rate environment and generally,
lower volume.
Non-interest income decreased $1.1 million, from $1.3 million
for the third quarter of 1993<PAGE>
<PAGE>
compared to $235,000 for the third quarter of 1994. Service
charges and fees decreased by $43,000, or 34.4%. Stock option
commissions and fees decreased $424,000, or 55.5% as a result of
reduced activities by holders of stock options. Other income was
$656,000 lower than the previous period in 1993 partly as a result
of a non-recurring loss from investment in Bank of San Francisco
Building Company of $486,000. See "The Bank of San Francisco
Building Company Limited Partnership".
The Bank expects to continue experiencing lower levels 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.
Non-Interest Expense
Operating Expenses
Operating costs increased by $1.6 million or 12.0%, from $13.3
million for the nine months ended September 30, 1993 to $14.9
million for the same period in 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 and a litigation reserve of
$600,000 established in the third quarter of 1994 for existing and
potential losses from various lawsuits. See "Part II -- Other
Information -- Legal Proceedings." Professional fees increased by
$1.2 million from $1.2 million for the nine months ended September
30, 1993 compared to $2.4 million for the same period in 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 $1.2 million from $6.6 million for the nine months ended
September 30, 1993 compared to $5.4 million for the same period in
1994. All other operating costs decreased by $1.3 million as a
result of lower costs related various cost control initiatives and
to lower deposit and loan volumes in 1994 compared to 1993,
partially offset by the loss on sale of the Sacramento Regional
office in 1993 of $425,000.
Operating costs increased by $111,000 or 2.5%, from $4.4
million for the third quarter of 1993 to $4.5 million for the third
quarter of 1994. The increase is primarily the result of the
litigation reserve of $600,000 accrued in the third quarter of 1994
as discussed above, higher professional fees of $354,000 partially
offset by lower salaries and related benefits of $451,000 and lower
costs as a result of lower loan and deposit volumes and portfolios
for the third quarter of 1993 compared to the third quarter of
1994. The increase in professional fees is partially offset by the
decrease in salaries and related benefits of $451,000 from $2.2
million for the third quarter of 1993 compared to $1.7 million for
the third quarter of 1994. Other occupancy increased by $86,000 or
11.8% primarily as a result of decreasing the amortization term of
the Bank's leasehold improvements.
During the fourth quarter of 1994, the Company and the Bank
implemented a reduction in work force to reduce the number of
employees from 107 to 90. The severance related costs will be
recognized in the fourth quarter of 1994.
Net Cost of Real Estate Operations
Net cost of real estate operations increased $3.0 million from
$3.8 million for the nine months ended September 30, 1993 compared
to $6.8 million for the same period in 1994. The increase is
attributed to write-downs on real estate owned and real estate
investment in 1994 of $5.0 million compared to $2.3 million in
1993. Other costs related to real estate operations increased by
$339,000<PAGE>
<PAGE>
to $1.8 million for the nine months ended September 30, 1994
compared to $1.5 million for the same period in 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 $2.3 million from
$812,000 for the third quarter of 1993 compared to $3.1 million for
the third quarter of 1994. The increase is attributed to write-
downs on real estate owned in third quarter of 1994 of $2.7 million
compared to write-downs of $453,000 in third quarter of 1993.
Costs related to real estate operations are $438,000 for the third
quarter of 1994 compared to $359,000 for the same period in 1993.
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short term
investments, totaled $41.4 million, or 23.3% of total assets, at
September 30, 1994, a decrease of $5.7 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 $66.1 million and
operating losses of $14.8 million partially offset by net loan
repayments of $36.2 million, real estate owned reduction of $10.2
million, borrowing from the Federal Home Loan Bank (the FHLB) of
$5.0 million and Repurchase Agreements of $4.8 million, and funds
raised from the Offering of $20.0 million during 1994.
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 September 30,
1994, the Bank had not drawn on its line of credit with the Federal
Reserve Bank. As of September 30, 1994, the Bank had pledged loans
and securities enabling the Bank to borrow up to $5.0 million from
the FHLB of San Francisco and securities enabling the Bank to
borrow up to $ 6.8 million against Repurchase Agreements. The Bank
has drawn $5.0 million on its facility with the FHLB of San
Francisco and $4.8 million against the Repurchase Agreement.
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 September 30, 1994, shareholders' equity was $20.3 million,
compared to $17.5 million at December 31, 1993, primarily as a
result of raising additional capital, net of costs, totaling $17.6
million partially offset by the $14.8 million net operating loss.
