UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 19971998
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.)
of incorporation or organization)
550 Montgomery Street, San Francisco, California 94111
(Address of principal executive office) (Zip Code)
(415) 781-7810
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
The Registrant had 31,723,78231,728,782 shares of Class A Common Stock
outstanding on October 31, 1997.27, 1998.
page
The San Francisco Company and Subsidiaries
Quarterly Report on Form 10-Q
Table of Contents
Page
Part I - Financial Information
Item 1. Consolidated Statements of Financial Condition
At September 30, 19971998 and December 31, 19961997 . . . . . . . . . . 1
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 19971998 and 19961997. 2
Consolidated Statements of Changes in Shareholders' EquityShareholders'Equity
For the Nine Months Ended September 30, 1998 and 1997 and 1996 3. . . . . 4
Consolidated Statements of Cash Flows
For the Three and Nine Months Ended September 30, 19971998 and 1996 41997. 5
Notes to Consolidated Financial Statements 5. . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6. . . . . . . . . . . . . . 8
Part II - Other Information
Item 1. Legal Proceedings 14Proceedings. . . . . . . . . . . . . . . . . . . . . . . .18
Item 2. Changes in Securities 14Securities. . . . . . . . . . . . . . . . . . . . . .18
Item 3. Defaults Upon Senior Securities 14Securities. . . . . . . . . . . . . . . . .18
Item 4. Submission of Matters to a Vote of Security Holders 14Holders. . . . . . .18
Item 5. Other Information 14Information. . . . . . . . . . . . . . . . . . . . . . . .18
Item 6. Exhibits and Reports on Form 8-K 14. . . . . . . . . . . . . . . .18
Signatures 15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
page
The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
September 30, 19971998 and December 31, 19961997
(Unaudited)
September 30, December 31,
(Dollars in Thousands Except Per Share Data) 1998 1997 1996
Assets:
Cash and due from banks $ 3,200 $ 3,701$3,567 $2,837
Federal funds sold 25,785 11,92517,280 14,150
Cash and cash equivalents 28,985 15,62620,847 16,987
Investment securities held-to-maturity, at cost
(Market(Fair value: 1998 $4,314;1997 - $6,178; 1996 - $6,848) 6,225 6,943$5,822) 4,315 5,864
Investment securities available-for-sale,
at fair value 34,295 28,34831,204 32,669
Federal Home Loan Bank stock, at par 701 6701,565 1,499
Loans 37,308 43,76260,942 51,924
Deferred loan costs, net of fees (143) (190)14 (61)
Allowance for loan losses (5,991) (5,663)(1,775) (3,200)
Loans, net 31,174 37,90959,181 48,663
Other real estate owned, net 1,661 5,13358 410
Premises and equipment, net 7,792 8,0597,650 7,791
Interest receivable 625 758603 720
Other assets 410 5551,920 2,014
Total Assets $111,868 $104,001$127,343 $116,617
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 21,760 $ 16,505$17,234 $19,691
Interest bearing deposits 74,957 74,66177,865 66,828
Total deposits 96,717 91,16695,099 86,519
Other borrowings 10,000 10,000
Other liabilities and interest payable 2,259 1,7712,114 2,528
Total Liabilities 98,976 92,937liabilities 107,213 99,047
Shareholders' Equity:
Preferred Stock (par value $0.01 per share)
Series B - Authorized - 437,500 shares;
Issued and outstanding - 1998 and 1997 - 15,869 111 111
Common stock (par value $0.01 per share)
Class A - Authorized - 100,000,000 shares;
Issued and outstanding - 1998 - 31,728,782
and 1997 - 31,717,171 and
1996 - 28,775,99531,723,782 317 288317
Additional paid-in capital 78,812 77,84178,816 78,814
Retained deficit (66,372) (67,099)
Unrealized gain/(59,272) (61,656)
Accumulated other comprehensive income (loss) on securities
available-for-sale 24 (77)158 (16)
Total shareholders' equity 12,892 11,06420,130 17,570
Total Liabilities and Shareholders' Equity $111,868 $104,001$127,343 $116,617
See accompanying notes to unaudited consolidated financial statements.
page 1
The San Francisco Company and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 19971998 and 19961997
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands
Except Per Share Data) 1998 1997 19961998 1997 1996
Interest income:
Loans $ 1,234 $ 1,005 $ 3,473 $ 3,222$1,363 $1,234 $3,826 $3,473
Investments 931 953 7432,576 2,512
2,182
Dividends 21 10 1166 31 28
Total interest income 2,315 2,197 1,7596,468 6,016 5,432
Interest expense:
Deposits 755 747778 775 2,077 2,113 2,393
Other borrowings 154 -- 1453 -- 2
Total interest expense 755 748932 775 2,530 2,113 2,395
Net interest income before
provisionadjustment for loan losses 1,383 1,442 1,0113,938 3,903
3,037
ProvisionAdjustment for loan losses (1,075) -- -- --(1,477) --
Net interest income after
provisionadjustment for loan losses 2,458 1,442 1,0115,415 3,903 3,037
Non-interest income:
Stock optionbrokerage commissions and
fees 220 440 196755 1,069 866
Real estate rental income 285 179 272816 658 756
Service charges and fees 181 198 113484 437 337
Other income 39 2 94 3
Gain on sale of assets, net 17 32 204 260 65942 266
Loss on sale of securities, net -- -- -- (6)
Other income 28 39 107 94
Total non-interest income 731 888 7872,204 2,518 2,621
Non-interest expense:
CompensationSalaries and related benefits 1,017 1,134 7623,003 2,968 2,480
Occupancy expense 318 288 263899 903 872
Professional fees 80 146 156339 361
450Data processing 93 98 307 324
Corporate insurance premiums 41 56 53131 165
244Property tax expense -- 22 -- 87
FDIC insurance premiums 2 10 9121 89 215
Property taxes 22 26 87 81
Data processing 98 80 324 213
Other operating expenses 127 221 336519 793 758
Total non-interest expense 1,678 1,975 1,7675,219 5,690 5,313
Income before income taxes 1,511 355 312,400 731 345
Provision for income taxes 6 (3) (272)11 4 (262)
Net Income $1,505 $358 $303 $ 727 $ 607$2,389 $727
Income per common share:
Primary:Basic: Net income $ 0.01 $ 0.05$0.05 $0.01 $0.08 $0.02 $ 0.10
Weighted average
shares outstanding 31,728,782 31,717,171 5,765,99531,726,566 29,950,311
5,765,990
Fully
diluted:Diluted: Net income $ 0.01$0.05 $0.01 $0.07 $0.02 $0.03
Weighted average
shares outstanding 31,717,171 26,168,780 29,950,311 22,242,08633,204,853 31,717,964 33,129,248 29,951,104
See accompanying notes to unaudited consolidated financial statements.
