UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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
incorporation or organization) (I.R.S. Employer Identification No.)
550 Montgomery Street, San Francisco, California 94111
(Address of principal executive office) (Zip Code)
(415) 781-7810
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
The Registrant had 5,765,995 shares of Class A Common Stock
outstanding on July 26, 1996.
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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 June 30, 1996 and December 31, 1995 . . . . . . . . . . . 1
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1996 and 1995 . . 2
Consolidated Statements of Changes in Shareholders'Equity
For the Six Months Ended June 30, 1996 and 1995 . . . . . . . 3
Consolidated Statements of Cash Flows
For the Three and Six Months Ended June 30, 1996 and 1995 . . 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. . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . 17
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 17
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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<TABLE>
The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
June 30, 1996 and December 31, 1995
<CAPTION>
(Unaudited)
June 30, December 31,
(Dollars in Thousands Except Per Share Data) 1996 1995
<S> <C> <C>
Assets:
Cash and due from banks $ 2,529 $ 4,814
Federal funds sold 16,600 38,000
Cash and cash equivalents 19,129 42,814
Investment securities held-to-maturity, at cost
(Fair value: $7,164) 7,448 --
Investment securities available-for-sale, at fair value 24,132 6,536
Federal Home Loan Bank stock, at par 649 632
Loans 42,739 53,208
Deferred loan fees (227) (180)
Allowance for loan losses (5,410) (5,912)
Loans, net 37,102 47,116
Other real estate owned, net 6,389 7,514
Real estate investments, net 150 236
Premises and equipment, net 8,355 8,689
Interest receivable 806 527
Other assets 504 798
Total Assets $104,664 $114,862
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 15,432 $ 20,365
Interest bearing deposits 76,736 85,308
Total deposits 92,168 105,673
Other borrowings 2,000 --
Other liabilities and interest payable 1,311 2,309
Total Liabilities 95,479 107,982
Shareholders' Equity:
Preferred Stock (par value $0.01 per share)
Series B - Authorized - 437,500 shares;
Issued and outstanding - 15,869 and 16,291, respectively 114 114
Series D - Authorized - 1,000,000 shares;
Issued and outstanding - 340,000 and 215,000, respectively 6,800 4,300
Common stock (par value $0.01 per share)
Class A - Authorized - 40,000,000 shares;
Issued and outstanding - 1996-5,765,999 and 1995-5,765,978 58 58
Additional paid-in capital 70,268 70,168
Retained deficit (67,497) (67,801)
Unrealized gain/(loss) on securities available-for-sale (558) 41
Total shareholders' equity 9,185 6,880
Total Liabilities and Shareholders' Equity $104,664 $114,862
<FN>
See accompanying notes to unaudited consolidated financial statements.
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The San Francisco Company and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1996 and 1995
(Unaudited)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in Thousands
Except Per Share Data) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Interest income:
Loans $ 1,073 $ 2,166 $2,217 $ 4,657
Investments 738 605 1,439 995
Dividends 9 5 17 26
Total interest income 1,820 2,776 3,673 5,678
Interest expense:
Deposits 781 1,132 1,646 2,165
Other borrowings 1 20 1 84
Total interest expense 782 1,152 1,647 2,249
Net interest income before provision
for loan losses 1,038 1,624 2,026 3,429
Provision for loan losses -- 500 -- 500
Net interest income after provision
for loan losses 1,038 1,124 2,026 2,929
Non-interest income:
Service charges and fees 82 106 133 219
Trust and escrow fees 36 87 91 161
Stock option commissions and fees 314 445 669 851
Other income -- 89 2 200
Gain on sale of assets, net -- 7 -- 23
Total non-interest income 432 734 895 1,454
Non-interest expense:
Salaries and related benefits 810 1,168 1,718 2,624
Occupancy expense 76 477 177 946
Professional fees 130 257 250 451
Corporate insurance premiums 96 102 191 179
FDIC insurance premiums 61 111 124 265
Data processing 90 119 133 290
Telephone 30 28 54 65
Other operating expenses 170 236 323 558
Total operating expenses 1,463 2,498 2,970 5,078
