UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 31,717,171 shares of Class A Common Stock
outstanding on July 31, 1997.
page
The San Francisco Company and Subsidiaries
Quarterly Report on Form 10-Q
Table of Contents
Page
Part I - Financial Information
Item 1. Consolidated Statements of Financial Condition
At June 30, 1997 and December 31, 1996 ....................1
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1997 and 1996... 2
Consolidated Statements of Changes in Shareholders'
Equity For the Six Months Ended June 30, 1997 and 1996 ..... 3
Consolidated Statements of Cash Flows
For the Three and Six Months Ended June 30, 1997 and 1996 ...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 ...........................................15
Item 2. Changes in Securities .......................................15
Item 3. Defaults Upon Senior Securities .............................15
Item 4. Submission of Matters to a Vote of Security Holders .........15
Item 5. Other Information ...........................................15
Item 6. Exhibits and Reports on Form 8-K ............................15
Signatures ............................................................16
page
The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
June 30, 1997 and December 31, 1996
(Unaudited)
June 30, December 31,
(Dollars in Thousands Except Per Share Data) 1997 1996
Assets:
Cash and due from banks $ 2,747 3,701
Federal funds sold 18,410 11,925
Cash and cash equivalents 21,157 15,626
Investment securities held-to-maturity, at cost
(Market value: 1997 - $6,412; 1996 - $6,848) 6,504 6,943
Investment securities available-for-sale, at
fair value 31,379 28,348
Federal Home Loan Bank stock, at par 691 670
Loans 40,684 43,762
Deferred loan fees (257) (190)
Allowance for loan losses (5,943) (5,663)
Loans, net 34,484 37,909
Other real estate owned, net 1,717 5,133
Premises and equipment, net 7,878 8,059
Interest receivable 869 758
Other assets 297 555
Total Assets $104,976 $104,001
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 18,485 $ 16,505
Interest bearing deposits 72,199 74,661
Total deposits 90,684 91,166
Other liabilities and interest payable 1,870 1,771
Total Liabilities 92,554 92,937
Shareholders' Equity:
Preferred Stock (par value $0.01 per share)
Series B - Authorized - 437,500 shares;
Issued and outstanding - 15,869 111 111
Common stock (par value $0.01 per share)
Class A - Authorized - 100,000,000 shares;
Issued and outstanding - 1997 - 31,171,717
and 1996 - 28,775,995 317 288
Additional paid-in capital 78,812 77,841
Retained deficit (66,730) (67,099)
Unrealized gain/(loss) on
securities available-for-sale (88) (77)
Total shareholders' equity 12,422 11,064
Total Liabilities and Shareholders' Equity $104,976 $104,001
See accompanying notes to unaudited consolidated financial
statements.
page
The San Francisco Company and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1997 and 1996
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in Thousands Except
Per Share Data) 1997 1996 1997 1996
Interest income:
Loans $ 1,117 $ 1,073 $ 2,240 $ 2,217
Investments 813 738 1,559 1,439
Dividends 9 9 21 17
Total interest income 1,939 1,820 3,820 3,673
Interest expense:
Deposits 662 781 1,359 1,646
Other borrowings -- -- -- 1
Total interest expense 662 782 1,359 1,647
Net interest income before provision
for loan losses 1,277 1,038 2,461 2,026
Provision for loan losses -- -- -- --
Net interest income after provision
for loan losses 1,277 1,038 2,461 2,026
Non-interest income:
Stock option commissions and fees 275 314 629 669
Real estate rental income 232 277 479 484
Service charges and fees 140 118 239 224
Other income 33 -- 55 2
Gain on sale of assets, net 206 170 228 455
Total non-interest income 886 879 1,630 1,834
Non-interest expense:
Salaries and related benefits 926 810 1,834 1,718
Occupancy expense 309 301 615 609
Professional fees 115 121 215 294
Corporate insurance premiums 48 96 109 191
FDIC insurance premiums 40 61 79 124
Property taxes 25 13 65 55
Data processing 112 90 226 133
Other operating expenses 355 223 572 422
Total non-interest expense 1,930 1,715 3,715 3,546
Income before income taxes 233 202 376 314
Provision for income taxes 2 6 7 10
Net Income $231 $196 $ 369 $304
Income per common share:
Primary: Net income $ 0.01 $ 0.03 $ 0.01 $ 0.05
Weighted average
shares outstanding 29,357,766 5,765,999 29,068,488 5,765,995
Fully: Net income $ 0.01 $0.01 $0.01 $0.02
Weighted average
shares outstanding 29,357,766 22,098,572 29,068,488 20,278,738
See accompanying notes to unaudited consolidated financial
statements.