page 2
The San Francisco Company and Subsidiaries
Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 1998 and 1997
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands
Except Per Share Data 1998 1997 1998 1997
Net Income $1,505 $358 $2,389 $727
Other comprehensive
income, net of tax:
Unrealized holding gains arising
during period, net 171 112 174 95
Plus: reclassification
adjustment for losses
included in net income -- -- -- 6
Other comprehensive income 171 112 174 101
Comprehensive income $1,676 $470 $2,563 $828
page 3
The San Francisco Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 1998 and 1997
and 1996
(Unaudited)
Unrealized
Gain/
(Loss) onAccumu
(Dollars in Thousands) lated
Other
Addi- Compre- Total
Additionaltional Compre- Retained Securitieshensive Share-
Preferred Common Paid-in hensive Earnings Available-Income/ holders'
(Dollars in Thousands)
Stock Stock Capital Income (Deficit) for-Sale(Loss) Equity
Balances at
January 1, 1996 $ 4,414 $ 58 $70,168 $(67,801) $ 41 $6,880
Proceeds1997 $111 $288 $77,841 $(67,099) $(77) $11,064
Net proceeds on
sale of stock 3,500 -- -- -- -- 3,500
Depreciation in
market value of
securities
available-for-sale -- -- -- -- (156) (156)
Conversion of Series
B Preferred stock
into Class A
Common Stock (3) -- 3 -- -- --
Other 100 100
Net income (nine months) -- -- -- 607 -- 607
Balances at
September 30, 1996 7,911 58 70,271 (67,194) (115) 10,931
Conversion of
preferred stock to
Class A Common Stock (7,800) 230 7,570 -- -- --
Appreciation in
market value
of securities
available-for-sale -- -- -- -- 38 38
Net income (three months) -- -- -- 95 -- 95
Balances at
December 31, 1996 111 288 77,841 (67,099) (77) 11,064
Proceeds from
sale of common stock -- 29 971 -- -- 1,000
Appreciation in
market valueOther comprehensive
income, net of securities
available-for-saletax
Net unrealized gains,
net of reclassification
adjustments $101 -- -- -- -- 101 101
Other comprehensive
income 101
Net income (nine months) -- --727 727 -- 727
-- 727Comprehensive income $828
Balances at
September 30, 1997 $ 111 $ 317 $78,812 $(66,372) $24 $12,89278,812 (66,372) 24 12,892
Net proceeds from
the exercise of
stock options -- -- 2 -- -- 2
Other comprehensive
income, net of tax
Net unrealized losses $(40) -- (40) (40)
Other comprehensive loss (40)
Net income (three months) 4,716 4,716 -- 4,716
Comprehensive income $4,676
Balances at
December 31, 1997 111 317 78,814 (61,656) (16) 17,570
Net proceeds from the
exercise of
stock options -- -- 2 -- -- 2
Dividend on
Preferred Stock -- -- -- (5) -- (5)
Other comprehensive
income, net of tax
Net unrealized gains $174 -- 174 174
Other comprehensive income 174
Net income (nine months) 2,389 2,389 -- 2,389
Comprehensive income $2,563
Balances at
September 30, 1998 $111 $317 $78,816 $(59,272) $158 $20,130
See accompanying notes to unaudited consolidated financial statements.
page 34
The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 19971998 and 19961997
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30
(Dollars in Thousands) 1998 1997 19961998 1997 1996
Cash Flows from
Operating Activities:
Net income $ 358 $ 303 $ 727 $ 607$1,505 $358 $2,389 $727
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
ProvisionAdjustment for loan losses (1,075) -- -- --(1,477) --
Depreciation and amortization expense 142 135 145393 412
530
Net lossLoss on sale of investment securities available for sale-- -- -- 6 --
Net gain on sale of other real estate owned and
real estate investment(17) (37) (206)(42) (271)
(661)
Provision of possiblefor loss on
other real estate owned -- -- -- 182 --
Decrease in interest
receivable and other assets 54 131 344211 278
361
Increase (decrease)(Decrease) increase in interest
payable and other liabilities (1,408) 388 73(419) 487
(784)
(Increase) decreaseIncrease in deferred loan
fees net of costs (38) (114) (17)(75) (47) 29
Net cash flows (used in)
provided by operating activities (837) 861 642980 1,774 82
Cash Flows from Investing Activities:
Proceeds from maturities of
investment securities
held-to-maturity 553 270 2951,549 688 645
Proceeds from maturities of
investment securities
available-for-sale 10,652 2,791 16923,187 3,517 4,232
Proceeds from the sale of
investment securities
available-for-sale -- -- -- 6,200
Proceeds from the sale of FHLB Stock 708 -- 708 --
Purchase of investment
securities held-to-maturity -- -- -- (7,815)available-or-sale (11,256) (5,585) (21,548) (15,538)
Purchase of investment
securities available-for-sale (5,595) (4,996) (15,569) (27,256)FHLB Stock and
FHLB Stock dividends (21) (10) (774) (31)
Net (increase) decrease in loans (8,022) 3,376 4,357(9,018) 6,453 12,625
Recoveries of loans
previously charged off net-- 48 13552 329
279
(Purchases) sales
of premises and equipment (49) 6 (145) (44)
SaleProceeds from the sale of
other real estate owned 296 93 572394 3,533
3,708Purchases of premises and equipment (39) (49) (252) (145)
Acquisition and capitalized
cost of other real estate owned -- 150-- -- 28 236
Net cash (used in) provided
by (used in) investing activities (7,129) 934 688(5,702) 5,034 (13,390)
Cash Flows from Financing Activities:
Net (decrease) increase (decrease) in deposits (7,353) 6,033 (4,485)8,580 5,551
(18,032)
Net increasedecrease in other borrowings (5,000) -- -- -- 2,000
Net proceeds from
sale of common stock -- -- 1,000 --
Net proceeds from sale of preferred stock -- 1,000 -- 3,5002 1,000
Net cash (used in) provided
by (used in) financing activities (12,353) 6,033 (3,485)8,582 6,551
(12,532)
Increase (decrease)(Decrease) increase in
cash and cash equivalents (20,319) 7,828 (2,155)3,860 13,359 (25,840)
Cash and cash equivalents
at beginning of period 41,166 21,157 19,12916,987 15,626 42,814
Cash and cash equivalents
at end of period $ 28,985 $16,974 $ 28,985 $16,974$20,847 $28,985 $20,847 $28,985
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period for:
Interest $ 736 $ 756 $ 2,125 $ 2,448$811 $736 $2,413 $2,125
Payment of income taxes 4 -- --24 2 3
Supplemental Schedule of Noncash
Investing and Financing Activities:
Net transfer of loans
to other real estate owned -- -- -- 1,378
See accompanying notes to unaudited consolidated financial statements.
page 45
The San Francisco Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Organization
The San Francisco Company (the "Company") is a Delaware
corporation and a bank holding company registered under the Bank
Holding Company Act of 1956. Bank of San Francisco (the "Bank"),
a state chartered bank, was organized as a California banking
corporation in 1978 and became a wholly owned subsidiary of the
Company through a reorganization in 1982.
