UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
October 31, 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 September 30, 1996 and December 31, 1995 . . . . . . . . . . . 1
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1996 and 1995 . 2
Consolidated Statements of Changes in Shareholders' Equity
For the Nine Months Ended September 30, 1996 and 1995 . . . . . . 3
Consolidated Statements of Cash Flows
For the Three and Nine Months Ended September 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. . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 16
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
September 30, 1996 and December 31, 1995
(caption> (Unaudited)
September 30, December 31,
(Dollars in Thousands Except Per Share Data) 1996 1995
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Assets:
Cash and due from banks $ 2,674 $ 4,814
Federal funds sold 14,300 38,000
Cash and cash equivalents 16,974 42,814
Investment securities held-to-maturity, at cost
(Fair value: $7,060) 7,142 --
Investment securities available-for-sale,
at fair value 29,404 6,536
Federal Home Loan Bank stock, at par 660 632
Loans 38,154 53,208
Deferred loan fees (210) (180)
Allowance for loan losses (5,545) (5,912)
Loans, net 32,399 47,116
Other real estate owned, net 6,251 7,514
Real estate investments, net -- 236
Premises and equipment, net 8,204 8,689
Interest receivable 514 527
Other assets 450 798
Total Assets $101,998 $114,862
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 14,102 $ 20,365
Interest bearing deposits 73,540 85,308
Total deposits 87,642 105,673
Other borrowings 2,000 --
Other liabilities and interest payable 1,424 2,309
Total Liabilities 91,066 107,982
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 111 114
Series D - Authorized - 1,000,000 shares;
Issued and outstanding - 390,000 and
215,000, respectively 7,800 4,300
Common stock (par value $0.01 per share)
Class A - Authorized - 40,000,000 shares;
Issued and outstanding - 1996 - 5,765,995
and 1995 - 5,765,978 58 58
Additional paid-in capital 70,271 70,168
Retained deficit (67,193) (67,801)
Unrealized gain/(loss) on securities
available-for-sale (115) 41
Total shareholders' equity 10,932 6,880
Total Liabilities and Shareholders' Equity $101,998 $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 Nine Months Ended September 30, 1996 and 1995
(Unaudited)
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Three Months Nine Months
Ended September 30, Ended September 30,
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(Dollars in Thousands
Except Per Share Data) 1996 1995 1996 1995
Interest income:
Loans $ 1,005 $ 2,087 $ 3,222 $ 6,744
Investments 743 626 2,182 1,622
Dividends 11 9 28 36
Total interest income 1,759 2,722 5,432 8,401
Interest expense:
Deposits 747 1,091 2,393 3,258
Other borrowings 1 70 2 154
Total interest expense 748 1,161 2,395 3,410
Net interest income before
provision for loan losses 1,011 1,561 3,037 4,991
Provision for loan losses -- -- -- 500
Net interest income after
provision for loan losses 1,011 1,561 3,037 4,491
Non-interest income:
Service charges and fees 63 78 196 297
Trust and escrow fees 50 30 141 191
Stock option commissions and fees 196 362 866 1,213
Other income 2 16 3 217
Gain on sale of assets, net (2) 20 (2) 43
Total non-interest income 309 506 1,204 1,961
Non-interest expense:
Salaries and related benefits 762 843 2,480 3,167
Occupancy expense, net of
sublease income 39 188 216 1,137
Professional fees 129 264 379 715
Corporate insurance premiums 53 90 244 268
FDIC insurance premiums 91 97 215 361
Data processing 80 90 213 403
Telephone 25 29 79 94
Other operating expenses 313 86 636 621
Total operating expenses 1,492 1,687 4,462 6,766
Net (income) expense from
real estate operations (203) 219 (566) (742)
Total non-interest expense 1,289 1,906 3,896 6,024
Income before income taxes 31 161 345 428
Net (refund) provision
for income taxes (272) 37 (262) 116
Net Income $ 303 $ 124 $ 607 $ 312
Income per common share:
Net income $ 0.05 $ 0.02 $ 0.10 $ 0.05
Weighted average shares
outstanding 5,765,995 5,765,978 5,765,997 5,765,985
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
Nine Months Ended September 30, 1996 and 1995
(Unaudited)
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
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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 -- -- -- -- -- 30 30
Net income(nine months) -- -- -- 312 -- -- 312
Balances at
September 30, 1995 4,414 58 70,168 (67,824) (70) 26 6,772
Net change in
employee stock
ownership plans -- -- -- -- 70 -- 70
Appreciation in market
