1 

                               UNITED STATES
                    SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C. 20549

                                 FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

     For the quarterly period ended  March 31,June 30, 1996                         

                                    OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

                      COMMISSION FILE NUMBERCommission File Number 0-10198

                         THE SAN FRANCISCO COMPANYThe 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 5,765,9995,765,995 shares of Class A Common Stock outstanding on May 1,July 26, 1996. 2 THE SAN FRANCISCO COMPANY AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS
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 March 31,June 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . 1 Consolidated Statements of Operations For the Three and Six Months Ended March 31,June 30, 1996 and 1995. . . . . . .1995 . . 2 Consolidated Statements of Changes in Shareholders' EquityShareholders'Equity For the ThreeSix Months Ended March 31,June 30, 1996 and 1995. .1995 . . . . . . . 3 Consolidated Statements of Cash Flows For the Three and Six Months Ended March 31,June 30, 1996 and 1995. . . . . . .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 . . . . . .Proceedings. . . . . . . . . . . . . . . . . . . . . . 17 Item 2. Changes in Securities . . . . . .Securities. . . . . . . . . . . . . . . . . . . . 17 Item 3. Defaults Upon Senior Securities . . . . . .Securities. . . . . . . . . . . . . . . 17 Item 4. Submission of Matters to a Vote of Security Holders . . . . . .Holders. . . . . 17 Item 5. Other Information . . . . . .Information. . . . . . . . . . . . . . . . . . . . . . 17 Item 6. Exhibits and Reports on Form 8-K. . . . . .8-K . . . . . . . . . . . . . . 17 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3 THE SAN FRANCISCO COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MARCH 31, 1996 AND DECEMBER The San Francisco Company and Subsidiaries Consolidated Statements of Financial Condition June 30, 1996 and December 31, 1995
(Unaudited) March 31,June 30, December 31, (Dollars in Thousands Except Per Share Data) 1996 1995 --------------------------- ASSETS:Assets: Cash and due from banks $ 3,8372,529 $ 4,814 Federal funds sold 22,60016,600 38,000 ----------------------- Cash and cash equivalents 26,43719,129 42,814 Investment securities held-to-maturity, (Market: $7,732) 7,807at cost (Fair value: $7,164) 7,448 -- Investment securities available-for-sale, 24,642at fair value 24,132 6,536 Federal Home Loan Bank stock, at par 640649 632 Loans 41,74942,739 53,208 Deferred loan fees (196)(227) (180) Allowance for loan losses (5,715)(5,410) (5,912) ----------------------- Loans, net 35,83837,102 47,116 Other real estate owned, 6,882net 6,389 7,514 Real estate investments, 236net 150 236 Premises and equipment, net 8,5288,355 8,689 Interest receivable 449806 527 Other assets 560504 798 ----------------------- Total Assets $112,019$104,664 $114,862 ======================= LIABILITIES AND SHAREHOLDERS' EQUITY:Liabilities and Shareholders' Equity: Non-interest bearing deposits $ 18,86215,432 $ 20,365 Interest bearing deposits 83,70176,736 85,308 ----------------------- Total deposits 102,56392,168 105,673 Other borrowings 2,000 -- Other liabilities and interest payable 1,5251,311 2,309 ----------------------- Total Liabilities 104,08895,479 107,982 ----------------------- SHAREHOLDERS' EQUITY:Shareholders' Equity: Preferred Stock (par value $0.01 per share) Series B - Authorized - 437,500 sharesshares; Issued and outstanding - 1996 - 15,869 and 1995 - 16,291, respectively 114 114 Series D - Authorized - 1,000,000 sharesshares; Issued and outstanding - 1996 - 265,000340,000 and 1995 - 215,000, 5,300respectively 6,800 4,300 Common stock (par value $0.01 per share) Class A - Authorized - 40,000,000 sharesshares; Issued and outstanding -1996- 1996-5,765,999 and 1995 - 5,765,9991995-5,765,978 58 58 Additional paid-in capital 70,268 70,168 Retained deficit (67,693)(67,497) (67,801) Unrealized gain/(loss) on securities available-for-sale (116)(558) 41 ----------------------- Total shareholders' equity 7,9319,185 6,880 ----------------------- Total Liabilities and Shareholders' Equity $112,019$104,664 $114,862 =======================
See accompanying notes to unaudited consolidated financial statements. -1- 4 THE SAN FRANCISCO COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 AND The San Francisco Company and Subsidiaries Consolidated Statements of Operations Three and Six Months Ended June 30, 1996 and 1995 (Unaudited)
March 31, -------------------Three Months Six Months Ended June 30, Ended June 30, (Dollars in Thousands Except Per Share Data) 1996 1995 -------------------1996 1995 Interest income: Loans $ 1,1441,073 $ 2,4912,166 $2,217 $ 4,657 Investments 701 390738 605 1,439 995 Dividends 8 21 -------------------9 5 17 26 Total interest income 1,853 2,902 -------------------1,820 2,776 3,673 5,678 Interest expense: Deposits 865 1,033781 1,132 1,646 2,165 Other borrowings -- 64 -------------------1 20 1 84 Total interest expense 865 1,097 -------------------782 1,152 1,647 2,249 Net interest income 988 1,805before provision for loan losses 1,038 1,624 2,026 3,429 Provision for loan losses -- 500 -- -------------------500 Net interest income after provision for loan losses 988 1,805 -------------------1,038 1,124 2,026 2,929 Non-interest income: Service charges and fees 51 113 Loan brokerage82 106 133 219 Trust and servicingescrow fees 55 7436 87 91 161 Stock option commissions and fees 355 406314 445 669 851 Other income 10 111 Income-- 89 2 200 Gain on sale of other assets, net -- 16 -------------------7 -- 23 Total non-interest income 471 720 -------------------432 734 895 1,454 Non-interest expense: Salaries and related benefits 908 1,156810 1,168 1,718 2,624 Occupancy expense 101 59376 477 177 946 Professional fees 120 194130 257 250 451 Corporate insurance premiums 95 7796 102 191 179 FDIC insurance premiums 63 15461 111 124 265 Data processing 43 17190 119 133 290 Telephone 24 3730 28 54 65 Other operating expenses 161 198 -------------------170 236 323 558 Total operating expenses 1,515 2,5801,463 2,498 2,970 5,078 Net income from real estate operations (168) (161) -------------------(195) (800) (363) (961) Total non-interest expense 1,347 2,419 -------------------1,268 1,698 2,607 4,117 Income before income taxes 112 106202 160 314 266 Provision for income taxes 4 38 -------------------6 40 10 78 Net Income $196 $120 $ 108 $ 68 ====================304 $188 Income per common share: Net income $ 0.03 $ 0.02 $ 0.010.05 $ 0.03 Weighted average shares outstanding 5,765,999 5,765,978 5,765,993
