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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-28118.
UNIONBANCAL CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
CALIFORNIA 94-1234979
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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350 CALIFORNIA STREET,
SAN FRANCISCO, CA 94104-1476
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (415) 765-2126
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock
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.
__X__ Yes ______ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of December 31, 1998, the aggregate market value of voting stock held by
nonaffiliates of the registrant was $1,101,403,363. The aggregate market value
was computed by reference to the last sales price of such stock.
As of December 31, 1998, the number of shares outstanding of the registrant's
common stock was 175,259,919.
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DOCUMENTS INCORPORATED BY REFERENCE
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LOCATION IN FORM 10-K INCORPORATED DOCUMENT
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Part III Portions of the Proxy Statement for the May
27, 1998 Annual Meeting of Shareholders
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INDEX
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PART I PAGE
---------
2
ITEM 1. BUSINESS
2
General
2
Banking
3
Subsidiaries
3
Employees
3
Competition
4
Monetary Policy
4
Supervision and Regulation
5
ITEM 2. PROPERTIES
5
ITEM 3. LEGAL PROCEEDINGS
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
6
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER 8
MATTERS
8, F-1
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 8, F-1
RESULTS OF OPERATIONS
ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 8, F-29
MARKET RISK
8, F-33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 8
FINANCIAL DISCLOSURE
PART III
9
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
9
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 9
AND MANAGEMENT
9
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
10
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES II-1
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PART I
ITEM 1. BUSINESS
GENERAL
UnionBanCal Corporation (UNBC) is a commercial bank holding company
incorporated in the State of California in 1952 and is among the oldest banks on
the West Coast, having roots as far back as 1864. UNBC was formed as a result of
the combination of Union Bank with BanCal Tri-State Corporation on April 1,
1996. The combination was effected by the issuance of 54.4 million shares of
Union Bank common stock in exchange for all the outstanding shares of BanCal
Tri-State Corporation.
On November 18, 1998, the Company's Board of Directors approved the
declaration of a 3-for-1 stock split effective for shareholders of record on
December 7, 1998. Accordingly, all historical financial information has been
restated as if the stock split had been in effect for all periods presented.
On August 10, 1998, UNBC and its consolidated subsidiaries (the Company)
exchanged 10.2 million shares of its common stock for 7.2 million shares of
Union Bank of California, N.A. (the Bank) common stock owned directly by the
Bank of Tokyo-Mitsubishi, Ltd. (BTM). This share exchange provides the Company
with a 100 percent ownership interest in the Bank. In addition, it increases
BTM's ownership percentage of the Company to 82 percent from 81 percent.
The exchange of shares was accounted for as a reorganization of entities
under common control. Accordingly, amounts previously reported as Parent Direct
Interest in Bank Subsidiary, including the proportionate share of net income,
dividends, and other comprehensive income have been reclassified to combine them
with the corresponding amounts attributable to the Company's common shareholders
for all periods presented.
At December 31, 1997, the Company was the third largest bank holding company
in California and among the thirty largest in the United States, based on total
assets of $30.6 billion. UNBC is 82 percent owned by BTM and 18 percent owned by
other shareholders. UNBC's principal subsidiary, the Bank, is wholly owned by
UNBC.
The Company provides a wide range of financial services to consumers, small
businesses, middle market companies and major corporations, primarily in
California, Oregon, and Washington, but nationally and internationally as well.
BANKING
COMMUNITY BANKING
The Community Banking Group serves consumers, smaller businesses, and
government and nonprofit institutions through its 245 branch offices in
California, Oregon, and Washington. It provides a wide variety of loan products
and deposit services with an emphasis on quality customer service. In addition,
its deposit customers are linked with greatly expanded automated teller and
point-of-sale debit services through its founding membership in the Star
System-Registered Trademark-, the largest shared ATM network in the Western
United States. The group has been a leader in providing alternative delivery
systems which enable customers to conduct their banking 24 hours a day via
telephone or personal computer. The group also operates more than 44
full-service branches within retail establishments, primarily supermarkets.
Additionally, it provides Priority Banking-Registered Trademark- services to
affluent customers and professional service firms.
COMMERCIAL FINANCIAL SERVICES
The Commercial Financial Services Group provides a wide variety of financial
services to commercial customers, primarily in the western states. The services
provided include loans, mortgages and construction
2
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financing on residential and commercial properties, asset-based financing,
project financing, trade financing, and customized cash management services.
Customized credit products and financial services are provided to major
communications, media, entertainment, energy, utility and environmental services
customers nationwide. In addition, specialized depository services are offered
to domestic financial institutions, government agencies, bankruptcy trustees and
other customers with significant deposit volumes. These deposit services provide
the Bank with a low cost source of funds and generate noninterest income.
INTERNATIONAL BANKING
The International Banking Group provides trade finance and payment-related
products and services to banks. The group also extends credit that is primarily
of a short-term nature to commercial banks, agencies, and domestic and foreign
corporations engaged in international business.
TRUST AND PRIVATE FINANCIAL SERVICES GROUP
The Trust and Private Financial Services Group provides fiduciary, private
banking, investment, and asset management services for individuals and
institutions globally through offices in California, Oregon, and Washington.
Services provided include private banking, personal trust services, trusteeship
and administration for employee benefit plans, investment management, domestic
and global custody, securities lending, trusteeship for bond issues, retail
brokerage, and origination and distribution of debt instruments. The group also
advises and markets a proprietary mutual fund family, the HighMark Funds.
SUBSIDIARIES
UNBC has eleven active nonbank subsidiaries that provide various types of
services to it and its customers. Bankers Commercial Corporation, UNBC Leasing,
Inc. and UnionBanCal Leasing Corporation engage in equipment leasing and other
lease related financing. Cal First Properties, Inc. holds and manages various
properties used by the Company. UnionBanCal Venture Corporation is a small
business investment company licensed under the Small Business Investment Act of
1958. UnionBanCal Commercial Funding Corporation sells commercial paper and
invests the proceeds in eurodollar placements with the Bank. UnionBanCal
Equities, Inc. invests in equity securities of other companies. Mills-Ralston,
Inc. and SBS Realty, Inc. were established to hold and dispose of problem
assets, including other real estate owned (OREO). Stanco Properties, Inc.
engages in custodian activities in connection with tax-deferred exchanges of
real property under Section 1031 of the Internal Revenue Code. UnionBanCal
Mortgage Corporation acts as trustee under deeds of trust on behalf of UNBC.
The Bank has two active subsidiaries, UBOC Investment Services, Inc.
(UBOCIS) and Union Bank of California International (UBOCI). UBOCIS, a
registered securities broker-dealer and member of the National Association of
Securities Dealers (NASD), offers a wide range of investment products. These
products include a wide range of securities, including publicly traded stocks,
treasury and government agency issues, stock options, corporate and municipal
bonds and mutual funds. In addition, it provides a wholesale investment program
to other financial institutions. UBOCI is an Edge Act subsidiary supporting the
Bank's international correspondent banking business.
EMPLOYEES
At December 31, 1997, the Company had 9,753 full-time-equivalent employees.
COMPETITION
Banking is a highly competitive business. The Company competes actively for
loan, deposit, and other financial services business in California, Oregon, and
Washington, as well as nationally and internationally.
3
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The Company's competitors include a large number of state and national banks and
major foreign-affiliated or foreign banks, as well as many financial and
nonfinancial firms which offer services similar to those offered by the Company
or its subsidiaries.
The Company believes that continued emphasis on enhanced services and
distribution systems, an expanded customer base, increased productivity and
strong credit quality, together with an established capital base, will position
it to meet the challenges provided by this competition.
MONETARY POLICY
The operations of bank holding companies and their subsidiaries are affected
by the credit and monetary policies of the Federal Reserve Board (FRB). The FRB
influences financial performance through its management of the discount rate,
the money supply, and reserve requirements on bank deposits. Monetary policies
of the FRB have had and will continue to have a significant effect on the
operating results of financial institutions, including the Company.