value of securities
available-for-sale -- -- -- -- -- 15 15
Net income(three months -- -- -- 24 -- -- 24
Balances at
December 31, 1995 4,414 58 70,168 (67,800) -- 41 6,880
Proceeds from issuance of
stock and warrants 3,500 -- -- -- -- -- 3,500
Other -- -- 100 -- -- -- 100
Conversion of Series B
Preferred Stock into
Class A Common Stock (3) -- 3 -- -- -- --
Depreciation in market
value of securities
available-for-sale -- -- -- -- -- (156) (156)
Net income(nine months) -- -- -- 607 -- -- 607
Balances at
September 30, 1996 $ 7,911 $ 58 $ 70,271 $(67,193) $ -- $(115) $10,932
<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 Nine Months Ended September 30, 1996 and 1995
(Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands) 1996 1995 1996 1995
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Cash Flows from Operating Activities:
Net income $ 303 $ 124 $ 607 $ 312
Adjustments to reconcile net income
to net cash
(used in) provided
by operating activities:
Provision for loan losses -- -- -- 500
Depreciation and amortization expense 145 185 530 387
Provision for loss on other real
estate owned and
real estate investment -- 100 -- 653
Net gain on sale of real estate
owned and investment (206) -- (661) (1,890)
Decrease in interest receivable
and other assets 344 154 361 751
Increase (decrease) in interest
payable and other liabilities 73 (521) (784) (1,248)
(Increase) decrease in deferred
loan fees (17) (39) 29 (156)
Net cash flows (used in) provided
by operating activities 642 3 82 (691)
Cash Flows from Investing Activities:
Proceeds from sale of FHLB Stock -- -- -- 714
Proceeds from maturities of
investment securities
held-to-maturity 295 -- 645 7,859
Proceeds from maturities of
investment securities
available for sale 169 1,954 4,232 4,163
Purchase of investment securities
held to maturity -- -- (7,815) --
Purchase of investment securities
available for sale (4,996) (2,943) (27,256) (5,914)
Net decrease in loans 4,357 7,953 12,625 35,197
Recoveries of loans previously
charged off 135 568 279 1,316
(Purchases) sales of premises
and equipment, net 6 (3,388) (44) (3,528)
Proceeds from sale of other real
estate owned 572 -- 3,708 5,385
Acquisition and capitalized cost
of other real estate owned 150 (6) 236 395
Net cash (used in) provided by
investing activities 688 4,138 (13,390) 45,587
Cash Flows from Financing Activities:
Net decrease in deposits (4,485) (18,913) (18,032) (38,654)
Net (decrease) increase in other
borrowings -- -- 2,000 (4,070)
Net proceeds from issuance of
preferred stock and warrants 1,000 -- 3,500 4,300
Net cash used in financing activities (3,485) (18,913) (12,532) (38,424)
(Decrease) increase in cash and
cash equivalents (2,155) (14,772) (25,840) 6,472
Cash and cash equivalents at
beginning of period 19,129 49,891 42,814 28,647
Cash and cash equivalents at
end of period $ 16,974 $ 35,119 $ 16,974 $ 35,119
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 377 $ 1,325 $ 2,448 $ 3,574
Payment of income taxes -- 78 3 116
Supplemental Schedule of Noncash
Investing and Financing Activities:
Net transfer of loans to other
real estate owned -- 10 1,378 10
<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 September 30, 1996, and for the nine months ended September
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
nine months ending September 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 and amended Form 10-K/A dated April 29, 1996.
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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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 $303,000, or $0.05 per Common Share,
and $607,000, or $0.10 per Common Share, for the three and nine months ended
September 30, 1996, compared to a net income of $124,000, or $0.02 per
Common Share and $312,000, or $0.05 per Common Share for the same periods
in 1995. The increase in the Company's net income of $295,000 was
primarily from reductions in operating costs and Delaware franchise taxes
refund received in the third quarter of 1996 (compared to a provisions
for tax expense during 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 $2.1 million in the
first nine months 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 September 30, 1996, total assets were $102.0 million, a decline of
$12.9 million, or 11% from $114.9 million at December 31, 1995. Total loans
were $38.2 million, a decrease of $15.0 million, or 28% from $53.2 million
at December 31, 1995. Total deposits were $87.6 million at September 30,
1996, a decline of $18.1 million, or 17% compared to $105.7 million at
December 31, 1995.
