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, 1998
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 31,728,782 shares of Class A Common Stock
outstanding on October 27, 1998.
page
The San Francisco Company and Subsidiaries
Quarterly Report on Form 10-Q
Table of Contents
Page
Part I - Financial Information
Item 1. Consolidated Statements of Financial Condition
At September 30, 1998 and December 31, 1997 . . . . . . . . . . 1
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1998 and 1997. 2
Consolidated Statements of Changes in Shareholders'Equity
For the Nine Months Ended September 30, 1998 and 1997 . . . . . 4
Consolidated Statements of Cash Flows
For the Three and Nine Months Ended September 30, 1998 and 1997. 5
Notes to Consolidated Financial Statements . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 8
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 . . . . . . . . . . . . . . . .18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
page
The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
September 30, 1998 and December 31, 1997
(Unaudited)
September 30, December 31,
(Dollars in Thousands Except Per Share Data) 1998 1997
Assets:
Cash and due from banks $3,567 $2,837
Federal funds sold 17,280 14,150
Cash and cash equivalents 20,847 16,987
Investment securities held-to-maturity, at cost
(Fair value: 1998 $4,314;1997 $5,822) 4,315 5,864
Investment securities available-for-sale,
at fair value 31,204 32,669
Federal Home Loan Bank stock, at par 1,565 1,499
Loans 60,942 51,924
Deferred loan costs, net of fees 14 (61)
Allowance for loan losses (1,775) (3,200)
Loans, net 59,181 48,663
Other real estate owned, net 58 410
Premises and equipment, net 7,650 7,791
Interest receivable 603 720
Other assets 1,920 2,014
Total Assets $127,343 $116,617
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $17,234 $19,691
Interest bearing deposits 77,865 66,828
Total deposits 95,099 86,519
Other borrowings 10,000 10,000
Other liabilities and interest payable 2,114 2,528
Total liabilities 107,213 99,047
Shareholders' Equity:
Preferred Stock (par value $0.01 per share)
Series B - Authorized - 437,500 shares;
Issued and outstanding - 1998 and 1997 - 15,869 111 111
Common stock (par value $0.01 per share)
Class A - Authorized - 100,000,000 shares;
Issued and outstanding - 1998 - 31,728,782
and 1997 - 31,723,782 317 317
Additional paid-in capital 78,816 78,814
Retained deficit (59,272) (61,656)
Accumulated other comprehensive income (loss) 158 (16)
Total shareholders' equity 20,130 17,570
Total Liabilities and Shareholders' Equity $127,343 $116,617
See accompanying notes to unaudited consolidated financial statements.
page 1
The San Francisco Company and Subsidiaries
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 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
Interest income:
Loans $1,363 $1,234 $3,826 $3,473
Investments 931 953 2,576 2,512
Dividends 21 10 66 31
Total interest income 2,315 2,197 6,468 6,016
Interest expense:
Deposits 778 775 2,077 2,113
Other borrowings 154 -- 453 --
Total interest expense 932 775 2,530 2,113
Net interest income before
adjustment for loan losses 1,383 1,442 3,938 3,903
Adjustment for loan losses (1,075) -- (1,477) --
Net interest income after
adjustment for loan losses 2,458 1,442 5,415 3,903
Non-interest income:
Stock brokerage commissions and
fees 220 440 755 1,069
Real estate rental income 285 179 816 658
Service charges and fees 181 198 484 437
Gain on sale of assets, net 17 32 42 266
Loss on sale of securities, net -- -- -- (6)
Other income 28 39 107 94
Total non-interest income 731 888 2,204 2,518
Non-interest expense:
Salaries and related benefits 1,017 1,134 3,003 2,968
Occupancy expense 318 288 899 903
Professional fees 80 146 339 361
Data processing 93 98 307 324
Corporate insurance premiums 41 56 131 165
Property tax expense -- 22 -- 87
FDIC insurance premiums 2 10 21 89
Other operating expenses 127 221 519 793
Total non-interest expense 1,678 1,975 5,219 5,690
Income before income taxes 1,511 355 2,400 731
Provision for income taxes 6 (3) 11 4
Net Income $1,505 $358 $2,389 $727
Income per common share:
Basic: Net income $0.05 $0.01 $0.08 $0.02
Weighted average
shares outstanding 31,728,782 31,717,171 31,726,566 29,950,311
Diluted: Net income $0.05 $0.01 $0.07 $0.02
Weighted average
shares outstanding 33,204,853 31,717,964 33,129,248 29,951,104
See accompanying notes to unaudited consolidated financial statements.