Net income from real estate operations (195) (800) (363) (961)
Total non-interest expense 1,268 1,698 2,607 4,117
Income before income taxes 202 160 314 266
Provision for income taxes 6 40 10 78
Net Income $196 $120 $ 304 $188
Income per common share:
Net income $ 0.03 $ 0.02 $ 0.05 $ 0.03
Weighted average shares outstanding 5,765,999 5,765,978 5,765,999 5,765,985
<FN>
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
Six Months Ended June 30, 1996 and 1995
(Unaudited)
<CAPTION>
Unrealized
Employee Gain/
Add- Purchase (Loss) on Total
(Dollars in Thousands) itional Retained and Securities Share-
Preferred Common Paid-in Earnings Option Available holders
Stock Stock Capital (Deficit) Plans for-Sale Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1995 $ 114 $ 58 $70,168 $(68,137) $ (70) $ (4) $2,129
Proceeds on
sale of stock 4,300 -- -- -- -- -- 4,300
Appreciation in market
value of securities
available-for-sale -- -- -- -- -- 34 34
Net income(six months)-- -- -- 188 -- -- 188
Balances at
June 30, 1995 4,414 58 70,168 (67,948) (70) 14 6,652
Net change in
employee stock
ownership plans -- -- -- -- 70 -- 70
Appreciation in market
value of securities
available-for-sale -- -- -- -- -- 27 27
Net income (six months) -- -- -- 148 -- -- 148
Balances at
December 31, 1995 4,414 58 70,168 (67,801) -- 41 6,880
Proceeds from sale of
stock and warrants 2,500 -- -- -- -- -- 2,500
Other -- -- 100 -- -- -- 100
Depreciation in market
value of securities
available-for-sale -- -- -- -- -- (599) (599)
Net income (six months) -- -- -- 304 -- -- 304
Balances at
June 30, 1996 $ 6,914 $ 58 $70,268 $(67,497) $ -- $(558) $9,185
<FN>
See accompanying notes to unaudited consolidated financial statements.
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The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three and Six Months Ended June 30, 1996 and 1995
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in Thousands) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 19 $ 120 $ 304 $ 188
Adjustments to reconcile net income
to net cash (used in) provided
by operating activities:
Provision for loan losses -- 500 -- 500
Depreciation and
amortization expense 192 97 385 202
Provision for loss on other real
estate owned and
real estate investment -- 346 -- 346
Net gain on sale of real estate
owned and investment (170) (342) (455) (1,683)
Decrease (increase) in interest
receivable and other assets (301) 232 15 588
(Decrease) increase in interest
payable and other liabilities (215) 462 (897) (727)
(Increase) decrease in
deferred loan fees 31 (35) 47 (117)
Net cash flows (used in) provided
by operating activities (267) 1,380 (601) (703)
Cash Flows from Investing Activities:
Proceeds from sale of FHLB Stock -- 745 -- 724
Proceeds from maturities of
investment securities
held-to-maturity 350 4,936 350 7,859
Proceeds from maturities of investment
securities available for sale 69 2,069 4,064 2,209
Purchase of investment securities
held to maturity -- -- (7,815) --
Purchase of investment securities
available for sale -- (1,972) (22,260) (2,971)
Net (increase) decrease in loans (1,248) 14,217 8,913 28,108
Recoveries of loans previously
charged off, net (305) (584) (502) (116)
Purchases of premises and
equipment, net (19) (31) (51) (34)
Proceeds from sale of
other real estate owned 921 3,800 3,136 5,391
Acquisition and capitalized cost
of other real estate owned 86 280 86 288
Net Cash (used in) provided
by investing activities (146) 23,460 (14,079) 41,458
Cash Flows from Financing Activities:
Net decrease in deposits (10,395) (3,080) (13,505) (19,741)
Net (decrease) increase
in other borrowings 2,000 (5,315) 2,000 (4,070)
Net proceeds from sale of
preferred stock and warrants 1,500 4,300 2,500 4,300
Net cash used
in financing activities (6,895) (4,095) (9,005) (19,511)
Increase (decrease)
in cash and cash equivalents (7,308) 20,745 (23,685) 21,244
Cash and cash equivalents
at beginning of period 26,437 29,146 42,814 28,647
Cash and cash equivalents
at end of period $ 19,129 $ 49,891 $19,129 $49,891
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,158 $ 986 $ 2,047 $2,083
Payment of income taxes 2 54 3 96
Supplemental Schedule of Noncash
Investing and Financing Activities:
Net transfer of loans to
other real estate owned 119 -- 1,378 --
<FN>
See accompanying notes to unaudited consolidated financial statements.
