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,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 31,723,78231,728,782 shares of Class A Common Stock
outstanding on May 1,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 March 31,September 30, 1998 and December 31, 1997 . . . . . . . . . . 1
Consolidated Statements of Operations
For the Three and Nine Months Ended March 31,September 30, 1998 and 1997. 2
Consolidated Statements of Changes in Shareholders'
EquityShareholders'Equity
For the ThreeNine Months Ended March 31,September 30, 1998 and 1997.1997 . . . . . 4
Consolidated Statements of Cash Flows
For the Three and Nine Months Ended March 31,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 . . . . . . . . . . . . . 7. 8
Part II - Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . .13. . . . . . .18
Item 2. Changes in Securities. . . . . . . . . . . . . . . .13. . . . . . .18
Item 3. Defaults Upon Senior Securities. . . . . . . . . . .13. . . . . . .18
Item 4. Submission of Matters to a Vote of Security Holders.13Holders. . . . . . .18
Item 5. Other Information. . . . . . . . . . . . . . . . . .13. . . . . . .18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . .13. . . . . . .18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . .14. . . . . . .19
page
Item. 1 - Consolidated Financial Statements
The San Francisco Company and Subsidiaries
Consolidated Statements of Financial Condition
March 31,September 30, 1998 and December 31, 1997
(Unaudited)
March 31,September 30, December 31,
(Dollars in Thousands Except Per Share Data) 1998 1997
Assets:
Cash and due from banks $ 2,699 $ 2,837$3,567 $2,837
Federal funds sold 20,30517,280 14,150
Cash and cash equivalents 23,00420,847 16,987
Investment securities held-to-maturity, (Market:at cost
(Fair value: 1998 $5,414; $4,314;1997 $6,567) 5,458$5,822) 4,315 5,864
Investment securities available-for-sale,
29,920at fair value 31,204 32,669
Federal Home Loan Bank stock, at par 1,5211,565 1,499
Loans 51,70260,942 51,924
Deferred loan costs, net of fees (24)14 (61)
Allowance for loan losses (3,116)(1,775) (3,200)
Loans, net 48,56259,181 48,663
Other real estate owned, 362net 58 410
Premises and equipment, net 7,7927,650 7,791
Interest receivable 534603 720
Other assets 1,9411,920 2,014
Total Assets $119,094$127,343 $116,617
Liabilities and Shareholders' Equity:
Non-interest bearing deposits $ 19,714 $ 19,691$17,234 $19,691
Interest bearing deposits 69,32777,865 66,828
Total deposits 89,04195,099 86,519
Other borrowings 10,000 10,000
Other liabilities and interest payable 2,1892,114 2,528
Total liabilities 101,230107,213 99,047
Shareholders' Equity:
Preferred stockStock (par value $0.01 per share)
Series B - Authorized - 437,500 sharesshares;
Issued and outstanding - 1998 and 1997-15,8691997 - 15,869 111 111
Common stock (par value $0.01 per share)
Class A - Authorized - 100,000,000 sharesshares;
Issued and outstanding-1998outstanding - 1998 - 31,728,782
and 1997-31,723,7821997 - 31,723,782 317 317
Additional paid-in capital 78,81478,816 78,814
Retained deficit (61,354)(59,272) (61,656)
Accumulated other comprehensive loss (24)income (loss) 158 (16)
Total shareholders' equity 17,86420,130 17,570
Total Liabilities and Shareholders' Equity $119,094$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 March 31,September 30, 1998 and 1997
(Unaudited)
March 31,Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands
Except Per Share Data) 1998 1997 1998 1997
Interest income:
Loans $ 1,211 $1,123$1,363 $1,234 $3,826 $3,473
Investments 826 746931 953 2,576 2,512
Dividends 23 1221 10 66 31
Total interest income 2,060 1,8812,315 2,197 6,468 6,016
Interest expense:
Deposits 653 697778 775 2,077 2,113
Other borrowing s 150borrowings 154 -- 453 --
Total interest expense 803 697932 775 2,530 2,113
Net interest income 1,257 1,184
Provision (adjustment)before
adjustment for loan losses (94)1,383 1,442 3,938 3,903
Adjustment for loan losses (1,075) -- (1,477) --
Net interest income after
provisionadjustment for loan losses 1,351 1,1842,458 1,442 5,415 3,903
Non-interest income:
Stock brokerage commissions and
fees 257 354220 440 755 1,069
Real estate rental income 257 244285 179 816 658
Service charges and fees 146 99181 198 484 437
Gain on sale of other assets, net 17 32 42 266
Loss on sale of securities, net -- 22-- -- (6)
Other income 37 2228 39 107 94
Total non-interest income 697 741731 888 2,204 2,518
Non-interest expense:
Salaries and related benefits 973 9081,017 1,134 3,003 2,968
Occupancy expense 292 304318 288 899 903
Professional fees 126 10080 146 339 361
Data processing 111 11593 98 307 324
Corporate insurance premiums 41 56 61
Equipment131 165
Property tax expense 39 61
Property taxes -- 4022 -- 87
FDIC insurance premiums 2 10 3921 89
Other operating expenses 139 154127 221 519 793
Total non-interest expense 1,746 1,7821,678 1,975 5,219 5,690
Income before income taxes 302 1431,511 355 2,400 731
Provision for income taxes -- 56 (3) 11 4
Net Income $ 302 $ 138$1,505 $358 $2,389 $727
Income per common share:
Basic: Net income $ 0.01 $ 0.01$0.05 $0.01 $0.08 $0.02
Weighted average
shares outstanding 31,723,782 28,775,99531,728,782 31,717,171 31,726,566 29,950,311
Diluted: Net income $ 0.01$0.05 $0.01 $0.07 $0.02
Weighted average
shares outstanding 33,089,892 28,776,78833,204,853 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 March 31,September 30, 1998 and 1997
(Unaudited)
March 31,Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands
Except Per Share Data)Data 1998 1997 1998 1997
Net Income $ 302 $ 138$1,505 $358 $2,389 $727
Other comprehensive
income, (loss), net of tax:
Unrealized holding lossesgains arising
during period, net (8) (227)171 112 174 95
Plus: reclassification
adjustment for losses
included in net income -- -- -- 6
Other comprehensive income (loss) (8) (227)171 112 174 101
Comprehensive income (loss) $ 294 $ (89)
See accompanying notes to unaudited consolidated financial statements.$1,676 $470 $2,563 $828
page 3
The San Francisco Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
ThreeNine Months Ended March 31,September 30, 1998 and 1997
(Unaudited)
Accu-Accumu
(Dollars in Thousands) mulatedlated
Other
Addi- Compre- Total
Additionaltional Compre- Retained Compre-hensive Share-
Preferred Common Paid-in hensive Earnings hensiveIncome/ holders'
Stock Stock Capital Income (Deficit) Income(Loss) Equity
Balances at
January 1, 1997 $111 $288 $77,841 $(67,099) $(77) $11,064
Other comprehensive
income (loss),
net of tax
Unrealized losses
on securities, net -- -- (227) -- (227) (227)
Other comprehensive
income -- -- -- (227) -- -- --
Net income
(three months) -- -- -- 138 138 -- 138
Comprehensive loss (89)
Balances at
March 31, 1997 111 288 77,841 (66,961) (304) 10,975
Net proceeds fromon
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
Unrealized gain
on securities, netNet unrealized losses $(40) -- -- -- 288 -- 288 288(40) (40)
Other comprehensive income 288loss (40)
Net income (nine(three months) 4,716 4,716 -- -- -- 5,305 5,305 -- 5,3054,716
Comprehensive income 5,593$4,676
Balances at
December 31,199731, 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
Unrealized loss
on securities, netNet unrealized gains $174 -- -- -- (8) -- (8) (8)174 174
Other comprehensive income (8)174
Net income (three(nine months) 2,389 2,389 -- -- -- 302 302 -- 3022,389
Comprehensive income 294$2,563
Balances at
March 31,September 30, 1998 $111 $317 $77,814 $(61,354) $(24) $17,864$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 March 31,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 $ 302 $138$1,505 $358 $2,389 $727
Adjustments to reconcile
net income to net cash
provided by operating activities:
Adjustment for loan losses (94)(1,075) -- (1,477) --
Depreciation and amortization expense 124 138142 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 and
real estate investment -- (22)-- -- 182
Decrease in interest
receivable and other assets 259 36454 131 211 278
(Decrease) increase in interest
payable and other liabilities (339) 116
(Decrease) increase(1,408) 388 (419) 487
Increase in deferred loan
fees (37) 68net of costs (38) (114) (75) (47)
Net cash flows (used in)
provided by operating activities 215 802(837) 861 980 1,774
Cash Flows from Investing Activities:
Proceeds from maturities of
investment securities
held-to-maturity 406 221553 270 1,549 688
Proceeds from maturities of
investment securities
available-for-sale 8,024 1,60410,652 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-for-sale (5,305) --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 222 2,363(8,022) 3,376 (9,018) 6,453
Recoveries of loans
previously charged off 10 261
Purchases of premises and equipment (125) (76)-- 48 52 329
Proceeds formfrom the sale of
other real estate owned 48 1,385296 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 3,280 5,758(7,129) 934 (5,702) 5,034
Cash Flows from Financing Activities:
Net (decrease) increase in deposits 2,522 1,171(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 2,522 1,171
Increase(12,353) 6,033 8,582 6,551
(Decrease) increase in
cash and cash equivalents 6,017 7,731(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 $ 23,004 $ 23,357$20,847 $28,985 $20,847 $28,985
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period for:
Interest $ 538 $ 724
Income$811 $736 $2,413 $2,125
Payment of income taxes 12 3
Supplemental Schedule of Noncash
Investing and Financing Activities:
Net transfer of loans to other real estate owned4 -- --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 March 31,September 30, 1998, and for the three and nine
months ended March 31,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 March 31,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"Earnings Per Share." SFAS No. 128
requires dual presentation of basic EPS and diluted EPS on the face
of the income statement and requires 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 toassuming the exercise of all potentially
dilutive Common Shares, such as certain
page 6 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 $ 302 31,723,782 $0.01$1,503 31,728,782 $0.05
Effect of dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- 1,365,3171,475,278
Diluted EPS $ 304 33,089,892 $0.01$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 $ 138 28,775,995$356 31,717,171 $0.01
Effect of dilutive securities:
Series B Preferred Stock 2 793
Stock Options -- --
Diluted EPS $ 140 28,776,788$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. SubjectIn order
to regulatory approval, it isbring the present intention ofcash dividends current, the Board of Directors
to pay dividends in arrearsdeclared a cash dividend on the Series B Preferred Stock totaling
$60,000 later this year, and thereafter to pay ongoing
dividends$3.92 per share for stockholders of record on the Series B Preferred Stock pursuant to their terms.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 Statement of Financial Accounting Standard (the "SFAS") NumberSFAS 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 as required by SFAS
No. 130.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
page 7 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 SEC.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.exchange and
is not actively traded. Van Kasper & Company of San Francisco,
California is the sole market maker in the Company's Common Stock.