5,765,999 5,765,985 See accompanying notes to unaudited consolidated financial statements. -2- 5 THE SAN FRANCISCO COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 1996 AND The San Francisco Company and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity Six Months Ended June 30, 1996 and 1995 (Unaudited)
Unrealized Employee Gain/ Add- Purchase (Loss) on Total Additional(Dollars in Thousands) itional Retained and Securities Share- Preferred Common Paid-in Earnings Option Available- holders' (Dollars in Thousands)Available holders Stock Stock Capital (Deficit) Plans for-Sale Equity ----------------------------------------------------------------------------------- Balances at January 1, 1995 $ 114 $58 $ 70,16858 $70,168 $(68,137) $ (70) $ (4) $ 2,129 Appreciation in market value of securities available-for-sale -- -- -- -- -- 18 18 Net income (three months) -- -- -- 68 -- -- 68 ----------------------------------------------------------------------------------- Balances at March 31, 1995 114 58 70,168 (68,068) (70) 14 2,216 Net change in employee stock ownership plans -- -- -- -- 70 -- 70 Net proceeds from$2,129 Proceeds on sale of stock 4,300 -- -- -- -- -- 4,300 Appreciation in market value of securities available-for-sale -- -- -- -- -- 34 34 Net income(six months)-- -- -- 188 -- -- 188 Balances at June 30, 1995 4,414 58 70,168 (67,948) (70) 14 6,652 Net change in employee stock ownership plans -- -- -- -- 70 -- 70 Appreciation in market value of securities available-for-sale -- -- -- -- -- 27 27 Net income (nine(six months) -- -- -- 268148 -- -- 268 -----------------------------------------------------------------------------------148 Balances at December 31, 1995 4,414 58 70,168 (67,801) -- 41 6,880 Net proceedsProceeds from sale of stock and warrants 1,0002,500 -- -- -- -- -- 1,0002,500 Other -- -- 100 -- -- -- 100 Depreciation in market value of securities available-for-sale -- -- -- -- -- (157) (157)(599) (599) Net income (three(six months) -- -- -- 108304 -- -- 108 -----------------------------------------------------------------------------------304 Balances at March 31,June 30, 1996 $5,414 $58$ 6,914 $ 58 $70,268 $(67,693)$(67,497) $ -- $(116) $ 7,931 ===================================================================================
$(558) $9,185 See accompanying notes to unaudited consolidated financial statements. -3- 6 THE SAN FRANCISCO COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1996 AND The San Francisco Company and Subsidiaries Consolidated Statements of Cash Flows Three and Six Months Ended June 30, 1996 and 1995 (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, (Dollars in Thousands) 1996 1995 ---------------1996 1995 Cash Flows from Operating Activities: Net income $ 10819 $ 68120 $ 304 $ 188 Adjustments to reconcile net income to net cash used in(used in) provided by operating activities: Provision for loan losses -- 500 -- 500 Depreciation and amortization expense 193 105 Net gain192 97 385 202 Provision for loss on other real estate owned and real estate investment (285) (343)-- 346 -- 346 Net gain on sale of real estate owned and investment (170) (342) (455) (1,683) Decrease (increase) in interest receivable and other assets 316 356 Decrease(301) 232 15 588 (Decrease) increase in interest payable and other liabilities (684) (1,189) Increase (decrease)(215) 462 (897) (727) (Increase) decrease in deferred loan fees 16 (82) ---------------31 (35) 47 (117) Net cash flows used in(used in) provided by operating activities (336) (1,085) ---------------(267) 1,380 (601) (703) Cash Flows from Investing Activities: Proceeds from maturitiessale of investment securities held-to-maturityFHLB Stock -- 2,901745 -- 724 Proceeds from maturities of investment securities available-for-sale 3,997 140 Purchaseheld-to-maturity 350 4,936 350 7,859 Proceeds from maturities of investment securities available-for-sale (22,268) (999)available for sale 69 2,069 4,064 2,209 Purchase of investment securities held to maturity (7,807) -- -- (7,815) -- Purchase of investment securities available for sale -- (1,972) (22,260) (2,971) Net (increase) decrease in loans 9,605 13,891(1,248) 14,217 8,913 28,108 Recoveries of loans previously charged off, 399 468net (305) (584) (502) (116) Purchases of premises and equipment, (32) (2) Salenet (19) (31) (51) (34) Proceeds from sale of other real estate owned 2,215 733921 3,800 3,136 5,391 Acquisition and capitalized costscost of other real estate owned (39) (132) ---------------86 280 86 288 Net cashCash (used in) provided by investing activities (13,930) 17,000 ---------------(146) 23,460 (14,079) 41,458 Cash Flows from Financing Activities: Net decrease in deposits (3,111) (16,661)(10,395) (3,080) (13,505) (19,741) Net increase(decrease)(decrease) increase in other borrowings -- 1,245 Proceeds2,000 (5,315) 2,000 (4,070) Net proceeds from the sale of preferred stock and warrants 1,000 -- ---------------1,500 4,300 2,500 4,300 Net cash used in financing activities (2,111) (15,416) --------------- Increase(decrease)(6,895) (4,095) (9,005) (19,511) Increase (decrease) in cash and cash equivalents (16,377) 499(7,308) 20,745 (23,685) 21,244 Cash and cash equivalents at beginning of period 26,437 29,146 42,814 28,647 --------------- Cash and cash equivalents at end of period $ 26,43719,129 $ 29,146 ================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:49,891 $19,129 $49,891 Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 8891,158 $ 923 Income986 $ 2,047 $2,083 Payment of income taxes 1 422 54 3 96 Supplemental Schedule of Noncash Investing and Financing Activities: Net transfer of loans to other real estate owned 1,259 --
