<PAGE>
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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 JUNE 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-28118
UNIONBANCAL CORPORATION
State of Incorporation: California I.R.S. Employer Id. No. 94-1234979
350 California Street
San Francisco, California 94104
Telephone: (415) 705-7350
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 July 31, 1997: [ ]
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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:
Condensed Consolidated Statements of Income......................................................... 4
Condensed Consolidated Balance Sheets............................................................... 5
Condensed Consolidated Statements of Cash Flows..................................................... 6
Condensed Consolidated Statements of Shareholders' Equity........................................... 7
Notes to Condensed Consolidated Financial Statements................................................ 8
Item 2. Management's Discussion and Analysis:
Introduction........................................................................................ 10
Summary............................................................................................. 11
Analysis of Earnings................................................................................ 13
Net Interest Income................................................................................. 14
Noninterest Income.................................................................................. 18
Noninterest Expense................................................................................. 19
Merger and Integration Expense...................................................................... 20
Income Tax Expense.................................................................................. 20
Loans............................................................................................... 21
Allowance for Credit Losses......................................................................... 22
Nonperforming Assets................................................................................ 23
Liquidity........................................................................................... 24
Regulatory Capital.................................................................................. 25
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................................. 26
Signatures............................................................................................ 26
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
INCREASE (DECREASE)
JUNE 30, JUNE 30, ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 AMOUNT PERCENT
- -------------------------------------------------------------------------- ------------- ------------- ---------- ---------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net interest income (1)................................................. $ 308,401 $ 290,263 $ 18,138 6.25%
Provision for credit losses............................................. -- 10,000 (10,000) (100.00)
Noninterest income...................................................... 111,021 105,550 5,471 5.18
Noninterest expense, excluding merger and integration expense (2)....... 255,753 252,518 3,235 1.28
------------- ------------- ---------- ---------
Income before merger and integration expense and income
taxes (1)(2).......................................................... 163,669 133,295 30,374 22.79
Merger and integration expense.......................................... -- 61,266 (61,266) (100.00)
------------- ------------- ---------- ---------
Income before income taxes (1).......................................... 163,669 72,029 91,640 127.23
Taxable-equivalent adjustment........................................... 1,385 2,024 (639) (31.57)
Income tax expense...................................................... 65,739 25,597 40,142 156.82
------------- ------------- ---------- ---------
Net income.............................................................. $ 96,545 $ 44,408 $ 52,137 117.40%
------------- ------------- ---------- ---------
------------- ------------- ---------- ---------
NET INCOME APPLICABLE TO:
Common stock............................................................ $ 88,097 $ 39,096 $ 49,001 125.34%
------------- ------------- ---------- ---------
------------- ------------- ---------- ---------
Parent direct interest in bank subsidiary............................... $ 5,621 $ 2,486 $ 3,135 126.11%
------------- ------------- ---------- ---------
------------- ------------- ---------- ---------
PER COMMON SHARE:
Net income.............................................................. $ 1.61 $ 0.71 $ 0.90 126.76%
Pro forma earnings, excluding after-tax merger and integration expense
(2)................................................................... 1.61 1.37 0.24 17.52
Dividends............................................................... 0.35 0.35 -- 0.00
Book value (end of period).............................................. 43.15 39.29 3.86 9.82
Common shares outstanding (end of period)............................... 54,866,952 54,757,877 109,075 0.20
Weighted average common shares outstanding.............................. 54,795,625 54,752,316 43,309 0.08
BALANCE SHEET (END OF PERIOD):
Total assets............................................................ $ 30,275,150 $ 28,114,916 $2,160,234 7.68%
Total loans............................................................. 21,951,559 20,480,678 1,470,881 7.18
Nonperforming assets.................................................... 176,199 228,173 (51,974) (22.78)
Subordinated capital notes.............................................. 482,000 495,369 (13,369) (2.70)
Preferred stock......................................................... 135,000 135,000 -- 0.00
Common equity........................................................... 2,367,630 2,151,698 215,932 10.04
BALANCE SHEET (PERIOD AVERAGE):
Total assets............................................................ $ 29,439,297 $ 27,798,201 $1,641,096 5.90%
Total loans............................................................. 21,532,898 20,381,891 1,151,007 5.65
Common equity........................................................... 2,330,809 2,166,783 164,026 7.57
Earning assets.......................................................... 26,006,291 24,492,765 1,513,526 6.18
FINANCIAL RATIOS:
Return on average assets (3)............................................ 1.32% 0.64% 0.68 ts.
Pro forma return on average assets, excluding after-tax merger
and integration expense (2)(3)........................................ 1.32 1.20 0.12
Return on average common equity (4)..................................... 15.16 7.26 7.90
Pro forma return on average common equity, excluding after-tax merger
and integration expense (2)(4)........................................ 15.16 13.95 1.21
Efficiency ratio (5).................................................... 60.87 79.06 (18.19)
Pro forma efficiency ratio, excluding merger and integration expense
(2)(5)................................................................ 60.87 63.58 (2.71)
Net interest margin (1)................................................. 4.75 4.77 (0.02)
Tier 1 risk-based capital ratio......................................... [9.19] 8.94 0.25
Total risk-based capital ratio.......................................... [11.59] 11.24 0.35
Leverage ratio.......................................................... [8.68] 8.33 0.35
Allowance for credit losses to total loans.............................. 2.29 2.66 (0.37)
Allowance for credit losses to nonaccrual loans......................... 343.58 284.78 58.80
Net loans charged off to average total loans (6)........................ 0.39 0.24 0.15
Nonperforming assets to total loans and foreclosed assets............... 0.80 1.11 (0.31)
Nonperforming assets to total assets.................................... 0.58 0.81 (0.23)
</TABLE>
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(1) Amounts are on a taxable-equivalent basis using the federal statutory tax
rate of 35 percent.
(2) See page 9, "Merger Accounting", for a description of merger accounting and
pro forma earnings presentations.
(3) Based on annualized net income.
(4) Based on annualized net income applicable to common stock.
(5) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense, as a percentage of net interest income (taxable-equivalent) and
noninterest income. Foreclosed asset expense was $0.5 million in the second
quarter of 1997 and $0.9 million in the second quarter of 1996.
(6) Annualized.
2
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------------
INCREASE (DECREASE)
JUNE 30, JUNE 30, ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 AMOUNT PERCENT
- -------------------------------------------------------------------------- ------------- ------------- ---------- ---------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net interest income (1)................................................. $ 603,853 $ 588,058 $ 15,795 2.69%
Provision for credit losses............................................. -- 20,000 (20,000) (100.00)
Noninterest income...................................................... 225,807 208,424 17,383 8.34
Noninterest expense, excluding merger and integration expense (2)....... 502,854 504,542 (1,688) (0.33)
------------- ------------- ---------- ---------
Income before merger and integration expense and income
taxes (1)(2).......................................................... 326,806 271,940 54,866 20.18
Merger and integration expense.......................................... 6,037 61,266 (55,229) (90.15)
------------- ------------- ---------- ---------
Income before income taxes (1).......................................... 320,769 210,674 110,095 52.26
Taxable-equivalent adjustment........................................... 2,806 4,152 (1,346) (32.42)
Income tax expense...................................................... 128,916 78,848 50,068 63.50
------------- ------------- ---------- ---------
Net income.............................................................. $ 189,047 $ 127,674 $ 61,373 48.07%
------------- ------------- ---------- ---------
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NET INCOME APPLICABLE TO:
Common stock............................................................ $ 172,388 $ 115,864 $ 56,524 48.78%
------------- ------------- ---------- ---------
------------- ------------- ---------- ---------
Parent direct interest in bank subsidiary............................... $ 11,006 $ 6,158 $ 4,848 78.73%
------------- ------------- ---------- ---------
------------- ------------- ---------- ---------
PER COMMON SHARE:
Net income.............................................................. $ 3.15 $ 2.12 $ 1.03 48.58%
Pro forma earnings, excluding after-tax merger and integration expense
(2)................................................................... 3.21 2.78 0.43 15.47
Dividends (3)........................................................... 0.70 0.70 -- 0.00
Book value (end of period).............................................. 43.15 39.29 3.86 9.82
Common shares outstanding (end of period)............................... 54,866,952 54,757,877 109,075 0.20
Weighted average common shares outstanding.............................. 54,780,158 54,721,265 58,893 0.11
BALANCE SHEET (END OF PERIOD):
Total assets............................................................ $ 30,275,150 $ 28,114,916 $2,160,234 7.68%
Total loans............................................................. 21,951,559 20,480,678 1,470,881 7.18
Nonperforming assets.................................................... 176,199 228,173 (51,974) (22.78)
Subordinated capital notes.............................................. 482,000 495,369 (13,369) (2.70)
Preferred stock......................................................... 135,000 135,000 -- 0.00
Common equity........................................................... 2,367,630 2,151,698 215,932 10.04
BALANCE SHEET (PERIOD AVERAGE):
Total assets............................................................ $ 29,116,709 $ 27,613,461 $1,503,248 5.44%
Total loans............................................................. 21,302,142 20,285,159 1,016,983 5.01
Common equity........................................................... 2,296,397 2,188,235 108,162 4.94
Earning assets.......................................................... 25,728,698 24,443,391 1,285,307 5.26
FINANCIAL RATIOS:
Return on average assets (4)............................................ 1.31% 0.93% 0.38%pts.