On May 1, 1998 Van Kasper & Company quoted a bid price of
$0.60.
The Company recorded net income of $302,000$1,505,000 for the three
months ended March 31,September 30, 1998 and $2,389,000 for the nine months
ended September 30, 1998, compared to a net income of $138,000$358,000 and
$727,000 for the same periodperiods, respectively, in 1997. The increase
in the Company's net income of $164,000$1,147,000 for the three month
period was primarily from anthe 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 interest income and reductions in non-interest
expenses partially offset by lower brokerage fees inof $1,662,000 for the
first quarternine months of 1998 compared to the same period in 1997.1997 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 March 31,September 30, 1998, total assets were $119.1$127.3 million, an
increase of $2.5$10.7 million, or 2.1%9.2% from $116.6 million at December
31, 1997. As of March 31,September 30, 1998, total loans were $51.7$60.9
million, an increase of $9.0 million, or 17.3%, compared to $51.9
million at December 31, 1997. Total deposits were $89.0$95.1 million at
March 31,September 30, 1998, an increase of $2.5$8.6 million, or 2.9%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 19971998 examination
that the Company was in full compliance with the Agreement, and
management believes the Company continues to be in full compliance.
page 8
Memorandum of Understanding
On May 27, 1997,In June 1998, the Federal Deposit Insurance Corporation (the
"FDIC") and the California Department of Financial Institutions
(the "DFI") terminated the Bank's Cease and Desist Orders and in lieu thereof entered into a Memorandum of Understanding (the "MOU") with the Bank. The MOU provides, among other
things,that the Bank: (a) have and retain management acceptable to the
Regional Director of the FDIC (the "Regional Director") and the Commissioner
of the DFI (the "Commissioner"); (b) increase its capital by not less than
$1.0 million by June 30, 1997, (c) maintain a 7% Leverage Capital ratio;
(d) reduce assets classified "Substandard" as of September 30, 1996 to no
more than $12.0 million as of June 30, 1997, $10.0 million as of September
30, 1997, and $8.0 million as of December 31, 1997; (e) develop and
implement written policy recommendations outlined in the Report of
Examination; (f) implement a police which establishes a range for the Bank's
volatile liability dependency ratio, and which ratio shall not be more than
15%; (g) submit a strategic plan covering the period 1997 - 2002; (h) no pay
cash dividends without prior written consent from the Regional Director and
the Commissioner; and (i) report to the Regional Director and the
Commissioner on a quarterly basis the form and manner of any actions taken to
secure compliance with the MOU.
As of March 31, 1998, the Bank has filed all of the required submissions
with the FDIC and DFI in accordance with the MOU, and management believes
that the Bank is full compliance with the requirements of the MOU.Understanding.
Results of Operations
Net Interest Income
The Company's net interest income was $1.3 million in the quarter ended
March 31, 1998 compared to $1.2$1.4 million for the
same periodquarters 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 1997, or an
increase of 6%. The increase was primarily the future as a result of an increasethe recent reductions in earning assets.
Provision (Adjustment)the prime and
fed funds rate indexes.
Adjustment for Loan Losses
The Company recorded an adjustmenta reduction to the allowance for loan
losses of $94,000$1.1 million for the first quarter ofthree months ended September 30,
1998 and $1.5 million for the nine months ended September 30, 1998
compared to none infor the same periodperiods 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 $697,000 at March 31,$731,000 for the three months ended
September 30, 1998 compared to $741,000
at March 31,$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 of $44,000 was primarily
the result of the reduction in stock option and brokerage
commissiongain on sale of real estate owned
income in 1998 compared to 1997.1997 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 slightly$297,000 to $1.7
million from $1.8$2.0 million and $471,000 to $5.2 million from $5.7
million for the three month periodand nine month periods ended March 31,September
30, 1998 and 1997, respectively.
page 9The 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 $23.0$20.8 million, or 19.3%16.4% of total assets, at
March 31,September 30, 1998, an increase of $6.0$3.8 million, from $17.0
million, or 14.6% of total assets, at December 31, 1997.
The increase in liquidity was the result of an increase
in core deposits of $2.5 million and a decrease in investment securities
totaling $3.1 million.
As of March 31,September 30, 1998, the Bank had pledged securities totaling
$11.5$11.7 million pledged to the Federal Home Loan Bank of San
Francisco (the "FHLB") as collateral for other borrowings. As of
March 31,September 30, 1998, the Bank hashad the ability to borrow up to 20% of
total assets or $23.8 million from the FHLB upon the pledge of sufficient
collateral.Incollateral. 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,September 30, 1998, the Bank had other securities totaling
$1.6 million pledged as collateral for public funds, trust, and a lettervarious other purposes.
As of credit
facility with another Bank.
TheSeptember 30, 1998, the Bank hashad access to the discount
window at the FRB for a total borrowing facility of $1.7$2.0 million
upon the pledge of securities.securities, and to $3.5 million for day-light
overdrafts with the FRB. At March
31,September 30, 1998 and December 31,
1997, no securities were pledged as collateral for the FRB
facility.
