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 June 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 31,818,782 shares of Class A Common Stock outstanding on July
17, 1999.
Page
The San Francisco Company and Subsidiaries
Quarterly Report on Form 10-Q
Table of Contents
Page
Part I - Financial Information
Item 1. Consolidated Statements of Financial Condition
At June 30, 1999 and December 31, 1998 . . . . . . . . . . . . 1
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1999 and 1998 . . . 2
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income For the Six Months
Ended June 30, 1999 and 1998 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
For the Three and Six Months Ended June 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
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Page
The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
June 30, 1999 and December 31, 1998
(Unaudited)
June 30, December 31,
(Dollars in Thousands Except Per Share Data) 1999 1998
Assets:
Cash and due from banks $5,158 $5,908
Federal funds sold 13,303 9,000
Cash and cash equivalents 18,461 14,908
Investment securities held-to-maturity, at cost
(Fair value: 1999 $2,758; 1998 $4,830) 2,789 3,846
Investment securities available-for-sale, at fair value 28,045 34,235
Federal Home Loan Bank stock, at par 2,022 1,971
Loans 84,544 73,980
Deferred loan fees (118) (144)
Allowance for loan losses (1,525) (1,625)
Loans, net 82,901 72,211
Other real estate owned, net -- 51
Premises and equipment, net 7,307 7,546
Interest receivable 741 748
Other assets 7,270 4,620
Total Assets $149,536 $140,136
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $19,615 $18,237
Interest bearing deposits 85,160 77,451
Total deposits 104,775 95,688
Other borrowings 20,000 20,000
Other liabilities and interest payable 1,364 1,744
Total liabilities 126,139 117,432
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 - 31,818,782 and
1998 - 31,728,782 318 317
Additional paid-in capital 78,845 78,816
Retained deficit (55,353) (56,619)
Accumulated other comprehensive (loss) income (524) 79
Total shareholders' equity 23,397 22,704
Total Liabilities and Shareholders' Equity $149,536 $140,136
See accompanying notes to unaudited consolidated financial statements.
Page 1
The San Francisco Company and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1999 and 1998
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in Thousands
Except Per Share Data) 1999 1998 1999 1998
Interest income:
Loans $1,830 $1,252 $3,583 $2,463
Investments 651 819 1,340 1,645
Dividends 25 22 51 45
Total interest income 2,506 2,093 4,974 4,153
Interest expense:
Deposits 693 646 1,345 1,299
Other borrowings 275 149 547 299
Total interest expense 968 795 1,892 1,598
Net interest income before
provision (adjustment)
for loan losses 1,538 1,298 3,082 2,555
Provision (adjustment) for
loan losses 100 (308) 100 (402)
Net interest income after
provision (adjustment)
for loan losses 1,438 1,606 2,982 2,957
Non-interest income:
Stock brokerage
commissions and fees 413 278 850 535
Real estate rental income 310 274 616 531
Service charges and fees 239 157 413 303
Income from operating leases 130 -- 183 --
Gain on sale of assets, net 70 25 70 25
Loss on sale of securities,net -- -- -- --
Other income 62 42 111 79
Total non-interest income 1,224 776 2,243 1,473
Non-interest expense:
Salaries and related benefits 1,201 1,013 2,424 1,986
Occupancy expense 291 289 581 581
Data processing 117 103 226 214
Corporate insurance premiums 65 34 128 90
Professional fees 59 133 144 259
Other operating expenses 192 223 425 411
Total non-interest expense 1,925 1,795 3,928 3,541
Income before income taxes 737 587 1,297 889
Provision for income taxes 20 5 23 5
Net Income $717 $582 $1,274 $884
Income per common share:
Basic: Net income $0.02 $0.02 $0.04 $0.03
Weighted average
shares outstanding 31,735,705 31,727,134 31,732,244 31,725,458
Diluted: Net income $0.02 $0.02 $0.04 $0.03
Weighted average
shares outstanding 33,448,958 33,091,792 33,161,699 33,090,838
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
Six Months Ended June 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 $3 -- 3 3
Other comprehensive
income 3 -- -- --
Net income
(six months) 884 884 -- 884
Comprehensive income $887
Balances at
June 30, 1998 111 317 78,816 (60,777) (13) 18,454
Comprehensive income,
net of tax
Net unrealized gains $92 -- 92 92
Other comprehensive
income 92
Net income
(six months) 4,158 4,158 -- 4,158
Comprehensive income $4,250
Balances at
December 31, 1998 111 317 78,816 (56,619) 79 22,704
Net proceeds from
the exercise of
stock options -- 1 29 -- -- -- 30
Dividend on
Preferred Stock (8) -- (8)
Comprehensive income,
net of tax
Net unrealized losses $(603) -- (603) (603)
Other comprehensive
loss (603)
Net income
(six months) 1,274 1,274 -- 1,274
Comprehensive income $671
Balances at
June 30, 1999 $111 $318 $78,845 $(55,353) $(524) $23,397
See accompanying notes to unaudited consolidated financial statements.
