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, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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 31,723,782 shares of Class A Common Stock
outstanding on October 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 September 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations For the Three and
Nine Months Ended September 30, 1997 and 1996 2
Consolidated Statements of Changes in Shareholders' Equity
For the Nine Months Ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows For the Three and
Nine Months Ended September 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 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
page
The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
September 30, 1997 and December 31, 1996
(Unaudited)
September 30, December 31,
(Dollars in Thousands
Except Per Share Data) 1997 1996
Assets:
Cash and due from banks $ 3,200 $ 3,701
Federal funds sold 25,785 11,925
Cash and cash equivalents 28,985 15,626
Investment securities held-to-maturity, at cost
(Market value: 1997 - $6,178; 1996 - $6,848) 6,225 6,943
Investment securities available-for-sale,
at fair value 34,295 28,348
Federal Home Loan Bank stock, at par 701 670
Loans 37,308 43,762
Deferred loan fees (143) (190)
Allowance for loan losses (5,991) (5,663)
Loans, net 31,174 37,909
Other real estate owned, net 1,661 5,133
Premises and equipment, net 7,792 8,059
Interest receivable 625 758
Other assets 410 555
Total Assets $111,868 $104,001
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 21,760 $ 16,505
Interest bearing deposits 74,957 74,661
Total deposits 96,717 91,166
Other liabilities and interest payable 2,259 1,771
Total Liabilities 98,976 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 - 31,717,171 and
1996 - 28,775,995 317 288
Additional paid-in capital 78,812 77,841
Retained deficit (66,372) (67,099)
Unrealized gain/(loss) on securities
available-for-sale 24 (77)
Total shareholders' equity 12,892 11,064
Total Liabilities and Shareholders' Equity $111,868 $104,001
See accompanying notes to unaudited consolidated financial
statements.
page 1
The San Francisco Company and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands
Except Per Share Data) 1997 1996 1997 1996
Interest income:
Loans $ 1,234 $ 1,005 $ 3,473 $ 3,222
Investments 953 743 2,512 2,182
Dividends 10 11 31 28
Total interest income 2,197 1,759 6,016 5,432
Interest expense:
Deposits 755 747 2,113 2,393
Other borrowings -- 1 -- 2
Total interest expense 755 748 2,113 2,395
Net interest income before
provision for loan losses 1,442 1,011 3,903 3,037
Provision for loan losses -- -- -- --
Net interest income after
provision for loan losses 1,442 1,011 3,903 3,037
Non-interest income:
Stock option commissions and
fees 440 196 1,069 866
Real estate rental income 179 272 658 756
Service charges and fees 198 113 437 337
Other income 39 2 94 3
Gain on sale of assets, net 32 204 260 659
Total non-interest income 888 787 2,518 2,621
Non-interest expense:
Compensation and
related benefits 1,134 762 2,968 2,480
Occupancy expense 288 263 903 872
Professional fees 146 156 361 450
Corporate insurance premiums 56 53 165 244
FDIC insurance premiums 10 91 89 215
Property taxes 22 26 87 81
Data processing 98 80 324 213
Other operating expenses 221 336 793 758
Total non-interest expense 1,975 1,767 5,690 5,313
Income before income taxes 355 31 731 345
Provision for income taxes (3) (272) 4 (262)
Net Income $358 $303 $ 727 $ 607
Income per common share:
Primary:Net income $ 0.01 $ 0.05 $0.02 $ 0.10
Weighted average
shares outstanding 31,717,171 5,765,995 29,950,311 5,765,990
Fully
diluted: Net income $ 0.01 $0.01 $0.02 $0.03
Weighted average
shares outstanding 31,717,171 26,168,780 29,950,311 22,242,086
See accompanying notes to unaudited consolidated financial
statements.