Pro forma return on average assets, excluding after-tax merger
and integration expense (2)(4)........................................ 1.33 1.21 0.12
Return on average common equity (5)..................................... 15.14 10.65 4.49
Pro forma return on average common equity, excluding after-tax merger
and integration expense (2)(5)........................................ 15.43 13.96 1.47
Efficiency ratio (6).................................................... 61.23 70.52 (9.29)
Pro forma efficiency ratio, excluding merger and integration expense
(2)(6)................................................................ 60.50 62.83 (2.33)
Net interest margin (1)................................................. 4.72 4.84 (0.12)
Tier 1 risk-based capital ratio......................................... [9.19] 8.94 0.25
Total risk-based capital ratio.......................................... [11.59] 11.24 0.35
Leverage ratio.......................................................... [8.68] 8.33 0.35
Allowance for credit losses to total loans.............................. 2.29 2.66 (0.37)
Allowance for credit losses to nonaccrual loans......................... 343.58 284.78 58.80
Net loans charged off to average total loans (7)........................ 0.21 0.30 (0.09)
Nonperforming assets to total loans and foreclosed assets............... 0.80 1.11 (0.31)
Nonperforming assets to total assets.................................... 0.58 0.81 (0.23)
</TABLE>
- ------------------------------
(1) Amounts are on a taxable-equivalent basis using the federal statutory tax
rate of 35 percent.
(2) See page 9, "Merger Accounting", for a description of merger accounting and
pro forma earnings presentations.
(3) The dividend amount for the first half of 1996 does not include a dividend
of $145 million paid to The Mitsubishi Bank, Limited in the first quarter
of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A.
(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, as a percentage of net interest income (taxable-equivalent) and
noninterest income. Foreclosed asset expense was $0.9 million in the first
six months of 1997 and $4.1 million in the first six months of 1996.
(7) Annualized.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT ------------------ ------------------
PER SHARE DATA) 1997 1996 1997 1996
- ------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees....... $437,087 $412,991 $857,559 $832,796
Investment securities --
taxable................... 38,642 32,099 74,470 64,853
Investment securities --
tax-exempt................ 2,160 2,630 4,379 5,356
Interest bearing deposits in
banks..................... 16,080 11,821 27,279 26,098
Federal funds sold and
securities purchased under
resale agreements......... 4,683 7,396 14,523 15,815
Trading account
securities.................. 6,011 6,664 11,484 11,751
-------- -------- -------- --------
Total interest income... 504,663 473,601 989,694 956,669
-------- -------- -------- --------
INTEREST EXPENSE
Deposits in domestic
offices................... 125,407 107,003 251,811 215,601
Deposits in foreign
offices................... 19,487 17,731 37,397 35,473
Federal funds purchased and
securities sold under
repurchase agreements..... 15,492 12,208 25,883 27,845
Commercial paper............ 24,876 23,225 44,729 43,962
Other borrowed funds........ 7,564 17,306 18,503 33,759
Subordinated capital
notes..................... 4,821 7,889 10,324 16,123
-------- -------- -------- --------
Total interest
expense............... 197,647 185,362 388,647 372,763
-------- -------- -------- --------
NET INTEREST INCOME........... 307,016 288,239 601,047 583,906
Provision for credit losses... -- 10,000 -- 20,000
-------- -------- -------- --------
Net interest income
after provision for
credit losses......... 307,016 278,239 601,047 563,906
-------- -------- -------- --------
NONINTEREST INCOME
Service charges on deposit
accounts.................. 28,307 25,067 55,428 49,028
Trust fees.................. 25,696 23,309 49,594 45,557
International commissions
and fees.................. 17,306 17,124 32,385 33,402
Credit card merchant fees... 14,283 12,905 27,327 24,503
Merchant banking fees....... 6,445 5,234 14,825 14,482
Investment securities gains,
net....................... 81 2,621 552 3,237
Other....................... 18,903 19,290 45,696 38,215
-------- -------- -------- --------
Total noninterest
income................ 111,021 105,550 225,807 208,424
-------- -------- -------- --------
NONINTEREST EXPENSE
Salaries and employee
benefits.................. 137,173 139,964 277,961 282,315
Occupancy................... 22,884 24,270 42,514 46,225
Equipment................... 14,143 13,336 27,830 27,149
Communications.............. 10,518 9,334 20,786 18,021
Credit card processing...... 10,545 10,038 20,267 18,407
Professional services....... 7,882 6,592 12,601 12,461
Advertising and public
relations................. 7,218 6,702 13,227 13,695
Data processing............. 6,148 4,689 12,571 10,007
Printing and office
supplies.................. 6,087 6,434 12,256 12,532
Foreclosed asset expense.... 465 867 876 4,141
Merger and integration...... -- 61,266 6,037 61,266
Other....................... 32,690 30,292 61,965 59,589
-------- -------- -------- --------
Total noninterest
expense............... 255.753 313,784 508,891 565,808
-------- -------- -------- --------
Income before income taxes.... 162,284 70,005 317,963 206,522
Income tax expense............ 65,739 25,597 128,916 78,848
-------- -------- -------- --------
NET INCOME.................... $ 96,545 $ 44,408 $189,047 $127,674
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME APPLICABLE TO:
Common stock................ $ 88,097 $ 39,096 $172,388 $115,864
-------- -------- -------- --------
-------- -------- -------- --------
Parent direct interest in
bank subsidiary........... $ 5,621 $ 2,486 $ 11,006 $ 6,158
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME PER AVERAGE COMMON
SHARE........................ $ 1.61 $ 0.71 $ 3.15 $ 2.12
-------- -------- -------- --------
-------- -------- -------- --------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (IN THOUSANDS)... 54,796 54,752 54,780 54,721
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
JUNE 30, DECEMBER 31, JUNE 30,
(DOLLARS IN THOUSANDS) 1997 1996 1996
- ----------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks................................................ $ 2,340,247 $2,268,771 $ 1,951,582
Interest bearing deposits in banks..................................... 919,040 1,131,216 914,087
Federal funds sold and securities purchased under resale agreements.... 262,700 537,710 488,240
------------ ------------ ------------
Total cash and cash equivalents.................................... 3,521,987 3,937,697 3,353,909
Trading account securities............................................. 580,401 617,464 544,551
Investment securities available for sale............................... 2,531,733 2,164,197 1,917,089
Investment securities held to maturity (market value of 252,188 at June
30, 1997, $274,405 at December 31, 1996, and $314,203 at June 30,
1996)................................................................. 247,809 268,196 309,712
Loans.................................................................. 21,951,559 20,898,105 20,480,678
Less: Allowance for credit losses...................................... 502,114 523,946 545,345
------------ ------------ ------------
Net loans.......................................................... 21,449,445 20,374,159 19,935,333
Customers' acceptance liability........................................ 803,272 778,378 884,162
Premises and equipment, net............................................ 410,831 410,621 424,116
Intangible assets...................................................... 84,439 91,129 97,827
Other assets........................................................... 645,233 592,218 648,217
------------ ------------ ------------
Total assets....................................................... $ 30,275,150 $29,234,059 $ 28,114,916
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits in domestic offices:
Noninterest bearing.................................................. $ 7,674,300 $7,381,078 $ 6,696,146
Interest bearing..................................................... 12,983,561 12,607,691 11,565,169
Deposits in foreign offices:
Noninterest bearing.................................................. 296,848 274,031 317,082
Interest bearing..................................................... 1,398,210 1,270,160 1,387,111
------------ ------------ ------------
Total deposits..................................................... 22,352,919 21,532,960 19,965,508
Federal funds purchased and securities sold under repurchase
agreements............................................................ 1,114,292 1,322,654 1,130,840
Commercial paper....................................................... 1,756,777 1,495,463 1,736,712
Other borrowed funds................................................... 528,385 758,251 970,848
Acceptances outstanding................................................ 803,272 778,378 884,162
Other liabilities...................................................... 597,648 469,420 519,459
Subordinated capital notes............................................. 482,000 382,000 495,369
------------ ------------ ------------
Total liabilities.................................................. 27,635,293 26,739,126 25,702,898
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Parent direct interest in equity of bank subsidiary.................... 137,227 128,689 125,320
Preferred stock:
Authorized 5,000,000 shares, issued 1,350,000 shares 8 3/8%
Noncumulative, Series A............................................ 135,000 135,000 135,000
Common stock--$5 stated value:
Authorized 100,000,000 shares, issued 54,866,952 as of June 30, 1997,
54,762,653 as of December 31, 1996, and 54,757,877 as of June 30,
1996............................................................... 274,334 273,813 273,789
Additional paid-in capital............................................. 1,316,973 1,310,813 1,310,428
Retained earnings...................................................... 766,419 635,180 563,437
Cumulative translation adjustment...................................... (3,580) (2,752) (2,157)
Net unrealized gain on securities available for sale................... 13,484 14,190 6,201
------------ ------------ ------------
Total shareholders' equity......................................... 2,639,857 2,494,933 2,412,018
------------ ------------ ------------
Total liabilities and shareholders' equity......................... $ 30,275,150 $29,234,059 $ 28,114,916
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
(DOLLARS IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................... $ 189,047 $ 127,674
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses........................................................ -- 20,000
Depreciation, amortization and accretion........................................... 32,698 32,196
Provision for deferred income taxes................................................ 17,606 19,482
Gain on sale or call of investment securities available for sale, net.............. (502) (3,149)
Non cash portion of M&I expense.................................................... (886) --
Other, net......................................................................... 97,309 (337,670)
----------- -----------
Total adjustments................................................................ 146,225 (269,141)
----------- -----------
Net cash provided (used) by operating activities..................................... 335,272 (141,467)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment securities available for sale....................... 989 11,667
Proceeds from matured and called investment securities available for sale............ 111,123 495,606
Purchase of investment securities available for sale................................. (431,931) (419,552)
Proceeds from matured and called investment securities held to maturity.............. 20,636 50,687
Net increase in loans................................................................ (1,123,433 (292,040)
Other, net........................................................................... (34,043) (22,769)
----------- -----------
Net cash used by investing activities.............................................. (1,456,659) (176,401)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits............................................................. 819,959 310,465
Net decrease in federal funds purchased and securities sold under repurchase
