<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
-----------------------------------
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
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(Exact name of Registrant as specified in its charter)
Delaware 94-3071255
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Montgomery Street, San Francisco, California 94111
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(Address of principal executive office) (Zip Code)
(415) 781-7810
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(Registrant's telephone number, including area code)
None
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(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
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The Registrant had 5,765,978 shares of Class A Common Stock outstanding on May
11, 1995.
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THE SAN FRANCISCO COMPANY AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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Page
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Part I - Financial Information
Item 1. Consolidated Statements of Financial Condition
At March 31, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations
For the Three Months Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
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THE SAN FRANCISCO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
(Dollars in Thousands Except Per Share Data) 1995 1994
---------------------------
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ASSETS:
Cash and due from banks $ 5,846 $ 11,397
Federal funds sold 23,300 17,250
---------------------------
Cash and cash equivalents 29,146 28,647
Investment securities held-to-maturity
(Market: 1995, $6,288; 1994, $9,173) 6,295 9,196
Investment securities available-for-sale 3,088 2,211
Loans 92,561 106,452
Deferred loan fees (306) (388)
Allowance for loan losses (7,044) (6,576)
---------------------------
Loans, net 85,211 99,488
Other real estate owned 9,771 10,021
Real estate investments 2,356 2,364
Premises and equipment, net 2,893 2,996
Interest receivable 651 820
Other assets 850 1,037
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Total Assets $140,261 $156,780
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Non-interest bearing deposits $ 25,411 $ 30,259
Interest bearing deposits 105,076 116,889
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Total deposits 130,487 147,148
Other borrowings 5,245 4,070
Other liabilities and interest payable 2,313 3,433
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Total Liabilities 138,045 154,651
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SHAREHOLDERS' EQUITY:
Preferred Stock (par value $0.01 per share)
Series B - Authorized - 437,500 shares
Issues and outstanding - 16,291 and 16,291, respectively 114 114
Common stock (par value $0.01 per share)
Class A - Authorized - 40,000,000 shares
Issued and outstanding - 5,765,978 and 5,766,008, respectively 58 58
Additional paid-in capital 70,168 70,168
Retained deficit (68,068) (68,137)
Employee purchase and option plans (70) (70)
Unrealized gain/(loss) on securities available-for-sale 14 (4)
---------------------------
Total shareholders' equity 2,216 2,129
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Total Liabilities and Shareholders' Equity $140,261 $156,780
===========================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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THE SAN FRANCISCO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(Unaudited)
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<CAPTION>
March 31,
--------------------------
(Dollars in Thousands Except Per Share Data) 1995 1994
--------------------------
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Interest income:
Loans $ 2,491 $ 2,966
Investments 390 286
Dividends 21 11
--------------------------
Total interest income 2,902 3,263
--------------------------
Interest expense:
Deposits 1,033 1,267
Other borrowings 64 28
--------------------------
Total interest expense 1,097 1,295
--------------------------
Net interest income 1,805 1,968
Provision for loan losses -- 141
--------------------------
Net interest income after provision for loan losses 1,805 1,827
--------------------------
Non-interest income:
Service charges and fees 164 120
Loan brokerage and servicing fees 74 81
Stock option commissions and fees 406 614
Other income 111 101
Income(loss) on sale of investment securities and
other assets, net 16 (101)
--------------------------
Total non-interest income 771 815
--------------------------
Non-interest expense:
Salaries and related benefits 1,156 1,999
Occupancy expense 593 615
Professional fees 194 609
FDIC insurance premiums 154 179
Data processing 171 101
Telephone 37 48
Other operating expenses 326 589
--------------------------
Total operating expenses 2,631 4,140
Net (income)cost of real estate operations (161) 1,658
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Total non-interest expense 2,470 5,798
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Income(loss) before income taxes 106 (3,156)
Provision for income taxes 38 28
--------------------------
Net Income(loss) $ 68 $(3,184)
==========================
Income(loss) per common share:
Net income(loss) $ 0.01 $ (7.16)
Weighted average shares outstanding 5,765,993 445,100
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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THE SAN FRANCISCO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Employee Gain/
Purchase (Loss) on Total
Additional Retained and Securities Share-
Preferred Common Paid-in Earnings Option Available- holders'
(Dollars in Thousands) Stock Stock Capital (Deficit) Plans for-Sale Equity
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Balances at January 1, 1994 $ 18,116 $ 4 $ 34,662 $(35,101) $(166) (60) $ 17,455
Net change in employee stock
ownership plans -- -- -- -- 93 -- 93
Appreciation in market value of securities
available-for-sale -- -- -- -- -- 20 20
Net loss (three months) -- -- -- (3,184) -- -- (3,184)
---------------------------------------------------------------------------------
Balances at March 31, 1994 18,116 4 34,662 (38,285) (73) (40) 14,384
Net change in employee stock
ownership plans -- -- -- -- (3) -- (3)
Conversion of preferred stock
to common stock (18,002) 18 17,984 -- -- -- --
Net proceeds from sale of stock 36 17,524 -- -- -- 17,560
Redemption on fractional shares -- -- (2) -- -- -- (2)
Appreciation in market value of securities
available-for-sale -- -- -- -- -- 36 36
Net loss (nine months) -- -- -- (29,852) -- -- (29,852)
---------------------------------------------------------------------------------
Balances at December 31, 1994 114 58 70,168 (68,137) (70) (4) 2,129
Appreciation in market value of securities
available-for-sale -- -- -- -- -- 18 18
Net income (three months) -- -- -- 68 -- -- 68
---------------------------------------------------------------------------------
Balances at March 31, 1995 $ 114 $ 58 $ 70,168 $(68,068) $ (70) $ 14 $ 2,216
================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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THE SAN FRANCISCO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(Unaudited)
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<CAPTION>
(Dollars in Thousands) 1994 1993
----------------------
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Cash Flows from Operating Activities:
Net income(loss) $ 68 $ (3,184)
Adjustments to reconcile net income(loss) to net cash
used in operating activities:
Provision for loan losses -- 141
Depreciation and amortization expense 105 123
Net loss on other real estate owned and real estate investment -- 1,200
(Gain)loss on sale of investment securities available-for-sale (343) 100
Decrease in interest receivable 169 65
Decrease in interest payable (20) (172)
Decrease in deferred loan fees (82) (106)
----------------------
Net cash flows used in operating activities (103) (1,833)
----------------------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities held-to-maturity 2,901 3,299
Proceeds from maturities of investment securities available-for-sale 140 --
Purchase of investment securities available-for-sale (999) (4,579)
Purchase of investment securities held to maturity -- (7,887)
Sale of investment securities available-for-sale -- 15,020
Net decrease in loans 13,891 5,170
Recoveries of loans previously charged off 468 87
Purchases of premises and equipment (2) --
Sale of other real estate owned 733 1,978
Acquisition and capitalized costs of other real estate owned (132) (445)
Net decrease(increase) in other assets 187 (248)
----------------------
Net cash provided by investing activities 17,186 12,395
----------------------
Cash Flows from Financing Activities:
Net decrease in deposits (16,661) (13,028)
Net increase(decrease) in other borrowings 1,245 (7)
Net (decrease)increase in other liabilities (1,169) 489
----------------------
Net cash used in financing activities (16,585) (12,546)
----------------------
Increase(decrease) in cash and cash equivalents 498 (1,984)
Cash and cash equivalents at beginning of period 28,647 25,833
----------------------
Cash and cash equivalents at end of period $ 29,146 $ 23,849
======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 923 $ 1,467
Payment of income taxes 42 67
Supplemental Schedule of Noncash Investing and Financing Activities:
Net transfer of loans to other real estate owned -- --
</TABLE>
See accompanying notes to unaudited 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 (the "Company") is a Delaware corporation
and a bank holding company registered under the Bank Holding Company Act of
1956. Bank of San Francisco (the "Bank"), a state chartered bank, was
organized as a California banking corporation in 1978 and became a wholly owned
subsidiary of the Company through a reorganization in 1982.
