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, 1999
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 31,868,660 shares of Class A Common Stock
outstanding on October 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, 1999 and December 31, 1998 . . . . . . . . . 1
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1999
and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Changes in Shareholders'
Equity and Comprehensive Income
For the Nine Months Ended September 30, 1999 and 1998 . . . . 3
Consolidated Statements of Cash Flows
For the Three and Nine Months Ended September 30, 1999
and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
page
The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
September 30, 1999 and December 31, 1998
(Unaudited)
September 30, December 31,
(Dollars in Thousands
Except Per Share Data) 1999 1998
Assets:
Cash and due from banks $3,700 $5,908
Federal funds sold 21,784 9,000
Cash and cash equivalents 25,484 14,908
Investment securities held-to-maturity, at cost
(Fair value: 1999 $2,335; 1998 $3,851) 2,376 3,846
Investment securities available-for-sale,
at fair value 26,747 34,235
Federal Home Loan Bank stock, at par 2,048 1,971
Loans 86,894 73,980
Deferred loan fees (43) (144)
Allowance for loan losses (1,525) (1,625)
Loans, net 85,326 72,211
Other real estate owned, net -- 51
Premises and equipment, net 7,180 7,546
Interest receivable 831 748
Other assets 7,163 4,620
Total Assets $157,155 $140,136
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $24,364 $18,237
Interest bearing deposits 86,822 77,451
Total deposits 111,186 95,688
Other borrowings 20,000 20,000
Other liabilities and interest payable 1,849 1,744
Total liabilities 133,035 117,432
Shareholders' Equity:
Preferred Stock (par value $0.01 per share)
Series B - Authorized - 437,500 shares;
Issued and outstanding - 1999 and 1998 - 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 - 31,728,782 319 317
Additional paid-in capital 78,861 78,816
Retained deficit (54,440) (56,619)
Accumulated other comprehensive (loss) income (731) 79
Total shareholders' equity 24,120 22,704
Total Liabilities and Shareholders' Equity $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, 1999 and 1998
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands
Except Per Share Data) 1999 1998 1999 1998
Interest income:
Loans $1,972 $1,363 $5,555 $3,826
Investments 732 931 2,072 2,576
Dividends 26 21 77 66
Total interest income 2,730 2,315 7,704 6,468
Interest expense:
Deposits 722 778 2,067 2,077
Other borrowings 282 154 829 453
Total interest expense 1,004 932 2,896 2,530
Net interest income
before provision (adjustment)
for loan losses 1,726 1,383 4,808 3,938
Provision (adjustment)
for loan losses -- (1,075) 100 (1,477)
Net interest income after
provision (adjustment)
for loan losses 1,726 2,458 4,708 5,415
Non-interest income:
Stock brokerage
commissions and fees 500 220 1,350 755
Real estate rental income 306 285 922 816
Service charges and fees 230 181 643 484
Income from operating leases 124 -- 307 --
Gain on sale of assets, net -- 17 70 42
Loss on sale of securities, net -- -- -- --
Other income 61 28 172 107
Total non-interest income 1,221 731 3,464 2,204
Non-interest expense:
Salaries and related benefits 1,251 1,017 3,675 3,003
Occupancy expense 292 318 873 899
Data processing 136 93 362 307
Corporate insurance premiums 64 41 192 131
Professional fees 86 80 230 339
Other operating expenses 188 129 613 540
Total non-interest expense 2,017 1,678 5,945 5,219
Income before income taxes 930 1,511 2,227 2,400
Provision for income taxes 17 6 40 11
Net Income $913 $1,505 $2,187 $2,389
Income per common share:
Basic: Net income $0.03 $0.05 $0.07 $0.08
Weighted average shares
outstanding 31,856,703 31,728,782 31,774,199 31,726,566
Diluted: Net income $0.03 $0.05 $0.07 $0.07
Weighted average shares
outstanding 33,756,127 33,204,853 33,363,071 33,129,248
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
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Accum
ulated
Other Total
Additional Compre- Retained Compre- Share-
Preferred Common Paid-in hensive Earnings hensive holders'
(Dollars in Stock Stock Capital Income (Deficit) Income Equity
Thousands)
Balances at
January 1, 1998 $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)
Comprehensive loss,
net of tax
Net unrealized
gains, net of
reclassification
adjustments $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 $319 $78,861 $(54,440) $(731) $24,120
See accompanying notes to unaudited consolidated financial statements.