agreements......................................................................... (208,362) (170,518)
Net increase in commercial paper and other borrowed funds............................ 31,448 454,407
Maturity and redemption of subordinated capital notes................................ 100,000 (6,000)
Dividends paid....................................................................... (46,180) (181,734)
Repayment of borrowing to support corporate owned life insurance..................... -- (95,475)
Other, net........................................................................... 1,490 1,193
----------- -----------
Net cash provided (used) by financing activities................................... 698,355 312,338
----------- -----------
Net increase (decrease) in cash and cash equivalents................................... (423,032) (5,530)
Cash and cash equivalents at beginning of period....................................... 3,937,697 3,352,423
Foreign exchange revaluation gain...................................................... 7,322 7,016
----------- -----------
Cash and cash equivalents at end of period............................................. $ 3,521,987 $ 3,353,909
----------- -----------
----------- -----------
CASH PAID DURING THE PERIOD FOR:
Interest............................................................................. $ 402,018 $ 373,902
Income taxes......................................................................... 80,080 43,249
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Loans transferred to foreclosed assets............................................... $ 12,856 $ 17,629
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NET
PARENT UNREALIZED
DIRECT GAIN
INTEREST IN ADDITIONAL CUMULATIVE ON SECURITIES
BANK PREFERRED COMMON PAID-IN RETAINED TRANSLATION AVAILABLE FOR
(DOLLARS IN THOUSANDS) SUBSIDIARY STOCK STOCK CAPITAL EARNINGS ADJUSTMENT SALE
- --------------------------------- ----------- ----------- ----------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995..... $ 159,996 $ 135,000 $ 273,351 $1,306,697 $ 585,680 $ (972) $ 24,340
Decrease in unrealized gain on
securities available for sale,
net of taxes.................... (865) (18,139)
Net income....................... 6,158 121,516
Dividend reinvestment plan....... 116 1,077
Dividends on common stock ($0.35
per share) (1).................. (31,960)
Dividends on preferred stock..... (5,652)
Dividend to MBL (2).............. (39,890) (105,000)
Deferred compensation--restricted
stock awards.................... 212 2,095 (1,147)
Stock options exercised.......... 110 559
Change in translation
adjustment...................... (79) (1,185)
----------- ----------- ----------- ----------- --------- ----------- -------------
BALANCE AT JUNE 30, 1996......... $ 125,320 $ 135,000 $ 273,789 $1,310,428 $ 563,437 $ (2,157) $ 6,201
----------- ----------- ----------- ----------- --------- ----------- -------------
----------- ----------- ----------- ----------- --------- ----------- -------------
BALANCE AT DECEMBER 31, 1996..... $ 128,689 $ 135,000 $ 273,813 $1,310,813 $ 635,180 $ (2,752) $ 14,190
Decrease in unrealized gain on
securities available for sale,
net of taxes.................... 19 (706)
Net income....................... 11,006 178,041
Dividend reinvestment plan....... 1 (76)
Dividends on common stock ($0.35
per share)...................... (2,434) (38,368)
Dividends on preferred stock..... (5,653)
Deferred compensation--restricted
stock awards.................... 287 3,558 (2,781)
Stock options exercised.......... 233 2,678
Change in translation
adjustment...................... (53) (828)
----------- ----------- ----------- ----------- --------- ----------- -------------
BALANCE AT JUNE 30, 1997......... $ 137,227 $ 135,000 $ 274,334 $1,316,973 $ 766,419 $ (3,580) $ 13,484
----------- ----------- ----------- ----------- --------- ----------- -------------
----------- ----------- ----------- ----------- --------- ----------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS) TOTAL
- --------------------------------- ---------
<S> <C>
BALANCE AT DECEMBER 31, 1995..... $2,484,092
Decrease in unrealized gain on
securities available for sale,
net of taxes.................... (19,004)
Net income....................... 127,674
Dividend reinvestment plan....... 1,193
Dividends on common stock ($0.35
per share) (1).................. (31,960)
Dividends on preferred stock..... (5,652)
Dividend to MBL (2).............. (144,890)
Deferred compensation--restricted
stock awards.................... 1,160
Stock options exercised.......... 669
Change in translation
adjustment...................... (1,264)
---------
BALANCE AT JUNE 30, 1996......... $2,412,018
---------
---------
BALANCE AT DECEMBER 31, 1996..... $2,494,933
Decrease in unrealized gain on
securities available for sale,
net of taxes.................... (687)
Net income....................... 189,047
Dividend reinvestment plan....... (75)
Dividends on common stock ($0.35
per share)...................... (40,802)
Dividends on preferred stock..... (5,653)
Deferred compensation--restricted
stock awards.................... 1,064
Stock options exercised.......... 2,911
Change in translation
adjustment...................... (881)
---------
BALANCE AT JUNE 30, 1997......... $2,639,857
---------
---------
</TABLE>
- ------------------------------
(1) Based on historical Union Bank common cash dividends declared and does not
include a $145 million dividend paid to The Mitsubishi Bank, Limited in the
first quarter of 1996 by BanCal Tri-State Corporation and The Bank of
California, N.A.
(2) The Mitsubishi Bank, Limited.
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The unaudited condensed 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. Accordingly, they do not include
all of the information and footnote disclosures necessary for complete financial
statements in conformity with GAAP. The preparation of financial statements in
conformity with GAAP 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. These unaudited condensed
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, 1996.
In the opinion of management, all adjustments (comprised of normal accruals)
considered necessary for a fair presentation of the Company's interim financial
statements have been included.
Primary and fully diluted earnings per share are computed based on net
income after preferred dividends and parent direct interest in bank subsidiary,
and use the weighted average number of common shares and equivalent common
shares outstanding during the period. Stock options are a common stock
equivalent but, for the periods presented, did not have a dilutive effect and
are, therefore, not included in the Company's earnings per share calculations.
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 on the Company's financial statements was not material
and believes that the effect of adoption of SFAS No. 127 will also not be
material.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". This
Statement simplifies the standards for computing earnings per share ("EPS") and
makes them comparable to international EPS standards. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In addition, all
entities with complex capital structures are required to provide a dual
disclosure of basic and diluted EPS on the face of the income statement and a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. This Statement
applies to entities with publicly held common stock or potential common stock
and is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods, and requires restatement of all
prior period EPS data presented.
8
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
NOTE 2 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The following table provides pro forma disclosure of basic and diluted EPS
in accordance with SFAS No. 128:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Pro forma basic EPS..................................................... 1.61 0.71 3.15 2.12
Pro forma diluted EPS................................................... 1.60 0.71 3.14 2.11
</TABLE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expense, gains, and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It also
requires disclosure of the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. The statement is effective for
fiscal years beginning after December 15, 1997, and requires the
reclassification of financial statements for earlier periods presented for
comparative purposes.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. This Statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
Statement is effective for financial statements for periods beginning after
December 15, 1997, and requires the restatement of financial statements for
earlier periods presented for comparative purposes. This Statement need not be
applied to interim financial statements in the initial year of its application.
NOTE 3 -- SUBSEQUENT EVENT
Subsequent to June 30, 1997, the Company announced that the Franchise Tax
Board of the State of California approved tax and interest refunds to settle
litigation, administration and audit disputes covering tax years 1975-1987. The
final agreement is expected to be signed during the third quarter of 1997. It is
estimated that the effect on the Company's net income will be approximately $25
million after tax.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
UnionBanCal Corporation is a San Francisco, California-based bank holding
company with consolidated assets of $30 billion at June 30, 1997. Its primary
banking subsidiary is Union Bank of California, N.A. the third largest
commercial bank in California, and among the 30 largest banks in the United
States. Union Bank of California, N.A., had 237 banking offices in California, 5
banking offices in Oregon and Washington and 18 overseas facilities at June 30,
1997. UnionBanCal Corporation is 81 percent owned by The Bank of
Tokyo-Mitsubishi, Ltd., and 19 percent owned by other shareholders. Union Bank
of California, N.A., is 94 percent owned by UnionBanCal Corporation and 6
percent directly owned by The Bank of Tokyo-Mitsubishi, Ltd.
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.
The interim financial information should be read in conjunction with the
Company's Form 10-K for the year ended December 31, 1996. Certain amounts for
prior periods have been reclassified to conform with current financial statement
presentation.
MERGER ACCOUNTING
UnionBanCal Corporation was formed from the combination of Union Bank with
BanCal Tri-State Corporation and its banking subsidiary, The Bank of California,
N.A., on April 1, 1996. The merger was effected by the issuance of 18,134,027
shares of Union Bank common stock in exchange for all the outstanding common
shares of BanCal Tri-State Corporation.
The combination was accounted for as a reorganization of entities under
common control (similar to a pooling of interests). Accordingly, all historical
financial information has been restated as if the combination had been in effect
for all periods presented.
To facilitate the discussion of the results of operations, the Consolidated
Financial Highlights on pages 2 and 3 and the Analysis of Earnings on page 13
include certain pro forma earnings disclosures. These presentations supplement
the Condensed Consolidated Statements of Income on page 4 (which are prepared in
accordance with GAAP) with respect to the treatment of merger and integration
expense. Management believes that it is meaningful to review the operating
results trends excluding merger and integration expense and, therefore, has
included information in the Consolidated Financial Highlights and the Analysis
of Earnings which presents earnings before and after income taxes, as well as
certain financial ratios, excluding merger and integration expense.
10
<PAGE>
SUMMARY
Net income in the second quarter of 1997 was $97 million. Net income
applicable to common stock was $88 million, or $1.61 per common share, in the
second quarter of 1997, compared with $39 million, or $0.71 per common share, in
the second quarter of 1996. Pro forma earnings, excluding after-tax merger and
integration expense, were $97 million, an increase of 17 percent from a year
earlier. Pro forma earnings applicable to common stock were $88 million, or
$1.61 per common share, compared with $75 million, or $1.37 per common share, in
the second quarter of 1996. Other comparisons of the second quarter of 1997 with
the second quarter of 1996 are as follows:
- Net interest income on a taxable-equivalent basis was $308 million in the
second quarter of 1997, a $18 million, or 6 percent, increase from one
year earlier, due to a $1.5 billion, or 6 percent, increase in average
earning assets.