Note 2 - Principles of Consolidation and Presentation
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with the instructions pursuant to Form
10-Q Quarterly Report and Articles 9 and 10 of Regulation S-X, and therefore,
do not include all the information and footnotes necessary to present the
consolidated financial condition, results of operations and cash flows of the
Company in conformity with generally accepted accounting principles.
The data as of March 31, 1995, and for the three months ended March
31, 1995 and 1994 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 results of operations.
Certain amounts in the 1994 consolidated financial statements have been
reclassified for comparative purposes. The results of operations for the three
months ending March 31, 1995 are not necessarily indicative of the results to
be expected for the entire year of 1995. This report should be read in
conjunction with the Company's 1994 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 ("BSFRI"). All material intercompany transactions
have been eliminated in consolidation.
Note 3 - Income(Loss) Per Common Share
Income(loss) per common share is calculated using the weighted average
number of common shares outstanding divided into net income(loss).
Note 4 - Dividend Restrictions
The Company is subject to dividend restrictions under the Delaware
General Corporation Law and regulations and policies of the Federal Reserve
Bank of San Francisco (the "FRB" ). The Company's Series B Preferred Shares
and Series D Preferred Shares (as defined under "Item 2 - Change in
Securities") participate equally, share for share, in cash dividends paid on
the Class A Common Shares in addition to receiving the cash dividends to which
they are entitled. The Board of Directors suspended the dividend on the Class
A Common Shares, the Series B Preferred Shares and the Series D Preferred
Shares.
Note 5 - Adoption of Statement of Financial Accounting Standard No. 114
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114 (FAS 114), Accounting by Creditors for Impairment
of a Loan, as amended by FAS 118
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(collectively referred to as FAS 114). FAS 114 addresses the accounting
treatment of certain impaired loans and amends FASB Statements No. 5 and 15.
However, these statements do not address the overall adequacy of the allowance
for loan losses and do not apply to large groups of smaller-balance homogeneous
loans unless they have been involved in a restructuring. These statements can
only be applied prospectively.
A loan within the scope of FAS 114 is considered impaired when, based
on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement, including scheduled interest payments. For a loan that has
been restructured, the contractual terms of the loan agreement refer to the
contractual terms specified by the original loan agreement, not the contractual
terms specified by the restructuring agreement.
For loans covered by FAS 114, the Company makes an assessment for
impairment when and while such loans are adversely classified. When a loan
with unique risk characteristics has been identified as being impaired, the
amount of impairment will be measured by the Company using discounted cash
flows, the fair value of the collateral if the loan is collateral dependent and
secured by real estate, or the observable market value of the loan. In cases
where the loan is collateral dependent and secured by real estate, the current
fair value of the collateral, reduced by costs to sell will be used in place of
discounted cash flows. Additionally, some impaired loans can have risk
characteristics similar to other impaired loans and can be aggregated for the
purpose of measuring impairment using historical loss factors as a means of
measurement.
If the measurement of the impaired loan is less than the recorded
investment in the loan (including accrued interest, net deferred loan fees or
costs and unamortized premium or discount), impairment is recognized by
creating or adjusting an existing allocation of the allowance for loan losses.
FAS 114 does not change the timing of charge-off of loans to reflect the amount
ultimately expected to be collected.
Generally, the Company uses either the cash or cost recovery method to
record cash receipts on impaired loans. Under the cash method, contractual
interest is credited to interest income when received. This method is used
when the ultimate collectibility of the total principal is not in doubt. Under
the cost recovery method, all payments received are applied to principal.
Loans on the cost recovery method may be changed to the cash method when the
applications of the cash payments has reduced the principal balance to a level
where collection of the remaining recorded investment is no longer in doubt.
Not all impaired loans are on non-accrual status. Generally, a loan
is placed on non-accrual status upon becoming 90 days past due as to interest
or principal (unless both well secured and in the process of collection), when
the full timely collection of interest or principal becomes uncertain. For
example, the Company may not place a loan on non-accrual that has been
identified as impaired if that loan is performing under its contractual terms
and the Bank believes that full repayment is likely, but the fair value of the
underlying collateral is not sufficient to cover the principal and interest.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a one-bank holding company registered in Delaware under
the Bank Holding Company Act of 1956. The principal activity of the Company is
to serve as the holding company for Bank of San Francisco, a California
chartered bank organized in 1978, with deposits insured by the Federal Deposit
Insurance Corporation's Bank Insurance Fund. The information set forth in this
report, including unaudited interim financial statements and related data,
relates primarily to the Bank.
The Company's Class A Common Stock, par value $0.01 per share, is
listed on the American Stock Exchange (AMEX). On April 10, 1995, the AMEX
suspended trading of the Company's Class A Common Stock as a result of the
Company no longer meeting certain AMEX listing requirements. The Company is
communicating with the AMEX to resolve the issues which triggered the
suspension of the trading of the Company's Class A Common Stock.
The Company recorded net income of $68,000, or $0.01 per common share,
for the three months ended March 31, 1995, compared to a net loss of $3.2
million, or $7.16 per common share for the same period in 1994. The increase
in the Company's net operating results of $3.3 million was primarily from
income related to real estate operation of $161,000 compared to a net loss of
$1.7 million for the same period in 1994, and reductions in the loan loss
provision of $141,000 and all other operating costs of $1.5 million in first
quarter 1995 compared to the same period in 1994 partially offset by declines
in net interest income and other revenue of $207,000.
