<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission file number 0-28118
UNIONBANCAL CORPORATION
<TABLE>
<S> <C>
State of Incorporation: California I.R.S. Employer Identification No. 94-1234979
</TABLE>
350 California Street
San Francisco, California 94104
Telephone: (415) 765-2126
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 __
Number of shares of Common Stock outstanding at October 31, 1998: 58,402,605
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<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
-----------
<S> <C>
PART I
FINANCIAL INFORMATION
Consolidated Financial Highlights..................................................................... 2
Item 1. Financial Statements:
Consolidated Statements of Income................................................................... 4
Consolidated Balance Sheets......................................................................... 5
Consolidated Statements of Changes in Shareholders' Equity.......................................... 6
Consolidated Statements of Cash Flows............................................................... 7
Notes to Consolidated Financial Statements.......................................................... 8
Item 2. Management's Discussion and Analysis:
Introduction........................................................................................ 12
Business Segments................................................................................... 12
Summary............................................................................................. 13
Net Interest Income................................................................................. 16
Noninterest Income.................................................................................. 19
Noninterest Expense................................................................................. 20
Income Tax Expense.................................................................................. 21
Loans............................................................................................... 22
Cross-Border Outstandings........................................................................... 23
Allowance for Credit Losses......................................................................... 24
Nonperforming Assets................................................................................ 26
Loans 90 Days or More Past Due and Still Accruing................................................... 27
Liquidity........................................................................................... 27
Regulatory Capital.................................................................................. 27
Year 2000........................................................................................... 28
Euro Conversion..................................................................................... 31
Item 3. Market Risk................................................................................... 31
PART II
OTHER INFORMATION
Item 5. Other Information............................................................................. 32
Item 6. Exhibits and Reports on Form 8-K.............................................................. 32
Signatures............................................................................................ 33
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)
<TABLE>
<CAPTION>
PERCENT CHANGE TO
SEPTEMBER 30, 1998 FROM:
FOR THE THREE MONTHS ENDED
---------------------------------------- ----------------------------
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1998 1997 1998 1997
- - ---------------------------------------------------- ------------- ---------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net interest income(1)............................ $ 337,702 $ 326,708 $ 313,555 3.37% 7.70%
Provision for credit losses....................... 10,000 15,000 -- (33.33) nm
Noninterest income................................ 123,925 147,994 116,820 (16.26) 6.08
Noninterest expense............................... 290,378 277,325 253,317 4.71 14.63
------------- ---------- -------------
Income before income taxes(1)..................... 161,249 182,377 177,058 (11.58) (8.93)
Taxable-equivalent adjustment..................... 1,069 1,152 1,301 (7.20) (17.83)
Income tax expense................................ 11,913 72,704 45,953 (83.61) (74.08)
------------- ---------- -------------
Net income........................................ $ 148,267 $ 108,521 $ 129,804 36.63% 14.22%
------------- ---------- -------------
------------- ---------- -------------
PER COMMON SHARE:
Net income--basic(2).............................. $ 2.54 $ 1.86 $ 2.19 36.56% 15.98%
Net income--diluted(2)............................ 2.53 1.85 2.19 36.76 15.53
Dividends(3)...................................... 0.42 0.42 0.42 -- --
Book value (end of period)(2)..................... 51.11 48.63 44.87 5.10 13.91
Common shares outstanding (end of period)(2)...... 58,402,679 58,391,538 58,282,820 0.02 0.21
Weighted average common shares
outstanding--basic(2)........................... 58,396,028 58,371,658 58,273,550 0.04 0.21
Weighted average common shares
outstanding--diluted(2)......................... 58,597,321 58,596,656 58,479,993 -- 0.20
BALANCE SHEET (END OF PERIOD):
Total assets...................................... $31,407,318 $30,922,575 $30,982,479 1.57% 1.37%
Total loans....................................... 23,497,845 22,958,328 22,297,724 2.35 5.38
Nonperforming assets.............................. 81,399 122,943 132,974 (33.79) (38.79)
Total deposits.................................... 23,663,129 23,412,519 22,974,188 1.07 3.00
Subordinated capital notes........................ 298,000 348,000 382,000 (14.37) (21.99)
Common equity(2).................................. 2,984,950 2,839,530 2,615,327 5.12 14.13
BALANCE SHEET (PERIOD AVERAGE):
Total assets...................................... $30,762,880 $29,756,517 $30,113,382 3.38% 2.16%
Total loans....................................... 23,432,772 22,698,082 22,167,332 3.24 5.71
Earning assets.................................... 27,767,944 26,724,142 26,730,417 3.91 3.88
Total deposits.................................... 22,571,441 22,154,050 22,226,453 1.88 1.55
Common equity(2).................................. 2,866,497 2,795,714 2,550,254 2.53 12.40
FINANCIAL RATIOS:
Return on average assets(4)....................... 1.91% 1.46% 1.71%
Return on average common equity(2)(5)............. 20.52 15.57 19.89
Efficiency ratio(6)............................... 62.97 58.47 59.22
Net interest margin(1)............................ 4.84 4.90 4.66
Tier 1 risk-based capital ratio................... 9.53 9.28 8.92
Total risk-based capital ratio.................... 11.51 11.34 11.02
Leverage ratio.................................... 9.37 9.27 8.39
Allowance for credit losses to total loans........ 2.02 2.08 2.15
Allowance for credit losses to nonaccrual loans... 697.19 446.71 435.92
Net loans charged off to average total loans(7)... 0.21 0.05 0.42
Nonperforming assets to total loans and foreclosed
assets.......................................... 0.35 0.54 0.60
Nonperforming assets to total assets.............. 0.26 0.40 0.43
</TABLE>
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(1) Amounts are on a taxable-equivalent basis using the federal statutory tax
rate of 35 percent.
(2) Three months ended June 30, 1998 and September 30, 1997 results have been
restated to give retroactive effect to the exchange on August 10, 1998 of
3.4 million shares of the Company's common stock for The Bank of
Tokyo-Mitsubishi, Ltd.'s (BTM) direct ownership interest in Union Bank of
California (the Bank).
(3) Dividends per share reflect dividends declared on the Company's common
stock outstanding as of the declaration date.
(4) Based on annualized net income.
(5) Based on annualized net income applicable to common stock.
(6) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income
(taxable-equivalent) and noninterest income. Foreclosed asset expense
(income) was $(0.3) million, $(0.2) million, and $(1.6) million in the
third quarter of 1998, the second quarter of 1998, and the third quarter
of 1997, respectively.
(7) Annualized.
nm = not meaningful
2
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-----------------------------------------
<S> <C> <C> <C>
SEPTEMBER 30, SEPTEMBER 30, PERCENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 CHANGE
- - -------------------------------------------------------------------------- ------------- ------------- -----------
RESULTS OF OPERATIONS:
Net interest income(1).................................................. $ 983,056 $ 917,408 7.16%
Provision for credit losses............................................. 45,000 -- nm
Noninterest income...................................................... 399,949 342,627 16.73
Noninterest expense..................................................... 836,178 762,208 9.70
------------- -------------
Income before income taxes(1)........................................... 501,827 497,827 0.80
Taxable-equivalent adjustment........................................... 3,417 4,107 (16.80)
Income tax expense...................................................... 146,045 174,869 (16.48)
------------- -------------
Net income.............................................................. $ 352,365 $ 318,851 10.51%
------------- -------------
------------- -------------
PER COMMON SHARE:
Net income--basic(2).................................................... $ 6.04 $ 5.35 12.90%
Net income--diluted(2).................................................. 6.02 5.33 12.95
Dividends(3)............................................................ 1.26 1.12 12.50
Book value (end of period)(2)........................................... 51.11 44.87 13.91
Common shares outstanding (end of period)(2)............................ 58,402,679 58,282,820 0.21
Weighted average common shares outstanding--basic(2).................... 58,363,630 58,204,921 0.27
Weighted average common shares outstanding--diluted(2).................. 58,576,283 58,357,097 0.38
BALANCE SHEET (END OF PERIOD):
Total assets............................................................ $31,407,318 $30,982,479 1.37%
Total loans............................................................. 23,497,845 22,297,724 5.38
Nonperforming assets.................................................... 81,399 132,974 (38.79)
Total deposits.......................................................... 23,663,129 22,974,188 3.00
Subordinated capital notes.............................................. 298,000 382,000 (21.99)
Common equity(2)........................................................ 2,984,950 2,615,327 14.13
BALANCE SHEET (PERIOD AVERAGE):
Total assets............................................................ $30,130,893 $29,451,728 2.31%
Total loans............................................................. 22,916,992 21,693,329 5.64
Earning assets.......................................................... 27,002,879 26,066,274 3.59
Total deposits.......................................................... 22,386,160 21,823,524 2.58
Common equity(2)........................................................ 2,792,727 2,469,521 13.09
FINANCIAL RATIOS:
Return on average assets(4)............................................. 1.56% 1.45%
Return on average common equity(2)(5)................................... 16.87 16.85
Efficiency ratio(6)..................................................... 60.51 60.55
Net interest margin(1).................................................. 4.86 4.70
Tier 1 risk-based capital ratio......................................... 9.53 8.92
Total risk-based capital ratio.......................................... 11.51 11.02
Leverage ratio.......................................................... 9.37 8.39
Allowance for credit losses to total loans.............................. 2.02 2.15
Allowance for credit losses to nonaccrual loans......................... 697.19 435.92
Net loans charged off to average total loans(7)......................... 0.12 0.28
Nonperforming assets to total loans and foreclosed assets............... 0.35 0.60
Nonperforming assets to total assets.................................... 0.26 0.43
</TABLE>
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(1) Amounts are on a taxable-equivalent basis using the federal statutory tax
rate of 35 percent.
(2) Nine months ended September 30, 1997 results have been restated to give
retroactive effect to the exchange on August 10, 1998 of 3.4 million
shares of the Company's common stock for BTM's direct ownership interest
in the Bank.
(3) Dividends per share reflect dividends declared on the Company's common
stock outstanding as of the declaration date.
(4) Based on annualized net income.
(5) Based on annualized net income applicable to common stock.
(6) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income
(taxable-equivalent) and noninterest income. Foreclosed asset expense
(income) was $(0.7) million for the first nine months of 1998 and 1997.
(7) Annualized.
nm = not meaningful
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
- - --------------------------------------------------------------------- --------- --------- --------- ---------
INTEREST INCOME
Loans.............................................................. $ 468,199 $ 449,840 $1,365,285 $1,311,337
Securities......................................................... 53,559 44,226 145,390 123,075
Interest bearing deposits in banks................................. 2,769 16,125 14,187 43,404
Federal funds sold and securities purchased under resale
agreements....................................................... 4,074 4,204 11,784 18,727
Trading account assets............................................. 7,372 5,842 19,976 13,388
--------- --------- --------- ---------
Total interest income.......................................... 535,973 520,237 1,556,622 1,509,931
--------- --------- --------- ---------
INTEREST EXPENSE
Domestic deposits.................................................. 118,847 134,888 353,283 386,699
Foreign deposits................................................... 20,805 17,759 66,455 55,156
Federal funds purchased and securities sold under repurchase
agreements....................................................... 26,051 18,170 59,667 44,053
Commercial paper................................................... 24,257 21,814 67,719 66,543
Subordinated capital notes......................................... 4,797 6,856 15,883 17,180
Other borrowed funds............................................... 4,583 8,496 13,976 26,999
--------- --------- --------- ---------
Total interest expense......................................... 199,340 207,983 576,983 596,630
--------- --------- --------- ---------
NET INTEREST INCOME.................................................. 336,633 312,254 979,639 913,301
Provision for credit losses........................................ 10,000 -- 45,000 --
--------- --------- --------- ---------
Net interest income after provision for credit losses.......... 326,633 312,254 934,639 913,301
--------- --------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts................................ 35,709 29,271 101,288 84,699
Trust and investment management fees............................... 30,777 27,143 88,806 76,737
International commissions and fees................................. 17,951 17,208 54,516 49,593
Merchant transaction processing fees............................... 14,871 15,326 42,988 42,653
Merchant banking fees.............................................. 6,095 5,074 24,083 19,899
Securities gains, net.............................................. 653 1,546 5,579 2,098
Other.............................................................. 17,869 21,252 82,689 66,948
--------- --------- --------- ---------
Total noninterest income....................................... 123,925 116,820 399,949 342,627
--------- --------- --------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits..................................... 159,680 141,009 459,592 418,970
Net occupancy...................................................... 23,590 21,619 67,294 64,133
Equipment.......................................................... 14,039 13,376 41,842 41,206
Merchant transaction processing.................................... 11,415 11,002 33,008 31,269
Communications..................................................... 9,834 10,349 31,515 31,135
Professional services.............................................. 9,285 6,461 25,186 19,062
Advertising and public relations................................... 8,066 7,532 22,419 20,759
Data processing.................................................... 7,327 6,544 20,462 19,115
Foreclosed asset expense (income).................................. (325) (1,572) (746) (696)
Merger and integration............................................. -- -- -- 6,037
Other.............................................................. 47,467 36,997 135,606 111,218
--------- --------- --------- ---------
Total noninterest expense...................................... 290,378 253,317 836,178 762,208
--------- --------- --------- ---------
Income before income taxes......................................... 160,180 175,757 498,410 493,720
Income tax expense................................................. 11,913 45,953 146,045 174,869
--------- --------- --------- ---------
NET INCOME........................................................... $ 148,267 $ 129,804 $ 352,365 $ 318,851
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INCOME APPLICABLE TO COMMON STOCK(1)............................. $ 148,267 $ 127,857 $ 352,365 $ 311,251
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INCOME PER COMMON SHARE--BASIC(1)................................ $ 2.54 $ 2.19 $ 6.04 $ 5.35
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INCOME PER COMMON SHARE--DILUTED(1).............................. $ 2.53 $ 2.19 $ 6.02 $ 5.33
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC(1)................. 58,396 58,274 58,364 58,205
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED(1)............... 58,597 58,480 58,576 58,357
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- - ------------------------------
(1) Results for the three and nine months ended September 30, 1997 have been
restated to give retroactive effect to the exchange on August 10, 1998 of
3.4 million shares of the Company's common stock for BTM's direct
ownership interest in the Bank.
See accompanying notes to consolidated financial statements.
4
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1998 1997 1997
- - ------------------------------------------------------------------------ ------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks................................................. $ 2,211,595 $2,541,699 $ 2,086,873
Interest bearing deposits in banks...................................... 133,165 633,421 1,064,858
Federal funds sold and securities purchased under resale agreements..... 629,784 24,335 762,978
------------- ------------ -------------
Total cash and cash equivalents..................................... 2,974,544 3,199,455 3,914,709
Trading account assets.................................................. 357,515 394,313 496,254
Securities available for sale........................................... 3,200,376 2,538,386 2,625,490
Securities held to maturity (market value: September 30, 1998, $165,807;
December 31, 1997, $193,115; September 30, 1997, $237,102)............ 162,018 188,775 232,388
Loans (net of allowance for credit losses: September 30, 1998, $473,717;
December 31, 1997, $451,692; September 30, 1997, $478,454)............ 23,024,128 22,289,716 21,819,270
Due from customers on acceptances....................................... 464,581 773,339 737,600
Premises and equipment, net............................................. 407,863 406,299 403,851
Other assets............................................................ 816,293 794,982 752,917
------------- ------------ -------------
Total assets........................................................ $31,407,318 $30,585,265 $30,982,479
------------- ------------ -------------
------------- ------------ -------------
LIABILITIES
Domestic deposits:
Noninterest bearing................................................... $ 9,427,080 $8,574,515 $ 7,958,088
Interest bearing...................................................... 12,379,167 12,666,458 13,297,367
Foreign deposits:
Noninterest bearing................................................... 247,038 275,029 284,611
Interest bearing...................................................... 1,609,844 1,780,372 1,434,122
------------- ------------ -------------
Total deposits...................................................... 23,663,129 23,296,374 22,974,188
Federal funds purchased and securities sold under repurchase
agreements............................................................ 1,574,163 1,335,884 1,294,943
Commercial paper........................................................ 1,417,077 966,575 1,593,733
Other borrowed funds.................................................... 339,340 476,010 745,753
Acceptances outstanding................................................. 464,581 773,339 737,600
Other liabilities....................................................... 666,078 709,784 638,935
Subordinated capital notes.............................................. 298,000 348,000 382,000
------------- ------------ -------------
Total liabilities................................................... 28,422,368 27,905,966 28,367,152
------------- ------------ -------------
SHAREHOLDERS' EQUITY(1)
Common stock--$5 stated value:
Authorized 100,000,000 shares, issued 58,402,679 as of September 30,
1998, 58,305,891 as of December 31, 1997, and 58,282,820 as of
September 30, 1997.................................................. 292,013 291,529 291,414
Additional paid-in capital.............................................. 1,430,539 1,422,680 1,420,428
Retained earnings....................................................... 1,233,068 957,662 889,105
Accumulated other comprehensive income.................................. 29,330 7,428 14,380
------------- ------------ -------------
Total shareholders' equity.......................................... 2,984,950 2,679,299 2,615,327
------------- ------------ -------------
Total liabilities and shareholders' equity.......................... $31,407,318 $30,585,265 $30,982,479
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
- - ------------------------------
(1) Balances as of December 31, 1997 and September 30, 1997 have been
restated to give retroactive effect to the exchange on August 10, 1998 of
3.4 million shares of the Company's common stock for BTM's direct
ownership interest in the Bank.
See accompanying notes to consolidated financial statements.
5
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY(3)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS) 1998 1997
- - ---------------------------------------------------------------------------------------- ----------- -----------
PREFERRED STOCK
Balance, beginning of period............................................................ $ -- $ 135,000
Redemption of preferred stock........................................................... -- (135,000)
----------- -----------
Balance, end of period................................................................ $ -- $ --
----------- -----------
COMMON STOCK
Balance, beginning of period............................................................ $ 291,529 $ 290,762
Dividend reinvestment plan.............................................................. 6 2
Deferred compensation--restricted stock awards.......................................... 281 283
Stock options exercised................................................................. 197 367
----------- -----------
Balance, end of period................................................................ $ 292,013 $ 291,414
----------- -----------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period............................................................ $ 1,422,680 $ 1,413,076
Dividend reinvestment plan.............................................................. 10 (77)
Deferred compensation--restricted stock awards.......................................... 5,217 3,498
Stock options exercised................................................................. 2,632 3,931
----------- -----------
Balance, end of period................................................................ $ 1,430,539 $ 1,420,428
----------- -----------
RETAINED EARNINGS
Balance, beginning of period............................................................ $ 957,662 $ 645,214
Net income(1)........................................................................... 352,365 318,851
Dividends on common stock(2)............................................................ (73,632) (65,320)
Dividends on preferred stock............................................................ -- (7,600)
Deferred compensation--restricted stock awards.......................................... (3,327) (2,040)
----------- -----------
Balance, end of period................................................................ $ 1,233,068 $ 889,105
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period............................................................ $ 7,428 $ 10,881
Net income(1)........................................................................... 352,365 318,851
Other comprehensive income.............................................................. 21,902 3,499
----------- -----------
Comprehensive income.................................................................... 374,267 322,350
Less: net income included in retained earnings.......................................... (352,365) (318,851)
----------- -----------
Balance, end of period................................................................ $ 29,330 $ 14,380
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.......................................................... $ 2,984,950 $ 2,615,327
----------- -----------
----------- -----------
</TABLE>
- - ------------------------
(1) Includes income applicable to preferred shareholders of $7.6 million for
the first nine months of 1997.
(2) Dividends per share were $1.26 and $1.12 for the first nine months of
1998 and 1997, respectively, and are based on the Company's shares
outstanding at the declaration date.