- No provision for credit losses was recorded, compared with $10 million in
the second quarter of 1996, reflecting improvement in the quality of the
loan portfolio. The allowance for credit losses was $502 million, or 344
percent of total nonaccrual loans, at June 30, 1997, compared with an
allowance of $545 million, or 285 percent of total nonaccrual loans, at
June 30, 1996.
- Noninterest income was $111 million, an increase of $5 million over the
second quarter of 1996, due primarily to an increase in service charges on
deposits of $3 million and an increase in trust fees of $2 million.
- Noninterest expense was $256 million, a $3 million, or 1 percent, increase
from the second quarter of 1996, excluding $61 million of merger and
integration expense. Although salaries and employee benefits declined $3
million due to staff reductions and occupancy $1 million due to the
closure of banking offices, all other interest expense combined increased
$7 million or 8 percent. No merger and integration expense was recorded in
the second quarter of 1997.
- The effective tax rate for second quarter 1997 was 41 percent compared
with 37 percent for the same quarter in 1996, due to a $5 million tax
benefit in 1996 reflecting the settlement of a unitary tax issue with the
State of California.
- The return on average assets increased to 1.32% from 0.64%. The return on
average common equity increased to 15.16% from 7.26%. Excluding the
after-tax effect of merger and integration expense, the pro forma return
on average assets increased to 1.32% from 1.20%, while the pro forma
return on average common equity increased to 15.16% from 13.95%.
- Total loans at June 30, 1997, increased $1.5 billion, or 7 percent, over
June 30, 1996, due to growth in both the commercial, financial and
industrial and the commercial mortgage portfolios. At $22.0 billion, total
loans were 4 percent higher at June 30, 1997 than at March 31, 1997.
- Nonperforming assets declined $52 million, or 23 percent, from June 30,
1996, to $176 million at June 30, 1997. Nonperforming assets as a percent
of total assets were 0.58% at June 30, 1997 compared with 0.81% a year
earlier. Total nonaccrual loans at June 30, 1997 and 1996 were $146
million and $191 million, respectively. This decrease caused the ratio of
nonaccrual and renegotiated loans to total loans to drop from 0.94% to
0.67%.
- The Tier 1 and total risk-based capital ratios were [9.19%] and [11.59%]
at June 30, 1997, compared with 8.94% and 11.24% at June 30, 1996. The
second quarter 1997 leverage ratio was [8.68%], compared with 8.33% for
the second quarter of 1996.
11
<PAGE>
SUMMARY (CONTINUED)
Net income in the first half of 1997 was $189 million, after $4 million of
after-tax merger and integration expense recorded in connection with the April
1, 1996, combination of Union Bank and BanCal Tri-State Corporation. Net income
applicable to common stock was $172 million, or $3.15 per common share, in the
first half of 1997, compared with $116 million, or $2.12 per common share, in
the first half of 1996. Pro forma earnings, excluding after-tax merger and
integration expense, were $193 million, an increase of 16 percent from a year
earlier. Pro forma earnings applicable to common stock were $176 million, or
$3.21 per common share, compared with $152 million, or $2.78 per common share,
in the first half of 1996. Other comparisons of the first half of 1997 with the
first half of 1996 are as follows:
- Net interest income on a taxable-equivalent basis was $604 million in the
first half of 1997, a $16 million, or 3 percent, increase from one year
earlier. The net interest margin declined 12 basis points to 4.72 percent,
largely due to a drop in domestic loan yields of 17 basis points, which
was offset by loan growth of 5 percent.
- No provision for credit losses was recorded, compared with $20 million in
the first half of 1996, reflecting improvement in the quality of the loan
portfolio. Net loans charged off in the first half of 1997 were $22
million, or 0.21% of average loans outstanding, compared with $30 million,
or 0.30% of average loans outstanding, in the same period a year ago.
- Noninterest income was $226 million, an increase of $17 million over the
first half of 1996, due primarily to a $6 million increase in service
charges on deposit accounts and an $8 million gain on a real estate joint
venture.
- Noninterest expense, excluding $6 million of merger and integration
expense in the first half of 1997 compared with $61 million in the first
half of 1996, was $503 million, a $2 million decrease from the first half
of 1996. Personnel-related and occupancy expense decreased $8 million as a
result of consolidations stemming from the merger. In addition, foreclosed
asset expense declined $3 million. These decreases were mostly offset by
increases in credit card, communications, and data processing expense.
- The effective tax rate for the second half of 1997 was 41% compared with
38% for the same period of 1996.
- The return on average assets increased to 1.31% from 0.93%. The return on
average common equity increased to 15.14% from 10.65%. Excluding the
after-tax effect of merger and integration expense, the pro forma return
on average assets increased to 1.33% from 1.21%, while the pro forma
return on average common equity increased to 15.43% from 13.96%. The 12
basis point increase in pro forma return on average assets is attibutable
to a 16 percent increase in pro forma earnings combined with a 5 percent
increase in average assets. Similarly, the 147 basis point increase in pro
forma return an average common equity is due to a 16 percent increase in
pro forma earnings applicable to common stock combined with an 8 percent
increase in average common equity.
12
<PAGE>
ANALYSIS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE THREE MONTHS ENDED MONTHS ENDED
--------------------------------------------------------------- --------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, JUNE 30, JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1997 1996 1996 1996 1997 1996
- ------------------------------------- --------- ----------- ------------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS SUMMARY
Interest income (1)................ $ 506,048 $ 486,452 $ 490,803 $ 482,404 $ 475,625 $ 992,500 $ 960,821
Interest expense................... 197,647 191,000 196,236 189,727 185,362 388,647 372,763
--------- ----------- ------------- ------------- --------- --------- ---------
Net interest income (1)............ 308,401 295,452 294,567 292,677 290,263 603,853 588,058
Provision for credit losses........ -- -- 10,000 10,000 10,000 -- 20,000
Noninterest income................. 111,021 114,786 102,972 107,280 105,550 225,807 208,424
Noninterest expense, excluding
merger and integration expense
(2).............................. 255,753 247,101 254,375 258,523 252,518 502,854 504,542
--------- ----------- ------------- ------------- --------- --------- ---------
Income before merger and
integration expense and income
taxes (1)(2)..................... 163,669 163,137 133,164 131,434 133,295 326,806 271,940
Merger and integration expense
(2).............................. -- 6,037 30,646 25,552 61,266 6,037 61,266
--------- ----------- ------------- ------------- --------- --------- ---------
Income before income taxes (1)..... 163,669 157,100 102,518 105,882 72,029 320,769 210,674
Taxable-equivalent adjustment...... 1,385 1,421 1,483 1,089 2,024 2,806 4,152
Income tax expense................. 65,739 63,177 41,234 42,810 25,597 128,916 78,848
--------- ----------- ------------- ------------- --------- --------- ---------
Net income......................... $ 96,545 $ 92,502 $ 59,801 $ 61,983 $ 44,408 $ 189,047 $ 127,674
--------- ----------- ------------- ------------- --------- --------- ---------
--------- ----------- ------------- ------------- --------- --------- ---------
Net income applicable to:
Common stock..................... $ 88,097 $ 84,291 $ 53,472 $ 55,745 $ 39,096 $ 172,388 $ 115,864
--------- ----------- ------------- ------------- --------- --------- ---------
--------- ----------- ------------- ------------- --------- --------- ---------
Parent direct interest in bank
subsidiary..................... $ 5,621 $ 5,385 $ 3,503 $ 3,411 $ 2,486 $ 11,006 $ 6,158
--------- ----------- ------------- ------------- --------- --------- ---------
--------- ----------- ------------- ------------- --------- --------- ---------
RECAP OF EARNINGS
Net income......................... $ 96,545 $ 92,502 $ 59,801 $ 61,983 $ 44,408 $ 189,047 $ 127,674
Merger and integration expense
(after-tax) (2).................. -- 3,550 18,570 15,025 38,323 3,550 38,323
--------- ----------- ------------- ------------- --------- --------- ---------
Pro forma earnings, excluding
merger and integration expense
(2).............................. $ 96,545 $ 96,052 $ 78,371 $ 77,008 $ 82,731 $ 192,597 $ 165,997
--------- ----------- ------------- ------------- --------- --------- ---------
--------- ----------- ------------- ------------- --------- --------- ---------
Net income applicable to common
stock............................ $ 88,097 $ 84,291 $ 53,472 $ 55,745 $ 39,096 $ 172,388 $ 115,864
Merger and integration expense
(after-tax) applicable to common
stock (2)........................ -- 3,338 17,460 14,128 36,036 3,338 36,036
--------- ----------- ------------- ------------- --------- --------- ---------
Pro forma earnings applicable to
common stock, excluding merger
and integration expense (2)...... $ 88,097 $ 87,629 $ 70,932 $ 69,873 $ 75,132 $ 175,726 $ 151,900
--------- ----------- ------------- ------------- --------- --------- ---------
--------- ----------- ------------- ------------- --------- --------- ---------
PER COMMON SHARE
Net income......................... $ 1.61 $ 1.54 $ 0.98 $ 1.02 $ 0.71 $ 3.15 $ 2.12
Merger and integration expense
(after-tax) (2).................. -- 0.06 0.32 0.26 0.66 0.06 0.66
--------- ----------- ------------- ------------- --------- --------- ---------
Pro forma earnings, excluding
merger and integration expense
(2).............................. $ 1.61 $ 1.60 $ 1.30 $ 1.28 $ 1.37 $ 3.21 $ 2.78
--------- ----------- ------------- ------------- --------- --------- ---------
--------- ----------- ------------- ------------- --------- --------- ---------
Dividends (3)...................... $ 0.35 $ 0.35 $ 0.35 $ 0.35 $ 0.35 $ 0.70 $ 0.70
Book value (end of period)......... 43.15 41.76 40.74 40.04 39.29 43.15 39.29
Weighted average common shares
outstanding (in thousands)....... 54,796 54,765 54,760 54,759 54,752 54,780 54,721
</TABLE>
- ------------------------------
(1) Amounts are on a taxable-equivalent basis using the federal statutory tax
rate of 35 percent.