Note 2 - Principles of Consolidation and Presentation
The accompanying unaudited consolidated financial statements
of the Company have been prepared in accordance with the
instructions pursuant to Form 10-Q Quarterly Report and Articles 9
and 10 of Regulation S-X, and therefore, do not include all the
information and footnotes necessary to present the consolidated
financial condition, results of operations and cash flows of the
Company in conformity with generally accepted accounting
principles.
The data as of September 30, 1997,1998, and for the three and nine
months ended September 30, 19971998 and 19961997 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 1997 consolidated financial statements have been
reclassified for comparative purposes. The results of operations
for the three and nine months endingended September 30, 19971998 are not
necessarily indicative of the results to be expected for the entire
year of 1997.1998. This report should be read in conjunction with the
Company's 19961997 Annual Report on Form 10-K.
The accompanying financial statements include the accounts of
the Company, the Bank, and the Bank's wholly owned subsidiary, Bank
of San Francisco Realty Investors (the "BSFRI"). All material
intercompany transactions have been eliminated in consolidation.
Certain amounts in the 1996 consolidated financial
statements have been reclassified for comparative purposes.
Note 3 - IncomeEarnings Per Common Share Primary(the "EPS")
The Company adopted Statement of Financial Accounting
Standards (the "SFAS") no. 128, "Earnings Per Share." SFAS No. 128
requires dual presentation of basic EPS and diluted EPS on the face
of the income per common sharestatement and disclosure of the calculation of basic
EPS compared to diluted EPS in the footnotes to the financial
statements.
Basic EPS is calculated usingby dividing net income by the weighted
average number of Class A Common Shares par
value of $0.01 per share (the "Common Stock"), outstanding
divided into net income. Fully diluted income per share. The
dilutive EPS is calculated using the weighted average number of shares
outstanding assuming the conversionexercise of all potentially
dilutive Common Shares, such as certain stock options, that were
outstanding during the period. The following tables present a
reconciliation of the amounts used in calculating basic and diluted
EPS for each of the periods shown.
page 6
(dollars in thousands except per-share amounts)
Per-share
1998 Income Shares amount
Three-months ended September 30:
Basic EPS $1,503 31,728,782 $0.05
Effect of dilutive securities:
Series DB Preferred Stock into Common2 793
Stock divided into net income. On December 31,
1996, all 390,000 outstanding sharesOptions -- 1,475,278
Diluted EPS $1,505 33,204,853 $0.05
Nine-months ended September 30:
Basic EPS $2,382 31,726,566 $0.08
Effect of dilutive securities:
Series DB Preferred Stock were converted into 23,010,000 shares7 793
Stock Options -- 1,401,889
Diluted EPS $2,389 33,129,248 $0.07
Per-share
1997 Income Shares amount
Three-months ended September 30:
Basic EPS $356 31,717,171 $0.01
Effect of Common Stock.dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- --
Diluted EPS $358 31,717,964 $0.01
Nine-months ended September 30:
Basic EPS $72 29,950,311 $0.02
Effect of dilutive securities:
Series B Preferred Stock 7 793
Stock Options -- --
Diluted EPS $727 29,951,104 $0.02
Note 4 - Dividend Restrictions
The Company is subject to dividend restrictions under the
Delaware General Corporation Law and regulations and policies of,
and a Written Agreement dated December 14, 1994 (the "Agreement")
with, the Federal Reserve Bank of San Francisco (the "FRB"). ). The
Company's Series B Preferred Shares participate equally, share for
share, in cash dividends paid on the Class A
Common Shares in addition to
receiving the cash dividends to which they are entitled. The Company has not paid anyIn order
to bring the cash dividends current, the Board of Directors
declared a cash dividend on the Series B Preferred stock since the second quarterStock totaling
$3.92 per share for stockholders of 1991.
The Board of Directors does not intend to declare dividendsrecord on any class of the Company's stock.July 1, 1998 that was
paid on July 15, 1998.
page 7
Note 5 - Recent Accounting Pronouncements
In FebruaryJune 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
(the "SFAS") No. 128 "Earnings per Share" (the "SFAS No. 128").
Generally, SFAS No.
page 5
128 establishes standards for computing and presenting
earnings per share (the "EPS") for publicly held companies,
replaces Primary EPS with Basic EPS, and specifies additional
disclosure requirements regarding EPS. SFAS No. 128 is effective
for financial statements issued for periods ending after December
15, 1997. Earlier application is not permitted. The adoption of
SFAS No. 128 is not expected to have a material impact on the
Company's present computation of primary and fully diluted EPS.
In February 1997, the FASB also issued SFAS No. 129
"Disclosure of Information about Capital Structure" (the "SFAS
No. 129"). Generally, SFAS No. 129 is effective for financial
statements issued for periods ending after December 15, 1997.
The adoption of SFAS No. 129 is not expected to have any impact
on the Company's present disclosure of its capital structure.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". This statement establishes which
provides standards for reporting and displaying comprehensive
income and its components in the financial statements. It requires that a company classify
items of other comprehensive income, as defined by accounting
standards, by their nature (e.g., unrealized gains or losses on
securities) in a financial statement, but does not require a
specific format for that statement. The Company is in the
process of determining its preferred format. This
statement is effective with the year-end 1998 financial statements; however, a
total comprehensive income is required in thestatements
including interim financial statements of the 1998 interim periods.statements. Reclassification of
financial statements for earlier periods is required. The Company
has included comprehensive income in its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures"Disclosure about
Segments of an Enterprise and Related Information". This
statement, which requires
that a public business enterprisecompany report financial and descriptive information
about its reportable operating segments on the basis that is used
internally for evaluating segment performance and deciding how to
allocate resources to segments. This statement is effective with thefor
year-end 1998 financial statements. The SecuritiesCompany is in the process
of determining its format for reporting segment information.
In February 1998, the FASB issued SFAS No. 132, "Accounting
for Pensions and Exchange Commission (the "SEC") has
approved rule amendments to clarifyOther Post- Retirement Benefit Plans", which
revises and expand existingstandardizes the disclosure requirements for derivative financial instruments.pension
and other post retirement benefit plans. The amendmentsCompany does not have
any pension or post retirement benefit plans that require
enhanced disclosure ofin accordance with SFAS No. 132.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which standardizes
the accounting policies for derivative financial instruments, including certain
derivative instruments embedded in other contracts, by requiring
that an entity recognize those items as assets or liabilities in
the footnotesstatement of financial position and measure them at fair value.
This statement is effective for all quarters of fiscal years
beginning after June 15, 1999. As of September 30, 1998, the
Company did not have any derivative instruments or engage in
hedging activities.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an
amendment of FASB Statement No. 65". This statement is to conform
the financial statements. In addition,subsequent accounting for securities retained after the
amendments expand
existing disclosure requirements to include disclosuresecuritization of quantitative and qualitative information about market risk
inherent in market risk sensitive instruments outsidemortgage loans by mortgage banking enterprises
with that of the
financial statements and related notes thereto. The enhanced
accounting policy disclosure requirements arenon-mortgage banking enterprises. This statement is
effective for the quarterly period endedfirst quarter beginning after December 15, 1998.