SUPERVISION AND REGULATION
The Company is subject to regulation under the Bank Holding Company Act of
1956, as amended (BHCA), which subjects it to requirements for filing reports
with the Board of Governors of the Federal Reserve System and for undergoing
regular inspections by the Federal Reserve Bank of San Francisco. Generally, the
BHCA restricts any investment that the Company may make to no more than 5% of
the voting shares of any non-banking entity, and the Company may not acquire
more than 5% of the voting shares of any domestic bank without the prior
approval of the bank regulatory authorities. The Company's activities are
limited, with some exceptions, to banking, the business of managing or
controlling banks, and activities which the regulatory authorities deem to be so
closely related to banking as to be a "proper incident thereto."
The Bank and most of its subsidiaries are regulated by the Office of the
Comptroller of the Currency (OCC). The Company's subsidiaries are also subject
to extensive regulation, supervision and examination by various federal and
state regulatory agencies. In addition, the Bank and its subsidiaries are
subject to certain restrictions under the Federal Reserve Act, including
restrictions on affiliate transactions. Dividends payable by the Bank to the
Company are subject to a formula imposed by the OCC unless express approval is
given to deviate from the formula. For more information regarding restrictions
on loans and dividends by the Bank to its affiliates and on transactions with
affiliates, see Notes 15 and 20 to the Consolidated Financial Statements
included in this Form 10-K/A.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
imposed stricter capital requirements on banks. FDICIA requires federal bank
regulatory authorities to take "prompt corrective action" in dealing with
inadequately capitalized banks. FDICIA established five tiers of capital
measurement ranging from "well capitalized" to "critically undercapitalized". It
is the Company's policy to maintain risk-based capital ratios for both the
Company and the Bank at or above the required minimum capital adequacy levels.
At December 31, 1997, management believes the Bank met the requirements of a
"well capitalized" institution.
Furthermore, the activities of UBOCIS are subject to the rules and
regulations promulgated by the Securities and Exchange Commission and the NASD,
as well as other securities regulators at the state level.
There are additional requirements and restrictions in the laws of the United
States and the states of California, Oregon and Washington, as well as other
states in which the Bank and its subsidiaries may conduct operations which may
include restrictions on the amount of loans and the nature and amount of
investments, as well as activities as an underwriter of securities, the opening
and closing of branches and the acquisition of other financial institutions.
4
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The activities of the Bank in the international arena may be subject to the
laws and regulations of the jurisdiction where business is being conducted which
may change from time to time and affect the business opportunities and
competitiveness of the Bank in these jurisdictions. Furthermore, due to the
controlling ownership of the Company by BTM, regulatory requirements adopted or
enforced by the Government of Japan may have an effect on the activities and
investments of the Company and the Bank in the future.
The trend followed in recent years by the United States Congress has been to
make major legislative changes which, in turn, lead to major regulatory changes,
which affect the Company, the Bank and its subsidiaries, as well as the
financial services industry in general. Such changes can be expected to occur in
the future. Generally, the effect of such changes has been to increase
competition and narrow the functional distinctions among different types of
financial institutions. In some cases, these changes create opportunities for
the Company and the Bank, as well as the financial services industry, to compete
in financial markets on a more general basis with less regulation. However,
these changes also lead to new and major competitors in geographic and product
markets which have historically been limited by law and regulation to depository
institutions, such as the Bank.
Changes in the laws, regulations, or policies that impact the Company and
the Bank cannot necessarily be predicted and may have a material affect on the
business and earnings thereof.
ITEM 2. PROPERTIES
At December 31, 1997, the Company operated 240 full service branches and 33
limited service offices in California, 5 full service branches in Oregon and
Washington, and 18 overseas branches and business offices. The Company owns the
property occupied by 87 of the domestic offices and leases the remaining
properties for periods of five to twenty years.
The Company owns 3 administrative facilities in San Francisco and 3 in San
Diego. Other administrative offices in Los Angeles, Portland, Seattle, and New
York operate under long-term leases expiring in three to fifteen years.
Rental expense for branches and administrative premises are included in Note
4 to the Company's Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various pending and threatened legal actions which
arise in the normal course of business. The Company maintains reserves for
losses from legal actions which are both probable and estimable. In the opinion
of management, the disposition of claims currently pending will not have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
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EXECUTIVE OFFICERS OF THE REGISTRANT
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EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
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Tamotsu Yamaguchi........... 67 Mr. Yamaguchi has served as Chairman of the Company and the Bank since April
1996. He served as Chairman of the former Union Bank from September 1992
until March 1996. Mr. Yamaguchi has served as a director of the Company since
September 1992.
Takahiro Moriguchi.......... 53 Mr. Moriguchi has served as President and Chief Executive Officer of the
Company and the Bank since May 1997. He served as Vice Chairman and Chief
Financial Officer of the Company and the Bank from April 1996 to May 1997. He
served as Vice Chairman and Chief Financial Officer of the former Union Bank
from June 1993 until March 1996. He served as General Manager of the former
Bank of Tokyo, Ltd.'s Capital Markets Division 2 from May 1992 to May 1993.
He has served as a director of BTM since April 1996 and as a director of the
former Bank of Tokyo, Ltd. prior thereto. Mr. Moriguchi has served as a
director of the Company since June 1993.
Minoru Noda................. 51 Mr. Noda has served as Deputy Chairman, Chief Credit Officer, and Chief
Financial Officer of the Company and the Bank since May 1997. He served as
Vice Chairman and Chief Credit Officer of the Company and the Bank from April
1996 to May 1997. He served as Vice Chairman, Credit and Finance, and
Director of the former BanCal Tri-State Corporation and the former Bank of
California, N.A. from August 1993 until March 1996. He served as Executive
Vice President for Regional Banking of the former Bank of California, N.A.
from July 1992 through June 1993. Mr. Noda has served as a director of the
Company since April 1996.
Richard C. Hartnack......... 52 Mr. Hartnack has served as Vice Chairman and head of the Community Banking
Group of the Company and the Bank since April 1996. He served as Vice
Chairman of the former Union Bank from June 1991 until March 1996. Mr.
Hartnack has served as a director of the Company since June 1991.
Robert M. Walker............ 56 Mr. Walker has served as Vice Chairman and head of the Commercial Financial
Services Group for the Company and the Bank since April 1996 and head of the
Corporate and Real Estate Banking Group for the Company and the Bank since
July 1996. He served as Vice Chairman and head of the Commercial Financial
Services Group of the former Union Bank from July 1992 until March 1996. Mr.
Walker has served as a director of the Company since July 1992.
Peter R. Butcher............ 57 Mr. Butcher has served as Executive Vice President, Credit Management Group,
of the Company and the Bank since April 1996. He served as Executive Vice
President and Chief Credit Officer of the former BanCal Tri-State Corporation
and former Bank of California, N.A. from July 1993 until March 1996. He
served as Executive Vice President of Society National Bank from March 1992
to July 1993.
Yoichi Kambara.............. 49 Mr. Kambara has served as Executive Vice President and head of the Trust &
Private Financial Services Group of the Company and the Bank since July 1997.
He served as Executive Vice President and Trust Executive Officer of the
Trust and Investment Management Group of the Bank from April 1996 to June
1997. He served in the same capacity at the former Bank of California, N.A.
from April 1995 to March 1996. He served as General Manager of the
Investments Division, from November 1993 to March 1996, and as Senior Vice
President and Deputy General Manager, from April 1993 to March 1995, of the
Trust and Investment Management Group of the former Bank of California, N.A.