(3) Balances as of September 30, 1997 have been restated to give retroactive
effect to the exchange on August 10, 1998 of 3.4 million shares of the
Company's common stock for BTM's direct ownership interest in the Bank.
See accompanying notes to consolidated financial statements.
6
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- - ---------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................ $ 352,365 $ 318,851
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses......................................................... 45,000 --
Depreciation, amortization and accretion............................................ 50,528 49,285
Provision for deferred income taxes................................................. 16,018 38,734
Gain on sales of securities available for sale...................................... (5,579) (2,098)
Merger and integration costs less than cash utilized................................ (12,350) (27,200)
Net (increase) decrease in trading account assets................................... 36,798 (37,045)
Other, net.......................................................................... (33,448) 92,393
----------- -----------
Total adjustments................................................................. 96,967 114,069
----------- -----------
Net cash provided by operating activities............................................. 449,332 432,920
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale.................................. 418,456 3,920
Proceeds from matured and called securities available for sale........................ 196,358 326,833
Purchases of securities available for sale............................................ (1,253,529) (777,281)
Proceeds from matured and called securities held to maturity.......................... 26,960 36,121
Net increase in loans................................................................. (797,343) (1,315,578)
Other, net............................................................................ (42,032) (19,986)
----------- -----------
Net cash used by investing activities............................................... (1,451,130) (1,745,971)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.............................................................. 366,755 1,441,228
Net increase (decrease) in federal funds purchased and securities sold under
repurchase agreements............................................................... 238,279 (27,711)
Net increase in commercial paper and other borrowed funds............................. 313,832 94,601
Maturity and redemption of subordinated debt.......................................... (50,000) (200,000)
Proceeds from issuance of subordinated debt........................................... -- 200,000
Payments of cash dividends............................................................ (73,631) (68,787)
Redemption of preferred stock......................................................... -- (135,000)
Other, net............................................................................ 2,471 2,642
----------- -----------
Net cash provided by financing activities........................................... 797,706 1,306,973
----------- -----------
Net decrease in cash and cash equivalents............................................... (204,092) (6,078)
Cash and cash equivalents at beginning of period........................................ 3,199,455 3,937,697
Effect of exchange rate changes on cash and cash equivalents............................ (20,819) (16,910)
----------- -----------
Cash and cash equivalents at end of period.............................................. $ 2,974,544 $ 3,914,709
----------- -----------
----------- -----------
CASH PAID DURING THE PERIOD FOR:
Interest.............................................................................. $ 727,211 $ 611,347
Income taxes.......................................................................... 189,411 47,359
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Loans transferred to foreclosed assets (OREO)......................................... $ 13,882 $ 19,033
Dividends declared but unpaid......................................................... 24,529 24,518
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The unaudited consolidated financial statements of UnionBanCal Corporation
and subsidiaries (the Company) have been prepared in accordance with generally
accepted accounting principles (GAAP) for interim financial reporting and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. However, they do not
include all of the disclosures necessary for annual financial statements in
conformity with GAAP. Accordingly, these unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements included in the Company's Form 10-K for the year ended December 31,
1997. The preparation of financial statements in conformity with GAAP also
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from those estimates.
On August 10, 1998, the Company exchanged 3.4 million shares of its common
stock for 2.4 million shares of Union Bank of California, N.A. (the Bank) common
stock owned directly by The Bank of Tokyo-Mitsubishi, Ltd. (BTM). This share
exchange provides the Company with a 100 percent ownership interest in the Bank.
In addition, it increases BTM's ownership percentage of the Company to 82
percent from 81 percent.
The exchange of shares was accounted for as a reorganization of entities
under common control. Accordingly, amounts previously reported as Parent Direct
Interest in Bank Subsidiary, including the proportionate share of net income,
dividends, and other comprehensive income have been reclassified to combine them
with the corresponding amounts attributable to the Company's Common Stockholders
for all periods presented.
Certain other amounts for prior periods have been reclassified to conform to
current financial statement presentation.
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1996, Statement of Financial Accounting Standards (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", was issued. This Statement establishes standards for when
transfers of financial assets, including those with continuing involvement by
the transferor, should be considered a sale. SFAS No. 125 also establishes
standards for when a liability should be considered extinguished. This Statement
is effective for transfers of assets and extinguishments of liabilities after
December 31, 1996. In December 1996, the Financial Accounting Standards Board
(FASB) reconsidered certain provisions of SFAS No. 125 and issued SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125", to defer for one year the effective date of implementation for
transactions related to repurchase agreements, dollar-roll repurchase
agreements, securities lending and similar transactions. Management determined
that the effect of adoption of SFAS No. 125 and SFAS No. 127 on the Company's
financial statements was not material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of this Statement will not impact the Company's consolidated financial
position, results of operations or cash flows, and any effect will be limited to
the form and content of its disclosures.
8
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
This Statement is effective for fiscal years beginning after December 15, 1997,
with earlier application permitted. The Company expects to adopt SFAS No. 131 at
December 31, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". The Standard revises the
disclosure requirements for pensions and other postretirement benefits. Adoption
of this Statement will not impact the Company's consolidated financial position,
results of operations or cash flows, and any effect will be limited to the form
and content of its disclosures. This Statement is effective for fiscal years
beginning after December 15, 1997. The Company expects to adopt SFAS No. 132 at
December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. SFAS No. 133
requires that derivative instruments used to hedge be identified specifically to
assets, liabilities, firm commitments or anticipated transactions and measured
as effective and ineffective when hedging changes in fair value or cash flows.
Derivative instruments that do not qualify as either a fair value or cash flow
hedge will be valued at fair value with the resultant gain or loss recognized in
current earnings. Changes in the effective portion of fair value hedges will be
recognized in current earnings along with the change in fair value of the hedged
item. Changes in the effective portion of the fair value of cash flow hedges
will be recognized in other comprehensive income until realization of the cash
flows of the hedged item through current earnings. Any ineffective portion of
hedges will be recognized in current earnings. Management believes that,
depending upon the accumulated net gain or loss of the effective portion of cash
flow hedges at the date of adoption, the impact of SFAS No. 133 could have a
material impact on other comprehensive income. However, Management believes that
any ineffective portion of cash flow hedges or any other hedges will not have a
material impact on the Company's financial position or results of operations.
This Statement is effective for fiscal years beginning after June 15, 1999, with
earlier application encouraged. The Company expects to adopt SFAS No. 133 as of
January 1, 2000.
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". This Statement amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities", which established
accounting and reporting standards for certain activities of mortgage banking
and other similar enterprises. After securitization of mortgage loans held for
sale, SFAS No. 134 requires an entity to classify the resulting mortgage-backed
securities or other retained interests, based on its ability or intent to sell
or hold those investments. Management believes that the adoption of SFAS No. 134
will have no impact on the Company's financial position or results of
operations. This Statement is effective for fiscal years beginning after
December 15, 1998, with earlier application permitted. The Company expects to
adopt SFAS No. 134 at January 1, 1999.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires the
capitalization of eligible costs of specified activities related to computer
software developed or obtained for internal use. Management believes that the
adoption of SOP 98-1 will not have a material effect on the Company's financial
position or results of operations. The Statement is effective for fiscal years
beginning after December 15, 1998, with earlier adoption encouraged. The Company
expects to adopt SOP 98-1 on January 1, 1999.
9
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires that entities expense start-up costs and
organization costs as they are incurred. Management believes that the adoption
of SOP 98-5 will not have a material effect on the Company's financial position
or results of operations. The Statement is effective for fiscal years beginning
after December 15, 1998, with earlier adoption encouraged. The Company expects
to adopt SOP 98-5 on January 1, 1999.
NOTE 3--EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income after
preferred dividends by the weighted average number of common shares outstanding
during the period. Diluted EPS incorporates the dilutive effect of common stock
equivalents outstanding on an average basis during the period. Stock options are
a common stock equivalent. The following table presents a reconciliation of
basic and diluted EPS for the three months and nine months ended September 30,
1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1998 1997
-------------------- -------------------- -------------------- --------------------
<CAPTION>
(AMOUNTS IN THOUSANDS) BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
- - ----------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income......................... $ 148,267 $ 148,267 $ 129,804 $ 129,804 $ 352,365 $ 352,365 $ 318,851 $ 318,851
Less:
Dividends on preferred stock..... -- -- (1,947) (1,947) -- -- (7,600) (7,600)
--------- --------- --------- --------- --------- --------- --------- ---------
Income available to common
shareholders..................... $ 148,267 $ 148,267 $ 127,857 $ 127,857 $ 352,365 $ 352,365 $ 311,251 $ 311,251
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Weighted average common shares
outstanding...................... 58,396 58,396 58,274 58,274 58,364 58,364 58,205 58,205
Additional shares due to:
Assumed conversion of dilutive
stock options.................. -- 201 -- 206 -- 212 -- 152
--------- --------- --------- --------- --------- --------- --------- ---------
Adjusted weighted average common
shares outstanding............... 58,396 58,597 58,274 58,480 58,364 58,576 58,205 58,357
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings per share................. $ 2.54 $ 2.53 $ 2.19 $ 2.19 $ 6.04 $ 6.02 $ 5.35 $ 5.33
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
NOTE 4--COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the period
from non-owner sources. This Statement is effective for fiscal years beginning
after December 15, 1997. The adoption of this Statement in the first quarter of
1998 resulted in a change in the financial statement presentation, but did not
have an impact on the Company's consolidated financial position, results of
operations or cash flows. Certain amounts in the prior period have been
reclassified to conform to the current presentation under SFAS No. 130.
10
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 4--COMPREHENSIVE INCOME (CONTINUED)
The following is a summary of the components of accumulated other
comprehensive income:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS) 1998 1997
- - ------------------------------------------------------------------------------------------------ --------- ---------
Net unrealized gain on securities available for sale, net of reclassification adjustment:
Beginning balance............................................................................. $ 19,886 $ 14,064
Net unrealized gain on securities available for sale, during the first nine months, before
tax......................................................................................... 41,378 10,626
Income tax expense............................................................................ (15,766) (4,229)
Less: reclassification adjustment for net realized gains on securities available for sale
included in net income during the first nine months, before tax............................. (5,579) (2,098)
Plus: income tax expense...................................................................... 1,960 857
--------- ---------
Net activity.................................................................................. 21,993 5,156
--------- ---------
Ending balance................................................................................ 41,879 19,220
--------- ---------
Foreign currency translation adjustments:
Beginning balance............................................................................. (12,458) (3,183)
Foreign currency translation adjustments during the first nine months, before tax............. (153) (2,785)
Income tax benefit............................................................................ 62 1,128
--------- ---------
Net activity.................................................................................. (91) (1,657)
--------- ---------
Ending balance................................................................................ (12,549) (4,840)
--------- ---------
Other comprehensive income...................................................................... $ 21,902 $ 3,499
--------- ---------
--------- ---------
Accumulated other comprehensive income.......................................................... $ 29,330 $ 14,380
--------- ---------
--------- ---------
</TABLE>
NOTE 5--INCOME TAX EXPENSE
During the third quarter of 1998, a reduction of state income tax
liabilities of $52.4 million, net of federal tax, was recorded: $44.8 million
reflects previously accrued 1997 and 1998 state income tax liabilities and the
remaining $7.6 million relates to third quarter 1998. The reduction results from
the Company's ability to file its 1997 and 1998 California franchise tax returns
on a worldwide unitary basis, which incorporates the financial results of BTM
and its worldwide affiliates. During the third quarter of 1997, the Company
received a refund from the State of California Franchise Tax Board of $24.7
million, net of federal tax, in settlement of litigation, administration and
audit disputes covering the years 1975-1987.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS DOCUMENT MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED. FOR A DISCUSSION OF FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER, PLEASE SEE THE DISCUSSION CONTAINED HEREIN AND IN THE
COMPANY'S PUBLICLY AVAILABLE SECURITIES AND EXCHANGE COMMISSION FILINGS AND
PRESS RELEASES.
INTRODUCTION
UnionBanCal Corporation (UNBC) is a San Francisco, California-based
commercial bank holding company with consolidated assets of $31.4 billion at
September 30, 1998. Based on total assets, UNBC and its consolidated
subsidiaries (the Company) was the third largest bank holding company in
California and among the 30 largest in the United States. At September 30, 1998,
the Company operated 244 banking offices in California, 6 banking offices in
Oregon and Washington, and 18 overseas facilities. At September 30, 1998, UNBC
was 82 percent owned by The Bank of Tokyo-Mitsubishi, Ltd. (BTM) and 18 percent
owned by other shareholders. UNBC's principal subsidiary, Union Bank of
California, N.A. (the Bank), was 100 percent owned by UNBC. (See Note 1 in the
accompanying notes to the Company's Consolidated Financial Statements.)
The interim financial information should be read in conjunction with the
Company's Form 10-K for the year ended December 31, 1997. Certain amounts for
prior periods have been reclassified to conform to current financial statement
presentation.
BUSINESS SEGMENTS
The Company's operations are divided into five primary segments: the
Community Banking Group (CBG); the Commercial Financial Services Group (CFSG);
the Trust and Private Financial Services Group (TPFSG); the Global Markets Group
(GMG); and the International Banking Group (IBG).
CBG offers a comprehensive line of loan and deposit products for consumers
and businesses primarily located in California. CBG provides services through
its 244 branches in California, as well as branches in Oregon and Washington. In
addition to the traditional consumer and business loan products, CBG offers
credit products to small to mid-size agricultural enterprises, international
trade and settlement services; and E-banking through the Company's web site and
through personal financial management products. Average assets in CBG for the
nine months ended September 30, 1998, were $10.3 billion of the Company's total
assets.
CFSG offers a full product line of commercial financial services to
California middle market companies, large corporations across the nation, real
estate companies and other, more specialized industries such as oil and energy
utilities, media, communications, healthcare, forest products, finance companies
and retailing. Through its relationships with title and escrow companies,
government agencies and other primarily corporate customers who provide large
pools of deposits, CFSG provides a significant source of funding for the
Company. Average assets in CFSG for the nine months ended September 30, 1998,
were $10.8 billion of the Company's total assets.
TPFSG, through its five main business divisions, offers trust, custody and
advisory services to institutional and to individual customers. Within these
divisions, TPFSG provides trust and private banking services to high net worth
individuals; investment management and advisory services for trust customers,
the Company's proprietary mutual fund family, HighMark and for traditional
employee benefit plan and 401(k) services; and global and domestic custody
services, securities lending and corporate trust services. Through the Company's
registered broker/dealer, TPFSG provides brokerage services to trust and retail
customers. At September 30, 1998, TPFSG had approximately $90 billion assets
under administration.
GMG manages the market-related risks for the Company as part of its
responsibilities for asset/liability management. Additionally, GMG offers to
customers a broad range of risk management products such as foreign exchange,
interest rate swaps, caps and floors. GMG originates debt instruments
12
<PAGE>
for bank eligible issuers and trades debt instruments in the secondary market.
Average assets in GMG for the nine months ended September 30, 1998, were $4.3
billion of the Company's total assets.
IBG offers corporate banking products through its full service foreign
branches in Tokyo, Taipei, and Seoul and its banking units and representative
offices in other parts of Asia and Latin America. A leader in international
correspondent banking, IBG ranks among the top 5 U.S. banks doing correspondent
banking in Asia. Through its branches in the U.S., IBG also provides trade
finance and other international services for export/import activity. Average
assets in IBG for the nine months ended September 30, 1998, were $3.0 billion of
the Company's total assets.
SUMMARY
Net income in the third quarter of 1998 was $148.3 million, compared to
$129.8 million in the third quarter of 1997. Net income applicable to common
stock was $148.3 million, or $2.53 per diluted common share, in the third
quarter of 1998, compared with $127.9 million, or $2.19 per diluted common
share, in the third quarter of 1997. Excluding the tax benefit of $44.8 million,
net of federal tax, for previously accrued 1997 and 1998 state income tax
liabilities, and lower third quarter state income tax provision of $7.6 million,
net of federal tax, net income applicable to common stock was $95.8 million, or
$1.64 per diluted common share. Excluding the $24.7 million tax refund in the
third quarter of 1997, net income applicable to common stock was $103.2 million,
or $1.76 per diluted common share. This decrease in diluted earnings per common
share from the third quarter of last year was primarily related to increases in
personnel expense, an increase in the provision for credit losses, and expenses
related to higher deposit volumes and Year 2000 compliance expenses. Other
highlights of the third quarter of 1998 include:
- Net interest income, on a taxable-equivalent basis, was $337.7 million in
the third quarter of 1998, a $24.1 million, or 8 percent, increase from
the third quarter of 1997. The increase in net interest income was
primarily due to an 18 basis point increase in the net interest margin and
a $1.0 billion, or 4 percent, increase in average earning assets,
resulting primarily from a $1.3 billion, or 6 percent, increase in average
loans. The increase in net interest margin was principally due to a $1.1
billion, or 14 percent, increase in average noninterest bearing deposits,
which raised the proportion of earning assets funded by core deposits.
- A provision for credit losses of $10.0 million was recorded in the third
quarter of 1998, compared with no provision in 1997. Net charge-offs for
the third quarter of 1998 were $12.5 million. This resulted from
management's regular quarterly assessment of overall credit quality, loan
growth and economic conditions in relation to the level of the allowance
for credit losses. Nonperforming assets declined $48.4 million, or 37
percent, from December 31, 1997 to $81.4 million at September 30, 1998.
Nonperforming assets as a percentage of total assets declined to 0.26
percent at September 30, 1998, compared with 0.42 percent at the end of
1997. Total nonaccrual loans at September 30, 1998 and December 31, 1997
were $67.9 million and $109.3 million, respectively. This decrease was due
primarily to third quarter 1998 loan sales totaling $29.8 million. The
ratio of nonaccrual loans to total loans declined from 0.48 percent to
0.29 percent.
- Noninterest income was $123.9 million, an increase of $7.1 million, or 6
percent, over the third quarter of 1997. Service charges on deposit
accounts grew $6.4 million, or 22 percent, reflecting growth in average
deposits. In addition, trust and investment management fees increased $3.6
million, or 13 percent, on growth in assets under management. These
increases were partially offset by a decrease in other noninterest income
of $3.4 million, or 16 percent, partially due to a $2.9 million trading
loss arising from the decline in interest rates.
- Noninterest expense was $290.4 million in the third quarter of 1998,
compared with $253.3 million in the third quarter of 1997, an increase of
$37.1 million, or 15 percent. Personnel-related expense increased $18.7
million, or 13 percent, primarily due to increases in salaries and
employee benefits, a portion of which relates to a 3 percent increase in
total employees, performance-based incentive compensation, and a decline
in the fair value of assets underlying postretirement benefit plans,
13
<PAGE>
caused by the downturn in the financial markets. Professional services
increased $2.8 million, or 44 percent, due principally to additional costs
related to the Year 2000 effort. Other noninterest expense increased $10.5
million, or 28 percent, primarily attributable to additional expenses
incurred to support higher deposit volumes.
- The effective tax rate for the third quarter of 1998 was 7 percent,
compared with 26 percent for the third quarter of 1997. The lower
effective tax rate in the third quarter of 1998 was the result of a total
reduction of $52.4 million, net of federal tax, $44.8 million for
previously accrued 1997 and 1998 state income tax liabilities, and lower
third quarter state income tax provision of $7.6 million. The third
quarter 1997 effective tax rate was reduced by a $24.7 million after-tax
refund from the State of California Franchise Tax Board (FTB). Excluding
the state tax reduction and the FTB refund, the effective tax rates for
the third quarter of 1998 and 1997 were 40 percent.
- In the third quarter of 1998, the return on average assets increased to
1.91 percent from 1.71 percent a year earlier. The return on average
common equity was 20.52 percent at September 30, 1998, compared to 19.89
percent at September 30, 1997.
