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 March 31, 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 31,723,782 shares of Class A Common Stock
outstanding on April 30, 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 March 31, 1999 and December 31, 1998 . . . . . . . . . . 1
Consolidated Statements of Operations
For the Three Months Ended March 31, 1999 and 1998. . . . . 2
Consolidated Statements of Changes in Shareholders'Equity
and Comprehensive Income For the Three Months Ended
March 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998. . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 6
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PAGE
Item. 1 - Consolidated Financial Statements
The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
March 31, 1999 and December 31, 1998
(Unaudited)
March 31, December 31,
(Dollars in Thousands
Except Per Share Data) 1999 1998
Assets:
Cash and due from banks $2,772 $5,908
Federal funds sold 6,000 9,000
Cash and cash equivalents 8,772 14,908
Investment securities held-to-maturity
(Market: 1999 $3,287; 1998 $3,851) 3,298 3,846
Investment securities available-for-sale 28,116 34,235
Federal Home Loan Bank stock, at par 1,998 1,971
Loans and leases 81,457 73,980
Deferred fees (158) (144)
Allowance for loan and lease losses (1,625) (1,625)
Loans and leases, net 79,674 72,211
Other real estate owned 51 51
Premises and equipment, net 7,431 7,546
Interest receivable 760 748
Other assets 7,544 4,620
Total Assets $137,644 $140,136
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $16,288 $18,237
Interest bearing deposits 76,949 77,451
Total deposits 93,237 95,688
Other borrowings 20,000 20,000
Other liabilities and interest payable 1,322 1,744
Total liabilities 114,559 117,432
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 and 1998-31,728,782 317 317
Additional paid-in capital 78,816 78,816
Retained deficit (56,067) (56,619)
Accumulated other comprehensive (loss) income (92) 79
Total shareholders' equity 23,085 22,704
Total Liabilities and Shareholders' Equity $137,644 $140,136
See accompanying notes to unaudited consolidated financial statements.
PAGE 1
The San Francisco Company and Subsidiaries
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998
(Unaudited)
March 31,
(Dollars in Thousands
Except Per Share Data) 1999 1998
Interest income:
Loans $1,753 $1,211
Investments 689 826
Dividends 26 23
Total interest income 2,468 2,060
Interest expense:
Deposits 652 653
Other borrowings 272 150
Total interest expense 924 803
Net interest income 1,544 1,257
Adjustment for loan and lease losses -- (94)
Net interest income after adjustment
for loan and lease losses 1,544 1,351
Non-interest income:
Stock option commissions and brokerage fees 437 257
Real estate rental income 306 257
Service charges and fees 174 146
Income from operating leases 53 --
Other income 49 37
Total non-interest income 1,019 697
Non-interest expense:
Salaries and related benefits 1,223 973
Occupancy expense 290 292
Data processing 109 111
Professional fees 85 126
Corporate insurance premiums 63 56
Equipment expense 51 39
Other operating expenses 182 149
Total non-interest expense 2,003 1,746
Income before income taxes 560 302
Provision for income taxes 3 --
Net Income $557 $302
Income per common share:
Basic: Net income $0.02 $0.01
Weighted average shares outstanding 31,728,782 31,723,782
Diluted: Net income $0.02 $0.01
Weighted average shares outstanding 33,254,168 33,089,892
See accompanying notes to unaudited consolidated financial statements.