</TABLE>
6
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EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
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David I. Matson............. 53 Mr. Matson has served as Executive Vice President and Director of Finance of
the Company and the Bank since August 1997. He served as Executive Vice
President and head of the Institutional and Deposit Markets Division from
April 1996 until July 1997. He served in the same capacity at the former
Union Bank from January 1994 until March 1996. He served as Senior Vice
President of the former Union Bank for more than five years prior thereto.
Magan C. Patel.............. 60 Mr. Patel has served as Executive Vice President and head of the
International Banking Group of the Company and the Bank since April 1996. He
served as Executive Vice President of the former BanCal Tri-State Corporation
and the former Bank of California, N.A. for more than five years prior
thereto.
Charles L. Pedersen......... 54 Mr. Pedersen has served as Executive Vice President and head of the Systems,
Technology and Item Processing Group of the Company and the Bank since April
1996. He served as Executive Vice President and head of the Bank Operations &
Automation Group of the former Union Bank from September 1992 until March
1996.
Michael A. C. Spilsbury..... 48 Mr. Spilsbury has served as Executive Vice President and head of the
Operations and Services Group of the Company and the Bank since April 1996.
He served as Executive Vice President, Resources and Services, with the
former BanCal Tri-State Corporation and the former Bank of California, N.A.
from January 1992 through March 1996.
Ikuzo Sugiyama.............. 48 Mr. Sugiyama has served as Executive Vice President and head of the Pacific
Rim Corporate Group of the Company and the Bank, and General Manager of the
Los Angeles Branch of BTM since July 1997. He served as Chief Manager,
Corporate Banking Division No. 3 under Corporate Banking Group No. 1 of BTM
from April 1996 to July 1997. From April 1994 to March 1996, he served as
Deputy General Manager of the Marunonchi Office of the former Bank of Tokyo,
Ltd. From May 1991 to March 1994, he served as Deputy General Manager of the
Los Angeles Agency of the former Bank of Tokyo, Ltd. and as Senior Vice
President of the Japanese Corporate Department-LA of the former Union Bank.
Philip M. Wexler............ 59 Mr. Wexler has served as Executive Vice President and head of the Specialized
Lending Group of the Company and the Bank since April 1996. He served as
Executive Vice President and General Manager of the Specialized Lending Group
of the former Union Bank from October 1987 through March 1996.
</TABLE>
The term of office of the executive officer extends until the officer
resigns, is removed, retires, or is otherwise disqualified for service. There is
no family relationship among any such officers.
7
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol UNBC. As of October 31, 1998, the Company's common stock was held of
record by approximately 2,255 shareholders, and approximately 82 percent of the
Company's common stock was held by BTM. During 1997 and 1996, the average daily
trading volume of the Company's common stock was approximately 104,910 shares
and 106,899 shares, respectively. At December 31, 1997, 1996 and 1995, the
Company's common stock closed at $35.83 per share, $17.67 per share and $18.08
per share, respectively. The following table presents stock quotations for each
quarterly period for the two years ended December 31, 1997.
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1997 1996
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HIGH LOW HIGH LOW
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First quarter............................................................... 21 17 1/2 19 1/8 16 7/8
Second quarter.............................................................. 25 7/8 16 7/8 18 1/2 15 1/2
Third quarter............................................................... 29 1/2 23 3/4 17 3/4 15 1/2
Fourth quarter.............................................................. 35 7/8 27 7/8 18 2/3 16 1/3
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The following table presents quarterly per share cash dividends declared for
1997 and 1996:
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1997 1996
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First quarter.............................................................. $ 0.117 $ 0.117
Second quarter............................................................. 0.117 0.117
Third quarter.............................................................. 0.140 0.117
Fourth quarter............................................................. 0.140 0.117
</TABLE>
The Company offers a dividend reinvestment plan that allows shareholders to
reinvest dividends in the Company's common stock at 5 percent below the market
price. At December 31, 1997, BTM was not a participant in the plan.
The availability of retained earnings of the Company for the payment of
dividends is affected by certain legal restrictions. See Note 15 to the
Company's Consolidated Financial Statements. In addition, the Company has a
dividend reinvestment and stock purchase plan. For further information about
these plans, see Note 11.
ITEM 6. SELECTED FINANCIAL DATA
See page F-1 of this Form 10-K/A.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See pages F-1 through F-32 of this Form 10-K/A.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages F-29 through F-32 of this Form 10-K/A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-33 through F-79 of this Form 10-K/A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
8
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the Company's Proxy Statement for the May 27, 1998
Annual Meeting of Shareholders for incorporation of information concerning
directors and persons nominated to become directors of the Company. Information
concerning executive officers of the Company as of February 28, 1998 is included
in Part I above in accordance with Instruction 3 to Item 401(b) of Regulation
S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
from the text under the caption "Compensation and Other Transactions with
Management and Others" in the Proxy Statement for the May 27, 1998 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning ownership of the equity stock of UNBC by certain
beneficial owners and management is incorporated by reference from page 1 and
the text under the caption "Election of Directors" in the Proxy Statement for
the May 27, 1998 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
officers, directors, and BTM is incorporated by reference from the text under
the caption "Transactions with Management and Others" in the Proxy Statement for
the May 27, 1998 Annual Meeting of Shareholders.
9
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company, the Management
Statement, and the independent auditors' reports are set forth on pages F-34
through F-79. (See index on page F-33).
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules to the Consolidated Financial Statements are omitted because
of the absence of the conditions under which they are required or because the
required information is included in the Consolidated Financial Statements or
accompanying notes.
(a)(3) EXHIBITS
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INCORPORATED BY REFERENCE TO
REPORT ON FORM
---------------------------------
10-K
NO. DESCRIPTION FILED HEREWITH DATED 8-K DATED EXHIBIT NO.
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3.1 Restated Articles of Incorporation of the Registrant, as amended 4-1-96 3.1
3.2 By-laws of the Registrant, as amended 4-1-96 3.2
4.1.a Certificate of Determination of the Preferred Stock of the 3-27-98 4.1.a
Registrant, as amended
10.1 Management Stock Plan. (As restated effective June 1, 1997)* 3-27-98 10.1
10.2 Union Bank of California Deferred Compensation Plan. (January 1, 3-28-97 10.2
1997, Restatement, as amended November 21, 1996)*
10.3 Union Bank of California Senior Management Bonus Plan. (Effective 3-27-98 10.3
January 1, 1997)*
10.4 Richard C. Hartnack Employment Agreement (Effective June 4, 1991) 4-1-96 10.6
and Amendment to Employment Agreement. (Dated February 24, 1992)*
10.5 Robert M. Walker Employment Agreement. (Effective July 1, 1992)* 4-1-96 10.7
10.6 Union Bank of California Supplemental Executive Retirement Plan. 3-27-98 10.6
(Effective January 1, 1988) (Amended and restated as of January
1, 1997)*
10.7 Union Bank Executive Wellness Plan. (Effective January 1, 1994)* 4-1-96 10.12
10.8 Union Bank Financial Services Reimbursement Program. (Effective 4-1-96 10.14
January 1, 1996)*
10.9 Performance Share Plan. (Effective January 1, 1997)* 3-27-98 10.9
10.10 Service Agreement Between Union Bank of California and The Bank 3-27-98 10.10
of Tokyo-Mitsubishi, LTD. (Effective October 1, 1997)*
12.1 Computation of Ratio of Earnings to Combined Fixed Charges and 3-27-98 12.1
Preferred Stock Dividend Requirements
21.1 Subsidiaries of the Registrant 3-28-97 21.1
23.1 Consent of Deloitte & Touche LLP 11-19-98 23.1
23.2 Consent of Arthur Andersen LLP 11-19-98 23.2
27.1 Financial Data Schedule X
27.2 Financial Data Schedule X
27.3 Financial Data Schedule X
</TABLE>
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* Management contract or compensatory plan, contract or arrangement.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on December 8, 1998 under item 5, to
amend the Registration Statements of UnionBanCal Corporation to reflect an
increase in the number of shares of common stock as a result of a 3-for-1 split,
payable on Decmeber 21, 1998 to shareholders of record on December 7, 1998.