The Company's total non-interest expenses declined by $3.3 million in
the first quarter of 1995 compared to the same period in 1994 as a result of a
decline in costs and losses on real estate, staff reductions, reductions in
professional service and litigation settlement costs, and operating expense
controls.
At March 31, 1995, total assets were $140.3 million, a decline of
$16.5 million, or 10.5% from $156.8 million at December 31, 1994. Total loans
were $92.6 million, a decrease of $13.9 million, or 13.1% from the $106.5
million at December 31, 1994. Total deposits were $130.5 million at March 31,
1995, a decline of $16.6 million or 11.3%, compared to $147.1 million at
December 31, 1994.
REGULATORY DIRECTIVES AND ORDERS
CAPITAL ORDERS
On March 24, 1995, the State Banking Department (the "SBD")
issued an order for the Bank to increase its capital. The capital order
required that the Bank increase its capital by $4.2 million on or before April
10, 1995 and by a minimum of $10.5 million (including the first installment of
$4.2 million) on or before June 30, 1995. The second installment must be at
least equal to the amount of capital necessary to increase the shareholder's
equity to not less than 7.0% of total tangible assets as of February 28, 1995.
No assurances have been given that the SBD will refrain from taking action
against the Bank until the deadlines specified have passed. On April 24, 1995,
the Company received a contribution of $3.8 million in capital from its major
shareholder. On April 24, 1995, the Company contributed $4.2 million,
including $400,000 from other funds of the Company, in capital to the Bank to
meet the first installment required by the SBD Capital order.
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On March 28, 1995, the Federal Deposit Insurance Corporations (the
"FDIC") issued a Notification of Capital Category ("Notification") in
accordance with its Prompt Corrective Action regulations. The FDIC has
determined that the Bank is Critically Undercapitalized. On the date of the
Notification the Bank became subject to certain mandatory requirements
including submission of a capital restoration plan and restrictions on asset
growth, acquisitions, new activities, new branches, payment of dividends or
making any other capital distribution, management fees, and senior executive
compensation. Prior to the Notification, the Bank was subject to the Orders
(defined below) which included these limitations. In addition, immediately
upon receiving notice, the Bank must obtain FDIC's prior written approval
before entering into any material transaction other than in the usual course of
business, extending any credit for any highly leveraged transactions, as
defined by regulation, amending the Bank's charter or bylaws, except to the
extent necessary to carry out any other requirement of any law, regulation, or
order, making any change in accounting methods, engaging in any covered
transaction as defined in section 23A(b) of the Federal Reserve Act, paying
excessive compensation or bonuses, paying interest on new or renewed
liabilities at a rate that would increase the Bank's weighted average cost of
funds to a level significantly exceeding the prevailing rates of interest on
insured deposits in the Bank's normal market area, and making any principal or
interest payment on subordinated debt.
FEDERAL RESERVE BOARD WRITTEN AGREEMENT
As a result of the FRB's 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 stockholders, (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").
On December 16, 1994, the Company and the FRB entered into a Written
Agreement (the "Agreement") that supersedes the previous directive dated April
20, 1992. The Agreement prohibits the Company, without prior approval of the
FRB, from: (a) paying any cash dividends to its shareholders; (b) directly or
indirectly, acquiring or selling any interest in any entity, line of business,
problem or other assets; (c) executing any new employment, service, or
severance contracts, or renewing or modifying any existing contracts with any
executive officer; (d) engaging in any transactions with the Bank that exceeds
an aggregate of $20,000 per month; (e) engaging in any cash expenditures with
any individual or entity that exceeds $25,000 per month; (f) increasing fees
paid to any directors for attendance at board or committee meetings, or paying
any bonuses to any executive officers; (g) incurring any new debt or increasing
existing debt; and (h) repurchasing any outstanding stock of the Company. The
Company is required to submit a progress report to the FRB on a quarterly
basis.
The Company was also required to submit to the FRB an acceptable
written plan to improve and maintain an adequate capital position, a
comprehensive business plan concerning current and proposed business
activities, a comprehensive operating budget for the Bank and the consolidated
Company. In addition, the Board of Directors was required to submit an
acceptable written plan designed to enhance their supervision of the operations
and management of the consolidated organization. The Company has filed all of
the required submissions with the FRB in accordance with the Agreement.
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CEASE AND DESIST ORDERS
On August 18, 1993, the Bank, without admitting or denying any alleged
charges, stipulated to Cease and Desist Orders (the "Orders") issued by the
FDIC and the SBD that became effective August 29, 1993 (the "Orders Effective
Date"). The Orders directed, among other things, that the Bank: (a) achieve
and maintain a 7% leverage capital ratio on and after September 30, 1993; (b)
pay no dividends without the prior written consent of the FDIC and the
California Superintendent of Banks (the "Superintendent"); (c) reduce the $88.6
million in assets classified "Substandard" or "Doubtful" as of November 30,
1992 (the date of the most recent full-scope FDIC and SBD Report of Examination
of the Bank), to no more than $75.0 million by October 31, 1993, with further
reductions to no more than $60.0 million by December 31, 1993, no more than
$50.0 million by March 31, 1994 and no more than $40.0 million by September 30,
1994; (d) have and retain management whose qualifications and experience are
commensurate with their duties and responsibilities to operate the Bank in a
safe and sound manner, notify the FDIC and the Superintendent at least 30 days
prior to adding or replacing any new director or senior executive officer and
comply with certain restrictions in compensation of senior executive officers;
(e) maintain an adequate reserve for loan losses; (f) not extend additional
credit to, or for the benefit of, any borrower who had a previous loan from the
Bank that was charged off or classified "Loss" in whole or in part; (g) develop
and implement a plan to reduce its concentrations of construction and
development loans; (h) not increase the amount of its brokered deposits above
the amount outstanding on the Order's Effective Date and submit a written plan
for eliminating reliance on brokered deposits; (i) revise or adopt, and
implement, certain plans and policies to reduce the Bank's concentration of
construction and land development loans, reduce the Bank's dependency on
brokered deposits and out of area deposits, and to improve internal routines
and controls; (j) reduce the Bank's volatile liability dependency ratio to not
more than 25% by December 31, 1993, and not more than 15% by April 30, 1994;
(k) eliminate or correct all violations of law set out in the most recent
Report of Examination, and take all necessary steps to ensure future compliance
with all applicable laws and regulations; and (l) establish a committee of
three independent directors to monitor compliance with the Orders and report to
the FDIC and the Superintendent on a quarterly basis.