(2) See page 9, "Merger Accounting", for a description of merger accounting and
pro forma earnings presentations.
(3) The dividend amount for the first six months of 1996 does not include a
dividend of $145 million paid to The Mitsubishi Bank, Limited in the second
quarter of 1996 by BanCal Tri-State Corporation and The Bank of California,
N.A.
13
<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
------------------------------------------------------------------------------------
JUNE 30, 1997 MARCH 31, 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............................... $ 20,239,615 $ 416,966 8.26% $ 19,818,799 $ 401,456 8.19%
Foreign................................ 1,293,283 20,431 6.34 1,250,023 19,307 6.26
Investment securities--taxable (3)....... 2,459,386 38,641 6.29 2,312,482 35,829 6.24
Investment securities--tax-exempt (3).... 127,403 3,236 10.16 134,157 3,348 9.98
Interest bearing deposits in banks....... 1,099,134 16,080 5.87 802,784 11,199 5.66
Federal funds sold and securities
purchased under resale agreements...... 329,367 4,683 5.70 733,499 9,840 5.44
Trading account securities............... 458,103 6,011 5.26 396,277 5,473 5.60
-------------- ------------ -------------- ------------
Total earning assets................. 26,006,291 506,048 7.80 25,448,021 486,452 7.73
------------ ------------
Allowance for credit losses.............. (515,546) (531,621)
Cash and due from banks.................. 2,034,748 2,032,209
Premises and equipment, net.............. 412,993 416,582
Other assets............................. 1,500,811 1,425,210
-------------- --------------
Total assets......................... $ 29,439,297 $ 28,790,401
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits in domestic offices:
Interest bearing....................... $ 5,280,831 37,074 2.82 $ 5,212,126 35,961 2.80
Savings and consumer time.............. 2,955,092 27,890 3.79 2,918,508 27,025 3.76
Large time............................. 4,479,911 60,442 5.41 4,755,047 63,419 5.41
Deposits in foreign offices.............. 1,626,865 19,488 4.80 1,540,546 17,909 4.71
-------------- ------------ -------------- ------------
Total interest bearing deposits...... 14,342,699 144,894 4.05 14,426,227 144,314 4.06
-------------- ------------ -------------- ------------
Federal funds purchased and securities
sold under repurchase agreements....... 1,158,540 15,492 5.36 819,980 10,391 5.14
Subordinated capital notes............... 295,187 4,821 6.55 343,111 5,503 6.51
Other borrowed funds..................... 2,409,865 32,440 5.40 2,291,772 30,792 5.45
-------------- ------------ -------------- ------------
Total borrowed funds................. 3,863,592 52,753 5.48 3,454,863 46,686 5.48
-------------- ------------ -------------- ------------
Total interest bearing liabilities... 18,206,291 197,647 4.35 17,881,090 191,000 4.33
------------ ------------
Demand deposits.......................... 7,364,799 7,102,730
Other liabilities........................ 1,268,456 1,279,767
-------------- --------------
Total liabilities.................... 26,839,546 26,263,587
SHAREHOLDERS' EQUITY..................... 2,599,751 2,526,814
-------------- --------------
Total liabilities and shareholders'
equity............................. $ 29,439,297 $ 28,790,401
-------------- --------------
-------------- --------------
Net interest income/margin
(taxable-equivalent basis)............. 308,401 4.75% 295,452 4.69%
Less: taxable-equivalent adjustment...... 1,385 1,421
------------ ------------
Net interest income.................. $ 307,016 $ 294,031
------------ ------------
------------ ------------
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE (1) RATE (1)
- ----------------------------------------- -------------- ------------ -----------
<S> <C> <C> <C>
ASSETS
Loans: (2)
Domestic............................... $ 19,632,870 $ 404,481 8.20%
Foreign................................ 1,210,820 18,864 6.20
Investment securities--taxable (3)....... 2,234,788 34,408 6.14
Investment securities--tax-exempt (3).... 142,155 3,568 10.04
Interest bearing deposits in banks....... 980,076 14,126 5.73
Federal funds sold and securities
purchased under resale agreements...... 606,687 8,403 5.51
Trading account securities............... 488,505 6,953 5.66
-------------- ------------
Total earning assets................. 25,295,901 490,803 7.72
------------
Allowance for credit losses.............. (534,247)
Cash and due from banks.................. 2,020,856
Premises and equipment, net.............. 430,765
Other assets............................. 1,378,108
--------------
Total assets......................... $ 28,591,383
--------------
--------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits in domestic offices:
Interest bearing....................... $ 5,121,292 35,806 2.78
Savings and consumer time.............. 2,892,147 27,342 3.76
Large time............................. 4,759,405 65,018 5.43
Deposits in foreign offices.............. 1,486,542 17,720 4.74
-------------- ------------
Total interest bearing deposits...... 14,259,386 145,886 4.07
-------------- ------------
Federal funds purchased and securities
sold under repurchase agreements....... 692,535 8,784 5.05
Subordinated capital notes............... 391,685 6,489 6.59
Other borrowed funds..................... 2,521,206 35,077 5.53
-------------- ------------
Total borrowed funds................. 3,605,426 50,350 5.56
-------------- ------------
Total interest bearing liabilities... 17,864,812 196,236 4.37
------------
Demand deposits.......................... 7,030,556
Other liabilities........................ 1,220,071
--------------
Total liabilities.................... 26,115,439
SHAREHOLDERS' EQUITY..................... 2,475,944
--------------
Total liabilities and shareholders'
equity............................. $ 28,591,383
--------------
--------------
Net interest income/margin
(taxable-equivalent basis)............. 294,567 4.63%
Less: taxable-equivalent adjustment...... 1,483
------------
Net interest income.................. $ 293,084
------------
------------
</TABLE>
- ------------------------------
(1) Yields and interest income are presented on a taxable-equivalent basis
using the federal statutory tax rate of 35 percent.
(2) The amortized portion of net loan origination fees (costs) is included in
interest income on loans.
(3) Yields on investment securities available for sale were based on fair
value. The difference between these yields and those based on amortized
cost was not significant.
14
<PAGE>
NET INTEREST INCOME (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------------------------------------
SEPTEMBER 30, 1996 JUNE 30, 1996
------------------------------ ---------------------------------
INTEREST AVERAGE AVERAGE
INCOME/ YIELD/ INTEREST YIELD/
AVERAGE EXPENSE RATE AVERAGE INCOME/ RATE
(DOLLARS IN THOUSANDS) BALANCE (1) (1) BALANCE EXPENSE (1) (1)
- -------------------------------------------------------------- ----------- -------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans: (2)
Domestic.................................................... $19,453,079 $402,143 8.22% $19,235,527 $ 396,344 8.29%
Foreign..................................................... 1,198,378 17,847 5.92 1,146,364 17,272 6.06
Investment securities--
taxable (3).................................................. 2,119,276 33,909 6.38 2,082,706 32,099 6.18
Investment securities--
tax-exempt (3)............................................... 147,623 3,735 10.12 157,139 4,024 10.24
Interest bearing deposits in banks............................ 864,087 12,485 5.75 833,804 11,821 5.70
Federal funds sold and securities purchased under resale
agreements................................................... 433,494 6,028 5.53 547,527 7,396 5.43
Trading account securities.................................... 439,227 6,257 5.67 489,698 6,669 5.48
----------- -------- ----------- -----------
Total earning assets...................................... 24,655,164 482,404 7.78 24,492,765 475,625 7.81
-------- -----------
Allowance for credit losses................................... (543,646) (546,744)
Cash and due from banks....................................... 1,918,643 1,911,415
Premises and equipment, net................................... 425,019 427,181
Other assets.................................................. 1,526,714 1,513,584
----------- -----------
Total assets.............................................. $27,981,894 $27,798,201
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits in domestic offices:
Interest bearing............................................ $ 5,037,400 34,137 2.70 $ 4,924,269 33,148 2.71
Savings and consumer time................................... 2,854,894 26,294 3.66 2,816,501 25,695 3.67
Large time.................................................. 4,137,305 55,932 5.38 3,724,302 48,160 5.20
Deposits in foreign offices................................... 1,512,042 18,244 4.80 1,504,478 17,731 4.74
----------- -------- ----------- -----------
Total interest bearing deposits........................... 13,541,641 134,607 3.95 12,969,550 124,734 3.87
----------- -------- ----------- -----------
Federal funds purchased and securities sold under repurchase
agreements................................................... 817,236 10,466 5.09 1,022,271 12,208 4.80
Subordinated capital notes.................................... 452,211 7,492 6.59 495,369 7,889 6.40
Other borrowed funds.......................................... 2,759,849 37,162 5.36 3,032,052 40,531 5.38
----------- -------- ----------- -----------
Total borrowed funds...................................... 4,029,296 55,120 5.44 4,549,692 60,628 5.36
----------- -------- ----------- -----------
Total interest bearing liabilities........................ 17,570,937 189,727 4.30 17,519,242 185,362 4.26
-------- -----------
Demand deposits............................................... 6,640,131 6,560,900
Other liabilities............................................. 1,335,204 1,291,592
----------- -----------
Total liabilities......................................... 25,546,272 25,371,734
SHAREHOLDERS' EQUITY.......................................... 2,435,622 2,426,467
----------- -----------
Total liabilities and shareholders' equity................ $27,981,894 $27,798,201
----------- -----------
----------- -----------
Net interest income/margin (taxable-equivalent basis)......... 292,677 4.72% 290,263 4.77%
Less: taxable-equivalent adjustment........................... 1,089 2,024
-------- -----------
Net interest income....................................... $291,588 $ 288,239
-------- -----------
-------- -----------
</TABLE>
- ------------------------------
(1) Yields and interest income are presented on a taxable-equivalent basis
using the federal statutory tax rate of 35 percent.
(2) The amortized portion of net loan origination fees (costs) is included in
interest income on loans.