The Company filed a report on Form 8-K on January 11, 1999 to restate the
Consolidated Financial Statements for the years ended December 31, 1995, 1996
and 1997, and for the nine months ended September 30, 1997 (unaudited) and
September 30, 1998 (unaudited), to give retroactive effect to the 3-for-1 common
stock split.
10
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UNIONBANCAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
- -------------------------------------------------- ----------- ----------- ----------- ----------- -----------
RESULTS OF OPERATIONS:
Net interest income (taxable-equivalent)(1)..... $ 1,237,010 $ 1,175,302 $ 1,152,777 $ 1,007,789 $ 986,411
Provision for credit losses..................... -- 40,000 53,250 73,000 151,000
Noninterest income.............................. 463,001 418,676 395,319 359,831 405,965
Noninterest expense(2).......................... 1,044,665 1,134,904 978,101 1,036,349 1,055,020
----------- ----------- ----------- ----------- -----------
Income before income taxes and cumulative effect
of accounting change(1)....................... 655,346 419,074 516,745 258,271 186,356
Taxable-equivalent adjustment................... 5,328 6,724 10,444 12,566 14,734
Income tax expense.............................. 238,722 162,892 193,359 120,356 63,966
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of accounting
change........................................ 411,296 249,458 312,942 125,349 107,656
Cumulative effect of accounting change(3)....... -- -- -- -- 192,793
----------- ----------- ----------- ----------- -----------
Net income...................................... $ 411,296 $ 249,458 $ 312,942 $ 125,349 $ 300,449
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK(4).......... $ 403,696 $ 238,152 $ 301,637 $ 114,045 $ 289,174
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
PER COMMON SHARE:
Net income-basic(4)(5).......................... 2.31 1.37 1.74 0.67 1.73
Net income-diluted(4)(5)........................ 2.30 1.36 1.73 0.67 1.73
Pro forma earnings (basic), excluding after-tax
merger and integration expense and cumulative
effect of accounting change(2)(4)(5).......... 2.33 1.78 1.74 0.67 0.58
Pro forma earnings (diluted), excluding
after-tax merger and integration expense and
cumulative effect of accounting
change(2)(4)(5)............................... 2.32 1.77 1.73 0.67 0.58
Dividends(6).................................... 0.51 0.47 0.47 0.47 0.47
Book value (end of period)(4)................... 15.32 13.53 13.49 11.88 11.64
Common shares outstanding (end of period)(4).... 174,917,674 174,457,603 174,180,493 172,043,617 169,989,829
Weighted average common shares
outstanding-basic(3)(4)....................... 174,683,338 174,391,048 173,806,300 171,089,311 166,857,166
Weighted average common shares
outstanding-diluted(3)(4)..................... 175,189,078 174,783,565 174,099,241 171,149,731 166,917,256
BALANCE SHEET (END OF PERIOD):
Total assets.................................... $30,585,265 $29,234,059 $27,546,859 $24,569,042 $24,005,530
Total loans..................................... 22,741,408 21,049,787 20,431,683 18,065,650 17,759,181
Nonperforming assets............................ 129,809 156,784 246,871 421,227 1,193,450
Total deposits.................................. 23,296,374 21,532,960 19,655,043 17,409,737 16,978,347
Subordinated capital notes...................... 348,000 382,000 501,369 655,859 725,859
Preferred stock................................. -- 135,000 135,000 135,000 135,000
Common equity(4)................................ 2,679,299 2,359,933 2,349,092 2,044,202 1,978,455
BALANCE SHEET (PERIOD AVERAGE):
Total assets.................................... $29,692,992 $27,899,734 $25,564,843 $23,692,560 $23,926,924
Total loans..................................... 21,855,911 20,727,577 18,974,540 17,616,002 18,219,288
Earning assets.................................. 26,291,822 24,717,326 22,849,129 21,046,600 21,176,396
Total deposits.................................. 22,067,155 20,101,544 17,969,972 16,826,443 17,160,129
Common equity(4)................................ 2,514,610 2,325,437 2,197,476 1,980,577 1,917,530
FINANCIAL RATIOS:
Return on average assets........................ 1.39% 0.89% 1.22% 0.53% 1.26%
Pro forma return on average assets, excluding
after-tax merger and integration expense and
cumulative effect of accounting change(2)..... 1.40 1.15 1.22 0.53 0.45
Return on average common equity(4).............. 16.05 10.24 13.73 5.76 15.08
Pro forma return on average common equity,
excluding after-tax merger and integration
expense and cumulative effect of accounting
change(2)(4).................................. 16.20 13.33 13.73 5.76 5.03
Efficiency ratio(7)............................. 61.53 71.02 63.39 70.39 66.92
Pro forma efficiency ratio, excluding merger and
integration expense(2)(7)..................... 61.17 63.65 63.39 70.39 66.92
Net interest margin(1).......................... 4.70 4.75 5.05 4.79 4.66
Tier 1 risk-based capital ratio................. 8.96 9.08 9.35 9.24 8.88
Total risk-based capital ratio.................. 11.05 11.17 11.70 12.03 12.07
Leverage ratio.................................. 8.53 8.41 8.70 8.67 8.26
Allowance for credit losses to total loans...... 1.99 2.49 2.72 3.12 3.90
Allowance for credit losses to nonaccrual
loans......................................... 413.12 408.48 266.56 161.08 84.82
Net loans charged off to average total loans.... 0.33 0.34 0.32 1.15 1.37
Nonperforming assets to total loans, real estate
ventures and foreclosed assets................ 0.57 0.74 1.21 2.32 6.58
Nonperforming assets to total assets............ 0.42 0.54 0.90 1.71 4.97
</TABLE>
- -----------------
(1) Amounts are on a taxable-equivalent basis using the federal statutory tax
rate of 35 percent.
(2) Merger and integration expense was $6 million and $117 million in 1997 and
1996, respectively. See page F-2 "Merger Accounting" for a description of
merger accounting and pro forma earnings presentation. After-tax merger and
integration expense was $4 million and $72 million in 1997 and 1996,
respectively.
(3) 1993 net income includes the cumulative effect of the adoption of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes".
(4) All periods have been restated to give retroactive effect to the exchange
on August 10, 1998 of 10.2 million shares of the Company's common stock for
the Bank of Tokyo-Mitsubishi, Ltd's direct ownership interest in Union Bank
of California.
(5) Basic and diluted earnings per share above are calculated according to SFAS
No. 128, "Earnings per Share"; 1996 and prior periods have been restated.
(6) Dividends per share reflect dividends declared on the Company's common
stock outstanding as of the declaration date. Amounts prior to the merger
are based on Union Bank only and do not include the 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.
(7) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income
(taxable-equivalent) and noninterest income. Foreclosed asset expense
(income) was $(1.3) million, $2.9 million, $(3.2) million, $73.7 million,
and $123.3 million for 1997 through 1993, respectively.
F-1
<PAGE>
Management's discussion and analysis (MD&A) of the consolidated financial
position and results of operations of the Company for the years ended December
31, 1997, 1996 and 1995 should be read in conjunction with the Company's
Consolidated Financial Statements and Notes to Consolidated Financial
Statements. Averages as presented in the following tables are substantially all
based upon daily average balances.
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.