As of March 31, 1995, the Bank did not meet the industry-wide capital
requirements and failed to meet the 7% leverage capital ratio imposed by the
Orders. The Bank also failed to reduce its volatile liability dependency ratio
to not more than 15% as of March 31, 1995. The Bank presently has outstanding
$10.0 million of certificate brokered deposits, all of which mature over the
next ten months. The Bank's brokered deposit waiver was suspended during the
first quarter of 1995. The Bank may not accept or renew any brokered deposits
without obtaining regulatory approval which cannot be granted if the Bank's
risk-based capital ratio remains below the minimum requirement. Certain other
transaction account deposits placed in the Bank by certain money managers were
reclassified as brokered deposits. The aggregate amount of such deposits were
$2.1 million at March 31, 1995.
The Bank believes that the findings of the FDIC and SBD at
their recent examination which began January 30, 1995 will be that the Bank is
not in compliance with substantial requirements of the Orders. However, no
Report of Examination has been received from the FDIC and the SBD as a result
of their recent examination of the Bank. Management believes that the FDIC and
SBD will find that the Bank is not in compliance with: (a) having and
maintaining management whose qualifications and experience are commensurate
with their duties and responsibilities to operate the Bank in a safe and sound
manner; (b) the implementation of a plan to reduce loan concentrations; (c) the
submission of an acceptable plan for the elimination of the reliance on
brokered deposits; (d) the reduction of the volatile liabilities dependency
ratio to at or below 15%, and; (e) the correction of all violations of law as
set out in the previous examination. In addition, because of its asset
quality, operating losses, volatile liability dependency and liquidity
constraints, the Bank is potentially subject to further regulatory sanctions
that
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<PAGE> 12
are generally applicable to banks that are critically undercapitalized.
In response to the Orders and the failure of the Bank to meet
industry wide capital requirements, management submitted a Capital Restoration
Plan (Plan) during the first quarter 1995 to the FDIC and the SBD for approval.
The FDIC has requested that the Plan be updated primarily to give effect for
the present condition of the Bank. On May 4, 1995, the Bank filed a revised
Plan with the FDIC. Management believes that the Bank will be able to take the
general actions contemplated by such Plan, subject to the general requirement
that the Bank return to profitability and be operated safely and soundly. A
number of the restrictions imposed by the Orders will remain in effect until
the Orders can be officially lifted. Although management anticipates the FDIC
and the SBD will lift the Orders once the Bank demonstrates full compliance
with the Orders, and the Bank's problem assets are resolved and it is deemed to
be operating is a safe and sound manner, no assurance can be given as to when
all conditions precedent to the lifting of the Orders will be fulfilled. The
Company also is subject to certain restrictions imposed by the FRB pursuant to
the Agreement that may prevent the Company from taking steps to establish new
businesses (or new subsidiaries) at the Company level until similar conditions
precedent are fulfilled.
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 must levy such an assessment within 60 days of the
Superintendent's order; the assessment becomes a lien upon the shares assessed
from the time of service or publication of such notice of assessment. Within
60 days of the date on which the assessment becomes delinquent, a bank subject
to the Superintendent's order must sell or cause to be sold to the highest
bidder for cash as many shares of each delinquent holder of the assessed shares
as may be necessary to pay the assessment and charges thereon.
As of March 31, 1995, the Bank had contributed capital of
$66.2 million and deficit retained earnings of $64.4 million, or approximately
97.3% of contributed capital, within the meaning of Section 134(b) of the
Financial Code. Thus, under Section 134(b) of the Financial Code, the Bank's
contributed capital was impaired as of that date in the approximate amount of
$38.0 million. The Superintendent issued orders, most recently on May 3, 1995,
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
- 10 -
<PAGE> 13
capital.
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. The Bank is addressing the possibility of obtaining approval of a
quasi-reorganization with the SBD. If the SBD refuses to grant permission for
such a quasi-reorganization, as of March 31, 1995, the Bank would have been
required to raise $94.9 million in new capital in order to correct its impaired
contributed capital (because the ratio of deficit retained earnings to
contributed capital may not exceed 40%, $2.50 of new capital must be raised for
every dollar of impairment). In response to the February 1, 1995 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 cooperation as
the Company implements its Plan, and as the Company continues to consider the
requirements for 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.
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 reflect its assets and liabilities at market value at the time of
the reorganization, the Bank's capital could be further impacted from its
present level as a result of such an adjustment in the market value of the
Bank's assets and 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.
In order to permit a quasi-reorganization of a bank's capital,
the SBD requires, among other things, that a bank demonstrate that it is
adequately capitalized and that it is capable of operating profitably.
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 additional capital is received, that it will then be possible for
the Bank to effect a quasi-reorganization. Management also believes that if
current capital raising efforts are successful, it is unlikely that the
Superintendent would seek to take action solely on the basis of impaired
capital under the Section 134 definition. There can be no assurance, however,
that other circumstances such as insufficient liquidity or further operating
issues will not arise that would provide incentive to the Superintendent to
utilize the powers granted by Section 134.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's net interest income decreased to $1.8 million from $2.0
million in the quarter ended March 31, 1995 from the same quarter in 1994,
respectively, a decline of $163,000 or 8.3%. The
- 11 -
<PAGE> 14
decrease was the result of reductions in interest-earning assets partially
offset by an increase in the Bank's interest margin. Average interest-earning
assets declined by 28% and average interest bearing liabilities decreased 33.4%
for the quarter ended March 31, 1995 compared to the quarter ended March 31,
1994. The average margin increased 44 basis points from 4.56% for the quarter
ended March 31, 1994, to 5.00% for the quarter ended March 31, 1995 primarily
as a result of an increase in prime rate and secondarily an increase in net
average earning assets over liabilities in the first quarter 1995 compared to
the same period in 1994.
As of March 31, 1995, the certificates of deposit were $47.2 million
or 34.8% of total deposits and borrowings compared to $79.8 million or 40.0% of
total deposits and borrowings for the same period in 1994. During first
quarter of 1995, the average stock option loans were lower and fees related to
loans were lower than in the same period in 1994.
NON-INTEREST INCOME
Non-interest income decreased $44,000, from $815,000 at March 31, 1994
to $771,000 at March 31, 1995. Stock option commissions and fees decreased
$208,000, or 33.9% as a result of reduced activities by holders of stock
options. The increase in the Company's service charges and fees of $44,000, or
36.7% was primarily the result of limitations on fee waivers. The increase in
income(loss) on assets was attributable to no losses incurred in first quarter
of 1995 compared to a $101,000 loss on the redemption of mutual funds incurred
in the same period in 1994.
NON-INTEREST EXPENSE
OPERATING EXPENSES
The Company's operating expenses decreased by $1.5 million during the
first quarter of 1995 compared to the same period in 1994 primarily as a result
of staff reductions, reduction in the use and cost of professional services,
lower litigation settlement costs, continued reductions to operating costs
resulting from an expense control program, and, generally, as a result of lower
costs related to lower loan and deposit volumes. Offsetting some of these
reductions is an increase in data processing related expenses resulting from
the outsourcing of the Bank's check processing function. The one time costs in
1994, included a $300,000 payment for the settlement of a lawsuit.