- Total loans at September 30, 1998 increased $756.4 million, or 3 percent,
over December 31, 1997, primarily due to growth in the commercial,
financial and industrial portfolio.
- The Company's Tier 1 and total risk-based capital ratios were 9.53 percent
and 11.51 percent at September 30, 1998, compared with 8.96 percent and
11.05 percent at December 31, 1997. The third quarter 1998 leverage ratio
for the Company was 9.37 percent, compared with 8.53 percent at December
31, 1997.
Net income for the first nine months of 1998 was $352.4 million, compared to
$318.9 million for the first nine months of 1997. Net income applicable to
common stock was $352.4 million, or $6.02 per diluted common share, for the
first nine months of 1998, compared with $311.3 million, or $5.33 per diluted
common share, for the first nine months of 1997. Excluding the tax benefit of
$52.4 million, net of federal tax, recorded in the first nine months of 1998,
net income applicable to common stock was $299.9 million, or $5.12 per diluted
common share. Excluding the $24.7 million tax refund for the first nine months
of 1997, net income applicable to common stock was $286.6 million, or $4.91 per
diluted common share.
Other highlights of the first nine months of 1998 include:
- Net interest income, on a taxable-equivalent basis, was $983.1 million for
the first nine months of 1998, a $65.6 million, or 7 percent, increase
from the comparable period one year earlier. The increase in net interest
income was primarily due to a 16 basis point increase in the net interest
margin and a $936.6 million, or 4 percent, increase in average earning
assets, resulting primarily from a $1.2 billion, or 6 percent, increase in
average loans, largely funded by a $1.1 billion, or 15 percent, increase
in average noninterest bearing deposits.
- A provision for credit losses of $45.0 million was recorded for the first
nine months of 1998, compared with no provision in 1997. Net charge-offs
for the nine months ended September 30, 1998 were $21.0 million. This
resulted from management's regular quarterly assessments of overall credit
quality, loan growth and economic conditions in relation to the level of
the allowance for credit losses.
- Noninterest income was $399.9 million, an increase of $57.3 million, or 17
percent, over the first nine months of 1997. This increase includes the
$17.1 million gain from the sale of the credit card portfolio in the
second quarter of 1998. Service charges on deposit accounts grew $16.6
million, or 20 percent, reflecting growth in average deposits; trust and
investment management fees increased $12.1 million, or 16 percent, on
growth in assets under management; international commissions and fees
increased $4.9 million; and securities gains, net increased $3.5 million,
primarily from the sale of securities available for sale.
14
<PAGE>
- Noninterest expense was $836.2 million for the first nine months of 1998,
compared with $762.2 million for the first nine months of 1997, an
increase of $74.0 million, or 10 percent. Personnel-related expense
increased $40.6 million, or 10 percent, primarily due to increases in
salaries, a portion of which relates to increases in staffing,
performance-based incentive compensation as well as a decline in the fair
value of assets underlying postretirement benefit plans, caused by the
downturn in the financial markets. Professional fees increased $6.1
million, or 32 percent, primarily due to additional costs related to the
Year 2000 effort. Other noninterest expense increased $24.4 million, or 22
percent, primarily attributable to additional expenses incurred to support
higher deposit volumes.
- The effective tax rate for the first nine months of 1998 was 29 percent,
compared with 35 percent for the first nine months of 1997. The lower
effective tax rate for the first nine months of 1998 was the result of a
total reduction of $52.4 million, net of federal tax, in state income tax
liabilities. Excluding this state tax reduction, the effective tax rate
for the first nine months of 1998 was 40 percent. Excluding the $24.7
million after-tax refund from the California Franchise Tax Board, the
effective tax rate for the first nine months of 1997 was 40 percent.
- The return on average assets for the first nine months of 1998 increased
to 1.56 percent, compared to 1.45 percent for the first nine months of
1997. The return on average common equity increased slightly to 16.87
percent for the first nine months of 1998, compared to 16.85 percent for
the first nine months of 1997.
15
<PAGE>
NET INTEREST INCOME
The table below shows the major components of net interest income and net
interest margin.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------------------ ------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1)
- - -------------------------------------------- ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:(2)
Domestic.................................. $22,132,617 $ 445,989 8.00% $20,572,171 $ 426,992 8.23%
Foreign(3)................................ 1,300,155 22,388 6.83 1,595,161 23,147 5.76
Securities--taxable(4)...................... 3,287,094 51,584 6.26 2,655,275 42,245 6.34
Securities--tax-exempt(4)................... 99,440 2,809 11.30 118,514 2,983 10.07
Interest bearing deposits in banks.......... 152,283 2,769 7.21 1,085,110 16,125 5.90
Federal funds sold and securities purchased
under resale agreements................... 288,295 4,074 5.61 293,775 4,204 5.68
Trading account assets...................... 508,060 7,429 5.80 410,411 5,842 5.65
---------- ----------- ---------- -----------
Total earning assets.................... 27,767,944 537,042 7.69 26,730,417 521,538 7.75
----------- -----------
Allowance for credit losses................. (480,555) (495,361)
Cash and due from banks..................... 1,889,831 1,951,891
Premises and equipment, net................. 406,375 409,574
Other assets................................ 1,179,285 1,516,861
---------- ----------
Total assets............................ $30,762,880 $30,113,382
---------- ----------
---------- ----------
LIABILITIES
Domestic deposits:
Interest bearing.......................... $5,501,340 $ 39,120 2.82 $5,328,180 $ 38,422 2.86
Savings and consumer time................. 3,272,432 31,253 3.79 2,995,038 28,780 3.81
Large time................................ 3,563,309 48,474 5.40 4,838,640 67,686 5.55
Foreign deposits(3)......................... 1,604,878 20,805 5.14 1,513,336 17,759 4.66
---------- ----------- ---------- -----------
Total interest bearing deposits......... 13,941,959 139,652 3.97 14,675,194 152,647 4.13
---------- ----------- ---------- -----------
Federal funds purchased and securities sold
under repurchase agreements............... 1,901,127 26,051 5.44 1,334,367 18,170 5.40
Subordinated capital notes.................. 308,870 4,797 6.16 421,130 6,856 6.46
Commercial paper............................ 1,751,697 24,257 5.49 1,566,887 21,814 5.52
Other borrowed funds........................ 319,642 4,583 5.69 648,003 8,496 5.20
---------- ----------- ---------- -----------
Total borrowed funds.................... 4,281,336 59,688 5.53 3,970,387 55,336 5.53
---------- ----------- ---------- -----------
Total interest bearing liabilities...... 18,223,295 199,340 4.34 18,645,581 207,983 4.43
----------- -----------
Noninterest bearing deposits................ 8,629,482 7,551,259
Other liabilities........................... 1,043,606 1,273,842
---------- ----------
Total liabilities....................... 27,896,383 27,470,682
SHAREHOLDERS' EQUITY
Preferred stock............................. -- 92,446
Common equity............................... 2,866,497 2,550,254
---------- ----------
Total shareholders' equity.............. 2,866,497 2,642,700
---------- ----------
Total liabilities and shareholders'
equity................................ $30,762,880 $30,113,382
---------- ----------
---------- ----------
Net interest income/margin
(taxable-equivalent basis)................ 337,702 4.84% 313,555 4.66%
Less: taxable-equivalent adjustment......... 1,069 1,301
----------- -----------
Net interest income..................... $ 336,633 $ 312,254
----------- -----------
----------- -----------
</TABLE>
- - ------------------------
(1) Yields and interest income are presented on a taxable-equivalent basis
using the federal statutory tax rate of 35 percent.
(2) Average balances on loans outstanding include all nonperforming and
renegotiated loans. The amortized portion of net loan origination fees
(costs) is included in interest income on loans, representing an adjustment
to the yield.
(3) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
(4) Yields on securities available for sale are based on fair value. The
difference between these yields and those based on amortized cost was not
significant.
16
<PAGE>
NET INTEREST INCOME (CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
--------------------------------------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------------------ ------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1)
- - -------------------------------------------- ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:(2)
Domestic.................................. $21,569,891 $1,297,483 8.04% $20,218,298 $1,245,658 8.23%
Foreign(3)................................ 1,347,101 68,380 6.79 1,475,031 66,578 6.03
Securities--taxable(4)...................... 2,949,151 139,720 6.32 2,476,970 116,715 6.29
Securities--tax-exempt(4)................... 106,783 8,348 10.42 126,634 9,567 10.07
Interest bearing deposits in banks.......... 279,938 14,187 6.78 996,710 43,404 5.82
Federal funds sold and securities purchased
under resale agreements................... 281,565 11,784 5.60 450,603 18,727 5.56
Trading account assets...................... 468,450 20,137 5.75 322,028 13,389 5.56
---------- ----------- ---------- -----------
Total earning assets.................... 27,002,879 1,560,039 7.72 26,066,274 1,514,038 7.76
----------- -----------
Allowance for credit losses................. (471,384) (514,043)
Cash and due from banks..................... 1,903,155 2,005,177
Premises and equipment, net................. 402,197 413,024
Other assets................................ 1,294,046 1,481,296
---------- ----------
Total assets............................ $30,130,893 $29,451,728
---------- ----------
---------- ----------
LIABILITIES
Domestic deposits:
Interest bearing.......................... $5,447,712 $ 115,626 2.84 $5,274,137 $ 111,457 2.83
Savings and consumer time................. 3,176,898 90,713 3.82 2,956,493 83,695 3.78
Large time................................ 3,606,182 146,945 5.45 4,691,506 191,547 5.46
Foreign deposits(3) 1,723,282 66,454 5.16 1,560,149 55,156 4.73
---------- ----------- ---------- -----------
Total interest bearing deposits......... 13,954,074 419,738 4.02 14,482,285 441,855 4.08
---------- ----------- ---------- -----------
Federal funds purchased and securities sold
under repurchase agreements............... 1,481,809 59,667 5.38 1,106,180 44,053 5.32
Subordinated capital notes.................. 335,179 15,883 6.34 353,429 17,180 6.50
Commercial paper............................ 1,641,425 67,720 5.52 1,631,056 66,543 5.45
Other borrowed funds........................ 323,082 13,975 5.78 673,359 26,999 5.36
---------- ----------- ---------- -----------
Total borrowed funds.................... 3,781,495 157,245 5.56 3,764,024 154,775 5.50
---------- ----------- ---------- -----------
Total interest bearing liabilities...... 17,735,569 576,983 4.35 18,246,309 596,630 4.37
----------- -----------
Noninterest bearing deposits................ 8,432,086 7,341,239
Other liabilities........................... 1,170,511 1,274,000
---------- ----------
Total liabilities....................... 27,338,166 26,861,548
SHAREHOLDERS' EQUITY
Preferred stock............................. -- 120,659
Common equity............................... 2,792,727 2,469,521
---------- ----------
Total shareholders' equity.............. 2,792,727 2,590,180
---------- ----------
Total liabilities and shareholders'
equity................................ $30,130,893 $29,451,728
---------- ----------
---------- ----------
Net interest income/margin
(taxable-equivalent basis)................ 983,056 4.86% 917,408 4.70%
Less: taxable-equivalent adjustment......... 3,417 4,107
----------- -----------
Net interest income..................... $ 979,639 $ 913,301
----------- -----------
----------- -----------
</TABLE>
- - ------------------------
(1) Yields and interest income are presented on a taxable-equivalent basis
using the federal statutory tax rate of 35 percent.
(2) Average balances on loans outstanding include all nonperforming and
renegotiated loans. The amortized portion of net loan origination fees
(costs) is included in interest income on loans, representing an adjustment
to the yield.
(3) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
(4) Yields on securities available for sale are based on fair value. The
difference between these yields and those based on amortized cost was not
significant.
17
<PAGE>
Net interest income is interest earned on loans and investments less
interest expense on deposit accounts and borrowings. Primary factors affecting
the level of net interest income include the margin between the yield earned on
interest earning assets and the rate paid on interest bearing liabilities, as
well as the volume and composition of average interest earning assets and
average interest bearing liabilities.
Net interest income, on a taxable-equivalent basis, was $337.7 million in
the third quarter of 1998, compared with $313.6 million in the third quarter of
1997. This increase of $24.1 million, or 8 percent, was primarily attributable
to a $1.0 billion, or 4 percent, increase in average earning assets largely
funded by a $1.1 billion, or 14 percent, increase in average noninterest bearing
deposits. In addition, the net interest margin increased 18 basis points to 4.84
percent. Net interest margin was favorably impacted by the positive 3 basis
point differential between the decrease in the yield on average earning assets
and the decrease in the rate of interest bearing liabilities, coupled with the
increase in proportion of funding provided by average noninterest bearing
deposits, thereby lowering the overall cost of funds.
Average earning assets were $27.8 billion in the third quarter of 1998,
compared with $26.7 billion in the third quarter of 1997. Most of this increase
was attributable to growth in average loans, which increased $1.3 billion, or 6
percent, and average securities, which were $612.7 million, or 22 percent,
higher, partially offset by a $932.8 million decrease in average interest
bearing deposits in banks. The growth in average loans was attributable to the
increase in average commercial, financial and industrial loans of $1.9 billion,
partly offset by the decrease in average consumer loans of $474.5 million,
primarily related to the sale of the credit card portfolio. The increase in
primarily fixed rate securities reflected interest rate risk management actions
to reduce the Company's exposure to declines in interest rates.
The $1.0 billion, or 4 percent, growth in average earning assets from the
third quarter of 1997 to the third quarter of 1998 was funded primarily by a
$1.1 billion increase in average noninterest bearing deposits. The increase in
average noninterest bearing deposits was partially due to an influx of new
customer relationships, arising from the recent merger and acquisition
activities of other financial institutions in the California market during the
past year.
For the first nine months of 1998, net interest income, on a taxable
equivalent basis, was $983.1 million, compared with $917.4 million in the
comparable period one year earlier. The increase of $65.6 million, or 7 percent,
was primarily attributable to a $936.6 million, or 4 percent, increase in
average earning assets largely funded by a $1.1 billion, or 15 percent, increase
in average noninterest bearing deposits. In addition, the net interest margin
increased 16 basis points to 4.86 percent. Although the differential between the
decrease in the yield on average earning assets and the decrease in the rate of
average interest bearing liabilities was a negative 2 basis points, the negative
impact on the net interest margin of these two factors was more than offset by
the increase in the proportion of funding provided by average noninterest
bearing deposits.
Average earning assets were $27.0 billion and $26.1 billion, for the nine
months ended September 30, 1998 and 1997, respectively. Most of this increase
was attributable to growth in average loans, which increased $1.2 billion, or 6
percent, and average securities, which were $452.3 million, or 17 percent,
higher. This increase was partially offset by a $716.8 million decrease in
average interest bearing deposits in banks. The growth in average loans
outstanding was attributable to the increase in average commercial, financial
and industrial loans of $1.5 billion, partly offset by the decrease in average
consumer loans of $337.4 million, which was primarily related to the sale of the
credit card portfolio. See "Loans" on page 22 for additional commentary on
growth in the loan portfolio. The increase in primarily fixed rate securities
reflected interest rate risk management actions to reduce the Company's exposure
to declines in interest rates.
18
<PAGE>
NONINTEREST INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------------- -------------------------------------
SEPTEMBER SEPTEMBER PERCENT SEPTEMBER SEPTEMBER PERCENT
(DOLLARS IN THOUSANDS) 30, 1998 30, 1997 CHANGE 30, 1998 30, 1997 CHANGE
- - ----------------------------------------- ------------ ------------ --------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts...... $ 35,709 $ 29,271 21.99% $ 101,288 $ 84,699 19.59%
Trust and investment management fees..... 30,777 27,143 13.39 88,806 76,737 15.73
International commissions and fees....... 17,951 17,208 4.32 54,516 49,593 9.93
Merchant transaction processing fees..... 14,871 15,326 (2.97) 42,988 42,653 0.79
Merchant banking fees.................... 6,095 5,074 20.12 24,083 19,899 21.03
Brokerage commissions and fees........... 4,723 3,920 20.48 14,188 11,529 23.06
Foreign exchange trading gains, net...... 4,708 3,927 19.89 14,159 11,249 25.87
Securities gains, net.................... 653 1,546 (57.76) 5,579 2,098 165.92
Gain on sale of credit card portfolio.... -- -- -- 17,056 -- nm
Other.................................... 8,438 13,405 (37.05) 37,286 44,170 (15.59)
------------ ------------ ------------ ------------
Total noninterest income............... $ 123,925 $ 116,820 6.08% $ 399,949 $ 342,627 16.73%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
- - ------------------------
nm = not meaningful
In the third quarter of 1998, noninterest income was $123.9 million,
compared with $116.8 million for the same period in 1997. This increase of $7.1
million, or 6 percent, includes a $6.4 million, or 22 percent, increase in
service charges on deposit accounts, reflecting a 2 percent increase in average
deposits coupled with the expansion of several products and services, a $3.6
million, or 13 percent, increase in trust and investment management fees,
largely due to growth of assets under management, partially offset by the
decrease in other noninterest income of $5.0 million, or 37 percent, due partly
to a $2.9 million trading loss arising from the decline in interest rates.
For the first nine months of 1998, noninterest income was $399.9 million,
compared with $342.6 million for the same period in 1997. This increase of $57.3
million, or 17 percent, includes the second quarter 1998 gain of $17.1 million
from the sale of the credit card portfolio, a $16.6 million increase in service
charges on deposit accounts, reflecting a 3 percent increase in average deposits
coupled with the expansion of several products and services, a $12.1 million
increase in trust and investment management fees, largely due to growth of
assets under management, a $4.9 million increase in international commissions
and fees, a $3.5 million increase in securities gains, net, and a $6.8 million
increase related to brokerage commissions and merchant banking fees. In
contrast, other noninterest income decreased $6.9 million, or 16 percent, due to
a $7.7 million nonrecurring gain recognized in 1997 related to a real estate
joint venture and the $2.9 million trading loss in 1998, partially offset by the
$4.8 million gain recognized in the second quarter of 1998 from the sale of
commercial real estate loans.
19
<PAGE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER SEPTEMBER PERCENT SEPTEMBER SEPTEMBER PERCENT
(DOLLARS IN THOUSANDS) 30, 1998 30, 1997 CHANGE 30, 1998 30, 1997 CHANGE
- - ------------------------------------------ ------------ ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Salaries and other compensation........... $ 127,706 $ 116,086 10.01% $ 369,715 $ 337,401 9.58%
Employee benefits......................... 31,974 24,923 28.29 89,877 81,569 10.19
------------ ------------ ------------ ------------
Personnel-related expense............... 159,680 141,009 13.24 459,592 418,970 9.70
Net occupancy............................. 23,590 21,619 9.12 67,294 64,133 4.93
Equipment................................. 14,039 13,376 4.96 41,842 41,206 1.54
Merchant transaction processing........... 11,415 11,002 3.75 33,008 31,269 5.56
Communications............................ 9,834 10,349 (4.98) 31,515 31,135 1.22
Professional services..................... 9,285 6,461 43.71 25,186 19,062 32.13
Advertising and public relations.......... 8,066 7,532 7.09 22,419 20,759 8.00
Data processing........................... 7,327 6,544 11.97 20,462 19,115 7.05
Printing and office supplies.............. 6,289 5,390 16.68 19,112 17,646 8.31
Software.................................. 5,526 4,025 37.29 14,536 12,358 17.62
Travel.................................... 4,724 3,757 25.74 13,041 11,321 15.19
Intangible asset amortization............. 3,393 3,338 1.65 10,069 10,014 0.55
Armored car............................... 3,118 3,091 0.87 8,989 9,160 (1.87)
Foreclosed asset expense (income)......... (325) (1,572) nm (746) (696) nm
Merger and integration expense............ -- -- -- -- 6,037 nm
Other..................................... 24,417 17,396 40.36 69,859 50,719 37.74
------------ ------------ ------------ ------------
Total noninterest expense............... $ 290,378 $ 253,317 14.63% $ 836,178 $ 762,208 9.70%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
- - --------------------------
nm = not meaningful
Noninterest expense was $290.4 million in the third quarter of 1998,
compared with $253.3 million in the third quarter of 1997, an increase of $37.1
million, or 15 percent. Personnel-related expense increased $18.7 million, or 13
percent, primarily due to a $5.5 million increase in performance-based incentive
compensation, a 3 percent increase in workforce to support increased revenue
growth, and a $5.5 million increase in benefits expense arising from an
unrealized loss in the fair value of assets underlying postretirement benefit
plans, caused by the downturn in the financial markets. Net occupancy expense
increased $2.0 million, or 9 percent, primarily due to expenses related to lease
terminations on several properties. Professional services increased $2.8
million, or 44 percent, due to additional costs related to the Year 2000 effort.