page 3
The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands) 1999 1998 1999 1998
Cash Flows from Operating Activities:
Net income $913 $1,505 $2,187 $2,389
Adjustments to reconcile
net income to net cash
provided by operating activities:
Provisions (adjustment)
for loan losses -- (1,075) 100 (1,477)
Depreciation and amortization expense 139 142 421 393
Net gain on sale of real estate owned -- (17) (71) (42)
Decrease (increase) in interest
receivable and other assets (159) 54 (39) 211
Increase (decrease) in interest
payable and other liabilities 485 (1,408) 105 (419)
Decrease in deferred loan fees (75) (38) (101) (75)
Net cash flows provided
by operating activities 1,303 (837) 2,602 980
Cash Flows from Investing Activities:
Proceeds from maturities of
investment securities held-to-
maturity 413 553 1,470 1,549
Proceeds from maturities of
investment securities
available-for-sale 1,091 10,652 12,736 23,187
Proceeds from the sale of FHLB stock -- 708 -- 708
Purchase of investment securities
available-for-sale -- (11,256) (6,058) (21,548)
Purchase FHLB stock and
FHLB stock dividends (26) (21) (77) (774)
Net increase in loans (2,350) (8,022) (12,914) (9,018)
Loans (charged off) net of recoveries -- -- (200) 52
Proceeds from the sale of
other real estate owned -- 296 122 394
Purchases of premises and equipment (12) (39) (55) (252)
Net decrease (increase) in
investment in operating leases 176 -- (2,587) --
Net cash (used in) provided
by investing activities (708) (7,129) (7,563) (5,702)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits 6,411 (7,353) 15,498 8,580
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
Net cash provided
by financing activities 6,428 (12,353) 15,537 8,582
Increase in cash and
cash equivalents 7,023 (20,319) 10,576 3,860
Cash and cash equivalents
at beginning of period 18,461 41,166 14,908 16,987
Cash and cash equivalents
at end of period $25,484 $20,847 $25,484 $20,847
Supplemental Disclosure
of Cash Flow Information:
Cash paid during the period for:
Interest $763 $811 $2,668 $2,413
Payment of income taxes 15 4 42 24
See accompanying notes to unaudited consolidated financial statements.
page 4
The San Francisco Company and Subsidiaries
Notes to Consolidated Financial Statements
(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 banking corporation and a wholly owned
subsidiary of the 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 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. 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 giving 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.
(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
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
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
Note 4 - Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board 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. Recently, SFAS No. 137 was issued
amending the effective date of SFAS No. 133 as the fiscal quarter
beginning January 1, 2001. The Company is in the process of
determining what impact, if any, the adoption of SFAS No. 133 will
have 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.
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.
First Security Van Kasper 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 $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 by $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, 1999, compared to a net income of $2.4
million for the same period in 1998. The 1998 earnings included an
allowance for loan loss adjustment totaling $1.5 million. Earnings
for the nine months ended September 30, 1999 were better than for
the same period in 1998 by $1.3 million excluding the adjustment
for the allowance for loan losses recorded in 1998. This increase
is comprised of higher net interest income, higher non-interest
income, partially offset by higher operating expenses.
At September 30, 1999, total assets were $157.2 million, an
increase of $17.1 million, or 12.2% from $140.1 million at December
31, 1998. As of September 30, 1999, total loans were $86.9
million, an increase of $12.9 million, or 17.4%, compared to $74.0
million at December 31, 1998. Total deposits were $111.2 million
at September 30, 1999, an increase of $15.5 million, or 16.2%,
compared to $95.7 million at December 31, 1998.
page 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
same period in 1998, 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, 1999 compared to 4.69% for the same
period in 1998. The increase in net interest margin was 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
non-interest bearing deposits.
Provision/Adjustment for Loan and Lease Losses
In 1998, the Bank recorded reductions 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 same
period in 1998. The Company recorded a provision for loan and
lease losses of $100,000 for the first nine months of 1999 compared
to an adjustment of $1.5 million for the same period in 1998. The
provision and adjustments were based on the factors more fully
discussed under "Allowance for Loan and Lease Losses".
Non-Interest Income
Non-interest income was $1.2 million for the quarter ended
September 30, 1999 compared to $731,000 for the same period in
1998, an increase of $490,000, or 67.0%. Non-interest income was
$3.5 million for the first nine months of 1999 compared to $2.2
million for the same period in 1998, an increase of $1.3 million,
or 57.2%. The increase in non-interest income was primarily the
result of an increase in stock option and brokerage commission
income from higher transaction volumes, an increase in real estate
rental income from higher rents, an increase in operating lease
income, and an increase in all other fees and charges in 1999
compared to 1998.
