<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, 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)
<TABLE>
<S> <C>
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)
</TABLE>
(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 5,765,999 shares of Class A Common Stock outstanding on May
1, 1996.
<PAGE> 2
THE SAN FRANCISCO COMPANY AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1. Consolidated Statements of Financial Condition
At March 31, 1996 and December 31, 1995 . . . . . . . . . . . . . . 1
Consolidated Statements of Operations
For the Three Months Ended March 31, 1996 and 1995. . . . . . . . . 2
Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 1996 and 1995. . . . . . . . . 3
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 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
</TABLE>
<PAGE> 3
THE SAN FRANCISCO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
(Dollars in Thousands Except Per Share Data) 1996 1995
---------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 3,837 $ 4,814
Federal funds sold 22,600 38,000
-----------------------
Cash and cash equivalents 26,437 42,814
Investment securities held-to-maturity
(Market: $7,732) 7,807 --
Investment securities available-for-sale 24,642 6,536
Federal Home Loan Bank stock, at par 640 632
Loans 41,749 53,208
Deferred loan fees (196) (180)
Allowance for loan losses (5,715) (5,912)
-----------------------
Loans, net 35,838 47,116
Other real estate owned 6,882 7,514
Real estate investments 236 236
Premises and equipment, net 8,528 8,689
Interest receivable 449 527
Other assets 560 798
-----------------------
Total Assets $112,019 $114,862
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Non-interest bearing deposits $ 18,862 $ 20,365
Interest bearing deposits 83,701 85,308
-----------------------
Total deposits 102,563 105,673
Other liabilities and interest payable 1,525 2,309
-----------------------
Total Liabilities 104,088 107,982
-----------------------
SHAREHOLDERS' EQUITY:
Preferred Stock (par value $0.01 per share)
Series B - Authorized - 437,500 shares
Issued and outstanding - 1996 - 15,869 and 1995 - 16,291 114 114
Series D - Authorized - 1,000,000 shares
Issued and outstanding - 1996 - 265,000 and 1995 - 215,000 5,300 4,300
Common stock (par value $0.01 per share)
Class A - Authorized - 40,000,000 shares
Issued and outstanding -1996 and 1995 - 5,765,999 58 58
Additional paid-in capital 70,268 70,168
Retained deficit (67,693) (67,801)
Unrealized gain/(loss) on securities available-for-sale (116) 41
-----------------------
Total shareholders' equity 7,931 6,880
-----------------------
Total Liabilities and Shareholders' Equity $112,019 $114,862
=======================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-1-
<PAGE> 4
THE SAN FRANCISCO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
March 31,
-------------------
(Dollars in Thousands Except Per Share Data) 1996 1995
-------------------
<S> <C> <C>
Interest income:
Loans $ 1,144 $ 2,491
Investments 701 390
Dividends 8 21
-------------------
Total interest income 1,853 2,902
-------------------
Interest expense:
Deposits 865 1,033
Other borrowings -- 64
-------------------
Total interest expense 865 1,097
-------------------
Net interest income 988 1,805
Provision for loan losses -- --
-------------------
Net interest income after provision for loan losses 988 1,805
-------------------
Non-interest income:
Service charges and fees 51 113
Loan brokerage and servicing fees 55 74
Stock option commissions and fees 355 406
Other income 10 111
Income on sale of other assets, net -- 16
-------------------
Total non-interest income 471 720
-------------------
Non-interest expense:
Salaries and related benefits 908 1,156
Occupancy expense 101 593
Professional fees 120 194
Corporate insurance premiums 95 77
FDIC insurance premiums 63 154
Data processing 43 171
Telephone 24 37
Other operating expenses 161 198
-------------------
Total operating expenses 1,515 2,580
Net income from real estate operations (168) (161)
-------------------
Total non-interest expense 1,347 2,419
-------------------
Income before income taxes 112 106
Provision for income taxes 4 38
-------------------
Net Income $ 108 $ 68
====================
Income per common share:
Net income $ 0.02 $ 0.01
Weighted average shares outstanding 5,765,978 5,765,993
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-2-
<PAGE> 5
THE SAN FRANCISCO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain/
(Loss) on Total
Additional Retained Securities Share-
Preferred Common Paid-in Earnings Option Available- holders'
(Dollars in Thousands) 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
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
Net change in employee stock
ownership plans -- -- -- -- 70 -- 70
Net proceeds from sale of stock 4,300 -- -- -- -- -- 4,300
Appreciation in market value of
securities available-for-sale -- -- -- -- -- 27 27
Net income (nine months) -- -- -- 268 -- -- 268
-----------------------------------------------------------------------------------
Balances at December 31, 1995 4,414 58 70,168 (67,801) -- 41 6,880
Net proceeds from sale of stock
and warrants 1,000 -- -- -- -- -- 1,000
Other -- -- 100 -- -- -- 100
Depreciation in market value of
securities available-for-sale -- -- -- -- -- (157) (157)
Net income (three months) -- -- -- 108 -- -- 108
-----------------------------------------------------------------------------------