The Bank expects professional service related costs to continue to
decline as legal and consulting related matters are reduced.
NET INCOME(COST) OF REAL ESTATE OPERATIONS
Net income(cost) of real estate operations decreased $1.5 million from
a net cost of $1.7 million at March 31, 1994 to net income of 161,000 at March
31, 1995. The decrease is attributed to an increase in the Bank's gain on sale
of other real estate owned, totaling $342,000 for the quarter ended March 31,
1995, compared to provisions and loss on sale of other real estate owned of
$1.2 million for the quarter ended March 31, 1994. In part, the decrease was
due to a reduction in foreclosed properties and no additional write-downs
required for existing properties.
The gain on sale recognized during the first quarter of 1995 related
to one property that had been written down during the third quarter of 1994
compared to the loss on sale and real estate loss provisions recognized during
the first quarter 1994 related to seven properties. The Bank anticipates that
additional recoveries may occur in future quarters throughout 1995.
- 12 -
<PAGE> 15
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Bank's liquid assets, which includes cash and short term
investments totaled $38.5 million, or 27.5% of total assets, at March 31, 1995,
a decrease of $1.6 million, from $40.1 million, or 25.6% of total assets, at
December 31, 1994. The decrease was the result of net reduction in deposits of
$16.7 million during the first quarter of 1995. See "Deposits."
As of March 31, 1995, the Bank had pledged loans and securities
enabling the Bank to borrow up to $5.2 million from the Federal Home Loan Bank
of San Francisco (FHLB). The Bank had drawn on this lending facility during
the first quarter of 1995. The Bank expects that it will repay the FHLB
borrowing during the second quarter of 1995. In the future, long and short
term borrowings from the FHLB may be used as an on-going source of liquidity
and funding.
The Bank's short-term line of credit at the discount window with the
Federal Reserve Bank was canceled during the first quarter of 1995 as a result
of the Notification from the FDIC. The Bank has loans pledged to the FRB
totaling $2.1 million which provide collateral to the FRB should the Bank be
unable to meet its FRB cash letter requirements of up to $972,000.
The Bank has a contingency funding plan which addresses possible
funding and liquidity problems. 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. As a result of the suspension of the brokered deposit
waiver and the inability of the Bank to renew maturing brokered deposits, the
Bank's brokered certificates of deposit declined to $10.0 million as of March
31, 1995 from $12.6 million at December 31, 1994. The Bank's money desk
deposits increased to $17.8 million as of March 31, 1995 from $14.9 million at
December 31, 1994.
During 1995 and 1994, the Company's principal source of liquidity has
been new capital from the issuance of its capital stock.
CAPITAL
At March 31, 1995, shareholders' equity was $2.2 million, compared to
$2.1 million at December 31, 1994, primarily as a result of the $68,000 net
income.
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
and Capital Order. As of March 31, 1995, the Company was not in compliance
with all minimum capital requirements and the Bank was not in compliance with
all minimum capital requirements, including the minimum leverage ratio of 7%
mandated by the Orders. The increase in the Company and Bank's leverage ratio
during the first quarter of 1995 was primarily the result of the first quarter
income and reduction in average assets.
- 13 -
<PAGE> 16
The following table reflects both the Company's and the Bank's capital
ratios with respect to minimum capital requirements in effect as of March 31,
1995:
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
--------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage ratio 1.6% 1.2% 4.0% 7.0%
Tier 1 risk-based capital 1.9 1.5 4.0 N/A
Total risk-based capital 3.3 2.9 8.0 N/A
</TABLE>
On April 24, 1995, the Company's majority shareholder contributed $3.8
million in capital. The Company contributed $4.2 million of capital to the
Bank upon receipt of the $3.8 million. The following table reflects both the
Company's and Bank's capital ratios with respect to minimum capital
requirements in effect as of March 31, 1995 giving effect to the capital
received in April 1995.
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
--------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage ratio 4.3% 4.2% 4.0% 7.0%
Tier 1 risk-based capital 5.1 5.1 4.0 N/A
Total risk-based capital 6.7 6.7 8.0 N/A
</TABLE>
The Company is attempting to raise a minimum of $6.3 million in
additional capital which would be immediately contributed to the Bank. The
additional capital would significantly increase the Company's and Bank's
capital ratios.
INVESTMENT ACTIVITIES
At March 31, 1995, the Company's investment securities, including Fed
funds sold, totaled $32.7 million, or 23.3% of total assets, compared to $28.7
million, or 18.3% of total assets, at December 31, 1994.
At March 31, 1995, investment securities held-to-maturity totaled $6.3
million, compared to $9.2 million at December 31, 1994, and are carried at
amortized cost. At March 31, 1995, the Company held $3.1 million defined as
securities available-for-sale and an unrealized gain of $14,000 is included as
a separate component of shareholder's equity to reflect the current market
value of these securities. Investment securities available-for-sale are
accounted for at fair value. Unrealized gains and losses are recorded as an
adjustment to equity and are not reflected in the current earnings of the
Company.
Investment securities available-for-sale of $2.2 million at December
31, 1994, consisting primarily of treasury securities. The investments
purchased could include treasury securities, adjustable rate mortgage backed
securities and to a limited extent collateralized mortgage backed securities.
A loss of $100,000 was recorded on the sale a securities available for sale
during the first quarter of 1994.
The decrease in investment securities held-to-maturity of $2.9 million
resulted primarily from the maturity of the investment securities. Investment
securities held-to-maturity have maturities or principal
- 14 -
<PAGE> 17
amortization of one year or less.
LOANS
During the first quarter of 1995, total loans decreased by $13.9
million, from $106.5 million at December 31, 1994 to $92.6 million at March 31,
1995. The reduction resulted primarily from loan repayments. The composition
of the Bank's loan portfolio at March 31, 1995 and December 31, 1994 is
summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in Thousands) 1995 1994
---------------------------
<S> <C> <C>
Commercial and financial $ 71,828 $ 83,141
Real estate construction 6,574 9,004
Real estate mortgage 14,140 14,276
Net lease financing 19 31
---------------------------
92,561 106,452
Deferred fees and discounts, net (306) (388)
Allowance for possible loan losses (7,044) (6,576)
---------------------------
Total loans, net $ 85,211 $ 99,488
===========================
</TABLE>
Included in new loan fundings have been loans to facilitate the sale
of the Bank's other real estate owned and real estate investment properties.