119 -- 1,378 -- See accompanying notes to unaudited consolidated financial statements. -4- 7 THE SAN FRANCISCO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe San Francisco Company and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NoteItem 1 - Organization The San Francisco Company (the "Company") is a Delaware corporation and a bank holding company registered under the Bank Holding Company Act of 1956. Bank of San Francisco (the "Bank"), a state chartered bank, was organized as a California banking corporation in 1978 and became a wholly owned subsidiary of the Company through a reorganization in 1982. Note 2 - Principles of Consolidation and Presentation The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions pursuant to Form 10-Q Quarterly Report and Articles 9 and 10 of Regulation S-X, and therefore, do not include all the information and footnotes necessary to present the consolidated financial condition, results of operations and cash flows of the Company in conformity with generally accepted accounting principles. The data as of March 31,June 30, 1996, and for the threesix months ended March 31,June 30, 1996 and 1995 are unaudited, but in the opinion of management, reflect all accruals and adjustments of a normally recurring nature necessary for fair presentation of the Company's financial condition and results of operations. Certain amounts in the 1995 consolidated financial statements have been reclassified for comparative purposes. The results of operations for the threesix months ending March 31,June 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. 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. Note 5 - Recent Accounting Pronouncements Effective January 1, 1996, the Company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment -5- 8 of Long-livedLong- lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes indicated that the carrying value of an asset may not be recoverable. As of March 31,June 30, 1996, the Company determined that no events or changes occurred during the first quarterhalf 1996 that would indicate that the carrying value of any long-lived assets may not be recoverable. ITEMItem 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEWManagement's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company is a one-bank holding company registered in Delaware under the Bank Holding Company Act of 1956. The principal activity of the Company is to serve as the holding company for Bank of San Francisco, a California chartered bank organized in 1978, with deposits insured by the Federal Deposit Insurance Corporation's Bank Insurance Fund. The information set forth in this report, including unaudited interim financial statements and related data, relates primarily to the Bank. On November 15, 1995, the Company's Common Shares were delisted from the American Stock Exchange. The Company's Common shares are not listed on any exchange.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 $108,000,$196,000, or $0.02$0.03 per Common Share, and $304,000, or $0.05 per Common Share, for the three and six months ended March 31,June 30, 1996, compared to a net income of $68,000,$120,000, or $0.01$0.02 per Common Share and $188,000, or $0.03 per Common Share for the same periodperiods in 1995. The increase in the Company's net income of $40,000$116,000 was primarily from reductions in operating costs and the provision for incomeDelaware franchise taxes of $1.1 million in first quartersix months of 1996 compared to the same period in 1995, partially offset by declines in net interest income, non-interest income, and other revenue of $1.0 million.net income from real estate operations. The Company's total non-interest expenses declined by $1.1$1.5 million in the first quarterhalf of 1996 compared to the same period in 1995 primarily as a result of a decline in costs and losses on real estate, staff levels, occupancy costs, and professional services. At March 31,June 30, 1996, total assets were $112.0$104.7 million, a decline of $2.9$10.2 million, or 2.5%9% from $114.9 million at December 31, 1995. Total loans were $41.7$42.7 million, a decrease of $11.5$10.5 million, or 21.6%20% from $53.2 million at December 31, 1995. Total deposits were $102.6$92.1 million at March 31,June 30, 1996, a decline of $3.1$13.4 million, or 2.9%,13% compared to $105.7 million at December 31, 1995. REGULATORY DIRECTIVES AND ORDERS FEDERAL RESERVE BOARD WRITTEN AGREEMENTRegulatory Directives and Orders Federal Reserve Board Written Agreement On December 16, 1994, the Company and the FRB entered into a Written Agreement (the "Agreement") that supersedes the previous directive dated April 20, 1992. The Agreement prohibits the Company, without prior approval of the FRB, from: (a) paying any cash dividends to its shareholders; (b) directly or indirectly, acquiring or selling any interest in any entity, line of business, problem or other assets; (c) executing any new employment, service, or severance contracts, or renewing or modifying any existing contracts with any executive officer; (d) engaging in any transactions with the Bank that exceeds an aggregate of $20,000 per month; (e) engaging in any cash expenditures with any individual or entity that exceeds $25,000 per month; (f) increasing fees paid to any directors for attendance at board or -6- 9 committee meetings, or paying any bonuses to any executive officers; (g) incurring any new debt or increasing existing debt; and (h) repurchasing any outstanding stock of the Company. The Company is required to submit a progress report to the FRB on a quarterly basis. The Company was also required to submit to the FRB an acceptable written plan to improve and maintain an adequate capital position, a comprehensive