Page 3
The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three and Six Months Ended June 30, 1999 and 1998
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in Thousands) 1999 1998 1999 1998
Cash Flows from Operating Activities:
Net income $717 $582 $1,274 $884
Adjustments to reconcile net
income to net cash
provided by operating activities:
Provisions (adjustment) for loan losses 100 (308) 100 (402)
Depreciation and amortization expense 140 127 282 251
Net gain on sale of real estate owned (71) (25) (71) (25)
Decrease (increase) in interest
receivable and other assets 114 (102) 120 157
Increase (decrease) in interest
payable and other liabilities 37 1,350 (385) 995
Decrease in deferred loan fees (40) -- (26) (37)
Net cash flows provided by
operating activities 997 1,624 1,294 1,823
Cash Flows from Investing Activities:
Proceeds from maturities of
investment securities held-to-maturity 509 590 1,057 996
Proceeds from maturities of investment
securities available-for-sale 1,581 4,488 11,594 12,529
Purchase of investment securities
available-for-sale (1,965) (5,739) (6,058) (11,045)
Net increase in loans (3,087) (1,218) (10,564) (996)
Loans charged off net of (recoveries) (200) 42 (200) 52
Proceeds from the sale of
other real estate owned 122 50 122 98
Purchases of premises and equipment (16) (88) (43) (213)
Net decrease (increase) in
investment in operating leases 181 -- (2,762) --
Net cash (used in) provided
by investing activities (2,875) (1,875) (6,854) 1,421
Cash Flows from Financing Activities:
Net increase in deposits 11,537 13,411 9,087 15,933
Net increase in other borrowings -- 5,000 -- 5,000
Cash dividends paid on
Series B Preferred Stock -- -- (4) --
Net proceeds from sale of stock 30 2 30 2
Net cash provided by financing activities 11,567 18,413 9,113 20,935
Increase in cash and cash equivalents 9,689 18,162 3,553 24,179
Cash and cash equivalents at
beginning of period 8,772 23,004 14,908 16,987
Cash and cash equivalents at
end of period $18,461 $41,166 $18,461 $41,166
Supplemental Disclosure
of Cash Flow Information:
Cash paid during the period for:
Interest $1,158 $913 $1,905 $1,451
Payment of income taxes 21 6 27 18
See accompanying notes to unaudited consolidated financial statements.
Page 4
The San Francisco Company and Subsidiaries
Notes to Consolidated Financial Statements
(June 30, 1999 Unaudited)
Note 1 - Organization
The San Francisco Company (the "Company") is a Delaware corporation and a
bank holding company registered under the Bank Holding Company Act of 1956.
Bank of San Francisco (the "Bank") is a California state chartered 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 data as of June 30, 1999, and for the three months ended June 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 June
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.
The accompanying financial statements include the accounts of the Company,
the Bank, 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 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
Second quarter
Basic EPS $715 31,735,705 $0.02
Effect of dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- 1,712,460
Diluted EPS $717 33,448,958 $0.02
Year to date
Basic EPS $1,270 31,732,244 $0.04
Effect of dilutive securities:
Series B Preferred Stock 4 793
Stock Options -- 1,428,662
Diluted EPS $1,274 33,161,699 $0.04
Per-share
1998 Income Shares amount
Second quarter
Basic EPS $580 31,727,134 $0.02
Effect of dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- 1,363,865
Diluted EPS $582 33,091,792 $0.02
Year to date
Basic EPS $879 31,725,458 $0.03
Effect of dilutive securities:
Series B Preferred Stock 5 793
Stock Options -- 1,364,587
Diluted EPS $884 33,090,838 $0.03
Note 4 - Recent Accounting Pronouncements
During the first half of 1999, there were no new pronouncements that are
applicable to the Company or the Bank.
In June 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. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. As of June 30,
1999, the Company did not have any derivative instruments or engage in
hedging activities.