page 2
The San Francisco Company and Subsidiaries
Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 1998 and 1997
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands
Except Per Share Data 1998 1997 1998 1997
Net Income $1,505 $358 $2,389 $727
Other comprehensive
income, net of tax:
Unrealized holding gains arising
during period, net 171 112 174 95
Plus: reclassification
adjustment for losses
included in net income -- -- -- 6
Other comprehensive income 171 112 174 101
Comprehensive income $1,676 $470 $2,563 $828
page 3
The San Francisco Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
Accumu
(Dollars in Thousands) lated
Other
Addi- Compre- Total
tional Compre- Retained hensive Share-
Preferred Common Paid-in hensive Earnings Income/ holders'
Stock Stock Capital Income (Deficit) (Loss) Equity
Balances at
January 1, 1997 $111 $288 $77,841 $(67,099) $(77) $11,064
Net proceeds on
sale of stock -- 29 971 -- -- 1,000
Other comprehensive
income, 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
See accompanying notes to unaudited consolidated financial statements.
page 4
The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 1998 and 1997
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30
(Dollars in Thousands) 1998 1997 1998 1997
Cash Flows from
Operating Activities:
Net income $1,505 $358 $2,389 $727
Adjustments to reconcile
net income to net cash
provided by operating activities:
Adjustment for loan losses (1,075) -- (1,477) --
Depreciation and amortization expense 142 135 393 412
Loss on sale of investment securities -- -- -- 6
Net gain on sale of real estate owned (17) (37) (42) (271)
Provision for loss on
other real estate owned -- -- -- 182
Decrease in interest
receivable and other assets 54 131 211 278
(Decrease) increase in interest
payable and other liabilities (1,408) 388 (419) 487
Increase in deferred loan
fees net of costs (38) (114) (75) (47)
Net cash flows (used in)
provided by operating activities (837) 861 980 1,774
Cash Flows from Investing Activities:
Proceeds from maturities of
investment securities
held-to-maturity 553 270 1,549 688
Proceeds from maturities of
investment securities
available-for-sale 10,652 2,791 23,187 3,517
Proceeds from the sale of
investment securities
available-for-sale -- -- -- 6,200
Proceeds from the sale of FHLB Stock 708 -- 708 --
Purchase of investment
securities available-or-sale (11,256) (5,585) (21,548) (15,538)
Purchase of FHLB Stock and
FHLB Stock dividends (21) (10) (774) (31)
Net (increase) decrease in loans (8,022) 3,376 (9,018) 6,453
Recoveries of loans
previously charged off -- 48 52 329
Proceeds from the sale of
other real estate owned 296 93 394 3,533
Purchases of premises and equipment (39) (49) (252) (145)
Acquisition and capitalized
cost of real estate owned -- -- -- 28
Net cash (used in) provided
by investing activities (7,129) 934 (5,702) 5,034
Cash Flows from Financing Activities:
Net (decrease) increase in deposits (7,353) 6,033 8,580 5,551
Net decrease in other borrowings (5,000) -- -- --
Net proceeds from sale of stock -- -- 2 1,000
Net cash (used in) provided
by financing activities (12,353) 6,033 8,582 6,551
(Decrease) increase in
cash and cash equivalents (20,319) 7,828 3,860 13,359
Cash and cash equivalents
at beginning of period 41,166 21,157 16,987 15,626
Cash and cash equivalents
at end of period $20,847 $28,985 $20,847 $28,985
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period for:
Interest $811 $736 $2,413 $2,125
Payment of income taxes 4 -- 24 2
See accompanying notes to unaudited consolidated financial statements.
page 5
The San Francisco Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Organization
The San Francisco Company (the "Company") is a Delaware
corporation and a bank holding company registered under the Bank
Holding Company Act of 1956. Bank of San Francisco (the "Bank"),
a state chartered bank, was organized as a California banking
corporation in 1978 and became a wholly owned subsidiary of the
Company through a reorganization in 1982.