page
The San Francisco Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 1997 and 1996
(Unaudited)
Unrealized
Gain/
(Loss) on Total
Additional Retained Securities Share-
(Dollars in Preferred Common Paid-in Earnings Available- holders'
Thousands) Stock Stock Capital (Deficit) for-Sale Equity
Balances at
January 1, 1996 $ 4,414 $ 58 $ 70,168 $(68,801) $ 41 $ 6,880
Proceeds on sale
of stock 3,500 -- -- -- -- 3,500
Depreciation in
market value of
securities
available-for-sale -- -- -- -- (599) (599)
Net income (six months) -- -- -- 304 -- 304
Balances at
June 30, 1996 7,914 58 70,168 (67,948) (558) 9,185
Conversion of
preferred stock to
common stock (7,803) 230 7,573 -- -- --
Appreciation in market
value of securities
available-for-sale -- -- -- -- 481 481
Net income (six months) -- -- -- 398 -- 398
Balances at
December 31, 1996 111 288 77,841 (67,099) (77) 11,064
Proceeds from sale
of common stock -- 29 971 -- -- 1,000
Depreciation in
market value
of securities
available-for-sale -- -- -- -- (11) (11)
Net income (six months) -- -- -- 369 -- 369
Balances at
June 30, 1997 $ 111 $ 317 $ 78,812 $(66,730) $(88) $12,422
See accompanying notes to unaudited consolidated financial
statements.
page
The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three and Six Months Ended June 30, 1997 and 1996
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in Thousands) 1997 1996 1997 1996
Cash Flows from
Operating Activities:
Net income $ 231 $ 196 $ 369 $ 304
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Provision for loan losses -- -- -- --
Depreciation and amortization expense 139 192 277 385
Net loss on sale of investment
securities available for sale 6 -- 6 --
Net gain on sale of other real
estate owned and
real estate investment (212) (170) (234) (455)
Provision of possible loss on
other real estate owned 182 -- 182 --
(Increase) decrease in interest
receivable and other assets (217) (301) 147 15
(Decrease) increase in interest
payable and other liabilities (17) (215) 99 (897)
(Increase) decrease in deferred
loan fees (1) 31 67 47
Net cash flows provided by
(used in) operating activities 111 (267) 913 (601)
Cash Flows from Investing Activities:
Proceeds from maturities
of investment securities
held-to-maturity 207 350 417 350
Proceeds from maturities of
investment securities
available-for-sale 312 69 1,926 4,064
Proceeds from the sale of
investment securities
available-for-sale 5,000 -- 5,000 --
Purchase of investment securities
held-to-maturity -- -- -- (7,815)
Purchase of investment securities
available-for-sale (9,974) -- (9,974) (22,260)
Net decrease (increase) in loans 715 (1,248) 3,078 8,913
Recoveries of loans previously
charged off, net 20 (305) 281 (502)
Purchases of premises and equipment (20) (19) (96) (51)
Sale of other real estate owned 2,054 921 3,440 3,136
Acquisition and capitalized cost
of other real estate owned 28 86 28 86
Net cash (used in) provided
by investing activities (1,658) (146) 4,100 (14,079)
Cash Flows from Financing Activities:
Net decrease in deposits (1,653) (10,395) (482) (13,505)
Net increase in other borrowings -- 2,000 -- 2,000
Net proceeds from sale of
common stock 1,000 -- 1,000 --
Net proceeds from sale of
preferred stock -- 1,500 -- 2,500
Net cash (used in) provided
by financing activities (653) (6,895) 518 (9,005)
(Decrease) increase in cash and
cash equivalents (2,200) (7,308) 5,531 (23,685)
Cash and cash equivalents at
beginning of period 23,357 26,437 15,626 42,814
Cash and cash equivalents at
end of period $ 21,157 $ 19,129 $ 21,157 $19,129
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period for:
Interest $ 719 $ 1,158 $ 1,389 $ 2,047
Payment of income taxes 2 2 2 3
Supplemental Schedule of Noncash
Investing and Financing Activities:
Net transfer of loans to
other real estate owned -- 119 -- 1,378
See accompanying notes to unaudited consolidated financial
statements.