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The San Francisco Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Item 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 June 30, 1996, and for the six months ended June
30, 1996 and 1995 are unaudited, but in the opinion of management,
reflect all accruals and adjustments of a recurring nature
necessary for fair presentation of the Company's financial
condition and results of operations. Certain amounts in the 1995
consolidated financial statements have been reclassified for
comparative purposes. The results of operations for the six months
ending June 30, 1996 are not necessarily indicative of the results
to be expected for the entire year of 1996. This report should be
read in conjunction with the Company's 1995 Annual Report on Form
10-K.
The accompanying financial statements include the accounts of
the Company, the Bank, the Bank's wholly owned subsidiary, Bank of
San Francisco Realty Investors ("BSFRI"), and the Bank's wholly
owned limited partnership, Bank of San Francisco Building Company
("BSFBC"). The Bank acquired all of the minority limited
partnership interest in BSFBC during the third quarter of 1995.
The assets of BSFBC include the leasehold improvements and the
leasehold interest of the Company's and the Bank's headquarters.
All material intercompany transactions have been eliminated in
consolidation.
Note 3 - Income Per Common Share
Income per common share is calculated using the weighted average
number of Class A Common Shares, par value of $0.01 per share,
outstanding divided into net income.
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
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 does not intend
to declare dividends on any class of the Company's stock.
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Note 5 - Recent Accounting Pronouncements
Effective January 1, 1996, the Company adopted the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
lived Assets and for Long-Lived Assets to be Disposed Of." SFAS
No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes indicated that the carrying
value of an asset may not be recoverable. As of June 30, 1996, the
Company determined that no events or changes occurred during the
first half 1996 that would indicate that the carrying value of any
long-lived assets may not be recoverable.
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 Common shares are traded over the counter. A
market is made for the Company's stock by Van Kasper & Company, San
Francisco, California.
The Company recorded net income of $196,000, or $0.03 per
Common Share, and $304,000, or $0.05 per Common Share, for the
three and six months ended June 30, 1996, compared to a net income
of $120,000, or $0.02 per Common Share and $188,000, or $0.03 per
Common Share for the same periods in 1995. The increase in the
Company's net income of $116,000 was primarily from reductions in
operating costs and the provision for Delaware franchise taxes in
first six months of 1996 compared to the same period in 1995,
partially offset by declines in net interest income, non-interest
income, and net income from real estate operations.
The Company's total non-interest expenses declined by $1.5
million in the first half of 1996 compared to the same period in
1995 primarily as a result of a decline in staff levels, occupancy
costs, and professional services.
At June 30, 1996, total assets were $104.7 million, a decline
of $10.2 million, or 9% from $114.9 million at December 31, 1995.
Total loans were $42.7 million, a decrease of $10.5 million, or
20% from $53.2 million at December 31, 1995. Total deposits were
$92.1 million at June 30, 1996, a decline of $13.4 million, or 13%
compared to $105.7 million at December 31, 1995.
Regulatory Directives and Orders
Federal Reserve Board Written Agreement
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
<PAGE>
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 and management believes the
Company is in compliance with the Agreement.
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 amount necessary to at
least equal the amount of capital necessary to increase
shareholders' equity to not less than 7.0% of total tangible assets
(the "Leverage Capital") on or before June 30, 1995. During the
second quarter of 1995, the Company contributed $4.7 million in
capital to the Bank.
On February 26, 1996, the Company's majority shareholder
committed to investing additional capital totaling $4.5 million in
the Company in four installments throughout 1996. During the first
half of 1996, the Company received two installments totalling $2.5
million of the $4.5 million. The Company contributed $2.6 million
in capital to the Bank during the first half of 1996. As of June
30, 1996, the Bank's Leverage Capital ratio was 9.2%.