page 2
The San Francisco Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Unrealized
Gain/
(Loss) on Total
Additional Retained Securities Share-
Preferred Common Paid-in Earnings Available- holders'
(Dollars in Thousands) Stock Stock Capital (Deficit) for-Sale Equity
Balances
at January 1, 1996 $ 4,414 $ 58 $70,168 $(67,801) $ 41 $6,880
Proceeds on
sale of stock 3,500 -- -- -- -- 3,500
Depreciation in
market value of
securities
available-for-sale -- -- -- -- (156) (156)
Conversion of Series
B Preferred stock
into Class A
Common Stock (3) -- 3 -- -- --
Other 100 100
Net income (nine months) -- -- -- 607 -- 607
Balances at
September 30, 1996 7,911 58 70,271 (67,194) (115) 10,931
Conversion of
preferred stock to
Class A Common Stock (7,800) 230 7,570 -- -- --
Appreciation in
market value
of securities
available-for-sale -- -- -- -- 38 38
Net income (three months) -- -- -- 95 -- 95
Balances at
December 31, 1996 111 288 77,841 (67,099) (77) 11,064
Proceeds from
sale of common stock -- 29 971 -- -- 1,000
Appreciation in
market value
of securities
available-for-sale -- -- -- -- 101 101
Net income (nine months) -- -- -- 727 -- 727
Balances at
September 30, 1997 $ 111 $ 317 $78,812 $(66,372) $24 $12,892
See accompanying notes to unaudited consolidated financial
statements.
page 3
The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands) 1997 1996 1997 1996
Cash Flows from
Operating Activities:
Net income $ 358 $ 303 $ 727 $ 607
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Provision for loan losses -- -- -- --
Depreciation and
amortization expense 135 145 412 530
Net loss on sale of investment
securities available for sale -- -- 6 --
Net gain on sale of other real
estate owned and
real estate investment (37) (206) (271) (661)
Provision of possible
loss on other real estate owned -- -- 182 --
Decrease in interest
receivable and other assets 131 344 278 361
Increase (decrease) in interest
payable and other liabilities 388 73 487 (784)
(Increase) decrease
in deferred loan fees (114) (17) (47) 29
Net cash flows provided
by operating activities 861 642 1,774 82
Cash Flows from
Investing Activities:
Proceeds from maturities
of investment securities
held-to-maturity 270 295 688 645
Proceeds from maturities
of investment securities
available-for-sale 2,791 169 3,517 4,232
Proceeds from the sale
of investment securities
available-for-sale -- -- 6,200 --
Purchase of investment
securities held-to-maturity -- -- -- (7,815)
Purchase of investment
securities available-for-sale (5,595) (4,996) (15,569) (27,256)
Net decrease in loans 3,376 4,357 6,453 12,625
Recoveries of loans previously
charged off, net 48 135 329 279
(Purchases) sales
of premises and equipment (49) 6 (145) (44)
Sale of other real estate owned 93 572 3,533 3,708
Acquisition and capitalized
cost of other real estate owned -- 150 28 236
Net cash provided by
(used in) investing activities 934 688 5,034 (13,390)
Cash Flows from
Financing Activities:
Net increase (decrease)
in deposits 6,033 (4,485) 5,551 (18,032)
Net increase in other borrowings -- -- -- 2,000
Net proceeds from
sale of common stock -- -- 1,000 --
Net proceeds from
sale of preferred stock -- 1,000 -- 3,500
Net cash provided by
(used in) financing activities 6,033 (3,485) 6,551 (12,532)
Increase (decrease)
in cash and cash equivalents 7,828 (2,155) 13,359 (25,840)
Cash and cash equivalents
at beginning of period 21,157 19,129 15,626 42,814
Cash and cash equivalents
at end of period $ 28,985 $16,974 $ 28,985 $16,974
Supplemental Disclosure
of Cash Flow Information:
Cash paid during the period for:
Interest $ 736 $ 756 $ 2,125 $ 2,448
Payment of income taxes -- -- 2 3
Supplemental Schedule of Noncash
Investing and Financing Activities:
Net transfer of loans
to other real estate owned -- -- -- 1,378
See accompanying notes to unaudited consolidated financial
statements.
page 4
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 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, 1997, and for the
three and nine months ended September 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 three and nine
months ending September 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 (the "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, par
value of $0.01 per share (the "Common Stock"), 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.
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.
page 5
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.
The Securities and Exchange Commission (the "SEC") has
approved rule amendments to clarify and expand existing
disclosure requirements for derivative financial instruments.
