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 SeptemberJune 30, 19981999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-10198
The San Francisco Company
(Exact name of Registrant as specified in its charter)
Delaware 94-3071255
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
550 Montgomery Street, San Francisco, California 94111
(Address of principal executive office) (Zip Code)
(415) 781-7810
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
The Registrant had 31,728,78231,818,782 shares of Class A Common Stock outstanding on October 27, 1998.
pageJuly
17, 1999.
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 SeptemberJune 30, 19981999 and December 31, 19971998 . . . . . . . . . . . . 1
Consolidated Statements of Operations
For the Three and NineSix Months Ended SeptemberJune 30, 1999 and 1998 and 1997.. . . 2
Consolidated Statements of Changes in Shareholders'EquityShareholders' Equity and
Comprehensive Income For the NineSix Months
Ended SeptemberJune 30, 19981999 and 19971998 . . . . . 4. . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
For the Three and NineSix Months Ended SeptemberJune 30, 1999 and 1998 and 1997. 5. . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . 65
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . 8. . . . . 7
Part II - Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . .18
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . .18
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . .18
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . .18
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . .18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .1814
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
page16
Page
The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
SeptemberJune 30, 19981999 and December 31, 19971998
(Unaudited)
SeptemberJune 30, December 31,
(Dollars in Thousands Except Per Share Data) 1999 1998 1997
Assets:
Cash and due from banks $3,567 $2,837$5,158 $5,908
Federal funds sold 17,280 14,15013,303 9,000
Cash and cash equivalents 20,847 16,98718,461 14,908
Investment securities held-to-maturity, at cost
(Fair value: 1999 $2,758; 1998 $4,314;1997 $5,822) 4,315 5,864$4,830) 2,789 3,846
Investment securities available-for-sale, at fair value 31,204 32,66928,045 34,235
Federal Home Loan Bank stock, at par 1,565 1,4992,022 1,971
Loans 60,942 51,92484,544 73,980
Deferred loan costs, net of fees 14 (61)(118) (144)
Allowance for loan losses (1,775) (3,200)(1,525) (1,625)
Loans, net 59,181 48,66382,901 72,211
Other real estate owned, net 58 410-- 51
Premises and equipment, net 7,650 7,7917,307 7,546
Interest receivable 603 720741 748
Other assets 1,920 2,0147,270 4,620
Total Assets $127,343 $116,617$149,536 $140,136
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $17,234 $19,691$19,615 $18,237
Interest bearing deposits 77,865 66,82885,160 77,451
Total deposits 95,099 86,519104,775 95,688
Other borrowings 10,000 10,00020,000 20,000
Other liabilities and interest payable 2,114 2,5281,364 1,744
Total liabilities 107,213 99,047126,139 117,432
Shareholders' Equity:
Preferred Stock (par value $0.01 per share)
Series B - Authorized - 437,500 shares;
Issued and outstanding - 19981999 and 19971998 - 15,869 111 111
Common stock (par value $0.01 per share)
Class A - Authorized - 100,000,000 shares;
Issued and outstanding - 1999 - 31,818,782 and
1998 - 31,728,782 and 1997 - 31,723,782 317318 317
Additional paid-in capital 78,845 78,816 78,814
Retained deficit (59,272) (61,656)(55,353) (56,619)
Accumulated other comprehensive (loss) income (loss) 158 (16)(524) 79
Total shareholders' equity 20,130 17,57023,397 22,704
Total Liabilities and Shareholders' Equity $127,343 $116,617$149,536 $140,136
See accompanying notes to unaudited consolidated financial statements.
pagePage 1
The San Francisco Company and Subsidiaries
Consolidated Statements of Operations
Three and NineSix Months Ended SeptemberJune 30, 19981999 and 19971998
(Unaudited)
Three Months NineSix Months
Ended SeptemberJune 30, Ended SeptemberJune 30,
(Dollars in Thousands
Except Per Share Data) 1999 1998 19971999 1998 1997
Interest income:
Loans $1,363 $1,234 $3,826 $3,473$1,830 $1,252 $3,583 $2,463
Investments 931 953 2,576 2,512651 819 1,340 1,645
Dividends 21 10 66 3125 22 51 45
Total interest income 2,315 2,197 6,468 6,0162,506 2,093 4,974 4,153
Interest expense:
Deposits 778 775 2,077 2,113693 646 1,345 1,299
Other borrowings 154 -- 453 --275 149 547 299
Total interest expense 932 775 2,530 2,113968 795 1,892 1,598
Net interest income before
adjustmentprovision (adjustment)
for loan losses 1,383 1,442 3,938 3,903
Adjustment1,538 1,298 3,082 2,555
Provision (adjustment) for
loan losses (1,075) -- (1,477) --100 (308) 100 (402)
Net interest income after
adjustmentprovision (adjustment)
for loan losses 2,458 1,442 5,415 3,9031,438 1,606 2,982 2,957
Non-interest income:
Stock brokerage
commissions and fees 220 440 755 1,069413 278 850 535
Real estate rental income 285 179 816 658310 274 616 531
Service charges and fees 181 198 484 437239 157 413 303
Income from operating leases 130 -- 183 --
Gain on sale of assets, net 17 32 42 26670 25 70 25
Loss on sale of securities,net -- -- -- (6)--
Other income 28 39 107 9462 42 111 79
Total non-interest income 731 888 2,204 2,5181,224 776 2,243 1,473
Non-interest expense:
Salaries and related benefits 1,017 1,134 3,003 2,9681,201 1,013 2,424 1,986
Occupancy expense 318 288 899 903
Professional fees 80 146 339 361291 289 581 581
Data processing 93 98 307 324117 103 226 214
Corporate insurance premiums 41 56 131 165
Property tax expense -- 22 -- 87
FDIC insurance premiums 2 10 21 8965 34 128 90
Professional fees 59 133 144 259
Other operating expenses 127 221 519 793192 223 425 411
Total non-interest expense 1,678 1,975 5,219 5,6901,925 1,795 3,928 3,541
Income before income taxes 1,511 355 2,400 731737 587 1,297 889
Provision for income taxes 6 (3) 11 420 5 23 5
Net Income $1,505 $358 $2,389 $727$717 $582 $1,274 $884
Income per common share:
Basic: Net income $0.05 $0.01 $0.08 $0.02 $0.02 $0.04 $0.03
Weighted average
shares outstanding 31,728,782 31,717,171 31,726,566 29,950,31131,735,705 31,727,134 31,732,244 31,725,458
Diluted: Net income $0.05 $0.01 $0.07 $0.02 $0.02 $0.04 $0.03
Weighted average
shares outstanding 33,204,853 31,717,964 33,129,248 29,951,10433,448,958 33,091,792 33,161,699 33,090,838
See accompanying notes to unaudited consolidated financial statements.
pagePage 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
Nineand Comprehensive Income
Six Months Ended SeptemberJune 30, 1999 and 1998
and 1997
(Unaudited)
Accumu
(Dollars in Thousands) latedAccum
ulated
Other Addi- Compre- Total
tionalAdditional Compre- Retained hensiveCompre- Share-
Preferred Common Paid-in hensive Earnings Income/hensive holders'
(Dollars in Stock Stock Capital Income (Deficit) (Loss)Income Equity
Thousands)
Balances at
January 1, 19971998 $111 $288 $77,841 $(67,099) $(77) $11,064$317 $78,814 $(61,656) $(16) $17,570
Net proceeds on
salefrom
the exercise of
stock options -- 29 9712 -- -- 1,000
Other comprehensive
income,2
Dividend on
Preferred Stock (5) -- (5)
Comprehensive loss,
net of tax
Net unrealized gains,
net of
reclassification
adjustments $101$3 -- 101 1013 3
Other comprehensive
income 1013 -- -- --
Net income
(nine(six months) 727 727884 884 -- 727884
Comprehensive income $828$887
Balances at
SeptemberJune 30, 19971998 111 317 78,812 (66,372) 24 12,89278,816 (60,777) (13) 18,454
Comprehensive income,
net of tax
Net unrealized gains $92 -- 92 92
Other comprehensive
income 92
Net income
(six months) 4,158 4,158 -- 4,158
Comprehensive income $4,250
Balances at
December 31, 1998 111 317 78,816 (56,619) 79 22,704
Net proceeds from
the exercise of
stock options -- -- 21 29 -- -- 2
Other comprehensive-- 30
Dividend on
Preferred Stock (8) -- (8)
Comprehensive income,
net of tax
Net unrealized losses $(40)$(603) -- (40) (40)(603) (603)
Other comprehensive
loss (40)(603)
Net income
(three(six months) 4,716 4,7161,274 1,274 -- 4,7161,274
Comprehensive income $4,676$671
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
SeptemberJune 30, 19981999 $111 $317 $78,816 $(59,272) $158 $20,130$318 $78,845 $(55,353) $(524) $23,397
See accompanying notes to unaudited consolidated financial statements.