Capital
At March 31,September 30, 1998, shareholders' equity was $17.9$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, and the Bank is under specific capital requirements as a result of
the MOU.capital. As of March 31,September 30, 1998, the Company
and the Bank arewere in compliance with the all minimum capital ratio
requirements including the minimum
Leverage ratio of 7% mandated by the MOU.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 March 31,September 30, 1998:
Minimum
Capital
Company Bank Requirement
MOU
Leverage ratio 14.0%13.9% 13.8% 4.0% 7.0%
Tier 1 risk-based capital 20.7 20.5 4.0
N/A
Total risk-based capital 22.6 22.422.1 21.9 8.0 N/A
Investment Activities
At March 31,September 30, 1998, the Company's investment securities,
including Fed
funds sold,FHLB stock, totaled $54.4$37.1 million, or 48.0%29.1% of total
assets, compared to $54.2$40.0 million, or 46.5%34.3% of total assets, at
December 31, 1997. The decreasenet decline in investment securities resultedwas
primarily fromnormal principal amortization onrepayment of mortgage relatedbacked securities,
and the maturity andor 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 five years or less.
page 10
At March 31,September 30, 1998, investment securities held-to-maturity
totaled $5.5$4.3 million, compared to $5.9 million at December 31,
1997, and are carried at amortized cost. At March 31,September 30, 1998,
the Company held $29.9$31.2 million in investment securities available-for-sale,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 an adjustment to equitya component of
comprehensive income and are not reflected in the current earnings
of the Company. As of March
31,September 30, 1998, the investment
securities available-for-sale havehad an unrealized lossgain of $24,000$158,000
that was included as a separate component of shareholder's
equitycomprehensive income to reflect
the current market value of these securities.
page 12
Loans
During the first quarternine months of 1998, total loans decreased slightly,increased
$9.0 million, from $51.9 million at December 31, 1997 to $51.7$60.9
million at March 31,September 30, 1998. The reductionnet increase resulted primarily
from lower outstanding unsecured loans.disbursement of new loan commitments. The composition of the
Bank's loan portfolio at March 31,September 30, 1998 and December 31, 1997
is summarized as follows:
March 31,September 30, December 31,
(Dollars in Thousands) 1998 1997
Real estate mortgage $ 38,399 $ 37,826$43,598 $37,826
Secured commercial and financial 5,5369,112 4,912
Unsecured 7,1307,484 8,633
Other 637748 553
51,70260,942 51,924
Deferred costs and premiums
net of fees and discounts net (24)14 (61)
Allowance for possible loan losses (3,116)(1,775) (3,200)
Total loans, net $ 48,562 $ 48,663$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, other real estate owned
(the "OREO"),OREO, and
performing loans that exhibit credit quality weaknesses. The table
below outlines the Bank's classified assets at March 31,September 30, 1998
and December 31, 1997:
March 31,September 30, December 31,
(Dollars in Thousands) 1998 1997
Loans - performing $ 4,672 $ 1,393$4,253 $1,393
Non-accrual loans -- 171
OREO 36258 410
Total classified assets $ 5,034 $ 1,974$4,311 $1,974
On March 31,September 30, 1998, the Bank had one loan totaling $101,000 secured by
cash collateral and in the process of collectionno loans that waswere 90 days
past due and still accruing and there were no loansone loan totaling $12,000 that was
past due between 31 and 89 days. Classified assets increased by
155%118% to $5.0$4.3 million as of March 31,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 March 31,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-IncomeLoan-
Income Recognition and Disclosures" (the "SFAS No.114"No. 114").
page 11 As of
March 31,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 quarternine months of 1998
and 1997 was $4,000 and $31,000.$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-performingnon-
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 provisions or adjustments take into considerationBank 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. As of March 31, 1998, none ofIn
addition, 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 loss allowance
to provideprovides for losses that
may occur in the future in loans that are or are
not presently classified, based on present economic conditions,
trends, and related uncertainties. The following table summarizes
the loan loss experience of the Bank for the quarternine months ended
March 31,September 30, 1998:
March 31,September 30,
(Dollars in Thousands) 1998
Beginning balance of allowance
for loan losses at December 31, 1997 $ 3,200$3,200
Charge-offs --
Recoveries 10
Provision (adjustment) (94)52
Adjustment (1,477)
Ending balance of allowance for loan losses $ 3,116
For$1,775
At September 30, 1998, the quarter ended Marchallowance 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 losslosses totaled $1.5 million$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 1214
Deposits
The Bank had total deposits of $89.0$95.1 million at March 31,September 30,
1998 compared to $86.5 million at December 31, 1997, an increase of
$2.5$8.6 million or 2.9%9.9%. The increase was attributed to short-term
escrow related customer's deposits of $6.9
millionand Association Bank Service deposits which
were partially offset by a decrease in Stock Option lending related
deposits of approximately $3.1 million and volatile deposits of $900,000.deposits. A summary of deposits at March 31,September 30, 1998 and December
31, 1997 is as follows:
March 31,September 30, December 31,
(Dollars in Thousands) 1998 1997
Demand deposits $ 19,714 $ 19,691$17,234 $19,691
NOW 15,72916,294 15,986
Money market and savings 18,93222,073 16,040
Total deposits with no stated maturity 54,37555,601 51,717
Time deposits:
Less than $100,000 19,65018,967 19,184
$100,000 and greater 15,01620,531 15,618
Total time deposits 34,66639,498 34,802
Total deposits $ 89,041 $ 86,519$95,099 $86,519
The Bank's deposits from private and business banking customers
totaled $34.4$40.6 million, or 38.6%42.7% of total deposits, at March 31,September 30,
1998, compared to $34.7 million, or 40.1% of total deposits, at
December 31, 1997. DepositsThe deposits from Association Bank ServicesService
customers totaled $17.1$17.7 million, or 19.2%18.6% of total deposits at
March 31,September 30, 1998, compared to $17.2 million, or 19.9% of total
deposits at December 31, 1997. DepositsThe 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 $10.8$12.7 million, or 12.1%13.4% of total deposits at March
31,September 30,
1998, compared to $11.7 million, or 13.5% of total deposits at
December 31, 1997.
The Bank expects to decrease money desk deposits during the
remainder of the year with the intention of replacing these deposits with
core deposits.
Concentrations of deposits acquired through the money desk operations
have been classified by bank regulators as volatile liabilities associated
with certain risks, including the risks of reduced liquidity if a bank is
unable to retain such deposits and reduced margins if its interest costs are
increased by a bank in order to retain such deposits. As a result of the
MOU, the Bank is required to maintain a volatile liability dependency ratio
of not more than 15%. The Bank's volatile dependency ratio at March 31, 1998
was below the 15.0% requirement.
Other Borrowings
As of March 31,September 30, 1998, the Bank had long-term FHLB
borrowings outstanding totaling $10.0 million secured by pledged
securities totaling $11.5$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.
page 13
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
Indemnification Agreements dated March 18, 1998 between each
director and executive officer of the Company and the Bank.None
(b) Report on Form 8-K
None
page 1418
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 8,October 28, 1998 /s/ James E. Gilleran
James E. Gilleran
Chairman of the Board and
Chief Executive Officer
Date: May 8,October 28, 1998 /s/ Keary L. Colwell
Keary L. Colwell
Chief Financial Officer and
Executive Vice President
page 15
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of March
18, 1998, between The San Francisco Company, a Delaware corporation (the
"Corporation"), and ________________, an individual (the "Director").
RECITALS
A. The Director is a member of the Corporation's Board of
Directors and the Corporation desires that the Director continue to serve
in such capacity. The Director is willing to continue to serve on the
Corporation's Board of Directors if the Director receives the protection
provided by this Agreement.
B. The Corporation maintains directors and officers liability
insurance ("D&O Insurance") and intends to continue to maintain such D&O
Insurance in accordance with the provisions of this Agreement.
C. The Corporation believes that (1) it is increasingly
difficult to attract and keep qualified directors because of potential
liabilities; (2) it is important for a director to have assurance that
indemnification will be available to the fullest extent permitted by law;
and (3) it is in the best interests of the Corporation and its shareholders
for the Corporation to contractually obligate itself to indemnify the
Director and to set forth the details of the indemnification process.
Therefore, in consideration of the premises and the mutual
promises herein contained, the Corporation and the Director agree as
follows:
1. Agreement to Serve. The Director will continue to serve as
a member of the Board of Directors of the Corporation so long as the
Director is duly elected and qualified to so serve or until the Director
resigns or is removed from the Corporation's Board of Directors.
2. Indemnification.
(a) The Corporation shall indemnify and hold harmless the
Director to the fullest extent permitted under applicable law (including
without limitation Section 28(k) of the Federal Deposit Insurance Act and
Part 359 of the Rules and regulations of the Federal Deposit Insurance
Commission (the "FDIC Rules")) if the Director was or is a party or
threatened to be made a party to any threatened, pending or completed
action, suit, arbitration (or other alternative dispute resolution
mechanism), or proceeding of any kind, wherever brought, whether civil,
criminal, administrative or investigative and whether formal or informal
(including actions by or in the right of the Corporation and any
preliminary inquiry or claim by any person or authority), by reason of or
associated with the fact that the Director is or was a director, officer,
partner, trustee, employee, consultant or agent of the Corporation or is or
was serving at the Corporation's request, or for the convenience of or
page 1
otherwise to benefit or represent the interests of the Corporation or a
subsidiary of the Corporation, as a director, officer, employee or agent of
another corporation, limited liability company, partnership, joint venture,
trust, employee benefit plan or other enterprise (collectively, an
"Affiliate"), whether or not for profit, or by reason of anything done or
not done by the Director in any such capacity (collectively, "Covered
Matters"). Such indemnification will cover all Expenses (as defined
below), liabilities, judgments (including punitive and exemplary damages),
penalties, fines (including excise taxes relating to employee benefit plans
and civil penalties) and amounts paid or to be paid in settlement which are
incurred by or imposed upon the Director in connection with a Covered
Matter, including all interest assessments on any of the foregoing
(collectively, "Indemnified Amounts"). "Expenses" means all direct or
indirect costs and expenses (including, without limitation, attorneys'
fees, retainers, transcripts, witness fees, expert fees, other professional
fees, court costs and travel costs) incurred by the Director in connection
with a Covered Matter, together with interest thereon commencing 30 days
after incurrence, other than liabilities, judgments, penalties, fines and
settlement amounts.