The amendments require enhanced disclosure of accounting policies
for derivative financial instruments in the footnotes to the
financial statements. In addition, the amendments expand
existing disclosure requirements to include disclosure of
quantitative and qualitative information about market risk
inherent in market risk sensitive instruments outside of the
financial statements and related notes thereto. The enhanced
accounting policy disclosure requirements are effective for the
quarterly period ended September 30, 1997. The rule amendments
that require expanded disclosure of quantitative and qualitative
information about market risk are effective with the 1997 Form
10-K. At September 30, 1997and 1996, the Company had no
derivative financial instruments outstanding.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
This document contains forward-looking statements that are
subject to risks and uncertainties, including, but not limited
to, the Company's and Bank's ability to implement their
respective long-term business plan, the economy in general and
the condition of stock markets upon which the Company's stock
brokerage business and fee income is dependent, the continued
services of the Company's and Bank's key executives and managers,
the real estate market in California and other factors beyond the
Company's and the Bank's control. Such risks, uncertainties and
factors, including those discussed herein, could cause actual
results to differ materially from those indicated. Readers
should not place undue reliance on forward-looking statements,
which reflect management's views only as of the date hereof. The
Company and the Bank undertake no obligation to publicly revise
these forward-looking statements to reflect subsequent events or
circumstances. Readers are also encouraged to review the
Company's publicly available filing with the SEC.
page 6
Overview
The principal activity of the Company is to serve as the
holding company for the Bank 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 $358,000 and $727,000 for
the three and nine months ended September 30, 1997, compared to a
net income of $303,000 and $607,000 for the same periods in 1996.
The increase in the Company's net income for the nine months
ended September 30, 1997 of $120,000 compared to income for the
same period in 1996 was primarily from an increase in net
interest income and brokerage fees 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.
At September 30, 1997, total assets were $111.9
million, an increase of $7.9 million from $104.0 million at
December 31, 1996. Total loans were $37.3 million, a decrease of
$6.5 million, or 15% from $43.8 million at December 31, 1996.
Total deposits were $96.7 million at September 30, 1997, an
increase of $5.5 million compared to $91.2 million at December
31, 1996.
Regulatory Directives
Federal Reserve Board Written 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) 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 Company's 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.
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 in
lieu thereof entered into a Memorandum of Understanding with the
Bank (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.
page 7
The Bank has filed all of the required submissions with the
FDIC and the FDI in accordance with the MOU, and management
believes that the Bank is in full compliance with the
requirements of the MOU.
Capital Impairment Orders
Under the California Financial Code as presently in effect,
if a bank's deficit retained earnings exceeds 40% of its
contributed capital, its capital is deemed to be impaired, and
the bank may be required by the DFI to levy an assessment on its
shares to correct the impairment (the "Capital Impairment Law").
The DFI has deemed the Bank's capital to be impaired, but has not
required the Bank to levy any assessment on its shares. The
Capital Impairment Law has been rescinded by the California
Legislature, effective January 1, 1998. All assessment
provisions shall terminate and the Bank may take expedited steps
to remove all assessment provisions from its bylaws.
Results of Operations
Net Interest Income
The Company's net interest income increased to $3.9 million
in the first nine months of 1997 from $3.0 million in the same
period in 1996, an increase of $866,000 or 29%. The net interest
rate margin improved to 5.2% for the first nine months of 1997
from 4.3% for the same period in 1996 as a result of an increase
in average earning assets of $6.0 million and an decrease in
average interest bearing liabilities of $6.3 million. The
increase in average earning assets was comprised of an increase
in investment securities and Federal funds sold partially offset
by a decline in loans. The weighted average yield on average
interest-earning assets increased to 8.0% during the first nine
months of 1997 from 7.7% during the same period in 1996 and the
weighted average cost of funds on average deposits declined to
3.0% in 1997 from 3.3% in 1996.
The increase in average earnings assets was primarily from a
decline in the average non-performing assets of $5.9 million to
$4.6 million as of September 30,1997 from $10.5 million as of
December 31, 1996. The improvement in the yield on average
earning assets was primarily the increase in the Fed Funds rate
and the prime interest rate in 1997 compared to 1996. An increase
in average non-interest bearing deposits resulted in the decline
in the average cost of funds on total deposits. The decline in
interest bearing deposits was primarily due to the maturity of
higher costing time deposits.
The Company's net interest income increased to $1.4 million
in the third quarter from $1.0 million in the same quarter in
1996, an increase of $431,000 or 43%. The increase was the
result of an increase in net interest rate margin, average
earning assets, non-interest bearing liabilities and capital.
