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, 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 31,728,78231,868,660 shares of Class A Common Stock
outstanding on October 27, 1998.22, 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 September 30, 19981999 and December 31, 1997 .1998 . . . . . . . . . 1
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1999
and 1998 and 1997.. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Changes in Shareholders'EquityShareholders'
Equity and Comprehensive Income
For the Nine Months Ended September 30, 19981999 and 19971998 . . . . . 43
Consolidated Statements of Cash Flows
For the Three and Nine Months Ended September 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
Part II - Other Information7
Item 1. Legal Proceedings.3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . .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 . . . . . . . . . . . . . . . .1815
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1916
page
The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
September 30, 19981999 and December 31, 19971998
(Unaudited)
September 30, December 31,
(Dollars in Thousands
Except Per Share Data) 1999 1998 1997
Assets:
Cash and due from banks $3,567 $2,837$3,700 $5,908
Federal funds sold 17,280 14,15021,784 9,000
Cash and cash equivalents 20,847 16,98725,484 14,908
Investment securities held-to-maturity, at cost
(Fair value: 1999 $2,335; 1998 $4,314;1997 $5,822) 4,315 5,864$3,851) 2,376 3,846
Investment securities available-for-sale,
at fair value 31,204 32,66926,747 34,235
Federal Home Loan Bank stock, at par 1,565 1,4992,048 1,971
Loans 60,942 51,92486,894 73,980
Deferred loan costs, net of fees 14 (61)(43) (144)
Allowance for loan losses (1,775) (3,200)(1,525) (1,625)
Loans, net 59,181 48,66385,326 72,211
Other real estate owned, net 58 410-- 51
Premises and equipment, net 7,650 7,7917,180 7,546
Interest receivable 603 720831 748
Other assets 1,920 2,0147,163 4,620
Total Assets $127,343 $116,617$157,155 $140,136
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $17,234 $19,691$24,364 $18,237
Interest bearing deposits 77,865 66,82886,822 77,451
Total deposits 95,099 86,519111,186 95,688
Other borrowings 10,000 10,00020,000 20,000
Other liabilities and interest payable 2,114 2,5281,849 1,744
Total liabilities 107,213 99,047133,035 117,432
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 - 31,868,660 and 1998 - 31,728,782 and 1997 - 31,723,782 317319 317
Additional paid-in capital 78,861 78,816 78,814
Retained deficit (59,272) (61,656)(54,440) (56,619)
Accumulated other comprehensive (loss) income (loss) 158 (16)(731) 79
Total shareholders' equity 20,130 17,57024,120 22,704
Total Liabilities and Shareholders' Equity $127,343 $116,617$157,155 $140,136
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, 19981999 and 19971998
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands
Except Per Share Data) 1999 1998 19971999 1998 1997
Interest income:
Loans $1,972 $1,363 $1,234$5,555 $3,826
$3,473
Investments 732 931 9532,072 2,576
2,512
Dividends 26 21 1077 66 31
Total interest income 2,730 2,315 2,1977,704 6,468 6,016
Interest expense:
Deposits 722 778 7752,067 2,077 2,113
Other borrowings 282 154 --829 453 --
Total interest expense 1,004 932 7752,896 2,530 2,113
Net interest income
before adjustmentprovision (adjustment)
for loan losses 1,726 1,383 1,4424,808 3,938
3,903
AdjustmentProvision (adjustment)
for loan losses -- (1,075) --100 (1,477) --
Net interest income after
adjustmentprovision (adjustment)
for loan losses 1,726 2,458 1,4424,708 5,415 3,903
Non-interest income:
Stock brokerage
commissions and fees 500 220 4401,350 755 1,069
Real estate rental income 306 285 179922 816 658
Service charges and fees 230 181 198643 484
437Income from operating leases 124 -- 307 --
Gain on sale of assets, net -- 17 3270 42 266
Loss on sale of securities, net -- -- -- (6)--
Other income 61 28 39172 107 94
Total non-interest income 1,221 731 8883,464 2,204 2,518
Non-interest expense:
Salaries and related benefits 1,251 1,017 1,1343,675 3,003 2,968
Occupancy expense 292 318 288873 899 903
Professional fees 80 146 339 361
Data processing 136 93 98362 307 324
Corporate insurance premiums 64 41 56192 131
165
Property tax expense -- 22 -- 87
FDIC insurance premiums 2 10 21 89Professional fees 86 80 230 339