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 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 $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
<PAGE>
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 15% by March
31, 1994; (k) eliminate or correct all violations of law set out in
the most recent Report of Examination, and take all necessary steps
to ensure future compliance with all applicable laws and
regulations; and (l) establish a committee of three independent
directors to monitor compliance with the Orders and report to the
FDIC and the Superintendent on a quarterly basis.
Management believes that the Bank is in full compliance with
the requirements of the Orders.
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 June 30, 1996, the Bank had contributed capital of
$73.3 million and deficit retained earnings of $63.7 million, or
approximately 87% 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 $34.4 million. The
Superintendent issued orders, most recently on May 7, 1996, to the
Bank to correct the impairment of its contributed capital within 60
days. In response to the May 7, 1996 order, 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 business plan, and as the
Company continues to consider the requirements for a quasi-
reorganization.
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.
<PAGE>
As ofJune 30, 1996, the Bank would have been required to raise
$86.0 million in new capital in order to correct its impaired
contributed capital (because the ratio of deficit retained earnings
to contributed capital may not exceed 40%, $2.50 of new capital
must be raised for every dollar of impairment). 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.
As long as the Bank's contributed capital is impaired, the
Superintendent is authorized to take possession of the property and
business of the Bank, or to order the Bank to comply with the legal
requirement and levy an assessment on the shares of the Bank held
by the Company sufficient to correct the impairment. As the
Company is the sole shareholder of the Bank, the assessment would
be made on the Company. The Company does not have the funds to
satisfy such an assessment. Management believes, however, that the
Superintendent has never exercised his bank takeover powers under
Section 134 solely on the basis that a bank's capital is impaired
under the standards set forth in Section 134.
Results of Operations
Net Interest Income
The Company's net interest income decreased to $2.0 million
from $3.4 million in the first half of 1996 from the same period in
1995, respectively, a decline of $1.4 million or 41.1%. The
decrease was the result of reductions in interest-earning assets
and a decrease in the Bank's interest rate margin. Average
interest-earning assets declined by $33.2 million, or 25.8%, and
average interest bearing liabilities decreased $29.2 million, or
26.5%, for the first half of 1996 compared to the same period in
1995.
The average interest rate margin decreased 108 basis points to
4.25% for the first half of 1996, from 5.33% for the same period in
1995 primarily as a result of a change in the composition of
average interest earning assets from higher yielding loans into
lower yielding liquidity investments and a decline in interest
rates on loans due to a decrease in prime rate without a
corresponding decline in the average cost of funds. The Bank's
loan to deposit ratio declined to 46% as of June 30, 1996 from 61%
as of June 30, 1995 primarily as a result of the reduction in
loans. The cost of funds on the interest bearing liabilities
remained unchanged in the first half of 1996 compared to the same
period in 1995 primarily as a result of increasing volumes of one
to two year term certificates of deposits during the second quarter
of 1995.
The Company's net interest income decreased to $1.0 million
from $1.6 million in the quarter ended June 30, 1996 from the same
quarter in 1995, respectively, a decline of $586,000 or 36.6%. The
decrease was the result of reductions in interest-earning assets
and by a decrease in the Bank's interest rate margin. Average
interest-earning assets declined by $34.3 million, or 27.1%, and
average interest bearing liabilities decreased $29.3 million, or
27.2%, for the quarter ended June 30, 1996 compared to the same
period in 1995. The average interest rate margin declined 59 basis
points from 5.09% for the quarter ended June 30, 1995, to 4.5% for
the same period in 1996 primarily as a result of a change in the
composition of earning assets from higher yielding loans into lower
yielding investments in the second quarter of 1996 compared to the
same period in 1995, and a change in the composition of average
interest earning assets from higher yielding loans into lower
yielding liquidity investments.
<PAGE>
Non-Interest Income
Non-interest income decreased $559,000 for the first half of
1996 to $895,000 compared to $1.5 million for the same period in
1995. Stock option and brokerage commissions and fees decreased
$182,000, or 21.4% as a result of reduced trading activities by
holders of stock options and brokerage customers. The decrease in
the Company's service charges and fees of $156,000, or 41.1% was
primarily the result of lower deposit transaction volumes and the
elimination of the trust department in 1996. The decrease in other
income is attributable to the acquisition of BSFBC during the third
quarter of 1995. During the first half of 1995, the earnings from
BSFBC were included in other income. The acquisition of the
minority interest in BSFBC resulted in a reduction of occupancy
expense.
