-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UkicVj46S1U1vKBOclKKaE40XEFTZ0qf3iZSOayfEYwgQHgUd2adWcn31T97O5EN g4I7inxuthMHgwKMsO48AQ== 0000351238-96-000005.txt : 19961111 0000351238-96-000005.hdr.sgml : 19961111 ACCESSION NUMBER: 0000351238-96-000005 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961108 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAN FRANCISCO CO CENTRAL INDEX KEY: 0000351238 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 943071255 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-10198 FILM NUMBER: 96657349 BUSINESS ADDRESS: STREET 1: 550 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4157817810 MAIL ADDRESS: STREET 1: PO BOX 2887 CITY: SAN FRANCISCO STATE: CA ZIP: 94126 FORMER COMPANY: FORMER CONFORMED NAME: BANK OF SAN FRANCISCO CO HOLDING CO DATE OF NAME CHANGE: 19920703 10-Q/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT #2 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.
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, 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
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 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 See accompanying notes to unaudited consolidated financial statements.
The San Francisco Company and Subsidiaries Consolidated Statements of Operations Three and Nine Months Ended September 30, 1996 and 1995 (Unaudited)
Three Months Nine Months Ended September 30, Ended September 30, (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. 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 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 See accompanying notes to unaudited consolidated financial statements.
The San Francisco Company and Subsidiaries Consolidated Statements of Cash Flows Three and Nine Months Ended September 30, 1996 and 1995 (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, (Dollars in Thousands) 1996 1995 1996 1995 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 See accompanying notes to unaudited consolidated financial statements.
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. 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) 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 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. 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. 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. 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:
Minimum Capital Company Bank Requirement 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
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. 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:
September 30, December 31, (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:
September 30, December 31, (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%
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. 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:
September 30, December 31 (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 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:
September 30, (Dollars in Thousands) 1996 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:
September 30 (Dollars in Thousands) 1996 Beginning balance of allowance for losses $ 11,991 Charge-offs (2,755) Provision -- Ending balance of allowance for losses $ 9,236
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. 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:
September 30 (Dollars in Thousands) 1996 Beginning balance of allowance for losses $ 1,478 Charge-off (1,478) Provision -- Ending balance of allowance for losses $ --
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:
September 30, December 31, (Dollars in Thousands) 1996 1995 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
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. 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 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 EX-27 2
9 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 1,000 U.S. DOLLARS 9-MOS DEC-31-1996 JAN-1-1996 SEP-30-1996 1 2,674 0 14,300 0 29,404 7,142 7,060 38,154 5,545 101,998 87,642 2,000 1,424 0 0 7,911 58 0 101,998 3,222 2,210 0 5,432 2,393 2,395 3,037 0 0 3,896 345 345 0 0 607 0.10 0.10 4.30 2,557 0 4,004 957 5,912 646 279 5,545 5,545 0 0
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