Other operating expenses 127 221 519 793188 129 613 540
Total non-interest expense 2,017 1,678 1,9755,945 5,219 5,690
Income before income taxes 930 1,511 3552,227 2,400 731
Provision for income taxes 17 6 (3)40 11 4
Net Income $913 $1,505 $358$2,187 $2,389 $727
Income per common share:
Basic: Net income $0.03 $0.05 $0.01$0.07 $0.08 $0.02
Weighted average shares
outstanding 31,856,703 31,728,782 31,717,17131,774,199 31,726,566 29,950,311
Diluted: Net income $0.03 $0.05 $0.01 $0.07 $0.02$0.07
Weighted average shares
outstanding 33,756,127 33,204,853 31,717,96433,363,071 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 Changes in Shareholders' Equity and
Comprehensive Income
Three and
Nine Months Ended September 30, 1999 and 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 $727Accum
ulated
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
(Unaudited)
Accumu
(Dollars in Thousands) lated
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 -- 101 101
Other comprehensive
income 101
Net income (nine months) 727 727 -- 727
Comprehensive income $828
Balances at
September 30, 1997 111 317 78,812 (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
Comprehensive
income,
net of tax
Net unrealized losses $(79) -- (79) (79)
Other comprehensive
income
Net income
(nine months) 2,653 2,653 -- 2,653
Comprehensive income $2,574
Balances at
December 31, 1998 111 317 78,816 (56,619) 79 22,704
Net proceeds from
the exercise of
stock options -- 2 45 -- -- -- 47
Dividend on
Preferred Stock (8) -- (8)
Comprehensive income,
net of tax
Net unrealized losses $(810) -- (810) (810)
Other comprehensive loss (810)
Net income
(nine months) 2,187 2,187 -- 2,187
Comprehensive income $1,377
Balances at
September 30, 1999 $111 $317 $78,816 $(59,272) $158 $20,130$319 $78,861 $(54,440) $(731) $24,120
See accompanying notes to unaudited consolidated financial statements.
page 43
The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 19981999 and 19971998
(Unaudited)
Three Months Ended Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands) 1999 1998 19971999 1998 1997
Cash Flows from Operating Activities:
Net income $913 $1,505 $358$2,187 $2,389 $727
Adjustments to reconcile
net income to net cash
provided by operating activities:
AdjustmentProvisions (adjustment)
for loan losses -- (1,075) --100 (1,477) --
Depreciation and amortization expense 139 142 135421 393 412
Loss on sale of investment securities -- -- -- 6
Net gain on sale of real estate owned -- (17) (37)(71) (42)
(271)
Provision for loss on
other real estate owned -- -- -- 182
Decrease (increase) in interest
receivable and other assets (159) 54 131(39) 211
278
(Decrease) increaseIncrease (decrease) in interest
payable and other liabilities 485 (1,408) 388105 (419)
487
IncreaseDecrease in deferred loan fees net of costs(75) (38) (114)(101) (75) (47)
Net cash flows (used in) provided
by operating activities 1,303 (837) 8612,602 980 1,774
Cash Flows from Investing Activities:
Proceeds from maturities of
investment securities held-to-maturityheld-to-
maturity 413 553 2701,470 1,549 688
Proceeds from maturities of
investment securities
available-for-sale 1,091 10,652 2,79112,736 23,187 3,517
Proceeds from the sale of
investment securities
available-for-sale -- -- -- 6,200
Proceeds from the sale of FHLB Stockstock -- 708 -- 708 --
Purchase of investment securities
available-or-saleavailable-for-sale -- (11,256) (5,585)(6,058) (21,548)
(15,538)
Purchase of FHLB Stockstock and
FHLB Stockstock dividends (26) (21) (10)(77) (774)
(31)
Net (increase) decreaseincrease in loans (2,350) (8,022) 3,376(12,914) (9,018)
6,453
RecoveriesLoans (charged off) net of loans
previously charged offrecoveries -- 48-- (200) 52 329
Proceeds from the sale of
other real estate owned -- 296 93122 394 3,533
Purchases of premises and equipment (12) (39) (49)(55) (252)
(145)
Acquisition and capitalized
cost of real estate ownedNet decrease (increase) in
investment in operating leases 176 -- (2,587) -- -- 28
Net cash (used in) provided
by investing activities (708) (7,129) 934(7,563) (5,702) 5,034
Cash Flows from Financing Activities:
Net increase (decrease) increase in deposits 6,411 (7,353) 6,03315,498 8,580 5,551
Net decrease in other borrowings -- (5,000) -- --
Cash dividends paid on
Series B Preferred Stock -- -- (8) --
Net proceeds from sale of stock 17 -- --47 2 1,000