page 4Page 3
The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three and NineSix Months Ended SeptemberJune 30, 19981999 and 19971998
(Unaudited)
Three Months Ended NineSix Months
Ended SeptemberJune 30, SeptemberEnded June 30,
(Dollars in Thousands) 1999 1998 19971999 1998 1997
Cash Flows from Operating Activities:
Net income $1,505 $358 $2,389 $727$717 $582 $1,274 $884
Adjustments to reconcile net
income to net cash
provided by operating activities:
AdjustmentProvisions (adjustment) for loan losses (1,075) -- (1,477) --100 (308) 100 (402)
Depreciation and amortization expense 142 135 393 412
Loss on sale of investment securities -- -- -- 6140 127 282 251
Net gain on sale of real estate owned (17) (37) (42) (271)
Provision for loss on
other real estate owned -- -- -- 182(71) (25) (71) (25)
Decrease (increase) in interest
receivable and other assets 54 131 211 278
(Decrease) increase114 (102) 120 157
Increase (decrease) in interest
payable and other liabilities (1,408) 388 (419) 487
Increase37 1,350 (385) 995
Decrease in deferred loan fees net of costs (38) (114) (75) (47)(40) -- (26) (37)
Net cash flows (used in) provided by
operating activities (837) 861 980 1,774997 1,624 1,294 1,823
Cash Flows from Investing Activities:
Proceeds from maturities of
investment securities held-to-maturity 553 270 1,549 688509 590 1,057 996
Proceeds from maturities of investment
securities available-for-sale 10,652 2,791 23,187 3,517
Proceeds from the sale1,581 4,488 11,594 12,529
Purchase of investment securities
available-for-sale -- -- -- 6,200
Proceeds from the sale of FHLB Stock 708 -- 708 --
Purchase of investment
securities available-or-sale (11,256) (5,585) (21,548) (15,538)
Purchase of FHLB Stock and
FHLB Stock dividends (21) (10) (774) (31)(1,965) (5,739) (6,058) (11,045)
Net (increase) decreaseincrease in loans (8,022) 3,376 (9,018) 6,453
Recoveries of loans
previously(3,087) (1,218) (10,564) (996)
Loans charged off -- 48net of (recoveries) (200) 42 (200) 52 329
Proceeds from the sale of
other real estate owned 296 93 394 3,533122 50 122 98
Purchases of premises and equipment (39) (49) (252) (145)
Acquisition and capitalized
cost of real estate owned(16) (88) (43) (213)
Net decrease (increase) in
investment in operating leases 181 -- (2,762) -- -- 28
Net cash (used in) provided
by investing activities (7,129) 934 (5,702) 5,034(2,875) (1,875) (6,854) 1,421
Cash Flows from Financing Activities:
Net (decrease) increase in deposits (7,353) 6,033 8,580 5,55111,537 13,411 9,087 15,933
Net decreaseincrease in other borrowings (5,000)-- 5,000 -- 5,000
Cash dividends paid on
Series B Preferred Stock -- -- (4) --
Net proceeds from sale of stock -- --30 2 1,00030 2
Net cash (used in) provided by financing activities (12,353) 6,033 8,582 6,551
(Decrease) increase11,567 18,413 9,113 20,935
Increase in cash and cash equivalents (20,319) 7,828 3,860 13,3599,689 18,162 3,553 24,179
Cash and cash equivalents at
beginning of period 41,166 21,1578,772 23,004 14,908 16,987 15,626
Cash and cash equivalents at
end of period $20,847 $28,985 $20,847 $28,985$18,461 $41,166 $18,461 $41,166
Supplemental Disclosure
of Cash Flow Information:
Cash paid during the period for:
Interest $811 $736 $2,413 $2,125$1,158 $913 $1,905 $1,451
Payment of income taxes 4 -- 24 221 6 27 18
See accompanying notes to unaudited consolidated financial statements.
page 5Page 4
The San Francisco Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)(June 30, 1999 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"), is a California 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.Company.
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 SeptemberJune 30, 1998,1999, and for the three and nine
months ended SeptemberJune 30, 19981999
and 19971998 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 ended SeptemberJune
30, 19981999 are not necessarily indicative of the results to be expected for
the entire year of 1998.1999. This report should be read in conjunction with
the Company's 19971998 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.
Note 3 - Earnings Per Share (the "EPS")
The Company adopted Statement of Financial Accounting Standards (the
"SFAS") no.No. 128, "EarningsEarnings Per Share." SFAS No. 128 requires dual
presentation of basic EPS and diluted EPS on the face of the income
statement and disclosure of the calculation of basic EPS compared to
diluted EPS in the footnotes to the financial statements.
Basic EPS is calculated by dividing net income by the weighted average
number of Class A Common Shares (the "Common Stock"). The dilutive EPS is
calculated assuming the exercise ofgiving effect to all potentially dilutive Common Shares, such as
certain stock options, that were outstanding during the period. The
Page 5
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
19981999 Income Shares amount
Three-months ended September 30:Second quarter
Basic EPS $1,503 31,728,782 $0.05$715 31,735,705 $0.02
Effect of dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- 1,475,2781,712,460
Diluted EPS $1,505 33,204,853 $0.05
Nine-months ended September 30:$717 33,448,958 $0.02
Year to date
Basic EPS $2,382 31,726,566 $0.08$1,270 31,732,244 $0.04
Effect of dilutive securities:
Series B Preferred Stock 74 793
Stock Options -- 1,401,8891,428,662
Diluted EPS $2,389 33,129,248 $0.07$1,274 33,161,699 $0.04
Per-share
19971998 Income Shares amount
Three-months ended September 30:Second quarter
Basic EPS $356 31,717,171 $0.01$580 31,727,134 $0.02
Effect of dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- --1,363,865
Diluted EPS $358 31,717,964 $0.01
Nine-months ended September 30:$582 33,091,792 $0.02
Year to date
Basic EPS $72 29,950,311 $0.02$879 31,725,458 $0.03
Effect of dilutive securities:
Series B Preferred Stock 75 793
Stock Options -- --1,364,587
Diluted EPS $727 29,951,104 $0.02$884 33,090,838 $0.03
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 Common Shares in addition to
receiving the cash dividends to which they are entitled. In order
to bring the cash dividends current, the Board of Directors
declared a cash dividend on the Series B Preferred Stock totaling
$3.92 per share for stockholders of record on July 1, 1998 that was
paid on July 15, 1998.
page 7
Note 5 - Recent Accounting Pronouncements
During the first half of 1999, there were no new pronouncements that are
applicable to the Company or the Bank.