business plan concerning current and proposed business activities, a comprehensive operating budget for the Bank and the consolidated Company. In addition, the Board of Directors was required to submit an acceptable written plan designed to enhance their supervision of the operations and management of the consolidated organization. The Company has filed all of the required submissions with the FRB in accordance with the Agreement and management believes the Company is in compliance with the Agreement. CAPITAL ORDERSCapital Orders On March 24, 1995, the State Banking Department (the "SBD") issued an order for the Bank to increase its capital. The capital order required that the Bank increase its capital by $4.2 million on or before April 10, 1995 and by a minimum amount necessary to at least equal the amount of capital necessary to increase shareholders' equity to not less than 7.0% of total tangible assets (the "Leverage Capital") on or before June 30, 1995. During the second quarter of 1995, the Company contributed $4.7 million in capital to the Bank. On February 26, 1996, the Company's majority shareholder committed to investing additional capital totaling $4.5 million in the Company in four installments throughout 1996. On March 20,During the first half of 1996, the Company received $1.0two installments totalling $2.5 million of the $4.5 million. The Company contributed $1.1$2.6 million in capital to the Bank during the first quarterhalf of 1996. As of March 31,June 30, 1996, the Bank's Leverage Capital ratio was 7.2%, but the Bank is not in compliance with the Capital Impairment Order, discussed below. No assurances have been given that the SBD will refrain from taking action against the Bank to enforce its Capital Order. CEASE AND DESIST ORDERS9.2%. Cease and Desist Orders On August 18, 1993, the Bank, without admitting or denying any alleged charges, stipulated to Cease and Desist Orders (the "Orders") issued by the FDIC and the SBD that became effective August 29, 1993 (the "Orders Effective Date").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 -7- 10 reliance on brokered deposits; (i) revise or adopt, and implement, certain plans and policies to reduce the Bank's concentration of construction and land development loans, reduce the Bank's dependency on brokered deposits and out of area deposits, and to improve internal routines and controls; (j) reduce the Bank's volatile liability dependency ratio to not more than 15% by March 31, 1994; (k) eliminate or correct all violations of law set out in the most recent Report of Examination, and take all necessary steps to ensure future compliance with all applicable laws and regulations; and (l) establish a committee of three independent directors to monitor compliance with the Orders and report to the FDIC and the Superintendent on a quarterly basis. Management believes that the Bank is in full compliance with the requirements of the Orders. CAPITAL IMPAIRMENT ORDERSCapital 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,quasi- reorganization, which may include eliminating its deficit retained earnings, under Section 663 of the Financial Code. However, a bank that is not able to effect such a quasi-reorganization or otherwise to correct an impairment of its contributed capital within 60 days of an order to do so from the Superintendent must levy and collect an assessment on its common shares pursuant to Section 423 of the California Corporations Code. A bank must levy such an assessment within 60 days of the Superintendent's order; the assessment becomes a lien upon the shares assessed from the time of service or publication of such notice of assessment. Within 60 days of the date on which the assessment becomes delinquent, a bank subject to the Superintendent's order must sell or cause to be sold to the highest bidder for cash as many shares of each delinquent holder of the assessed shares as may be necessary to pay the assessment and charges thereon. As of March 31,June 30, 1996, the Bank had contributed capital of $71.8$73.3 million and deficit retained earnings of $63.9$63.7 million, or approximately 89%87% of contributed capital, within the meaning of Section 134(b) of the Financial Code. Thus, under Section 134(b) of the Financial Code, the Bank's contributed capital was impaired as of that date in the approximate amount of $35.2$34.4 million. The Superintendent issued orders, most recently on May 7, 1996, to the Bank to correct the impairment of its contributed capital within 60 days. The Bank has not complied with these orders. As the sole shareholder of the Bank, the Company (not the Company's shareholders) will receive any notices of assessment issued by the Bank. The Bank is in violation of this California law requiring it to assess the shares of the Bank (which are all held by the Company) in order to correct the impairment of the Bank's capital. The Bank's capital impairment may be corrected through earnings, by raising additional capital or by a quasi-reorganization, subject to the approval of the SBD, in which the Bank's deficit retained earnings would be reduced or eliminated by a corresponding reduction in the Bank's contributed capital. The Bank is addressing the possibility of obtaining approval of a quasi-reorganization with the SBD. If the SBD refuses to grant permission for such a quasi-reorganization, as of March 31, 1996, the Bank -8- 11 would have been required to raise $87.8 million in new capital in order to correct its impaired contributed capital (because the ratio of deficit retained earnings to contributed capital may not exceed 40%, $2.50 of new capital must be raised for every dollar of impairment). In response to the May 7, 1996 order, requiring the Bank to correct its impaired capital within 60 days, the Bank notified the SBD in writing that it did not believe it will be in a position to comply with the order within 60 days, and requested the SBD's cooperation as the Company implements its business plan, and as the Company continues to consider the requirements for a quasi-reorganization.