In addition, other noninterest expense increased $7.0 million, or 40 percent,
primarily attributable to additional expenses incurred to support higher deposit
volumes.
Noninterest expense was $836.2 million for the first nine months of 1998,
compared with $762.2 million for the first nine months of 1997, an increase of
$74.0 million, or 10 percent. Personnel-related expense increased $40.6 million,
or 10 percent, primarily due to a $16.7 million increase in performance-based
incentive compensation, a 4 percent increase in the workforce, to support
increased revenue growth, and a $4.8 million increase in benefits expense
arising from a loss in the fair value of assets underlying postretirement
benefit plans. Professional services increased $6.1 million, or 32 percent, due
to additional costs related to the Year 2000 effort. In addition, other
noninterest expense increased $19.1 million, primarily attributable to
additional expenses incurred to support higher deposit volumes.
The Company continues to make preparations for the Year 2000. (For a
detailed discussion of the Year 2000 Program see page 28). The total cost of the
Year 2000 project is estimated to be approximately $50 million, of which $10
million relates to capital expenditures which the Company will capitalize and
depreciate over their useful lives. The remaining $40 million will be included
in noninterest expense in the
20
<PAGE>
period incurred. As of September 30, 1998, the Company has spent $19 million on
the Year 2000 Project, $17 million and $2 million in 1998 and 1997,
respectively. Of the $19 million spent as of September 30, 1998, $6 million
relates to capital expenditures, $5 million and $1 million in 1998 and 1997,
respectively. Of the estimated $31 million remaining to be spent, an estimated
$4 million is for capital expenditures. During the third quarter of 1998, the
Company spent $12 million on the Year 2000 Project, of which $5 million relates
to capital expenditures. The remaining $7 million is included in noninterest
expense. The cost of the year 2000 Project is being funded by normal operating
cash and staffed by external resources as well as internal staff re-deployed
from less time-sensitive assignments. Estimated total cost could change further
as analysis continues.
The combination of Union Bank and BanCal Tri-State Corporation on April 1,
1996 resulted in the recording of a total of $123.5 million in merger and
integration expense. The remaining liability balance at September 30, 1998 was
$10.6 million. The balance includes amounts primarily for lease payments that
are continuing over the expected term of the leases. No merger and integration
expense was recorded for the first nine months of 1998, compared with $6.0
million for the first nine months of 1997.
INCOME TAX EXPENSE
The effective tax rates for the nine months and three months ended September
30, 1998 were 29 percent and 7 percent, respectively. The effective tax rates
for the nine and three months ended September 30, 1997 were 35 percent and 26
percent, respectively. The decrease in the effective tax rates for 1998 was the
result of a reduction of California franchise taxes for 1997 and 1998 from the
Company's ability to file California franchise tax returns on a worldwide
unitary basis, which incorporates the financial results of BTM and its worldwide
affiliates. The total reduction of $52.4 million, net of federal tax, was
reflected in the third quarter of 1998. Of this amount, $44.8 million related to
the reversal of previously accrued 1997 and 1998 state income tax liabilities
and $7.6 million related to a lower third quarter state tax provision. The
effective tax rates for the nine months and three months ended September 30,
1997 were reduced as a result of an after-tax refund from the State of
California Franchise Tax Board (the FTB) of $24.7 million in settlement of
litigation, administration and audit disputes covering the years 1975-1987.
Excluding these reductions, the effective tax rates for all periods would have
been 40 percent.
The Company anticipates that its fourth quarter effective tax rate will be
approximately 35 percent. At this time, the Company anticipates that it will
continue to file its California franchise tax return on the worldwide basis for
1999. Its anticipated 1999 tax rate will be dependent on the Company's
proportionate share of BTM's financial results for that year, and is expected to
be within the range of 35 to 40 percent.
21
<PAGE>
LOANS
The following table shows loans outstanding by loan type.
<TABLE>
<CAPTION>
PERCENT CHANGE TO
SEPTEMBER 30, 1998 FROM:
----------------------------
SEPTEMBER DECEMBER 31, SEPTEMBER DECEMBER 31, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 30, 1998 1997 30, 1997 1997 1997
- - ---------------------------------- ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and
industrial.................... $ 12,151,210 $ 10,747,179 $ 10,405,299 13.06 % 16.78 %
Construction.................... 420,267 293,333 312,318 43.27 34.56
Mortgage:
Residential................... 2,742,451 2,961,233 2,966,326 (7.39) (7.55)
Commercial.................... 2,980,371 2,951,807 2,851,838 0.97 4.51
------------ ------------ ------------
Total mortgage.............. 5,722,822 5,913,040 5,818,164 (3.22) (1.64)
Consumer:
Installment................... 2,026,441 2,090,752 2,075,065 (3.08) (2.34)
Home equity................... 844,256 992,916 1,027,147 (14.97) (17.81)
Credit card and other lines of
credit...................... -- 270,097 275,258 nm nm
------------ ------------ ------------
Total consumer.............. 2,870,697 3,353,765 3,377,470 (14.40) (15.00)
Lease financing................. 1,013,772 874,860 863,745 15.88 17.37
------------ ------------ ------------
Total loans in domestic
offices................... 22,178,768 21,182,177 20,776,996 4.70 6.75
Loans originated in foreign
branches........................ 1,319,077 1,559,231 1,520,728 (15.40) (13.26)
------------ ------------ ------------
Total loans................. $ 23,497,845 $ 22,741,408 $ 22,297,724 3.33 % 5.38 %
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- - --------------------------
nm = not meaningful
The Company's lending activities are predominantly domestic, with such loans
and leases comprising 94 percent of the portfolio at September 30, 1998. Total
loans at September 30, 1998 were $23.5 billion, an increase of $756.4 million,
or 3 percent, from December 31, 1997. The increase was primarily attributable to
growth in the commercial, financial and industrial loan portfolio, which
increased $1.4 billion from December 31, 1997, partly offset by the consumer
loan portfolio, which decreased $483.1 million.
Commercial, financial and industrial loans represent the largest category in
the loan portfolio. These loans are extended principally to major corporations,
middle market businesses, and small businesses, with no industry concentration
exceeding 10 percent of total commercial, financial and industrial loans. At
September 30, 1998 and year-end 1997, the commercial, financial and industrial
loan portfolio was $12.2 billion, or 52 percent of total loans, and $10.7
billion, or 47 percent of total loans, respectively. The increase of $1.4
billion, or 13 percent, from year-end 1997 was primarily attributable to
continued growth in loans extended to large corporations.
The construction loan portfolio totaled $420.3 million, or 2 percent of
total loans, at September 30, 1998, compared with $293.3 million, or 1 percent
of total loans, at December 31, 1997. This growth is primarily attributable to
the favorable California real estate market coupled with the continuing
improvement in the West Coast economy.
Mortgage loans were $5.7 billion, or 24 percent of total loans, at September
30, 1998, compared with $5.9 billion, or 26 percent of total loans, at December
31, 1997. The mortgage loan portfolio consists of loans on commercial and
industrial projects and loans secured by one to four family residential
properties,
22
<PAGE>
primarily in California. Despite the sale of $123.0 million in commercial real
estate mortgages during the second quarter of 1998, commercial mortgage loans
increased $28.6 million from December 31, 1997, primarily attributable to the
favorable California real estate market coupled with the continuing improvement
in the West Coast economy. Residential mortgage loans decreased $218.8 million
due to prepayments arising from the favorable interest rate environment and to
sales in the secondary market.
Consumer loans totaled $2.9 billion, or 12 percent of total loans, at
September 30, 1998, compared with $3.4 billion, or 15 percent of total loans, at
December 31, 1997. The decrease of $483.1 million was attributable to the sale
of the $253.0 million credit card loan portfolio in April 1998, and to a
reduction in home equity loans as customers refinanced to take advantage of
favorable long-term, fixed rate mortgages.
Lease financing totaled $1.0 billion, or 4 percent of total loans, at
September 30, 1998, compared with $874.9 million, or 4 percent of total loans,
at December 31, 1997.
Loans originated in foreign branches totaled $1.3 billion, or 6 percent of
total loans, at September 30, 1998 and $1.6 billion, or 7 percent of total
loans, at December 31, 1997.
CROSS-BORDER OUTSTANDINGS
The Company's cross-border outstandings reflect certain additional economic
and political risks that are not reflected in domestic outstandings. These risks
include those arising from exchange rate fluctuations and restrictions on the
transfer of funds. The following table sets forth the Company's cross-border
outstandings as of September 30, 1998, December 31, 1997, and September 30, 1997
for each country where such outstandings exceeded 1 percent of total assets. The
cross-border outstandings were compiled based upon category and domicile of
ultimate risk and are comprised of balances with banks, trading account assets,
securities available for sale, securities purchased under resale agreements,
loans, accrued interest receivable, acceptances outstanding and investments with
foreign entities. The amounts outstanding for each country exclude local
currency outstandings. The Company does not have significant local currency
outstandings to the individual countries listed in the following table that are
not hedged or are not funded by local currency borrowings.
<TABLE>
<CAPTION>
PUBLIC CORPORATIONS
FINANCIAL SECTOR AND OTHER TOTAL
(DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS
- - -------------------------------------------------------------- ------------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
September 30, 1998
Japan......................................................... $ 115 $ -- $ 469 $ 584
Korea......................................................... 376 -- 139 515
December 31, 1997
Japan......................................................... 401 -- 438 839
Korea......................................................... 561 10 257 828
Thailand...................................................... 320 -- -- 320
September 30, 1997
Japan......................................................... 939 -- 403 1,342
Korea......................................................... 691 36 293 1,020
</TABLE>
The economic condition and the ability of some countries, to which the
Company has cross-border exposure, to manage their external debt obligations
have been impacted by the Asian economic crisis which began in the second half
of 1997. The impact of the Asian crisis appears to be spreading to other global
markets. The Company's exposure in all affected countries continues to be
short-term in nature and substantially related to the finance of trade. Although
the extent of risk will vary from country to country, and institution to
institution, these short-term exposures are characterized by management to be in
the low to moderate range.
23
<PAGE>
Cross-border exposures, other than those referred to in the table above,
include total outstandings as of September 30, 1998 of $133 million in Brazil.
Since Japan is the second largest trading nation in the world, its
political, economic and financial markets situation is being closely monitored.
The situation in Japan is worsening and the depressed conditions in that country
are impacting other areas which are highly dependent on trade relations with it.
There is considerable concern that the United States is not immune to the
effects of the depressed economic conditions in Japan and to the Asian crisis.
Management is monitoring the Company's portfolio accordingly.
Although management cannot predict the ultimate impact of the global
financial crisis on the Company's financial position and results of operations
since much depends on the effect of the stabilizing activities already under
way, management believes that the continuation of internal supervision,
monitoring and portfolio risk management practices will be effective in
minimizing the impact over and above that already identified. Increases in
nonaccrual loans, together with some related increases in charge-off activity,
may occur as events unfold.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level considered
appropriate by management and is based on an ongoing assessment of risk in the
credit and lease portfolio, including commitments to provide financing. The
allowance is increased by the provision for credit losses, which is charged
against current period operating results, and is decreased by the amount of net
loans charged off during the period. In evaluating the adequacy of the allowance
for credit losses, management incorporates such factors as collateral value,
portfolio composition and concentration, and trends in local, national, and
international economic conditions and the related impact on the financial
strength of the Company's borrowers. While the allowance is segmented by broad
portfolio categories to analyze its adequacy, the allowance is general in nature
and is available for the portfolio in its entirety. Although management believes
that the allowance for credit losses is adequate as of September 30, 1998,
future provisions will be subject to continuing evaluation of risk in the credit
and lease portfolio.
24
<PAGE>
The table below sets forth a reconciliation of changes in the allowance for
credit losses.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS) 1998 1997 1998 1997
- - ----------------------------------------------------------------- ---------- ---------- ---------- ----------
Balance, beginning of period..................................... $ 478,133 $ 502,114 $ 451,692 $ 523,946
Loans charged off:
Commercial, financial and industrial........................... 10,765 22,815 21,966 40,618
Construction................................................... -- -- 3 120
Mortgage....................................................... 3,997 1,044 4,992 4,481
Consumer....................................................... 5,173 12,859 24,206 38,864
Lease financing................................................ 640 824 1,971 2,502
---------- ---------- ---------- ----------
Total loans charged off...................................... 20,575 37,542 53,138 86,585
Recoveries of loans previously charged off:
Commercial, financial and industrial........................... 3,187 7,289 17,788 18,473
Construction................................................... -- 2,163 3 9,054
Mortgage....................................................... 1,048 749 2,705 2,833
Consumer....................................................... 3,717 3,692 11,389 10,575
Lease financing................................................ 95 81 273 284
---------- ---------- ---------- ----------
Total recoveries of loans previously charged off............. 8,047 13,974 32,158 41,219
---------- ---------- ---------- ----------
Net loans charged off...................................... 12,528 23,568 20,980 45,366
Provision for credit losses...................................... 10,000 -- 45,000 --
Transfer of reserve for trading account assets................... (1,911) -- (1,911) --
Foreign translation adjustment and other net additions
(deductions)................................................... 23 (92) (84) (126)
---------- ---------- ---------- ----------
Balance, end of period........................................... $ 473,717 $ 478,454 $ 473,717 $ 478,454
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Allowance for credit losses to total loans....................... 2.02% 2.15% 2.02% 2.15%
Provision for credit losses to net loans charged off............. 79.82 nm 214.49 nm
Net loans charged off to average loans outstanding for the
period(1)...................................................... 0.21 0.42 0.12 0.28
</TABLE>
- - ------------------------
(1) Annualized.
nm = not meaningful
At September 30, 1998, the Company's allowance for credit losses was $473.7
million, or 2.02 percent of total loans, and 697.2 percent of total nonaccrual
loans, compared with an allowance for credit losses at September 30, 1997 of
$478.5 million, or 2.15 percent of total loans, and 435.9 percent of total
nonaccrual loans.
During the third quarter of 1998, the Company recorded a $10.0 million
provision for credit losses, compared with no provision for credit losses in the
third quarter of 1997. This resulted from management's regular quarterly
assessment of overall credit quality, loan growth and economic conditions in
relation to the level of the allowance for credit losses. Future quarterly
provisions will be subject to the same evaluation process.
During the third quarter of 1998, net loans charged off were $12.5 million,
compared with $23.6 million in the third quarter of 1997. Loans charged off in
the third quarter of 1998 decreased by $17.0 million, primarily due to a $12.1
million decrease in commercial, financial and industrial loans charged off as
portfolio quality improved, and a $7.7 million decrease in consumer loans
charged off primarily due to the sale of the credit card portfolio in April of
1998. Recoveries of loans previously charged off decreased by $5.9 million, and
the percentage of net loans charged off to average loans decreased from 0.42
percent in the third quarter of 1997 to 0.21 percent in the third quarter of
1998.
25
<PAGE>
For the nine months ended September 30, 1998, the Company recorded a $45.0
million provision for credit losses, compared with no provision for the nine
months ended September 30, 1997. Management considers a range of estimated
credit losses inherent in the portfolio when evaluating the adequacy of the
allowance for credit losses. Central to this process is the required reserve, an
amount calculated by applying historical loss factors to credit exposures. These
factors are based on loss experience, adjusted for significant factors that
affect the collectibility of the portfolio as of the evaluation date. Additional
amounts, which are unallocated, provide a margin of error for the required
reserve calculation. At September 30, 1998, the unallocated reserve is also
available to cover specific credit risks which are more difficult to quantify.
These risks, such as the weak economic indicators in the global markets, the
decline in oil prices, the potentially adverse impact on agriculture from "El
Nino," and the volatility in the debt and equity markets, add to the uncertainty
in estimating credit losses. When determining the need for a credit provision,
these factors, as well as the likelihood of loan charge-offs, are used.
Net loans charged-off were $21.0 million and $45.4 million for the nine
months ended September 30, 1998 and 1997, respectively. Loans charged-off in
1998 decreased by $33.4 million primarily due to a $18.7 million decrease in
commercial, financial and industrial loans charged-off as portfolio quality
improved, and a $14.7 million decrease in consumer loans charged-off primarily
due to the sale of the credit card portfolio in April of 1998. Recoveries of
loans previously charged-off decreased by $9.1 million, and the percentage of
net loans charged-off to average loans decreased from 0.28 to 0.12 percent for
the nine months ended September 30, 1997 and 1998, respectively.
In the third quarter 1998, the Company reclassified a $1.9 million
previously established reserve for credit losses related to interest rate
derivatives and foreign exchange contracts from the unallocated portion of the
allowance for credit losses. The reserve for derivative and foreign exchange
contracts is presented as an offset to trading account assets. Future changes in
the reserve as a result of changes in the positive replacement cost of those
contracts will be provided as an offset to trading gains and losses.
The Company evaluates its loan portfolio for impairment as defined by SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan", as amended. At
September 30, 1998, total impaired loans were $67.9 million and the associated
impairment allowance was $7.5 million, compared with total impaired loans of
$108.4 million and an associated impairment allowance of $9.4 million at
December 31, 1997.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1998 1997 1997
- - --------------------------------------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
Commercial, financial and industrial................................. $ 55,407 $ 46,392 $ 54,087
Construction......................................................... 4,377 4,071 4,579
Mortgage:
Residential........................................................ -- 954 1,133
Commercial......................................................... 8,163 57,921 49,959
------------- ------------ -------------
Total mortgage................................................... 8,163 58,875 51,092
------------- ------------ -------------
Total nonaccrual loans........................................... 67,947 109,338 109,758
Foreclosed assets.................................................... 13,452 20,471 23,216
------------- ------------ -------------
Total nonperforming assets....................................... $ 81,399 $ 129,809 $ 132,974
------------- ------------ -------------
------------- ------------ -------------
Allowance for credit losses.......................................... $ 473,717 $ 451,692 $ 478,454
------------- ------------ -------------
------------- ------------ -------------
Nonaccrual loans to total loans...................................... 0.29% 0.48% 0.49%
Allowance for credit losses to nonaccrual loans...................... 697.19 413.12 435.92
Nonperforming assets to total loans and foreclosed assets............ 0.35 0.57 0.60
Nonperforming assets to total assets................................. 0.26 0.42 0.43
</TABLE>
26
<PAGE>
At September 30, 1998, nonperforming assets totaled $81.4 million, a
decrease of $48.4 million, or 37 percent, from December 31, 1997. The decrease
was primarily the result of reductions of $49.8 million in nonaccrual commercial
mortgage loans due to a combination of note sales, repayments and restorations
to accrual and $7.0 million in foreclosed assets due to sales of individual
assets.
Nonaccrual loans as a percentage of total loans were 0.29 percent at
September 30, 1998, compared with 0.48 percent at December 31, 1997.