On February 26, 1996, the Company and its majority shareholder entered
into an agreement which provides that the 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 an exercise 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.
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"). 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)
<PAGE>
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.
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 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
<PAGE>
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 September 30, 1996, the Bank had contributed capital of $74.5
million and deficit retained earnings of $63.8 million, or approximately 86%
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 $34.0 million. The Superintendent issued orders, most recently
on August 15, 1996, to the Bank to correct the impairment of its contributed
capital within 60 days. In response to the August 15, 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. As of September 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.
<PAGE>
Results of Operations
Net Interest Income
The Company's net interest income decreased to $3.0 million from $5.0
million in the first nine months of 1996 from the same period in 1995,
respectively, a decline of $2.0 million or 40%. 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 $36.0
million, or 27.7%, and average interest bearing liabilities decreased
$27.0 million, or 25.4%, for the first nine months of 1996 compared to the
same period in 1995.
The average interest rate margin decreased 78 basis points to 4.31% for
the first nine months of 1996, from 5.09% 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 44% as of September 30, 1996
from 64% as of September 30, 1995 primarily as a result of the reduction in
loans. The cost of funds on the interest bearing liabilities declined 23
basis points to 3.28% for the first nine months of 1996 from 3.51% for
the same period in 1995 primarily as a result of increasing volumes of
higher costing one to two year term certificates of deposits during the
first nine months of 1995.
The Company's net interest income decreased to $1.0 million from $1.6
million in the quarter ended September 30, 1996 from the same quarter in
1995 a decline of $550,000 or 35.2%. 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 $30.2
million, or 24.9%, and average interest bearing liabilities decreased
$22.6 million, or 22.8%, for the quarter ended September 30, 1996 compared
to the same period in 1995. The average interest rate margin declined 71
basis points from 5.14% for the quarter ended September 30, 1995, to 4.43%
for the same period in 1996 primarily as a result of a change in the
composition of average interest earning assets from higher yielding loans
into lower yielding liquidity investments.
Non-Interest Income
Non-interest income decreased $757,000 for the first nine months of 1996
to $1.2 million compared to $2.0 million for the same period in 1995.
Stock option and brokerage commissions and fees decreased $348,000, or
28.7% 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 $151,000, or 30.9% 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 (see Note 2). During the first six
months 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 $197,000, for the third quarter of 1996 to
$309,000 compared to $506,000 for the same period in 1995. Stock option and
brokerage commissions and fees decreased $166,000, or 45.9% as a result
of reduced trading activities by holders of stock options and brokerage
customers. The increase in the Company's service charges and fees of
$5,000, or 4.6% was primarily the result of higher escrow fees. The
decrease in other income is attributable to the acquisition of BSFBC
during the third quarter of 1995.
<PAGE>
Non-Interest Expense
The Company's operating expenses decreased by $2.3 million, or 34.1%
during the first nine months 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 nine months 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 $195,000 during the third
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. Other
operating expenses increased $227,000 to $313,000 in 1996 from $86,000 in
the same period in 1995 primarily as a result of providing a $200,000
provision for non-recurring expenses.
The increase in net income from real estate operations of $422,000 to
$203,000 for the third quarter of 1996 compared to the same period in
1995 is the result of higher gains on sale of real estate assets and the
decline in the cost of holding real estate.
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short term investments,
totaled $17.0 million, or 16.7% of total assets, at September 30, 1996, a
decrease of $25.8 million, from $42.8 million, or 37.2% of total assets,
at December 31, 1995. The decrease was primarily the result of the purchase
of longer duration investment securities totaling $30.0 million.
As of September 30, 1996, the Bank had pledged loans and securities
totaling $8.7 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
business. The Bank borrowed $2.0 million against this lending facility during
the first nine months of 1996. The borrowing was repaid during the
fourth 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 a short-term credit facility at the discount window with the
FRB of up to $1.8 million secured by loans and securities totaling $2.3
million.
The Bank's brokered certificates of deposit declined to zero as of
September 30, 1996 from $3.4 million at December 31, 1995. The Bank's
money desk deposits decreased $7.2 million to $20.8 million as of
September 30, 1996 from $28.0 million at December 31, 1995.