(3) Yields on investment securities available for sale were based on fair
value. The difference between these yields and those based on amortized
cost was not significant.
15
<PAGE>
NET INTEREST INCOME (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------------------------------------------
JUNE 30, 1997 JUNE 30, 1996
------------------------------ ---------------------------------
INTEREST AVERAGE AVERAGE
INCOME/ YIELD/ INTEREST YIELD/
AVERAGE EXPENSE RATE AVERAGE INCOME/ RATE
(DOLLARS IN THOUSANDS) BALANCE (1) (1) BALANCE EXPENSE (1) (1)
- -------------------------------------------------------------- ----------- -------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans: (2)
Domestic.................................................... $20,030,369 $818,422 8.23% $19,100,846 $ 797,806 8.40%
Foreign..................................................... 1,271,773 39,738 6.30 1,184,313 36,343 6.17
Investment securities--taxable (3)............................ 2,386,340 74,470 6.27 2,099,105 64,853 6.21
Investment securities--tax-exempt (3)......................... 130,761 6,584 10.07 159,128 8,148 10.24
Interest bearing deposits in banks............................ 951,777 27,279 5.78 901,098 26,098 5.82
Federal funds sold and securities purchased under resale
agreements................................................... 530,317 14,523 5.52 575,305 15,815 5.53
Trading account securities.................................... 427,361 11,484 5.42 423,596 11,758 5.58
----------- -------- ----------- -----------
Total earning assets...................................... 25,728,698 992,500 7.77 24,443,391 960,821 7.90
-------- -----------
Allowance for credit losses................................... (523,539) (550,731)
Cash and due from banks....................................... 2,033,552 1,881,872
Premises and equipment, net................................... 414,777 423,973
Other assets.................................................. 1,463,221 1,414,956
----------- -----------
Total assets.............................................. $29,116,709 $27,613,461
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits in domestic offices:
Interest bearing............................................ $ 5,246,668 73,035 2.81 $ 4,921,914 65,878 2.69
Savings and consumer time................................... 2,936,900 54,915 3.77 2,800,477 51,714 3.71
Large time.................................................. 4,616,719 123,861 5.41 3,738,208 98,009 5.27
Deposits in foreign offices................................... 1,583,944 37,397 4.76 1,508,895 35,473 4.73
----------- -------- ----------- -----------
Total interest bearing deposits........................... 14,384,231 289,208 4.05 12,969,494 251,074 3.89
----------- -------- ----------- -----------
Federal funds purchased and securities sold under repurchase
agreements................................................... 990,195 25,883 5.27 1,113,942 27,845 5.03
Subordinated capital notes.................................... 319,017 10,324 6.53 496,391 16,124 6.53
Other borrowed funds.......................................... 2,351,213 63,232 5.42 2,843,906 77,720 5.50
----------- -------- ----------- -----------
Total borrowed funds...................................... 3,660,425 99,439 5.48 4,454,239 121,689 5.49
----------- -------- ----------- -----------
Total interest bearing liabilities........................ 18,044,656 388,647 4.34 17,423,733 372,763 4.30
-------- -----------
Demand deposits............................................... 7,234,488 6,490,768
Other liabilities............................................. 1,274,081 1,233,753
----------- -----------
Total liabilities......................................... 26,553,225 25,148,254
SHAREHOLDERS' EQUITY.......................................... 2,563,484 2,465,207
----------- -----------
Total liabilities and shareholders' equity................ $29,116,709 $27,613,461
----------- -----------
----------- -----------
Net interest income/margin (taxable-equivalent basis)......... 603,853 4.72% 588,058 4.84%
Less: taxable-equivalent adjustment........................... 2,806 4,152
-------- -----------
Net interest income....................................... $601,047 $ 583,906
-------- -----------
-------- -----------
</TABLE>
- ------------------------------
(1) Yields and interest income are presented on a taxable-equivalent basis
using the federal statutory tax rate of 35 percent.
(2) The amortized portion of net loan origination fees (costs) is included in
interest income on loans.
(3) Yields on investment securities available for sale were based on fair
value. The difference between these yields and those based on amortized
cost was not significant.
16
<PAGE>
NET INTEREST INCOME (CONTINUED)
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 composition of average interest earning assets and average interest
bearing liabilities.
Net interest income on a taxable-equivalent basis was $308 million for the
second quarter of 1997 and $290 million for the second quarter of 1996. This
increase of $18 million, or 6 percent, was primarily attributable to a $1.5
billion, or 6 percent, increase in average earning assets. At the same time, the
net interest margin declined 2 basis points to 4.75%, as a result of an increase
in the cost of interest bearing deposits. The negative effect of the decline in
the net interest margin was partly offset by an increase in the proportion of
funding provided by lower cost sources of funds.
Average earning assets were $26.0 billion in the second quarter of 1997,
compared with $24.5 billion in the second quarter of 1996. Most of this increase
was attributable to growth in average loans, which were up $1.2 billion, or 6
percent, while average investment securities were $347 million higher. See
"Loans" for additional commentary on growth in the loan portfolio.
The $1.5 billion, or 6 percent, growth in average earning assets from the
second quarter of 1996 to the second quarter of 1997 was funded primarily by
increases in demand deposits and interest bearing core deposits. Increases in
these categories were: demand deposits $804 million, or 12 percent; interest
bearing domestic deposits $357 million, or 7 percent; and savings and consumer
time deposits $139 million, or 5 percent. The average proportion of funding
provided by non-interest bearing and interest bearing core deposits (excluding
large time) increased from 65 percent in the second quarter of 1996 to 66
percent in the same period of 1997.
For the first half of 1997, net interest income before the provision for
loan losses, on a full taxable-equivalent basis was $604 million compared with
$588 million, a $16 million, or 3 percent, increase from one year earlier. In
contrast, the net interest margin declined 12 basis points to 4.72%. The 12
basis point decline in the net interest margin resulted from both an increase in
the cost of lower cost sources of funds and a decrease in the average yield on
assets. The cost of interest bearing core deposits (excluding large time)
increased by 8 basis points, while the yield on domestic loans dropped by 17
basis points.
The negative impact of the drop in the net interest margin was offset both
by an increase in the proportion of funding provided by demand deposits and
interest bearing core deposits as compared with other, higher cost, borrowed
funds and by growth in average earning assets of $1.3 billion, or 5 percent. The
majority of this growth was attributable to average domestic loans, which
increased by $930 million, or 5 percent. The proportion of funding provided by
noninterest bearing and other lower cost sources of funds increased from 64
percent in the first half of 1996 to 66 percent in the first half of 1997.
17
<PAGE>
NONINTEREST INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE THREE MONTHS ENDED ENDED
--------------------------------------------------------------- ----------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, JUNE 30, JUNE 30,
(DOLLARS IN THOUSANDS) 1997 1997 1996 1996 1996 1997 1996
- ----------------------------------- ---------- ---------- ------------ ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit
accounts.......................... $ 28,307 $ 27,121 $ 26,148 $ 26,799 $ 25,067 $ 55,428 $ 49,028
Trust fees......................... 25,696 23,898 23,824 24,098 23,309 49,594 45,557
International commissions and
fees.............................. 17,306 15,079 16,586 16,120 17,124 32,385 33,402
Credit card merchant fees.......... 14,283 13,044 11,554 13,721 12,905 27,327 24,503
Merchant banking fees.............. 6,445 8,380 4,718 4,729 5,234 14,825 14,482
Investment services................ 6,096 4,979 5,182 5,225 4,714 11,075 8,973
Foreign exchange................... 3,853 3,469 3,598 2,641 3,330 7,322 7,016
Investment securities gains, net... 81 471 637 628 2,621 552 3,237
Other.............................. 8,954 18,345 10,725 13,319 11,246 27,299 22,226
---------- ---------- ------------ ------------- ---------- ---------- ----------
Total noninterest income......... $ 111,021 $ 114,786 $ 102,972 $ 107,280 $ 105,550 $ 225,807 $ 208,424
---------- ---------- ------------ ------------- ---------- ---------- ----------
---------- ---------- ------------ ------------- ---------- ---------- ----------
</TABLE>
In the second quarter of 1997, the Company had noninterest income of $111
million, compared with $106 million for the same period in 1996. This increase
of $5 million was primarily due to a $3 million increase in service charges on
deposits arising from increased account analysis fees and a $2 million increase
in trust fees due to growth in the Company's proprietary mutual funds. Increases
of approximately $ 1 million each in credit card, merchant banking, investment
services and foreign exchange fees were offset by a $ 3 million decrease in net
gains on sales of investment securities.
For the six months ended June 30, 1997, noninterest income increased to $226
million from $208 million for the same period in 1996. This increase of $18
million was due to $8 million of non-recurring gains from a real estate-related
joint venture (included in "Other"), a $6 million increase in service charges on
deposits, a $4 million increase in trust fees and a $3 million increase in
credit card fees resulting from increased merchant volume, offset by the $3
million decrease in gains on secuities sales.