MERGER ACCOUNTING
The combination of Union Bank with BanCal Tri-State Corporation and its
banking subsidiary, The Bank of California, N.A., was completed on April 1,
1996, (the Merger) resulting in UnionBanCal Corporation (UNBC) and its banking
subsidiary, Union Bank of California, N.A. (the Bank). 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 Selected
Financial Data table on page F-1 includes certain pro forma earnings disclosures
and ratios. These presentations supplement the Consolidated Statements of Income
on page F-34 (which are prepared in accordance with generally accepted
accounting principles), primarily with respect to the treatment of merger and
integration expense. Management believes that it is meaningful to understand the
operating results and trends excluding these expenses and, therefore, has
included information in this table and in the MD&A which follows, that presents
income before merger and integration expense and income taxes and related pro
forma ratio and per share calculations.
On August 10, 1998, UNBC and its consolidated subsidiaries (the Company)
exchanged 10.2 million shares of its common stock for the 7.2 million shares of
the Bank's common stock owned directly by the Bank of Tokyo-Mitsubishi, Ltd.
(BTM). This share exchange provides the Company with a 100 percent ownership
interest in the Bank. In addition, it increases BTM's ownership percentage of
the Company to 82 percent from 81 percent.
The exchange of shares was accounted for as a reorganization of entities
under common control. Accordingly, amounts previously reported as Parent Direct
Interest in Bank Subsidiary, including the proportionate share of net income,
dividends, and other comprehensive income have been reclassified to combine them
with the corresponding amounts attributable to the Company's common shareholders
for all periods presented.
On November 18, 1998, the Company's Board of Directors approved the
declaration of a 3-for-1 stock split effective for shareholders of record on
December 7, 1998. Accordingly, all historical financial information has been
restated as if the stock split had been in effect for all periods presented.
OVERVIEW
Net income in 1997 was $411 million, including $4 million (after-tax) of
merger and integration related expense. Net income in 1996 was $249 million,
including $72 million (after-tax) of merger and integration related expense. Net
income applicable to common stock was $404 million, or $2.30 per diluted common
share, in 1997 compared with $238 million, or $1.36 per diluted common share, in
1996. Excluding after-tax merger and integration expense, pro forma earnings for
1997 were $415 million, an increase of 29 percent from $321 million a year
earlier. Pro forma earnings applicable to common stock were $407 million, or
$2.32 per diluted common share, in 1997 compared with $310 million, or $1.77 per
diluted common share, in 1996. This increase of 31 percent over the comparable
figures for 1996 was due to a 5 percent increase in net interest income, an 11
percent increase in noninterest income, a decrease in
F-2
<PAGE>
the effective income tax rate, and a $40 million reduction in the provision for
credit losses, partially offset by a 2 percent increase in noninterest expense
(excluding merger and integration expense). Other highlights for 1997 include:
- Net interest income, on a taxable-equivalent basis, was $1,237 million in
1997, an increase of $62 million, or 5 percent, over 1996 primarily due to
a $1.6 billion, or 6 percent, increase in average earning assets,
resulting primarily from a $1.1 billion, or 5 percent, increase in average
loans and largely funded by an $851 million, or 13 percent, increase in
average demand deposits. Partially offsetting the positive impact of the
growth in earning assets and demand deposits on net interest income was a
5 basis point decline in the net interest margin to 4.70%. The decline in
net interest margin was primarily due to a 14 basis point decrease in the
spread between the average yield on earning assets and the average rate
paid on interest bearing liabilities.
- No provision for credit losses was recorded in 1997 compared with $40
million in 1996, reflecting improvement in the quality of the Company's
loan portfolio and a reduction in nonaccrual loans. Nonperforming assets
declined $27 million, or 17 percent, from December 31, 1996 to $130
million at December 31, 1997. Nonperforming assets as a percent of total
assets declined to 0.42% at December 31, 1997 compared with 0.54% a year
earlier. Total nonaccrual loans were $109 million at December 31, 1997
compared with $128 million at year-end 1996, resulting in a reduction in
the ratio of nonaccrual and renegotiated loans to total loans from 0.61%
at December 31, 1996 to 0.48% at year-end 1997. The allowance for credit
losses was $452 million, or 413% of total nonaccrual loans, at December
31, 1997 compared with $524 million, or 408% of total nonaccrual loans, at
December 31, 1996.
- Noninterest income was $463 million in 1997, an increase of $44 million,
or 11 percent, over 1996. Service charges on deposit accounts grew $13
million, or 12 percent, reflecting growth in deposit balances while trust
and investment management fees increased $14 million, or 15 percent, on
growth in trust accounts and assets under management.
- Excluding merger and integration expense, noninterest expense was $1,039
million in 1997, an increase of $21 million, or 2 percent, over 1996. This
increase was primarily attributable to an increase of $14 million, or 3
percent, in personnel-related expense, a significant portion of which was
due to severance payments related to realignment of departments and to
higher performance-related incentive compensation, and an increase of $14
million, or 25 percent, in other expenses. These increases were partially
offset by a decline of $18 million in net occupancy expense, reflecting a
$12 million charge recorded in 1996 related to former banking facilities,
as well as merger efficiencies realized in 1997. Excluding the $12 million
charge in 1996 and merger and integration expense, noninterest expense
increased $33 million over 1996.
- The effective tax rate for 1997 was 37% compared with 40% for 1996.
Excluding the $25 million after-tax refund from the State of California
Franchise Tax Board (FTB), the effective tax rate in 1997 was 41%.
Excluding a $5 million after-tax benefit from the settlement of a unitary
tax issue with the FTB, the effective tax rate in 1996 was also 41%.
- The return on average assets for 1997 increased to 1.39% compared to 0.89%
for 1996. Excluding the after-tax effect of merger and integration
expense, the pro forma return on average assets was 1.40% for 1997
compared to 1.15% for 1996. The return on average common equity for 1997
was 16.05% compared to 10.24% for 1996. Excluding the after-tax effect of
merger and integration expense, the pro forma return on average common
equity was 16.20% for 1997 compared to 13.33% for 1996.
- Total loans at December 31, 1997 were $22.7 billion, an increase of $1.7
billion, or 8 percent, over year-end 1996, primarily from growth in the
commercial, financial and industrial loan portfolio.
- At December 31, 1997, the Tier 1 risk-based capital ratio was 8.96% and
the total risk-based capital ratio was 11.05%, exceeding the minimum
regulatory guidelines for bank holding companies of 4% and 8%,
respectively. The Tier 1 and total risk-based capital ratios for the Bank
at December 31, 1997 exceeded the regulatory guidelines for
"well-capitalized" banks. The Company's leverage ratio was 8.53% at
December 31, 1997, exceeding the minimum regulatory guideline for bank
holding companies.