Non-interest income decreased $302,000, for the second quarter
of 1996 to $432,000 compared to $734,000 for the same period in
1995. Stock option and brokerage commissions and fees decreased
$131,000, or 29.4% as a result of reduced trading activities by
holders of stock options and brokerage customers. The decrease in
the Company's service charges and fees of $75,000, or 38.9% was
primarily the result of lower deposit transaction volumes and the
reduced trust fees from the elimination of trust activities. The
decrease in other income is attributable to the acquisition of
BSFBC during the third quarter of 1995.
Non-Interest Expense
The Company's operating expenses decreased by $2.1 million, or
41.5% during the first half of 1996 compared to the same period in
1995 primarily as a result of a reduction in occupancy costs, staff
reductions, reduction in the use and cost of professional services,
and, generally, as a result of lower costs related to lower loan
and deposit volumes. The reduction in occupancy costs is primarily
the result of the acquisition of the minority interest of BSFBC
during the third quarter of 1995 which reduced the overall
occupancy cost to the Bank, and, secondarily, the result of
increased subleasing of unused office space in 1996 compared to
1995.
The decline in net income from real estate operations is due
to lower gains on sale of real estate assets primarily as a result
of fewer properties available for sale. In addition, the costs
related to holding real estate properties in the first half of 1996
compared to the same period in 1995 have declined as a result of
lower asset levels.
The Company's operating expenses decreased by $1.0 million
during the second quarter of 1996 compared to the same period in
1995 primarily as a result of a reduction in occupancy costs, staff
reductions, reduction in the use and cost of professional services,
and, generally, as a result of lower costs related to lower loan
and deposit volumes as discussed above.
The decline in net income from real estate operations is the
result of lower gains on sale of real estate assets due to fewer
asset sales.
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short term
investments, totaled $19.1 million,
<PAGE>
or 18.2% of total assets, at
June 30, 1996, a decrease of $23.7 million, from $42.8 million, or
37.2% of total assets, at December 31, 1995. The decrease was the
result of the purchase of longer duration investment securities
totaling $25.9 million and a decline in deposits totaling $13.6
million during the first half of 1996 partially offset by a
decrease in loans totaling $10.5 million and a $2.0 million
borrowing.
As of June 30, 1996, the Bank had pledged loans and securities
totaling $8.9 million enabling the Bank to borrow approximately
$5.0 million from the Federal Home Loan Bank of San Francisco
(FHLB). The Bank will, from time-to-time, borrow from the FHLB in
the normal course of managing its liquidity. The Bank borrowed
$2.0 million against this lending facility during the first half of
1996. The borrowing was repaid during the third quarter of 1996.
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 has loans pledged to the FRB totaling $220,000 which
provide collateral to the FRB should the Bank be unable to meet its
FRB cash letter requirements of up to $93,000.
The Bank's brokered certificates of deposit declined to zero
as of June 30, 1996 from $3.4 million at December 31, 1995. The
Bank's money desk deposits decreased to $24.3 million as of June
30, 1996 from $28.0 million at December 31, 1995.
Capital
At June 30, 1996, shareholders' equity was $9.2 million,
compared to $6.9 million at December 31, 1995, primarily as a
result of the $304,000 net income and the capital contribution of
$2.5 million partially offset by an unrealized decline in the
market value of investment securities available for sale of
$558,000 during the first half of 1996.
The Company and the Bank are subject to general regulations
issued by the FRB, FDIC, and SBD which require maintenance of
certain levels of capital and the Bank is under specific capital
requirements as a result of the Orders and Capital Order. As of
June 30, 1996, the Company and the Bank are in compliance with the
all minimum capital ratio requirements including the minimum
Leverage ratio of 7% mandated by the Orders. The Bank is not in
compliance with the capital requirements as defined by the Capital
Impairment Orders (see Capital Impairment Orders). The increase in
the Company and Bank's leverage ratio during the first half of 1996
was primarily the result of the first half income, the reduction in
average assets and the capital contribution.