Balances at March 31, 1996 $5,414 $58 $70,268 $(67,693) $ -- $(116) $ 7,931
===================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-3-
<PAGE> 6
THE SAN FRANCISCO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995
---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 108 $ 68
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization expense 193 105
Net gain on other real estate owned and real estate
investment (285) (343)
Decrease in interest receivable and other assets 316 356
Decrease in interest payable and other liabilities (684) (1,189)
Increase (decrease) in deferred loan fees 16 (82)
---------------
Net cash flows used in operating activities (336) (1,085)
---------------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities
held-to-maturity -- 2,901
Proceeds from maturities of investment securities
available-for-sale 3,997 140
Purchase of investment securities available-for-sale (22,268) (999)
Purchase of investment securities held to maturity (7,807) --
Net decrease in loans 9,605 13,891
Recoveries of loans previously charged off 399 468
Purchases of premises and equipment (32) (2)
Sale of other real estate owned 2,215 733
Acquisition and capitalized costs of other real estate
owned (39) (132)
---------------
Net cash (used in) provided by investing activities (13,930) 17,000
---------------
Cash Flows from Financing Activities:
Net decrease in deposits (3,111) (16,661)
Net increase(decrease) in other borrowings -- 1,245
Proceeds from the sale of preferred stock and warrants 1,000 --
---------------
Net cash used in financing activities (2,111) (15,416)
---------------
Increase(decrease) in cash and cash equivalents (16,377) 499
Cash and cash equivalents at beginning of period 42,814 28,647
---------------
Cash and cash equivalents at end of period $ 26,437 $ 29,146
==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 889 $ 923
Income taxes 1 42
Supplemental Schedule of Noncash Investing and
Financing Activities:
Net transfer of loans to other real estate owned 1,259 --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE> 7
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, 1996, and for the three months ended March 31,
1996 and 1995 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 1995 consolidated financial statements have been
reclassified for comparative purposes. The results of operations for the three
months ending March 31, 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"). 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.
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
-5-
<PAGE> 8
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 March 31, 1996, the Company determined
that no events or changes occurred during the first quarter 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.
On November 15, 1995, the Company's Common Shares were delisted from the
American Stock Exchange. The Company's Common shares are not listed on any
exchange.
The Company recorded net income of $108,000, or $0.02 per Common Share,
for the three months ended March 31, 1996, compared to a net income of $68,000,
or $0.01 per Common Share for the same period in 1995. The increase in the
Company's net income of $40,000 was primarily from reductions in operating
costs and provision for income taxes of $1.1 million in first quarter 1996
compared to the same period in 1995, partially offset by declines in net
interest income and other revenue of $1.0 million.
The Company's total non-interest expenses declined by $1.1 million in the
first quarter of 1996 compared to the same period in 1995 as a result of a
decline in costs and losses on real estate, staff levels, occupancy costs, and
professional services.
At March 31, 1996, total assets were $112.0 million, a decline of $2.9
million, or 2.5% from $114.9 million at December 31, 1995. Total loans were
$41.7 million, a decrease of $11.5 million, or 21.6% from $53.2 million at
December 31, 1995. Total deposits were $102.6 million at March 31, 1996, a
decline of $3.1 million or 2.9%, 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 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
-6-
<PAGE> 9
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. On March 20, 1996, the Company received $1.0
million of the $4.5 million. The Company contributed $1.1 million in capital
to the Bank during the first quarter of 1996. As of March 31, 1996, the Bank's
Leverage Capital ratio was 7.2%, but the Bank is not in compliance with the
Capital Impairment Order, discussed below. No assurances have been given that
the SBD will refrain from taking action against the Bank to enforce its Capital
Order.
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 $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
-7-
<PAGE> 10
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 March 31, 1996, the Bank had contributed capital of $71.8 million
and deficit retained earnings of $63.9 million, or approximately 89% 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 $35.2
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.
The Bank has not complied with these orders. As the sole shareholder of the
Bank, the Company (not the Company's shareholders) will receive any notices of
assessment issued by the Bank. The Bank is in violation of this California law
requiring it to assess the shares of the Bank (which are all held by the
Company) in order to correct the impairment of the Bank's capital.