<PAGE>
Capital
At September 30, 1996, shareholders' equity was $10.9 million, compared
to $6.9 million at December 31, 1995, primarily as a result of the $607,000
net income and the capital contribution of $3.5 million from the Company's
majority shareholder, partially offset by an unrealized decline in the
market value of investment securities available for sale of $115,000 during
the first nine months 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 September 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 nine months of
1996 was primarily the result of the first nine months 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
September 30, 1996:
<TABLE>
<CAPTION>
Minimum
Capital
Company Bank Requirement
<S> <C> <C> <C>
Leverage ratio 10.6% 10.4% 4.0%
Tier 1 risk-based capital 16.7 16.3 4.0
Total risk-based capital 19.3 18.9 8.0
</TABLE>
Investment Activities
At September 30, 1996, the Company's investment securities, including Fed
funds sold, totaled $51.5 million, or 50.5% 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 September 30, 1996, investment securities held-to-maturity totaled $7.1
million, compared to zero at December 31, 1995, and are carried at amortized
cost. At September 30, 1996, the Company held $29.4 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 $7.1
million and investment securities available for sale of $22.9 million
resulted primarily from management's decision to diversify 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.
<PAGE>
Investment securities available-for-sale are accounted for at fair value.
Unrealized gains and losses are recorded as an adjustment to equity and are
not reflected in the current earnings of the Company. As of September 30,
1996, the investment securities available for sale have an unrealized loss
of $115,000 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 but fluctuations will occur depending on loan demands.
Loans
During the first nine months of 1996, total loans decreased by $15.0
million, from $53.2 million at December 31, 1995 to $38.2 million at
September 30, 1996. The reduction resulted primarily from loan
repayments. The composition of the Bank's loan portfolio at September 30,
1996 and December 31, 1995 is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
<S> <C> <C>
(Dollars in Thousands) 1996 1995
Commercial and financial $ 10,265 $ 16,159
Real estate construction 3,491 5,661
Real estate mortgage 24,398 31,388
38,154 53,208
Deferred fees and discounts, net (210) (180)
Allowance for possible loan losses (5,545) (5,912)
Total loans, net $32,399 $ 47,116
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 September 30, 1996 and
December 31, 1995:
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
<S> <C> <C>
(Dollars in Thousands) 1996 1995
Loans - performing $ 11,179 $ 17,800
Non-accrual loans 2,557 7,511
OREO 6,251 7,514
Real estate investments -- 236
Total classified assets $ 19,987 $ 33,061
Total classified assets as a
percentage of total assets 19.6% 28.8%
</TABLE>
Classified loans decreased by $11.6 million to $13.7 million as of
September 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
September 30, 1996 and December 31, 1995, all OREO and real estate
investments held for development were adversely classified. As of
September 30, 1996, the Bank no longer held any real estate investments
for development having sold all such assets.
<PAGE>
Non-performing assets which are included in classified assets are comprised
of non-accrual loans and real estate foreclosures. Non-performing assets
were $8.8 million, or 22.8% of total loans and OREO at September 30, 1996,
down from $15.0 million, or 24.7% of total loans and OREO at the end
of 1995. During the first nine months of 1996, the reduction of $6.2 million
in non-performing assets was primarily the result of OREO sales of $2.9
million, loans returned to accrual of $1.7 million, charge-offs of
$646,000. New loans transferred to non-accrual status totaled $365,000,
and $1.4 million in non-accrual loans were paid off.
There can be no assurance that the Bank will continue to reduce the level
of its non-performing assets, not experience losses in attempting to
collect the non-performing assets or not experience a deterioration of
loans presently not adversely classified. However, the Bank expects that if
reductions in non-performing assets continue, the costs incurred for
managing and carrying these assets will also decline.
The Bank had approximately $1.0 million in loans on September 30, 1996
that were between 31 and 89 days delinquent. All of the loans delinquent
between 31 and 89 days are secured by first 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 September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
September 30, December 31
<S> <C> <C>
(Dollars in Thousands) 1996 1995
Commercial and financial -- $ 307
Real estate construction $ 1,950 3,428
Other real estate mortgage 607 3,891
Total impaired loans $ 2,557 $ 7,626
As of September 30, 1996 and December 31, 1995, the Company measured the
impairment of loans totaling $2.6 million and $7.3 million, respectively,
using the collateral value method. As of September 30, 1996 and December
31, 1995, zero and $307,000 of the impaired loans were measured using the
discounted cash flow method. Total interest income recognized on impaired
loans during the first nine months of 1996 was $60,000 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
<PAGE>
grading to capture inherent risks including present value of expected cash
flows and fair value of real estate collateral. As of September 30, 1996,
$596,000 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, trends, and related uncertainties. The following
table summarizes the loan loss experience of the Bank for the nine months
ended September 30, 1996:
</TABLE>
<TABLE>
<CAPTION>
September 30,
(Dollars in Thousands) 1996
<S> <C>
Beginning balance of allowance for loan losses
at December 31, 1995 $ 5,912
Charge-offs (646)
Recoveries 279
Provision --
Ending balance of allowance for loan losses $ 5,545
The ratio of allowance for loan loss to total loans was 14.5% as of
September 30, 1996 compared to 11.1% as of December 31, 1995 primarily as a
result of a reduction in total loans. The ratio of the allowance for
loan loss to non-accrual loans was 217% as of September 30, 1996 compared
to 79% as of December 31, 1995.