The increase in the net interest rate margin of 87 basis points
to 5.3% for the third quarter of 1997 from 4.4% for the same
period in 1996 was primarily the result of an increase in the
yield on loans and a decline in the cost of funds for the
certificate of deposits. The increase in the yield on loans was
primarily the result of the recognition of deferred loan fees
upon the prepayment of related loans. The Bank's cost of funds
declined primarily as a result of the reduction in higher costing
money desk certificates of deposits from $20.8 million as of
September 30, 1996 compared to $15.6 million as of September 30,
1997.
Non-Interest Income
Non-interest income decreased $103,000 for the first nine
months of 1997 to $2.5 million compared to $2.6 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 nine months 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 of $260,000 compared to $659,000 in
1996.
page 8
Non-interest income increased $101,000, for the third
quarter of 1997 to $888,000 compared to $787,000 for the same
period in 1996. The improvement was primarily the increase in
transactions that generated the commissions, charges and fees
related to increased activity of the exercise of the underlying
stock options and discount brokerage transactions executed by the
Bank's customers.
Non-Interest Expense
The Company's operating expenses increased by $377,000, or
7% during the first nine months of 1997 compared to the same
period in 1996 primarily as a result of an increase in
compensation 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
compensation and benefit costs was primarily the result of an
increase in incentive related compensation accrued as a result of
the Company's improved core operating performance for the first
nine months of 1997 compared to the same period in 1996,
including a one time accrual for a special one-time bonus that is
likely to be payable to the Chief Executive Officer. The
increase in data processing costs for the first nine months of
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 data processing costs
was offset by reductions in data processing related compensation
expenses. 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 FDIC and corporate insurance premiums
reflects improvement in the financial condition of the Company
and the Bank in 1997 compared to 1996. The decline in
professional fees reflects a reduction in the need for legal, and
business and consulting services
The Company's operating expenses increased by $208,000
during the third quarter of 1997 compared to the same period in
1996 primarily as a result of an increase in compensation and
benefits related expenses partially offset by a reduction in
other operating expenses for the reasons discussed above.
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short
term investments, totaled $29.0 million or 26% of total assets as
of September 30, 1997 compared to $15.6 million, or 15% of total
assets, at December 31, 1996. The increase was funded by a
decline in net loans of $6.5 million and OREO of $3.5 million,
and an increase in deposits of $5.6 million and capital of $1.8
million.
As of September 30, 1997, the Bank had pledged loans and
securities totaling $6.6 million enabling the Bank to borrow
approximately $5.7 million from the Federal Home Loan Bank of San
Francisco (the "FHLB"). The Bank did not draw on this lending
facility during the first nine months 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.
As of September 30, 1997, the Bank had loans and securities
pledged to the FRB totaling $1.9 million, which provide
collateral to borrow up to $1.8 million from the FRB discount
window.
page 9
Capital
At September 30, 1997, shareholders' equity was $12.9
million, compared to $11.1 million at December 31, 1996 primarily
as a result of $727,000 in net income for the nine months then
ended and a shareholder's capital investment 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. As of September 30, 1997,
the Company and the Bank are in compliance with all minimum
capital ratio requirements including the minimum Leverage Capital
ratio of 7% mandated by the MOU.
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, 1997:
Minimum
Capital
Company Bank Requirement MOU(1)
Leverage ratio 11.0% 10.8% 4.0% 7.0%
Tier 1 risk-based capital 19.2 18.8 4.0 -
Total risk-based capital 22.2 21.7 8.0 -
(1) Bank only requirement
On June 13, 1997, Mr. Putra Masagung, the record holder of a
majority of the Company's Common Stock invested $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.
Mr. Masagung recently 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 September 30, 1997, the Company's investment securities,
including Fed funds sold, totaled $67.0 million, or 60% 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
$19.1 million was funded by the disposition of $6.7 million in
non-performing assets, reduction in performing loans of $3.3
million, a $1.8 million increase in capital, a $5.6 million
increase in deposits and a net decrease in other assets and other
liabilities of $1.7 million. 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 September 30, 1997, investment securities
held-to-maturity totaled $6.2 million, compared to $6.9 million
at December 31, 1996, and were carried at amortized cost.