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, 1996, the Bank
-8-
<PAGE> 11
would have been required to raise $87.8 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 May 7, 1996
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 business 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.
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 $1.0 million from $1.8
million in the quarter ended March 31, 1996 from the same quarter in 1995,
respectively, a decline of $817,000 or 45%. 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 $35.2 million, or
25.7%, and average interest bearing liabilities decreased $29.0 million, or
25.8%, for the quarter ended March 31, 1996 compared to the quarter ended March
31, 1995. The average interest rate margin decreased 140 basis points from
5.3% for the quarter ended March 31, 1995, to 3.9% for the quarter ended March
31, 1996 primarily as a result of a decrease in prime rate of 75 basis points
in the first 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. In addition, the cost of
funds on the interest bearing liabilities increased in the first quarter of
1996 by 23 basis points compared to the same period in 1995. The increase was
the result of the increase in higher costing volatile deposits.
As of March 31, 1996, the certificates of deposit were $43.1 million or
42% of total deposits and borrowings compared to $47.2 million or 34.8% of
total deposits and borrowings for the same period in 1995. During first
quarter of 1996, the average stock option loans were higher and amortization of
deferred loan fees was lower than in the same period in 1995.
NON-INTEREST INCOME
Non-interest income decreased $248,000, from $720,000 at March 31, 1995
to $472,000 at March 31, 1996. Stock option and brokerage commissions and fees
decreased $51,000, or 12.6% as a result of reduced activities by holders of
stock options and brokerage customers. The decrease in the Company's service
charges and fees of $61,000, or 54.0% was primarily the result of lower deposit
transaction volumes. The decrease in other income is attributable to the
acquisition of BSFBC during the
-9-
<PAGE> 12
third quarter of 1995. During the first quarter of 1995, the earnings from
BSFBC were included in other income.
NON-INTEREST EXPENSE
The Company's operating expenses decreased by $1.1 million during the
first 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. The reduction in occupancy costs is
primarily the result of the acquisition of BSFBC during the third quarter of
1995 which reduced the overall occupancy cost to the Bank, and, secondarily,
the result of increased leasing of unused office space in 1996 compared to
1995.
The improvement in net income from real estate operations is the result
of lower costs related to holding real estate properties in the first quarter
of 1996 compared to the same period in 1995.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Bank's liquid assets, which include cash and short term investments
totaled $26.4 million, or 23.6% of total assets, at March 31, 1996, a decrease
of $16.4 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 during the first quarter of 1996
partially offset by a decrease in loans totaling $11.5 million. See "Loans."
As of March 31, 1996, the Bank had pledged loans totaling $4.2 million
enabling the Bank to borrow up to $3.1 million from the Federal Home Loan Bank
of San Francisco (FHLB). The Bank had not drawn on this lending facility
during the first 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 $342,700 which provide
collateral to the FRB should the Bank be unable to meet its FRB cash letter
requirements of up to $145,800.
The Bank's brokered certificates of deposit declined to zero as of March
31, 1996 from $3.4 million at December 31, 1995. The Bank's money desk
deposits decreased to $27.4 million as of March 31, 1996 from $28.0 million at
December 31, 1995.
CAPITAL
At March 31, 1996, shareholders' equity was $8.0 million, compared to
$6.9 million at December 31, 1995, primarily as a result of the $108,000 net
income and the March 1996 capital contribution of $1.0 million.
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, 1996, the Company and the Bank are in
-10-
<PAGE> 13
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 quarter of 1996 was primarily the result of the
first quarter income, 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 March 31,
1996:
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement Orders
--------------------------------------------
<S> <C> <C> <C> <C>
Leverage ratio 7.2% 7.2% 4.0% 7.0%
Tier 1 risk-based capital 11.3 11.3 4.0 N/A
Total risk-based capital 13.4 13.4 8.0 N/A
</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 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
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. Assuming the
conversion of the Series D Preferred Stock into common stock the market value
per Class A Common Stock would be approximately $0.23 per share.
INVESTMENT ACTIVITIES
At March 31, 1996, the Company's investment securities, including Fed
funds sold, totaled $55.7 million, or 49.7% of total assets, compared to $45.2
million, or 39.3% of total assets, at December 31, 1995.
At March 31, 1996, investment securities held-to-maturity totaled $7.8
million, compared to zero at December 31, 1995, and are carried at amortized
cost. At March 31, 1996, the Company held $24.6 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 $7.8 million and
investment securities available for sale of $18.1 million resulted primarily
from management's decision to diversity the Bank's investment portfolio into
various investment securities with various terms to limit the Bank's risks to
downward adjustments in short-term interest rates. The investment portfolios
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.