The following table reflects both the Company's and the Bank's
capital ratios with respect to minimum capital requirements in
effect as of June 30, 1996:
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement
<S> <C> <C> <C>
Leverage ratio 9.2% 9.2% 4.0%
Tier 1 risk-based capital 13.7 13.7 4.0
Total risk-based capital 16.0 16.0 8.0
</TABLE>
The February 26, 1996 agreement between the Company and its
majority shareholder provides that the Company's majority
stockholder will purchase, at a per unit price of $20.00, a total
of 225,000
<PAGE>
additional shares of Series D Preferred Stock and
warrants to purchase 500,000 shares of Series D Preferred Stock at
a price of $20.00 per share. The warrants will be exercisable in
whole or part at any time after the purchase of the 225,000 shares
of Series D Preferred Stock, but in no event later than February
26, 2003.
Management has estimated that the market value of the 225,000
shares of Series D Preferred Stock is $13.45 per share and that
each unit has 2.22 warrants that have a market value of $2.95 per
warrant.
Investment Activities
At June 30, 1996, the Company's investment securities,
including Fed funds sold, totaled $48.8 million, or 46.6% of total
assets, compared to $45.2 million, or 39.3% of total assets, at
December 31, 1995. A portion of the investment portfolio is used
to manage the Bank's liquidity position. Liquid investments
include investment securities with a term to maturity of one year
or less including Fed funds. See "Liquidity and Capital Resources"
above. The investment portfolio may include treasury and agency
securities, fixed and adjustable rate mortgage backed securities,
and to a limited extent collateralized mortgage backed securities.
Generally, the Bank's investment securities held-to-maturity and
available-for-sale have maturities or principal amortization of
five years or less.
At June 30, 1996, investment securities held-to-maturity
totaled $7.4 million, compared to zero at December 31, 1995, and
are carried at amortized cost. At June 30, 1996, the Company held
$24.1 million defined as securities available-for-sale, compared to
$6.5 million at December 31, 1995. The increase in investment
securities held-to-maturity of $7.4 million and investment
securities available for sale of $17.6 million resulted primarily
from management's decision to diversity the Bank's investment
portfolio to limit the Bank's risks to downward adjustments in
short-term interest rates and to increase the yield on its
investment portfolio.
Investment securities available-for-sale are accounted for at
fair value. Unrealized gains and losses are recorded as an
adjustment to equity and are not reflected in the current earnings
of the Company. As of June 30, 1996, the investment securities
available for sale have an unrealized loss of $558,000 that is
included as a separate component of shareholder's equity to reflect
the current market value of these securities. Management expects
to maintain its investment securities portfolio at its existing
level.
Loans
During the first half of 1996, total loans decreased by $10.5
million, from $53.2 million at December 31, 1995 to $42.7 million
at June 30, 1996. The reduction resulted primarily from loan
<PAGE>
repayments. The composition of the Bank's loan portfolio at June
30, 1996 and December 31, 1995 is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in Thousands) 1996 1995
<S> <C> <C>
Commercial and financial $ 12,709 $ 16,159
Real estate construction 3,040 5,661
Real estate mortgage 26,990 31,388
42,739 53,208
Deferred fees and discounts, net (227) (180)
Allowance for possible loan losses (5,410) (5,912)
Total loans, net $37,102 $ 47,116
</TABLE>
Classified Assets and Impaired Loans
Classified assets include non-accrual loans, OREO, real estate
investments and performing loans that exhibit credit quality
weaknesses. The table below outlines the Bank's classified assets
at June 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in Thousands) 1996 1995
<S> <C> <C>
Loans - performing $ 11,654 $ 17,800
Non-accrual loans 2,560 7,511
OREO 6,389 7,514
Real estate investments 150 236
Total classified assets $ 20,753 $ 33,061
Total classified assets as a
percentage of total assets 19.8% 28.8%
</TABLE>
Classified loans decreased by $11.1 million as of June 30,
1996 compared to $25.3 million at December 31, 1995. The decrease
was primarily the result of loan payoffs, transfers to other real
estate owned as a result of foreclosure and loan upgrades. As of
June 30, 1996 and December 31, 1995, all OREO and real estate
investments held for development were classified.