At September 30, 1994, the Company and the Bank had Tier I capital
of $20.3 million and $16.3 million, 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 September 30, 1994,
the Company and the Bank were in compliance<PAGE>
<PAGE>
with all the minimum capital ratios and the Bank was in compliance
with the minimum leverage ratio of 7% mandated by the Orders. The
increase in the Company's and Bank's ratios as of September 30,
1994 are primarily the result of raising additional capital.
The following table reflects both the Company's and the Bank's
capital ratios with respect to minimum capital requirements in
effect as of September 30, 1994:
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
<S> <C> <C> <C> <C>
Leverage ratio 10.70% 8.60% 4.0% 7.0%
Tier 1 risk-based capital 13.35 10.69 4.0 N/A
Total risk-based capital 15.02 12.28 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 $2.4 million. The net capital
contribution to the Company is $17.6 million. On July 27, 1994,
the Company contributed net capital of $13.5 million to the Bank.
Investment Activities
At September 30, 1994, the Company's investment securities,
including Federal funds, totaled $33.5 million, or 18.8% of total
assets, compared to $38.8 million, or 16.8% of total assets, at
December 31, 1993.
At September 30, 1994, investment securities held-to-maturity
totaled $9.1 million, compared to $6.4 million at December 31,
1993, and are carried at amortized cost. At September 30, 1994,
the Company held $4.4 million defined as investment securities
available-for-sale, and $24,000 was charged against equity to
reflect the unrealized loss on 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 September 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 have contractual maturities of one year
or less.
Loans
During the nine months ended September 30, 1994, total loans
decreased by $36.2 million, from $149.7 million at December 31,
1993 to $113.6 million at September 30, 1994. The reduction
resulted<PAGE>
<PAGE>
primarily from loan repayments and loan charge-offs. The
composition of the Bank's loan portfolio at September 30, 1994 and
December 31, 1993 is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Commercial and financial $ 88,276 $ 109,008
Real estate construction 15,515 14,023
Real estate mortgage 9,705 26,479
Net lease financing 55 230
113,551 149,740
Deferred fees and discounts, net (517) (550)
Allowance for possible loan losses (6,132) (8,050)
Total loans, net $ 106,902 $ 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 foreclosure are included in other real estate owned. The
table below outlines the Bank's classified assets at September 30,
1994 and December 31, 1993:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Loans - performing $ 14,716 $ 11,847
Non-accrual loans 10,616 11,086
Other real estate owned 22,123 32,372
Real estate investments 725 1,468
Total classified assets $ 48,180 $ 56,773
</TABLE>
Classified loans decreased to $48.2 million as of September
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 nine months ended September
30, 1994, a total of $23.3 million in classified assets was
resolved as a result of repayments, credit quality improvements,
charge-offs and write-downs.
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 September
30, 1994, the Bank was not in compliance with the Orders with $42.3
million in such assets.
Management cannot foresee when the present weakness in the
regional real estate market will diminish, and could continue to
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<PAGE>
<PAGE>
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 analyzed certain
classified assets and determined that short-term liquidation was
warranted. Accordingly, the Bank recorded write-downs on certain
assets based on potential sales prices. During the fourth quarter
of 1994, the Bank will continue to analyze its classified asset
portfolio to determine additional 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 assets to a single buyer. A change
in resolution strategy could result in additional losses during the
fourth 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 $33.5 million at September 30, 1994,
down $10.0 million or 23.0% from $43.5 million at the end of 1993.
During the nine months ended September 30, 1994, $6.4 million
in loans were transferred to non-accrual status as a result of
certain credit quality weaknesses. The reduction of $16.4 million
in non-performing assets was primarily the result of OREO sales of
$5.4 million, write-downs of $4.7 million, cash repayment of $3.0
million and charge-offs of $3.3 million.
At September 30, 1994 and December 31, 1993, other real estate
owned, including in-substance foreclosed loans, was $22.1 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 September 30, 1994 and
December 31, 1993, in-substance foreclosed loans were $9.8 million
and $19.1 million, respectively. As of September 30, 1994 and
December 31, 1993, all other real estate owned (OREO) and real
estate investments were adversely classified.<PAGE>
<PAGE>
Non-performing loans secured by first deeds of trust totaled
$7.2 million as of September 30, 1994. Of the $9.8 million in
other real estate owned classified as in-substance foreclosure, one
property totaling $298,000 was secured by a subordinate deed of
trust. Restructured loans totaled $2.2 million at September 30,
1994 and December 31, 1993.