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 ofJune 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 INCOMEResults of Operations Net Interest Income The Company's net interest income decreased to $2.0 million from $3.4 million in the first half of 1996 from the same period in 1995, respectively, a decline of $1.4 million or 41.1%. 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 $33.2 million, or 25.8%, and average interest bearing liabilities decreased $29.2 million, or 26.5%, for the first half of 1996 compared to the same period in 1995. The average interest rate margin decreased 108 basis points to 4.25% for the first half of 1996, from 5.33% 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 46% as of June 30, 1996 from 61% as of June 30, 1995 primarily as a result of the reduction in loans. The cost of funds on the interest bearing liabilities remained unchanged in the first half of 1996 compared to the same period in 1995 primarily as a result of increasing volumes of one to two year term certificates of deposits during the second quarter of 1995. The Company's net interest income decreased to $1.0 million from $1.8$1.6 million in the quarter ended March 31,June 30, 1996 from the same quarter in 1995, respectively, a decline of $817,000$586,000 or 45%36.6%. The decrease was the result of reductions in interest-earning assets and by a decrease in the Bank's interest rate margin. Average interest-earning assets declined by $35.2$34.3 million, or 25.7%27.1%, and average interest bearing liabilities decreased $29.0$29.3 million, or 25.8%27.2%, for the quarter ended March 31,June 30, 1996 compared to the quarter ended March 31,same period in 1995. The average interest rate margin decreased 140declined 59 basis points from 5.3%5.09% for the quarter ended March 31,June 30, 1995, to 3.9%4.5% for the quarter ended March 31,same period in 1996 primarily as a result of a decrease in prime rate of 75 basis pointschange in the firstcomposition of earning assets from higher yielding loans into lower yielding investments in the second quarter of 1996 compared to the same period in 1995, and a change in the composition of average interest earning assets from higher yielding loans into lower yielding liquidity investments. In addition, the cost of funds on the interest bearing liabilities increased in Non-Interest Income Non-interest income decreased $559,000 for the first quarterhalf of 1996 by 23 basis pointsto $895,000 compared to the same period in 1995. The increase was the result of the increase in higher costing volatile deposits. As of March 31, 1996, the certificates of deposit were $43.1$1.5 million or 42% of total deposits and borrowings compared to $47.2 million or 34.8% of total deposits and borrowings for the same period in 1995. During first quarter of 1996, the average stock option loans were higher and amortization of deferred loan fees was lower than in the same period in 1995. NON-INTEREST INCOME Non-interest income decreased $248,000, from $720,000 at March 31, 1995 to $472,000 at March 31, 1996. Stock option and brokerage commissions and fees decreased $51,000,$182,000, or 12.6%21.4% 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 $61,000,$156,000, or 54.0%41.1% was primarily the result of lower deposit transaction volumes.volumes and the elimination of the trust department in 1996. The decrease in other income is attributable to the acquisition of BSFBC during the -9- 12 third quarter of 1995. During the first quarterhalf of 1995, the earnings from BSFBC were included in other income. NON-INTEREST EXPENSEThe acquisition of the minority interest in BSFBC resulted in a reduction of occupancy expense. Non-interest income decreased $302,000, for the second quarter of 1996 to $432,000 compared to $734,000 for the same period in 1995. Stock option and brokerage commissions and fees decreased $131,000, or 29.4% 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 $75,000, or 38.9% was primarily the result of lower deposit transaction volumes and the reduced trust fees from the elimination of trust activities. 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 $1.1$2.1 million, or 41.5% during the first quarterhalf 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 leasingsubleasing of unused office space in 1996 compared to 1995. The improvementdecline 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 half 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 $1.0 million during the second 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. The decline in net income from real estate operations is the result of lower costs related to holdinggains on sale of real estate properties in the first quarter of 1996 comparedassets due to the same period in 1995. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES LIQUIDITYfewer asset sales. Financial Condition Liquidity and Capital Resources Liquidity The Bank's liquid assets, which include cash and short term investments, totaled $26.4$19.1 million, or 23.6%18.2% of total assets, at March 31,June 30, 1996, a decrease of $16.4$23.7 million, from $42.8 million, or 37.2% of total assets, at December 31, 1995. The decrease was the result of the purchase of longer duration investment securities totaling $25.9 million and a decline in deposits totaling $13.6 million during the first quarterhalf of 1996 partially offset by a decrease in loans totaling $11.5 million. See "Loans."$10.5 million and a $2.0 million borrowing. As of March 31,June 30, 1996, the Bank had pledged loans and securities totaling $4.2$8.9 million enabling the Bank to borrow up to $3.1approximately $5.0 million from the Federal Home Loan Bank of San Francisco (FHLB). The Bank had not drawn onwill, from time-to-time, borrow from the FHLB in the normal course of managing its liquidity. The Bank borrowed $2.0 million against this lending facility during the first half of 1996. The borrowing was repaid during the third quarter of 1996. In the future, long and short term borrowings from the FHLB may be used as an on-going source of liquidity and funding. The Bank has loans pledged to the FRB totaling $342,700$220,000 which provide collateral to the FRB should the Bank be unable to meet its FRB cash letter requirements of up to $145,800.