PAGE 2
The San Francisco Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income
Three Months Ended March 31, 1999 and 1998
(Unaudited)
Accum
ulated
Other Total
Additional Compre- Retained Compre- Share-
(Dollars in Preferred Common Paid-in hensive Earnings hensive holders'
Thousands) Stock Stock Capital Income (Deficit) Income Equity
Balances at
January 1, 1998 $111 $317 $78,814 $(61,656) $(16) $17,570
Other comprehensive
loss, net of tax
Unrealized losses
on securities, net -- -- (8) -- (8) (8)
Other comprehensive
loss -- -- -- (8) -- -- --
Net income
(three months) -- -- -- 302 302 -- 302
Comprehensive income 294
Balances at
March 31, 1998 111 317 78,814 (61,354) (24) 17,864
Net proceeds from
the exercise of
stock options -- -- 2 -- -- 2
Dividend on
Preferred Stock -- -- -- (5) -- (5)
Other comprehensive
income, net of tax
Unrealized gain on
securities, net -- -- -- 103 -- 103 103
Other comprehensive
income 103
Net income
(nine months) -- -- -- 4,740 4,740 -- 4,740
Comprehensive income 4,843
Balances at
December 31, 1998 111 317 78,816 (56,619) 79 22,704
Dividend on
Preferred Stock -- -- -- (5) -- (5)
Other comprehensive
loss, net of tax
Unrealized loss on
securities, net -- -- -- (171) -- (171) (171)
Other comprehensive
loss (171)
Net income
(three months) -- -- -- 557 557 -- 557
Comprehensive income 386
Balances at
March 31, 1999 $111 $317 $78,816 $(56,067) $(92) $23,085
See accompanying notes to unaudited consolidated financial statements.
PAGE 3
The San Francisco Company and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998
(Unaudited)
(Dollars in Thousands) 1999 1998
Cash Flows from Operating Activities:
Net income $557 $302
Adjustments to reconcile net income to net cash
provided by operating activities:
Adjustment for loan losses -- (94)
Depreciation and amortization expense 142 124
Decrease in interest receivable and other assets 7 259
Decrease in interest payable and other liabilities (422) (339)
Increase (decrease) in deferred loan fees 14 (37)
Net cash flows provided by operating activities 298 215
Cash Flows from Investing Activities:
Proceeds from maturities of investment
securities held-to-maturity 548 406
Proceeds from maturities of investment
securities available-for-sale 10,013 8,024
Purchase of investment securities available-for-sale (4,093) (5,305)
Net (increase) decrease in loans (7,477) 222
Recoveries of loans previously charged off -- 10
Purchases of premises and equipment (27) (125)
Net increase of investment in operating leases (2,943) --
Proceeds from the sale of other real estate owned -- 48
Net cash (used in) provided by investing activities (3,979) 3,280
Cash Flows from Financing Activities:
Net (decrease) increase in deposits (2,450) 2,522
Dividends on Series B Preferred Stock (5) --
Net cash (used in) provided by financing activities (2,455) 2,522
(Decrease) increase in cash and cash equivalents (6,136) 6,017
Cash and cash equivalents at beginning of period 14,908 16,987
Cash and cash equivalents at end of period $8,772 $23,004
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $747 $538
Income taxes 6 12
See accompanying notes to unaudited consolidated financial statements.
PAGE 4
The San Francisco Company and Subsidiaries
Notes to Consolidated Financial Statements
(March 31, 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 March 31, 1999, and for the three months ended March 31,
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 March 31, 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
PAGE 5
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.
(dollars in thousands except per-share amounts)
Per-share
1999 Income Shares amount
Basic EPS $555 31,728,782 $0.02
Effect of dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- 1,524,593
Diluted EPS $557 33,254,168 $0.02
Per-share
1998 Income Shares amount
Basic EPS $300 31,723,782 $0.01
Effect of dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- 1,365,317
Diluted EPS $302 33,089,892 $0.01
Note 4 - Recent Accounting Pronouncements
During the first quarter 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 March 31, 1999, the Company did not have any derivative instruments or
engage in hedging activities.
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.
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
PAGE 6
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 $557,000 for the three months ended
March 31, 1999, compared to a net income of $302,000 for the same period in
1998. The increase in the Company's net income of $255,000 was primarily
from an increase in net interest income and non-interest income, partially
offset by an increase in non-interest expenses in first quarter 1999 compared
to the same period in 1998.