18
<PAGE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE THREE MONTHS ENDED ENDED
--------------------------------------------------------------- ----------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, JUNE 30, JUNE 30,
(DOLLARS IN THOUSANDS) 1997 1997 1996 1996 1996 1997 1996
- ----------------------------------- ---------- ---------- ------------ ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other compensation.... $ 112,714 $ 108,601 $ 109,201 $ 113,416 $ 114,281 $ 221,315 $ 226,176
Employee benefits.................. 24,459 32,187 27,724 24,591 25,683 56,646 56,139
---------- ---------- ------------ ------------- ---------- ---------- ----------
Personnel-related expense........ 137,173 140,788 136,925 138,007 139,964 277,961 282,315
Occupancy.......................... 22,884 19,630 21,671 35,439 24,270 42,514 46,225
Equipment.......................... 14,143 13,687 14,790 14,003 13,336 27,830 27,149
Communications..................... 10,518 10,268 9,203 8,713 9,334 20,786 18,021
Credit card processing............. 10,545 9,722 9,065 9,619 10,038 20,267 18,407
Professional services.............. 7,882 4,719 5,737 6,144 6,592 12,601 12,461
Advertising and public relations... 7,218 6,009 9,585 5,508 6,702 13,227 13,695
Data processing.................... 6,148 6,423 6,565 5,568 4,689 12,571 10,007
Printing and office supplies....... 6,087 6,169 6,614 7,939 6,434 12,256 12,532
Software........................... 3,604 4,729 4,575 3,966 3,678 8,333 7,354
Intangible asset amortization...... 3,338 3,338 3,321 3,338 3,338 6,676 6,676
Travel............................. 4,369 3,195 4,487 3,553 3,822 7,564 6,896
Armored car........................ 2,956 3,113 4,778 4,458 4,171 6,069 8,256
Foreclosed asset expense
(income).......................... 465 411 (556) (696) 867 876 4,141
Other.............................. 18,423 14,900 17,615 12,964 15,283 33,323 30,407
---------- ---------- ------------ ------------- ---------- ---------- ----------
Noninterest expense, excluding
merger and integration
expense........................ 255,753 247,101 254,375 258,523 252,518 502,854 504,542
Merger and integration expense..... -- 6,037 30,646 25,552 61,266 6,037 61,266
---------- ---------- ------------ ------------- ---------- ---------- ----------
Total noninterest expense........ $ 255,753 $ 253,138 $ 285,021 $ 284,075 $ 313,784 $ 508,891 $ 565,808
---------- ---------- ------------ ------------- ---------- ---------- ----------
---------- ---------- ------------ ------------- ---------- ---------- ----------
</TABLE>
Noninterest expense was $256 million for the second quarter of 1997,
compared with $253 million for the second quarter of 1996, an increase of $3
million, or 1 percent. Personnel-related expense decreased $3 million, or 2
percent, due to a 6 percent decline in full-time equivalent employees from 9,962
at June 30, 1996 to 9,381 at June 30, 1997. In addition, occupancy expense
decreased $1 million from a year ago due to the consolidation of administrative
functions and the closure of banking offices. Offsetting these reductions was an
increase of $7 million, or 8 percent, in all other noninterest expense combined,
of which the largest individual increases were in customer service payments
(which is recovered in revenue) and in credit card interchange and item
processing fees. No merger and integration expense was recorded in the second
quarter of 1997, compared with $61 million in the same quarter in 1996.
For the six months ended June 30, 1997, noninterest expense, excluding
merger and integration expense of $6 million, was $503 million, compared with
$505 million for the first six months of 1996, excluding merger and integration
expense of $61 million. This decrease of $2 million, or less than 1 percent,
resulted principally from a $4 million decrease in personnel-related expense,
due to a decline in full-time equivalent employees and a reduction in contract
labor expense, as well as a $4 million reduction in occupancy expense and a $3
million decline in forclosed asset expense. Offsetting these decreases was $7
million in increases in communication, credit card processing and data
processing expense.
19
<PAGE>
MERGER AND INTEGRATION EXPENSE
In connection with the merger, $6 million of merger and integration expense
was recognized in the first half of 1997. These costs included severance,
retention, and other employee-related costs ($1 million); professional fees ($1
million); and other merger and integration related expenses ($4 million). As a
result of the combination of Union Bank and BanCal Tri-State Corporation on
April 1, 1996, merger and integration expense totaling $124 million was
recorded. No further merger and integration charges are expected.
The table that follows presents merger and integration expense provisions in
1996 and the first half of 1997, the cash and noncash utilization of those
expense provisions during the periods, and the resulting liability balances as
of June 30, 1997, and December 31, 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED TWELVE MONTHS ENDED
(DOLLARS IN THOUSANDS) JUNE 30, 1997 DECEMBER 31, 1996
- ------------------------------------------------------------------------- ----------------- --------------------
<S> <C> <C>
Balance, accrued merger and integration expense, beginning of period..... $ 54,344 $ --
Provision for merger and integration costs............................... 6,037 117,464
Utilization:
Cash................................................................... 25,354 40,155
Noncash................................................................ 886 22,965
-------- -------
Total utilization.................................................... 26,240 63,120
-------- -------
Balance, accrued merger and integration expense, end of period........... $ 34,141 $ 54,344
-------- -------
-------- -------
</TABLE>
The Company's liquidity has not been significantly affected by these cash
outlays, and future cash outlays are not expected to impact liquidity.
INCOME TAX EXPENSE
The effective tax rates for the six months ended June 30, 1997 and 1996,
were 40.5 percent and 38.2 percent, respectively. The increase in the effective
tax rate was primarily attributable to an increase in the effective state tax
rates as a result of the combination of Union Bank with BanCal Tri-State
Corporation and of their parents, The Bank of Tokyo, Ltd. and The Mitsubishi
Bank, Limited, on April 1, 1996, and to a $5 million benefit recognized in 1996
from a favorable settlement with the California Franchise Tax Board for an
examination of 1985 and 1986 taxes.
20
<PAGE>
LOANS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
(DOLLARS IN THOUSANDS) 1997 1997 1996 1996 1996
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and
industrial....................... $ 10,385,050 $ 9,676,131 $ 9,492,255 $ 9,603,845 $ 9,439,260
Construction....................... 319,355 331,149 357,817 362,324 365,946
Mortgage:
Residential...................... 2,960,502 2,973,411 2,960,908 3,005,167 3,026,548
Commercial....................... 2,804,061 2,650,511 2,597,616 2,485,963 2,301,144
------------- ------------- ------------- ------------- -------------
Total mortgage................. 5,764,563 5,623,922 5,558,524 5,491,130 5,327,692
Consumer:
Installment...................... 2,054,050 2,061,883 2,063,434 2,038,849 1,943,889
Home equity...................... 1,058,937 1,064,357 1,113,269 1,137,454 1,166,428
Credit card and other lines of
credit......................... 279,163 284,009 303,235 296,131 298,798
------------- ------------- ------------- ------------- -------------
Total consumer................. 3,392,150 3,410,249 3,479,938 3,472,434 3,409,115
Lease financing.................... 857,935 824,325 800,048 823,082 830,889
------------- ------------- ------------- ------------- -------------
Total loans in domestic
offices...................... 20,719,053 19,865,776 19,688,582 19,752,815 19,372,902
Loans originated in foreign
branches............................ 1,232,506 1,234,150 1,209,523 1,193,950 1,107,776
------------- ------------- ------------- ------------- -------------
Total loans.................... $ 21,951,559 $ 21,099,926 $ 20,898,105 $ 20,946,765 $ 20,480,678
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The Company's lending activities are predominantly domestic, with such loans
comprising approximately 94 percent of the portfolio at June 30, 1997. Total
loans at June 30, 1997, were $22.0 billion, an increase of $1.5 billion, or 7
percent, from June 30, 1996. The increase was primarily attributable to growth
in the commercial, financial and industrial loan portfolio, which increased $946
million from June 30, 1996.
Commercial, financial and industrial loans represent the largest category in
the loan portfolio. These loans are principally to major corporations, middle
market businesses, and small businesses, with no industry concentration
exceeding ten percent of the total. At June 30, 1997 and 1996, the commercial,
financial and industrial loan portfolio was $10.4 billion, or 47 percent of
total loans, and $9.4 billion, or 46 percent of total loans, respectively. The
majority of the $1 billion increase over the 12 month period occurred in the
last quarter. The increase of $709 million in commercial loans from March 31,
1997 to June 30, 1997 was principally due to loans to large corporations. A
significant portion of the increase is expected to be repaid by year end.
The construction loan portfolio totaled $319 million, or 1 percent of total
loans, at June 30, 1997, compared with $366 million, or 2 percent of total
loans, at June 30, 1996.
Mortgage loans were $5.8 billion, or 26 percent of total loans, at June 30,
1997, and $5.3 billion, or 26 percent of total loans, at June 30, 1996. The
mortgage loan portfolio consists of loans on commercial and industrial projects
and loans secured by one to four family residential properties, primarily in
California. Commercial mortgages increased $503 million from June 30, 1996,
primarily due to originations of mini perm loans ranging from $1 million to $10
million.
Consumer loans totaled $3.4 billion, or 15 percent of total loans, at June
30, 1997, compared with $3.4 billion, or 17 percent of total loans, at June 30,
1996. This portfolio is primarily comprised of installment loans and home equity
loans. Installment loans increased $110 million from June 30, 1996, due to
increases in automobile lending.
21
<PAGE>
LOANS (CONTINUED)
Lease financing totaled $858 million, or 4 percent of total loans, at June
30, 1997, compared with $831 million, or 4% percent of total loans, at June 30,
1996.
Loans originated in foreign branches totaled $1.2 billion, or 6 percent of
total loans, at June 30, 1997 and $1.1 billion, or 5 percent of total loans, at
June 30, 1996.
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 the risks
inherent 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
and national 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, without any provision for
credit losses in the second quarter of 1997, future provisions will be subject
to continuing evaluation of inherent risk in the loan portfolio.