$93,000. The Bank's brokered certificates of deposit declined to zero as of March 31,June 30, 1996 from $3.4 million at December 31, 1995. The Bank's money desk deposits decreased to $27.4$24.3 million as of March 31,June 30, 1996 from $28.0 million at December 31, 1995. CAPITALCapital At March 31,June 30, 1996, shareholders' equity was $8.0$9.2 million, compared to $6.9 million at December 31, 1995, primarily as a result of the $108,000$304,000 net income and the March 1996 capital contribution of $1.0 million.$2.5 million partially offset by an unrealized decline in the market value of investment securities available for sale of $558,000 during the first half of 1996. The Company and the Bank are subject to general regulations issued by the FRB, FDIC, and SBD which require maintenance of a certain levellevels of capital and the Bank is under specific capital requirements as a result of the Orders and Capital Order. As of March 31,June 30, 1996, the Company and the Bank are in -10- 13 compliance with the all minimum capital ratio requirements including the minimum Leverage ratio of 7% mandated by the Orders. The Bank is not in compliance with the capital requirements as defined by the Capital Impairment Orders (see CAPITAL IMPAIRMENT ORDERS)Capital Impairment Orders). The increase in the Company and Bank's leverage ratio during the first quarterhalf of 1996 was primarily the result of the first quarterhalf 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 March 31,June 30, 1996:
Minimum Capital Company Bank Requirement Orders -------------------------------------------- Leverage ratio 7.2% 7.2%9.2% 9.2% 4.0% 7.0% Tier 1 risk-based capital 11.3 11.313.7 13.7 4.0 N/A Total risk-based capital 13.4 13.416.0 16.0 8.0 N/A
The February 26, 1996 agreement between the Company and its majority shareholder provides that the Company's majority stockholder will purchase, at a per unit price of $20.00, a total of 225,000 additional shares of Series D Preferred Stock and warrants to purchase 500,000 shares of Series D Preferred Stock at a price of $20.00 per share. The warrants will be exercisable in whole or part at any time after the purchase of the 225,000 shares of Series D Preferred Stock, but in no event later than February 26, 2003. Management has estimated that the market value of the 225,000 shares 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. Assuming the conversion of the Series D Preferred Stock into common stock the market value per Class A Common Stock would be approximately $0.23 per share. INVESTMENT ACTIVITIESInvestment Activities At March 31,June 30, 1996, the Company's investment securities, including Fed funds sold, totaled $55.7$48.8 million, or 49.7%46.6% of total assets, compared to $45.2 million, or 39.3% of total assets, at December 31, 1995. At March 31, 1996,A portion of the investment securities held-to-maturity totaled $7.8 million, comparedportfolio is used to zero at December 31, 1995, and are carried at amortized cost. At March 31, 1996, the Company held $24.6 million defined as securities available-for-sale, compared to $6.5 million at December 31, 1995. The increase in investment securities held-to-maturity of $7.8 million and investment securities available for sale of $18.1 million resulted primarily from management's decision to diversitymanage the Bank's investment portfolio into variousliquidity position. Liquid investments include investment securities with various termsa term to limit the Bank's risks to downward adjustments in short-term interest rates.maturity of one year or less including Fed funds. See "Liquidity and Capital Resources" above. The investment portfoliosportfolio 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 saleavailable-for-sale have maturities or principal amortization of five years or less. At June 30, 1996, investment securities held-to-maturity totaled $7.4 million, compared to zero at December 31, 1995, and are carried at amortized cost. At June 30, 1996, the Company held $24.1 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 $7.4 million and investment securities available for sale of $17.6 million resulted primarily from management's decision to diversity 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 -11- 14 Company. As of March 31,June 30, 1996, the investment securities available for sale have an unrealized loss of $116,000$558,000 that is included as a separate component of shareholder's equity to reflect the current market value of these securities. LOANSManagement expects to maintain its investment securities portfolio at its existing level. Loans During the first quarterhalf of 1996, total loans decreased by $11.5$10.5 million, from $53.2 million at December 31, 1995 to $41.7$42.7 million at March 31,June 30, 1996. The reduction resulted primarily from loan repayments. The composition of the Bank's loan portfolio at March 31,June 30, 1996 and December 31, 1995 is summarized as follows:
March 31,June 30, December 31, (Dollars in Thousands) 1996 1995 --------------------------- Commercial and financial $ 12,91312,709 $ 16,12816,159 Real estate construction 2,8083,040 5,661 Real estate mortgage 25,99926,990 31,388 Net lease financing 29 31 ---------------------- 41,74942,739 53,208 Deferred fees and discounts, net (196)(227) (180) Allowance for possible loan losses (5,715)(5,410) (5,912) ---------------------- Total loans, net $37,102 $ 35,838 $ 47,116 ======================