At March 31, 1999, total assets were $137.6 million, a decrease of $2.5
million, or 1.8% from $140.1 million at December 31, 1998. As of March 31,
1999, total loans were $81.5 million, an increase of $7.5 million, or 10.1%,
compared to $74.0 million at December 31, 1998. Total deposits were $93.2
million at March 31, 1999, a decrease of $2.5 million, or 2.6%, compared to
$95.7 million at December 31, 1998.
Results of Operations
Net Interest Income
The Company's net interest income was $1.5 million in the quarter ended
March 31, 1999 compared to $1.3 million for the same period in 1998, or an
increase of 23%. The increase was primarily the result of an increase in
earning assets.
Adjustment for Loan and Lease Losses
The Company recorded an adjustment for loan and lease losses of $94,000
for the first quarter of 1998 compared to none in the same period in 1999.
Based on the factors more fully discussed under "Allowance for Loan and Lease
Losses", no provision or adjustment was required for the first quarter of
1999. The adjustment for loan and lease losses in 1998 reflected the amount
necessary to reduce the allowance for loan and lease losses to a level that
management believed was adequate based on the factors that are more fully
discussed under "Loans and Leases - Allowance for Loan and Lease Losses".
Non-Interest Income
Non-interest income was $1.0 million at March 31, 1999 compared to
$697,000 at March 31, 1998. The increase in non-interest income of $322,000
was primarily the result of an increase in stock option and brokerage
commission income in 1999 compared to 1998. In addition, all other types of
non-interest income improved.
Non-Interest Expense
The Company's non-interest expenses increased to $2.0 million from $1.7
million for the three month period ended March 31, 1999 and 1998,
respectively. The increase of $257,000, or 17.6%, was primarily related to
compensation related expenses including incentive programs.
PAGE 7
Financial Condition
Liquidity and Capital Resources
Liquidity
The Bank's liquid assets, which include cash and short term investments
totaled $8.8 million, or 6.4% of total assets, at March 31, 1999, a decrease
of $6.1 million, from $14.9 million, or 10.6% of total assets, at December
31, 1998. The decrease in liquidity was the result of an increase in loans
by $7.5 million, an increase in operating leases by $3.0 million, a decrease
in deposits by $2.5 million, and a decrease in investment securities totaling
$6.6 million.
As of March 31, 1999, the Bank had pledged securities totaling $22.7
million to the Federal Home Loan Bank of San Francisco (the "FHLB")
as collateral for other borrowings totalling $20.0 million. As of March
31, 1999, the Bank has the ability to borrow up to a maximum of 20% of total
assets or $27.5 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 March
31, 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 $1.8 million upon the
pledge of securities. At March 31, 1999 and December 31, 1998, no
securities were pledged as collateral for the FRB facility.
Capital
At March 31, 1999, shareholders' equity was $23.1 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 level of
capital. As of March 31, 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 March 31,
1999:
Minimum
Capital
Company Bank Requirement
Leverage ratio 15.3% 15.2% 4.0%
Tier 1 risk-based capital 20.6 20.5 4.0
Total risk-based capital 21.9 21.8 8.0
Investment Activities
At March 31, 1999, the Company's investment securities and Fed funds
sold totaled $39.4 million, or 28.6% 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 March 31, 1999, investment securities held-to-maturity totaled $3.3
million, compared to $3.8 million at
PAGE 8
December 31, 1998, and are carried at amortized cost. At March 31, 1999,
the Company held $28.1 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 March 31, 1999, the investment
securities available-for-sale have an unrealized loss of $92,000 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.
Loans and Leases
During the first quarter of 1999, total loans and leases increased, from
$74.0 million at December 31, 1998 to $81.5 million at March 31, 1999. The
increase resulted primarily from the funding of new loans. The composition
of the Bank's loan and lease portfolio at March 31, 1999 and December 31,
1998 is summarized as follows:
March 31, December 31,
(Dollars in Thousands) 1999 1998
Real estate mortgage $56,385 $50,845
Secured commercial and financial 9,884 10,054
Unsecured 12,707 11,771
Other loans and leases 2,481 1,310
81,457 73,980
Deferred fees and costs, net (158) (144)
Allowance for possible loan and lease losses (1,625) (1,625)
Total loans and leases, net $79,674 $72,211
Impaired Loans and Leases
On March 31, 1999, the Bank had one unsecured loan totaling $200,000
that was 90 days past due, and there were no loans past due between 31 and 89
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 March 31, 1999 and December 31, 1998, the Company had impaired
loans totaling $200,000 and zero, respectively. Total interest income
recognized on impaired loans during the first quarter 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 the non-performing assets which
are presently reflected on the Company's statement of financial condition.