The following table provides information on all non-performing
assets at September 30, 1994 and December 31, 1993:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Non-accrual loans $ 10,616 $ 11,086
Other real estate owned 22,123 32,372
Total non-performing assets $ 32,739 $ 43,458
As a percentage of total loans and OREO outstanding 24.1% 23.9%
</TABLE>
In addition to the loans disclosed in the foregoing table, the
Bank had approximately $1.7 million in loans at September 30, 1994
that were between 31 and 89 days delinquent. Approximately
$900,000 of the loans delinquent between 31 and 89 days are
commercial loans. 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
September 30, 1994. As of September 30, 1994, approximately
$366,000 of commercial loans were delinquent 90 days or more and
still accruing. Total non-accrual loans includes one loan
classified as a loan to facilitate the sale of real estate owned
that is less 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 exploring the possible sale of part or all of the
problem asset portfolio to a single buyer as discussed previously.
In addition, 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 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<PAGE>
<PAGE>
1995, but, earlier implementation is permitted. The Company
elected not to implement SFAS No. 114 for the period ended
September 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 three quarters ended
September 30, 1994:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994
<S> <C>
Beginning balance of allowance for loan losses $ 8,050
Charge-offs (3,253)
Recoveries 912
Provision 423
Ending balance of allowance for loan losses $ 6,132
</TABLE>
For the nine months ended September 30, 1994, the Company
charged-off $1.1 million in real estate related loans, $1.5 million
in commercial loans and $687,000 in unsecured loans. The charge-
offs were primarily allocated loan loss allowances on specific
loans. Unallocated loan loss allowances are $1.6 million as of
September 30, 1994 compared to $2.8 million as of December 31,
1993.
Allowance for Losses on Other Real Estate Owned
The following table summarizes the other real estate owned
loss experience of the Bank for the three quarters ended September
30, 1994:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994
<S> <C>
Beginning balance of allowance for losses $ 2,986
Charge-offs (57)
Provision 4,711
Ending balance of allowance for losses $ 7,640
</TABLE>
The Bank recorded a net gain on sale of other real estate
owned totaling $243,000 in the first nine months 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 nine
months of 1994. The loss was also related to one property. The
OREO properties are shown net of allowance for losses.<PAGE>
<PAGE>
Allowance for Losses on Real Estate Investments
The following table summarizes the real estate investments
loss experience of the Bank for the three quarters ended September
30, 1994:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994
<S> <C>
Beginning balance of allowance for losses $ 712
Charge-off (202)
Provision 506
Ending balance of allowance for losses $ 1,016
</TABLE>
During the nine months ended September 30, 1994, one real
estate investment property was sold for a gain of $10,200. As of
September 30, 1994, the remaining two properties were written down
by $382,000 to reflect potential sales prices. Real estate
investments are shown net of allowance for losses.
Deposits
The Bank had total deposits of $144.0 million at September 30,
1994, compared to $210.1 million at December 31, 1993, a decrease
of $66.1 million. A summary of deposits at September 30, 1994 and
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Demand deposits $ 30,095 $ 34,859
NOW 36,919 48,908
Money market 29,434 35,051
Savings 3,374 7,544
Total deposits with no stated maturity 99,822 126,362
Time deposits:
Less than $100,000 33,954 51,481
$100,000 and greater 10,252 32,268
Total time deposits 44,206 83,749
Total deposits $ 144,028 $ 210,111
</TABLE>
A summary of deposits by customer base at September 30, 1994
and December 31, 1993 are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
<S> <C> <C>
Private Banking $ 63,590 $ 80,372
Association Bank Services 35,601 45,100
Trust and Investment Services 14,762 16,336
Money Desk Deposits 18,935 41,543
Brokered Deposits 11,140 26,760
Total deposits $ 144,028 $ 210,111
</TABLE>
The Bank's primary focus is in private and business banking,
with deposits totaling $63.6 million,<PAGE>
<PAGE>
or 44.1% of total deposits, at September 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 $35.6 million, or 24.7% of total deposits at September 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 $14.8 million, or 10.2% of total
deposits at September 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 in deposits. As a result of the first
closing of the Offering which was completed in July 1994, the Bank
has implemented a program during the third quarter of 1994 to build
existing and former client relations and reestablish these
relationships with the Bank, particularly their depository
relationships.
Deposits acquired through the money desk operations totaled
$18.9 million, or 13.1% of total deposits at September 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
deposits as required by the Orders as well as from a competitive
rate environment. Depositors view other investments as more
attractive because of higher interest rates for those types of
investments compared to the interest rates the Bank can offer for
money desk deposits.