In June 1997,1998, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 130, "Reporting Comprehensive Income" which
provides standards for reporting and displaying comprehensive
income and its components in the financial statements. This
statement is effective with the year-end 1998 financial statements
including interim financial 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, "Disclosure about
Segments of an Enterprise and Related Information", which requires
that a public company 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 for
year-end 1998 financial statements. The Company 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 Other Post- Retirement Benefit Plans", which
revises and standardizes the disclosure requirements for pension
and other post retirement benefit plans. The Company does not have
any pension or post retirement benefit plans that require
disclosure in 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 for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement 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 SeptemberJune 30,
1998,1999, 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 subsequent accounting for securities retained after the
securitization of mortgage loans by mortgage banking enterprises
with that of non-mortgage banking enterprises. This statement is
effective for the first quarter beginning after December 15, 1998.
As of September 30, 1998, the Company did not have any mortgage-
backed securities retained after the securitization of mortgage
loans held for sale.Page 6
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 risks associated with Year
2000 remediation, 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 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 revise
these forward-looking statements to reflect subsequent events or
circumstances. Readers are also encouraged to review the Company's
publicly available filings with the Securities and Exchange Commission.
page 8
Overview
The Company is a one-bank holding company registered in Delaware under the
Bank Holding Company Act of 1956. The principal activity of the Company is to
serve as the holding company for Bank of San Francisco, a California chartered
bank organized in 1978, with deposits insured by the Federal Deposit Insurance
Corporation's Bank Insurance Fund. The information set forth in this report,
including unaudited interim financial statements and related data, relates
primarily to the Bank.
The Company's Common Stock is not listed on any exchange and
is not actively traded.exchange. First Security
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$717,000 for the three months ended SeptemberJune
30, 1998 and $2,389,000 for the nine months
ended September 30, 1998,1999, compared to a net income of $358,000 and
$727,000$582,000 for the same periods, respectively,period in 1997.1998. The
increase in the Company's net income of $1,147,000 for the three month
period$135,000 was primarily from an increase
in net interest income and non-interest income, partially offset by an increase
in the adjustmentprovision for loan losses and by an increase in non-interest expenses in
second quarter 1999 compared to the same period in 1998.
The Company recorded net income of $1.3 million for the six months ended
June 30, 1999, compared to a net income of $884,000 for the same period in
1998 of $1,075,000 and the improvement in core operating income
in 1998 of $87,000 as compared with 1997.1998. The increase in the Company's net income of $1,662,000$390,000 was primarily from an
increase in net interest income and non-interest income, partially offset by an
increase in the provision for theloan losses and by an increase in non-interest
expenses in first nine monthshalf of 19981999 compared to the same period in 1997 was
primarily from the adjustment for loan losses of $1,477,000 and
lower provision for loss on other real estate owned (the "OREO") of
$182,000, partially offset by reductions in gain on sale of OREO of
$224,000.1998.
At SeptemberJune 30, 1998,1999, total assets were $127.3$149.5 million, an increase of $10.7$9.4
million, or 9.2%6.7% from $116.6$140.1 million at December 31, 1997.1998. As of SeptemberJune 30, 1998,1999,
total loans were $60.9$84.5 million, an increase of $9.0$10.5 million, or 17.3%14.2%, compared
to $51.9$74.0 million at December 31, 1997.1998. Total deposits were $95.1$104.8 million at
SeptemberJune 30, 1998,1999, an increase of $8.6$9.1 million, or 9.9%9.5%, compared to $86.5$95.7 million
at December 31, 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 exceed
an aggregate of $20,000 per month; (e) engaging in any cash
expenditures with any individual or entity that exceed $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 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.
page 9
Management was notified by the FRB at its 1998 examination
that the Company was in full compliance with the Agreement, and
management believes the Company continues to be in full compliance.
Memorandum of Understanding
In June 1998, the Federal Deposit Insurance Corporation (the
"FDIC") and the California Department of Financial Institutions
(the "DFI") terminated the Bank's Memorandum of Understanding.1998.
Page 7
Results of Operations
Net Interest Income
The Company's net interest income was $1.4$1.5 million in the quarter ended
June 30, 1999 compared to $1.3 million for the quarters ended September 30,same period in 1998, and 1997.or an
increase of 18.5%. The Company's net interest income was $3.9$3.1 million in
the six months ended June 30, 1999 compared to $2.6 million for the nine months ended
September 30,same
period in 1998, and 1997.or an increase of 20.6%. The net interest margin may decline
inincrease was primarily the future as a
result of the recent reductionsan increase in the prime and
fed funds rate indexes.
higher yielding earning assets.
Provision/Adjustment for Loan and Lease Losses
The CompanyIn 1998, the Bank recorded a reductionreductions to the allowance for loan and lease
losses as an adjustment for loan and lease losses. The Company recorded a
provision for loan and lease losses of $1.1 million$100,000 for the three months ended September 30,
1998 and $1.5 million for the nine months ended September 30, 1998second quarter of 1999
compared to nonean adjustment of $308,000 for the same periodsperiod in 1997.1998. The adjustmentCompany
recorded a provision for loan and lease losses reflectsof $100,000 for the amount necessaryfirst half of
1999 compared to reducean adjustment of $402,000 for the allowance
for loan losses to a level that management believes is adequatesame period in 1998. The
provision and adjustments were based on manythe factors that are more fully discussed herein under
"Loans - Allowance"Allowance for Loan and Lease Losses".