Typically, these properties have been purchased from the Bank with certain
minimum financing terms. The terms vary on a case-by-case basis, but depend
heavily on the down payment and the financial strength of the borrower. The
Bank's loans to facilitate the sale of other real estate owned and real estate
investment were $20.8 million at March 31, 1995 compared to $23.6 million at
December 31, 1994.
CLASSIFIED ASSETS AND IMPAIRED LOANS
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 March 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in Thousands) 1995 1994
---------------------------
<S> <C> <C>
Loans - performing $ 17,048 $ 15,580
Non-accrual loans 8,921 9,377
Other real estate owned 9,771 10,021
Real estate investments 682 682
---------------------------
Total classified assets $ 36,422 $ 35,660
===========================
</TABLE>
Classified loans increased to $26.0 million as of March 31, 1995
compared to $25.0 million at December 31, 1994. The increase was primarily the
result of the adverse classification of two loans with a total principal
balance of $2.2 million. These loans were down graded as a result of certain
credit quality concerns. These loans are performing under their contractual
terms.
- 15 -
<PAGE> 18
The Bank was required by the Orders to reduce certain classified
assets to no more than $40.0 million by September 30, 1994. See "Regulatory
Directives and Orders -- Cease and Desist Orders." At March 31, 1995, the Bank
was in compliance with the Orders with $25.1 million in such assets.
Effective January 1, 1995, the Company adopted FAS 114 as amended by
FAS 118. The Company identifies loans with weak credit quality characteristics
for review under FAS 114. Certain classified loan are identified as impaired
loans under FAS 114. The table below outlines the recorded investment in
impaired loans by loan category at March 31, 1995:
<TABLE>
<CAPTION>
March 31,
(Dollars in Thousands) 1995
---------
<S> <C>
Commercial and financial $ 1,293
Real estate construction and land 7,803
Other real estate mortgage 7,620
---------
Total impaired loans $ 16,716
=========
</TABLE>
Of the recorded investment in impaired loans of $16.7 million at March
31, 1995, the Company measured the impairment of $15.4 million using the
collateral value method. For $1.3 million of impaired loans, impairment was
measured using the discounted cash flow method. Total interest recognized on
impaired loans during the first quarter of 1995 was $202,000.
Further deterioration in the regional real estate market could
increase the amount of the Bank's classified and non-performing assets, and,
in addition, could have an adverse effect on the Bank's efforts to collect its
non-performing loans or otherwise liquidate its non-performing assets on terms
that are favorable to the Bank. Accordingly, there can be no assurance that
the Bank will not experience additional increases in the amount of its
non-performing assets or experience significant additional losses in attempting
to collect the non-performing loans or otherwise liquidate the non-performing
assets which are presently reflected on the Company's statement of financial
condition. Moreover, historically, the Bank has incurred substantial asset-
carrying expenses, such as maintaining and operating properties included within
the Bank's other real estate owned classification, and the Bank may continue to
incur asset-carrying expenses in connection with such loans and assets until
its non-performing loans and assets are collected or liquidated.
The Bank has discontinued evaluating the possible sale of part or all
of the problem assets in its loan, other real estate owned, and real estate
investment portfolios to a single buyer. The Bank expects that continued
reductions in non-performing assets will continue to reduce the costs incurred
for managing and carrying the assets.
NON-PERFORMING ASSETS
Non-performing assets are comprised of non-accrual loans, in-substance
foreclosed assets and real estate foreclosures. Non-performing assets were
$18.6 million at March 31, 1995, down from $19.4 million at the end of 1994.
During the first quarter 1995, the reduction of $900,000 in
non-performing assets was primarily the result of OREO sales of $250,000 and
non-performing loan pay downs. No new loans were transferred to non-accrual
status and $532,000 in non-accrual loans were paid off. The Bank recorded no
charge-offs and $468,000 in recoveries during the first quarter of 1995.
- 16 -
<PAGE> 19
At March 31, 1995 and December 31, 1994, other real estate owned,
including in-substance foreclosed loans, was $9.8 million and $10.0 million,
respectively. In-substance foreclosed loans are those in which the borrower
has little or no equity in the collateral based on its fair value, the borrower
has effectively abandoned control of the collateral so that many of the risks
and rewards of ownership have been passed to the lender, and repayment of the
loan can only be expected from the operation or sale of the collateral. An
in-substance loan may be returned to a performing loan status if the existing
borrower can pay all uncollected interest or provide for a principal reduction
and can demonstrate the financial ability to maintain cash flow to support the
loan for the foreseeable future. At March 31, 1995 and December 31, 1994,
in-substance foreclosed loans were $2.6 million. As of March 31, 1995 and
December 31, 1994, all other real estate owned (OREO) and real estate
investments held for development were classified.
The Bank had no non-performing assets secured by subordinate deeds of
trust as of March 31, 1995. Of the $2.6 million in other real estate owned
that were classified as in-substance foreclosure, all are secured by first
deeds of trust. Restructured loans totaled $6.3 million at March 31, 1995 and
December 31, 1994.
The following table provides information on all non-performing assets
at March 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in Thousands) 1995 1994
----------------------------
<S> <C> <C>
Non-accrual loans $ 8,921 $ 9,377
Other real estate owned 9,771 10,021
----------------------------
Total non-performing assets 18,692 $19,398
==========================
Percentage of total loans and OREO outstanding 18.2% 16.7%
</TABLE>
In addition to the loans disclosed in the foregoing table, the Bank
had approximately $1.9 million in loans on March 31, 1995 that were between 31
and 89 days delinquent. In the opinion of management, these loans have a
greater than ordinary risk that the borrowers may not be able to perform under
the terms of their contractual arrangements. As of March 31, 1995, one loan
totaling $45,000 was less than 90 days delinquent and in non-accrual status.
Approximately $960,000 of the loans delinquent between 31 and 89 days are
secured by first or subordinate deeds of trust on real estate and $46,000 were
unsecured.
- 17 -
<PAGE> 20
VALUATION ALLOWANCES
During 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 114 "Accounting by Creditors for
Impairment of a Loan" (SFAS No. 114). Among the requirements of SFAS No. 114
is that the value of an impaired loan be measured based on the present value of
expected future cash flows or at the fair value of the collateral if the loan
is real estate dependent. Loans historically classified as in-substance
foreclosure will no longer be included in other real estate owned, but rather
will remain in the loan portfolio. SFAS No. 114 is effective beginning in
1995, but, earlier implementation is permitted. The Company implemented SFAS
No. 114 on January 1, 1995. The effect of SFAS No. 114 on the Company's
financial statements is immaterial. As of March 31, 1995, $3.3 million in the
allowance of loan losses was allocable to impaired loans which totaled $16.7
million.
Allowance for Loan Losses
The Bank charges current earnings with provisions for estimated losses
on loans receivable. The provisions take into consideration specifically
identified problem loans, the financial condition of the borrowers, the fair
value of the collateral, recourse to guarantors and other factors.