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
-11-
<PAGE> 14
Company. As of March 31, 1996, the investment securities available for sale
have an unrealized loss of $116,000 that is included as a separate component of
shareholder's equity to reflect the current market value of these
securities.
LOANS
During the first quarter of 1996, total loans decreased by $11.5
million, from $53.2 million at December 31, 1995 to $41.7 million at March 31,
1996. The reduction resulted primarily from loan repayments. The composition
of the Bank's loan portfolio at March 31, 1996 and December 31, 1995 is
summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in Thousands) 1996 1995
---------------------------
<S> <C> <C>
Commercial and financial $ 12,913 $ 16,128
Real estate construction 2,808 5,661
Real estate mortgage 25,999 31,388
Net lease financing 29 31
----------------------
41,749 53,208
Deferred fees and discounts, net (196) (180)
Allowance for possible loan losses (5,715) (5,912)
----------------------
Total loans, net $ 35,838 $ 47,116
======================
</TABLE>
Included in the loan portfolio are loans to facilitate the sale of the
Bank's other real estate owned ("OREO") 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 OREO and real estate investment were
$7.8 million at March 31, 1996 compared to $9.3 million at December 31, 1995.
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 March 31, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in Thousands) 1996 1995
--------------------------
<S> <C> <C>
Loans - performing $ 13,929 $ 17,800
Non-accrual loans 2,510 7,511
OREO 6,882 7,514
Real estate investments 236 236
-------------------------
Total classified assets $ 23,557 $ 33,061
=========================
</TABLE>
Classified loans decreased to $16.4 million as of March 31, 1996 compared
to $25.3 million at December 31, 1995. The decrease was primarily the result
of loan payoffs and transfers to other real estate owned as a result of
foreclosure. As of March 31, 1996 and December 31, 1995, all OREO and real
estate investments held for development were classified.
-12-
<PAGE> 15
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
March 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
March 31, December 31
(Dollars in Thousands) 1996 1995
-----------------------
<S> <C> <C>
Commercial and financial $ 140 $ 307
Real estate construction 1,950 3,428
Other real estate mortgage 420 3,891
-------------------
Total impaired loans $ 2,510 $ 7,626
===================
</TABLE>
As of March 31, 1996 and December 31, 1995, the Company measured the
impairment of $2.5 million and $7.3 million, respectively, using the collateral
value method. As of March 31, 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 quarter of 1996
was $30,800 compared to $202,000 for the same period in 1995.
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 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 and real estate
foreclosures. Non-performing assets were $9.4 million at March 31, 1996, down
from $15.0 million at the end of 1995. Restructured loans totaled $4.0 million
at March 31, 1996 compared to $5.9 million at December 31, 1995.
During the first quarter 1996, the reduction of $5.6 million in
non-performing assets was primarily the result of OREO sales of $2.1 million
and loans returned to accrual of $1.3 million. No new loans were transferred
to non-accrual status and $325,000 in non-accrual loans were paid off. The
Bank recorded charge-offs of $596,000 and recoveries of $399,000 during the
first quarter of 1996.
The following table provides information on all non-performing assets at
March 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in Thousands) 1996 1995
-----------------------
<S> <C> <C>
Non-accrual loans $ 2,510 $ 7,511
OREO 6,882 7,514
--------------------
Total non-performing assets 9,392 $15,025
====================
Percentage of total loans and OREO outstanding 19.3% 24.7%
</TABLE>
-13-
<PAGE> 16
In addition to the loans disclosed in the foregoing table, the Bank had
approximately $1.3 million in loans on March 31, 1996 that were between 31 and
89 days delinquent. All of these loans have matured and are in the process of
collection. All of the loans delinquent between 31 and 89 days are secured by
first or subordinate deeds of trust on real estate or certificates of deposits.
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 March 31, 1996, $395,000 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 $2.5 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, trends, and
related uncertainties. The following table summarizes the loan loss experience
of the Bank for the quarter ended March 31, 1996:
<TABLE>
<CAPTION>
March 31,
(Dollars in Thousands) 1996
---------
<S> <C>
Beginning balance of allowance for loan losses
at December 31, 1995 $ 5,912
Charge-offs (596)
Recoveries 399
Provision --
-------
Ending balance of allowance for loan losses $ 5,715
=======
</TABLE>
For the quarter ended March 31, 1996, the Company charged-off $596,000 of
non-performing loans. Recoveries were $399,000 relating to 15 loans. The
unallocated portion of the allowance for loan loss totaled $2.3 million at
March 31, 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.