The unallocated portion of the allowance for loan loss totaled $2.4 million
at September 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 nine months ended September 30, 1996:
</TABLE>
<TABLE>
<CAPTION>
September 30
(Dollars in Thousands) 1996
<S> <C>
Beginning balance of allowance for losses $ 11,991
Charge-offs (2,755)
Provision --
Ending balance of allowance for losses $ 9,236
</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 September 30, 1996, no
additional provision was required during the first nine months of 1996
compared to a provision of $500,000 during the same period in 1995. The
Bank recorded a net gain of $576,000 on sale of five OREO properties
during the first nine months 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 September 30, 1996:
<TABLE>
<CAPTION>
September 30
(Dollars in Thousands) 1996
<S> <C>
Beginning balance of allowance for losses $ 1,478
Charge-off (1,478)
Provision --
Ending balance of allowance for losses $ --
</TABLE>
No provision for loss on real estate investments was required during the
first nine months of 1996. The Bank recorded a net gain on sale of real
estate investment totaling $85,000 during the first nine months of 1996.
Deposits
The Bank had total deposits of $87.6 million at September 30, 1996,
compared to $105.7 million at December 31, 1995, a decrease of $18.1 million
or 17.1%. The decline was attributed to decreases in private banking
customer deposits of $3.0 million, homeowners' association deposits of
$3.0 million, brokerage deposit activity of $1.3 million, and volatile
deposits (including money desk deposits) of $11.2 million partially offset
by an increase in escrow deposits of $852,000. A summary of deposits at
September 30, 1996 and December 31, 1995 is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in Thousands) 1996 1995
<S> <C> <C>
Demand deposits $ 14,102 $ 20,365
NOW 18,157 23,762
Money market 17,262 16,185
Savings 1,262 1,649
Total deposits with no stated maturity 50,783 61,961
Time deposits:
Less than $100,000 30,923 37,296
$100,000 and greater 5,936 6,416
Total time deposits 36,859 43,712
Total deposits $ 87,642 $ 105,673
</TABLE>
The Bank's deposits from private and business banking totaled $35.0 million,
or 40.0% of total deposits, at September 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 $19.9 million, or
22.7% of total deposits at September 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 $20.8 million, or 23.7% of total
deposits at September 30, 1996, compared to $28.0 million, or 26.3% of
total deposits at December 31, 1995.
<PAGE>
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% which the Bank is in compliance with
as of September 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: November 7, 1996 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: November 7, 1996 /s/ Keary L. Colwell
Keary L. Colwell
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SAN FRANCISCO COMPANY'S CONSOLIDATED STATEMENTS OF CONDITION AND
OPERATIONS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,674
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,404
<INVESTMENTS-CARRYING> 7,142
<INVESTMENTS-MARKET> 7,060
<LOANS> 38,154
<ALLOWANCE> 5,545
<TOTAL-ASSETS> 101,998
<DEPOSITS> 87,642
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 1,424
<LONG-TERM> 0
0
7,911
<COMMON> 58
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 101,998
<INTEREST-LOAN> 3,222
<INTEREST-INVEST> 2,210
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,432
<INTEREST-DEPOSIT> 2,393
<INTEREST-EXPENSE> 2,395
<INTEREST-INCOME-NET> 3,037
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,896
<INCOME-PRETAX> 345
<INCOME-PRE-EXTRAORDINARY> 345
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 607
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
<YIELD-ACTUAL> 4.30
<LOANS-NON> 2,557
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,004
<LOANS-PROBLEM> 957
<ALLOWANCE-OPEN> 5,912
<CHARGE-OFFS> 646
<RECOVERIES> 279
<ALLOWANCE-CLOSE> 5,545
<ALLOWANCE-DOMESTIC> 5,545
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