As of September 30, 1997. The rule amendments
that require expanded disclosure of quantitative and qualitative
information about market risk are effective with the 1997 Form
10-K. At September 30, 1997and 1996,1998, the Company had no
derivative financial instruments outstanding.did not have any mortgage-
backed securities retained after the securitization of mortgage
loans held for sale.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
This document contains forward-looking statements that are
subject to risks and uncertainties, including, but not limited to,
the Company's and Bank's ability to implement their respective
long-term business plan, the economy in general and the condition
of stock markets upon which the Company's stock brokerage business
and fee income is dependent, the continued services of the
Company's and Bank's key executives and managers, the real estate
market in California and other factors beyond the Company's and
the Bank's control. Such risks, uncertainties and factors, including
those discussed herein, could cause actual results to differ
materially from those indicated. Readers should not place undue
reliance on forward-looking statements, which reflect management's
views only as of the date hereof. The Company and the Bank
undertake no obligation to publicly revise these forward-looking statements
to reflect subsequent events or circumstances. Readers are also
encouraged to review the Company's publicly available filingfilings with
the SEC.Securities and Exchange Commission.
page 68
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 the Bank
of San Francisco, a California chartered bank organized in 1978,
with deposits insured by the Federal Deposit Insurance
Corporation's (the "FDIC") Bank Insurance Fund. The information set forth in
this report, including unaudited interim financial statements and
related data, relates primarily to the Bank.
The Company's Common Stock is not listed on any exchange and
is not actively traded. Van Kasper & Company of San Francisco,
California is the sole market maker in the Company's Common Stock.
The Company recorded net income of $1,505,000 for the three
months ended September 30, 1998 and $2,389,000 for the nine months
ended September 30, 1998, compared to a net income of $358,000 and
$727,000 for the three and nine months ended September 30, 1997, compared to a
net income of $303,000 and $607,000 for the same periods, respectively, in 1996.1997. The increase
in the Company's net income of $1,147,000 for the three month
period was primarily from the adjustment for loan losses recorded
in 1998 of $1,075,000 and the improvement in core operating income
in 1998 of $87,000 as compared with 1997.
The increase in the Company's net income of $1,662,000 for the
first nine months ended September 30, 1997 of $120,0001998 compared to income for the same period in 19961997 was
primarily from an increase in net
interest income and brokerage fees partially offset by an
increase in operating costs in 1997the adjustment for loan losses of $1,477,000 and
lower gainsprovision for loss on sale of other real estate owned (the "OREO") of
$182,000, partially offset by reductions in 1997 as compared to 1996.gain on sale of OREO of
$224,000.
At September 30, 1997,1998, total assets were $111.9$127.3 million, an
increase of $7.9$10.7 million, or 9.2% from $104.0$116.6 million at December
31, 1996. Total1997. As of September 30, 1998, total loans were $37.3$60.9
million, a decreasean increase of $6.5$9.0 million, or 15% from $43.817.3%, compared to $51.9
million at December 31, 1996.1997. Total deposits were $96.7$95.1 million at
September 30, 1997,1998, an increase of $5.5$8.6 million, or 9.9%, compared
to $91.2$86.5 million at December 31, 1996.1997.
Regulatory Directives
Federal Reserve Board Written Agreement
The Agreement prohibits the Company, without prior approval of
the FRB, from: (a) paying any cash dividends to its shareholders;
(b) directly or indirectly, acquiring or selling any interest in
any entity, line of business, problem or other assets; (c)
executing any new employment, service, or severance contracts, or
renewing or modifying any existing contracts with any executive
officer; (d) engaging in any transactions with the Bank that exceedsexceed
an aggregate of $20,000 per month; (e) engaging in any cash
expenditures with any individual or entity that exceedsexceed $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, and a comprehensive operating budget
for the Bank and the consolidated Company. In addition, the Company's Board
of Directors was required to submit an acceptable written plan
designed to enhance their supervision of the operations and
management of the consolidated organization.
The Company has filed all of the required submissions withpage 9
Management was notified by the FRB at its 1998 examination
that the Company was in accordancefull compliance with the Agreement, and
management believes the Company continues to be in full compliance with the
Agreement.compliance.
Memorandum of Understanding
On May 27, 1997,In June 1998, the FDICFederal Deposit Insurance Corporation (the
"FDIC") and the California Department of Financial Institutions
(formerly the State Banking Department)
(the "DFI") terminated the Bank's Cease and Desist Orders and in
lieu thereof entered into a Memorandum of Understanding with the
Bank (the "MOU"). The MOU directs, among other things, that the
Bank: (a) have and retain management acceptable to the Regional
Director of the FDIC (the "Regional Director") and the
Commissioner of the DFI (the "Commissioner"); (b) increase its
capital by not less than $1.0 million; (c) maintain a 7% Leverage
Capital ratio; (d) reduce assets classified "Substandard" as of
September 30, 1996 (the date of the most recent full-scope FDIC
and DFI Report of Examination of the Bank), to no more than $12.0
million by June 30, 1997, $10.0 million as of September 30, 1997,
and $8.0 million as of December 31, 1997; (e) maintain an
adequate reserve for loan losses; (f) develop and implement
written policy recommendations outlined in the Report of
Examination; (g) implement a policy which establishes a range for
the Bank's volatile liabilities dependency ratio, and which ratio
shall not be more than 15%; (h) submit a strategic plan covering
the period 1997 - 2002; (i) not pay cash dividends without prior
written consent from the Regional Director and the Commissioner;
and (j) report to the Regional Director and the Commissioner on a
quarterly basis the form and manner of any actions taken to
secure compliance with the MOU.
page 7
The Bank has filed all of the required submissions with the
FDIC and the FDI in accordance with the MOU, and management
believes that the Bank is in full compliance with the
requirements of the MOU.
Capital Impairment Orders
Under the California Financial Code as presently in effect,
if a bank's deficit retained earnings exceeds 40% of its
contributed capital, its capital is deemed to be impaired, and
the bank may be required by the DFI to levy an assessment on its
shares to correct the impairment (the "Capital Impairment Law").
The DFI has deemed the Bank's capital to be impaired, but has not
required the Bank to levy any assessment on its shares. The
Capital Impairment Law has been rescinded by the California
Legislature, effective January 1, 1998. All assessment
provisions shall terminate and the Bank may take expedited steps
to remove all assessment provisions from its bylaws.Understanding.
Results of Operations
Net Interest Income
The Company's net interest income increased towas $1.4 million for the
quarters ended September 30, 1998 and 1997. The Company's net
interest income was $3.9 million for the nine months ended
September 30, 1998 and 1997. The net interest margin may decline
in the firstfuture as a result of the recent reductions in the prime and
fed funds rate indexes.