page
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 June 30, 1997, and for the six months ended
June 30, 1997 and 1996 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. The results of operations
for the six months ending June 30, 1997 are not necessarily
indicative of the results to be expected for the entire year of
1997. This report should be read in conjunction with the
Company's 1996 Annual Report on Form 10-K.
The accompanying financial statements include the accounts
of the Company, the Bank, and the Bank's wholly owned subsidiary,
Bank of San Francisco Realty Investors ("BSFRI"). All material
intercompany transactions have been eliminated in consolidation.
Certain amounts in the 1996 consolidated financial statements
have been reclassified for comparative purposes.
Note 3 - Income Per Common Share
Primary income per common share is calculated using the
weighted average number of Class A Common Shares (the "Common
Stock"), par value of $0.01 per share, outstanding divided into
net income. Fully diluted income per share is calculated using
the weighted average number of shares outstanding assuming the
conversion of the Series D Preferred Stock into Common Stock
divided into net income. On December 31, 1996, all 390,000
outstanding shares of Series D Preferred Stock were converted
into 23,010,000 shares of Common Stock.
Note 4 - Dividend Restrictions
The Company is subject to dividend restrictions under the
Delaware General Corporation Law and regulations and policies of,
and a Written Agreement dated December 14,1994 (the "Agreement")
with, the Federal Reserve Bank of San Francisco (the "FRB"). The
Company's Series B 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 Company has not paid any dividends on the Series B
Preferred stock since the second quarter of 1991. The Board of
Directors does not intend to declare dividends on any class of
the Company's stock.
page
Note 5 - Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards (the
"SFAS") No. 128 "Earnings per Share" (the "SFAS No. 128").
Generally, SFAS No. 128 establishes standards for computing and
presenting earnings per share (the "EPS") for publicly held
companies, replaces Primary EPS with Basic EPS, and specifies
additional disclosure requirements regarding EPS. SFAS No. 128
is effective for financial statements issued for periods ending
after December 15, 1997. Earlier application is not permitted.
The adoption of SFAS No. 128 is not expected to have a material
impact on the Company's present computation of primary and fully
diluted EPS.
In February 1997, the FASB also issued SFAS No. 129 "Disclosure
of Information about Capital Structure" (the "SFAS No. 129").
Generally, SFAS No. 129 is effective for financial statements
issued for periods ending after December 15, 1997. The adoption
of SFAS No. 129 is not expected to have any impact on the
Company's present disclosure of its capital structure.