Nonperforming assets as a percentage of total loans and foreclosed assets were
0.35 percent at September 30, 1998, compared with 0.57 percent at December 31,
1997.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1998 1997 1997
- - --------------------------------------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
Commercial, financial and industrial................................. $ 1,403 $ 450 $ 3,682
Mortgage:
Residential........................................................ 9,223 10,170 9,606
Commercial......................................................... 370 1,660 2,284
------------- ------------ -------------
Total mortgage................................................... 9,593 11,830 11,890
Consumer and other................................................... 4,299 7,712 10,010
------------- ------------ -------------
Total loans 90 days or more past due and still accruing............ $ 15,295 $ 19,992 $ 25,582
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
LIQUIDITY
Liquidity refers to the Company's ability to adjust its future cash flows to
meet the needs of depositors and borrowers and to fund operations on a timely
and cost-effective basis. The Company's liquidity management draws upon the
strengths of its extensive retail and commercial market business franchise,
coupled with its ability to obtain funds for various terms in a variety of
domestic and international money markets.
Core deposits provide the Company with a sizable source of relatively stable
and low-cost funds. In the third quarter of 1998, lower cost sources of funds,
which include noninterest bearing deposits and interest bearing core deposits,
funded 63 percent of average earning assets. Most of the remaining funding was
provided by short-term borrowing in the form of negotiable certificates of
deposit, foreign deposits, federal funds purchased and securities sold under
repurchase agreements, and other borrowings. In the third quarter 1998, the
Company increased its Commercial Paper program by $100 million.
REGULATORY CAPITAL
The following table summarizes risk-based capital, risk-weighted assets, and
risk-based capital ratios for the Company.
<TABLE>
<CAPTION>
MINIMUM
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, REGULATORY
(DOLLARS IN THOUSANDS) 1998 1997 1997 REQUIREMENT
- - ------------------------------------------------------ ------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
CAPITAL COMPONENTS
Tier 1 capital........................................ $ 2,876,605 $ 2,587,071 $ 2,520,589
Tier 2 capital........................................ 598,027 601,102 593,865
------------- ------------- -------------
Total risk-based capital.............................. $ 3,474,632 $ 3,188,173 $ 3,114,454
------------- ------------- -------------
Risk-weighted assets.................................. $ 30,176,967 $ 28,862,340 $ 28,249,379
------------- ------------- -------------
------------- ------------- -------------
Quarterly average assets.............................. $ 30,696,414 $ 30,334,507 $ 30,037,626
------------- ------------- -------------
------------- ------------- -------------
CAPITAL RATIOS
Total risk-based capital 11.51% 11.05% 11.02% 8.0%
Tier 1 risk-based capital............................. 9.53 8.96 8.92 4.0
Leverage ratio(1)..................................... 9.37 8.53 8.39 4.0
</TABLE>
- - ------------------------
(1) Tier 1 capital divided by quarterly average assets (excluding intangible
assets).
27
<PAGE>
The Company and the Bank are subject to various regulations issued by
Federal banking agencies, including minimum capital requirements. The Company
and the Bank are required to maintain minimum ratios of total and Tier 1 capital
to risk-weighted assets and of Tier 1 capital to average assets (the leverage
ratio).
Compared with December 31, 1997, the Company's Tier 1 risk-based capital
ratio at September 30, 1998 increased 57 basis points to 9.53 percent, the total
risk-based capital ratio increased 46 basis points to 11.51 percent, and the
leverage ratio increased 84 basis points to 9.37 percent. The increase in the
capital ratios was primarily attributable to retained earnings growing faster
than both risk-weighted assets and average assets, partly offset by the
reduction of $50.0 million in subordinated capital notes.
As of September 30, 1998, management believes the capital ratios of the Bank
met all regulatory minimums of a "well-capitalized" institution.
YEAR 2000
The Year 2000 problem exists because many computer programs use only the
last two digits to refer to a year. This convention could affect date-sensitive
calculations that treat "00" as the year 1900, rather than 2000. Another issue
is that the year 2000 is a leap year and some programs may not properly provide
for February 29, 2000.
The following discussion of the implications of the Year 2000 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 internal Year 2000 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. (See details with respect to costs
for Year 2000 on page 20). 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 effect on the Company.
In addition, the Company places a high degree of reliance on computer
systems of third parties, such as customers, vendors, and other financial and
governmental institutions. Although the Company is assessing the readiness of
these third parties and preparing contingency plans, there can be no guarantee
that the failure of these third parties to modify their systems in advance of
December 31, 1999, would not have a material adverse effect on the Company.
READINESS PREPARATION
Many of the Company's critical operations are not presently ready to operate
normally in the year 2000 and beyond, although preparations are underway to
correct this. In 1997, the Company alerted its business customers of the Year
2000 problem and is now assessing the readiness preparations of its major
customers and suppliers. Resolution of the Year 2000 problem is among the
Company's highest priorities, and a comprehensive program has been established
to address its many aspects.
The Company is preparing for the century change with an enterprise-wide Year
2000 Program. It has identified all of the major application and processing
systems, and sought external and internal resources to replace and test the
systems. Purchased software, internally developed systems and systems supported
by external parties are being tested as part of the program. Customers and
vendors which have significant relationships with the Company are being
evaluated to determine whether they are adequately preparing for the Year 2000.
In addition, contingency plans are being developed to reduce the impact of some
potential events that may occur. However, there can be no guarantee that the
systems of vendors or customers with which the Company does business will be
completed on a timely basis, or that contingency plans will shield operations
from failures that may occur.
The Company's Year 2000 program is comprised of numerous individual projects
which address the following broad areas: data processing systems,
telecommunications and data networks, building facilities and security systems,
vendor risk, customer risk, contingency planning, and communications. There are
28
<PAGE>
over 2,000 individual projects identified. The projects vary in size, importance
and materiality: from large undertakings, such as remediating complicated data
systems and organizing the process of assessing the readiness of customers, to
smaller, but still important, projects such as installing compliant computer
utility systems or assuring that processor-controlled systems in individual
buildings will perform properly. The program continues to evolve as new projects
are identified to keep up with increased understanding of Year 2000 implications
and evolving external requirements. Virtually all of the projects currently
identified have begun, while more than a third have been completed.
Projects are assigned a priority indicating the importance of the function
to the Company's continuing operation. This prioritization facilitates reporting
on projects based on their relative importance. The Company has prioritized
projects as Critical and Non-Critical. Critical projects are further prioritized
as Mission Critical and Other Critical. Mission Critical projects are defined
as:
- systems vital to the continuance of a broad core business activity;
- functions, the interruption of which for longer than 3 days would threaten
the viability of the Company;
- functions that provide the environment and infrastructure necessary to
continue the broad core business activities.
Other Critical projects are defined as:
- other customer and accounting systems;
- functions supporting delivery of information and service to customers;
- administrative systems, the interruption of which for longer than 2 weeks
would cause severe business impact;
- functions that provide the environment and infrastructure necessary for
delivery of the above systems and functions.
The Company plans to complete all projects currently identified prior to the
year 2000, with special emphasis placed on those prioritized as Mission Critical
or Other Critical. Failure to complete an Other Critical project would not
necessarily have a material adverse effect on the Company.
The most important projects are the Mission Critical application systems
upon which the Company relies for its principal business functions. Most of
these systems have been renovated. The Company expects to have all of these
systems renovated by December 31, 1998, and tested by March 30, 1999. The
following table presents actual and estimated progress with Mission Critical
projects.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ACTUAL
<S> <C> <C>
June 1998 10%
September 1998 38%
ESTIMATED
December 1998 95%
March 1999 100%
</TABLE>
In addition to testing individual systems, the Company also plans to conduct
integrated contingency testing of its Mission Critical and many other systems
during 1999 in a separate computer environment where machine dates will be set
forward in order to identify and correct problems which might not otherwise
become evident until the actual end of the century.
The Company does not significantly rely on embedded technology in its
critical processes. Embedded technology does control some building security and
operations such as power management, ventilation, and elevator control. All
building facilities are presently being evaluated, and we expect for all systems
using embedded technology to be confirmed as Year 2000 ready by June 1999.
The Company is reliant on vendors and customers, and Year 2000 issues with
both groups are being addressed. Over 300 vendors, upon whom there is
significant reliance, have been identified and inquiries
29
<PAGE>
have been made regarding their Year 2000 readiness plans and status. Written
risk assessments are being completed on each and appropriate measures to
minimize risk will be undertaken with those vendors that appear to pose a
significant risk. Risk assessments of the critical vendors are scheduled to be
completed by December 1998, and replacements effected where necessary by June
1999. The Company, however, has no viable alternatives for some suppliers, such
as power distribution and local telephone companies. These companies are still
being evaluated and the results will be used as information for contingency
planning. As with all financial institutions, the Company places a high degree
of reliance on the systems of other institutions, including governmental
agencies, to settle transactions. Principal settlement methods associated with
major payment systems will be tested as part of their associated system
projects.
The Company is also reliant on its customers to make necessary preparations
for the year 2000 so that their business operations will not be interrupted,
thus threatening their ability to honor their financial commitments. Over 2,500
borrowers, capital market counterparties, funding sources, and large depositors
(collectively referred to as "customers") have been identified as having
financial volumes sufficiently large to warrant inquiry and assessment of their
Year 2000 preparation. The financial volumes included, among other components,
loans and unused commitments, collected deposit balances, Automated Clearing
House, foreign exchange, and derivatives. At September 30, 1998, inquiries and
initial written assessments had been completed for 90% of the identified
financial volumes. Assessments for the remaining 10% continue.
In the initial assessments, customers were classified as representing low,
medium and high risks. Approximately 80% were classified as low risk, 18% as
medium risk and 2% as high risk. High risk customers include those which failed
to respond to the inquiry or which appear to pose a high degree of risk of not
being ready for Year 2000.
The population of customers with loans and unused commitments outstanding
("borrowers") pose the highest level of concern for any lender. As of September
30, 1998, the assessment of these borrowers resulted in the following
assignments of risk: 79% low risk, 19% medium risk and 2% high risk.
Ongoing assessments will be made for all levels of risk. Customers with low
risk will be reassessed semi-annually, while customers with medium and high risk
will be reassessed quarterly. Risk mitigation plans will be developed for
customers with high risk. The risk mitigation plan will evaluate whether Year
2000 issues will materially affect the customer's cash flow, asset account
values related to its balance sheet, and/or collateral pledged to the Company.
The risk mitigation plan utilizes the normal credit process that the Company
employs to manage credit risk and requires the concurrence of a credit
administrator.
RISKS
The principal risks associated with the Year 2000 problem can be grouped
into three categories. The first is the risk that the Company does not
successfully ready its operations for the next century. The second is the risk
of disruption of Company operations due to operational failures of third
parties. The third is the risk of business interruption among fund providers and
obligors such that expected funding and repayment does not take place.
The only risk largely under the Company's control is preparing its internal
operations for the Year 2000. The Company, like other financial institutions, is
heavily dependent on its computer systems. The complexity of these systems and
their interdependence make it impractical to convert to alternative systems
without interruptions in the event necessary modifications are not completed on
schedule. Management believes it will be able to make the necessary
modifications on schedule.
Failure of third parties may jeopardize Company operations, but how
seriously depends on the nature and duration of such failures. The most serious
impact on Company operations from vendors would result if basic services such as
telecommunications, electric power suppliers, and services provided by other
financial institutions and governmental agencies were disrupted. Significant
public disclosure of the state of readiness among basic infrastructure and other
suppliers has not generally been available. Although the Company's inquiries are
underway, the Company does not yet have the information to estimate the
likelihood of significant disruptions among its suppliers.
30
<PAGE>
Operational failures among the Company's sources of major funding, larger
borrowers and capital market counterparties could affect their ability to
continue to provide funding or meet obligations when due. Similar to the
situation outlined above with suppliers, public information has been scant.
Although the Company's inquiries are underway, the Company does not yet have the
information to estimate the likelihood of significant disruptions among its
funding sources and obligors.
PROGRAM ASSESSMENT
The Internal Audit Division and the National Bank Examiners regularly assess
the Company's year 2000 preparations. In addition, a leading information
technology consulting and services firm was engaged to conduct a third party
review of the Company's Year 2000 Program. Management is considering the
recommendations provided by the firm to further enhance the Year 2000 Program.
CONTINGENCY PLANS
The Company is developing Year 2000 remediation contingency plans and
business resumption contingency plans specific to the Year 2000. Remediation
contingency plans address the actions to be taken if the current approach to
remediating a system is falling behind schedule or otherwise appears in jeopardy
of failing to deliver a Year 2000-ready system when needed. Business resumption
contingency plans address the actions that would be taken if critical business
functions cannot be carried out in the normal manner upon entering the next
century due to system or supplier failure.
The Company's contingency planning strategy is a four-phase process:
Organizational Planning Guidelines, Business Impact Analysis, Plan Development
for Individual Operating Units and Validation of Plans. The first two phases
have been completed. The Company identified the following system-wide areas of
concern, assigned to each a level of potential risk and a probability of
occurrence and determined whether a contingency plan was warranted.
The areas of concern are as follows:
- Global telecommunications and network
- Enterprise information systems
- Operational disruptions
- Vendors and service providers
The level of potential risk was rated as high, moderate or low and the
probability of occurrence was rated as high, moderate or low. Those areas with a
low or moderate level of potential risk and a low probability of occurrence do
not require a contingency plan. For any other combination, the development of a
contingency plan is required. The development of the plans and their validation
are expected to be completed by June 1999.
OTHER RELATED DISCLOSURES
Certain of the Company's subsidiaries are registered investment advisers or
broker-dealers that make publicly available separate Year 2000 reports.
Additional Company Year 2000 information may be found in those reports.
EURO CONVERSION
On January 1, 1999, 11 European countries who have joined the Economic and
Monetary Union (EMU) will be transitioning into a single currency (the Euro) and
a single central bank--the European Central Bank (ECB). On that date, the
exchange rates of the national currencies of the 11 countries will be fixed and
all financial transactions will be settled in Euros.
The Company has completed its analysis of the bank-wide impact and has
created a project plan in anticipation of the Euro conversion and expects to be
fully operational to settle transactions in the Euro by January 1, 1999.
ITEM 3. MARKET RISK
The Company's exposure to market risk has not substantially changed since
December 31, 1997 and is more fully discussed in Item 7A. of the December 31,
1997 Form 10-K.
31
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
SHAREHOLDER PROPOSALS: Shareholders who expect to present an oral proposal
at the 1999 Annual Meeting of Shareholders should notify the Secretary of the
Company at 400 California Street, Mail Code 1-001-18, San Francisco, CA 94104 by
March 15, 1999. Without such notice, proxy holders appointed by the Board of
Directors of the Company will be entitled to exercise their discretionary voting
authority when the proposal is raised at the annual meeting, without any
discussion of the proposal in the proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Index:
<TABLE>
<CAPTION>
NO. DESCRIPTION
- - --------- ------------------------------------------------------------------------
<C> <S>
10.4 Richard C. Hartnack Employment Agreement (Dated August 11, 1998)
10.5 Robert M. Walker Employment Agreement (Dated July 7, 1998)
10.6 Agreement with The Bank of Tokyo-Mitsubishi, LTD. (July 22, 1998)
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K: The Company filed a report on Form 8-K on August
10, 1998 under Item 5, containing a press release that announced the
exchange of shares of the Company's common stock for BTM's direct
ownership interest in the Bank.
32
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
UNIONBANCAL CORPORATION
(Registrant)
By /s/ DAVID I. MATSON
-----------------------------------------
David I. Matson
CHIEF FINANCIAL OFFICER AND
EXECUTIVE VICE PRESIDENT
By /s/ DAVID A. ANDERSON
-----------------------------------------
David A. Anderson
SENIOR VICE PRESIDENT AND CONTROLLER
Dated: November 16, 1998
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, effective as of January 1, 1998, is entered into by and
between Union Bank of California, N.A., a National Banking Association (the
"Bank"), and Richard C. Hartnack ("Mr. Hartnack"), an individual.
WHEREAS, Mr. Hartnack is currently employed by the Bank as Vice Chairman
and Group Head, Retail Banking ("Vice Chairman");
WHEREAS, Mr. Hartnack has been designated a policy making officer of the
Bank and UnionBanCal Corporation ("UNBC") and a Director on the Board of
Directors of UNBC (the "Board"), the Bank and various subsidiaries and
affiliates of the Bank and UNBC; and
WHEREAS, the parties wish to terminate and supersede the existing terms and
conditions of Mr. Hartnack's employment with the Bank; and
WHEREAS, the Bank desires to continue to secure the services of
Mr. Hartnack and Mr. Hartnack desires to perform services for the Bank on the
terms and conditions set forth in this Agreement;
NOW THEREFORE, in consideration of the foregoing and of the material
promises and conditions contained in this Agreement, the parties agree as
follows:
1. REPRESENTATIONS AND WARRANTIES.
The Bank represents that it is fully authorized to enter into this
Agreement. Mr. Hartnack warrants that he is under no employment contract, bond,
confidentiality agreement, or any other obligation which would violate or be in
conflict with the terms and conditions of this Agreement or encumber his
performance of duties assigned to him by the Bank. Mr. Hartnack further
warrants that he has not signed or committed to any employment or consultant
duties or other obligations which would divert his attention from the duties
assigned to him by the Bank under this Agreement. The parties do not intend to
include within the meaning of this paragraph Mr. Hartnack's service at the
request of the Bank's Chief Executive Officer, or with the concurrence of the
Bank's Chief Executive Officer, for nonprofit, charitable, or trade associations
or on the boards of directors or other governing bodies of business enterprises
unrelated to the Bank and not in a business competitive with the business of the
Bank, for example, Mr. Hartnack's service on the U.S. Region Board of MasterCard
International, Inc.
2. EMPLOYMENT AND DUTIES.
The Bank will continue to employ Mr. Hartnack as a Vice Chairman and,
during such employment, will continue to nominate him as a Director of UNBC.
Mr. Hartnack hereby accepts such employment with the Bank. Mr. Hartnack shall
devote his time, ability, attention, energy, knowledge and skill solely and
exclusively to performing all reasonable duties as Vice Chairman of the Bank as
assigned to him by the Bank's Chief Executive Officer or the Board.
-1-
<PAGE>
3. BASE SALARY.
In consideration for Mr. Hartnack's services to the Bank during the time
period in which this Agreement is effective, Mr. Hartnack is receiving a base
salary of Four Hundred Fifteen Thousand Dollars ($415,000.00) per annum to be
paid in equal installments as per the Bank's salary administration program every
two (2) weeks, and subject to annual review and increases at the discretion of
the Executive Compensation and Benefits Committee of the Board, the Board or any
other committee constituted by the Board for this purpose (as applicable, the
"Committee"). Annual base salary shall be competitive with the annual base
salaries for comparable executive positions at banks of similar size and focus,
as determined at the discretion of the Committee.