Adjustment for Loan Losses
The Company recorded a reduction to the allowance for loan
losses of $1.1 million for the three months ended September 30,
1998 and $1.5 million for the nine months of 1997 from $3.0 millionended September 30, 1998
compared to none for the same periods in 1997. The adjustment for
loan losses reflects the amount necessary to reduce the allowance
for loan losses to a level that management believes is adequate
based on many factors that are more fully discussed herein under
"Loans - Allowance for Loan Losses".
Non-Interest Income
Non-interest income was $731,000 for the three months ended
September 30, 1998 compared to $888,000 for the same period in
1996,1997. Non-interest income was $2.2 million for the nine months
ended September 30, 1998 compared to $2.5 million for the same
period in 1997. The decline in non-interest income was primarily
the result of the reduction in gain on sale of real estate owned
income in 1998 compared to 1997 and the reduction in brokerage
commissions, partially offset by an increase in real estate rental
income.
The decline in stock brokerage commissions and fees of
$866,000$314,000, or 29%. The net interest
rate margin improved to 5.2%, for the first nine months of 1997
from 4.3%1998 and $220,000,
or 50%, for the same period in 1996 as a result of an increase
in average earning assets of $6.0 million and an decrease in
average interest bearing liabilities of $6.3 million. The
increase in average earning assets was comprised of an increase
in investment securities and Federal funds sold partially offset
by a decline in loans. The weighted average yield on average
interest-earning assets increasedthree months ended September 30, 1998 compared to 8.0% during the first nine
months of 1997 from 7.7% during
the same period in 1996 and the
weighted average cost of funds on average deposits declined to
3.0%periods in 1997 from 3.3% in 1996.
The increase in average earnings assets was primarilyresulted from a decline in brokerage
activity believed to be from the average non-performing assets of $5.9 million to
$4.6 million as of September 30,1997 from $10.5 million as of
December 31, 1996. The improvementrecent developments in the yieldequity
markets. The Bank's earnings from stock brokerage commissions and
fees is highly dependent on average
earning assets was primarily the trading prices of the stock
underlying the stock options of its clients and the overall
condition of the stock markets in which they trade. A continuing
reduced level of brokerage commissions would be expected if the
equity markets do not improve.
The net increase in the Fed Funds rate
and the prime interest rate in 1997 compared to 1996. An increase
in average non-interest bearing deposits resulted in the decline
in the average costreal estate rental income of funds on total deposits. The decline in
interest bearing deposits was primarily due to the maturity of
higher costing time deposits.
The Company's net interest income increased to $1.4 million
in the third quarter from $1.0 million in the same quarter in
1996, an increase of $431,000$158,000, or
43%. The increase was the
result of an increase in net interest rate margin, average
earning assets, non-interest bearing liabilities and capital.
The increase in the net interest rate margin of 87 basis points
to 5.3% for the third quarter of 1997 from 4.4% for the same
period in 1996 was primarily the result of an increase in the
yield on loans and a decline in the cost of funds for the
certificate of deposits. The increase in the yield on loans was
primarily the result of the recognition of deferred loan fees
upon the prepayment of related loans. The Bank's cost of funds
declined primarily as a result of the reduction in higher costing
money desk certificates of deposits from $20.8 million as of
September 30, 1996 compared to $15.6 million as of September 30,
1997.
Non-Interest Income
Non-interest income decreased $103,00024%, for the first nine months of 1997 to $2.5 million1998, and $106,000, or 59%, for
the three months ended September 30, 1998 compared to $2.6the same
periods in 1997 is the result of leasing additional space and from
an increase in market rents.
Some increase in real estate rental income is expected to continue
as other leases expire and are renewed at the market rental rates.
page 10
Non-Interest Expense
The Company's non-interest expenses declined $297,000 to $1.7
million from $2.0 million and $471,000 to $5.2 million from $5.7
million for the same periodthree month and nine month periods ended September
30, 1998 and 1997, respectively.
The Company's professional fees, data processing, corporate
insurance premiums, property tax expense, FDIC insurance premiums
and other operating expenses all declined. Generally, the
operating expenses that declined did so as a result of continuing
cost containment measures and the overall improving financial
condition of the Company. The reduction in 1996. The decline wasproperty taxes and
other operating expenses is primarily the result of a
reduction in the sale of other real
estate owned (the "OREO") for the first nine months of 1997
compared to the same period in 1996.lower non-
performing assets including OREO. The reduction in OREO
resulted in fewer sales, which in turn resulted in a lower gain
on sale of assets in 1997 of $260,000 compared to $659,000 in
1996.
page 8
Non-interest income increased $101,000, for the third
quarter of 1997 to $888,000 compared to $787,000 for the same
period in 1996. The improvement was primarily the increase in transactions that generated the commissions, charges and fees
related to increased activity of the exercise of the underlying
stock options and discount brokerage transactions executed by the
Bank's customers.
Non-Interest Expense
The Company's operatingoccupancy
expenses increased by $377,000, or
7% during the first nine months of 1997 compared to the same
period in 1996 primarily as a result ofoccurred from an increase in compensationutilities and related
benefits, data processing costs and
other operating costs which were partially offset by declines in
professional fees and insurance premiums. The increase in
compensation and benefit costs was primarily the result of an
increase in incentive related compensation accruedexpenses as a result of the Company's improved core operating performance for the first
nine months of 1997 compared to the same period in 1996,
including a one time accrual for a special one-time bonus that is
likely to be payable to the Chief Executive Officer. The
increase in data processing costs for the first nine months of
1997 compared to 1996 was the result of outsourcing certain data
processing functions during the second quarter of 1996, which
resulted in higher data processing costs beginning late in the
second quarter of 1996. The increase in data processing costs
was offset by reductions in data processing related compensation
expenses. The increase in other operating costs was primarily
related to a provision for possible loss on sale of OREO recorded
as other operating expense in the second quarter of 1997.
The decline in FDIC and corporate insurance premiums
reflects improvement in the financial conditionfull occupancy of the Company
and the Bank in 1997 compared to 1996. The decline in
professional fees reflects a reduction in the need for legal, and
business and consulting services
The Company's operating expenses increased by $208,000
during the third quarter of 1997 compared to the same period in
1996 primarily as a result of an increase in compensation and
benefits related expenses partially offset by a reduction in
other operating expenses for the reasons discussed above.Bank's
headquarter building.
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short term
investments totaled $29.0$20.8 million, or 26%16.4% of total assets, as
ofat
September 30, 1997 compared to $15.61998, an increase of $3.8 million, from $17.0
million, or 15%14.6% of total assets, at December 31, 1996. The increase was funded by a
decline in net loans of $6.5 million and OREO of $3.5 million,
and an increase in deposits of $5.6 million and capital of $1.8
million.1997.