F-3
<PAGE>
NET INTEREST INCOME
The table below shows the major components of net interest income and net
interest margin.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996
-------------------------------------- ---------------------------------------
<CAPTION>
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.................................... $ 20,332,494 $ 1,672,006 8.22% $ 19,328,752 $ 1,604,799 8.30%
Foreign(3).................................. 1,523,417 92,420 6.07 1,398,825 84,693 6.05
Securities--taxable(4)........................ 2,521,339 158,950 6.30 2,138,282 133,170 6.23
Securities--tax-exempt(4)..................... 124,174 12,669 10.20 151,970 15,451 10.17
Interest bearing deposits in banks............ 968,966 56,748 5.86 911,575 52,709 5.78
Federal funds sold and securities purchased
under resale agreements..................... 466,321 26,079 5.59 547,547 30,246 5.52
Trading account assets........................ 355,111 19,917 5.61 240,375 12,960 5.39
------------ ----------- ------------ -----------
Total earning assets...................... 26,291,822 2,038,789 7.75 24,717,326 1,934,028 7.82
----------- -----------
Allowance for credit losses................... (503,126) (544,806)
Cash and due from banks....................... 2,006,038 1,926,050
Premises and equipment, net................... 411,302 425,943
Other assets.................................. 1,486,956 1,375,221
------------ ------------
Total assets.............................. $ 29,692,992 $ 27,899,734
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Domestic deposits:
Interest bearing............................ $ 5,340,661 151,768 2.84 $ 5,001,060 135,821 2.72
Savings and consumer time................... 2,970,370 112,808 3.80 2,837,198 105,350 3.71
Large time.................................. 4,652,293 256,007 5.50 4,095,222 218,959 5.35
Foreign deposits(3)........................... 1,589,303 75,398 4.74 1,504,067 71,437 4.75
------------ ----------- ------------ -----------
Total interest bearing deposits........... 14,552,627 595,981 4.10 13,437,547 531,567 3.96
------------ ----------- ------------ -----------
Federal funds purchased and securities sold
under repurchase agreements................. 1,097,707 58,544 5.33 933,433 47,095 5.05
Subordinated capital notes.................... 354,575 22,850 6.44 458,966 30,104 6.56
Commercial paper.............................. 1,637,070 89,912 5.49 1,620,087 87,411 5.40
Other borrowed funds.......................... 635,900 34,492 5.42 1,119,051 62,549 5.59
------------ ----------- ------------ -----------
Total borrowed funds...................... 3,725,252 205,798 5.52 4,131,537 227,159 5.50
------------ ----------- ------------ -----------
Total interest bearing liabilities........ 18,277,879 801,779 4.39 17,569,084 758,726 4.32
----------- -----------
Demand deposits............................... 7,514,528 6,663,997
Other liabilities............................. 1,295,728 1,206,216
------------ ------------
Total liabilities......................... 27,088,135 25,439,297
SHAREHOLDERS' EQUITY
Preferred stock............................... 90,247 135,000
Common equity(5).............................. 2,514,610 2,325,437
------------ ------------
Total shareholders' equity................ 2,604,857 2,460,437
------------ ------------
Total liabilities and shareholders'
equity.................................. $ 29,692,992 $ 27,899,734
------------ ------------
------------ ------------
Net interest income/margin (taxable-equivalent
basis)...................................... 1,237,010 4.70% 1,175,302 4.75%
Less: taxable-equivalent adjustment........... 5,328 6,724
----------- -----------
Net interest income....................... $ 1,231,682 $ 1,168,578
----------- -----------
----------- -----------
<CAPTION>
<S> <C> <C> <C>
1995
---------------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1)
- ---------------------------------------------- ------------ ----------- ------------
<S> <C> <C> <C>
ASSETS
Loans: (2)
Domestic.................................... $ 17,783,993 $ 1,540,694 8.66%
Foreign(3).................................. 1,190,547 76,723 6.44
Securities--taxable(4)........................ 2,055,504 120,210 5.85
Securities--tax-exempt(4)..................... 185,934 18,984 10.21
Interest bearing deposits in banks............ 930,999 58,201 6.25
Federal funds sold and securities purchased
under resale agreements..................... 368,684 22,247 6.03
Trading account assets........................ 333,468 20,578 6.17
------------ -----------
Total earning assets...................... 22,849,129 1,857,637 8.13
-----------
Allowance for credit losses................... (573,648)
Cash and due from banks....................... 1,617,715
Premises and equipment, net................... 411,794
Other assets.................................. 1,259,853
------------
Total assets.............................. $ 25,564,843
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Domestic deposits:
Interest bearing............................ $ 4,955,750 129,860 2.62
Savings and consumer time................... 2,738,588 99,215 3.62
Large time.................................. 2,474,685 128,974 5.21
Foreign deposits(3)........................... 1,806,820 96,109 5.32
------------ -----------
Total interest bearing deposits........... 11,975,843 454,158 3.79
------------ -----------
Federal funds purchased and securities sold
under repurchase agreements................. 1,384,762 78,908 5.70
Subordinated capital notes.................... 615,868 42,538 6.91
Commercial paper.............................. 1,448,739 86,695 5.98
Other borrowed funds.......................... 731,759 42,561 5.82
------------ -----------
Total borrowed funds...................... 4,181,128 250,702 6.00
------------ -----------
Total interest bearing liabilities........ 16,156,971 704,860 4.36
-----------
Demand deposits............................... 5,994,129
Other liabilities............................. 1,081,267
------------
Total liabilities......................... 23,232,367
SHAREHOLDERS' EQUITY
Preferred stock............................... 135,000
Common equity(5).............................. 2,197,476
------------
Total shareholders' equity................ 2,332,476
------------
Total liabilities and shareholders'
equity.................................. $ 25,564,843
------------
------------
Net interest income/margin (taxable-equivalent
basis)...................................... 1,152,777 5.05%
Less: taxable-equivalent adjustment........... 10,444
-----------
Net interest income....................... $ 1,142,333
-----------
-----------
</TABLE>
- ---------------
(1) Yields and interest income are presented on a taxable-equivalent basis
using the federal statutory tax rate of 35 percent.
(2) Average balances on loans outstanding include all nonperforming and
renegotiated loans. The amortized portion of net loan origination fees
(costs) is included in interest income on loans, representing an adjustment
to the yield.
(3) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
(4) Yields on securities available for sale were based on fair value. The
difference between these yields and those based on amortized cost was not
significant.
(5) Amounts restated to give retroactive effect to the exchange referred to in
Note 1 of the accompanying notes to Consolidated Financial Statements.
F-4
<PAGE>
Net interest income is interest earned on loans and investments less
interest expense on deposit accounts and borrowings. Primary factors affecting
the level of net interest income include the margin between the yield earned on
interest earning assets and the rate paid on interest bearing liabilities, as
well as the volume and composition of average interest earning assets and
average interest bearing liabilities.
Excluding the provision for credit losses, net interest income on a
taxable-equivalent basis was $1,237 million in 1997, compared with $1,175
million in 1996. The increase of $62 million, or 5 percent, was primarily
attributable to a $1.6 billion, or 6 percent, increase in average earning assets
largely funded by an $851 million, or 13 percent, increase in average demand
deposits. Partially offsetting the positive impact of the growth in earning
assets and demand deposits on net interest income was a 5 basis point decline in
the net interest margin to 4.70%, primarily as a result of both a 14 basis point
increase in the cost of interest bearing deposits due to a 25 basis point
increase in the Federal Funds rate in March 1997, and a decrease in the average
yield on domestic loans of 8 basis points.
Average earning assets were $26.3 billion in 1997 compared with $24.7
billion in 1996. This growth was primarily attributable to a $1.1 billion, or 5
percent, increase in average loans and a $355 million, or 16 percent, increase
in average securities. Average commercial, financial and industrial loans, which
increased $582 million, and average commercial mortgage loans, which increased
$437 million, contributed most of the loan growth. See "Loans" at F-11 for
additional commentary on loan portfolio growth. The increase in primarily fixed
rate securities reflected interest rate risk management actions to reduce the
Company's exposure to declines in interest rates.
The $1.6 billion, or 6 percent, increase in average earning assets over 1996
was primarily funded by increases in average demand deposits and average
interest bearing core deposits. Increases in these categories were: demand
deposits $851 million, or 13 percent; interest bearing domestic deposits $340
million, or 7 percent; and savings and consumer time deposits $133 million, or 5
percent. The increase in demand deposits in 1997 was partially due to an influx
of new customer relationships, arising from the recent merger and acquisition
activities of other financial institutions in the California market during the
year.
F-5
<PAGE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table shows the changes in the components of net interest
income on a taxable-equivalent basis. The changes in net interest income between
periods have been reflected as attributable either to volume or rate changes.