4. ADDITIONAL BENEFITS.
During his employment under this Agreement:
a. BONUS. Mr. Hartnack shall be entitled to participate in the Bank's
Senior Management Bonus Plan, or its successor, subject to the eligibility
requirements and other terms and conditions of such Plan and the determinations
of the administrator of such Plan. Mr. Hartnack's target bonus under the Senior
Management Bonus Plan shall be fifty percent (50%) of base salary, subject to
annual review and increases or decreases at the discretion of the Committee,
based on the median annual bonus targets for comparable executive positions at
banks of similar size and focus (as determined at the discretion of the
Committee).
b. LONG TERM INCENTIVES. Mr. Hartnack shall be eligible for long term
incentive awards available to policy making officers. Awards may consist of one
or more types of long-term incentives, including the grant of stock options and
restricted stock under the UNBC Management Stock Option Plan, or its successor,
and the award of performance shares under the UNBC Performance Share Plan, or
its successor. Mr. Hartnack's target award shall be valued at one hundred
percent (100%) of base salary. Notwithstanding the preceding sentence,
determinations of the amount of any award to Mr. Hartnack shall be made at the
discretion of the Committee, subject to annual review and increases or
decreases, based on the median long-term incentive targets for comparable
executive positions at banks of similar size and focus (as determined at the
discretion of the Committee).
c. RETIREMENT AND 401(k) PLAN. Mr. Hartnack shall be entitled to
participate in the Bank retirement and 401(k) plans that are now or hereafter
will be in effect, subject to the eligibility requirements and other terms and
conditions of such plans and the determinations of the administrator of such
plans.
d. SUPPLEMENTAL RETIREMENT BENEFITS. Subject to paragraph 6, Mr.
Hartnack shall be entitled to receive an overall pension benefit from the
Bank, calculated under the terms of the Union Bank of California Retirement
Plan (the "Retirement Plan"), without regard to the limits of Code
sections 401(a)(17) and 415, and crediting Mr. Hartnack with an additional
nine (9) years of "credited service." During the period represented by the
nine (9) year grant of past service credits, Mr. Hartnack participated in the
qualified and nonqualified pension plans of First National Bank of Chicago
(the "Chicago Plans"), and during his employment under this Agreement Mr.
Hartnack shall be a participant under the Bank's
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<PAGE>
Supplemental Executive Retirement Plan (the "SERP"). As such, the portion of
Mr. Hartnack's overall pension benefit payable under this Agreement shall be
a net benefit (the "Net Benefit"). Such Net Benefit shall be an amount
determined as described in the first sentence of this subparagraph less
(i) the amount payable from the Retirement Plan and from the SERP, and
(ii) the "Revised Offset" annuity amount in Exhibit A, which represents the
actuarial equivalent of the $92,678.04 total lump sum distribution that
Mr. Hartnack received from the Chicago Plans (representing his entire
interest under such plans) on June 28, 1991. The Net Benefit payable under
this Agreement shall be determined as a Normal Retirement Benefit, an Early
Retirement Benefit or a Deferred Retirement Benefit, as applicable, within
the meaning of the SERP, employing the same offset methodology and all other
terms and conditions as described under the SERP. As such, the Net Benefit
shall be paid in the same form and at the same time as the benefit payable
under the SERP. The Net Benefit obligation of this subparagraph 4(d) shall
be an unfunded and unsecured obligation of the Bank, as to which Mr. Hartnack
shall have no rights other than those of a general creditor of the Bank.
e. INSURANCE AND WELFARE PLANS. Mr. Hartnack and his eligible dependents
shall be eligible to receive such other benefits or rights as may be provided
under any employee benefit plan provided by the Bank that is now or hereafter
will be in effect (including participation in life, medical, disability, dental
and vision insurance plans), subject to eligibility requirements and other terms
and conditions of such plans and the determinations of administrators of such
plans.
f. OTHER BENEFITS. The Bank shall provide other benefits such as a car
allowance, luncheon and country club dues and assessments, and other perquisites
as determined by the Committee for similarly situated executives.
g. BUSINESS EXPENSES. Mr. Hartnack shall be entitled to reimbursement by
the Bank for such customary, ordinary and necessary business expenses as are
incurred by him in the performance of his duties and activities associated with
promoting or maintaining the business of the Bank. All expenses as described in
this subparagraph 4(g) will be reimbursed only upon presentation by Mr. Hartnack
of such documentation in accordance with Bank policy and as may be reasonably
necessary to substantiate that all such expenses were incurred in the
performance of his duties.
h. VACATION AND SICK LEAVE. Mr. Hartnack shall be entitled to earn
(i) four (4) weeks' paid vacation each year of employment under this Agreement
and (ii) sick leave on the same basis as other Bank employees and subject to all
accrual or accumulated maximum entitlement limitations which currently or may
hereafter exist under the Bank's vacation and sick leave policy.
5. OUTSIDE ACTIVITIES AND NON-COMPETITION.
During the term of this Agreement, and subject to paragraph 1, Mr. Hartnack
shall devote his time, ability, attention, energy, knowledge and skill to the
business of the Bank. During the term of this Agreement, Mr. Hartnack shall
not, directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, shareholder, corporate officer, director, or in any other
capacity, engage or assist any third party in engaging in any business
competitive with the business of the Bank, UNBC or their subsidiaries without
the written
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<PAGE>
approval of the Bank's Chief Executive Officer. Investments in publicly
traded corporations through brokerage accounts or in mutual funds, or
depositor/borrower relationships with other financial institutions are not
intended to be covered by this paragraph. Following his employment with the
Bank, Mr. Hartnack shall not engage in unfair competition with the Bank or
aid others in any unfair competition with the Bank, unfair competition having
the meaning ascribed in the "Competition and Business Promotion" section of
the Bank's April 1996 revision of the Business Standards of Conduct (except
that the object of the prohibition shall be read as the Bank rather than a
competitor). Following his employment with the Bank, Mr. Hartnack shall not
in any way breach the confidence that the Bank has placed in him or
misappropriate any proprietary information of the Bank, as such prohibitions
are described in the Bank's April 1996 revision of the Business Standards of
Conduct.
6. TERMINATION OF EMPLOYMENT.
This Agreement shall terminate as follows:
a. BY DEATH. This Agreement shall be terminated upon the death of
Mr. Hartnack. The Bank's total liability to Mr. Hartnack in the event of
termination of Mr. Hartnack's employment under this subparagraph shall be
limited to the payment (on his behalf) of Mr. Hartnack's salary and benefits as
set forth in paragraphs 3 and 4 of this Agreement through the effective date of
termination.
b. BY DISABILITY. If, in the sole opinion of the Bank's Chief Executive
Officer, governed by the exercise of good faith and supported by competent
medical opinion, Mr. Hartnack is prevented from properly performing his duties
hereunder by reason of any physical or mental incapacity, for a period of more
than ninety (90) days in the aggregate in any twelve (12) month period, then, to
the extent permitted by law, his employment with the Bank shall terminate. The
Bank's total liability to Mr. Hartnack in the event of termination of
Mr. Hartnack's employment under this subparagraph shall be limited to (i) the
payment of Mr. Hartnack's salary and benefits as set forth in paragraphs 3 and 4
of this Agreement through the effective date of termination. In calculating the
Net Benefit payable to Mr. Hartnack pursuant to subparagraph 4(d), Mr. Hartnack
will continue to accrue credited service in the manner described in Article VI
of the Retirement Plan (or a successor provision). Nothing in this paragraph 6
is intended to preclude Mr. Hartnack from exercising any rights he may have
under the Bank's Short Term Disability Plan or Long Term Disability Plan, in
accordance with the eligibility requirements and other terms and conditions of
those respective plans, or their respective successors.
c. FOR CAUSE. The Bank reserves the right to terminate this Agreement
immediately, at any time, if, in the opinion of the Bank's Chief Executive
Officer: Mr. Hartnack materially and/or habitually breaches or neglects the
duties which he is required to perform under the terms of this Agreement;
commits any material act of dishonesty, fraud, misrepresentation, or other act
which would violate the Bank's Business Standards of Conduct; is guilty of gross
carelessness or misconduct; fails to obey the lawful direction of the Bank's
Chief Executive Officer or the Board; or acts in any way that has a direct,
substantial and adverse effect on the Bank's reputation. The Bank's total
liability to Mr. Hartnack in the event of termination of Mr. Hartnack's
employment under this subparagraph shall be limited to the payment of
Mr. Hartnack's salary and benefits as set forth in paragraphs 3 and 4 of this
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<PAGE>
Agreement through the effective date of termination.
d. WITHOUT CAUSE. The Bank reserves the right to terminate this
Agreement without cause, for any reason and at any time, by written notice to
Mr. Hartnack from the Bank's Chief Executive Officer. Mr. Hartnack hereby
agrees that the Bank may dismiss him under this subparagraph 6(d) without regard
to (i) any general or specific policies (whether written or oral) of the Bank
relating to the employment or termination of its employees, or (ii) any
statements made to Mr. Hartnack, whether made orally or contained in any
document, pertaining to Mr. Hartnack's relationship with the Bank. In the event
of termination under this subparagraph 6(d), and subject to the conditions set
forth herein, Mr. Hartnack shall be entitled to receive the payments described
in (i) and (ii) below.
(i) If Mr. Hartnack has not yet attained age 65 at the time of his
termination of employment, and provided Mr. Hartnack has, at the time of his
termination of employment, previously executed the "General and Special Release"
(attached hereto as Exhibit B), then in consideration for such Release, the Bank
will provide Mr. Hartnack with:
(A) The greater of (I) two years of separation pay payable as
salary continuation on a payroll by payroll basis, in an amount equal
to Mr. Hartnack's base salary at the time of his termination, plus a
prorated bonus amount each payroll period equal to the average of
Mr. Hartnack's annual bonus (excluding any amount that represents an
award of long term incentive by the Bank) for the three most recent
bonus determination years divided by the number of payroll periods in
the year, or (II) the salary continuation amount payable under the
Bank's then existing separation pay plan; and
(B) Benefits (other than salary continuation) payable to
participants at or above the level of Executive Vice Presidents for
the salary continuation period under the Bank's Separation Pay Plan in
effect on the date of this Agreement, or, if better, under the Bank's
separation pay plan in effect at the time of his termination of
employment. A true and correct copy of the Plan as in effect on the
date of this Agreement is attached hereto as Exhibit C; and
(C) Full and immediate vesting, upon Mr. Hartnack's termination
of employment, in the target award amount under his outstanding
grant(s) of performance shares under the UNBC Performance Share Plan,
and payment of such vested shares within 120 days following his
termination of employment (without giving effect to any deferral
election that would have applied had the shares become an earned
award), such payment to be made in cash equal to the number of vested
shares times the average month-end closing price of UNBC common stock
(as published in the Western Edition of the Wall Street Journal) for
the six months immediately preceding Mr. Hartnack's date of
termination of employment; and
(ii) The Bank will provide Mr. Hartnack with salary and benefits as
set forth in paragraphs 3 and 4 of this Agreement through the effective date of
termination, provided, in addition, that for purposes of determining the Net
Benefit under subparagraph 4(d), Mr. Hartnack shall be treated as eligible for
the "10-Year Early" retirement benefit if not so
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<PAGE>
eligible at the time of his termination of employment.
A termination of this Agreement on account of Mr. Hartnack's disability shall be
governed by subparagraph 6(b) and not this subparagraph 6(d). In addition, in
the event Mr. Hartnack dies while receiving salary continuation benefits under
subparagraph 6(d)(i)(A) above, then Mr. Hartnack shall have the remaining salary
continuation, if any, paid to his Designated Beneficiary under Exhibit D
attached hereto.
e. BY MR. HARTNACK WITHOUT CAUSE. Mr. Hartnack reserves the right to
terminate this Agreement for any reason (other than the reason set forth in
subparagraph 6(f)) upon reasonable written notice to the Bank. The Bank's total
liability to Mr. Hartnack in the event of termination of Mr. Hartnack's
employment under this subparagraph shall be limited to the payment of
Mr. Hartnack's salary and benefits as set forth in paragraphs 3 and 4 of this
Agreement through the effective date of termination.
f. BY MR. HARTNACK FOR CAUSE. Subject to the further conditions next
described, Mr. Hartnack may terminate this Agreement by giving sixty (60) days'
written notice to the Bank if he has incurred a material reduction of his
duties, title or responsibility (including Mr. Hartnack no longer serving in the
capacity or under the title of Vice Chairman of the Bank, the Bank's failure to
continue to nominate Mr. Hartnack as a Director of UNBC, or Mr. Hartnack's
position ceasing to be one directly reporting to the Bank's Chief Executive
Officer), a reduction in his annual base salary or a reduction in his
compensation package below the median package for comparable executive positions
at banks of similar size and focus (this peer group to be determined at the
discretion of the Committee). In order to elect to terminate this Agreement
pursuant to this subparagraph 6(f), Mr. Hartnack must submit the written notice
to the Bank within sixty (60) days of the reduction. Mr. Hartnack shall not be
entitled to elect to terminate this Agreement pursuant to this subparagraph 6(f)
if prior to Mr. Hartnack's termination date the Bank corrects the deficiency
upon which Mr. Hartnack's resignation is based. In the event that Mr. Hartnack
is entitled to and elects to terminate this Agreement pursuant to this
subparagraph 6(f), (i) he shall be entitled to receive salary and benefits as
set forth in paragraphs 3 and 4 of this Agreement through the effective date of
termination, including, if applicable, the early retirement enhanced actuarial
factors described in subparagraph 6(d)(ii), and (ii) if he is has not yet
attained age 65 at the time of his termination of employment and further has, at
the time of his termination of employment, previously executed the "General and
Special Release" (attached hereto as Exhibit B), then in consideration for such
Release, the Bank will provide Mr. Hartnack with the salary continuation and
benefits set forth in subparagraphs 6(d)(i)(A), (B) and (C). In the event Mr.
Hartnack dies while receiving salary continuation benefits described in
subparagraph 6(d)(i)(A) above, then Mr. Hartnack shall have the remaining salary
continuation, if any, paid to his Designated Beneficiary under Exhibit D
attached hereto.
g. RESIGNATION OF POSITIONS. Upon termination of employment for any
reason whatsoever, Mr. Hartnack shall be deemed to have resigned from all
offices and positions with the Bank, UNBC, and their subsidiaries. Mr. Hartnack
agrees that, in connection with his termination under this Agreement, he will
sign such written resignations as required by the Bank.
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<PAGE>
7. PROHIBITION OF ASSIGNMENT.
This Agreement is personal to Mr. Hartnack and he may not assign or
delegate any of his rights or obligations hereunder without first obtaining the
written consent of the Bank.
8. UNBC OR BANK SUCCESSOR.
For all purposes under this Agreement, the term "UNBC" shall include any
successor to UNBC's business and/or assets, by purchase, merger, consolidation,
reorganization, liquidation or otherwise. For all purposes under this
Agreement, the term "Bank" shall include any successor to the Bank's business
and/or assets, by purchase, merger, consolidation, reorganization, liquidation
or otherwise, and, in such an event, for all purposes under this Agreement, the
term "UNBC" also shall mean the U.S. parent company to such successor (and, if
there is no such U.S. parent company the successor itself). This Agreement
shall inure to the benefit of and be binding upon any such successor to UNBC and
the Bank to which Mr. Hartnack's employment is transferred.
9. ARBITRATION.
Any controversy between the Bank, UNBC or their parent companies,
subsidiaries and affiliates and Mr. Hartnack or between any employee of the
Bank, UNBC or their parent companies, subsidiaries and affiliates and
Mr. Hartnack, including, but not limited to, any controversy arising out of
Mr. Hartnack's employment or the termination thereof, involving the construction
or application of any of the terms, provisions or conditions of this Agreement,
or otherwise arising out of or relating to this Agreement and any controversy
arising out of or relating to Exhibit B to this Agreement (the "General and
Special Release") or involving a claim of race, sex, religious, age, disability,
veteran status, sexual orientation or national origin discrimination, shall be
settled by arbitration in accordance with the then current employment dispute
resolution rules of the American Arbitration Association determined by the
Committee to most closely resemble the California Employment Dispute Resolution
Rules in effect on January 1, 1998, and judgment on the award rendered by the
arbitrator(s) may be entered by any court having jurisdiction thereof.
Reasonable limited discovery will be permitted in the form of the right of each
party to take the deposition of one individual and any expert witness designated
by the other party. Each party shall also have the right to make requests for
discovery of relevant documents to the other party. Additional discovery may be
had only where the arbitrator so orders, upon a showing of substantial need.
The Bank and Mr. Hartnack each shall bear their own costs and legal fees
associated with the arbitration, except that the arbitrator shall have the right
in his discretion to award reasonable legal fees to the prevailing party in the
arbitration. Further, the Bank shall bear the cost of the arbitrator (including
the costs of establishing a facility for or otherwise administering the
arbitration). The location of the arbitration shall be in San Francisco,
California, and the arbitration shall be conducted so as to result in the
rendering of the arbitrator's decision within ninety (90) days after the
original demand for arbitration.
In the event of a breach by Mr. Hartnack of any of the covenants contained
in paragraph 5 of this Agreement, it is recognized that in addition to any other
remedy available to it, the Bank shall be entitled to institute or prosecute
proceedings in any court of competent jurisdiction, either in law or in equity,
to obtain damages for any breach of this Agreement or to
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<PAGE>
sue for specific performance, or an injunction against performance of any
acts, or to seek any other available remedy.
This paragraph 9 of this Agreement and the obligations provided for herein
shall survive the termination of this Agreement and remain in full force and
effect following the termination of Mr. Hartnack's employment with the Bank.
10. LIMITATION ON PAYMENTS.
a. BASIC RULE. In the event Mr. Hartnack becomes entitled to payments
under this Agreement in connection with his termination of employment at a time
when the Bank's Auditors determine that the payments result in "excess parachute
payments" under section 280G of the Internal Revenue Code (the "Code"), then
instead of the amounts payable under this Agreement, Mr. Hartnack shall receive
aggregate payments equal to the Reduced Amount, if such Reduced Amount would
result in net after-tax payments to Mr. Hartnack that are greater than the net
after-tax payments he would have received without regard to this paragraph. For
purposes of this paragraph 10, the "Reduced Amount" shall be the amount,
expressed as a present value, that maximizes the aggregate present value of the
payments without causing any payment to be nondeductible by the Bank under
section 280G of the Code. All calculations required by this paragraph 10 shall
be performed by the Bank's independent auditors retained most recently prior to
the transaction implicating section 280G of the Code (the "Auditors"), based on
information supplied by the Bank and Mr. Hartnack, and shall be binding on the
Bank and Mr. Hartnack. All fees and expenses of the Auditors shall be paid by
the Bank.
b. REDUCTIONS. If the amount of the aggregate payments to Mr. Hartnack
must be reduced under this paragraph 10, then Mr. Hartnack shall direct in which
order the payments are to be reduced, but no change in the timing of any payment
shall be made without the Bank's consent. As a result of uncertainty in the
application of sections 280G and 4999 of the Code at the time of an initial
determination by the Auditors hereunder, it is possible that a payment will have
been made by the Bank that should not have been made (an "Overpayment") or that
an additional payment that will not have been made by the Bank could have been
made (an "Underpayment"). In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Bank or
Mr. Hartnack that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to Mr. Hartnack that he shall repay to the Bank,
together with interest at the applicable federal rate specified in
section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by Mr. Hartnack to the Bank if and to the extent that such payment
would not reduce the amount that is nondeductible under section 280G of the
Code or is subject to an excise tax under section 4999 of the Code. In the
event that the Auditors determine that an Underpayment has occurred, such
Underpayment shall promptly be paid or transferred by the Bank to, or for the
benefit of, Mr. Hartnack, together with interest at the applicable federal
rate specified in section 7872(f)(2) of the Code.
11. MODIFICATION.
Any modification of this Agreement will be effective only if it is in
writing and signed by the parties to be bound thereby.
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<PAGE>
12. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement between the Bank and
Mr. Hartnack pertaining to the subject matter hereof, and supersedes all prior
or contemporaneous written or verbal agreements and understandings with
Mr. Hartnack in connection with the subject matter hereof.
13. GOVERNING LAW.
This Agreement and the rights and obligations hereunder shall be governed
by the laws of California, and the parties to this Agreement specifically
consent to the jurisdiction of the courts of California over any action arising
out of or related to this Agreement.
14. SEVERABILITY.
If any provision of this Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
shall, nevertheless, continue in full force and effect without being impaired or
invalidated in any way.