In June 1997, the FASB issued SFAS No. 130 "Reporting
Comprehensive Income". This statement establishes standards for
reporting and displaying comprehensive income and its components
in the financial statements. It requires that a company classify
items of other comprehensive income, as defined by accounting
standards, by their nature (e.g., unrealized gains or losses on
securities) in a financial statement, but does not require a
specific format for that statement. The Company is in the
process of determining its preferred format. This statement is
effective with the year-end 1998 financial statements; however, a
total comprehensive income is required in the financial
statements of the 1998 interim periods. Reclassification of
financial statements for earlier periods is required.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information". This
statement requires that a public business enterprise report
financial and descriptive information about its reportable
operating segments on the basis that is used internally for
evaluating segment performance and deciding how to allocate
resources to segments. This statement is effective with the
year-end 1998 financial statements.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
The Company is a one-bank holding company incorporated in
Delaware and registered 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 (the "FDIC") 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 recorded net income of $231,000 and $369,000 for
the three and six months ended June 30, 1997, compared to a net
income of $196,000 and $304,000 for the same periods in 1996.
The increase in the Company's net income for the six months ended
June 30, 1997 of $65,000 compared to income for the same period in 1996
was primarily from an increase in net interest income partially offset by an
increase in operating costs in 1997 and lower gains on
sale of other real estate owned in 1997 as compared to 1996.
page
At June 30, 1997, total assets were $105.0 million, an
increase of $1.0 million from $104.0 million at December 31,
1996. Total loans were $40.7 million, a decrease of $3.1
million, or 7% from $43.8 million at December 31, 1996. Total
deposits were $90.7 million at June 30, 1997, a decline of
$482,000 compared to $91.2 million at December 31, 1996.
Regulatory Directives
Federal Reserve Board Written Agreement
The Company and the FRB entered into the Agreement that
supersedes the previous directive dated April 20, 1992. The
Agreement prohibits the Company, without prior approval of the
FRB, from: (a) paying any cash dividends to its shareholders; (b)
directly or indirectly, acquiring or selling any interest in any
entity, line of business, problem or other assets; (c) executing
any new employment, service, or severance contracts, or renewing
or modifying any existing contracts with any executive officer;
(d) engaging in any transactions with the Bank that exceeds an
aggregate of $20,000 per month; (e) engaging in any cash
expenditures with any individual or entity that exceeds $25,000
per month; (f) increasing fees paid to any directors for
attendance at board or committee meetings, or paying any bonuses
to any executive officers; (g) incurring any new debt or
increasing existing debt; and (h) repurchasing any outstanding
stock of the Company. The Company is required to submit a
progress report to the FRB on a quarterly basis.
The Company was also required to submit to the FRB an
acceptable written plan to improve and maintain an adequate
capital position, a comprehensive business plan concerning
current and proposed business activities, a comprehensive
operating budget for the Bank and the consolidated Company. In
addition, the Board of Directors was required to submit an
acceptable written plan designed to enhance their supervision of
the operations and management of the consolidated organization.
The Company has filed all of the required submissions with
the FRB in accordance with the Agreement and management believes
the Company continues to be in full compliance with the
Agreement.
page
Memorandum of Understanding
On May 27, 1997, the FDIC and the California Department of
Financial Institutions (formerly the State Banking Department)
(the "DFI") terminated the Bank's Cease and Desist Orders and
entered into a Memorandum of Understanding (the "MOU"). The MOU
directs, among other things, that the Bank: (a) have and retain
management acceptable to the Regional Director of the FDIC (the
"Regional Director") and the Commissioner of the DFI (the
"Commissioner"); (b) increase its capital by not less than $1.0
million; (c) maintain a 7% Leverage Capital ratio; (d) reduce
assets classified "Substandard" as of September 30, 1996 (the
date of the most recent full-scope FDIC and DFI Report of
Examination of the Bank), to no more than $12.0 million by June
30, 1997, $10.0 million as of September 30, 1997, and $8.0
million as of December 31, 1997; (e) maintain an adequate reserve
for loan losses; (f) develop and implement written policy
recommendations outlined in the Report of Examination; (g)
implement a policy which establishes a range for the Bank's
volatile liabilities dependency ratio, and which ratio shall not
be more than 15%; (h) submit a strategic plan covering the period
1997 - 2002; (i) not pay cash dividends without prior written
consent from the Regional Director and the Commissioner; and (j)
report to the Regional Director and the Commissioner on a
quarterly basis the form and manner of any actions taken to
secure compliance with the MOU.