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.
The Company recorded net income of $717,000 for the three months ended June
30, 1999, compared to a net income of $582,000 for the same period in 1998. The
increase in the Company's net income of $135,000 was primarily from an increase
in net interest income and non-interest income, partially offset by an increase
in the provision for loan losses and by an increase in non-interest expenses in
second quarter 1999 compared to the same period in 1998.
The Company recorded net income of $1.3 million for the six months ended
June 30, 1999, compared to a net income of $884,000 for the same period in
1998. The increase in the Company's net income of $390,000 was primarily from an
increase in net interest income and non-interest income, partially offset by an
increase in the provision for loan losses and by an increase in non-interest
expenses in first half of 1999 compared to the same period in 1998.
At June 30, 1999, total assets were $149.5 million, an increase of $9.4
million, or 6.7% from $140.1 million at December 31, 1998. As of June 30, 1999,
total loans were $84.5 million, an increase of $10.5 million, or 14.2%, compared
to $74.0 million at December 31, 1998. Total deposits were $104.8 million at
June 30, 1999, an increase of $9.1 million, or 9.5%, compared to $95.7 million
at December 31, 1998.
Page 7
Results of Operations
Net Interest Income
The Company's net interest income was $1.5 million in the quarter ended
June 30, 1999 compared to $1.3 million for the same period in 1998, or an
increase of 18.5%. The Company's net interest income was $3.1 million in
the six months ended June 30, 1999 compared to $2.6 million for the same
period in 1998, or an increase of 20.6%. The increase was primarily the
result of an increase in higher yielding earning assets.
Provision/Adjustment for Loan and Lease Losses
In 1998, the Bank recorded reductions to the allowance for loan and lease
losses as an adjustment for loan and lease losses. The Company recorded a
provision for loan and lease losses of $100,000 for the second quarter of 1999
compared to an adjustment of $308,000 for the same period in 1998. The Company
recorded a provision for loan and lease losses of $100,000 for the first half of
1999 compared to an adjustment of $402,000 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 June 30, 1999
compared to $776,000 for the same period in 1998, an increase of $448,000, or
58%. Non-interest income was $2.2 million for the first half of 1999 compared
to $1.5 million for the same period in 1998, an increase of $770,000, or 52%.
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 $1.9 million from $1.8
million for the second quarter 1999 and 1998, respectively. The increase of
$130,000, or 7.2%, was primarily related to compensation related expenses
including incentive programs.
The Company's non-interest expenses increased to $3.9 million from $3.5
million for the six month period ended June 30, 1999 and 1998,
respectively. The increase of $387,000, or 10.9%, was primarily related
to compensation related expenses including incentive programs.
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short term investments
totaled $18.5 million, or 12.3% of total assets, at June 30, 1999, an increase
of $3.6 million, from $14.9 million, or 24.2% of total assets, at December 31,
1998. The change in liquidity was the result of an increase in deposits of $9.1
million offset by a decrease in investments available for sale of $6.2 million
which was partially
Page 8
used to fund an increase in loans and operating leases.
As of June 30, 1999, the Bank had pledged securities totaling $20.0 million
to the Federal Home Loan Bank of San Francisco (the "FHLB") as collateral for
other borrowings totaling $20.0 million. As of June 30, 1999, the Bank has the
ability to borrow up to a maximum of 20% of total assets or $29.9 million from
the FHLB upon the pledge of sufficient collateral. In the future, long and
short-term borrowings from the FHLB may be used as an on-going source of
liquidity and funding. As of June 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 June 30, 1999 and December 31, 1998, no securities were pledged
as collateral for the FRB facility.
Capital
At June 30, 1999, shareholders' equity was $23.4 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 June 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 June 30,
1999:
Minimum
Capital
Company Bank Requirement
Leverage ratio 15.5% 15.4% 4.0%
Tier 1 risk-based capital 20.4 20.3 4.0
Total risk-based capital 21.6 21.5 8.0
Investment Activities
At June 30, 1999, the Company's investment securities, FHLB stock, and Fed
funds sold totaled $46.2 million, or 30.9% of total assets, compared to $49.1
million, or 35.0% of total assets, at December 31, 1998. The decrease in
investment securities resulted 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 seven years or less.