Non-Interest Expense
The Company's non-interest expenses increased to $2.0 million
from $1.7 million for the third 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 period ended September 30,
1999 and 1998, respectively. The increase of $726,000, or 13.9%,
was primarily related to compensation related expenses 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 $25.5 million, or 16.2% of total assets, at
September 30, 1999, an increase of $10.6 million, from $14.9
million, or 10.6% of total assets, at December 31, 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, 1999, the Bank had pledged securities
totaling $20.5 million and loans totaling $34.0 million to the
Federal Home Loan Bank of San Francisco (the "FHLB") as collateral
for other 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, 1999, the Bank has the ability to borrow up to a
maximum of $22.3 million from the FHLB. 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, 1999, the
Bank had other securities totaling $600,000 pledged as collateral
for public funds and trusts.
The Bank has access to the discount window at the Federal
Reserve Bank (the "FRB") for a total borrowing facility of $2.1
million upon the pledge of securities. At September 30, 1999 and
December 31, 1998, no securities were pledged as collateral for the
FRB facility.
Capital
At September 30, 1999, shareholders' equity was $24.1 million
compared to $22.7 million at December 31, 1998.
The Company and the Bank are subject to general regulations
issued by the FRB, Federal Deposit Insurance Corporation, and
California Department of Financial Institutions which require
maintenance of a certain levels of capital. As of September 30,
1999, the Company and the Bank are in compliance with all minimum
capital ratio requirements.
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, 1999:
Minimum
Capital
Company Bank Requirement
Leverage ratio 15.3% 15.3% 4.0%
Tier 1 risk-based capital 20.4 20.4 4.0
Total risk-based capital 21.7 21.6 8.0
page 9
Investment Activities
At September 30, 1999, the Company's investment securities,
FHLB stock, and Fed funds sold totaled $53.0 million, or 33.7% of
total assets, compared to $49.1 million, or 35.0% of total assets,
at December 31, 1998. Fed Funds increased by $12.8 million, or
142.2%, to $21.8 million from $9.0 million primarily from an
increase in deposits. Investment securities decreased primarily
from principal amortization on mortgage related securities, and the
maturity and call of certain agency securities. The Company's
investment portfolio may from time to time include treasury and
agency securities, fixed and adjustable rate mortgage backed
securities, and to a limited extent collateralized mortgage backed
securities. Generally, the Bank's investment securities held-to-
maturity and available-for-sale have maturities or principal
amortization of ten years or less.
At September 30, 1999, investment securities held-to-maturity
totaled $2.4 million, compared to $3.8 million at December 31,
1998, and are carried at amortized cost. At September 30, 1999,
the Company held $26.7 million in securities available-for-sale,
compared to $34.2 million at December 31, 1998. Investment
securities available-for-sale are accounted for at fair value.
Unrealized gains and losses are recorded as an adjustment to equity
and are not reflected in the current earnings of the Company. As
of September 30, 1999, the investment securities available-for-sale
have an unrealized loss of $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 the
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 1999, total loans and leases
increased from $74.0 million at December 31, 1998 to $86.9 million
at September 30, 1999. The increase resulted primarily from the
funding of new loans. The composition of the Bank's loan and lease
portfolio at September 30, 1999 and December 31, 1998 is summarized
as follows:
September 30, December 31,
(Dollars in Thousands) 1999 1998
Real estate mortgage $63,499 $50,845
Secured commercial and financial 9,990 10,054
Unsecured 10,403 11,771
Other loans and leases 3,002 1,310
86,894 73,980
Deferred fees and costs, net (43) (144)
Allowance for possible loan and lease losses (1,525) (1,625)
Total loans and leases, net $85,326 $72,211
Impaired Loans and Leases
On September 30, 1999, the Bank had no loans that were past
due more than 31 days.
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, 1999 and December 31, 1998, the Company had no
impaired loans. Total interest income recognized on impaired loans
during the first nine months of 1999 and 1998 was zero and $4,000,
respectively.
There can be no assurance that the Bank will not experience
losses in attempting to collect or otherwise liquidate any assets
that become non-performing in the future. As of September 30, 1999
and December 31, 1998, the Company's statement of financial
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 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
provisions 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 asset
characteristics 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. As of
September 30, 1999, none of the allowance for loan losses was
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 quarter
ended September 30, 1999:
(Dollars in Thousands) 1999
Beginning balance of allowance for loan and lease losses at
December 31, 1998 $1,625
Charge-offs (200)
Recoveries --
Provision 100
Ending balance of allowance for loan and
lease losses September 30, 1999 $1,525
As of September 30, 1999 and December 31, 1998, the allowance
for loan and lease losses was 1.75% and 2.20% of total loans and
leases, respectively.