Note 2 - Principles of Consolidation and Presentation
The accompanying unaudited consolidated financial statements
of the Company have been prepared in accordance with the
instructions pursuant to Form 10-Q Quarterly Report and Articles 9
and 10 of Regulation S-X, and therefore, do not include all the
information and footnotes necessary to present the consolidated
financial condition, results of operations and cash flows of the
Company in conformity with generally accepted accounting
principles.
The data as of September 30, 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.
Note 3 - Earnings Per Share (the "EPS")
The Company adopted Statement of Financial Accounting
Standards (the "SFAS") no. 128, "Earnings Per Share." SFAS No. 128
requires dual presentation of basic EPS and diluted EPS on the face
of the income 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 of all potentially
dilutive Common Shares, such as certain stock options, that were
outstanding during the period. The following tables present a
reconciliation of the amounts used in calculating basic and diluted
EPS for each of the periods shown.
page 6
(dollars in thousands except per-share amounts)
Per-share
1998 Income Shares amount
Three-months ended September 30:
Basic EPS $1,503 31,728,782 $0.05
Effect of dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- 1,475,278
Diluted EPS $1,505 33,204,853 $0.05
Nine-months ended September 30:
Basic EPS $2,382 31,726,566 $0.08
Effect of dilutive securities:
Series 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, 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 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.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
This document contains forward-looking statements that are
subject to risks and uncertainties, including, but not limited to,
the Company's and Bank's ability to implement their respective
long-term business plan, the economy in general and the condition
of stock markets upon which the Company's stock brokerage business
and fee income is dependent, the continued services of the
Company's and Bank's key executives and managers, the real estate
market in California and other factors beyond the Company's and
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. Van Kasper & Company of San Francisco,
California is the sole market maker in the Company's Common Stock.
The Company recorded net income of $1,505,000 for the three
months ended September 30, 1998 and $2,389,000 for the nine months
ended September 30, 1998, compared to a net income of $358,000 and
$727,000 for the same periods, respectively, in 1997. The increase
in the Company's net income of $1,147,000 for the three month
period was primarily from the adjustment for loan losses recorded
in 1998 of $1,075,000 and the improvement in core operating income
in 1998 of $87,000 as compared with 1997.
The increase in the Company's net income of $1,662,000 for the
first nine months 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.
At September 30, 1998, total assets were $127.3 million, an
increase of $10.7 million, or 9.2% from $116.6 million at December
31, 1997. As of September 30, 1998, total loans were $60.9
million, an increase of $9.0 million, or 17.3%, compared to $51.9
million at December 31, 1997. Total deposits were $95.1 million at
September 30, 1998, an increase of $8.6 million, or 9.9%, compared
to $86.5 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.
Results of Operations
Net Interest Income
The Company's net interest income was $1.4 million for the
quarters ended September 30, 1998 and 1997. The Company's net
interest income was $3.9 million for the nine months ended
September 30, 1998 and 1997. The net interest margin may decline
in the future as a result of the recent reductions in the prime and
fed funds rate indexes.
Adjustment for Loan Losses
The Company recorded a reduction to the allowance for loan
losses of $1.1 million for the three months ended September 30,
1998 and $1.5 million for the nine months 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 that are more fully discussed herein under
"Loans - Allowance for Loan Losses".
Non-Interest Income
Non-interest income was $731,000 for the three months ended
September 30, 1998 compared to $888,000 for the same period in
1997. Non-interest income was $2.2 million for the nine months
ended September 30, 1998 compared to $2.5 million for the same
period in 1997. The decline in non-interest income was primarily
the result of the reduction in gain on sale of real estate owned
income in 1998 compared to 1997 and the reduction in brokerage
commissions, partially offset by an increase in real estate rental
income.
The decline in stock brokerage commissions and fees of
$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 resulted 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 from
an increase in market rents.