As of September 30, 1997,1998, the Bank had pledged loans and
securities totaling
$6.6$11.7 million enabling the Bankpledged to borrow
approximately $5.7 million from the Federal Home Loan Bank of San
Francisco (the "FHLB"). The as collateral for other borrowings. As of
September 30, 1998, the Bank did not draw on this lending
facility duringhad the first nine monthsability to borrow up to 20% of
1997.total assets from the FHLB upon the pledge of sufficient
collateral. In the future, long and short-termshort term borrowings from the
FHLB may be used as an on-going source of liquidity and funding.
As of September 30, 1997,1998, the Bank had loans andother securities totaling
$1.6 million pledged as collateral for various other purposes.
As of September 30, 1998, the Bank had access to the FRB totaling $1.9 million, which provide
collateral to borrow up to $1.8 million fromdiscount
window at the FRB discount
window.
page 9for a total borrowing facility of $2.0 million
upon the pledge of securities, and to $3.5 million for day-light
overdrafts with the FRB. At September 30, 1998 and December 31,
1997, no securities were pledged as collateral for the FRB
facility.
Capital
At September 30, 1997,1998, shareholders' equity was $12.9$20.1 million
compared to $11.1$17.6 million at December 31, 1996 primarily
as a result of $727,000 in net income for the nine months then
ended and a shareholder's capital investment of $1.0 million.1997.
The Company and the Bank are subject to general regulations
issued by the FRB, FDIC, and DFI which require maintenance of a
certain levelslevel of capital and the Bank is under specific capital
requirements as a result of the MOU.capital. As of September 30, 1997,1998, the Company
and the Bank arewere in compliance with the all minimum capital ratio
requirements including the minimum Leverage Capital
ratio of 7% mandated by the MOU.requirements.
page 11
The following table reflects both the Company's and the Bank's
capital ratios with respect to minimum capital requirements in
effect as of September 30, 1997:1998:
Minimum
Capital
Company Bank Requirement
MOU(1)
Leverage ratio 11.0% 10.8%13.9% 13.8% 4.0% 7.0%
Tier 1 risk-based capital 19.2 18.820.7 20.5 4.0 -
Total risk-based capital 22.2 21.722.1 21.9 8.0 -
(1) Bank only requirement
On June 13, 1997, Mr. Putra Masagung, the record holder of a
majority of the Company's Common Stock invested $1.0 million in
capital pursuant to a February 26, 1996 agreement as
consideration for issuance of 2,941,176 shares of the Company's
Common Stock.
Mr. Masagung recently advised the Company that PT Gunung
Agung, an Indonesian company, beneficially acquired a majority
ownership of the Company's Common Stock. See "Change in
Beneficial Ownership" below for additional discussion.
Investment Activities
At September 30, 1997,1998, the Company's investment securities,
including Fed funds sold,FHLB stock, totaled $67.0$37.1 million, or 60%29.1% of total
assets, compared to $47.9$40.0 million, or 46.0%34.3% of total assets, at
December 31, 1996.1997. The increasenet decline in theinvestment securities was
primarily normal principal repayment of mortgage backed securities,
and maturity or call of agency securities.
The Company's investment portfolio of
$19.1 million was funded by the disposition of $6.7 million in
non-performing assets, reduction in performing loans of $3.3
million, a $1.8 million increase in capital, a $5.6 million
increase in deposits and a net decrease in other assets and other
liabilities of $1.7 million. The investment portfolio has
includedmay from time to time
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, 1997,1998, investment securities held-to-maturity
totaled $6.2$4.3 million, compared to $6.9$5.9 million at December 31,
1996,1997, and wereare carried at amortized cost. At September 30, 1997,1998,
the Company held $34.3$31.2 million in investment securities available-for-sale,available-
for-sale, compared to $28.3$32.7 million at December 31, 1996. The increase in investment1997.
Investment securities available-for-sale of $6.0 million was primarily
investments in fixed rate balloon mortgage-backed securities and
discounted callable agency securities with a weighted average
term to maturity of approximately two years. The investment
securities available-for-sale wereare accounted for at fair
value. Unrealized gains and losses are recorded as an adjustment to
equitya component of
comprehensive income and are not reflected in the current earnings
of the Company. As of September 30, 1997,1998, the investment
securities available-for-sale had an unrealized gain of $24,000$158,000
that iswas included as a separate component of shareholder's equitycomprehensive income to reflect
the current market value of these securities.
page 1012
Loans
During the first nine months of 1997,1998, total loans decreased
by $6.5increased
$9.0 million, from $43.8$51.9 million at December 31, 19961997 to $37.3$60.9
million at September 30, 1997,1998. The net increase resulted primarily
as a resultfrom disbursement of new loan repayments.commitments. The composition of the
Bank's loan portfolio at September 30, 19971998 and December 31, 19961997
is summarized as follows:
September 30, December 31,
(Dollars in Thousands) 1998 1997 1996
Real estate mortgage $ 25,219 $ 28,022$43,598 $37,826
Secured commercial and financial 4,413 6,2299,112 4,912
Unsecured 5,968 7,8007,484 8,633
Other 1,708 1,711
37,308 43,762748 553
60,942 51,924
Deferred costs and premiums
net of fees and discounts net (143) (190)14 (61)
Allowance for possible loan losses (5,991) (5,663)(1,775) (3,200)
Total loans, net $31,174 $ 37,909$59,181 $48,663
During the first nine months of 1998, total loan commitments
available increased $11.5 million to $22.2 million as of September
30, 1998 primarily as a result of new secured commercial and
financial loan commitments.
Classified Assets and Impaired Loans
Classified assets include non-accrual loans, OREO, and
performing loans that exhibit well-defined credit quality weaknesses. The table
below outlines the Bank's classified assets at September 30, 19971998
and December 31, 1996:1997:
September 30, December 31,
(Dollars in Thousands) 1998 1997 1996
Loans - performing $ 3,166 $10,391$4,253 $1,393
Non-accrual loans 207 3,400-- 171
OREO 1,661 5,13358 410
Total classified assets $ 5,034 $ 18,924$4,311 $1,974
On September 30, 1998, the Bank had no loans that were 90 days
past due and still accruing and one loan totaling $12,000 that was
past due between 31 and 89 days. Classified assets declinedincreased by
74%118% to $5.0$4.3 million as of September 30, 19971998 compared to $18.9$2.0
million at December 31, 1996.1997. The decreasenet increase was primarily the result of
the downgrade of one loan. The loan payoffs,that was downgraded was
originated in 1992 as a loan to facilitate the sale of OREO and loan upgrades.the
borrower has performed and continues to perform in accordance with
the terms of the loan. As of September 30, 19971998 and December 31,
1996,1997, all OREO properties were classified. As of September 30,
1997, the Bank did not have any loans that were between 31 and 89
days delinquent and still accruing.