For purposes of this table, changes which are not solely due to volume or rate
changes are allocated to rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 VERSUS 1996 1996 VERSUS 1995
-------------------------------- ----------------------------------
<CAPTION>
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO CHANGE
CHANGE IN IN
-------------------------------- ----------------------------------
AVERAGE AVERAGE NET AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE NET CHANGE
- ------------------------------------------- ---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN INTEREST INCOME:
Loans:
Domestic................................. $ 83,311 $ (16,104) $ 67,207 $ 133,776 $ (69,671) $ 64,105
Foreign(1)............................... 7,538 189 7,727 13,413 (5,443) 7,970
Securities--taxable........................ 23,856 1,924 25,780 4,843 8,117 12,960
Securities--tax-exempt (2,826) 44 (2,782) (3,468) (65) (3,533)
Interest bearing deposits in banks......... 3,317 722 4,039 (1,214) (4,278) (5,492)
Federal funds sold and securities purchased
under resale agreements................... (4,484) 317 (4,167) 10,785 (2,786) 7,999
Trading account assets..................... 6,184 773 6,957 (5,744) (1,874) (7,618)
---------- --------- --------- ---------- ---------- ----------
Total earning assets................... 116,896 (12,135) 104,761 152,391 (76,000) 76,391
---------- --------- --------- ---------- ---------- ----------
CHANGES IN INTEREST EXPENSE:
Domestic deposits:
Interest bearing......................... 9,237 6,710 15,947 1,187 4,774 5,961
Savings and consumer time................ 4,941 2,517 7,458 3,572 2,563 6,135
Large time............................... 29,803 7,245 37,048 84,458 5,527 89,985
Foreign deposits(1)........................ 4,049 (88) 3,961 (16,104) (8,568) (24,672)
---------- --------- --------- ---------- ---------- ----------
Total interest bearing deposits........ 48,030 16,384 64,414 73,113 4,296 77,409
---------- --------- --------- ---------- ---------- ----------
Federal funds purchased and securities sold
under repurchase agreements............... 8,296 3,153 11,449 (25,718) (6,095) (31,813)
Subordinated capital notes................. (6,848) (406) (7,254) (10,837) (1,597) (12,434)
Commercial paper........................... 916 1,585 2,501 10,254 (9,538) 716
Other borrowed funds....................... (27,006) (1,051) (28,057) 22,526 (2,538) 19,988
---------- --------- --------- ---------- ---------- ----------
Total borrowed funds................... (24,642) 3,281 (21,361) (3,775) (19,768) (23,543)
---------- --------- --------- ---------- ---------- ----------
Total interest bearing liabilities..... 23,388 19,665 43,053 69,338 (15,472) 53,866
---------- --------- --------- ---------- ---------- ----------
Changes in net interest income......... $ 93,508 $ (31,800) $ 61,708 $ 83,053 $ (60,528) $ 22,525
---------- --------- --------- ---------- ---------- ----------
---------- --------- --------- ---------- ---------- ----------
</TABLE>
- -------------
(1) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
Interest income on a taxable-equivalent basis increased $105 million in
1997, primarily due to growth in interest income from domestic loans and
securities, which reflected higher average balances outstanding, partially
offset by a lower average yield primarily on domestic loans.
Interest expense increased $43 million in 1997 due to higher interest
expense on interest bearing deposits, primarily reflecting higher average
deposit balances and higher average rates. Interest expense on borrowed funds
declined $21 million in 1997, reflecting lower volumes, offset by a 2 basis
point increase in the average rate paid.
F-6
<PAGE>
NONINTEREST INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
----------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 VERSUS 1996 1996 VERSUS 1995
---------------------------------- ---------------------- ----------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------ ---------- ---------- ---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit
accounts........................... $ 114,647 $ 101,975 $ 95,177 $ 12,672 12% $ 6,798 7%
Trust and investment management
fees............................... 107,527 93,479 87,743 14,048 15 5,736 7
International commissions and
fees.............................. 66,122 66,108 68,621 14 -- (2,513) (4)
Credit card merchant fees........... 57,128 49,778 45,767 7,350 15 4,011 9
Merchant banking fees............... 24,924 23,929 24,483 995 4 (554) (2)
Foreign exchange trading gains,
net................................ 16,268 13,255 19,043 3,013 23 (5,788) (30)
Brokerage commissions and fees...... 15,569 12,932 9,270 2,637 20 3,662 40
Securities gains (losses), net...... 2,711 4,502 (702) (1,791) (40) 5,204 nm
Other............................... 58,105 52,718 45,917 5,387 10 6,801 15
---------- ---------- ---------- --------- ---------
Total noninterest
income........................ $ 463,001 $ 418,676 $ 395,319 $ 44,325 11% $ 23,357 6%
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
- ------------
nm = not meaningful
Noninterest income in 1997 was $463 million, an increase of $44 million, or
11 percent, over 1996. This included a $13 million increase in revenue from
service charges on deposit accounts, a $14 million increase in trust and
investment management fees, a $7 million increase in credit card merchant fees,
a $3 million increase in foreign exchange trading gains, net, a $3 million
increase in brokerage commissions and fees, and a $5 million increase in other
noninterest income, partially offset by a $2 million decrease in securities
gains, net.
Revenue from service charges on deposit accounts was $115 million in 1997,
an increase of 12 percent over 1996. The increase was primarily attributable to
an increase in the volume of non-credit services provided.
Trust and investment management fees were $108 million in 1997, 15 percent
higher than in 1996, primarily due to an increase in assets under management,
which resulted in higher mutual fund management fees and personal trust fees.
Credit card merchant fees were $57 million in 1997, an increase of 15
percent over 1996. The increase was primarily due to an increase in the volume
of credit card drafts deposited by merchants.
Foreign exchange trading gains, net increased $3 million, or 23 percent, in
1997, primarily due to more volatility in the foreign exchange markets in 1997.
Brokerage commissions and fees were $16 million in 1997, an increase of 20
percent over 1996. The increase was primarily attributable to brokerage
commissions on non-proprietary mutual fund sales.
Other noninterest income in 1997 was $5 million, or 10 percent, higher than
in 1996. Included in other noninterest income in 1997 was an $8 million gain
related to a real estate joint venture, compared with gains of $2 million
related to a real estate joint venture and $2 million related to a non-recurring
insurance refund recognized in 1996.
F-7
<PAGE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
INCREASE (DECREASE)
----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
----------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31, 1997/1996 1996/1995
----------------------------------- ---------------------- ----------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------- ----------- ----------- --------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other compensation... $ 461,915 $ 448,793 $ 432,581 $ 13,122 3% $ 16,212 4%
Employee benefits................. 109,729 108,454 104,090 1,275 1 4,364 4
----------- ----------- --------- --------- ---------
Personnel-related expense....... 571,644 557,247 536,671 14,397 3 20,576 4
Net occupancy..................... 85,630 103,335 92,863 (17,705) (17) 10,472 11
Equipment......................... 56,137 55,942 55,056 195 -- 886 2
Communications.................... 42,372 40,133 35,806 2,239 6 4,327 12
Credit card processing............ 42,274 37,091 31,288 5,183 14 5,803 19
Advertising and public relations.. 28,664 28,788 20,911 (124) -- 7,877 38
Professional services............. 28,075 24,342 26,197 3,733 15 (1,855) (7)
Data processing................... 25,973 22,140 18,557 3,833 17 3,583 19
Printing and office supplies...... 24,098 27,085 22,626 (2,987) (11) 4,459 20
Software.......................... 16,562 15,895 13,839 667 4 2,056 15
Travel............................ 15,763 14,936 12,183 827 6 2,753 23
Intangible asset amortization..... 13,352 13,335 13,353 17 -- (18) --
Armored car....................... 12,209 13,296 13,792 (1,087) (8) (496) (4)
Regulatory authority assessments.. 5,778 4,048 23,431 1,730 43 (19,383) (83)
Foreclosed asset expense
(income)......................... (1,268) 2,889 (3,213) (4,157) nm 6,102 nm
Other............................. 71,365 56,938 64,741 14,427 25 (7,803) (12)
----------- ----------- --------- --------- ---------
Noninterest expense, excluding
merger and integration
expense....................... 1,038,628 1,017,440 978,101 21,188 2 39,339 4
Merger and integration expense.... 6,037 117,464 -- (111,427) (95) 117,464 nm
----------- ----------- --------- --------- ---------
Total noninterest expense..... $ 1,044,665 $ 1,134,904 $ 978,101 $ (90,239) (8)% $ 156,803 16%
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
</TABLE>
- ------------
nm = not meaningful
Noninterest expense, excluding merger and integration expense, was $1,039
million in 1997, an increase of $21 million, or 2 percent, over 1996. This
included a $14 million increase in personnel-related expense, a $5 million
increase in credit card processing expense, a $4 million increase in data
processing expense, and a $14 million increase in other noninterest expense,
partially offset by an $18 million decrease in net occupancy expense and a $4
million decrease in foreclosed asset expense.