-14-
<PAGE> 17
Allowance for Losses on OREO
The following table summarizes the OREO loss experience of the Bank for
the quarter ended March 31, 1996:
<TABLE>
<CAPTION>
March 31
(Dollars in Thousands) 1996
--------
<S> <C>
Beginning balance of allowance for losses $11,991
Charge-offs (882)
Provision --
-------
Ending balance of allowance for losses $11,109
=======
</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 March 31, 1996 and 1995, an
additional provision was not required during the first quarter of 1996 or 1995.
The Bank recorded a net gain of $285,000 on sale of two OREO properties.
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, 1996:
<TABLE>
<CAPTION>
March 31
(Dollars in Thousands) 1996
--------
<S> <C>
Beginning balance of allowance for losses $ 1,478
Charge-off --
Provision --
-------
Ending balance of allowance for losses $ 1,478
=======
</TABLE>
No provision for loss on real estate investments was required on the
remaining two properties during the first quarter of 1996.
-15-
<PAGE> 18
DEPOSITS
The Bank had total deposits of $102.6 million at March 31, 1996, compared
to $105.7 million at December 31, 1995, a decrease of $3.1 million or 3%. The
$3.1 million decline was attributed to decreases in private banking customer
deposits of $2.8 million and volatile deposits of $1.6 million which were
partially offset by increases in deposits related to stock option activity of
$1.6 million. A summary of deposits at March 31, 1996 and December 31, 1995 is
as follows:
<TABLE>
<CAPTION>
March 31 December 31
(Dollars in Thousands) 1996 1995
-----------------------
<S> <C> <C>
Demand deposits $ 18,862 $ 20,365
NOW 21,941 23,762
Money market 17,263 16,185
Savings 1,405 1,649
------------------------
Total deposits with no stated maturity 59,471 61,961
------------------------
Time deposits:
Less than $100,000 39,656 37,296
$100,000 and greater 3,436 6,416
------------------------
Total time deposits 43,092 43,712
------------------------
Total deposits $ 102,563 $ 105,673
========================
</TABLE>
The Bank's deposits from private and business banking totaled $35.8
million, or 34.9% of total deposits, at March 31, 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 $22.8 million, or 22.2%
of total deposits at March 31, 1996, compared to $22.9 million, or 21.7% of
total deposits at December 31, 1995. Deposits acquired through the money desk
operations totaled $27.4 million, or 26.7% of total deposits at March 31, 1996,
compared to $27.8 million, or 26.3% of total deposits at December 31, 1995.
The Bank expects to decrease money desk deposits during the remainder of the
year with the intention of replacing these deposits with core deposits.
Concentrations of 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
is required to maintain a volatile liability dependency ratio of not more than
15%. The Bank's volatile dependency ratio at March 31, 1996 was substantially
below the 15.0% requirement.
-16-
<PAGE> 19
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. The Bank
has been dismissed from, or reached settlement or potential settlement in
litigation or potential litigation matters which management deems is material.
As a result of the settlement or potential settlement, the Bank has established
a reserve for certain lawsuits. Based on information available to the Company
and the Bank, and its review of such outstanding claims to date, management
believes the liability relating to such claims, 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
-17-
<PAGE> 20
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)
<TABLE>
<S> <C> <C>
Date: May 9, 1996 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: May 9, 1996 /s/ Keary L. Colwell
Keary L. Colwell
Principal Accounting Officer
</TABLE>
-18-
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Document
- - -------------- --------
<S> <C>
27 Financial Data Schedule
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 3,837
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 22,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,642
<INVESTMENTS-CARRYING> 8,447
<INVESTMENTS-MARKET> 8,372
<LOANS> 41,553
<ALLOWANCE> 5,715
<TOTAL-ASSETS> 112,019
<DEPOSITS> 102,563
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,525
<LONG-TERM> 0
<COMMON> 58
0
5,414
<OTHER-SE> 2,459
<TOTAL-LIABILITIES-AND-EQUITY> 112,019
<INTEREST-LOAN> 1,144
<INTEREST-INVEST> 709
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,853
<INTEREST-DEPOSIT> 865
<INTEREST-EXPENSE> 865
<INTEREST-INCOME-NET> 988
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 876
<INCOME-PRETAX> 112
<INCOME-PRE-EXTRAORDINARY> 112
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
<YIELD-ACTUAL> 3.94
<LOANS-NON> 2,510
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,048
<LOANS-PROBLEM> 1,570
<ALLOWANCE-OPEN> 5,912
<CHARGE-OFFS> 596
<RECOVERIES> 399
<ALLOWANCE-CLOSE> 5,715
<ALLOWANCE-DOMESTIC> 5,715
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