At September 30, 1994, the Bank had brokered deposits totaling
$11.1 million. During the third quarter of 1994, the Bank's
brokered deposits matured and were repaid. The Bank's agreement
with a major retail brokerage firm for the placement of the Bank's
certificates of deposit was not renewed. At December 31, 1993, the
Bank had outstanding certificates of deposit placed through this
brokerage firm of $20.0 million, or 9.5% of total deposits. As of
September 30, 1994, the Bank established other sources of brokered
deposits with brokered deposits totaling $4.1 million through other
intermediaries. 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 $11.1 million,
or 7.7% of total deposits, at September 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 extension of a waiver of
such prohibition granted by the FDIC which expires in September
1995.
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 September
30, 1994 was 15.3%. As of September 30, 1994, total volatile
liabilities were $50.0 million or 31.7% 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<PAGE>
<PAGE>
dependency ratio by decreasing volatile deposits without decreasing
short-term investments or by increasing short-term investments
without increasing volatile deposits. Prior to the
reclassification, and with the additional capital from the
Offering, the Bank had expected to meet 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 third 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.
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 was deferred pending accounting and regulatory
review which has been completed. The Company and the Bank are
seeking to close the tender offer by December 31, 1994.
The Company and the Bank have examined the accounting
treatment should a majority interest in the partnership be
acquired. If the Bank acquires more than 50% of the limited
partnership interest, its investment in BSFBC would be on a
consolidated basis. No reserve for impairment would be required.
Presently, the Bank accounts for its interest in the limited
partnership using the equity method. During the third quarter of
1994, BSFBC's general partner, BSFRI, decided to reduce the
amortization term for BSFBC's assets. The change in the
amortization term of leasehold interest and leasehold improvements
resulted in the Bank recording a loss from BSFBC of $486,000.
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 September 30, 1994. However, the adjustment formula
does not require any Adjustment Shares to be issued as of September
30, 1994. The next interim date of distribution is December 31,
1994. The final distribution will be<PAGE>
<PAGE>
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 September 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 is presently the defendant in two lawsuits brought by
former employees. 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
Bank has reached a binding arbitration settlement requiring it to
pay $293,000 plus interest of approximately $100,000 to the former
employee. Additional amounts in respect of the plaintiff's legal
expenses will also be incurred. The Company and the Bank intend to
pursue its rights under its indemnification agreement with Mr.
Donald R. Stephens, a former Chairman of the Board and Chief
Executive Officer of the Company who resigned in 1993, pursuant to
which Mr. Stephens is required to provide indemnification in respect
of certain expenses of such action.
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 Bank has reached an agreement in
principal to settle this lawsuit for $135,000.
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, at which time BSFRI was given a release for
any liability. 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.
In the fifth lawsuit, the Bank has been named a defendant in
an action brought in Florida by the institutional purchaser of a
block of loans from the Bank, alleging failure of the Bank to
properly perform a credit check for one of the loans. The
plaintiff is seeking approximately $155,000 it allegedly lost when
the loan defaulted. The Bank is defending the matter vigorously
and believes it has meritorious defenses. In addition, the Bank
has been threatened with arbitration proceedings by another
institutional purchaser in connection with a $750,000 principal
amount loan purchased from the Bank on the sale of its former
Sacramento branch. The institutional purchaser contends that the
Bank breached the sale agreement by failing to notify the purchaser
of the downgrading of the loan and the release of certain
collateral. The Bank denies that it has breached the sale
agreement.
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<PAGE>
<PAGE>
or results of operation, however, management cannot predict the
specific outcome of these actions.
The Bank also reached a definitive settlement agreement on
July 25, 1994, to resolve a lawsuit pursuant to which an insurance
commissioner, as conservator for an allegedly insolvent insurance
company which deposited assets with the Bank under a trust
agreement, made claims against the Bank. Under the settlement
agreement the Bank paid to the plaintiff a single all-inclusive
payment of $2.0 million. In addition, the Bank turned over to the
plaintiff approximately $120,000, which the Bank continued to hold
in trust for the insurance company in a separate account for costs
of defense of claims, and it assigned to the plaintiff the proceeds
of recoveries by the Bank of up to $1.0 million against the Bank's
indemnity insurer and other third parties, which recoveries are not
guaranteed by the Bank. The Bank obtained a full release from the
plaintiff and also obtained its assistance, as conservator for the
insurance company, in resolving approximately six other claims made
against the Bank, which remain outstanding related to the dissolution of the
insurance company and the Bank's trust activities.