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 March 31, 1999, $100,000 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
PAGE 9
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 March 31, 1999:
March 31,
(Dollars in Thousands) 1999
Beginning balance of allowance for loan and
lease losses at December 31, 1998 $1,625
Charge-offs --
Recoveries --
Provision (adjustment) --
Ending balance of allowance for loan and lease losses $1,625
For the quarter ended March 31, 1999, the unallocated portion of the
allowance for loan and lease losses totaled $285,000 compared to $409,000 at
December 31, 1998.
Other Assets
Operating Leases
As of March 31, 1999, other assets included investments in operating
leases totaling $5.0 million compared to $2.0 million at December 31, 1998.
Deferred Tax Asset
As of March 31, 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 March 31, 1999, the Company's estimated
total deferred tax assets net of deferred tax liabilities is estimated to be
$17.7 million compared to $18.2 million as of December 31, 1998. As of March
31, 1999, the estimate includes tax credits of $500,000, other net temporary
difference of $100,000, and $17.1 million in net operating loss carryforward
benefits. The valuation allowance for net deferred tax assets totaled $15.6
million and $16.1 million at March 31, 1999 and December 31, 1998,
respectively.
Deposits
The Company had total deposits of $93.2 million at March 31, 1999
compared to $95.7 million at December 31, 1998, a decrease of $2.5 million or
2.6%. The decrease was attributed to a decline in Escrow related deposits of
approximately $1.5 million, a decline in private and business banking related
deposits of $4.7 million partially offset by an increase in homeowners'
association related customer's deposits of $3.3 million. A summary of
deposits at March 31, 1999 and December 31, 1998 is as follows:
March 31, December 31,
(Dollars in Thousands) 1999 1998
Demand deposits $16,288 $18,237
NOW 18,459 19,998
Money market and savings 18,069 17,838
Total deposits with no stated maturity 52,816 56,073
Time deposits:
Less than $100,000 18,622 18,373
$100,000 and greater 21,799 21,242
Total time deposits 40,421 39,615
Total deposits $93,237 $95,688
PAGE 10
The Bank's deposits from private and business banking customers totaled
$37.3 million, or 40.0% of total deposits, at March 31, 1999, compared to
$41.2 million, or 43.1% of total deposits, at December 31, 1998. Deposits
from Association Bank Services customers totaled $22.5 million, or 24.1% of
total deposits at March 31, 1999, compared to $19.2 million, or 20.0% of
total deposits at December 31, 1998. Deposits from Escrow customers totaled
$17.7 million, or 19.0% of total deposits at March 31, 1999, compared to
$19.2 million, or 20.0% of total deposits at December 31, 1998. Deposits
acquired through the money desk operations totaled $13.1 million, or 14.1% of
total deposits at March 31, 1999, compared to $12.3 million, or 12.9% of
total deposits at December 31, 1998.
Other Borrowings
As of March 31, 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 $22.7 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 March 31, 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 March 31, 1999. The Bank
has requested certification of testing compliance from all
PAGE 11
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 March 31, 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. 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 were estimated to be approximately $250,000, for 1997 and 1998,
including approximately $160,000 for acquired hardware which is being
amortized over its estimated useful life. Additional costs, estimated to be
a maximum of $100,000, may be incurred in the future. 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. As of
March 31, 1999, $248,000 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
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 12
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: May 7, 1999 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: May 7, 1999 /s/ Keary L. Colwell
Keary L. Colwell
Chief Financial Officer and
Executive Vice President