Net cash (used in) provided
by financing activities 6,428 (12,353) 6,03315,537 8,582
6,551
(Decrease) increaseIncrease in cash and
cash equivalents 7,023 (20,319) 7,82810,576 3,860 13,359
Cash and cash equivalents
at beginning of period 18,461 41,166 21,15714,908 16,987 15,626
Cash and cash equivalents
at end of period $25,484 $20,847 $28,985$25,484 $20,847 $28,985
Supplemental Disclosure
of Cash Flow Information:
Cash paid during the period for:
Interest $763 $811 $736$2,668 $2,413 $2,125
Payment of income taxes 15 4 --42 24 2
See accompanying notes to unaudited consolidated financial statements.
page 54
The San Francisco Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)(September 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 September 30, 1998, and for the three and nine
months ended September 30, 1998 and 1997 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 September 30, 1998 are not
necessarily indicative of the results to be expected for the entire
year of 1998. This report should be read in conjunction with the
Company's 1997 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.
The data as of September 30, 1999, and for the three months
ended September 30, 1999 and 1998 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. The results of
operations for the three months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the entire
year of 1999. This report should be read in conjunction with the
Company's 1998 Annual Report on Form 10-K.
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
1999 Income Shares amount
Third quarter
Basic EPS $911 31,856,703 $0.03
Effect of dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- 1,898,631
Diluted EPS $913 33,756,127 $0.03
Year to date
Basic EPS $2,181 31,774,199 $0.07
Effect of dilutive securities:
Series B Preferred Stock 6 793
Stock Options -- 1,588,079
Diluted EPS $2,187 33,363,071 $0.07
Per-share
1998 Income Shares amount
Three-months ended September 30:Third quarter
Basic EPS $1,503 31,728,782 $0.05
Effect of dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- 1,475,278
Diluted EPS $1,505 33,204,853 $0.05
Nine-months ended September 30:Year to date
Basic EPS $2,382 31,726,566 $0.08
Effect of dilutive securities:
Series B Preferred Stock 7 793
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 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 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
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 September 30, 1998, the
Company did not have any derivative instruments or engage in
hedging activities.
In October 1998, the FASB issuedRecently, SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after137 was issued
amending the Securitizationeffective date of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an
amendment of FASB StatementSFAS No. 65". This statement is to conform133 as 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 firstfiscal quarter
beginning after December 15, 1998.
AsJanuary 1, 2001. The Company is in the process of
September 30, 1998,determining what impact, if any, the Company did notadoption of SFAS No. 133 will
have any mortgage-
backed securities retained after the securitization of mortgage
loans held for sale.on its financial condition and operations.
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. During the third
quarter of 1999, the Company appointed American Securities Transfer
& Trust, Inc. (the "AST"), located at 12039 West Alameda Parkway,
Lakewood, Colorado, 80228, as its transfer agent. AST can be
contacted by telephone at (303)986-5400.
The Company recorded net income of $1,505,000$913,000 for the three
months ended September 30, 1999, compared to a net income of $1.5
million for the same period in 1998. Third quarter 1999 earnings
were lower than earnings for the same period 1998 and $2,389,000by $592,000
because an adjustment to the allowance for loan losses totaling
$1.1 million which was recorded in the third quarter of 1998. No
adjustment was recorded in the third quarter of 1999. The third
quarter 1999 earnings improved by $483,000 over the same period in
1998 excluding the allowance for loan loss adjustment. This
improvement in earnings is comprised of higher net interest income,
higher non-interest income, partially offset by higher operating
expenses.
