-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DO6reze5cbLSqu2jVnUtfNy5Jwb+2kVTYz2mZltwH7xdI/HFHGN42E3YUy0JDtnC YTToHkaIHk7HJNtRyi1E0Q== 0000351238-98-000004.txt : 19981029 0000351238-98-000004.hdr.sgml : 19981029 ACCESSION NUMBER: 0000351238-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981028 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAN FRANCISCO CO CENTRAL INDEX KEY: 0000351238 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 943071255 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10198 FILM NUMBER: 98732300 BUSINESS ADDRESS: STREET 1: 550 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4157817810 MAIL ADDRESS: STREET 1: PO BOX 2887 CITY: SAN FRANCISCO STATE: CA ZIP: 94126 FORMER COMPANY: FORMER CONFORMED NAME: BANK OF SAN FRANCISCO CO HOLDING CO DATE OF NAME CHANGE: 19920703 10-Q 1 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 EX-27 2
9 9-MOS DEC-31-1998 SEP-30-1998 3,567 0 17,280 0 31,204 37,084 37,083 60,942 1,775 127,343 95,099 0 2,114 10,000 0 111 317 0 20,130 3,826 2,576 66 6,468 2,077 453 2,530 (1,477) 0 5,219 2,400 2,400 0 0 2,389 0.08 0.07 4.70 0 0 0 0 3,200 0 52 1,775 1,775 0 0
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