Management believes that the Bank is in full compliance with
the requirements of the MOU.
Capital Impairment Orders
Under the California Financial Code, if a bank's deficit
retained earnings exceeds 40% of its contributed capital, its
capital is deemed to be impaired, and the bank is required to
levy an assessment on its shares to correct the impairment. The
DFI has issued thirteen impairment orders to the Bank, with the
most recent dated May 19, 1997 (the "Impairment Orders"). At
June 30, 1997, the Bank had contributed capital of $75.5 million
and deficit retained earnings of $63.2 million.
The Impairment Orders require the Bank to correct the
impairment within 60 days by levying an assessment on the Company
as the Bank's sole shareholder. The Bank has not levied an
assessment against its shares nor has it otherwise corrected the
impairment, and, therefore, is in violation of the Impairment
Orders. In addition, the DFI has specifically reserved the right
to take such other action as the Commissioner may deem
appropriate or necessary, which may include taking possession of
the Bank's property and business, including ultimately
liquidating the business and affairs of the Bank. Management
believes, however, that given the Bank's present financial
condition, it is unlikely that the Commissioner will exercise his
bank takeover powers due to the Bank's failure to comply with the
Impairment Orders.
The Company plans to correct the Bank's capital impairment
by requesting the DFI to approve a quasi-reorganization of the
Bank. In a quasi-reorganization, the Bank's retained deficit
would be reduced or eliminated by netting the retained deficit
against contributed capital. Management believes that approval
for such quasi-reorganization would only be granted by the DFI
upon the Bank demonstrating the ability to sustain profitable
operations and meet all of its capital requirements in the
future.
No assurances can be given that the Bank will be successful
in demonstrating such ability to the satisfaction of the DFI. A
quasi-reorganization requires that the Bank adjust its assets and
liabilities to market value at the time of the reorganization
which could result in a reduction in the Bank's capital from its
present level. There can be no assurances that following a
correction of the
page
Bank's impaired capital, whether through a
quasi-reorganization or otherwise, the Bank's capital position
will not erode through future operating losses.
Results of Operations
Net Interest Income
The Company's net interest income increased to $2.5 million
in the first half of 1997 from $2.0 million in the same period in
1996 an increase of $435,000 or 21%. The increase was primarily
the result of an increase in the Bank's net interest rate margin.
The net interest rate margin improved as a result of a decline of
$9.5 million in interest bearing liabilities and an improvement
in the yield on the investment portfolio. Average
interest-earning assets were substantially the same for the first
half of 1997 compared to the same period in 1996.
The average interest rate margin increased 91 basis points
to 5.17% for the first half of 1997 from 4.26% for the same
period in 1996. The increase was primarily a result of a change
in the composition of average interest earning assets from lower
yielding overnight investments to higher yielding agency and
mortgage-backed investment securities, an increase in interest
rates on loans due to an increase in the prime interest rate, a
decline in interest-bearing deposits, and a decline in the
average cost of funds.
The Company's net interest income increased to $1.3 million
in the quarter ended June 30, 1997 from $1.0 million in the same
quarter in 1996 an increase of $239,000 or 23%. The increase was
the result of an increase in net interest rate margin and an
increase in average earning assets. The increase in the net
interest rate margin of 84 basis points to 5.34% from 4.50% for
the second quarter of 1997 compared to the same period in 1996,
respectively, was primarily the result of an increase in the
yield on loans and investments resulting from an increase in
market interest rates including an increase in prime rate, the
discount rate and the treasury yield curve and a decline in the
Bank's cost of funds. The Bank's cost of funds declined
primarily as a result of the reduction in higher costing money
desk certificates of deposits from $24.1 million as of June 30,
1996 compared to $17.9 million as of June 30, 1997.