Some increase in real estate rental income is expected to continue
as other leases expire and are renewed at the market rental rates.
page 10
Non-Interest Expense
The Company's non-interest expenses declined $297,000 to $1.7
million from $2.0 million and $471,000 to $5.2 million from $5.7
million for the three month and nine month periods ended September
30, 1998 and 1997, respectively.
The Company's professional fees, data processing, corporate
insurance premiums, property tax expense, FDIC insurance premiums
and other operating expenses all declined. Generally, the
operating expenses that declined did so as a result of continuing
cost containment measures and the overall improving financial
condition of the Company. The reduction in property taxes and
other operating expenses is primarily the result of lower non-
performing assets including OREO. The increase in occupancy
expenses occurred from an increase in utilities and related
expenses as a result of the full occupancy of the Bank's
headquarter building.
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short term
investments totaled $20.8 million, or 16.4% of total assets, at
September 30, 1998, an increase of $3.8 million, from $17.0
million, or 14.6% of total assets, at December 31, 1997.
As of September 30, 1998, the Bank had securities totaling
$11.7 million pledged to the Federal Home Loan Bank of San
Francisco (the "FHLB") as collateral for other borrowings. As of
September 30, 1998, the Bank had the ability to borrow up to 20% of
total assets from the FHLB upon the pledge of sufficient
collateral. In the future, long and short term borrowings from the
FHLB may be used as an on-going source of liquidity and funding.
As of September 30, 1998, the Bank had other securities totaling
$1.6 million pledged as collateral for various other purposes.
As of September 30, 1998, the Bank had access to the discount
window at the FRB for a total borrowing facility of $2.0 million
upon the pledge of securities, and to $3.5 million for day-light
overdrafts with the FRB. At September 30, 1998 and December 31,
1997, no securities were pledged as collateral for the FRB
facility.
Capital
At September 30, 1998, shareholders' equity was $20.1 million
compared to $17.6 million at December 31, 1997.
The Company and the Bank are subject to general regulations
issued by the FRB, FDIC, and DFI which require maintenance of a
certain level of capital. As of September 30, 1998, the Company
and the Bank were 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:
Minimum
Capital
Company Bank Requirement
Leverage ratio 13.9% 13.8% 4.0%
Tier 1 risk-based capital 20.7 20.5 4.0
Total risk-based capital 22.1 21.9 8.0
Investment Activities
At September 30, 1998, the Company's investment securities,
including FHLB stock, totaled $37.1 million, or 29.1% of total
assets, compared to $40.0 million, or 34.3% of total assets, at
December 31, 1997. The net decline in investment securities was
primarily normal principal repayment of mortgage backed securities,
and maturity or call of 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 five years or less.
At September 30, 1998, investment securities held-to-maturity
totaled $4.3 million, compared to $5.9 million at December 31,
1997, and are carried at amortized cost. At September 30, 1998,
the Company held $31.2 million in investment securities available-
for-sale, compared to $32.7 million at December 31, 1997.
Investment securities available-for-sale are accounted for at fair
value. Unrealized gains and losses are recorded as a component of
comprehensive income and are not reflected in the current earnings
of the Company. As of September 30, 1998, the investment
securities available-for-sale had an unrealized gain of $158,000
that was included as a component of comprehensive income to reflect
the current market value of these securities.
page 12
Loans
During the first nine months of 1998, total loans increased
$9.0 million, from $51.9 million at December 31, 1997 to $60.9
million at September 30, 1998. The net increase resulted primarily
from disbursement of new loan commitments. The composition of the
Bank's loan portfolio at September 30, 1998 and December 31, 1997
is summarized as follows:
September 30, December 31,
(Dollars in Thousands) 1998 1997
Real estate mortgage $43,598 $37,826
Secured commercial and financial 9,112 4,912
Unsecured 7,484 8,633
Other 748 553
60,942 51,924
Deferred costs and premiums
net of fees and discounts 14 (61)
Allowance for possible loan losses (1,775) (3,200)
Total loans, 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 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 $1,974
On September 30, 1998, the Bank had no loans that were 90 days
past due and still accruing and one loan totaling $12,000 that was
past due between 31 and 89 days. Classified assets 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-
Income Recognition and Disclosures" (the "SFAS No. 114"). As of
September 30, 1998 and December 31, 1997, the Company had impaired
loans totaling zero and $171,000, respectively. The impairment was
measured using the collateral value method. Total interest income
recognized on impaired loans during the first nine months of 1998
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 the non-
performing assets which are presently reflected on the Company's
statement of financial condition.