At June 30, 1999, investment securities held-to-maturity totaled $2.8
million, compared to $3.8 million at December 31, 1998, and are carried at
amortized cost. At June 30, 1999, the Company held $28.0 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
Page 9
recorded as an adjustment to equity and are not reflected in the
current earnings of the Company. As of June 30, 1999, the investment securities
available-for-sale have an unrealized loss of $524,000 net of tax, that was
included as a component of accumulated other comprehensive income under
shareholder's equity to reflect the current market value of the securities
available-for-sale. The decline in market value of the investment
securities was the result of increasing market interest rates during the
second half of 1999. The market value of the investment portfolio will
fluctuate with changes in market interest rates. Management believes the
recent decline in market value is temporary and does not represent a
permanent impairment in the market value of the investment portfolio.
Loans and Leases
During the first half of 1999, total loans and leases increased, from $74.0
million at December 31, 1998 to $84.5 million at June 30, 1999. The increase
resulted primarily from the funding of new loans. The composition of the Bank's
loan and lease portfolio at June 30, 1999 and December 31, 1998 is summarized as
follows:
June 30, December 31,
(Dollars in Thousands) 1999 1998
Real estate mortgage $59,094 $50,845
Secured commercial and financial 9,456 10,054
Unsecured 11,549 11,771
Other loans and leases 4,445 1,310
84,544 73,980
Deferred fees and costs, net (118) (144)
Allowance for possible loan and lease losses (1,525) (1,625)
Total loans and leases, net $82,901 $72,211
Impaired Loans and Leases
On June 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 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 June 30,
1999 and December 31, 1998, the Company had no impaired loans. Total interest
income recognized on impaired loans during the first half 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 June 30, 1999, the Company's statement of
financial condition did not include any non-performing assets.
Allowance for Loan and Lease Losses
Generally, the Bank charges current earnings with a provision for estimated
losses on 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
Page 10
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
June 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 June 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 June 30, 1999 $1,525
As of June 30, 1999, the unallocated portion of the allowance for loan and
lease losses totaled $279,000 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.
Other Assets
Operating Leases
As of June 30, 1999, other assets included investments in operating leases
totaling $4.7 million compared to $2.0 million at December 31, 1998. Generally,
the operating leases are comprised of computer and electronic equipment leased
to various lessees for periods ranging from 30 days to five years. The Bank has
contracted with a leasing administrator to manage the equipment and collect
lease payments.
Deferred Tax Asset
As of June 30, 1999 and December 31, 1998, other assets included total
deferred tax assets net of deferred tax liabilities and the valuation allowance
of $2.1 million. As of June 30, 1999, the Company's estimated total deferred
tax assets net of deferred tax liabilities is estimated to be $17.0 million
compared to $18.2 million as of December 31, 1998. As of June 30, 1999, the
estimate includes tax credits of $500,000, other net temporary difference of
$100,000, and $16.5 million in net operating loss carryforward benefits. The
valuation allowance for net deferred tax assets totaled $14.9 million and
$16.1 million at June 30, 1999 and December 31, 1998, respectively.
Page 11
Deposits
The Company had total deposits of $104.8 million at June 30, 1999 compared
to $95.7 million at December 31, 1998, an increase of $9.1 million or 9.5%.
The increase is attributed primarily to an increase in homeowners' association
related customer's deposits of $4.8 million and an increase in SOL related
deposits of $3.3 million. A summary of deposits at June 30, 1999 and December
31, 1998 is as follows:
June 30, December 31,
(Dollars in Thousands) 1999 1998
Demand deposits $19,615 $18,237
NOW 19,638 19,998
Money market and savings 22,264 17,838
Total deposits with no stated maturity 61,517 56,073
Time deposits:
Less than $100,000 18,183 18,373
$100,000 and greater 25,075 21,242
Total time deposits 43,258 39,615
Total deposits $104,775 $95,688
The Bank's deposits from private and business banking customers totaled
$42.8 million, or 41% of total deposits, at June 30, 1999, compared to $41.2
million, or 43% of total deposits, at December 31, 1998. Deposits from
Association Bank Services customers totaled $24.0 million, or 23% of total
deposits at June 30, 1999, compared to $19.2 million, or 20% of total deposits
at December 31, 1998. Deposits from Escrow customers totaled $19.3 million, or
18% of total deposits at June 30, 1999, compared to $19.2 million, or 20% of
total deposits at December 31, 1998. Deposits acquired through the money desk
operations totaled $12.7 million, or 12% of total deposits at June 30, 1999,
compared to $12.3 million, or 12.9% of total deposits at December 31, 1998.