The Company identifies loans with weak credit quality
characteristics for review in accordance with SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" (SFAS No. 114)
as amended by
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-IncomeLoan-
Income Recognition and Disclosures" (the "SFAS No. 114"). As of
September 30, 19971998 and December 31, 1996,1997, the Company had impaired
loans totaling $207,000zero and $3.4 million,$171,000, respectively. The impairment was
measured using the collateral value method. The collateral value method uses an appraisal or other market
valuation to determine the value of the loans underlying
collateral in addition to other collection criteria to determine
overall collectability. TheTotal interest income
recognized on impaired loans during the first nine months of 1998
and 1997 was $4,000 and 1996 was
$43,000, and $60,000, respectively.
page 1113
There can be no assurancesassurance that the Bank will continue tonot experience
declinesincreases in the amount of its classified assets or not experience
losses in attempting to collect the classified loans
or otherwise liquidate the non-performingnon-
performing assets which are presently reflected on the Company's
statement of financial condition.
The Bank expects that to the extent that
non-performing assets continue to decline, it will be able to
reduce the costs incurred for managing and carrying those assets.
Allowance for Loan Losses
TheGenerally, the Bank charges current earnings with provisionsa provision
for estimated losses on loans receivable. The provisions take into
considerationBank will provide an
adjustment if the total allowance for loan losses exceeds the
amount of estimated loan losses. The Bank recorded an adjustment
for loan losses of $1.1 million for the three months ended
September 30, 1998 and $1.5 million for the nine months ended
September 30, 1998 compared to none for the same periods in 1997.
The adjustment for loan losses reflects the amount necessary to
reduce the allowance for loan losses to a level that management
believes is adequate based on many factors including specifically
identified problem loans, the financial condition of the borrowers,
the fair value of the collateral, recourse to guarantors and other
factors compared to
the total allowance for loan losses. Generally, a charge to
current earnings is required when the total allowance for loan
losses is less than the specific loss allowances, which are
determined as described below.factors.
Specific loss allowances are established based on the asset
classification and credit quality grade.quality. Specific loss allowances are
utilized to ensure that the allowance is allocated based on the
credit quality including the present value of the
expected future cash flows,
the terms and structure of the loan, the financial condition of the
borrower, and the fair value of underlying collateral. As of September 30, 1997, $31,000 in the
allowance of loan losses was allocable to impaired loans, as
identified in accordance with SFAS No. 114, which had an
outstanding principal balance totaling $207,000. In
addition, the Bank carries an "unallocated"allowance for loan loss allowance to providelosses provides for losses that
may occur in the future in loans that are not
presently classified, based on present economic conditions,
trends, and related uncertainties. The following table summarizes
the loan loss experience of the Bank for the nine months ended
September 30, 1997:1998:
September 30,
(Dollars in Thousands) 19971998
Beginning balance of allowance
for loan losses at December 31, 1996 $ 5,6631997 $3,200
Charge-offs --
Recoveries 328
Provision --52
Adjustment (1,477)
Ending balance of allowance for loan losses $ 5,991
The$1,775
At September 30, 1998, the allowance for loan losses was 2.9%
of total loans compared to 6.2% as of December 31, 1997. At
September 30, 1998, the unallocated portion of the allowance for
loan losslosses totaled $3.7 million at September 30, 1997$403,000 compared to $2.4$1.4 million at December
31, 1996. The increase in1997. As of September 30, 1998, the unallocated
allowance was primarily the result of recoveries and the
reduction in classifiedBank had no impaired
loans outstanding that require a higherrequired an allocation of reserves.the allowance for
loan losses, as identified in accordance with SFAS No. 114.
Deferred Tax Asset
As of September 30, 1998, the Company's estimated total
deferred tax assets net of deferred tax liabilities is estimated to
be $18.5 million compared to $20.4 million as of December 31, 1997.
As of September 30, 1998, the estimate includes net temporary
differences of $1.4 million, tax credits of $0.5 million, and $16.6
million in net operating loss carryforward benefits.
page 1214
Deposits
The Bank had total deposits of $96.7$95.1 million at September 30,
1997,1998 compared to $91.2$86.5 million at December 31, 1996,1997, an increase of
$5.5 million.$8.6 million or 9.9%. The increase was attributed to short-term
escrow related deposits and Association Bank Service deposits which
were partially offset by a decrease in Stock Option lending related
deposits. A summary of deposits at September 30, 19971998 and December
31, 19961997 is as follows:
September 30, December 31,
(Dollars in Thousands) 1998 1997 1996
Demand deposits $ 21,760 $ 16,505$17,234 $19,691
NOW 16,075 18,29516,294 15,986
Money market 16,779 17,376
Savings 1,329 1,343and savings 22,073 16,040
Total deposits with no stated maturity 55,943 53,51955,601 51,717
Time deposits:
Less than $100,000 24,008 29,15418,967 19,184
$100,000 and greater 16,766 8,49320,531 15,618
Total time deposits 40,774 37,64739,498 34,802
Total deposits $ 96,717 $ 91,166$95,099 $86,519
The Bank'sdeposits from private and business banking customer's depositscustomers
totaled $36.2$40.6 million, or 37.5%42.7% of total deposits, at September 30,
1997,1998, compared to $36.4$34.7 million, or 40.0%40.1% of total deposits, at
December 31, 1996. Deposits of the Bank's1997. The deposits from Association Bank Services clientsService
customers totaled $17.1$17.7 million, or 18.6% of total deposits at
September 30, 1998, compared to $17.2 million, or 19.9% of total
deposits at December 31, 1997. The deposits from Escrow customers
totaled $22.0 million, or 23.1% of total deposits at September 30,
1998, compared to $15.3 million, or 17.7% of total deposits at
December 31, 1997. The deposits related to Stock Option
transactions totaled $2.1 million, or 2.2% of total deposits at
September 30, 1997,1998, compared to $18.2$7.6 million, or 21.8%8.8% of total
deposits at December 31, 1996. Deposits1997.
The deposits acquired through the money desk operations
totaled $15.6$12.7 million, or 16.1%13.4% of total deposits at September 30,
1997,1998, compared to $20.1$11.7 million, or 23.0%13.5% of total deposits at
December 31, 1996. Escrow
customer's deposits totaled $19.8 million, or 20.5%1997.
Other Borrowings
As of total
deposits at September 30, 1997 compared to1998, the Bank had long-term FHLB
borrowings outstanding totaling $10.0 million secured by pledged
securities totaling $11.7 million. In the future, long and short
term borrowings from the FHLB may be used as an on-going source of
liquidity and funding.
Year 2000 Readiness Disclosure
The Company has adopted and is implementing a plan to
identify, assess, and address issues related to the Year 2000
problem (the "Y2K Plan"). The Year 2000 (the "Y2K") problem is a
computer programming issue that has occurred as a result of many
computer systems being programmed to use a two digit code to
identify the year. For example, the year 1998 would be signified
as "98", and, therefore, the year 2000 may be mis-recognized as
1900. This could result in the miscalculation of financial data
and/or 11.0%result in processing errors in transactions or functions
that are date sensitive.
page 15
The following discussion of total depositsthe implications of the Y2K
problem for the Company contains numerous forward-looking
statements based on inherently uncertain information. The cost of
the project and the date on which the Company plans to complete the
modifications are based on management's best estimates, which were
derived utilizing a number of assumptions of future events
including the continued availability of internal and external
resources, third party modifications and other factors. However,
there can be no guarantee that these estimates will be achieved and
actual results could differ. Moreover, although management
believes it will be able to make the necessary modifications in
advance, there can be no guarantee that failure to modify the
systems would not have a material adverse affect on the Company.