(b) The Director will be so indemnified for all Indemnified
Amounts and the Corporation will defend the Director against claims
(including threatened claims and investigations) which are covered matters,
including claims brought by or on behalf of the Corporation or any
Affiliate, except if it is finally determined by the court of last resort
(or by a lower court if not timely appealed) that the payment is prohibited
by applicable law.
(c) If the Director is entitled under this Agreement to
indemnification for less than all of the amounts incurred by the Director
in connection with a Covered Matter, the Corporation will indemnify the
Director for the indemnifiable amount.
3. Claims for Indemnification. The Director will give the
Corporation written notice of any claim for indemnification under this
Agreement, but failure to do so shall not affect the Director's rights
hereunder. Payment requests will include a schedule setting forth in
reasonable detail the amount requested and will be accompanied (or, if
necessary, followed) by copies of the relevant invoices or other
documentation. The Corporation will pay Indemnified Amounts directly
without requiring the Director to make any prior payment.
4. Determination of Right to Indemnification.
(a) The Director will be presumed to be entitled to
indemnification under this Agreement and will receive such indemnification,
subject to paragraph 4(b) below, irrespective of whether the Covered Matter
involves allegations of gross negligence or intentional misconduct, alleged
violations of Section 10(b) of the Securities Exchange Act of 1934
(including Rule 10b-5 thereunder), alleged breach of the Director's
fiduciary duties (including duties of loyalty or care) or any other claim.
(b) The Director shall be conclusively presumed to have met
any required standard of conduct established by applicable law, unless a
determination is made in the written opinion of independent counsel to the
Corporation, applicable law (including the FDIC Rules) permits
page 2
indemnification in a Covered Matter only as authorized in the specific case
upon a determination that indemnification is proper in the circumstances
because the Director has met the required standard of conduct. In such
event:
(1) The Corporation will immediately give the Director
notice, with a copy of counsel's opinion, that an evaluation and
determination will be made under this paragraph 4(b).
(2) Such evaluation and determination will be made, as
promptly as possible and in good faith, by a majority vote of the members
of the Corporation's Board of Directors who are not parties or threatened
to be made parties to the Covered Matter in question or, if so requested by
the Director, in a written opinion by independent counsel to the
Corporation (who shall not be the same as the counsel referred to above),
or by such other procedure as the Corporation and the Director agree.
(3) The Director will be entitled to present
information, and to be represented by counsel, in connection with such
evaluation and determination.
(4) The Director will be presumed to have met the
required standard of conduct unless it is conclusively demonstrated to the
determining firm or body that the Director has not met the required
standard of conduct. If the Director is successful (which includes a
settlement without admission of liability) on the merits or otherwise or in
the defense of any claim, issue or matter therein, he shall be conclusively
presumed to have met the required standard of conduct.
(5) The cost of any evaluation and determination under
this paragraph 4(b) (including attorneys' fees and other expenses incurred
by the Director) will be borne by the Corporation.
(6) If the requested indemnification falls within the
scope of the FDIC Rules, the FDIC Rules will also be observed.
(7) The termination of any proceeding by judgment,
order, settlement, arbitration award or conviction, or upon a plea of nolo
contendere or its equivalent shall not affect this presumption or, except
as determined by a judgment or other final adjudication adverse to the
Director, establish a presumption with regard to any factual matter
relevant to determining the Director's rights to indemnification hereunder.
(c) Determination of the Director's entitlement to
indemnification shall be made not later than thirty (30) days after the
Corporation's receipt of his written request for such indemnification. If
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the person or persons so empowered to make a determination pursuant to
paragraph 4 hereof shall have failed to make the requested determination
within thirty (30) days after any judgment, order, settlement, dismissal,
arbitration award, conviction, acceptance of a plea of nolo contendere or
its equivalent, or other disposition or partial disposition of any
proceeding or any other event which could enable the Corporation to
determine the Director's entitlement to indemnification, the requisite
determination that the Director is entitled to indemnification shall be
deemed to have been made.
5. Advance of Expenses.
(a) Subject to paragraphs 5(b) and (c), and notwithstanding
Section 4(b), before final adjudication of a Covered Matter, upon the
Director's request pursuant to paragraph 3 above, the Corporation will
promptly advance Expenses directly; provided, however, if the Director has
already paid any Expenses, the Corporation will promptly reimburse the
Director for all such Expenses.
(b) If, in the opinion of counsel to the Corporation, the
FDIC Rules permit advancement of Expenses with respect to a federal banking
agency proceeding or action only as authorized upon a determination that
the Director has met a standard of conduct established by the FDIC Rules,
the determination will be made in accordance with paragraph 4(b) above to
the extent not inconsistent with FDIC Rules.
(c) The Director will repay any Expenses that are advanced
under this paragraph 5 if so required by the FDIC Rules or if it is
ultimately determined, in a final, nonappealable judgment rendered by the
court of last resort (or by a lower court if not timely appealed), that the
Director is not entitled to be indemnified against such Expenses and
requires repayment.
(d) The Corporation shall use its best efforts to provide
the Director on or before the time of any Change of Control security and
liquidity for the obligations of the Corporation to indemnify and advance
Expenses to the Director pursuant to this Agreement (whether by letter of
credit, the posting of assets as security, or other means).
6. Defense of Claim.
(a) The Corporation, jointly with any other indemnifying
party, will be entitled to assume the defense of any Covered Matter as to
which the Director requests indemnification, provided, however, the
Corporation shall not be entitled to assume the defense if there has been a
Change of Control or the Director is entitled to employ the Director's own
counsel under paragraph 6(c) below, in which case both parties shall be
entitled to participate in the defense.
(b) Counsel selected by the Corporation to defend any
Covered Matter will be subject to the Director's advance written approval.
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(c) The Director may employ the Director's own counsel in a
Covered Matter and will be fully reimbursed therefor if (1) the Corporation
approves, in writing, the employment of such counsel or (2) either (A) the
Director has reasonably concluded that there may be a conflict of interest
between the Corporation and the Director or between the Director and other
parties represented by counsel employed by the Corporation to represent the
Director in such action or (B) the Corporation has not employed counsel
reasonably satisfactory to the Director to assume the defense of such
Covered Matter promptly after the Director's request.
(d) Neither the Corporation nor the Director will settle
any Covered Matter without the other's written consent, which will not be
unreasonably withheld.
(e) If the Director is required to testify (in court
proceedings, depositions, informal interviews or otherwise), consult with
counsel, furnish documents or take any other reasonable action in
connection with a Covered Matter, the Corporation will reimburse the
Director's reasonable expenses in connection therewith and also pay the
Director reasonable compensation for time spent by the Director for which
the Director is otherwise not compensated by the Corporation.
7. Disputes; Enforcement.
(a) If there is a dispute relating to the validity or
enforceability of this Agreement or a denial of indemnification, advance of
Expenses or payment of any other amounts due under this Agreement or the
Corporation's Certificate of Incorporation or Bylaws, the Corporation will
provide such indemnification, advance of Expenses or other payment until a
final, nonappealable judgment that the Director is not entitled to such
indemnification, advance of Expenses or other payment has been rendered by
the court of last resort (or by a lower court if not timely appealed). The
Director will repay such amounts if such final, nonappealable judgment so
requires.
(b) In the event that (i) a determination pursuant to
Section 4(b) hereof is made that the Director is not entitled to
indemnification, (ii) advances of Expenses are not made pursuant to this
Agreement, (iii) payment has not been timely made following a determination
of entitlement to indemnification pursuant to this Agreement, or (iv) the
Director otherwise seeks enforcement of this Agreement, the Director shall
be entitled to a final adjudication in the Court of Chancery of the State
of Delaware of the remedy sought. Alternatively, unless court approval is
required by law for the indemnification sought by the Director, the
Director at his option may seek an award in arbitration to be conducted by
a single arbitrator pursuant to the commercial arbitration rules of the
American Arbitration Association now in effect, which award is to be made
within ninety (90) days following the filing of the demand for arbitration.