As a result of the settlement or potential settlement of
certain lawsuits, the Company established a litigation reserve of
$2.0 million as of June 30, 1994 and an additional litigation
provision of $600,000 as of September 30, 1994. A charge to the
litigation reserve of $2.0 million was taken in the third quarter
of 1994.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
See "Note 5 -- Dividend Restrictions".
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
On October 18, 1994, the Company and the Bank appointed James
E. Gilleran, formerly superintendent of the California State
Banking Department, as Chairman and Chief Executive Officer of the
Company and the Bank. The Company and the Bank have entered into
an employment agreement with Mr. Gilleran, effective October 1,
1994 (Employment Agreement), which has a term of three years. The
Employment Agreement provides for a base annual salary of $250,000,
but his salary will be increased to $300,000 upon the Company
concluding three consecutive profitable quarters after the date of
the Employment Agreement. The Employment Agreement also provides
for an annual bonus to be determined each year up to 100% of the
base salary, and a one-time special incentive of $150,000 if
subsequent to a regulatory examination the boards of directors of
the Company and the Bank determine, respectively, that the
condition of the Company and the condition of the Bank (as measured
by its capital, assets, management, earnings and liquidity) are
satisfactory.<PAGE>
<PAGE>
The Employment Agreement also provides that Mr. Gilleran will
receive stock options under the Company's Executive Stock Option
Plan to acquire shares of the Company's Class A Common Stock equal
to 5% of the shares of Company's Common Stock, with additional
options to be granted in the future as necessary to maintain the 5%
ratio until the Company completes its next public offering of its
Class A Common Stock. One-third of such options shall vest on each
anniversary of the Employment Agreement and once vested are, in
general, exercisable for a period of 10 years.
The Employment Agreement also provides termination provisions
which, so long as the Federal Reserve Board or the FDIC does not
determine that the Company and the Bank are in an unsafe and
unsound financial condition, can require, if his employment is
terminated without cause, payment of an additional one year's
salary, 50% of the bonus due him for the existing term plus an
additional year, and that his stock options will vest immediately.
Under the Employment Agreement, Mr. Gilleran is indemnified by
the Company and the Bank from any liability or expense arising as
a result of actions taken by the Company or the Bank, or events
relating to the business of the Company or the Bank, occurring
prior to the execution of the Employment Agreement. Subject to
certain limitations, Mr. Gilleran is also indemnified by the
Company and the Bank from any liability or expenses arising as a
result of actions taken by the Company or the Bank, occurring after
the execution of the Employment Agreement, unless such liability or
expense is due to the officer's bad faith or gross negligence or is
required by any relevant law or regulatory requirements. Exhibit
10.1 is a copy of the Employment Agreement.
During the third quarter of 1994, Mr. Kent Price resigned as
Chairman and Chief Executive Officer of the Company and the Bank.
Mr. Price will continue as a director of the Company. Mr. Price
advised management that his decision to resign was a personal one
in order to enable him to assume a full time position with a non-
banking company, and does not result from any disagreement with the
Board of Directors of the Company and the Bank.
Mr. Price terminated his employment contract with the Company
and the Bank effective September 16, 1994, and will not require the
payment or delivery of any compensation or benefits thereunder
following his cessation of active management of the Company and the
Bank, except for previously vested options on a fully diluted basis
for one percent of all classes of the Company's Common Stock. Mr.
Price will continue as a director of the Company and will received
compensation therefor commensurate with the non-management
directors of the Company. Exhibit 10.2 is a copy of Mr. Price's
termination agreement.
Mr. Champion, the Vice Chairman and Chief Financial Officer of
the Company and Bank, has announced his intentions to resign as an
officer of the Company and the Bank effective November 1, 1994, to
assume responsibilities as the Chief Executive Officer of a newly
formed asset management company, the equity of which, initially,
will be contributed principally by Mr. Oka Masagung, the brother of
the Principal Stockholder, and which is expected to maintain close
relations with the Company. Mr. Champion will continue as a
director of the Company and the Bank. Mr. Champion will terminate
his employment contract with the Company and the Bank, and will not
require the payment or delivery of any compensation or benefits
thereunder following his cessation of active employment by the
Company and the Bank, except for previously granted options on a
fully diluted basis of two percent of all classes of the Company's
Common Stock. Mr. Champion will also receive compensations as a
director of the Company and the Bank commensurate with the non-
management directors of the Company and the Bank.