Non-Interest Income
Non-interest income decreased $204,000 for the first half of
1997 to $1.6 million compared to $1.8 million for the same period
in 1996. The decline was primarily the result of a reduction in
the sale of other real estate owned (the "OREO") for the first
half of 1997 compared to the same period in 1996. The reduction
in OREO resulted in fewer sales which in turn resulted in a lower
gain on sale of assets in 1997 compared to 1996.
Non-interest income increased $7,000, for the second quarter
of 1997 to $886,000 compared to $879,000 for the same period in
1996.
Non-Interest Expense
The Company's operating expenses increased by $169,000, or
5% during the first half of 1997 compared to the same period in
1996 primarily as a result of an increase salaries and related
benefits, data processing costs and other operating costs which
were partially offset by declines in professional fees and
insurance premiums. The increase in salaries and benefit costs
was primarily the result of an
page
increase in incentive related
compensation accrued as a result of the Company's improved core
operating performance for the first half of 1997 compared to the
same period in 1996. The increase in data processing costs in
1997 compared to 1996 was the result of outsourcing certain data
processing functions during the second quarter of 1996, which
resulted in higher data processing costs beginning late in the
second quarter of 1996. The increase in other operating costs
was primarily related to a provision for possible loss on sale of
OREO recorded as other operating expense in the second quarter of
1997.
The decline in professional fees reflects a reduction in the
need for legal, and business and consulting services, and the
decline in FDIC and corporate insurance premiums reflects
improvement in the financial condition of the Company and the
Bank in 1997 compared to 1996.
The Company's operating expenses increased by $215,000
during the second quarter of 1997 compared to the same period in
1996 primarily as a result of an increase in salaries and
benefits related expenses and other operating expenses partially
offset by a reduction in insurance for the same reasons as
discussed above.
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short term
investments, totaled $21.1 million or 20% of total assets as of
June 30, 1997 compared to $15.6 million, or 15% of total assets,
at December 31, 1996. The increase was primarily the result of a
decline in net loans of $3.4 million and a decline in OREO of
$3.4 million.
As of June 30, 1997, the Bank had pledged loans and
securities totaling $6.8 million enabling the Bank to borrow
approximately $5.8 million from the Federal Home Loan Bank of San
Francisco (the "FHLB"). The Bank did not draw on this lending
facility during the first half of 1997. 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 and securities pledged to the FRB
totaling $2.1 million which provide collateral to borrow up to
$1.8 million from the FRB discount window.
Capital
At June 30, 1997, shareholders' equity was $12.4 million,
compared to $11.1 million at December 31, 1996 primarily as a
result of $369,000 in net income for the six months then ended
and a shareholder's capital contribution of $1.0 million.
The Company and the Bank are subject to general regulations
issued by the FRB, FDIC, and DFI which require maintenance of
certain levels of capital and the Bank is under specific capital
requirements as a result of the MOU and Impairment Orders. As of
June 30, 1997, the Company and the Bank are in compliance with
all minimum capital ratio requirements including the minimum
page
Leverage ratio of 7% mandated by the MOU. The Bank is not in
compliance with the capital requirements set fourth in the
Impairment Orders (see Capital Impairment Orders).
The following table reflects both the Company's and the
Bank's capital ratios with respect to minimum capital
requirements in effect as of June 30, 1997:
Minimum
Capital
Company Bank Requirement
Leverage ratio 11.9% 11.6% 4.0%
Tier 1 risk-based capital 18.6 18.2 4.0
Total risk-based capital 21.5 21.1 8.0
On June 13, 1997, Mr. Putra Masagung, the record holder of a
majority of the Company's Common Stock contributed $1.0 million
in capital pursuant to a February 26, 1996 agreement as
consideration for issuance of 2,941,176 shares of the Company's
Common Stock.
Recently, Mr. Masagung advised the Company that PT Gunung
Agung, an Indonesian company, beneficially acquired a majority
ownership of the Company's Common Stock. See "Change in
Beneficial Ownership" below for additional discussion.