The Company recorded net income of $2.2 million for the nine
months ended September 30, 1998,1999, compared to a net income of $358,000 and
$727,000$2.4
million for the same periods, respectively,period in 1997.1998. The increase
in the Company's net income of $1,147,0001998 earnings included an
allowance for loan loss adjustment totaling $1.5 million. Earnings
for the three monthnine months ended September 30, 1999 were better than for
the same period was primarily fromin 1998 by $1.3 million excluding the adjustment
for the allowance for loan losses recorded in 19981998. This increase
is comprised of $1,075,000 and the improvement in core operatinghigher net interest income, in 1998 of $87,000 as compared with 1997.
The increase in the Company's nethigher non-interest
income, of $1,662,000 for the
first nine months of 1998 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.higher operating expenses.
At September 30, 1998,1999, total assets were $127.3$157.2 million, an
increase of $10.7$17.1 million, or 9.2%12.2% from $116.6$140.1 million at December
31, 1997.1998. As of September 30, 1998,1999, total loans were $60.9$86.9
million, an increase of $9.0$12.9 million, or 17.3%17.4%, compared to $51.9$74.0
million at December 31, 1997.1998. Total deposits were $95.1$111.2 million
at September 30, 1998,1999, an increase of $8.6$15.5 million, or 9.9%16.2%,
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.1998.
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.7
Results of Operations
Net Interest Income
The Company's net interest income was $1.7 million in the
quarter ended September 30, 1999 compared to $1.4 million for the
quarters ended September 30,same period in 1998, and 1997.or an increase of 24.8%. The Company's net
interest income was $4.8 million in the nine months ended September
30, 1999 compared to $3.9 million for the same period in 1998, or
an increase of 22.1%. The increases in net interest income were
the result of an increase in earning assets and an improvement in
the mix of earning assets and the mix of deposits and borrowings
which resulted in an improvement in net interest margin.
The Company's net interest margin was 4.95% for the quarter
ended September 30, 1999 compared to 4.61% for the same period in
1998. The Company's net interest margin was 4.85% for the nine
months ended September 30, 1998 and 1997.1999 compared to 4.69% for the same
period in 1998. The increase in net interest margin may declinewas primarily
related to a higher yield on earning assets from a more profitable
mix of loans and investments, and a lower cost of funds from lower
interest rates paid on deposits and borrowings, and an increase in
the future as a result of the recent reductions in the prime and
fed funds rate indexes.
non-interest bearing deposits.
Provision/Adjustment for Loan and Lease Losses
The CompanyIn 1998, the Bank recorded a reductionreductions by way of an adjustment
to the allowance for loan and lease losses. The Company did not
record a provision for loan and lease losses for the third quarter
of 1999 compared to an adjustment of $1.1 million for the threesame
period in 1998. The Company recorded a provision for loan and
lease losses of $100,000 for the first nine months ended September 30,
1998 andof 1999 compared
to an adjustment of $1.5 million for the nine months ended September 30, 1998
compared to none for the same periodsperiod in 1997.1998. The
adjustment for
loan losses reflects the amount necessary to reduce the allowance
for loan losses to a level that management believes is adequateprovision 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
September 30, 19981999 compared to $888,000$731,000 for the same period in
1997.1998, an increase of $490,000, or 67.0%. Non-interest income was
$2.2$3.5 million for the first nine months ended September 30, 1998of 1999 compared to $2.5$2.2
million for the same period in 1997.1998, an increase of $1.3 million,
or 57.2%. 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$2.0 million
from $2.0 million and $471,000 to $5.2 million from $5.7$1.7 million for the three monththird quarter 1999 and 1998,
respectively. The increase of $339,000, or 20.2%, was primarily
related to compensation related expenses including incentive
programs related to profitability improvements.