Non-Interest Income
Non-interest income was $731,000$1.2 million for the three monthsquarter ended SeptemberJune 30, 19981999
compared to $888,000$776,000 for the same period in 1997.1998, an increase of $448,000, or
58%. Non-interest income was $2.2 million for the nine months
ended September 30, 1998first half of 1999 compared
to $2.5$1.5 million for the same period in 1997.1998, an increase of $770,000, or 52%.
The declineincrease in non-interest income was primarily the result of the reductionan increase in
gain on sale of real estate ownedstock option and brokerage commission income in 1998 compared to 1997 and the reduction in brokerage
commissions, partially offset byfrom higher transaction volumes, an
increase in real estate rental income.
The decline in stock brokerage commissions and fees of
$314,000, or 29%, for the first nine months of 1998 and $220,000,
or 50%, for the three months ended September 30, 1998 compared to
the same periods in 1997 resultedincome from a decline in brokerage
activity believed to be from the recent developments in the equity
markets. The Bank's earnings from stock brokerage commissions and
fees is highly dependent on 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 real estate rental income of $158,000, or
24%, for the first nine months of 1998, and $106,000, or 59%, for
the three months ended September 30, 1998 compared to the same
periods in 1997 is the result of leasing additional space and fromhigher rents, an increase in
market rents.
Someoperating lease income, and an increase in real estate rental income is expectedall other fees and charges in
1999 compared to continue
as other leases expire and are renewed at the market rental rates.
page 101998.
Non-Interest Expense
The Company's non-interest expenses declined $297,000increased to $1.7$1.9 million from $2.0 million and $471,000 to $5.2 million from $5.7$1.8
million for the three monthsecond quarter 1999 and nine month periods ended September
30, 1998, and 1997, respectively. The increase of
$130,000, or 7.2%, was primarily related to compensation related expenses
including incentive programs.
The Company's professional fees, data processing, corporate
insurance premiums, property tax expense, FDIC insurance premiumsnon-interest expenses increased to $3.9 million from $3.5
million for the six month period ended June 30, 1999 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 property taxes and
other operating expenses is primarily the result of lower non-
performing assets including OREO.1998,
respectively. The increase in occupancy
expenses occurred from an increase in utilities andof $387,000, or 10.9%, was primarily related
to compensation related expenses as a result of the full occupancy of the Bank's
headquarter building.including incentive programs.
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short term investments
totaled $20.8$18.5 million, or 16.4%12.3% of total assets, at SeptemberJune 30, 1998,1999, an increase
of $3.8$3.6 million, from $17.0$14.9 million, or 14.6%24.2% of total assets, at December 31,
1997.1998. The change in liquidity was the result of an increase in deposits of $9.1
million offset by a decrease in investments available for sale of $6.2 million
which was partially
Page 8
used to fund an increase in loans and operating leases.
As of SeptemberJune 30, 1998,1999, the Bank had pledged securities totaling $11.7$20.0 million pledged
to the Federal Home Loan Bank of San Francisco (the "FHLB") as collateral for
other borrowings.borrowings totaling $20.0 million. As of SeptemberJune 30, 1998,1999, the Bank hadhas the
ability to borrow up to a maximum of 20% of total assets or $29.9 million 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 SeptemberJune 30, 1998,1999, the Bank had other securities
totaling $1.6 million$600,000 pledged as collateral for various other purposes.
As of September 30, 1998, thepublic funds and trusts.
The Bank hadhas access to the discount window at the FRBFederal Reserve Bank (the
"FRB") for a total borrowing facility of $2.0$2.1 million upon the pledge of
securities, and to $3.5 million for day-light
overdrafts with the FRB.securities. At SeptemberJune 30, 19981999 and December 31, 1997,1998, no securities were pledged
as collateral for the FRB facility.
Capital
At SeptemberJune 30, 1998,1999, shareholders' equity was $20.1$23.4 million compared to $17.6$22.7
million at December 31, 1997.1998.
The Company and the Bank are subject to general regulations issued by the
FRB, FDIC,Federal Deposit Insurance Corporation, and DFICalifornia Department of
Financial Institutions which require maintenance of a certain levellevels of
capital. As of SeptemberJune 30, 1998,1999, the Company and the Bank wereare in compliance
with the all minimum capital ratio 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 SeptemberJune 30,
1998:1999:
Minimum
Capital
Company Bank Requirement
Leverage ratio 13.9% 13.8%15.5% 15.4% 4.0%
Tier 1 risk-based capital 20.7 20.520.4 20.3 4.0
Total risk-based capital 22.1 21.921.6 21.5 8.0
Investment Activities
At SeptemberJune 30, 1998,1999, the Company's investment securities, including FHLB stock, and Fed
funds sold totaled $37.1$46.2 million, or 29.1%30.9% of total assets, compared to $40.0$49.1
million, or 34.3%35.0% of total assets, at December 31, 1997.1998. The net declinedecrease in
investment securities wasresulted primarily normalfrom principal repayment ofamortization on mortgage
backedrelated securities, and the maturity orand call of certain agency securities. The
Company's investment portfolio may 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 fiveseven years or less.