15. WAIVER.
The parties hereto shall not be deemed to have waived any of their
respective rights under this Agreement unless the waiver is in writing and
signed by such waiving party. No delay in exercising any right shall be a
waiver nor shall a waiver on one occasion operate as a waiver of such right on a
future occasion.
16. NOTICES.
All notices provided for herein shall be in writing and shall be deemed to
have been given when delivered personally, when deposited in the United States
mail, registered or certified, postage prepaid, or when delivered to a messenger
service, addressed as follows:
<TABLE>
<CAPTION>
<S> <C>
To the Bank: Paul Fearer
Executive Vice President
Union Bank of California, N.A.
350 California Street
San Francisco, CA 94104
To Mr. Hartnack: Richard Hartnack
Vice Chairman
Union Bank of California, N.A.
445 South Figueroa Street
Los Angeles, CA 90051
</TABLE>
or at such other addresses as either of said parties may from time to time in
writing appoint.
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<PAGE>
17. EXECUTIVE COMPENSATION AND BENEFITS COMMITTEE.
If at the time of a determination under this Agreement no Committee is in
existence, references to the Committee under this Agreement shall be deemed to
be references to the Board.
18. WITHHOLDING TAXES.
The Bank shall withhold and deduct all applicable federal and local taxes,
as required by applicable laws, from any payments made under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized officers or agents.
<TABLE>
<CAPTION>
<S> <C>
Dated: _____________ UNION BANK OF CALIFORNIA, N.A.
By _____________________________
Paul Fearer
Executive Vice President
Dated: _____________ _________________________________
Richard C. Hartnack
</TABLE>
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EXHIBIT A
ANNUITY VALUE OF LUMP SUM
<TABLE>
<CAPTION>
- - ------------------------------------------------------------
- - ------------------------------------------------------------
Age at Retirement Revised Offset
- - ------------------------------------------------------------
<S> <C>
55 $12,814.53
- - ------------------------------------------------------------
56 13,968.45
- - ------------------------------------------------------------
57 15,251.92
- - ------------------------------------------------------------
58 16,683.19
- - ------------------------------------------------------------
59 18,283.58
- - ------------------------------------------------------------
60 20,078.20
- - ------------------------------------------------------------
61 22,096.74
- - ------------------------------------------------------------
62 24,374.38
- - ------------------------------------------------------------
63 26,952.93
- - ------------------------------------------------------------
64 29,882.30
- - ------------------------------------------------------------
65 33,222.28
- - ------------------------------------------------------------
- - ------------------------------------------------------------
</TABLE>
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<PAGE>
EXHIBIT B
GENERAL AND SPECIAL RELEASE
1. In return for the benefits provided for in subparagraphs 6(d)(i) or
6(f)(ii) of the Employment Agreement entered into as of January 1, 1998 (the
"Agreement"), the adequacy of which as consideration is hereby acknowledged,
Richard C. Hartnack (hereinafter, "Mr. Hartnack") hereby fully releases and
forever discharges Union Bank of California, N.A., its parent, affiliated, and
subsidiary corporations, its and their successors and assigns, and the past and
present officers, directors, employees, shareholders, agents and employee
benefit plans of each (hereinafter, collectively the "Bank") from any and all
actions, causes of action, claims, demands, damages, and liabilities of
whatsoever kind or character, in law or in equity, now known or unknown,
suspected or unsuspected, past or present, that he has ever had or currently may
have against them or any of them including, but not limited to, claims of race,
sex, religious, age, disability, veteran status, sexual orientation or national
origin discrimination under Title VII of the Civil Rights Act of 1964, as
amended; the Americans with Disabilities Act of 1990, as amended; the Age
Discrimination in Employment Act, as amended; the California Fair Employment and
Housing Act and any other federal, state or local laws, arising out of or in any
way related to Mr. Hartnack's employment with the Bank or termination of that
employment. Mr. Hartnack further agrees not to institute in any state or
federal court any action or claim of any kind against the Bank. Execution of
this document by Mr. Hartnack operates as a complete bar and defense against any
and all current claims of any type that may be made by Mr. Hartnack against the
Bank, provided, however, that nothing in this release is intended to affect
Mr. Hartnack's right to seek a remedy in arbitration to resolve any controversy
arising out of the construction or application of the terms, provisions or
conditions of the Agreement.
2. Mr. Hartnack and the Bank understand and expressly agree that the
release granted in Paragraph 1 extends to all claims of every nature and kind,
known or unknown, suspected or unsuspected, past or present, which Mr. Hartnack
may have against the Bank arising from or related to his employment with the
Bank or the termination of that employment and that any and all rights granted
to Mr. Hartnack under Section 1542 of the California Civil Code or any analogous
state law, federal law, or regulation are hereby expressly waived. Section 1542
of the California Civil Code provides that:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
3. Mr. Hartnack has read this instrument, has had the opportunity of
consulting with an attorney regarding it, and signs it voluntarily and with the
intention of being bound by it. Mr. Hartnack understands that he is waiving
legal rights by signing this agreement.
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<PAGE>
4. Mr. Hartnack acknowledges that he has been given at least twenty-one
(21) days within which to consider this Release. Mr. Hartnack understands that
he may revoke this Release upon written notice to the Bank within seven (7) days
after execution of it and that this Release will not become effective or
enforceable until the eighth (8th) day after its execution.
Dated: ________________ ______________________________
Richard C. Hartnack
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<PAGE>
EXHIBIT D
UNION BANK OF CALIFORNIA, N.A.
BENEFICIARY DESIGNATION
UNDER EMPLOYMENT AGREEMENT
Name: Richard C. Hartnack
Social Security Number: ______-____-________
If I die while receiving salary continuation payments under subparagraph 6(d) or
6(f) of the Employment Agreement entered into as of January 1, 1998, then any
payments remaining to be made shall be paid to the person to whom I am married
at the time of my death. IN THE EVENT I HAVE NO SPOUSE AT THE TIME OF MY DEATH,
THEN PAYMENT IS TO BE MADE AS FOLLOWS [CHECK ONE BOX ONLY]:
/ /1 To all of my children who survive me in equal shares. [Please provide
names and addresses below.] The term "children" means natural or legally
adopted children but excludes stepchildren (if not adopted).
/ /2 To my estate.
/ /3 Other [please enter a description, and provide names and addresses, if
necessary]:
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
IN THE EVENT NO DESIGNATED BENEFICIARY SURVIVES ME, ANY REMAINING PAYMENTS
SHALL BE MADE TO MY ESTATE.
The names and addresses of my beneficiaries are as follows [please use a
separate sheet if necessary]:
1. Name:_____________________ Relationship:____________________________
Address:_______________________________________________________________
2. Name:_____________________ Relationship:____________________________
Address:_______________________________________________________________
3. Name:_____________________ Relationship:____________________________
Address:_______________________________________________________________
4. Name:_____________________ Relationship:____________________________
Address:_______________________________________________________________
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<PAGE>
This beneficiary designation is to take effect on the date when it is
received by the Director of Human Resources of Union Bank of California,
N.A., and it supersedes any prior designations that I may have made under the
above-referenced Employment Agreement.
___________________, 199__ __________________________________
[Date] [Signature]
Date of receipt:_____________, 199__.
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<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, effective as of January 1, 1998, is entered into by and
between Union Bank of California, N.A., a National Banking Association (the
"Bank"), and Robert M. Walker ("Mr. Walker"), an individual.
WHEREAS, Mr. Walker is currently employed by the Bank as Vice Chairman and
Group Head, Commercial Financial Services Group ("Vice Chairman");
WHEREAS, Mr. Walker has been designated a policy making officer of the Bank
and UnionBanCal Corporation ("UNBC") and a Director on the Board of Directors of
UNBC (the "Board"), the Bank and various subsidiaries and affiliates of the Bank
and UNBC; and
WHEREAS, the parties wish to terminate and supersede the existing terms and
conditions of Mr. Walker's employment with the Bank; and
WHEREAS, the Bank desires to continue to secure the services of Mr. Walker
and Mr. Walker desires to perform services for the Bank on the terms and
conditions set forth in this Agreement;
NOW THEREFORE, in consideration of the foregoing and of the material
promises and conditions contained in this Agreement, the parties agree as
follows:
1. REPRESENTATIONS AND WARRANTIES.
The Bank represents that it is fully authorized to enter into this
Agreement. Mr. Walker warrants that he is under no employment contract, bond,
confidentiality agreement, or any other obligation which would violate or be in
conflict with the terms and conditions of this Agreement or encumber his
performance of duties assigned to him by the Bank. Mr. Walker further warrants
that he has not signed or committed to any employment or consultant duties or
other obligations which would divert his attention from the duties assigned to
him by the Bank under this Agreement. The parties do not intend to include
within the meaning of this paragraph Mr. Walker's service at the request of the
Bank's Chief Executive Officer, or with the concurrence of the Bank's Chief
Executive Officer, for nonprofit, charitable, or trade associations or on the
boards of directors or other governing bodies of business enterprises unrelated
to the Bank and not in a business competitive with a business of the Bank.
2. EMPLOYMENT AND DUTIES.
The Bank will continue to employ Mr. Walker as a Vice Chairman and, during
such employment, will continue to nominate him as a Director of UNBC.
Mr. Walker hereby accepts such employment with the Bank. Mr. Walker shall
devote his time, ability, attention, energy, knowledge and skill solely and
exclusively to performing all reasonable duties as Vice Chairman of the Bank as
assigned to him by the Bank's Chief Executive Officer or the Board.
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<PAGE>
3. COMPENSATION.
a. BASE SALARY. In consideration for Mr. Walker's services to the Bank
during the time period in which this Agreement is effective, Mr. Walker is
receiving a base salary of Four Hundred Fifteen Thousand Dollars ($415,000.00)
per annum to be paid in equal installments as per the Bank's salary
administration program every two (2) weeks, and subject to annual review and
increases at the discretion of the Executive Compensation and Benefits Committee
of the Board, the Board or any other committee constituted by the Board for this
purpose (as applicable, the "Committee"). Annual base salary shall be
competitive with the annual base salaries for comparable executive positions at
banks of similar size and focus, as determined at the discretion of the
Committee.
b. ADDITIONAL RESTRICTED STOCK. Mr. Walker shall receive an award of six
thousand (6,000) shares of restricted stock on June 1, 1998, provided that he is
employed by the Bank on that date and subject to the vesting requirements next
described. Provided Mr. Walker is employed by the Bank, UNBC or one of their
subsidiaries on the applicable vesting date, 25% of the award (1500 shares)
shall vest on January 2, 1999, 25% of the award (1500 shares) shall vest on
January 2, 2000, 25% (1500 shares) shall vest on January 2, 2001, and 25% (1500
shares) shall vest on January 2, 2002. Mr. Walker shall forfeit any portion of
the award that is not vested on the date he ceases to be employed by the Bank,
UNBC and their subsidiaries, unless his termination of employment arises under
circumstances described in subparagraphs 6(a), 6(b), 6(d) or 6(f), in which case
Mr. Walker shall become 100% vested at the time of termination if not already so
vested.
4. ADDITIONAL BENEFITS.
During his employment under this Agreement:
a. BONUS. Mr. Walker shall be entitled to participate in the Bank's
Senior Management Bonus Plan, or its successor, subject to the eligibility
requirements and other terms and conditions of such Plan and the determinations
of the administrator of such Plan. Mr. Walker's target bonus under the Senior
Management Bonus Plan shall be fifty percent (50%) of base salary, subject to
annual review and increases or decreases at the discretion of the Committee,
based on the median annual bonus targets for comparable executive positions at
banks of similar size and focus (as determined at the discretion of the
Committee).
b. LONG TERM INCENTIVES. Mr. Walker shall be eligible for long term
incentive awards available to policy making officers. Awards may consist of one
or more types of long-term incentives, including the grant of stock options and
restricted stock under the UNBC Management Stock Option Plan, or its successor,
and the award of performance shares under the UNBC Performance Share Plan, or
its successor. Mr. Walker's target award shall be valued at one hundred percent
(100%) of base salary. Notwithstanding the preceding sentence, determinations
of the amount of any award to Mr. Walker shall be made at the discretion of the
Committee, subject to annual review and increases or decreases, based on the
median long-term incentive targets for comparable executive positions at banks
of similar size and focus (as determined at the discretion of the Committee).
c. RETIREMENT AND 401(k) PLAN. Mr. Walker shall be entitled to
participate in the
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Bank retirement and 401(k) plans that are now or hereafter will be in effect,
subject to the eligibility requirements and other terms and conditions of
such plans and the determinations of the administrator of such plans.
d. SUPPLEMENTAL RETIREMENT BENEFITS. Subject to paragraph 6, Mr. Walker
shall be entitled to receive an overall pension benefit from the Bank,
calculated under the terms of the Union Bank of California Retirement Plan (the
"Retirement Plan"), without regard to the limits of Code sections 401(a)(17) and
415, and crediting Mr. Walker with an additional five (5) years of "credited
service." Mr. Walker shall be a participant under the Bank's Supplemental
Executive Retirement Plan (the "SERP"), such that the portion of Mr. Walker's
overall pension benefit payable under this Agreement shall be a net benefit (the
"Net Benefit"). Such Net Benefit shall be an amount determined as described in
the first sentence of this subparagraph less the amount payable from the
Retirement Plan and from the SERP. The Net Benefit payable under this Agreement
shall be determined as a Normal Retirement Benefit, an Early Retirement Benefit
or a Deferred Retirement Benefit as applicable, within the meaning of the SERP,
employing the same offset methodology and all other terms and conditions as
described under the SERP. As such, the Net Benefit shall be paid in the same
form and at the same time as the benefit payable under the SERP. The Net
Benefit obligation of this subparagraph 4(d) shall be an unfunded and unsecured
obligation of the Bank, as to which Mr. Walker shall have no rights other than
those of a general creditor of the Bank.
e. INSURANCE AND WELFARE PLANS. Mr. Walker and his eligible dependents
shall be eligible to receive such other benefits or rights as may be provided
under any employee benefit plan provided by the Bank that is now or hereafter
will be in effect (including participation in life, medical, disability, dental
and vision insurance plans), subject to eligibility requirements and other terms
and conditions of such plans and the determinations of administrators of such
plans.
f. OTHER BENEFITS. The Bank shall provide other benefits such as a car
allowance, luncheon and country club dues and assessments, and other perquisites
as determined by the Committee for similarly situated executives.
g. BUSINESS EXPENSES. Mr. Walker shall be entitled to reimbursement by
the Bank for such customary, ordinary and necessary business expenses as are
incurred by him in the performance of his duties and activities associated with
promoting or maintaining the business of the Bank. All expenses as described in
this subparagraph 4(g) will be reimbursed only upon presentation by Mr. Walker
of such documentation in accordance with Bank policy and as may be reasonably
necessary to substantiate that all such expenses were incurred in the
performance of his duties.
h. VACATION AND SICK LEAVE. Mr. Walker shall be entitled to earn
(i) four (4) weeks' paid vacation each year of employment under this Agreement
and (ii) sick leave on the same basis as other Bank employees and subject to all
accrual or accumulated maximum entitlement limitations which currently or may
hereafter exist under the Bank's vacation and sick leave policy.
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5. OUTSIDE ACTIVITIES AND NON-COMPETITION.
During the term of this Agreement, and subject to paragraph 1, Mr. Walker
shall devote his time, ability, attention, energy, knowledge and skill to the
business of the Bank. During the term of this Agreement, Mr. Walker shall not,
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, shareholder, corporate officer, director, or in any other
capacity, engage or assist any third party in engaging in any business
competitive with the business of the Bank, UNBC or their subsidiaries without
the written approval of the Bank's Chief Executive Officer. Investments in
publicly traded corporations through brokerage accounts or in mutual funds, or
depositor/borrower relationships with other financial institutions are not
intended to be covered by this paragraph. Following his employment with the
Bank, Mr. Walker shall not engage in unfair competition with the Bank or aid
others in any unfair competition with the Bank, unfair competition having the
meaning ascribed in the "Competition and Business Promotion" section of the
Bank's April 1996 revision of the Business Standards of Conduct (except that the
object of the prohibition shall be read as the Bank rather than a competitor).
Following his employment with the Bank, Mr. Walker shall not in any way breach
the confidence that the Bank has placed in him or misappropriate any proprietary
information of the Bank, as such prohibitions are described in the Bank's
April 1996 revision of the Business Standards of Conduct.
6. TERMINATION OF EMPLOYMENT.
This Agreement shall terminate as follows:
a. BY DEATH. This Agreement shall be terminated upon the death of
Mr. Walker. The Bank's total liability to Mr. Walker in the event of
termination of Mr. Walker's employment under this subparagraph shall be limited
to the payment (on his behalf) of Mr. Walker's salary and benefits as set forth
in paragraphs 3 and 4 of this Agreement through the effective date of
termination.
b. BY DISABILITY. If, in the sole opinion of the Bank's Chief Executive
Officer, governed by the exercise of good faith and supported by competent
medical opinion, Mr. Walker is prevented from properly performing his duties
hereunder by reason of any physical or mental incapacity, for a period of more
than ninety (90) days in the aggregate in any twelve (12) month period, then, to
the extent permitted by law, his employment with the Bank shall terminate. The
Bank's total liability to Mr. Walker in the event of termination of Mr. Walker's
employment under this subparagraph shall be limited to the payment of
Mr. Walker's salary and benefits as set forth in paragraphs 3 and 4 of this
Agreement through the effective date of termination. In calculating the Net
Benefit payable to Mr. Walker pursuant to subparagraph 4(d), Mr. Walker will
continue to accrue credited service in the manner described in Article VI of the
Retirement Plan (or a successor provision). Nothing in this paragraph 6 is
intended to preclude Mr. Walker from exercising any rights he may have under the
Bank's Short Term Disability Plan or Long Term Disability Plan, in accordance
with the eligibility requirements and other terms and conditions of those
respective plans, or their respective successors.
c. FOR CAUSE. The Bank reserves the right to terminate this Agreement
immediately, at any time, if, in the opinion of the Bank's Chief Executive
Officer: Mr. Walker
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<PAGE>
materially and/or habitually breaches or neglects the duties which he is
required to perform under the terms of this Agreement; commits any material
act of dishonesty, fraud, misrepresentation, or other act which would violate
the Bank's Business Standards of Conduct; is guilty of gross carelessness or
misconduct; fails to obey the lawful direction of the Bank's Chief Executive
Officer or the Board; or acts in any way that has a direct, substantial and
adverse effect on the Bank's reputation. The Bank's total liability to Mr.
Walker in the event of termination of Mr. Walker's employment under this
subparagraph shall be limited to the payment of Mr. Walker's salary and
benefits as set forth in paragraphs 3 and 4 of this Agreement through the
effective date of termination.
d. WITHOUT CAUSE. The Bank reserves the right to terminate this
Agreement without cause, for any reason and at any time, by written notice to
Mr. Walker from the Bank's Chief Executive Officer. Mr. Walker hereby agrees
that the Bank may dismiss him under this subparagraph 6(d) without regard to
(i) any general or specific policies (whether written or oral) of the Bank
relating to the employment or termination of its employees, or (ii) any
statements made to Mr. Walker, whether made orally or contained in any document,
pertaining to Mr. Walker's relationship with the Bank. In the event of
termination under this subparagraph 6(d), and subject to the conditions set
forth herein, Mr. Walker shall be entitled to receive the payments described in
(i) and (ii) below.