There also can be no guarantee that the failure of other third
parties to modify their systems would not have a material adverse
affect on the Company and the Bank.
Generally, the Bank's business risks come from internal
sources such as the Bank's own computer systems and from external
sources such as borrowers whose businesses might be adversely
impacted by the Y2K problem, deposit customers whose transactions
are transmitted electronically, and other third parties such as
institutions, vendors, and governmental agencies whose computer
systems may have a direct or indirect adverse impact on the Bank or
the Bank's customers. The Bank maintains much of its computer
hardware on the premises of third party vendors, uses software
under licensing agreements with vendors, and has outsourced its
data processing requirements to outside vendors. As a result, the
Bank is highly reliant on vendors to upgrade many of the Bank's
systems to be Y2K compliant in the timeframe specified by the Y2K
Plan.
The purpose of the Y2K Plan is to manage and mitigate the
business risks associated with the Y2K problem. The Y2K Plan is a
five step process; identification, assessment, renovation, testing,
and implementation. A project team, staffed by Bank employees, is
responsible for monitoring the Y2K Plan progress including vendor
commitments, and periodically reporting such progress to the Bank
Audit and Regulatory Committee of the Board. The Bank's internal audit
function periodically performs a review of the Y2K Plan progress.
The Bank is in the process of upgrading all of its core
banking hardware and software. These mission critical system
upgrades are projected to be operational by December 31, 1996.
Concentrations1998 and
testing is expected to be completed by March 31, 1999. The Bank
has requested certification of deposits acquired throughcompliance from all vendors and
intends to test the money desk
operationscompliance of all major systems. The Bank will
attempt to obtain a certification of compliance of all major
systems from an independent third party where possible. The Bank
has sent notification to all loan and certificatesdeposit customers apprising
them of depositthe potential problems and requesting that they assess the
compliance of $100,000 and moretheir computer systems. The Bank's lending policies
have been classifiedrevised to require an assessment of a borrower's risks to
the Y2K problem, and the assessment has been incorporated into the
credit review process. In addition, the Y2K Plan includes
provisions that provide for manual processes, for a limited period
of time, if the Bank's systems are not operational, and that ensure
that additional liquidity is available in the event of a limited
disruption of customer cashflows.
The Y2K Plan includes a contingency plan if certain tasks are
not successfully completed by bank regulators as volatile liabilitiesspecified trigger dates. If the
Company's mission critical systems are not compliant by March 31,
1999, the Company will take the necessary steps to correct the
deficiency by implementing the contingency plan phase of the Y2K
Plan which includes engaging alternate vendors who are Y2K
compliant. If the Company implements the contingency phase,
additional costs are likely to be incurred.
page 16
The cost associated with certain risks,executing the Y2K Plan and completing
the Y2K modifications are estimated to be approximately $250,000
including approximately $160,000 for the riskspurchase of reduced
liquidity if a bank is unable to retain such depositsnew hardware
which will be amortized over the useful life of the equipment. The
funds for these modifications are from general working capital.
These costs, exclusive of the cost of replacement systems that are
being capitalized and amortized in accordance with the Company's
policies, are being expensed as incurred. As of reduced margins if interestSeptember 30,
1998, approximately $225,000 of Y2K costs are increased by a bank in
order to retain such deposits. Ashave been incurred. No
significant information technology projects have been deferred as
a result of the MOU,Y2K efforts. There can be no assurance that the
cost to replace or modify the Company's date sensitive systems will
not exceed the Company's present estimate or that all business
risks and related exposure have been identified.
If the Company's date sensitive systems or the systems of
those third parties who have material business relationships with
the Company are not Y2K compliant by January 1, 2000, the Company's
business and results of operations may be materially and adversely
affected. The Company could experience time delays in its daily
operations and increased processing costs due to the required shift
to manual processes, and the Company may not be able to provide
customers with timely and pertinent information regarding their
accounts which may negatively affect customer relations and lead to
the potential loss of customers. In addition, the Company's
clients may experience liquidity problems which may result in the
Bank is requiredneeding to maintain a volatile liability dependency ratio of
notincrease its liquidity by obtaining funds from
other more than 15%, whichexpensive sources including money desk deposits, or
borrowing from the Bank was in compliance with as of
September 30, 1997.
Change in Beneficial Ownership
Mr. Putra Masagung,FHLB or FRB.
While there can be no assurances, the record holder of 97.8% of the
Company's Common Stock, has advised the Company that a majority
ownership of the Company's Common Stock was beneficially acquired
by PT Gunung Agung (the "GA"), an Indonesian company, in a series
of transactions from 1992 to 1995. This acquisition of a
majority ownership occurred without the required prior approval
of the state and federal regulatory authorities. The Company believes that
without such regulatory approval, GA will be
preventedthe greatest risk for disruptions to its business exists with Y2K
noncompliance of third parties that have major business relationships
with the Company. The possible consequences of noncompliance by third
parties include, among other things, delays in processing daily deposits
and withdrawals, and an increase in loan delinquencies from exercising its rights as a shareholder.potential
business failures. These risks are inherent in the industry and not
specific to the Company. The Company advisedis unable to estimate the appropriate regulatory authorities of these
events. Representatives of both GA and Mr. Masagung have
initiated discussions with the regulatory agencies to determine
the appropriate steps to be taken under the circumstances.
Based on the facts known at this time, managementpotential
financial impact of the Company does not believe this development will have a material
impact on the operations or the current financial condition ofscenarios described above. However, the Company
or the Bank. This development is not expected to
materially reduce the net operating loss carryforwardsbelieves that the
Company may use toits Y2K Plan should reduce any future income tax liability.
However,material adverse
effect that any future change in control could materially reduce the
net present value of net operating loss carryforwards.such disruption may have.
page 1317
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 partiesa party to
legal actions. Based on information available to the Company and
the Bank, and its review of such outstanding claims to date,
management believes the liability relating to such claims, if any,
will not have a material adverse effect on the Company's liquidity,
consolidated financial condition or results of operations.
Item 2 - Changes in Securities
See "Financial Condition - Liquidity and Capital Resources".None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
A Report on Form 8-K, filed on August 8, 1997,
regarding a change in beneficial ownership is incorporated by
reference. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Change in
Beneficial Ownership".None
page 1418
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The San Francisco Company
(Registrant)
Date: November 12, 1997October 28, 1998 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: November 12, 1997October 28, 1998 /s/ Keary L. Colwell
Keary L. Colwell
Chief Financial Officer page 15and
Executive Vice President