Allowance for Loan Losses
Generally, the Bank charges current earnings with a provision
for estimated losses on loans receivable. The Bank will provide an
adjustment if the total allowance for loan losses exceeds the
amount of estimated loan losses. The Bank recorded an adjustment
for loan losses of $1.1 million for the three months ended
September 30, 1998 and $1.5 million for the nine months ended
September 30, 1998 compared to none for the same periods in 1997.
The adjustment for loan losses reflects the amount necessary to
reduce the allowance for loan losses to a level that management
believes is adequate based on many factors including specifically
identified problem loans, the financial condition of the borrowers,
the fair value of the collateral, recourse to guarantors and other
factors.
Specific loss allowances are established based on the asset
classification 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, the allowance for loan losses provides for losses that
may occur in the future based on present economic conditions,
trends, and related uncertainties. The following table summarizes
the loan loss experience of the Bank for the nine months ended
September 30, 1998:
September 30,
(Dollars in Thousands) 1998
Beginning balance of allowance
for loan losses at December 31, 1997 $3,200
Charge-offs --
Recoveries 52
Adjustment (1,477)
Ending balance of allowance for loan losses $1,775
At September 30, 1998, the allowance for loan losses was 2.9%
of total loans compared to 6.2% as of December 31, 1997. At
September 30, 1998, the unallocated portion of the allowance for
loan losses totaled $403,000 compared to $1.4 million at December
31, 1997. As of September 30, 1998, the Bank had no impaired
loans outstanding that required an allocation of the allowance for
loan losses, as identified in accordance with SFAS No. 114.
Deferred Tax Asset
As of September 30, 1998, the Company's estimated total
deferred tax assets net of deferred tax liabilities is estimated to
be $18.5 million compared to $20.4 million as of December 31, 1997.
As of September 30, 1998, the estimate includes net temporary
differences of $1.4 million, tax credits of $0.5 million, and $16.6
million in net operating loss carryforward benefits.
page 14
Deposits
The Bank had total deposits of $95.1 million at September 30,
1998 compared to $86.5 million at December 31, 1997, an increase of
$8.6 million or 9.9%. The increase was attributed to short-term
escrow related deposits and Association Bank Service deposits which
were partially offset by a decrease in Stock Option lending related
deposits. A summary of deposits at September 30, 1998 and December
31, 1997 is as follows:
September 30, December 31,
(Dollars in Thousands) 1998 1997
Demand deposits $17,234 $19,691
NOW 16,294 15,986
Money market and savings 22,073 16,040
Total deposits with no stated maturity 55,601 51,717
Time deposits:
Less than $100,000 18,967 19,184
$100,000 and greater 20,531 15,618
Total time deposits 39,498 34,802
Total deposits $95,099 $86,519
The deposits from private and business banking customers
totaled $40.6 million, or 42.7% of total deposits, at September 30,
1998, compared to $34.7 million, or 40.1% of total deposits, at
December 31, 1997. The deposits from Association Bank Service
customers totaled $17.7 million, or 18.6% of total deposits at
September 30, 1998, compared to $17.2 million, or 19.9% of total
deposits at December 31, 1997. The deposits from Escrow customers
totaled $22.0 million, or 23.1% of total deposits at September 30,
1998, compared to $15.3 million, or 17.7% of total deposits at
December 31, 1997. The deposits related to Stock Option
transactions totaled $2.1 million, or 2.2% of total deposits at
September 30, 1998, compared to $7.6 million, or 8.8% of total
deposits at December 31, 1997.
The deposits acquired through the money desk operations
totaled $12.7 million, or 13.4% of total deposits at September 30,
1998, compared to $11.7 million, or 13.5% of total deposits at
December 31, 1997.