Included in the loan portfolio are loans to facilitate the sale of the Bank's other real estate owned ("OREO")Classified Assets and real estate investment properties. Typically, these properties have been purchased from the Bank with certain minimum financing terms. The terms vary on a case-by-case basis, but depend heavily on the down payment and the financial strength of the borrower. The Bank's loans to facilitate the sale of OREO and real estate investment were $7.8 million at March 31, 1996 compared to $9.3 million at December 31, 1995. CLASSIFIED ASSETS AND IMPAIRED LOANSImpaired Loans Classified assets include non-accrual loans, OREO, real estate investments and performing loans that exhibit credit quality weaknesses. The table below outlines the Bank's classified assets at March 31,June 30, 1996 and December 31, 1995:
March 31,June 30, December 31, (Dollars in Thousands) 1996 1995 -------------------------- Loans - performing $ 13,92911,654 $ 17,800 Non-accrual loans 2,5102,560 7,511 OREO 6,8826,389 7,514 Real estate investments 150 236 236 ------------------------- Total classified assets $ 23,55720,753 $ 33,061 =========================Total classified assets as a percentage of total assets 19.8% 28.8%
Classified loans decreased to $16.4by $11.1 million as of March 31,June 30, 1996 compared to $25.3 million at December 31, 1995. The decrease was primarily the result of loan payoffs, and transfers to other real estate owned as a result of foreclosure.foreclosure and loan upgrades. As of March 31,June 30, 1996 and December 31, 1995, all OREO and real estate investments held for development were classified. -12-Non-performing assets which are included in classified assets are comprised of non-accrual loans and real estate foreclosures. Non-performing assets were $8.9 million, or 18.2% of total loans and OREO at June 30, 1996, down from $15.0 million, or 24.7% of total loans and OREO at the end of 1995. During the first half 1996, the reduction of $6.0 million in non-performing assets was primarily the result of OREO sales of $2.9 million and loans returned to accrual of $1.7 million. New loans transferred to non- accrual status totaled 365,000, and $325,000 in non-accrual loans were paid off. There can be no assurance that the Bank will continue to experience declines in the amount of its non-performing assets or not experience losses in attempting to collect the non-performing loans or otherwise liquidate the non-performing assets which are presently reflected on the Company's statement of financial condition. The Bank expects that reductions in non-performing assets will continue to reduce the costs incurred for managing and carrying the assets. 15The Bank had approximately $1.0 million in loans on June 30, 1996 that were between 31 and 89 days delinquent. All of the loans delinquent between 31 and 89 days are secured by first or subordinate 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 March 31,June 30, 1996 and December 31, 1995:
March 31,June 30, December 31 (Dollars in Thousands) 1996 1995 ----------------------- Commercial and financial $ 140-- $ 307 Real estate construction $ 1,950 3,428 Other real estate mortgage 420610 3,891 ------------------- Total impaired loans $ 2,5102,560 $ 7,626 ===================
As of March 31,June 30, 1996 and December 31, 1995, the Company measured the impairment of $2.5$2.6 million and $7.3 million, respectively, using the collateral value method. As of March 31,June 30, 1996 and December 31, 1995, zero and $307,000 of the impairment was measured using the discounted cash flow method. Total interest income recognized on impaired loans during the first quarterhalf of 1996 was $30,800$44,000 compared to $202,000 for the same period in 1995. There can be no assurance that the Bank will continue to experience declines in the amount of its non-performing assets or not experience losses in attempting to collect the non-performing loans or otherwise liquidate the non-performing assets which are presently reflected on the Company's statement of financial condition. The Bank expects that continued reductions in non-performing assets will continue to reduce the costs incurred for managing and carrying the assets. NON-PERFORMING ASSETS Non-performing assets are comprised of non-accrual loans and real estate foreclosures. Non-performing assets were $9.4 million at March 31, 1996, down from $15.0 million at the end of 1995. Restructured loans totaled $4.0 million at March 31, 1996 compared to $5.9 million at December 31, 1995. During the first quarter 1996, the reduction of $5.6 million in non-performing assets was primarily the result of OREO sales of $2.1 million and loans returned to accrual of $1.3 million. No new loans were transferred to non-accrual status and $325,000 in non-accrual loans were paid off. The Bank recorded charge-offs of $596,000 and recoveries of $399,000 during the first quarter of 1996. The following table provides information on all non-performing assets at March 31, 1996 and December 31, 1995:
March 31, December 31, (Dollars in Thousands) 1996 1995 ----------------------- Non-accrual loans $ 2,510 $ 7,511 OREO 6,882 7,514 -------------------- Total non-performing assets 9,392 $15,025 ==================== Percentage of total loans and OREO outstanding 19.3% 24.7%
-13- 16 In addition to the loans disclosed in the foregoing table, the Bank had approximately $1.3 million in loans on March 31, 1996 that were between 31 and 89 days delinquent. All of these loans have matured and are in the process of collection. All of the loans delinquent between 31 and 89 days are secured by first or subordinate deeds of trust on real estate or certificates of deposits. VALUATION ALLOWANCESValuation Allowances Allowance for Loan Losses The Bank charges current earnings with provisions for estimated losses on loans receivable. The provisions take into consideration specifically identified problem loans, the financial condition of the borrowers, the fair value of the collateral, recourse to guarantors and other factors. Specific loss allowances are established based on the asset classification and credit quality grade. Specific loss allowances are utilized to ensure that the allowance is allocated based on the credit quality grading to capture inherent risks including present value of expected cash flows and fair value of real estate collateral. As of March 31,June 30, 1996, $395,000$597,000 in the allowance of loan losses was allocable to impaired loans, as identified in accordance with SFAS No. 114, which had an outstanding principal balance totaling $2.5$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 quartersix months ended March 31,June 30, 1996:
March 31,June 30, (Dollars in Thousands) 1996 --------- Beginning balance of allowance for loan losses at December 31, 1995 $ 5,912 Charge-offs (596)(646) Recoveries 399144 Provision -- ------- Ending balance of allowance for loan losses $ 5,715 =======5,410
ForThe ratio of allowance for loan loss to total loans was 12.7% as of June 30, 1996 compared to 11.1% as of December 31, 1995. The ratio of the quarter ended Marchallowance for loan loss to non-accrual loans was 211% as of June 30, 1996 compared to 79% as of December 31, 1996, the Company charged-off $596,000 of non-performing loans. Recoveries were $399,000 relating to 15 loans.1995. The unallocated portion of the allowance for loan loss totaled $2.3$1.9 million at March 31,June 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. -14- 17 Allowance for Losses on OREO The following table summarizes the OREO loss experience of the Bank for the quartersix months ended March 31,June 30, 1996:
March 31June 30 (Dollars in Thousands) 1996 -------- Beginning balance of allowance for losses $11,991$ 11,991 Charge-offs (882)(2,705) Provision -- ------- Ending balance of allowance for losses $11,109 =======$ 9,286
The OREO properties are shown net of allowance for losses. The charge-offs related to the sale of specific OREO properties. Based on review of market value information available as of March 31,June 30, 1996 and 1995, an additional provision was not required during the first quarterhalf of 1996 orcompared to a provision of $500,000 during the same period in 1995. The Bank recorded a net gain of $285,000$402,000 on sale of twothree OREO properties.properties during the first half 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 March 31,June 30, 1996:
March 31June 30 (Dollars in Thousands) 1996 -------- Beginning balance of allowance for losses $ 1,478 Charge-off --(444) Provision -- ------- Ending balance of allowance for losses $ 1,478 =======1,034
No provision for loss on real estate investments was required on the one remaining two propertiesproperty during the first quarterhalf of 1996. -15- 18 DEPOSITSThe Bank recorded a net gain on sale of real estate investment totaling $53,000 during the first half of 1996. Deposits The Bank had total deposits of $102.6$92.1 million at March 31,June 30, 1996, compared to $105.7 million at December 31, 1995, a decrease of $3.1$13.6 million or 3%12.9%. The $3.1 million decline was attributed to decreases in private banking customer deposits of $2.8$6.2 million, Association Bank Services deposits of $1.5 million, Stock options services activity of $1.0 million, Escrow activities of $600,000, Trust activities of $500,000, and volatile deposits of $1.6 million which were partially offset by increases in deposits related to stock option activity of $1.6$3.8 million. A summary of deposits at March 31,June 30, 1996 and December 31, 1995 is as follows:
March 31June 30, December 31, (Dollars in Thousands) 1996 1995 ----------------------- Demand deposits $ 18,86215,432 $ 20,365 NOW 21,94119,473 23,762 Money market 17,26316,337 16,185 Savings 1,4051,522 1,649 ------------------------ Total deposits with no stated maturity 59,47152,764 61,961 ------------------------ Time deposits: Less than $100,000 39,65634,391 37,296 $100,000 and greater 3,4365,013 6,416 ------------------------ Total time deposits 43,09239,404 43,712 ------------------------ Total deposits $ 102,56392,168 $ 105,673 ========================
The Bank's deposits from private and business banking totaled $35.8$36.9 million, or 34.9%39.7% of total deposits, at March 31,June 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 $22.8$21.5 million, or 22.2%23.1% of total deposits at March 31,June 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 $27.4$24.1 million, or 26.7%25.9% of total deposits at March 31,June 30, 1996, compared to $27.8 million, or 26.3% of total deposits at December 31, 1995. The Bank expects to decrease money desk deposits during the remainder of the year with the intention of replacing these deposits with core deposits. Concentrations of deposits acquired through the money desk operations have been classified by bank regulators as volatile liabilities associated with certain risks, including the risks of reduced liquidity if a bank is unable to retain such deposits and reduced margins if its interest costs are increased by a bank in order to retain such deposits. As a result of the Orders, the Bank is required to maintain a volatile liability dependency ratio of not more than 15%. The Bank's volatile dependency ratio at March 31, 1996 was substantially below which the 15.0% requirement. -16- 19Bank is in compliance with as of June 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 or reached settlement or potential settlement in litigation or potential litigation matters which management deems is material. As a result of the settlement or potential settlement, the Bank has established a reserve for certain lawsuits. Based on information available to the Company and the Bank, and its review of such outstanding claims 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"Liquidity and Capital Resources". Item 3 - Defaults Upon Senior Securities See "Note 1 -- Dividend Restrictions". Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits None (b) Report on Form 8-K None -17- 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The San Francisco Company (Registrant) Date: May 9, 1996 /s/ James E. Gilleran James E. Gilleran Chairman of the Board and Chief Executive Officer Date: May 9,Date: August 13, 1996 /s/ James E. Gilleran James E. Gilleran Chairman of the Board and Chief Executive Officer Date: August 13, 1996 /s/ Keary L. Colwell Keary L. Colwell Principal Accounting Officer
-18- 21 EXHIBIT INDEX
Exhibit Number Document - - -------------- -------- 27 Financial Data Schedule
19