Investment Activities
At June 30, 1997, the Company's investment securities,
including Fed funds sold, totaled $57.0 million, or 54.3% of
total assets, compared to $47.9 million, or 46.0% of total
assets, at December 31, 1996. The increase in the investment
portfolio of $9.1 million was funded by the disposition of $5.4
million in non-performing assets, reduction in performing loans
of $1.4 million, a $1.0 million increase in contributed capital,
and a $1.0 million decrease in non-interest bearing cash and cash
equivalents. The investment portfolio has included treasury and
agency securities, fixed and adjustable rate mortgage backed
securities, and to a limited extent collateralized mortgage
backed securities. Generally, the Bank's investment securities
held-to-maturity and available-for-sale have maturities or
principal amortization of five years or less.
At June 30, 1997, investment securities held-to-maturity
totaled $6.5 million, compared to $6.9 million at December 31,
1996, and were carried at amortized cost.
At June 30, 1997, the Company held $31.4 million in
investment securities available-for-sale, compared to $28.3
million at December 31, 1996. The increase in investment
securities available-for-sale of $3.1 million was primarily
investments in fixed rate balloon mortgage-backed securities and
discounted callable agency securities with a final term to
maturity of approximately two years. The investment securities
available-for-sale were accounted for at fair value. Unrealized
gains and losses are recorded as an adjustment to equity and are
not reflected in the current earnings of the Company. As of June
30, 1997, the investment securities available-for-sale had an
unrealized loss of $88,000 that is included as a separate
component of shareholder's equity to reflect the current market
value of these securities.
page
Loans
During the first half of 1997, total loans decreased by $3.1
million, from $43.8 million at December 31, 1996 to $40.7 million
at June 30, 1997 as a result or loan repayments. The composition
of the Bank's loan portfolio at June 30, 1997 and December 31,
1996 is summarized as follows:
June 30, December 31,
(Dollars in Thousands) 1997 1996
Real estate mortgage $ 27,583 $ 28,002
Secured commercial and financial 6,016 6,229
Unsecured 6,018 7,800
Other 1,067 1,711
40,684 43,762
Deferred fees and discounts, net (257) (190)
Allowance for possible loan losses (5,943) (5,663)
Total loans, net $34,484 $ 37,909
Classified Assets and Impaired Loans
Classified assets include non-accrual loans, OREO and
performing loans that exhibit well-defined credit quality
weaknesses. The table below outlines the Bank's classified
assets at June 30, 1997 and December 31, 1996:
June 30, December 31,
(Dollars in Thousands) 1997 1996
Loans - performing $ 5,400 $10,391
Non-accrual loans 173 3,400
OREO 1,717 5,133
Total classified assets $ 7,290 $ 18,924
Classified assets declined by 61% to $11.6 million as of
June 30, 1997 compared to $18.9 million at December 31, 1996.
The decrease was primarily the result of loan payoffs, sale of
OREO, and loan upgrades. As of June 30, 1997 and December 31,
1996, all OREO were classified as substandard. The Bank had
approximately $273,000 in loans as of June 30, 1997 that were
between 31 and 89 days delinquent and still accruing. All of the
loans that were between 31 and 89 days delinquent were secured by
first deeds of trust on real estate.
page
The Company identifies loans with weak credit quality
characteristics for review in accordance with 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". As of
June 30, 1997 and December 31, 1996, the Company had impaired
loans totaling $173,000 and $3.4 million, respectively. The
impairment was measured using the collateral value method. The
collateral value method uses an appraisal or other market
valuation to determine the value of the loans underlying
collateral in addition to other collection criteria to determine
overall collectability. The interest income recognized on
impaired loans during the first half of 1997 and 1996 was $32,000
and $44,000, respectively.
There can be no assurances that the Bank will continue to
experience declines in the amount of its classified 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 those assets.