The Corporation shall not oppose the Director's right to seek any such
adjudication or arbitration award. In any such proceeding or arbitration
the Director shall be presumed to be entitled to indemnification and
advancement of Expenses under this Agreement and the Corporation shall have
the burden of proof to overcome that presumption. In the event that a
page 5
determination that Director is not entitled to indemnification, in whole or
in part, has been made pursuant to Section 4(b) hereof, the decision in the
judicial proceeding or arbitration provided in this Section 7 shall be made
de novo and the Director shall not be prejudiced by reason of a
determination that he is not entitled to indemnification. If a
determination that the Director is entitled to indemnification has been
made pursuant to Section 4(b) hereof, or is deemed to have been made
pursuant to Section 4 hereof or otherwise pursuant to the terms of this
Agreement, the Corporation shall be bound by such determination in the
absence of a misrepresentation of a material fact by the Director in
connection with such determination. The Corporation shall be precluded
from asserting that the procedures and presumptions of this Agreement are
not valid, binding and enforceable. The Corporation shall stipulate in any
such court or arbitration that the Corporation is bound by all the
provisions of this Agreement and is precluded from making any assertion to
the contrary.
(c) The Corporation will reimburse all of the Director's
reasonable expenses (including attorneys' fees) in pursuing an action to
enforce the Director's rights under this Agreement unless a final,
nonappealable judgment against the Director has been rendered in such
action by the court of last resort (or by a lower court if not timely
appealed) or unless the FDIC Rules otherwise require to the same effect as
set forth in Section 5(c). At the Director's request, such expenses will
be advanced by the Corporation to the Director as incurred before final
resolution of such action by the court of last resort; such expenses will
be repaid by the Director if a final, nonappealable judgment in the
Corporation's favor is rendered in such action by the court of last resort
(or by a lower court if not timely appealed) to the same effect as set
forth in Section 5(c).
8. Insurance.
(a) The Corporation hereby covenants and agrees that, as
long as the Director continues to serve as a director of the Corporation
and thereafter as long as the Director may be subject to any possible
Covered Matter, the Corporation, subject to paragraph 8(c) below, shall
maintain in full force and effect D&O Insurance from established and
reputable insurers in amounts not less than, and with coverage comparable
to, those in effect as of the date of this Agreement.
(b) In all D&O Insurance policies, the Director shall be
named as an insured in such a manner as to provide the Director the same
rights and benefits as are accorded the most favorably insured of the
Company's directors.
(c) The Corporation will not be required to maintain D&O
Insurance if the Board of Directors of the Corporation determines, after
diligent inquiry, that (1) such insurance is not available; (2) the
premiums for available insurance are disproportionate to the amount of
coverage and to the premiums paid by other corporations similarly situated;
or (3) the coverage provided by such insurance is so limited by exclusions
that it provides an insufficient benefit. The Board of Directors of the
Corporation will, from time to time, in good faith review any decision not
to maintain D&O Insurance and will purchase such insurance at any time that
the conditions of this paragraph 8(c) cease to apply.
page 6
(d) The parties will cooperate to obtain advances of
Expenses, indemnification payments and consents from D&O Insurance carriers
in any Covered Matter to the full extent of applicable D&O Insurance. The
existence of D&O Insurance coverage will not diminish or limit the
Corporation's obligation to make indemnification payments to the Director.
Amounts paid directly to the Director with respect to a Covered Matter by
the Corporation's D&O Insurance carriers will be credited to the amounts
payable by the Corporation to the Director under this Agreement.
(e) Payments under any D&O Insurance policies shall be
subject to the FDIC Rules.
9. Limitations of Actions; Limitation of Indemnity.
(a) No action will be brought by or on behalf of the
Corporation against the Director or the Director's heirs or personal
representatives relating to the Director's service as a director, after the
expiration of one year from the date the Director ceases (for any reason)
to serve as a director of the Corporation, and any claim or cause of action
of the Corporation will be extinguished and deemed released unless asserted
by the filing of a legal action before the expiration of such period.
(b) Notwithstanding the provisions hereof, the Corporation
shall not be obligated pursuant to the terms of this Agreement:
(1) Claims Initiated by the Director. To indemnify or
advance expenses to the Director with respect to proceedings or claims
initiated or brought voluntarily by the Director and not by way of defense,
except with respect to proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other statute or law or
otherwise as required under Section 145 of the Delaware General Corporation
Law, but such indemnification or advancement of expenses may be provided by
the Corporation in specific cases if the Board of Directors has approved
the initiation or bringing of such suit;
(2) Lack of Good Faith. To indemnify the Director for
any expenses incurred by the Director with respect to any proceeding
instituted by the Director to enforce or interpret this Agreement, if a
court of competent jurisdiction determines that each of the material
assertions made by the Director in such proceeding was not made in good
faith or was frivolous;
(3) Insured Claims. To indemnify the Director for
expenses or liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) which have been paid directly to the Director by an insurance
carrier under D&O Insurance maintained by the Corporation; or
page 7
(4) FDIC Rules. To make any indemnification payment
contrary to the FDIC Rules.
(5) Short Swing Profits. To indemnify the Director
for expenses or liabilities incurred by the Director under Section 16 of
the Securities and Exchange Act of 1934.
10. Rights Not Exclusive; Benefit of Amendments to Law. The
indemnification provided to the Director under this Agreement will be in
addition to any indemnification provided to the Director by any law,
agreement, Board resolution, provision of the Certificate of Incorporation
or Bylaws of the Corporation or otherwise (including, but not limited to,
under that certain Indemnification Agreement (the "Bank Agreement") made as
of March 18, 1998, between The Bank of San Francisco, a California
corporation (the "Bank") and the Director). If applicable laws, rules or
regulations are amended after the date of this Agreement to permit
indemnification of a type or to an extent beyond or greater than that
provided by this Agreement, the Director shall be entitled to
indemnification hereunder of such further types or to such further extent
as is then permitted; provided, however, that no such amendment shall in
any way restrict or limit the rights of the Director hereunder and the term
"applicable law" shall refer only to the same as amended to the extent such
amendment permits the Corporation to provide such greater indemnification.
The Corporation and the Director agree that the Director may pursue his
remedies under both this Agreement and the Bank Agreement, under only this
Agreement, or under only the Bank Agreement, and that the manner in which
the Director chooses to pursue (or not to pursue) his remedies under this
Agreement and/or under the Bank Agreement shall not in any way restrict or
limit the rights of the Director under this Agreement.
11. Change in Control. "Change in Control" shall mean the
occurrence of any of the following after January 1, 1998:
(a) Both (1) any "person" (as defined below) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Corporation representing at
least 15% of the total voting power represented by the Corporation's then
outstanding voting securities; and (2) the beneficial ownership by such
person of securities representing such percentage has not been approved by
a majority of the "continuing directors" (as defined below); or
(b) Any "person" (as defined below) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Corporation representing at
least 50% of the total voting power represented by the Corporation's then
outstanding voting securities; or
(c) A change in the composition of the Board occurs, as a
result of which fewer than two-thirds of the incumbent directors are
directors who either (1) had been directors of the Corporation on January
1, 1998 (the "Original Directors") or (2) were elected, or nominated for
election, to the Board with the affirmative votes of at least a majority in
the aggregate of the Original Directors who were still in office at the
time of the election or nomination and directors whose election or
nomination was previously so approved (the "continuing directors"); or
page 8
(d) The stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other corporation, if such merger
or consolidation would result in the voting securities of the Corporation
outstanding immediately prior thereto representing (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) 50% or less of the total voting power represented by the voting
securities of the Corporation or such surviving entity outstanding
immediately after such merger or consolidation; or
(e) The stockholders of the Corporation approve (1) a plan
of complete liquidation of the Corporation or (2) an agreement for the sale
or disposition by the Corporation of all or substantially all of the
Corporation's assets.
For purposes of Subsection (a) above, the term "person" shall have the
same meaning as when used in sections 13(d) and 14(d) of the Exchange Act,
but shall exclude (x) a trustee or other fiduciary holding securities under
an employee benefit plan of the Corporation or of a parent or subsidiary of
the Corporation or (y) a corporation owned directly or indirectly by the
stockholders of the Corporation in substantially the same proportions as
their ownership of the common stock of the Corporation.
Any other provisions of this Section 11 notwithstanding, the term
"Change in Control" shall not include (1) a transaction, if undertaken at
the election of the Corporation, the result of which is to sell all or
substantially all of the assets of the Corporation to another corporation
(the "surviving corporation"); provided that the surviving corporation is
owned directly or indirectly by the stockholders of the Corporation
immediately following such transaction in substantially the same
proportions as their ownership of the Corporation's common stock
immediately preceding such transaction; and provided, further that the
surviving corporation expressly assumes this Agreement; or (2) an
acquisition of voting and other rights on outstanding shares by a voting
trustee who is approved (and the agreement under which he acts is approved)
by the continuing directors, but not any subsequent Change of Control
effected by the voting trustee or his successor.