At SeptemberJune 30, 1998,1999, investment securities held-to-maturity totaled $4.3$2.8
million, compared to $5.9$3.8 million at December 31, 1997,1998, and are carried at
amortized cost. At SeptemberJune 30, 1998,1999, the Company held $31.2$28.0 million in investment securities
available-
for-sale,available-for-sale, compared to $32.7$34.2 million at December 31, 1997.1998. Investment
securities available-for-sale are accounted for at fair value. Unrealized gains
and losses are
Page 9
recorded as a component of
comprehensive incomean adjustment to equity and are not reflected in the
current earnings of the Company. As of SeptemberJune 30, 1998,1999, the investment securities
available-for-sale hadhave an unrealized gainloss of $158,000$524,000 net of tax, that was
included as a component of accumulated other comprehensive income under
shareholder's equity to reflect the current market value of these securities.
page 12the securities
available-for-sale. The decline in market value of the investment
securities was the result of increasing market interest rates during the
second half of 1999. The market value of the investment portfolio will
fluctuate with changes in market interest rates. Management believes the
recent decline in market value is temporary and does not represent a
permanent impairment in the market value of the investment portfolio.
Loans and Leases
During the first nine monthshalf of 1998,1999, total loans and leases increased, $9.0 million, from $51.9$74.0
million at December 31, 19971998 to $60.9$84.5 million at SeptemberJune 30, 1998.1999. The net increase
resulted primarily from disbursementthe funding of new loan commitments.loans. The composition of the Bank's
loan and lease portfolio at SeptemberJune 30, 19981999 and December 31, 19971998 is summarized as
follows:
SeptemberJune 30, December 31,
(Dollars in Thousands) 1999 1998 1997
Real estate mortgage $43,598 $37,826$59,094 $50,845
Secured commercial and financial 9,112 4,9129,456 10,054
Unsecured 7,484 8,63311,549 11,771
Other 748 553
60,942 51,924loans and leases 4,445 1,310
84,544 73,980
Deferred costs and premiums
net of fees and discounts 14 (61)costs, net (118) (144)
Allowance for possible loan and lease losses (1,775) (3,200)(1,525) (1,625)
Total loans and leases, net $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$82,901 $72,211
Impaired Loans Classified assets include non-accrual loans, OREO, and performing loans that exhibit credit quality weaknesses. The table
below outlines the Bank's classified assets at SeptemberLeases
On June 30, 1998
and December 31, 1997:
September 30, December 31,
(Dollars in Thousands) 1998 1997
Loans - performing $4,253 $1,393
Non-accrual loans -- 171
OREO 58 410
Total classified assets $4,311 $1,974
On September 30, 1998,1999, the Bank had no loans that were 90 days
past due and still accruing and one loan totaling $12,000 that was
past due betweenmore than 31
and 89 days. Classified assets increased by
118% to $4.3 million as of September 30, 1998 compared to $2.0
million at December 31, 1997. The net increase was the result of
the downgrade of one loan. The loan that was downgraded was
originated in 1992 as a loan to facilitate the sale of OREO and the
borrower has performed and continues to perform in accordance with
the terms of the loan. As of September 30, 1998 and December 31,
1997, all OREO properties were classified.
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" 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 SeptemberJune 30,
19981999 and December 31, 1997,1998, the Company had no impaired loans totaling zero and $171,000, respectively. The impairment was
measured using the collateral value method.loans. Total interest
income recognized on impaired loans during the first nine monthshalf of 1999 and 1998 was
zero and 1997 was $4,000, and $43,000, respectively.
page 13
There can be no assurance that the Bank will not experience increases in the amount of classified assets or not experience
losses in
attempting to collect or otherwise liquidate theany assets that become non-
performing assets which are presently reflected onin the future. As of June 30, 1999, the Company's statement of
financial condition.condition did not include any non-performing assets.
Allowance for Loan and Lease Losses
Generally, the Bank charges current earnings with a provision for estimated
losses on loans receivable.loan and lease receivables. The Bank will provide an adjustment if
the total allowance for loan and lease losses exceeds the amount of estimated
loan and lease 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 includingprovisions or adjustments take into consideration
specifically identified problem loans, the financial condition of the borrowers,
the fair value
Page 10
of the collateral, recourse to guarantors and other factors.