As of September 30, 1999, the unallocated portion of the
allowance for loan and lease losses totaled $436,000 compared to
$409,000 at December 31, 1998. The unallocated portion of the
allowance for loan and lease losses is 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
operating 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 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 $15.9 million compared
to $18.2 million as of December 31, 1998. The valuation allowance
for net deferred tax assets totaled $13.8 million and $16.1 million
at September 30, 1999 and December 31, 1998, respectively.
Deposits
The Company had total deposits of $111.2 million at September
30, 1999 compared to $95.7 million at December 31, 1998, an
increase of $15.5 million or 16.2%. The increase is attributed
primarily to an increase in homeowners' association related
customer's deposits of $5.7 million, an increase in SOL related
deposits of $4.9 million, and an increase in Private and Business
Banking related customer's deposits of $4.3 million. A summary of
deposits at September 30, 1999 and December 31, 1998 is as follows:
September 30, December 31,
(Dollars in Thousands) 1999 1998
Demand deposits $24,364 $18,237
NOW 21,839 19,998
Money market and savings 26,647 17,838
Total deposits with no stated maturity 72,850 56,073
Time deposits:
Less than $100,000 17,888 18,373
$100,000 and greater 20,448 21,242
Total time deposits 38,336 39,615
Total deposits $111,186 $95,688
The Bank's deposits from private and business banking
customers totaled $46.4 million, or 41.7% of total deposits, at
September 30, 1999, compared to $41.2 million, or 43% of total
deposits, at December 31, 1998. Deposits from Association Bank
Services customers totaled $24.9 million, or 22.4% of total
deposits at September 30, 1999, compared to $19.2 million, or 20%
of total deposits at December 31, 1998. Deposits from Escrow
customers totaled $20.6 million, or 18.5% of total deposits at
September 30, 1999, compared to $19.2 million, or 20% of total
deposits at December 31, 1998. Deposits acquired through the money
desk operations totaled $11.4 million, or 10.3% of total deposits
at September 30, 1999, compared to $12.3 million, or 12.9% of total
deposits at December 31, 1998.
page 12
Other Borrowings
As of September 30, 1999, the Bank had long-term FHLB
borrowings outstanding totaling $18.0 million and short-term FHLB
borrowings outstanding of $2.0 million secured by pledged
securities totaling $20.5 million and loans totaling $34.0 million.
Year 2000 Readiness Disclosure
The following 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 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.
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
involves 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.
As of September 30, 1999, the Bank has implemented mission
critical system upgrades for all of its core banking hardware and
software including vendor supported hardware and software. Testing
to the mission critical systems was successfully completed as of
September 30, 1999. The Bank has requested certification of
testing compliance from all vendors and is 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 Bank will continue testing mission critical systems
primarily 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,
the Bank 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 Bank is required to implement the
contingency phase because of a subsequent failure, additional costs
are likely to be incurred.
The cost associated with executing the Y2K Plan and completing
the Y2K modification and testing are estimated to be approximately
$350,000 including approximately $160,000 for acquired hardware
which is 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 on-
going testing and contingency plan implementation. The funds for
the 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 Bank's
policies, are being expensed as 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 Bank's date sensitive systems will not exceed
the Bank's present estimate or that all business risks and related
exposure have been identified.
If the Bank's date sensitive systems or the systems of those
third parties who have material business relationships with the
Bank are not Y2K compliant by January 1, 2000, the Bank's business
and results of operations may be materially and adversely affected.
The Bank could experience time delays in its daily operations and
increased processing costs due to the required shift to manual
processes, and the Bank 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 Bank'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.
The Bank believes that the greatest risk for disruption to its
business may result from Y2K noncompliance of third parties that
have major business relationships with the 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
Bank. The Bank is unable to estimate the potential financial
impact of the scenarios described above. However, the Bank
believes that its Y2K Plan should reduce any material adverse
effect caused by any such disruption.
page 14
Item 3. 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 does not have any significant risk related to foreign
currency, exchange rates, commodity prices, equity prices, and
other market changes that affect market sensitive instruments.
page 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The San Francisco Company
(Registrant)
Date: November 5, 1999 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: November 5, 1999 /s/ Keary L. Colwell
Keary L. Colwell
Chief Financial Officer and
Executive Vice President
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