Non-performing assets which are included in classified assets
are comprised of non-accrual loans and real estate foreclosures.
Non-performing assets were $8.9 million, or 18.2% of total loans
and OREO at June 30, 1996, down from $15.0 million, or 24.7% of
total loans and OREO at the end of 1995. During the first half
1996, the reduction of $6.0 million in non-performing assets was
primarily the result of OREO sales of $2.9 million and loans
returned to accrual of $1.7 million. New loans transferred to non-
accrual status totaled 365,000, and $325,000 in non-accrual loans
were paid off.
There can be no assurance that the Bank will continue to
experience declines in the amount of its non-performing assets or
not experience 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. The Bank expects that reductions in non-performing
assets will continue to reduce the costs incurred for managing and
carrying the assets.
<PAGE>
The Bank had approximately $1.0 million in loans on June 30,
1996 that were between 31 and 89 days delinquent. All of the loans
delinquent between 31 and 89 days are secured by first or
subordinate deeds of trust on real estate.
Effective January 1, 1995, the Company and the Bank adopted
the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan" (SFAS No. 114) as amended by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures". The Company identifies loans with
weak credit quality characteristics for review under SFAS 114.
Certain classified loan are identified as impaired loans under SFAS
114. The table below outlines the recorded investment in impaired
loans by loan category at June 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
June 30, December 31
(Dollars in Thousands) 1996 1995
<S> <C> <C>
Commercial and financial -- $ 307
Real estate construction $ 1,950 3,428
Other real estate mortgage 610 3,891
Total impaired loans $ 2,560 $ 7,626
</TABLE>
As of June 30, 1996 and December 31, 1995, the Company
measured the impairment of $2.6 million and $7.3 million,
respectively, using the collateral value method. As of June 30,
1996 and December 31, 1995, zero and $307,000 of the impairment was
measured using the discounted cash flow method. Total interest
income recognized on impaired loans during the first half of 1996
was $44,000 compared to $202,000 for the same period in 1995.
Valuation Allowances
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. As of June 30, 1996, $597,000 in the allowance of loan
losses was allocable to impaired loans, as identified in accordance
with SFAS No. 114, which had an outstanding principal balance
totaling $2.6 million. 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,
<PAGE>
trends, and related uncertainties. The following table summarizes
the loan loss experience of the Bank for the six months ended June 30, 1996:
<TABLE>
<CAPTION>
June 30,
(Dollars in Thousands) 1996
<S> <C>
Beginning balance of
allowance for loan losses at December 31, 1995 $ 5,912
Charge-offs (646)
Recoveries 144
Provision --
Ending balance of allowance for loan losses $ 5,410
</TABLE>
The ratio of allowance for loan loss to total loans was 12.7%
as of June 30, 1996 compared to 11.1% as of December 31, 1995. The
ratio of the allowance for loan loss to non-accrual loans was 211%
as of June 30, 1996 compared to 79% as of December 31, 1995.
The unallocated portion of the allowance for loan loss totaled
$1.9 million at June 30, 1996 compared to $1.2 million at December
31, 1995. The increase in the unallocated allowance was primarily
the result of recoveries and the reduction in substandard loans
which require a higher allocation of reserves.
Allowance for Losses on OREO
The following table summarizes the OREO loss experience of the
Bank for the six months ended June 30, 1996:
<TABLE>
<CAPTION>
June 30
(Dollars in Thousands) 1996
<S> <C>
Beginning balance of allowance for losses $ 11,991
Charge-offs (2,705)
Provision --
Ending balance of allowance for losses $ 9,286
</TABLE>
The OREO properties are shown net of allowance for losses.
The charge-offs related to the sale of specific OREO properties.
Based on review of market value information available as of June
30, 1996 and 1995, an additional provision was not required during
the first half of 1996 compared to a provision of $500,000 during
the same period in 1995. The Bank recorded a net gain of $402,000
on sale of three OREO properties during the first half of 1996
compared to a net gain on sale of $1.9 million on seven OREO
properties during the same period in 1995.