Specific loss allowances are established based on the asset classificationcharacteristics and
credit quality. Specific loss allowances are utilized to ensure that the
allowance is allocated based on the credit quality including the present value
of expected cash flows, the terms and structure of the loan, the financial
condition of the borrower, and the fair value of underlying collateral. In
addition,As of
June 30, 1999, none of the allowance for loan losses provideswas allocable to impaired
loans, as identified in accordance with SFAS No. 114. In addition, the Bank
carries an "unallocated" loan and lease loss allowance to provide for
losses that may occur in the future on loans and leases that may or may
not presently have credit quality weaknesses, based on present economic
conditions, trends, and related uncertainties. The following table
summarizes the loan and lease loss experience of the Bank for the nine monthsquarter
ended SeptemberJune 30, 1998:
September 30,1999:
(Dollars in Thousands) 19981999
Beginning balance of allowance for
loan and lease losses at December 31, 1997 $3,2001998 $1,625
Charge-offs 200
Recoveries --
Recoveries 52
Adjustment (1,477)Provision 100
Ending balance of allowance for
loan and lease losses $1,775
At SeptemberJune 30, 1998, the allowance for loan losses was 2.9%1999 $1,525
As of total loans compared to 6.2% as of December 31, 1997. At
SeptemberJune 30, 1998,1999, the unallocated portion of the allowance for loan and
lease losses totaled $403,000$279,000 compared to $1.4 million$409,000 at December 31, 1997. As of September 30, 1998, the Bank had no impaired
loans outstanding that required an allocation1998. The
unallocated portion of the allowance for loan and lease losses as identifiedis not associated
with a specific loan or lease, or with a specific group or category of loans or
leases. The unallocated allowance is intended to provide for those situations
where the Bank's experience may be different than industry experience or
the Bank does not have extensive historical data other than industry
experience upon which to base the level of the allowance for loan and
lease losses.
Other Assets
Operating Leases
As of June 30, 1999, other assets included investments in accordanceoperating leases
totaling $4.7 million compared to $2.0 million at December 31, 1998. Generally,
the operating leases are comprised of computer and electronic equipment leased
to various lessees for periods ranging from 30 days to five years. The Bank has
contracted with SFAS No. 114.a leasing administrator to manage the equipment and collect
lease payments.
Deferred Tax Asset
As of SeptemberJune 30, 1999 and December 31, 1998, other assets included total
deferred tax assets net of deferred tax liabilities and the valuation allowance
of $2.1 million. As of June 30, 1999, the Company's estimated total deferred
tax assets net of deferred tax liabilities is estimated to be $18.5$17.0 million
compared to $20.4$18.2 million as of December 31, 1997.1998. As of SeptemberJune 30, 1998,1999, the
estimate includes net temporary
differences of $1.4 million, tax credits of $0.5 million,$500,000, other net temporary difference of
$100,000, and $16.6$16.5 million in net operating loss carryforward benefits. page 14The
valuation allowance for net deferred tax assets totaled $14.9 million and
$16.1 million at June 30, 1999 and December 31, 1998, respectively.
Page 11
Deposits
The BankCompany had total deposits of $95.1$104.8 million at SeptemberJune 30, 19981999 compared
to $86.5$95.7 million at December 31, 1997,1998, an increase of $8.6$9.1 million or 9.9%9.5%.
The increase wasis attributed primarily to short-term
escrowan increase in homeowners' association
related customer's deposits of $4.8 million and an increase in SOL related
deposits and Association Bank Service deposits which
were partially offset by a decrease in Stock Option lending related
deposits.of $3.3 million. A summary of deposits at SeptemberJune 30, 19981999 and December
31, 19971998 is as follows:
SeptemberJune 30, December 31,
(Dollars in Thousands) 1999 1998 1997
Demand deposits $17,234 $19,691$19,615 $18,237
NOW 16,294 15,98619,638 19,998
Money market and savings 22,073 16,04022,264 17,838
Total deposits with no stated maturity 55,601 51,71761,517 56,073
Time deposits:
Less than $100,000 18,967 19,18418,183 18,373
$100,000 and greater 20,531 15,61825,075 21,242
Total time deposits 39,498 34,80243,258 39,615
Total deposits $95,099 $86,519$104,775 $95,688
The Bank's deposits from private and business banking customers totaled
$40.6$42.8 million, or 42.7%41% of total deposits, at SeptemberJune 30, 1998,1999, compared to $34.7$41.2
million, or 40.1%43% of total deposits, at December 31, 1997. The deposits1998. Deposits from
Association Bank ServiceServices customers totaled $17.7$24.0 million, or 18.6%23% of total
deposits at SeptemberJune 30, 1998,1999, compared to $17.2$19.2 million, or 19.9%20% of total deposits
at December 31, 1997. The deposits1998. Deposits from Escrow customers totaled $22.0$19.3 million, or
23.1%18% of total deposits at SeptemberJune 30, 1998,1999, compared to $15.3$19.2 million, or 17.7%20% 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, 1998, compared to $7.6 million, or 8.8% of total
deposits at December 31, 1997.
The deposits1998. Deposits acquired through the money desk
operations totaled $12.7 million, or 13.4%12% of total deposits at SeptemberJune 30, 1998,1999,
compared to $11.7$12.3 million, or 13.5%12.9% of total deposits at December 31, 1997.1998.
Other Borrowings
As of SeptemberJune 30, 1998,1999, the Bank had long-term FHLB borrowings outstanding
totaling $10.0$18.0 million and short-term FHLB borrowings outstanding of
$2.0 million secured by pledged securities totaling $11.7$20.0 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 Companyfollowing discussion of the implications of the Year 2000 (the "Y2K")
problem for the Bank contains numerous forward-looking statements based on
inherently uncertain information.