12. Subrogation. Upon payment of any Indemnified Amount under
this Agreement, the Corporation will be subrogated to the extent of such
payment to all of the Director's rights of recovery therefor and the
Director will take all reasonable actions requested by the Corporation (at
no cost or penalty to the Director) to secure the Corporation's rights
under this paragraph 11 including executing documents.
13. Continuation of Indemnity. All of the Corporation's
obligations under this Agreement will continue as long as the Director is
subject to any actual or possible Covered Matter, notwithstanding the
Director's termination of service as a director, and in any event for at
least five (5) years subsequent to the date when the Director ceases to be
a director of the Corporation. The right to indemnification conferred
herein shall be presumed to have been relied upon by the Director in
serving or continuing to serve as a director of the Corporation or in any
capacity with any Affiliate and shall be enforceable as a contract right.
page 9
14. Amendments. Neither the Corporation's Certificate of
Incorporation nor its Bylaws will be changed to increase liability of
directors or to limit the Director's indemnification. Any repeal or
modification of the Corporation's Certificate of Incorporation or Bylaws or
any repeal or modification of the relevant provisions of any applicable
law, rules or regulations will not in any way diminish any of the
Director's rights or the Corporation's obligations under this Agreement.
This Agreement cannot be amended except with the written consent of the
Corporation and the Director.
15. Governing Law. This Agreement will be governed by Delaware
law without regard to such state's conflicts of laws principles.
16. Successors.
(a) This Agreement will be binding upon and inure to the
benefit of the parties and their respective heirs, legal representatives
and assigns.
(b) The Corporation will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the business or assets of the Corporation to assume
all of the Corporation's obligations under this Agreement. Such assumption
will not release the Corporation from its obligations under this Agreement.
17. Severability. The provisions of this Agreement will be
deemed severable, and if any part of any provision is held illegal, void or
invalid under applicable law, such provision may be changed to the extent
reasonably necessary to make the provision, as so changed, legal, valid and
binding. If any provision of this Agreement is held illegal, void or
invalid in its entirety, the remaining provisions of this Agreement will
not in any way be affected or impaired but will remain binding in
accordance with their terms.
18. Notices. All notices given under this Agreement will be in
writing and delivered either personally, by registered or certified mail
(return receipt requested, postage prepaid), by recognized overnight
courier or by telecopy (if promptly followed by a copy delivered
personally, by registered or certified mail or overnight courier), as
follows:
If to the Director: _______________________
_______________________
_______________________
page 10
If to the Corporation: The San Francisco Company
550 Montgomery Street
San Francisco CA 94111
Attn.: Chief Executive Officer
or to such other address as either party furnishes to the other in writing.
19. Counterparts. This Agreement may be signed in counterparts.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the date first written above.
THE SAN FRANCISCO COMPANY
______________________________
By: __________________________
Its:___________________________
DIRECTOR
______________________________
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INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of March
18, 1998, between The San Francisco Company, a Delaware corporation (the
"Corporation"), and ________________, an individual (the "Officer").
RECITALS
A. The Officer is a member of the Corporation's Executive
Management Committee and the Corporation desires that the Officer continue
to serve in such capacity. The Officer is willing to continue to serve on
the Corporation's Executive Management Committee if the Officer receives
the protection provided by this Agreement.
B. The Corporation maintains directors and officers liability
insurance ("D&O Insurance") and intends to continue to maintain such D&O
Insurance in accordance with the provisions of this Agreement.
C. The Corporation believes that (1) it is increasingly
difficult to attract and keep qualified senior officers because of
potential liabilities; (2) it is important for a senior officer to have
assurance that indemnification will be available to the fullest extent
permitted by law; and (3) it is in the best interests of the Corporation
and its shareholders for the Corporation to contractually obligate itself
to indemnify the Officer and to set forth the details of the
indemnification process.
Therefore, in consideration of the premises and the mutual
promises herein contained, the Corporation and the Officer agree as
follows:
1. Agreement to Serve. The Officer will continue to serve as a
member of the Executive Management Committee of the Corporation at the
pleasure of the Corporation's Board of Directors.
2. Indemnification.
(a) The Corporation shall indemnify and hold harmless the
Officer to the fullest extent permitted under applicable law (including
without limitation Section 28(k) of the Federal Deposit Insurance Act and
Part 359 of the Rules and regulations of the Federal Deposit Insurance
Commission (the "FDIC Rules")) if the Officer was or is a party or
threatened to be made a party to any threatened, pending or completed
action, suit, arbitration (or other alternative dispute resolution
mechanism), or proceeding of any kind, wherever brought, whether civil,
criminal, administrative or investigative and whether formal or informal
(including actions by or in the right of the Corporation and any
preliminary inquiry or claim by any person or authority), by reason of or
associated with the fact that the Officer is or was a director, officer,
partner, trustee, employee, consultant or agent of the Corporation or is or
was serving at the Corporation's request, or for the convenience of or
otherwise to benefit or represent the interests of the Corporation or a
subsidiary of the Corporation, as a director, officer, employee or agent of
another corporation, limited liability company, partnership, joint venture,
trust, employee benefit plan or other enterprise (collectively, an
"Affiliate"), whether or not for profit, or by reason of anything done or
not done by the Officer in any such capacity (collectively, "Covered
Matters").
page 1
Such indemnification will cover all Expenses (as defined
below), liabilities, judgments (including punitive and exemplary damages),
penalties, fines (including excise taxes relating to employee benefit plans
and civil penalties) and amounts paid or to be paid in settlement which are
incurred by or imposed upon the Officer in connection with a Covered
Matter, including all interest assessments on any of the foregoing
(collectively, "Indemnified Amounts"). "Expenses" means all direct or
indirect costs and expenses (including, without limitation, attorneys'
fees, retainers, transcripts, witness fees, expert fees, other professional
fees, court costs and travel costs) incurred by the Officer in connection
with a Covered Matter, together with interest thereon commencing 30 days
after incurrence, other than liabilities, judgments, penalties, fines and
settlement amounts.
(b) The Officer will be so indemnified for all Indemnified
Amounts and the Corporation will defend the Officer against claims
(including threatened claims and investigations) which are covered matters,
including claims brought by or on behalf of the Corporation or any
Affiliate, except if it is finally determined by the court of last resort
(or by a lower court if not timely appealed) that the payment is prohibited
by applicable law.
(c) If the Officer is entitled under this Agreement to
indemnification for less than all of the amounts incurred by the Officer in
connection with a Covered Matter, the Corporation will indemnify the
Officer for the indemnifiable amount.
3. Claims for Indemnification. The Officer will give the
Corporation written notice of any claim for indemnification under this
Agreement, but failure to do so shall not affect the Officer's rights
hereunder. Payment requests will include a schedule setting forth in
reasonable detail the amount requested and will be accompanied (or, if
necessary, followed) by copies of the relevant invoices or other
documentation. The Corporation will pay Indemnified Amounts directly
without requiring the Officer to make any prior payment.
4. Determination of Right to Indemnification.
(a) The Officer will be presumed to be entitled to
indemnification under this Agreement and will receive such indemnification,
subject to paragraph 4(b) below, irrespective of whether the Covered Matter
involves allegations of gross negligence or intentional misconduct, alleged
violations of Section 10(b) of the Securities Exchange Act of 1934
(including Rule 10b-5 thereunder), alleged breach of the Officer's
fiduciary duties (including duties of loyalty or care) or any other claim.
(b) The Officer shall be conclusively presumed to have met
any required standard of conduct established by applicable law, unless a
determination is made in the written opinion of independent counsel to the
Corporation, applicable law (including the FDIC Rules) permits
indemnification in a Covered Matter only as authorized in the specific case
upon a determination that indemnification is proper in the circumstances
because the Officer has met the required standard of conduct. In such
event:
(1) The Corporation will immediately give the Officer
notice, with a copy of counsel's opinion, that an evaluation and
determination will be made under this paragraph 4(b).
(2) Such evaluation and determination will be made, as
promptly as possible and in good faith, by a majority vote of the members
of the Corporation's Board of Directors who are not parties or threatened
to be made parties to the Covered Matter in question or, if so requested by
the Officer, in a written opinion by independent counsel to the Corporation
(who shall not be the same as the counsel referred to above), or by such
other procedure as the Corporation and the Officer agree.
page 2
(3) The Officer will be entitled to present
information, and to be represented by counsel, in connection with such
evaluation and determination.