Specific loss allowances are established based on the asset
classification and credit quality grade. Specific loss allowances are utilized
to ensure that the allowance is allocated based on the credit quality grading
to capture inherent risks including present value of expected cash flows and
fair value of real estate collateral. 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 quarter ended March 31, 1995:
<TABLE>
<CAPTION>
March 31,
(Dollars in Thousands) 1995
---------
<S> <C>
Beginning balance of allowance for loan losses at December 31, 1994 $ 6,576
Charge-offs --
Recoveries 468
Provision --
---------
Ending balance of allowance for loan losses $ 7,044
=========
</TABLE>
For the quarter ended March 31, 1995, the Company did not charge-off
any loans. Recoveries were $468,000 relating to 14 loans. The unallocated
portion of the allowance for loan loss totaled $977,000 at March 31, 1995
compared to $373,000 at December 31, 1994. The increase in the unallocated
allowance was primarily the result of recoveries.
- 18 -
<PAGE> 21
Allowance for Losses on Other Real Estate Owned
The following table summarizes the other real estate owned loss
experience of the Bank for the quarter ended March 31, 1995:
<TABLE>
<CAPTION>
March 31
(Dollars in Thousands) 1995
--------
<S> <C>
Beginning balance of allowance for losses $ 19,404
Charge-offs (1,420)
Provision --
--------
Ending balance of allowance for losses $ 17,984
========
</TABLE>
The Bank recorded a net gain of $342,000 on sale of one OREO property.
The OREO properties are shown net of allowance for losses. There was no
provision for loss on OREO during the first quarter of 1995 based on the
quarterly review of the OREO portfolio. See "Results of Operations -- Net Cost
of Real Estate Operations."
Allowance for Losses on Real Estate Investments
The following table summarizes the real estate investments loss
experience of the Bank for the quarter ended March 31, 1995:
<TABLE>
<CAPTION>
March 31
(Dollars in Thousands) 1995
--------
<S> <C>
Beginning balance of allowance for losses $ 1,059
Charge-off --
Provision --
-------
Ending balance of allowance for losses $ 1,059
=======
</TABLE>
No provision for loss on real estate investments was required on the remaining
two properties during the first quarter of 1995.
- 19 -
<PAGE> 22
DEPOSITS
The Bank had total deposits of $130.5 million at March 31, 1995,
compared to $147.1 million at December 31, 1994, a decrease of $16.6 million.
A summary of deposits at March 31, 1995 and December 31, 1994 is as follows:
<TABLE>
<CAPTION>
March 31 December 31
(Dollars in Thousands) 1995 1994
-------------------------------
<S> <C> <C>
Demand deposits $ 25,411 $ 30,259
NOW 33,226 39,652
Money market 20,960 25,250
Savings 3,661 3,763
-------------------------------
Total deposits with no stated maturity 83,258 98,924
-------------------------------
Time deposits:
Less than $100,000 37,892 37,989
$100,000 and greater 9,337 10,235
-------------------------------
Total time deposits 47,229 48,224
-------------------------------
Total deposits $ 130,487 $ 147,148
===============================
</TABLE>
The $16.6 million decline was attributed to decreases in private
banking customer deposits of $16.3 million, Association Bank Services customer
deposits of $1.2 million, Trust deposits of $908,000, and Escrow deposits of
$872,000, which were partially offset by increases in deposits related to stock
option lending deposits of $2.7 million.
The Bank's primary focus is in private and business banking, with
deposits totaling $50.7 million, or 38.9% of total deposits, at March 31, 1995,
compared to $67.0 million, or 45.5% of total deposits, at December 31, 1994.
Private and business banking customer deposits declined $16.3 million during
the first quarter of 1995 primarily as a result of customers reducing their
account balances. Upon the completion of the recapitalization efforts, the
Bank believes that existing and former clients will increase and reestablish
their relationship with the Bank, particularly their depository relationships.
The Bank is dependent upon other sources for deposits. Deposits
acquired through its Association Bank Services function totaled $33.3 million,
or 25.5% of total deposits at March 31, 1995, compared to $34.5 million, or
23.5% of total deposits at December 31, 1994. The decline of $1.2 million
during the first quarter of 1995 was due to the same financial concerns
discussed earlier with respect to the private and business banking deposits.
Deposits acquired through the money desk operations totaled $17.8 million, or
13.6% of total deposits at March 31, 1995, compared to $14.9 million, or 10.0%
of total deposits at December 31, 1994. The increase in money desk deposits
reflected management's plan to reduce brokered deposits as a result of the
suspension of the brokered deposits waiver as discussed under "Liquidity." The
Bank expects to increase money desk deposits during the remainder of the year
with the intention of replacing the brokered deposits and to allow for a more
orderly reduction of dependence on volatile deposits.
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 not accepting or renewing brokered deposits. The Bank expects to
file an application with the FDIC to reinstate the brokered deposit waiver,
once it has raised sufficient
- 20 -
<PAGE> 23
capital to achieve the required capital level, to provide more flexibility in
the management of deposits and liquidity. No assurance can be given that
additional capital will be raised or that an additional waiver will be granted.
Concentrations of brokered deposits and deposits acquired through the
money desk operations have been classified by bank regulators as volatile
liabilities associated with certain risks, including the risks of reduced
liquidity if a bank is unable to retain such deposits and reduced margins if
its interest costs are increased by a bank in order to retain such deposits.
As a result of the Orders, the Bank was required to submit a plan to the FDIC
and SBD to reduce the Bank's volatile liability dependency ratio to not more
than 15%.
The Bank's volatile dependency ratio at March 31, 1995 was 15.5%. The
Bank is required to file a revised plan with the FDIC regarding the reduction
of its dependency on volatile deposits.
- 21 -
<PAGE> 24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Because of the nature of its business, the Company and its
subsidiaries, including the Bank, are from time-to-time, a party to legal
actions. At March 31, 1995, the Company and/or the Bank are defendants in
certain lawsuits for which the damages sought are substantial as described
below.
Presently, the Bank is involved in several lawsuits. In the first
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 is 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 from 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. During the second quarter 1995, the Bank and other parties to the
lawsuit began exploring possible settlement negotiations.
In the second 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 is currently involved in two lawsuits which were brought by
former employees of the Bank; one former employee has alleged discrimination
and wrongful termination. The other former employee alleges wrongful
termination. The former employees have sought unspecified damages.
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.
The Bank has reached settlement or potential settlement in numerous
other litigation or potential litigation matters. In some instances the Bank
has agreed to make certain payments. As a result of the settlement or
potential settlement of certain lawsuits, the Company established a litigation
reserve of $536,500 as of December 31, 1994. The Company charged $43,000 to
the reserve during the first quarter of 1995.