(i) If Mr. Walker has not yet attained age 65 at the time of his
termination of employment, and provided Mr. Walker has, at the time of his
termination of employment, previously executed the "General and Special Release"
(attached hereto as Exhibit A), then in consideration for such Release, the Bank
will provide Mr. Walker with:
(A) The greater of (I) two years of separation pay payable as
salary continuation on a payroll by payroll basis, in an amount equal
to Mr. Walker's base salary at the time of his termination, plus a
prorated bonus amount each payroll period equal to the average of
Mr. Walker's annual bonus (excluding any amount that represents an
award of long term incentive by the Bank) for the three most recent
bonus determination years divided by the number of payroll periods in
the year, or (II) the salary continuation amount payable under the
Bank's then existing separation pay plan; and
(B) Benefits (other than salary continuation) payable to
participants at or above the level of Executive Vice Presidents for
the salary continuation period under the Bank's Separation Pay Plan in
effect on the date of this Agreement, or, if better, under the Bank's
separation pay plan in effect at the time of his termination of
employment. A true and correct copy of the Plan as in effect on the
date of this Agreement is attached hereto as Exhibit B; and
(C) Full and immediate vesting, upon Mr. Walker's termination of
employment, in the target award amount under his outstanding grant(s)
of performance shares under the UNBC Performance Share Plan, and
payment of such vested shares within 120 days following his
termination of employment (without giving effect to any deferral
election that would have applied had the shares become an earned
award), such payment to be made in cash equal to the number of vested
shares times the average month-end closing price of UNBC
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<PAGE>
common stock (as published in the Western Edition of the Wall Street
Journal) for the six months immediately preceding Mr. Walker's date of
termination of employment; and
(ii) The Bank will provide Mr. Walker with salary and benefits as set
forth in paragraphs 3 and 4 of this Agreement through the effective date of
termination.
A termination of this Agreement on account of Mr. Walker's disability shall be
governed by subparagraph 6(b) and not this subparagraph 6(d). In addition, in
the event Mr. Walker dies while receiving salary continuation benefits under
subparagraph 6(d)(i)(A) above, then Mr. Walker shall have the remaining salary
continuation, if any, paid to his Designated Beneficiary under Exhibit C
attached hereto.
e. BY MR. WALKER WITHOUT CAUSE. Mr. Walker reserves the right to
terminate this Agreement for any reason (other than the reason set forth in
subparagraph 6(f)) upon reasonable written notice to the Bank. The Bank's total
liability to Mr. Walker in the event of termination of Mr. Walker's employment
under this subparagraph shall be limited to the payment of Mr. Walker's salary
and benefits as set forth in paragraphs 3 and 4 of this Agreement through the
effective date of termination.
f. BY MR. WALKER FOR CAUSE. Subject to the further conditions next
described, Mr. Walker may terminate this Agreement by giving sixty (60) days'
written notice to the Bank if he has incurred a material reduction of his
duties, title or responsibility (including Mr. Walker no longer serving in the
capacity or under the title of Vice Chairman of the Bank, the Bank's failure to
continue to nominate Mr. Walker as a Director of UNBC, or Mr. Walker's position
ceasing to be one directly reporting to the Bank's Chief Executive Officer), a
reduction in his annual base salary or a reduction in his overall compensation
package below the median package for comparable executive positions at banks of
similar size and focus (this peer group to be determined at the discretion of
the Committee). In order to elect to terminate this Agreement pursuant to this
subparagraph 6(f), Mr. Walker must submit the written notice to the Bank within
sixty (60) days of the reduction. Mr. Walker shall not be entitled to elect to
terminate this Agreement pursuant to this subparagraph 6(f) if prior to
Mr. Walker's termination date the Bank corrects the deficiency upon which
Mr. Walker's resignation election is based. In the event that Mr. Walker is
entitled to and elects to terminate this Agreement pursuant to this
subparagraph 6(f), (i) he shall be entitled to receive salary and benefits as
set forth in paragraphs 3 and 4 of this Agreement through the effective date of
termination, and (ii) if he is has not yet attained age 65 at the time of his
termination of employment and further has, at the time of his termination of
employment, previously executed the "General and Special Release" (attached
hereto as Exhibit A), then in consideration for such Release, the Bank will
provide Mr. Walker with the salary continuation and benefits set forth in
subparagraphs 6(d)(i)(A), (B) and (C). In the event Mr. Walker dies while
receiving salary continuation benefits described in subparagraph 6(d)(i)(A)
above, then Mr. Walker shall have the remaining salary continuation, if any,
paid to his Designated Beneficiary under Exhibit C attached hereto.
g. RESIGNATION OF POSITIONS. Upon termination of employment for any
reason whatsoever, Mr. Walker shall be deemed to have resigned from all offices
and positions with the Bank, UNBC, and their subsidiaries. Mr. Walker agrees
that, in connection with his termination under this Agreement, he will sign such
written resignations as required by the
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Bank.
7. PROHIBITION OF ASSIGNMENT.
This Agreement is personal to Mr. Walker and he may not assign or delegate
any of his rights or obligations hereunder without first obtaining the written
consent of the Bank.
8. UNBC OR BANK SUCCESSOR.
For all purposes under this Agreement, the term "UNBC" shall include any
successor to UNBC's business and/or assets, by purchase, merger, consolidation,
reorganization, liquidation or otherwise. For all purposes under this
Agreement, the term "Bank" shall include any successor to the Bank's business
and/or assets, by purchase, merger, consolidation, reorganization, liquidation
or otherwise, and, in such an event, for all purposes under this Agreement, the
term "UNBC" also shall mean the U.S. parent company to such successor (and, if
there is no such U.S. parent company the successor itself). This Agreement
shall inure to the benefit of and be binding upon any such successor to UNBC and
the Bank to which Mr. Walker's employment is transferred.
9. ARBITRATION.
Any controversy between the Bank, UNBC or their parent companies,
subsidiaries and affiliates and Mr. Walker or between any employee of the Bank,
UNBC or their parent companies, subsidiaries and affiliates and Mr. Walker,
including, but not limited to, any controversy arising out of Mr. Walker's
employment or the termination thereof, involving the construction or application
of any of the terms, provisions or conditions of this Agreement, or otherwise
arising out of or relating to this Agreement and any controversy arising out of
or relating to Exhibit A to this Agreement (the "General and Special Release")
or involving a claim of race, sex, religious, age, disability, veteran status,
sexual orientation or national origin discrimination, shall be settled by
arbitration in accordance with the then current employment dispute resolution
rules of the American Arbitration Association determined by the Committee to
most closely resemble the California Employment Dispute Resolution Rules in
effect on January 1, 1998, and judgment on the award rendered by the
arbitrator(s) may be entered by any court having jurisdiction thereof.
Reasonable limited discovery will be permitted in the form of the right of each
party to take the deposition of one individual and any expert witness designated
by the other party. Each party shall also have the right to make requests for
discovery of relevant documents to the other party. Additional discovery may be
had only where the arbitrator so orders, upon a showing of substantial need.
The Bank and Mr. Walker each shall bear their own costs and legal fees
associated with the arbitration, except that the arbitrator shall have the right
in his discretion to award reasonable legal fees to the prevailing party in the
arbitration. Further, the Bank shall bear the cost of the arbitrator (including
the costs of establishing a facility for and otherwise administering the
arbitration). The location of the arbitration shall be in San Francisco,
California, and the arbitration shall be conducted so as to result in the
rendering of the arbitrator's decision within ninety (90) days after the
original demand for arbitration.
In the event of a breach by Mr. Walker of any of the covenants contained in
paragraph 5 of this Agreement, it is recognized that in addition to any other
remedy available to it, the Bank
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shall be entitled to institute or prosecute proceedings in any court of
competent jurisdiction, either in law or in equity, to obtain damages for any
breach of this Agreement or to sue for specific performance, or an injunction
against performance of any acts, or to seek any other available remedy.
This paragraph 9 of this Agreement and the obligations provided for herein
shall survive the termination of this Agreement and remain in full force and
effect following the termination of Mr. Walker's employment with the Bank.
10. LIMITATION ON PAYMENTS.
a. BASIC RULE. In the event Mr. Walker becomes entitled to payments
under this Agreement in connection with his termination of employment at a time
when the Bank's Auditors determine that the payments result in "excess parachute
payments" under section 280G of the Internal Revenue Code (the "Code"), then
instead of the amounts payable under this Agreement, Mr. Walker shall receive
aggregate payments equal to the Reduced Amount, if such Reduced Amount would
result in net after-tax payments to Mr. Walker that are greater than the net
after-tax payments he would have received without regard to this paragraph. For
purposes of this paragraph 10, the "Reduced Amount" shall be the amount,
expressed as a present value, that maximizes the aggregate present value of the
payments without causing any payment to be nondeductible by the Bank under
section 280G of the Code. All calculations required by this paragraph 10 shall
be performed by the Bank's independent auditors retained most recently prior to
the transaction implicating section 280G of the Code (the "Auditors"), based on
information supplied by the Bank and Mr. Walker, and shall be binding on the
Bank and Mr. Walker. All fees and expenses of the Auditors shall be paid by the
Bank.
b. REDUCTIONS. If the amount of the aggregate payments to Mr. Walker
must be reduced under this paragraph 10, then Mr. Walker shall direct in which
order the payments are to be reduced, but no change in the timing of any payment
shall be made without the Bank's consent. As a result of uncertainty in the
application of sections 280G and 4999 of the Code at the time of an initial
determination by the Auditors hereunder, it is possible that a payment will have
been made by the Bank that should not have been made (an "Overpayment") or that
an additional payment that will not have been made by the Bank could have been
made (an "Underpayment"). In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Bank or
Mr. Walker that the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to Mr. Walker that he shall repay to the Bank,
together with interest at the applicable federal rate specified in section
7872(f)(2) of the Code; provided, however, that no amount shall be payable by
Mr. Walker to the Bank if and to the extent that such payment would not reduce
the amount that is nondeductible under section 280G of the Code or is subject to
an excise tax under section 4999 of the Code. In the event that the Auditors
determine that an Underpayment has occurred, such Underpayment shall promptly be
paid or transferred by the Bank to, or for the benefit of, Mr. Walker, together
with interest at the applicable federal rate specified in section 7872(f)(2) of
the Code.
11. MODIFICATION.
Any modification of this Agreement will be effective only if it is in
writing and signed
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by the parties to be bound thereby.
12. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement between the Bank and
Mr. Walker pertaining to the subject matter hereof, and supersedes all prior or
contemporaneous written or verbal agreements and understandings with Mr. Walker
in connection with the subject matter hereof.
13. GOVERNING LAW.
This Agreement and the rights and obligations hereunder shall be governed
by the laws of California, and the parties to this Agreement specifically
consent to the jurisdiction of the courts of California over any action arising
out of or related to this Agreement.
14. SEVERABILITY.
If any provision of this Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
shall, nevertheless, continue in full force and effect without being impaired or
invalidated in any way.
15. WAIVER.
The parties hereto shall not be deemed to have waived any of their
respective rights under this Agreement unless the waiver is in writing and
signed by such waiving party. No delay in exercising any right shall be a
waiver nor shall a waiver on one occasion operate as a waiver of such right on a
future occasion.
16. NOTICES.
All notices provided for herein shall be in writing and shall be deemed to
have been given when delivered personally, when deposited in the United States
mail, registered or certified, postage prepaid, or when delivered to a messenger
service, addressed as follows:
<TABLE>
<CAPTION>
<S> <C>
To the Bank: Paul Fearer
Executive Vice President
Union Bank of California, N.A.
350 California Street
San Francisco, CA 94104
To Mr. Walker: Robert Walker
Vice Chairman
Union Bank of California, N.A.
400 California Street
San Francisco, CA 94104
</TABLE>
or at such other addresses as either of said parties may from time to time in
writing appoint.
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17. EXECUTIVE COMPENSATION AND BENEFITS COMMITTEE.
If at the time of a determination under this Agreement no Committee is in
existence, references to the Committee under this Agreement shall be deemed to
be references to the Board.
18. WITHHOLDING TAXES.
The Bank shall withhold and deduct all applicable federal and local taxes,
as required by applicable laws, from any payments made under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized officers or agents.
<TABLE>
<CAPTION>
<S> <C>
Dated: _____________ UNION BANK OF CALIFORNIA, N.A.
By ______________________________
Paul Fearer
Executive Vice President
Dated: _____________ _________________________________
Robert M. Walker
</TABLE>
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EXHIBIT A
GENERAL AND SPECIAL RELEASE
1. In return for the benefits provided for in subparagraphs 6(d)(i) or
6(f)(ii) of the Employment Agreement entered into as of January 1, 1998 (the
"Agreement"), the adequacy of which as consideration is hereby acknowledged,
Robert M. Walker (hereinafter, "Mr. Walker") hereby fully releases and forever
discharges Union Bank of California, N.A., its parent, affiliated, and
subsidiary corporations, its and their successors and assigns, and the past and
present officers, directors, employees, shareholders, agents and employee
benefit plans of each (hereinafter, collectively the "Bank") from any and all
actions, causes of action, claims, demands, damages, and liabilities of
whatsoever kind or character, in law or in equity, now known or unknown,
suspected or unsuspected, past or present, that he has ever had or currently may
have against them or any of them including, but not limited to, claims of race,
sex, religious, age, disability, veteran status, sexual orientation or national
origin discrimination under Title VII of the Civil Rights Act of 1964, as
amended; the Americans with Disabilities Act of 1990, as amended; the Age
Discrimination in Employment Act, as amended; the California Fair Employment and
Housing Act and any other federal, state or local laws, arising out of or in any
way related to Mr. Walker's employment with the Bank or termination of that
employment. Mr. Walker further agrees not to institute in any state or federal
court any action or claim of any kind against the Bank. Execution of this
document by Mr. Walker operates as a complete bar and defense against any and
all current claims of any type that may be made by Mr. Walker against the Bank,
provided, however, that nothing in this release is intended to affect
Mr. Walker's right to seek a remedy in arbitration to resolve any controversy
arising out of the construction or application of the terms, provisions or
conditions of the Agreement.
2. Mr. Walker and the Bank understand and expressly agree that the
release granted in Paragraph 1 extends to all claims of every nature and kind,
known or unknown, suspected or unsuspected, past or present, which Mr. Walker
may have against the Bank arising from or related to his employment with the
Bank or the termination of that employment and that any and all rights granted
to Mr. Walker under Section 1542 of the California Civil Code or any analogous
state law, federal law, or regulation are hereby expressly waived. Section 1542
of the California Civil Code provides that:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
3. Mr. Walker has read this instrument, has had the opportunity of
consulting with an attorney regarding it, and signs it voluntarily and with the
intention of being bound by it. Mr. Walker understands that he is waiving
legal rights by signing this agreement.
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<PAGE>
4. Mr. Walker acknowledges that he has been given at least twenty-one
(21) days within which to consider this Release. Mr. Walker understands that he
may revoke this Release upon written notice to the Bank within seven (7) days
after execution of it and that this Release will not become effective or
enforceable until the eighth (8th) day after its execution.
Dated: _______________ ______________________________
Robert M. Walker
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EXHIBIT C
UNION BANK OF CALIFORNIA, N.A.
BENEFICIARY DESIGNATION
UNDER EMPLOYMENT AGREEMENT
Name: Robert M. Walker
Social Security Number: ______-____-________
If I die while receiving salary continuation payments under subparagraph 6(d) or
6(f) of the Employment Agreement entered into as of January 1, 1998, then any
payments remaining to be made shall be paid to the person to whom I am married
at the time of my death. IN THE EVENT I HAVE NO SPOUSE AT THE TIME OF MY DEATH,
THEN PAYMENT IS TO BE MADE AS FOLLOWS [CHECK ONE BOX ONLY]:
/ /1 To all of my children who survive me in equal shares. [Please provide
names and addresses below.] The term "children" means natural or legally
adopted children but excludes stepchildren (if not adopted).
/ /2 To my estate.
/ /3 Other [please enter a description, and provide names and addresses, if
necessary]:
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
IN THE EVENT NO DESIGNATED BENEFICIARY SURVIVES ME, ANY REMAINING PAYMENTS
SHALL BE MADE TO MY ESTATE.
The names and addresses of my beneficiaries are as follows [please use a
separate sheet if necessary]:
1. Name:_____________________ Relationship:__________________________
Address:_______________________________________________________________
2. Name:_____________________ Relationship:__________________________
Address:_______________________________________________________________
3. Name:_____________________ Relationship:__________________________
Address:_______________________________________________________________
4. Name:_____________________ Relationship:__________________________
Address:_______________________________________________________________
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This beneficiary designation is to take effect on the date when it is
received by the Director of Human Resources of Union Bank of California,
N.A., and it supersedes any prior designations that I may have made under the
above-referenced Employment Agreement.
___________________, 199 __________________________________
[Date] [Signature]
Date of receipt:_____________, 199__.
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AGREEMENT
This Agreement is entered into as of July 22, 1998, by and between THE BANK
OF TOKYO-MITSUBISHI, LTD., a Japanese bank ("BTM") and UNIONBANCAL
CORPORATION, a California corporation ("UNBC"), at San Francisco, California.
WHEREAS, BTM owns approximately six percent (6%) of the outstanding common
stock of UNION BANK OF CALIFORNIA, N.A., a national banking association ("the
Minority Shares"), and UNBC owns the remaining ninety-four percent (94%); and
WHEREAS, BTM wishes to exchange the Minority Shares for shares of UNBC common
stock of an equivalent value ("the Exchange Shares");
WHEREAS, the Board of Directors of UNBC has determined that, from a financial
point of view, the consideration to be given to UNBC by BTM is fair to UNBC;
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. The exchange ratio shall be 1.4078217 shares of UNBC common
stock for each Minority Share of UBOC common stock, resulting in a total of
3,389,881 Exchange Shares for the 2,407,891 Minority Shares.
2. At a date and time to be determined by the parties ("the
Exchange Date"), at UNBC's offices at 400 California Street, San Francisco,
California, BTM shall tender to UNBC the Minority Shares and UNBC shall issue
and deliver to BTM the Exchange Shares.
3. The parties will cooperate and assist each other in taking all
such actions, including but not limited to any regulatory filings or notices
which may be necessary, to consummate the exchange. UNBC specifically agrees
to mail whatever notice may be required to UNBC's shareholders of record in a
timely fashion not later than ten (10) days prior to the Exchange Date.
4. BTM represents that it is receiving the Exchange Shares for
its own account for investment and not with a view to or for sale in
connection with any distribution of the Exchange Shares. BTM recognizes that
the Exchange Shares are not registered under the Federal Securities Act of
1933, as amended, nor qualified under the California Corporate Securities
Law, nor does UNBC have any present contemplation of seeking such
registration or qualification. As a consequence, the stock is not freely
transferable but must be held indefinitely unless subsequently registered or
unless an exemption from the registration requirements of the Securities Act
of 1933, as amended is available.
<PAGE>
5. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed given when delivered
personally or received by registered or certified mail, return receipt
requested, to the parties at the following addresses (or to such other
address as a party may have specified by notice given to the other party
pursuant to this provision):
The Bank of Tokyo-Mitsubishi, Ltd. UnionBanCal Corporation
Headquarters for the Americas 400 California Street
1251 Avenue of the Americas, 14th Floor San Francisco, CA 94104
New York, NY 10020 Attn: Corporate Secretary's
Attn: Planning Division for the Americas Office
6. This Agreement is made in the State of California and shall
take effect under, be construed and enforced according to, and the rights and
obligations of the parties shall be governed in all respects by, the laws of
the State of California.
IN WITNESS WHEREOF, the parties executed this Agreement as of the date first
above written.
THE BANK OF TOKYO MITSUBISHI, LTD. UNIONBANCAL CORPORATION
By /s/ H. Watanabe By /s/ Takahiro Moriguchi
- - ------------------------------------ -----------------------------------
Its CEO, Headquarters for the Americas Its President and Chief Executive
Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,211,595
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0
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