Other Borrowings
As of September 30, 1998, the Bank had long-term FHLB
borrowings outstanding totaling $10.0 million secured by pledged
securities totaling $11.7 million. In the future, long and short
term borrowings from the FHLB may be used as an on-going source of
liquidity and funding.
Year 2000 Readiness Disclosure
The Company has adopted and is implementing a plan to
identify, assess, and address issues related to the Year 2000
problem (the "Y2K Plan"). The Year 2000 (the "Y2K") problem is a
computer programming issue that has occurred as a result of many
computer systems being programmed to use a two digit code to
identify the year. For example, the year 1998 would be signified
as "98", and, therefore, the year 2000 may be mis-recognized as
1900. This could result in the miscalculation of financial data
and/or 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 business risks come from internal
sources such as the Bank's own computer systems and from external
sources such as borrowers whose businesses might be adversely
impacted by the Y2K problem, deposit customers whose transactions
are transmitted electronically, and other third parties such as
institutions, vendors, and governmental agencies whose computer
systems may have a direct or indirect adverse impact on the Bank or
the Bank's customers. The Bank maintains much of its computer
hardware on the premises of third party vendors, uses software
under licensing agreements with vendors, and has outsourced its
data processing requirements to outside vendors. As a result, the
Bank is highly reliant on vendors to upgrade many of the Bank's
systems to be Y2K compliant in the timeframe specified by the Y2K
Plan.
The purpose of the Y2K Plan is to manage and mitigate the
business risks associated with the Y2K problem. The Y2K Plan is a
five step process; identification, assessment, renovation, testing,
and implementation. A project team, staffed by Bank employees, is
responsible for monitoring the Y2K Plan progress including vendor
commitments, and periodically reporting such progress to the Bank
Audit and Regulatory Committee of the Board. The Bank's internal audit
function periodically performs a review of the Y2K Plan progress.
The Bank is in the process of upgrading all of its core
banking hardware and software. These mission critical system
upgrades are projected to be operational by December 31, 1998 and
testing is expected to be completed by March 31, 1999. The Bank
has requested certification of compliance from all vendors and
intends to test the compliance of all major systems. The Bank will
attempt to obtain a certification of compliance of all major
systems from an independent third party where possible. The Bank
has sent notification to all loan and 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 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's mission critical systems are not compliant by March 31,
1999, the Company will take the necessary steps to correct the
deficiency by implementing the contingency plan phase of the Y2K
Plan which includes engaging alternate vendors who are Y2K
compliant. If the Company implements the contingency phase,
additional costs are likely to be incurred.
page 16
The cost associated with executing the Y2K Plan and completing
the Y2K modifications are estimated to be approximately $250,000
including approximately $160,000 for the purchase of new hardware
which will be amortized over the useful life of the equipment. The
funds for these modifications are from general working capital.
These costs, exclusive of the cost of replacement systems that are
being capitalized and amortized in accordance with the Company's
policies, are being expensed as incurred. As of 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's date sensitive systems will
not exceed the Company's present estimate or that all business
risks and related exposure have been identified.
If the Company's date sensitive systems or the systems of
those third parties who have material business relationships with
the Company are not Y2K compliant by January 1, 2000, the Company's
business and results of operations may be materially and adversely
affected. The Company could experience time delays in its daily
operations and increased processing costs due to the required shift
to manual processes, and the Company may not be able to provide
customers with timely and pertinent information regarding their
accounts which may negatively affect customer relations and lead to
the potential loss of customers. In addition, the Company's
clients may experience liquidity problems which may result in the
Bank 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 Company believes that
the greatest risk for disruptions to its business exists with Y2K
noncompliance of third parties that have major business relationships
with the Company. The possible consequences of noncompliance by third
parties include, among other things, delays in processing daily deposits
and withdrawals, and an increase in loan delinquencies from potential
business failures. These risks are inherent in the industry and not
specific to the Company. The Company is unable to estimate the potential
financial impact of the scenarios described above. However, the Company
believes that its Y2K Plan should reduce any material adverse
effect that any such disruption may have.
page 17
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 Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Report on Form 8-K
None
page 18
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, 1998 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: October 28, 1998 /s/ Keary L. Colwell
Keary L. Colwell
Chief Financial Officer and
Executive Vice President