The table below sets forth a reconciliation of changes in the allowance for
credit losses.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
(DOLLARS IN THOUSANDS) 1997 1997 1996 1996 1996
- ----------------------------------------------- ---------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period................... $ 522,835 $ 523,946 $ 535,087 $ 545,345 $ 547,401
Loans charged off:
Commercial, financial and industrial....... 12,628 5,175 13,280 10,289 6,628
Construction............................... 120 -- 2,376 -- 806
Mortgage................................... 1,549 1,888 1,706 5,086 2,621
Consumer................................... 13,466 12,539 18,083 12,293 12,162
Lease financing............................ 709 969 683 716 577
Loans originated in foreign branches....... 34 -- 42 1,256 49
---------- ---------- ------------ ------------- ----------
Total loans charged off.................. 28,506 20,571 36,170 29,640 22,843
Recoveries of loans previously charged off:
Commercial, financial and industrial....... 3,644 7,540 7,887 4,030 4,271
Construction............................... -- 6,891 2 -- 129
Mortgage................................... 610 1,474 4,310 2,230 3,097
Consumer................................... 3,402 3,481 2,786 3,027 3,147
Lease financing............................ 129 74 44 95 143
---------- ---------- ------------ ------------- ----------
Total recoveries of loans previously
charged off............................ 7,785 19,460 15,029 9,382 10,787
---------- ---------- ------------ ------------- ----------
Net loans charged off.................. 20,721 1,111 21,141 20,258 12,056
Provision for credit losses.................... -- -- 10,000 10,000 10,000
---------- ---------- ------------ ------------- ----------
Balance, end of period......................... $ 502,114 $ 522,835 $ 523,946 $ 535,087 $ 545,345
---------- ---------- ------------ ------------- ----------
---------- ---------- ------------ ------------- ----------
Allowance for credit losses to total loans..... 2.29% 2.48% 2.51% 2.55% 2.66%
Provision for credit losses to net loans
charged off................................... -- -- 47.30 49.36 82.95
Recoveries of loans to loans charged off in the
previous period............................... 37.84 53.80 50.71 41.07 35.28
Net loans charged off to average loans
outstanding for the period (1)................ 0.39 0.02 0.40 0.39 0.24
</TABLE>
- ------------------------------
(1) Annualized.
22
<PAGE>
ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
At June 30, 1997, the Company's allowance for credit losses was $502
million, or 2.29 percent of total loans, and 343.58 percent of total nonaccrual
loans, compared with an allowance for credit losses at June 30, 1996 of $545
million, or 2.66 percent of total loans, and 284.78 percent of total nonaccrual
loans.
During the second quarter of 1997, the Company recorded no provision for
credit losses compared with a provision of $10 million in the second quarter of
1996. Similarly, there was no provision for credit losses in the first quarter
of 1997, compared to a provision of $10 million in the first quarter of 1996.
This resulted from management's regular quarterly assessment of overall credit
quality 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 second quarter of 1997, the Company had net loans charged off of
$21 million, compared with $12 million in the second quarter of 1996. There were
$8 million in recoveries during the second quarter of 1997 compared with $11
million in recoveries for the same period in 1996. Net loans charged off as a
percentage of average total loans for the second quarter of 1997 increased to
0.39%, compared with 0.24% for the same quarter a year ago.
The Company evaluates its loan portfolio for impairment as defined by
Statement of Financial Accounting Standard No. 114, as amended. At June 30,
1997, total impaired loans were $145 million, and the associated impairment
allowance was $3 million, compared with total impaired loans of $158 million and
an associated impairment allowance of $11 million, at June 30, 1996.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
(DOLLARS IN THOUSANDS) 1997 1997 1996 1996 1996
- ----------------------------------------------- ---------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial, financial and industrial....... $ 87,415 $ 70,778 $ 56,864 $ 70,920 $ 94,303
Construction............................... 8,804 5,009 7,349 10,670 10,974
Mortgage:
Residential.............................. 1,134 3,244 11,214 10,577 16,083
Commercial............................... 48,787 57,636 52,593 54,904 66,911
---------- ---------- ------------ ------------- ----------
Total mortgage......................... 49,921 60,880 63,807 65,481 82,994
Other...................................... -- -- 247 704 3,223
---------- ---------- ------------ ------------- ----------
Total nonaccrual loans................. 146,140 136,667 128,267 147,775 191,494
Renegotiated loans............................. -- -- -- -- 681
Foreclosed assets.............................. 30,059 30,378 28,517 32,882 35,998
---------- ---------- ------------ ------------- ----------
Total nonperforming assets............... $ 176,199 $ 167,045 $ 156,784 $ 180,657 $ 228,173
---------- ---------- ------------ ------------- ----------
---------- ---------- ------------ ------------- ----------
Allowance for credit losses.................... $ 502,114 $ 522,835 $ 523,946 $ 535,087 $ 545,345
---------- ---------- ------------ ------------- ----------
---------- ---------- ------------ ------------- ----------
Nonaccrual and renegotiated loans to total
loans......................................... 0.67% 0.65% 0.61% 0.71% 0.94%
Nonaccrual loans to allowance for credit
losses........................................ 29.10 26.14 24.48 27.62 35.11
Nonperforming assets to total loans and
foreclosed assets............................. 0.80 0.79 0.75 0.86 1.11
Nonperforming assets to total assets........... 0.58 0.57 0.54 0.63 0.81
</TABLE>
23
<PAGE>
NONPERFORMING ASSETS (CONTINUED)
At June 30, 1997, nonaccrual and renegotiated loans totaled $146 million, a
decrease of $46 million, or 24 percent, from a year earlier. The decrease was
primarily the result of reductions of $18 million in nonaccrual commercial
mortgage loans, $15 million in nonaccrual residential mortgage loans, and $7
million in nonaccrual commercial, financial and industrial loans.
Nonperforming assets declined $52 million, or 23 percent, from June 30,
1996. Foreclosed assets declined $6 million due to sales of individual assets.
Nonperforming assets increased $19 million from December 31, 1996, primarily due
to the addition of a two nonaccrual commercial, financial and industrial loans
of $12 million and $25 million.
Nonaccrual loans as a percentage of total loans were 0.67% at June 30, 1997,
compared with 0.94% at June 30, 1996. Nonperforming assets as a percentage of
total loans and foreclosed assets were 0.80% at June 30, 1997, compared with
1.11% at June 30, 1996.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
(DOLLARS IN THOUSANDS) 1997 1997 1996 1996 1996
- -------------------------------------------------- --------- ----------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
Commercial, financial and industrial............. $ 2,085 $ 4,419 $ 4,527 $ 521 $ 1,800
Construction.................................... -- 5,081 -- 2,325 188
Mortgage:
Residential................................... 11,155 10,952 8,969 9,838 7,110
Commercial.................................... 2,190 13,742 168 16,372 117
--------- ----------- ------------ ------------- ---------
Total mortgage.............................. 13,345 24,694 9,137 26,210 7,227
Consumer and other.............................. 11,922 11,865 10,028 13,643 6,867
--------- ----------- ------------ ------------- ---------
Total loans 90 days or more past due and
still accruing............................ $ 27,352 $ 46,059 $ 23,692 $ 42,699 $ 16,082
--------- ----------- ------------ ------------- ---------
--------- ----------- ------------ ------------- ---------
</TABLE>
Total loans 90 days or more past due and still accruing were $27 million at
June 30, 1997, compared with $16 million at June 30, 1996.
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 second quarter of 1997, lower cost sources of funds,
which include demand deposits and interest bearing core deposits, funded 66
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, commercial paper, and other borrowings.
24
<PAGE>
REGULATORY CAPITAL
<TABLE>
<CAPTION>
MINIMUM
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, REGULATORY
(DOLLARS IN THOUSANDS) 1997 1997 1996 1996 1996 REQUIREMENT
- -------------------------------- --------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL COMPONENTS
Tier 1 capital.................. $ 2,547,483 $ 2,467,312 $ 2,395,580 $ 2,349,483 $ 2,308,038
Tier 2 capital.................. [667,408] 458,135 551,074 552,768 594,911
--------------- ------------- ------------- ------------- -------------
Total risk-based capital........ $ [3,214,891] $ 2,925,447 $ 2,946,654 $ 2,902,251 $ 2,902,949
--------------- ------------- ------------- ------------- -------------
--------------- ------------- ------------- ------------- -------------
Risk-weighted assets............ $ [27,735,120] $ 26,963,265 $ 26,390,288 $ 25,994,269 $ 25,827,724
--------------- ------------- ------------- ------------- -------------
--------------- ------------- ------------- ------------- -------------
Quarterly average assets........ $ [29,360,405] $ 28,702,616 $ 28,496,355 $ 27,885,645 $ 27,699,256
--------------- ------------- ------------- ------------- -------------
--------------- ------------- ------------- ------------- -------------
CAPITAL RATIOS
Tier 1 risk-based capital....... [9.19] 9.15% 9.08% 9.04% 8.94% 4.0%
Total risk-based capital........ [11.59] 10.85 11.17 11.16 11.24 8.0
Leverage ratio (1).............. [8.68] 8.60 8.41 8.43 8.33 4.0
</TABLE>
- ------------------------------
(1) Tier 1 capital divided by quarterly average assets.
The Company and the Company's subsidiary bank, Union Bank of California,
N.A. (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 amounts and ratios of total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to average assets (the "leverage
ratio").
Compared with one year earlier, the company's Tier 1 risk-based capital
ratio at June 30, 1997, increased [25] basis points to [9.19%], the total
risk-based capital ratio increased [35] basis points to [11.59%], and the
leverage ratio increased [35] basis points to [8.68%]. The increase in the Tier
1 risk-based capital and leverage ratios was due to retained earnings growing
faster than risk-weighted assets and average assets, respectively. The increase
in the total capital ratio was primarily due to the issuance of $200 million in
long-term subordinated debt partly offset by the redemption of $100 million of
subordinated debt in the first quarter.
The Company has announced the call of $135 million of preferred stock. This
call has no impact on the Bank. Excluding $135 million from Tier 1 capital
impacts the Tier 1 and total capital ratios by 50 basis points, and the leverage
ratio by 46 basis points.
As of June 30, 1997, management believes the capital ratios of the Bank met
all regulatory minimums of a well-capitalized bank.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Index:
NO. DESCRIPTION
- --- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K: None
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/ MINORU NODA
------------------------------------
Minoru Noda
DEPUTY CHAIRMAN OF THE BOARD AND
CHIEF FINANCIAL OFFICER AND
CHIEF CREDIT OFFICER
By /s/ DAVID W. EHLERS
------------------------------------
David W. Ehlers
EXECUTIVE VICE PRESIDENT AND
DIRECTOR OF FINANCE
By /s/ DAVID W. DOBON
------------------------------------
David W. Dobon
SENIOR VICE PRESIDENT AND CONTROLLER
Dated: [ ]
26