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 compared to
the total allowance for loan losses. Generally, a charge to
current earnings is required when the total allowance for loan
losses is less than the specific loss allowances, which are
determined as described below.
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 including the present value of the
expected future cash flows, the terms and structure of the loan,
the financial condition of the borrower, and the fair value of
underlying collateral. As of June 30, 1997, $26,000 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 $172,000. 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 six
months ended June 30, 1997:
June 30,
(Dollars in Thousands) 1997
Beginning balance of allowance for
loan losses at December 31, 1996 $ 5,663
Charge-offs --
Recoveries 280
Provision --
Ending balance of allowance for loan losses $ 5,943
The unallocated portion of the allowance for loan loss
totaled $3.4 million at June 30, 1997 compared to $2.4 million at
December 31, 1996. The increase in the unallocated allowance was
primarily the result of recoveries and the reduction in
substandard loans that require a higher allocation of reserves.
page
Deposits
The Bank had total deposits of $90.7 million at June 30,
1997, compared to $91.2 million at December 31, 1996, a decrease
of $500,000. A summary of deposits at June 30, 1997 and December
31, 1996 is as follows:
June 30, December 31,
(Dollars in Thousands) 1997 1996
Demand deposits $ 18,485 $ 16,505
NOW 17,264 18,295
Money market 21,338 17,376
Savings 1,304 1,343
Total deposits with no
stated maturity 58,391 53,519
Time deposits:
Less than $100,000 26,195 29,154
$100,000 and greater 6,098 8,493
Total time deposits 32,293 37,647
Total deposits $ 90,684 $ 91,166
The Bank's private and business banking customer's deposits
totaled $34.4 million, or 37.9% of total deposits, at June 30,
1997, compared to $36.4 million, or 40.0% of total deposits, at
December 31, 1996. Deposits of the Bank's Association Bank
Services clients totaled $18.6 million, or 20.5% of total
deposits at June 30, 1997, compared to $18.2 million, or 21.8% of
total deposits at December 31, 1996. Deposits acquired through
the money desk operations totaled $17.9 million, or 19.7% of
total deposits at June 30, 1997, compared to $20.1 million, or
23.0% of total deposits at December 31, 1996. Escrow customer's
deposits totaled $13.8 million, or 15.2% of total deposits at
June 30, 1997 compared to $10.0 million or 11.0% of total
deposits as of December 31, 1996.
Concentrations of deposits acquired through the money desk
operations and certificates of deposit of $100,000 and more 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 MOU, the Bank is
required to maintain a volatile liability dependency ratio of not
more than 15%, which the Bank is in compliance with as of June
30, 1997.
Change in Beneficial Ownership
Mr. Putra Masagung, the record holder of 97.8% of the
Company's Common Stock, has advised the Company that a majority
ownership of the Company's Common Stock was beneficially acquired
by PT Gunung Agung (the "GA"), an Indonesian company, in a series
of transactions from 1992 to 1995. This acquisition of a
majority ownership occurred without the required prior approval
of the state and federal regulatory authorities. The Company believes
that without such regulatory approval GA will be prevented from
exercising its rights as a shareholder. Representatives
of both the Company and Mr. Masagung have initiated discussions
with the regulatory agencies to determine the appropriate steps
to be taken under the circumstances.
page
This development will reduce the net operating loss
carryforwards that the Company may have used to reduce any future
income tax liability. Based on the facts known at this time,
management of the Company does not believe this development will
have any material impact on the operations or the current financial
condition of the Company or the Bank.
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 parties
to legal actions. 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
None
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
A Report on Form 8-K was filed on August 8, 1997 regarding a
change in beneficial ownership is incorporated herein by
reference. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Change in
Beneficial Ownership".
page
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The San Francisco Company
(Registrant)
Date: August 14, 1997 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: August 14, 1997 /s/ Keary L. Colwell
Keary L. Colwell
Chief Financial Officer
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