The Company's non-interest expenses increased to $5.9 million
from $5.2 million for the nine month periodsperiod ended September 30,
19981999 and 1997,1998, 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 resultincrease of continuing
cost containment measures and the overall improving financial
condition of the Company. The reduction in property taxes and
other operating expenses is$726,000, or 13.9%,
was primarily the result of lower non-
performing assets including OREO. The increase in occupancy
expenses occurred from an increase in utilities andrelated to compensation related expenses as a result of the full occupancy of the Bank's
headquarter building.including
incentive programs related to profitability improvements.
page 8
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short term
investments totaled $20.8$25.5 million, or 16.4%16.2% of total assets, at
September 30, 1998,1999, an increase of $3.8$10.6 million, from $17.0$14.9
million, or 14.6%10.6% of total assets, at December 31, 1997.1998. The
change in liquidity was the result of an increase in deposits of
$15.5 million offset by a decrease in investments available for
sale of $7.5 million which was partially used to fund an increase
in loans and operating leases.
As of September 30, 1998,1999, the Bank had pledged securities
totaling $11.7$20.5 million pledgedand loans totaling $34.0 million to the
Federal Home Loan Bank of San Francisco (the "FHLB") as collateral
for other borrowings.borrowings totaling $20.0 million and a short-term
liquidity commitment totaling $2.0 million. The loans were pledged
as additional collateral to facilitate the unpledging of investment
securities in the event that the Bank was required to liquidate
some of the investment securities for other business purposes
including liquidity needs during the next six months, if any. As
of September 30, 1998,1999, the Bank hadhas the ability to borrow up to 20%a
maximum of total assets$22.3 million from the FHLB upon the pledge of sufficient
collateral.FHLB. 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, 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 September 30, 19981999 and
December 31, 1997,1998, no securities were pledged as collateral for the
FRB facility.
Capital
At September 30, 1998,1999, shareholders' equity was $20.1$24.1 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 September 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 September 30, 1998:1999:
Minimum
Capital
Company Bank Requirement
Leverage ratio 13.9% 13.8%15.3% 15.3% 4.0%
Tier 1 risk-based capital 20.7 20.520.4 20.4 4.0
Total risk-based capital 22.1 21.921.7 21.6 8.0
page 9
Investment Activities
At September 30, 1998,1999, the Company's investment securities,
including FHLB stock, and Fed funds sold totaled $37.1$53.0 million, or 29.1%33.7% of
total assets, compared to $40.0$49.1 million, or 34.3%35.0% of total assets,
at December 31, 1997. The net decline1998. Fed Funds increased by $12.8 million, or
142.2%, to $21.8 million from $9.0 million primarily from an
increase in investmentdeposits. Investment securities wasdecreased 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-maturityheld-to-
maturity and available-for-sale have maturities or principal
amortization of fiveten years or less.
At September 30, 1998,1999, investment securities held-to-maturity
totaled $4.3$2.4 million, compared to $5.9$3.8 million at December 31,
1997,1998, and are carried at amortized cost. At September 30, 1998,1999,
the Company held $31.2$26.7 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 recorded as a component of
comprehensive incomean adjustment to equity
and are not reflected in the current earnings of the Company. As
of September 30, 1998,1999, the investment securities available-for-sale
hadhave an unrealized gainloss of $158,000$731,000 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 first nine months 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 months of 1998,1999, total loans and leases
increased $9.0 million, from $51.9$74.0 million at December 31, 19971998 to $60.9$86.9 million
at September 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 September 30, 19981999 and December 31, 19971998 is summarized
as follows:
September 30, December 31,
(Dollars in Thousands) 1999 1998 1997
Real estate mortgage $43,598 $37,826$63,499 $50,845
Secured commercial and financial 9,112 4,9129,990 10,054
Unsecured 7,484 8,63310,403 11,771
Other 748 553
60,942 51,924loans and leases 3,002 1,310
86,894 73,980
Deferred costs and premiums
net of fees and discounts 14 (61)costs, net (43) (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$85,326 $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 September 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 $1,974Leases
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
page 10
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-
Income Recognition and Disclosures" (the "SFAS No. 114"). As of
September 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 months 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 any assets
that become non-performing in the non-
performing assets which are presently reflected onfuture. As of September 30, 1999
and December 31, 1998, the Company's statement of financial
condition.condition did not include any non-performing loans.
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 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
September 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 September 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 September 30, 1999 $1,525
As of September 30, 1999 and December 31, 1998, the allowance
for loan and lease losses was 2.9%1.75% and 2.20% of total loans compared to 6.2% asand
leases, respectively.