At September 30, 1997, the Company held $34.3 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 $6.0 million was primarily
investments in fixed rate balloon mortgage-backed securities and
discounted callable agency securities with a weighted average
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 September 30, 1997, the investment securities
available-for-sale had an unrealized gain of $24,000 that is
included as a separate component of shareholder's equity to
reflect the current market value of these securities.
page 10
Loans
During the first nine months of 1997, total loans decreased
by $6.5 million, from $43.8 million at December 31, 1996 to $37.3
million at September 30, 1997, primarily as a result of loan
repayments. The composition of the Bank's loan portfolio at
September 30, 1997 and December 31, 1996 is summarized as
follows:
September 30, December 31,
(Dollars in Thousands) 1997 1996
Real estate mortgage $ 25,219 $ 28,022
Secured commercial and financial 4,413 6,229
Unsecured 5,968 7,800
Other 1,708 1,711
37,308 43,762
Deferred fees and discounts, net (143) (190)
Allowance for possible loan losses (5,991) (5,663)
Total loans, net $31,174 $ 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 September 30, 1997 and December 31, 1996:
September 30, December 31,
(Dollars in Thousands) 1997 1996
Loans - performing $ 3,166 $10,391
Non-accrual loans 207 3,400
OREO 1,661 5,133
Total classified assets $ 5,034 $ 18,924
Classified assets declined by 74% to $5.0 million as of
September 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 September 30, 1997 and
December 31, 1996, all OREO were classified. As of September 30,
1997, the Bank did not have any loans that were between 31 and 89
days delinquent and still accruing.
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
September 30, 1997 and December 31, 1996, the Company had
impaired loans totaling $207,000 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 nine months of 1997 and 1996 was
$43,000 and $60,000, respectively.
page 11
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 classified loans
or otherwise liquidate the non-performing assets which are
presently reflected on the Company's statement of financial
condition. The Bank expects that to the extent that
non-performing assets continue to decline, it will be able 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 September 30, 1997, $31,000 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 $207,000. 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 nine
months ended September 30, 1997:
September 30,
(Dollars in Thousands) 1997
Beginning balance of allowance for
loan losses at December 31, 1996 $ 5,663
Charge-offs --
Recoveries 328
Provision --
Ending balance of allowance for loan losses $ 5,991
The unallocated portion of the allowance for loan loss
totaled $3.7 million at September 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 classified loans that require a higher allocation of
reserves.
page 12
Deposits
The Bank had total deposits of $96.7 million at September
30, 1997, compared to $91.2 million at December 31, 1996, an
increase of $5.5 million. A summary of deposits at September 30,
1997 and December 31, 1996 is as follows:
September 30, December 31,
(Dollars in Thousands) 1997 1996
Demand deposits $ 21,760 $ 16,505
NOW 16,075 18,295
Money market 16,779 17,376
Savings 1,329 1,343
Total deposits with no stated maturity 55,943 53,519
Time deposits:
Less than $100,000 24,008 29,154
$100,000 and greater 16,766 8,493
Total time deposits 40,774 37,647
Total deposits $ 96,717 $ 91,166
The Bank's private and business banking customer's deposits
totaled $36.2 million, or 37.5% of total deposits, at September
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 $17.1 million, or 17.7% of total
deposits at September 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 $15.6 million, or 16.1%
of total deposits at September 30, 1997, compared to $20.1
million, or 23.0% of total deposits at December 31, 1996. Escrow
customer's deposits totaled $19.8 million, or 20.5% of total
deposits at September 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 of
reduced margins if 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 was in compliance with as of
September 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. The
Company advised the appropriate regulatory authorities of these
events. Representatives of both GA and Mr. Masagung have
initiated discussions with the regulatory agencies to determine
the appropriate steps to be taken under the circumstances.
Based on the facts known at this time, management of the
Company does not believe this development will have a material
impact on the operations or the current financial condition of
the Company or the Bank. This development is not expected to
materially reduce the net operating loss carryforwards that the
Company may use to reduce any future income tax liability.
However, any future change in control could materially reduce the
net present value of net operating loss carryforwards.
page 13
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, filed on August 8, 1997,
regarding a change in beneficial ownership is incorporated by
reference. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Change in
Beneficial Ownership".
page 14
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 12, 1997 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: November 12, 1997 /s/ Keary L. Colwell
Keary L. Colwell
Chief Financial Officer
page 15
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