<PAGE>
Allowance for Losses on Real Estate Investments
The following table summarizes the real estate investments
loss experience of the Bank for the quarter ended June 30, 1996:
<TABLE>
<CAPTION>
June 30
(Dollars in Thousands) 1996
<S> <C>
Beginning balance of allowance for losses $ 1,478
Charge-off (444)
Provision --
Ending balance of allowance for losses $ 1,034
</TABLE>
No provision for loss on real estate investments was required
on the one remaining property during the first half of 1996. The
Bank recorded a net gain on sale of real estate investment totaling
$53,000 during the first half of 1996.
Deposits
The Bank had total deposits of $92.1 million at June 30, 1996,
compared to $105.7 million at December 31, 1995, a decrease of
$13.6 million or 12.9%. The decline was attributed to decreases in
private banking customer deposits of $6.2 million, Association Bank
Services deposits of $1.5 million, Stock options services activity
of $1.0 million, Escrow activities of $600,000, Trust activities of
$500,000, and volatile deposits of $3.8 million. A summary of
deposits at June 30, 1996 and December 31, 1995 is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in Thousands) 1996 1995
<S> <C> <C>
Demand deposits $ 15,432 $ 20,365
NOW 19,473 23,762
Money market 16,337 16,185
Savings 1,522 1,649
Total deposits with no stated maturity 52,764 61,961
Time deposits:
Less than $100,000 34,391 37,296
$100,000 and greater 5,013 6,416
Total time deposits 39,404 43,712
Total deposits $ 92,168 $ 105,673
</TABLE>
The Bank's deposits from private and business banking totaled
$36.9 million, or 39.7% of total deposits, at June 30, 1996,
compared to $38.0 million, or 35.9% of total deposits, at December
31, 1995. Deposits acquired through the Association Bank Services
function totaled $21.5 million, or 23.1% of total deposits at June
30, 1996, compared to $22.9 million, or 21.7% of total deposits at
December 31, 1995. Deposits acquired through the money desk
operations totaled $24.1 million, or 25.9% of total deposits at
June 30, 1996, compared to $27.8 million, or 26.3% of total
deposits at December 31, 1995.
Concentrations of deposits acquired through the money desk
operations have been classified by
<PAGE>
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
is required to maintain a volatile liability dependency ratio of
not more than 15% which the Bank is in compliance with as of June
30, 1996.
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 claims and actions. The Bank has settled or been dismissed
from litigation or potential litigation matters which management
deems material. Based on information available to the Company and
the Bank, and its review of such outstanding claims and litigation
to date, management believes the liability relating to such claims
and litigation, if any, will not have a material adverse effect on
the Company's liquidity, consolidated financial condition or
results of operations.
Item 2 - Changes in Securities
See "Financial Condition - Liquidity and Capital Resources".
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
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The San Francisco Company
(Registrant)
Date: August 13, 1996 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: August 13, 1996 /s/ Keary L. Colwell
Keary L. Colwell
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,529
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,132
<INVESTMENTS-CARRYING> 7,448
<INVESTMENTS-MARKET> 7,164
<LOANS> 42,512
<ALLOWANCE> 5,410
<TOTAL-ASSETS> 104,664
<DEPOSITS> 92,168
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 1,311
<LONG-TERM> 0
<COMMON> 58
0
6,914
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 104,664
<INTEREST-LOAN> 2,217
<INTEREST-INVEST> 1,456
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,673
<INTEREST-DEPOSIT> 1,647
<INTEREST-EXPENSE> 1,648
<INTEREST-INCOME-NET> 2,026
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,607
<INCOME-PRETAX> 314
<INCOME-PRE-EXTRAORDINARY> 304
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 304
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
<YIELD-ACTUAL> 4.25
<LOANS-NON> 2,560
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,013
<LOANS-PROBLEM> 972
<ALLOWANCE-OPEN> 5,912
<CHARGE-OFFS> 646
<RECOVERIES> 144
<ALLOWANCE-CLOSE> 5,410
<ALLOWANCE-DOMESTIC> 5,410
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