(4) The Officer will be presumed to have met the
required standard of conduct unless it is conclusively demonstrated to the
determining firm or body that the Officer has not met the required standard
of conduct. If the Officer is successful (which includes a settlement
without admission of liability) on the merits or otherwise or in the
defense of any claim, issue or matter therein, he shall be conclusively
presumed to have met the required standard of conduct.
(5) The cost of any evaluation and determination under
this paragraph 4(b) (including attorneys' fees and other expenses incurred
by the Officer) will be borne by the Corporation.
(6) If the requested indemnification falls within the
scope of the FDIC Rules, the FDIC Rules will also be observed.
(7) The termination of any proceeding by judgment,
order, settlement, arbitration award or conviction, or upon a plea of nolo
contendere or its equivalent shall not affect this presumption or, except
as determined by a judgment or other final adjudication adverse to the
Officer, establish a presumption with regard to any factual matter relevant
to determining the Officer's rights to indemnification hereunder.
(c) Determination of the Officer's entitlement to
indemnification shall be made not later than thirty (30) days after the
Corporation's receipt of his written request for such indemnification. If
the person or persons so empowered to make a determination pursuant to
paragraph 4 hereof shall have failed to make the requested determination
within thirty (30) days after any judgment, order, settlement, dismissal,
arbitration award, conviction, acceptance of a plea of nolo contendere or
its equivalent, or other disposition or partial disposition of any
proceeding or any other event which could enable the Corporation to
determine the Officer's entitlement to indemnification, the requisite
determination that the Officer is entitled to indemnification shall be
deemed to have been made.
5. Advance of Expenses.
(a) Subject to paragraphs 5(b) and (c), and notwithstanding
Section 4(b), before final adjudication of a Covered Matter, upon the
Officer's request pursuant to paragraph 3 above, the Corporation will
promptly advance Expenses directly; provided, however, if the Officer has
already paid any Expenses, the Corporation will promptly reimburse the
Officer for all such Expenses.
page 3
(b) If, in the opinion of counsel to the Corporation, the
FDIC Rules permit advancement of Expenses with respect to a federal banking
agency proceeding or action only as authorized upon a determination that
the Officer has met a standard of conduct established by the FDIC Rules,
the determination will be made in accordance with paragraph 4(b) above to
the extent not inconsistent with FDIC Rules.
(c) The Officer will repay any Expenses that are advanced
under this paragraph 5 if so required by the FDIC Rules or if it is
ultimately determined, in a final, nonappealable judgment rendered by the
court of last resort (or by a lower court if not timely appealed), that the
Officer is not entitled to be indemnified against such Expenses and
requires repayment.
(d) The Corporation shall use its best efforts to provide
the Officer on or before the time of any Change of Control security and
liquidity for the obligations of the Corporation to indemnify and advance
Expenses to the Officer pursuant to this Agreement (whether by letter of
credit, the posting of assets as security, or other means).
6. Defense of Claim.
(a) The Corporation, jointly with any other indemnifying
party, will be entitled to assume the defense of any Covered Matter as to
which the Officer requests indemnification, provided, however, the
Corporation shall not be entitled to assume the defense if there has been a
Change of Control or the Officer is entitled to employ the Officer's own
counsel under paragraph 6(c) below, in which case both parties shall be
entitled to participate in the defense.
(b) Counsel selected by the Corporation to defend any
Covered Matter will be subject to the Officer's advance written approval.
(c) The Officer may employ the Officer's own counsel in a
Covered Matter and will be fully reimbursed therefor if (1) the Corporation
approves, in writing, the employment of such counsel or (2) either (A) the
Officer has reasonably concluded that there may be a conflict of interest
between the Corporation and the Officer or between the Officer and other
parties represented by counsel employed by the Corporation to represent the
Officer in such action or (B) the Corporation has not employed counsel
reasonably satisfactory to the Officer to assume the defense of such
Covered Matter promptly after the Officer's request.
(d) Neither the Corporation nor the Officer will settle any
Covered Matter without the other's written consent, which will not be
unreasonably withheld.
(e) If the Officer is required to testify (in court
proceedings, depositions, informal interviews or otherwise), consult with
counsel, furnish documents or take any other reasonable action in
connection with a Covered Matter, the Corporation will reimburse the
Officer's reasonable expenses in connection therewith and also pay the
Officer reasonable compensation for time spent by the Officer for which the
Officer is otherwise not compensated by the Corporation.
page 4
7. Disputes; Enforcement.
(a) If there is a dispute relating to the validity or
enforceability of this Agreement or a denial of indemnification, advance of
Expenses or payment of any other amounts due under this Agreement or the
Corporation's Certificate of Incorporation or Bylaws, the Corporation will
provide such indemnification, advance of Expenses or other payment until a
final, nonappealable judgment that the Officer is not entitled to such
indemnification, advance of Expenses or other payment has been rendered by
the court of last resort (or by a lower court if not timely appealed). The
Officer will repay such amounts if such final, nonappealable judgment so
requires.
(b) In the event that (i) a determination pursuant to
Section 4(b) hereof is made that the Officer is not entitled to
indemnification, (ii) advances of Expenses are not made pursuant to this
Agreement, (iii) payment has not been timely made following a determination
of entitlement to indemnification pursuant to this Agreement, or (iv) the
Officer otherwise seeks enforcement of this Agreement, the Officer shall be
entitled to a final adjudication in the Court of Chancery of the State of
Delaware of the remedy sought. Alternatively, unless court approval is
required by law for the indemnification sought by the Officer, the Officer
at his option may seek an award in arbitration to be conducted by a single
arbitrator pursuant to the commercial arbitration rules of the American
Arbitration Association now in effect, which award is to be made within
ninety (90) days following the filing of the demand for arbitration. The
Corporation shall not oppose the Officer's right to seek any such
adjudication or arbitration award. In any such proceeding or arbitration
the Officer shall be presumed to be entitled to indemnification and
advancement of Expenses under this Agreement and the Corporation shall have
the burden of proof to overcome that presumption. In the event that a
determination that Officer is not entitled to indemnification, in whole or
in part, has been made pursuant to Section 4(b) hereof, the decision in the
judicial proceeding or arbitration provided in this Section 7 shall be made
de novo and the Officer shall not be prejudiced by reason of a
determination that he is not entitled to indemnification. If a
determination that the Officer is entitled to indemnification has been made
pursuant to Section 4(b) hereof, or is deemed to have been made pursuant to
Section 4 hereof or otherwise pursuant to the terms of this Agreement, the
Corporation shall be bound by such determination in the absence of a
misrepresentation of a material fact by the Officer in connection with such
determination. The Corporation shall be precluded from asserting that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable. The Corporation shall stipulate in any such court or
arbitration that the Corporation is bound by all the provisions of this
Agreement and is precluded from making any assertion to the contrary.
(c) The Corporation will reimburse all of the Officer's
reasonable expenses (including attorneys' fees) in pursuing an action to
enforce the Officer's rights under this Agreement unless a final,
nonappealable judgment against the Officer has been rendered in such action
by the court of last resort (or by a lower court if not timely appealed) or
unless the FDIC Rules otherwise require to the same effect as set forth in
Section 5(c). At the Officer's request, such expenses will be advanced by
the Corporation to the Officer as incurred before final resolution of such
action by the court of last resort; such expenses will be repaid by the
Officer if a final, nonappealable judgment in the Corporation's favor is
rendered in such action by the court of last resort (or by a lower court if
not timely appealed) to the same effect as set forth in Section 5(c).
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8. Insurance.
(a) The Corporation hereby covenants and agrees that, as
long as the Officer continues to serve as an officer of the Corporation and
thereafter as long as the Officer may be subject to any possible Covered
Matter, the Corporation, subject to paragraph 8(c) below, shall maintain in
full force and effect D&O Insurance from established and reputable insurers
in amounts not less than, and with coverage comparable to, those in effect
as of the date of this Agreement.
(b) In all D&O Insurance policies, the Officer shall be
named as an insured in such a manner as to provide the Officer the same
rights and benefits as are accorded the most favorably insured of the
Company's directors or officers.
(c) The Corporation will not be required to maintain D&O
Insurance if the Board of Directors of the Corporation determines, after
diligent inquiry, that (1) such insurance is not available; (2) the
premiums for available insurance are disproportionate to the amount of
coverage and to the premiums paid by other corporations similarly situated;
or (3) the coverage provided by such insurance is so limited by exclusions
that it provides an insufficient benefit. The Board of Directors of the
Corporation will, from time to time, in good faith review any decision not
to maintain D&O Insurance and will purchase such insurance at any time that
the conditions of this paragraph 8(c) cease to apply.
(d) The parties will cooperate to obtain advances of
Expenses, indemnification payments and consents from D&O Insurance carriers
in any Covered Matter to the full extent of applicable D&O Insurance. The
existence of D&O Insurance coverage will not diminish or limit the
Corporation's obligation to make indemnification payments to the Officer.