Other Borrowings
As of June 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 $20.0 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
Page 12
computer systems and from external sources such as borrowers
whose businesses might be adversely impacted by the Y2K problem, deposit
customers whose transactions are transmitted electronically, and other third
parties such as institutions, vendors, and governmental agencies whose computer
systems may have a direct or indirect adverse impact on the Bank or the Bank's
customers. The Bank maintains much of its computer hardware on the premises of
third party vendors, uses software under licensing agreements with vendors, and
has outsourced its data processing requirements to outside vendors. As a
result, the Bank is highly reliant on vendors to upgrade many of the Bank's
systems to be Y2K compliant in the timeframe specified by the Y2K Plan.
The cost of the project and the date on which the Y2K Plan specifies the
Bank will complete the modifications are based on several assumptions of future
events including the continued availability of internal and external resources,
third party modifications and other factors. However, there can be no guarantee
that the Y2K Plan and the Bank's remediation efforts will be achieved and actual
results could differ. Moreover, while the Y2K Plan specifies that the Company
will be able to make the necessary modifications in advance, there can be no
guarantee that failure to modify the systems would not have a material adverse
affect on the Bank. There also can be no guarantee that the failure of other
third parties to modify their systems would not have a material adverse affect
on the Company and the Bank.
The purpose of the Y2K Plan is to manage and mitigate the business risks
associated with the Y2K problem. The Y2K Plan 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 June 30, 1999, the Bank has substantially 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 June 30, 1999. The Bank has
requested certification of testing compliance from all vendors and intends to
continue testing the compliance of all major vendor systems. The Bank will
attempt to obtain a certification of testing compliance of all major systems
from an independent third party where possible.
The Bank has sent notification to all loan and deposit customers apprising
them of the potential problems and requesting that they assess the compliance of
their computer systems. The Bank's lending policies have been revised to
require an assessment of a borrower's risks to the Y2K problem, and the
assessment has been incorporated into the credit review process. In addition,
the Y2K Plan includes provisions that provide for the Bank's use of manual
processes, for a limited period of time, if the Bank's systems are not
operational, and that ensure that additional liquidity is available in the
event of a limited disruption of customer cashflows.
The Y2K Plan includes a contingency plan if certain tasks are not
successfully completed by specified trigger dates. If the Bank's mission
critical systems were not compliant by June 30, 1999, the Bank would have been
required to take the necessary steps to correct the deficiency by implementing
the contingency plan phase of the Y2K Plan which includes engaging alternate
vendors who are Y2K compliant. The Bank will continue testing mission critical
systems throughout 1999. The contingency plan includes steps for implementing
manual processes. If the 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
modifications are estimated to be approximately $350,000 including approximately
$160,000 for acquired hardware which
Page 13
is being amortized over its estimated useful life. As of June 30, 1999,
$256,000 of Y2K costs have been incurred. The funds for these
modifications are from general working capital. These
costs, exclusive of the cost of replacement systems that are being capitalized
and amortized in accordance with the 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.
PART II
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1998 Annual Meeting (the "Annual Meeting") on
May 19, 1999. Two matters were submitted to a vote of security holders at the
Annual Meeting. The stockholders elected nine directors and ratified the Board
of Directors' selection of KPMG LLP, independent public accountants, as the
independent accounting firm for the Company during the fiscal years ending
December 31, 1999 and 1998.
page 14
The following schedule sets forth each matter voted upon at the
Annual Meeting and the number of votes casts for, against or withheld including
a tabulation with respect to each nominee for director.
Proposal/Nominee Votes For Votes Against Votes Withheld/
Abstentions
Proposal 1: Election of Directors
James E. Gilleran 31,623,863 -- 55,170
Paul Erickson 31,673,863 -- 5,170
Peter Foo 31,673,863 -- 5,170
John F. McGrath 31,623,863 -- 55,170
Kent D. Price 31,668,858 -- 10,175
Nicholas Unkovic 31,673,863 -- 5,170
Willard D. Sharpe 31,673,863 -- 5,170
Gordon Swanson 31,673,863 -- 5,170
Gary Williams 31,673,863 -- 5,170
Proposal 2: Ratify the selection
of KPMG LLP as the Company's
independent accounting firm for
1999 and 1998 31,623,846 1,075 54,112
Page 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
The San Francisco Company
(Registrant)
Date: July 30, 1999 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: July 30, 1999 /s/ Keary L. Colwell
Keary L. Colwell
Chief Financial Officer and
Executive Vice President
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