Mr. Carl D. Gustavson announced his resignation, effective
October 18, 1994, as a director of the Company and the Bank. Mr.
Gustavson advised management that his decision to resign was a<PAGE>
<PAGE>
personal one, and does not result from any disagreements with the
Board of Directors of the Company and the Bank.
Mr. Rodney D. Freed announced his resignation, effective
October 18, 1994, as a director of the Company and the Bank. Mr.
Freed also announced his resignation as President and Chief
Operating Officer of the Company and the Bank, effective November
3, 1994. He advised management that his decision to resign was a
personal one, and does not result from any disagreements with the
Board of Directors of the Company and the Bank. Mr. Freed's
cessation of active employment by the Company and the Bank will
require compensation of one year's salary.
On October 18, 1994, Mr. Stephen V. R. Spaulding, Executive
Vice President of the Bank, has been appointed a director and Vice
Chairman of the Bank subject to regulatory review of such election.
On October 18, 1994, Mr. Putra Masagung and Mr. Nicholas C.
Unkovic were elected members of the Board of Directors of the
Company, subject to regulatory review of such elections. Mr.
Masagung is the Principal Stockholder of the Company.
Mr. Unkovic is a partner in the law firm of Graham & James,
San Francisco, California, which represents the Principal
Stockholder and certain of his affiliates, including in matters
with respect to his investment in the Company. In connection with
such position, Mr. Unkovic's election is also subject to the mutually
satisfactory completion of an indemnity agreement between the
Company, and Mr. Unkovic and Graham & James.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 Gilleran Employment Agreement
Exhibit 10.2 Price Termination Agreement
(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: November 10, 1994 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: November 10, 1994 /s/ Keary L. Colwell
Keary L. Colwell
Controller
Senior Vice President
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
The San Francisco Company
Exhibit 27
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM SEPTEMBER 30, 1994 10Q AND DECEMBER 31, 1993
10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
The following schedule set forth certain selected consolidated financial data
of the Company at September 30, 1994 and December 31, 1993, and for the period
ended September 30, 1994 and 1993:
<CAPTION>
(Dollars in thousands) September 30, December 31,
1994 1993
ASSET DATA:
<S> <C> <C>
Cash and due from banks $ 7,923 $ 8,333
Federal funds purchased 20,000 17,500
Investments and mortgage backed securities
available for sale 4,431 14,940
Investments and mortgage backed securities
held to maturity - carrying value 9,082 6,351
Investments and mortgage backed securities
held to maturity - market value 9,077 6,353
Loans 113,551 149,750
Allowance for loan losses (6,132) (8,050)
Total Assets 177,849 231,021
LIABILITY AND EQUITY DATA:
Deposits 144,028 210,111
Short-term borrowings 9,851 1,303
Other liabilities 3,664 2,152
Preferred stock - no mandatory redemption 116 18,116
Common stock 58 4
Other stockholders' equity 20,132 (667)
Total liabilities and stockholders' equity $177,849 $231,021
<PAGE>
<PAGE>
(Financial Data Schedule continued)
<CAPTION>
(Dollars in thousands) September 30, September 30,
1994 1993
INCOME STATEMENT DATA:
<S> <C> <C>
Interest and fees on loans $ 8,635 $ 13,062
Interest and dividends on investments 995 1,131
Total interest income 9,630 14,193
Interest on deposits 3,608 5,443
Total interest expense 3,735 5,848
Net interest income 5,895 8,345
Provision for loan losses 423 3,400
Investment securities gains/losses (180) (73)
Other expenses 21,717 17,105
Loss before taxes (14,733) (8,438)
Net loss (14,838) (8,541)
Earnings per share - primary (6.83) (19.19)
Earnings per share - fully diluted (6.83) (19.19)
<CAPTION>
(Dollars in thousands) September 30, December 31,
1994 1993
OTHER DATA:
<S> <C> <C>
Net yield-interest earning assets 5.0% 4.6%
Loans on non-accrual $ 10,616 $ 11,086
Accruing loans past due 90 days or more 366 -
Troubled debt restructuring 2,200 2,200
Potential problem loans 14,716 11,847
Allowance for loan loss - beginning of period 8,050 8,400
Total charge-offs 3,253 4,603
Total recoveries 912 159
Allowance for loan loss - end of period 6,132 8,050
Allowance for loan loss allocated to domestic loans 4,482 5,255
Loan loss allowance unallocated 1,650 2,795
</TABLE>