Amounts paid directly to the Officer with respect to a Covered Matter by
the Corporation's D&O Insurance carriers will be credited to the amounts
payable by the Corporation to the Officer under this Agreement.
(e) Payments under any D&O Insurance policies shall be
subject to the FDIC Rules.
9. Limitations of Actions; Limitation of Indemnity.
(a) No action will be brought by or on behalf of the
Corporation against the Officer or the Officer's heirs or personal
representatives relating to the Officer's service as an officer, after the
expiration of one year from the date the Officer ceases (for any reason) to
serve as an officer of the Corporation, and any claim or cause of action of
the Corporation will be extinguished and deemed released unless asserted by
the filing of a legal action before the expiration of such period.
(b) Notwithstanding the provisions hereof, the Corporation
shall not be obligated pursuant to the terms of this Agreement:
(1) Claims Initiated by the Officer. To indemnify or
advance expenses to the Officer with respect to proceedings or claims
initiated or brought voluntarily by the Officer and not by way of defense,
except with respect to proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other statute or law or
otherwise as required under Section 145 of the Delaware General Corporation
Law, but such indemnification or advancement of expenses may be provided by
the Corporation in specific cases if the Board of Directors has approved
the initiation or bringing of such suit;
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(2) Lack of Good Faith. To indemnify the Officer for
any expenses incurred by the Officer with respect to any proceeding
instituted by the Officer to enforce or interpret this Agreement, if a
court of competent jurisdiction determines that each of the material
assertions made by the Officer in such proceeding was not made in good
faith or was frivolous;
(3) Insured Claims. To indemnify the Officer for
expenses or liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) which have been paid directly to the Officer by an insurance
carrier under D&O Insurance maintained by the Corporation; or
(4) FDIC Rules. To make any indemnification payment
contrary to the FDIC Rules.
(5) Short Swing Profits. To indemnify the Officer for
expenses or liabilities incurred by the Officer under Section 16 of the
Securities and Exchange Act of 1934.
10. Rights Not Exclusive; Benefit of Amendments to Law. The
indemnification provided to the Officer under this Agreement will be in
addition to any indemnification provided to the Officer by any law,
agreement, Board resolution, provision of the Certificate of Incorporation
or Bylaws of the Corporation or otherwise (including, but not limited to,
under that certain Indemnification Agreement (the "Bank Agreement") made as
of _________, 1998, between The Bank of San Francisco, a California
corporation (the "Bank") and the Officer). If applicable laws, rules or
regulations are amended after the date of this Agreement to permit
indemnification of a type or to an extent beyond or greater than that
provided by this Agreement, the Officer shall be entitled to
indemnification hereunder of such further types or to such further extent
as is then permitted; provided, however, that no such amendment shall in
any way restrict or limit the rights of the Officer hereunder and the term
"applicable law" shall refer only to the same as amended to the extent such
amendment permits the Corporation to provide such greater indemnification.
The Corporation and the Officer agree that the Officer may pursue his
remedies under both this Agreement and the Bank Agreement, under only this
Agreement, or under only the Bank Agreement, and that the manner in which
the Officer chooses to pursue (or not to pursue) his remedies under this
Agreement and/or under the Bank Agreement shall not in any way restrict or
limit the rights of the Officer under this Agreement.
11. Change in Control. "Change in Control" shall mean the
occurrence of any of the following after January 1, 1998:
(a) Both (1) any "person" (as defined below) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Corporation representing at
least 15% of the total voting power represented by the Corporation's then
outstanding voting securities; and (2) the beneficial ownership by such
person of securities representing such percentage has not been approved by
a majority of the "continuing directors" (as defined below); or
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(b) Any "person" (as defined below) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Corporation representing at
least 50% of the total voting power represented by the Corporation's then
outstanding voting securities; or
(c) A change in the composition of the Board occurs, as a
result of which fewer than two-thirds of the incumbent directors are
directors who either (1) had been directors of the Corporation on January
1, 1998 (the "Original Directors") or (2) were elected, or nominated for
election, to the Board with the affirmative votes of at least a majority in
the aggregate of the Original Directors who were still in office at the
time of the election or nomination and directors whose election or
nomination was previously so approved (the "continuing directors"); or
(d) The stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other corporation, if such merger
or consolidation would result in the voting securities of the Corporation
outstanding immediately prior thereto representing (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) 50% or less of the total voting power represented by the voting
securities of the Corporation or such surviving entity outstanding
immediately after such merger or consolidation; or
(e) The stockholders of the Corporation approve (1) a plan
of complete liquidation of the Corporation or (2) an agreement for the sale
or disposition by the Corporation of all or substantially all of the
Corporation's assets.
For purposes of Subsection (a) above, the term "person" shall have the
same meaning as when used in sections 13(d) and 14(d) of the Exchange Act,
but shall exclude (x) a trustee or other fiduciary holding securities under
an employee benefit plan of the Corporation or of a parent or subsidiary of
the Corporation or (y) a corporation owned directly or indirectly by the
stockholders of the Corporation in substantially the same proportions as
their ownership of the common stock of the Corporation.
Any other provisions of this Section 11 notwithstanding, the term
"Change in Control" shall not include (1) a transaction, if undertaken at
the election of the Corporation, the result of which is to sell all or
substantially all of the assets of the Corporation to another corporation
(the "surviving corporation"); provided that the surviving corporation is
owned directly or indirectly by the stockholders of the Corporation
immediately following such transaction in substantially the same
proportions as their ownership of the Corporation's common stock
immediately preceding such transaction; and provided, further that the
surviving corporation expressly assumes this Agreement; or (2) an
acquisition of voting and other rights on outstanding shares by a voting
trustee who is approved (and the agreement under which he acts is approved)
by the continuing directors, but not any subsequent Change of Control
effected by the voting trustee or his successor.
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12. Subrogation. Upon payment of any Indemnified Amount under
this Agreement, the Corporation will be subrogated to the extent of such
payment to all of the Officer's rights of recovery therefor and the Officer
will take all reasonable actions requested by the Corporation (at no cost
or penalty to the Officer) to secure the Corporation's rights under this
paragraph 11 including executing documents.
13. Continuation of Indemnity. All of the Corporation's
obligations under this Agreement will continue as long as the Officer is
subject to any actual or possible Covered Matter, notwithstanding the
Officer's termination of service as an officer, and in any event for at
least five (5) years subsequent to the date when the Officer ceases to be
an officer of the Corporation. The right to indemnification conferred
herein shall be presumed to have been relied upon by the Officer in serving
or continuing to serve as an officer of the Corporation or in any capacity
with any Affiliate and shall be enforceable as a contract right.
14. Amendments. Neither the Corporation's Certificate of
Incorporation nor its Bylaws will be changed to increase liability of
officers or to limit the Officer's indemnification. Any repeal or
modification of the Corporation's Certificate of Incorporation or Bylaws or
any repeal or modification of the relevant provisions of any applicable
law, rules or regulations will not in any way diminish any of the Officer's
rights or the Corporation's obligations under this Agreement. This
Agreement cannot be amended except with the written consent of the
Corporation and the Officer.
15. Governing Law. This Agreement will be governed by Delaware
law without regard to such state's conflicts of laws principles.
16. Successors.
(a) This Agreement will be binding upon and inure to the
benefit of the parties and their respective heirs, legal representatives
and assigns.
(b) The Corporation will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the business or assets of the Corporation to assume
all of the Corporation's obligations under this Agreement. Such assumption
will not release the Corporation from its obligations under this Agreement.
17. Severability. The provisions of this Agreement will be
deemed severable, and if any part of any provision is held illegal, void or
invalid under applicable law, such provision may be changed to the extent
reasonably necessary to make the provision, as so changed, legal, valid and
binding. If any provision of this Agreement is held illegal, void or
invalid in its entirety, the remaining provisions of this Agreement will
not in any way be affected or impaired but will remain binding in
accordance with their terms.
18. Notices. All notices given under this Agreement will be in
writing and delivered either personally, by registered or certified mail
(return receipt requested, postage prepaid), by recognized overnight
courier or by telecopy (if promptly followed by a copy delivered
personally, by registered or certified mail or overnight courier), as
follows:
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If to the Officer: _______________________
_______________________
_______________________
If to the Corporation: The San Francisco Company
550 Montgomery Street
San Francisco CA 94111
Attn.: Chief Executive Officer
or to such other address as either party furnishes to the other in writing.
19. Counterparts. This Agreement may be signed in counterparts.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the date first written above.
THE SAN FRANCISCO COMPANY
______________________________
By: __________________________
Its:___________________________
OFFICER
______________________________
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