The Company and the Bank intend to pursue their rights under an
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 related to actions brought by a former employee.
- 22 -
<PAGE> 25
Item 2 - Changes in Securities
The Board of Directors, pursuant to the Company's Certificate of
Incorporation, has designated seven hundred fifty thousand (750,000) shares of
the Company's preferred stock as "9% Series D Perpetual Preferred Stock" (the
"Series D Preferred Stock"). The Company sold one hundred ninety thousand
(190,000) shares of the Series D Preferred Stock, par value $.01 per share, to
Putra Masagung, the Company's principal stockholder who owns approximately 97%
of the Company's outstanding Class A Common Stock, for the purchase price of
$20.00 per share (an aggregate purchase price of $3.8 million). The principal
features of the Series D Preferred Stock are as follows:
Dividends. Holders of shares of Series D Preferred Stock are entitled
to receive out of funds legally available therefor, if, as and when declared by
the Board of Directors of the Company, an annual cash dividend of One Dollar
and Eighty Cents ($1.80) per share, payable semi-annually in April and October
of each year, before any cash dividends can be paid on the common stock of the
Company. Dividends on the Series D Preferred Stock are junior to payment of
dividend at the stated annual rate of fifty-six Cents ($.56) per share on the
Company's 8% Series B Convertible Preferred Stock (the "Series B Preferred
Stock") and all other series of preferred stock that the Company may issue in
the future that are designated senior to the Series D Preferred Stock. No
dividends or other distributions (other than those payable solely in common
stock) shall be payable with respect to the Company's Class A Common Stock or
any other stock junior to the Series D Preferred Stock during any fiscal year
of the Company until cash dividends on each share of the Series D Preferred
Stock shall have been paid in full or declared and set apart for payment in
full during that fiscal year. Dividends on the Series D Preferred Stock are
not cumulative and the Board of Directors has the right at any time to
eliminate or defer such dividends during any fiscal year of the Company.
After payment of cash dividends at the stated rate on the Series B
Preferred Stock and all other series of preferred shares that the Company may
issue in the future and that are designated senior to the Series D Preferred
stock and payment of cash dividends at the stated rate on the Series D
Preferred Stock, and on any other preferred stock of the Company that is on a
parity with the Series D Preferred Stock, holders of the Series D Preferred
Stock will participate pro rata with the holders of Class A Common Stock and
Series B Preferred Stock on the basis of number of shares owned, in all other
cash dividends by the Company to its shareholders.
Management anticipates that no dividends will be paid on the Series D
Preferred Stock and that it will be fully converted into Class A Common Stock
by the holder thereof upon approval by the shareholders of the Company. Even
if the conversion feature is not approved, it is highly unlikely that the
Company will pay dividends on the Series D Preferred Stock in the foreseeable
future.
Voting Rights. Subject to applicable law, the holders of shares of
Series D Preferred Stock are entitled to one vote per each share of Series D
Preferred Stock on all matters on which shareholders are entitled to vote,
including the election of directors. Holders of shares of Series D Preferred
Stock generally vote with the holders of shares of Class A Common Stock and the
holders of shares of Series B Preferred Stock as a single class, except that
the holders of shares of the Series D Preferred Stock are entitled to vote as a
separate class on any modifications to the rights of the holders of shares of
Series D Preferred Stock and otherwise as required by law.
Liquidation Preference. In the event of any liquidation, dissolution
or winding up of the Company, either voluntary or involuntary, the holders of
shares of Series D Preferred Stock are entitled to receive out of the assets of
the Company available for distribution to the Company's shareholders an amount
equal to Twenty Dollars ($20.00) per share, plus any declared but unpaid
dividends thereon,
- 23 -
<PAGE> 26
before any distributions will be made to the holders of shares of Class A
Common Stock or any other class of stock junior in preference upon liquidation,
but after distribution at the rate of Seven Dollars ($7.00) per share on the
Series B Preferred Stock and after or concurrent with distributions to be made
at the stated rate on any other preferred shares of any series ranking on a
parity with or senior in preference upon liquidation to the Series D Preferred
Stock.
Conversion. Shares of the Series D Preferred Stock are not currently
convertible but will become so if the conversion feature is approved by the
holders of a majority of the Class A Common Stock and Series B Preferred Stock
(voting as a single class). If the conversion feature of the Series D
Preferred Stock is so approved, each share of the Series D Preferred Stock will
be come convertible into that number of fully paid and nonassessable shares of
Class A Common Stock as is equal to a conversion ratios to be determined by a
committee of the Board of Directors of the Company determined to be independent
and without any personal interest in the determination of such conversion
ratio, in consultation with the holder or holders of the Series D Preferred
Stock at such time. Moreover, if holders of a majority of the Company's Class
A Common Stock and Series B Preferred Stock outstanding on the date that is
thirty (30) days following the date of the adoption of such shareholder
resolution approving the conversion feature will be mandatorily converted into
Class A Common Stock on the terms described above.
Item 3 - Defaults Upon Senior Securities
See "Note 1 -- Dividend Restrictions".
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
None
- 24 -
<PAGE> 27
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: May 15, 1995 /s/ James E. Gilleran
-------------------------
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: May 15, 1995 /s/ Keary L. Colwell
-------------------------
Keary L. Colwell
Controller
- 25 -
<PAGE> 28
Exhibit Index
Ex. 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 5,846
<INT-BEARING-DEPOSITS> 105,076
<FED-FUNDS-SOLD> 23,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,088
<INVESTMENTS-CARRYING> 6,295
<INVESTMENTS-MARKET> 6,288
<LOANS> 92,561
<ALLOWANCE> (7,044)
<TOTAL-ASSETS> 140,261
<DEPOSITS> 130,487
<SHORT-TERM> 5,245
<LIABILITIES-OTHER> 2,313
<LONG-TERM> 0
<COMMON> 58
0
114
<OTHER-SE> 2,044
<TOTAL-LIABILITIES-AND-EQUITY> 140,261
<INTEREST-LOAN> 2,491
<INTEREST-INVEST> 411
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,902
<INTEREST-DEPOSIT> 1,033
<INTEREST-EXPENSE> 1,097
<INTEREST-INCOME-NET> 1,805
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,470
<INCOME-PRETAX> 106
<INCOME-PRE-EXTRAORDINARY> 68
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<YIELD-ACTUAL> 0
<LOANS-NON> 8,921
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,889
<LOANS-PROBLEM> 17,048
<ALLOWANCE-OPEN> 6,576
<CHARGE-OFFS> 0
<RECOVERIES> 468
<ALLOWANCE-CLOSE> 7,044
<ALLOWANCE-DOMESTIC> 6,066
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 978
</TABLE>