The Bank 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")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 result in processing errors in transactions or functions
that are date sensitive.
page 15
The following discussion of the 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 Y2K business risks come from internal sources such
as the Bank's own
Page 12
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 cost of the project and the date on which the Y2K Plan specifies the
Bank will complete the modifications are based on several 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 the Y2K Plan and the Bank's remediation efforts will be achieved and actual
results could differ. Moreover, while the Y2K Plan specifies that the Company
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 Bank. 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.
The purpose of the Y2K Plan is to manage and mitigate the business risks
associated with the Y2K problem. The Y2K Plan isinvolves a five step process;
identification, assessment, renovation, testing, and implementation. Presently,
the Bank is in the implementation phase of the process. 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.
TheAs of June 30, 1999, the Bank is in the process of upgradinghas substantially implemented mission
critical system upgrades for all of its core banking hardware and software
including vendor supported hardware and software. TheseTesting to the mission
critical system
upgrades are projected to be operational by December 31, 1998 and
testing is expected to besystems was successfully completed by March 31,as of June 30, 1999. The Bank has
requested certification of testing compliance from all vendors and intends to
testcontinue testing the compliance of all major vendor systems. The Bank will
attempt to obtain a certification of testing compliance of all major systems
from an independent third party where possible.
The Bank has sent notification to all loan and deposit customers apprising
them of the potential problems and requesting that they assess the compliance of
their computer systems. The Bank's lending policies have been revised 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 the Bank's use of 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 specified trigger dates. If the Company'sBank's mission
critical systems arewere not compliant by March 31,June 30, 1999, the Company willBank would have been
required to 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. The Bank will continue testing mission critical
systems throughout 1999. The contingency plan includes steps for implementing
manual processes. If the Company implementsBank is required to implement the contingency phase
because of a subsequent failure, additional costs are likely to be incurred.
page 16
The cost associated with executing the Y2K Plan and completing the Y2K
modifications are estimated to be approximately $250,000$350,000 including approximately
$160,000 for the purchase of newacquired hardware which
will bePage 13
is being amortized over theits estimated useful lifelife. As of the equipment.June 30, 1999,
$256,000 of Y2K costs have been incurred. 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'sBank's policies, are being expensed as incurred. As of September 30,
1998, approximately $225,000 of Y2K costs have been
incurred. No significant information technology projects have been deferred
as a result of the Y2K efforts. There can be no assurance that the cost to
replace or modify the Company'sBank's date sensitive systems will not exceed the Company'sBank's
present estimate or that all business risks and related exposure have been
identified.
If the Company'sBank's date sensitive systems or the systems of those third parties
who have material business relationships with the CompanyBank are not Y2K compliant by
January 1, 2000, the Company'sBank's business and results of operations may be materially
and adversely affected. The CompanyBank could experience time delays in its daily
operations and increased processing costs due to the required shift to manual
processes, and the CompanyBank 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'sBank's clients may experience liquidity problems which may result in the
Bank needing to increase its liquidity by obtaining funds from other more
expensive sources including money desk deposits, or borrowing from the FHLB
or FRB.
While there can be no assurances, the CompanyThe Bank believes that the greatest risk for disruptionsdisruption to its business exists withmay
result from Y2K noncompliance of third parties that have major business
relationships with the Company.Bank. 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
potential business failures. These risks are inherent in the industry and
not specific to the Company.Bank. The CompanyBank is unable to estimate the potential
financial impact of the scenarios described above. However, the CompanyBank believes
that its Y2K Plan should reduce any material adverse effect thatcaused by any such
disruption may have.
page 17disruption.
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 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
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of MattersSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1998 Annual Meeting (the "Annual Meeting") on
May 19, 1999. Two matters were submitted to a Votevote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibitssecurity holders at the
Annual Meeting. The stockholders elected nine directors and Reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
Noneratified the Board
of Directors' selection of KPMG LLP, independent public accountants, as the
independent accounting firm for the Company during the fiscal years ending
December 31, 1999 and 1998.
page 1814
The following schedule sets forth each matter voted upon at the
Annual Meeting and the number of votes casts for, against or withheld including
a tabulation with respect to each nominee for director.
Proposal/Nominee Votes For Votes Against Votes Withheld/
Abstentions
Proposal 1: Election of Directors
James E. Gilleran 31,623,863 -- 55,170
Paul Erickson 31,673,863 -- 5,170
Peter Foo 31,673,863 -- 5,170
John F. McGrath 31,623,863 -- 55,170
Kent D. Price 31,668,858 -- 10,175
Nicholas Unkovic 31,673,863 -- 5,170
Willard D. Sharpe 31,673,863 -- 5,170
Gordon Swanson 31,673,863 -- 5,170
Gary Williams 31,673,863 -- 5,170
Proposal 2: Ratify the selection
of KPMG LLP as the Company's
independent accounting firm for
1999 and 1998 31,623,846 1,075 54,112
Page 15
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: October 28, 1998July 30, 1999 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: October 28, 1998July 30, 1999 /s/ Keary L. Colwell
Keary L. Colwell
Chief Financial Officer and
Executive Vice President