As of December 31, 1997. At September 30, 1998,1999, the unallocated portion of the
allowance for loan and lease losses totaled $403,000$436,000 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.
page 11
Other Assets
Operating Leases
As of September 30, 1999, other assets included investments in
accordanceoperating leases totaling $4.6 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
various periods with SFAS No. 114.a weighted average lease term of eight months.
The Bank has contracted with a leasing administrator to manage the
equipment and collect lease payments.
Deferred Tax Asset
As of September 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 September 30,
1999, the Company's estimated total deferred tax assets net of
deferred tax liabilities is estimated to be $18.5$15.9 million compared
to $20.4$18.2 million as of December 31, 1997.
As of1998. The valuation allowance
for net deferred tax assets totaled $13.8 million and $16.1 million
at September 30, 1999 and December 31, 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 14respectively.
Deposits
The BankCompany had total deposits of $95.1$111.2 million at September
30, 19981999 compared to $86.5$95.7 million at December 31, 1997,1998, an
increase of $8.6$15.5 million or 9.9%16.2%. The increase wasis attributed
primarily to short-term
escrowan increase in homeowners' association related
customer's deposits of $5.7 million, an increase in SOL related
deposits of $4.9 million, and Association Bank Servicean increase in Private and Business
Banking related customer's deposits which
were partially offset by a decrease in Stock Option lending related
deposits.of $4.3 million. A summary of
deposits at September 30, 19981999 and December 31, 19971998 is as follows:
September 30, December 31,
(Dollars in Thousands) 1999 1998 1997
Demand deposits $17,234 $19,691$24,364 $18,237
NOW 16,294 15,98621,839 19,998
Money market and savings 22,073 16,04026,647 17,838
Total deposits with no stated maturity 55,601 51,71772,850 56,073
Time deposits:
Less than $100,000 18,967 19,18417,888 18,373
$100,000 and greater 20,531 15,61820,448 21,242
Total time deposits 39,498 34,80238,336 39,615
Total deposits $95,099 $86,519$111,186 $95,688
The Bank's deposits from private and business banking
customers totaled $40.6$46.4 million, or 42.7%41.7% of total deposits, at
September 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$24.9 million, or 18.6%22.4% of total
deposits at September 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$20.6 million, or 23.1%18.5% of total deposits at
September 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$11.4 million, or 13.4%10.3% of total deposits
at September 30, 1998,1999, compared to $11.7$12.3 million, or 13.5%12.9% of total
deposits at December 31, 1997.1998.
page 12
Other Borrowings
As of September 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$20.5 million and loans totaling $34.0 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 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 September 30, 1999, the Bank is in the process of upgradinghas 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
September 30, 1999. The Bank has requested certification of
testing compliance from all vendors and intendsis continuing to test 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.
page 13
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 will continue testing mission critical systems
are notprimarily related to non-Y2K system enhancements and upgrades
throughout the remainder of 1999. If the on-going testing
indicates that a mission critical system is no longer compliant,
by March 31,
1999, the Company willBank is 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 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 modificationsmodification and testing are estimated to be approximately
$250,000$350,000 including approximately $160,000 for the purchase of newacquired hardware
which will beis being amortized over its estimated useful life. As of
September 30, 1999, $257,000 of Y2K costs have been incurred. The
remaining estimated cost of $93,000 may be required for the useful life of the equipment.on-
going testing and contingency plan implementation. The funds for
these modificationsthe modification and testing 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.disruption.
page 17
PART II - OTHER INFORMATION14
Item 1 - Legal Proceedings
Because of the nature of its business, the3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Management
Market risk includes risks that arise from changes in interest
rates, foreign currency, exchange rates, commodity prices, equity
prices, and other market changes that affect market sensitive
instruments. The Company's primary market rate risk, interest rate
risk, has not changed significantly since December 31, 1998. 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,
willdoes 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 Mattersany significant risk related to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibitsforeign
currency, exchange rates, commodity prices, equity prices, and
Reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
Noneother market changes that affect market sensitive instruments.
page 1815
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, 1998November 5, 1999 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: October 28, 1998November 5, 1999 /s/ Keary L. Colwell
Keary L. Colwell
Chief Financial Officer and
Executive Vice President