Personnel-related expense was $572 million in 1997, an increase of $14
million, or 3 percent, compared to 1996. This increase was primarily due to the
increase in salaries and other compensation expense, a significant portion of
which was due to severance payments related to realignment of departments and to
higher performance-related incentive compensation.
Credit card processing expense was $42 million in 1997, an increase of $5
million, or 14 percent, over 1996 due to higher merchant volumes.
Data processing expense was $26 million in 1997, an increase of $4 million,
or 17 percent, over 1996 due to increased activity in data processing systems
supporting the growth in deposits.
Other noninterest expense increased $14 million in 1997. Of the total
increase, $7.5 million reflected additional expenses incurred to support higher
deposit volumes.
Net occupancy expense was $86 million in 1997, $18 million, or 17 percent,
lower than the previous year. The decrease in net occupancy expense was
primarily due to a $12 million charge related to former
F-8
<PAGE>
banking facilities in 1996. Excluding this charge, net occupancy expense in 1997
declined 6 percent due to merger-related efficiencies realized in 1997.
Foreclosed asset expense decreased $4 million in 1997. The decrease was
primarily due to lower writedowns and maintenance and selling expenses,
reflecting a 28 percent reduction in the portfolio of foreclosed assets.
YEAR 2000
The Year 2000 issue is a computer programming situation that may affect many
electronic data processing systems. In order to minimize the length of data
fields, most computer programs eliminated the first two digits in the year date
field. This problem could affect date-sensitive calculations that treat "00" as
the year 1900, rather than 2000. Secondly, years that end in "00" are not leap
years, except for the anomaly in the year 2000. This anomaly could result in
miscalculations when processing critical date-sensitive information after
December 31, 1999.
The Company has prepared a project plan, identified all the major
application and processing systems, and sought external and internal resources
to replace and test the systems. Purchased software and systems supported by
external parties will be tested as part of the formal project plan. In addition,
customers and vendors who have significant relationships with the Company will
be evaluated to determine whether they are preparing for the Year 2000. The
failure of those customers to adequately prepare will be incorporated into the
credit review process. However, there can be no guarantee that the systems of
vendors or customers with which the Company does business will be completed on a
timely basis. The Company plans to complete the Year 2000 project well in
advance of December 31, 1999. Of the estimated total project cost of $40
million, the remaining amount to be incurred for the Year 2000 project is $38
million and will be funded by normal operating cash and staffed by external
resources as well as internal staff redeployed from less time-sensitive
assignments. Approximately $10 million of the remaining cost is attributable to
the purchase of new hardware and software, which will be capitalized and
expensed over the useful lives of those assets. The remaining $28 million, which
will be expensed as incurred over the next two years, is not expected to have a
material effect on the results of operations, liquidity or capital resources.
During 1997, the Company incurred and expensed approximately $2 million related
to its assessment of the Year 2000 issue and its preliminary efforts in
implementing the Year 2000 project plan. As with all financial institutions,
there is a high degree of reliance being placed on the systems of other
institutions to properly settle transactions. Their inability to process
transactions properly or the Company's inability to complete its plan on time
could have a material adverse effect on the Company.
The cost of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing a number of assumptions of future events including the
continued availability of internal and external resources, third party
modifications and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ.
MERGER AND INTEGRATION EXPENSE
Merger and integration expense of $124 million in total was recorded in 1997
and 1996 to cover $38 million of personnel expense for severance, retention and
other employee related costs, $54 million for facilities expense related to
redundant banking facilities and $32 million in professional services and other
expense as a result of the Merger.
F-9
<PAGE>
The following table presents merger and integration expense provisions in
1997 and 1996, the cash and noncash utilization of those expense provisions
during the periods, and the resulting liability balances as of December 31, 1997
and 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
(DOLLARS IN THOUSANDS) 1997 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 for the period:
Cash..................................................................................... 35,809 40,155
Noncash.................................................................................. 1,642 22,965
--------- ----------
Total utilization...................................................................... 37,451 63,120
--------- ----------
Balance, accrued merger and integration expense, end of period............................. $ 22,930 $ 54,344
--------- ----------
--------- ----------
</TABLE>
At December 31, 1997, the liability balance included amounts primarily for
severance payments that are being paid on a periodic basis and for lease
payments that are continuing over the expected term of the leases.
INCOME TAX EXPENSE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------- ---------- ---------- ----------
Income before income taxes................................................... $ 650,018 $ 412,350 $ 506,301
Income tax expense........................................................... 238,722 162,892 193,359
Effective tax rate........................................................... 37% 40% 38%
</TABLE>
The Company's effective tax rate in 1997 was 37% compared with 40% in 1996.
The lower 1997 effective tax rate was the result of an after-tax refund from the
FTB of approximately $25 million to settle litigation, administration, and audit
disputes covering the years 1975-1987. Excluding the FTB refund, the effective
tax rate for 1997 was 41%. Excluding a $5 million after-tax benefit recognized
in 1996 from a settlement with the FTB for 1985 and 1986, the effective tax rate
in 1996 was also 41%.
CREDIT RISK MANAGEMENT
The Company's principal business activity is the extension of credit in the
form of loans or other credit substitutes to individuals and businesses. The
Company's policies and applicable laws and regulations governing the extension
of credit require risk analysis as well as ongoing portfolio and credit
management through loan product diversification, lending limit constraints,
credit review and approval policies, and extensive internal monitoring.
The Company manages and controls credit risk through diversification of the
portfolio by type of loan, industry concentration, dollar limits on multiple
loans to the same borrower, geographic distribution and type of borrower.
Geographic diversification of loans originated through the Company's branch
network is generally within California, Oregon and Washington, which the Company
considers to be its principal markets. In addition, the Company will continue to
originate and participate in lending activities outside these states, as well as
internationally.
In analyzing the Company's existing loan portfolios, the Company applies
specific monitoring policies and procedures which vary according to the relative
risk profile and other characteristics of the loans within the various
portfolios. The Company's residential and consumer loans are relatively
homogeneous and no single loan is individually significant in terms of its size
or potential risk of loss. Therefore, the Company reviews its residential and
consumer portfolios by analyzing their performance as a pool of loans. In
contrast, the Company's monitoring process for the commercial, financial and
industrial; construction;
F-10
<PAGE>
commercial mortgage; and foreign loan portfolios includes a periodic review of
individual loans. Loans that are performing but have shown some signs of
weakness are subjected to more stringent reporting and oversight. The Company
reviews these loans to assess the ability of the borrowing entity to continue to
service all of its interest and principal obligations and as a result may adjust
the risk grade accordingly. In the event that the Company believes that full
collection of principal and interest is not reasonably assured, the loan will be
appropriately downgraded and, if warranted, placed on nonaccrual status, even
though the loan may be current as to principal and interest payments.
The Company has a Credit Policy Forum, composed of the Chief Credit Officer,
senior credit officers, and appropriate line officers who establish policy,
credit quality criteria, portfolio guidelines and other controls. Credit
Administration together with a series of loan committees, have the
responsibility for administering the credit approval process, as well as the
implementation and administration of the Company's credit policies and lending
practices and procedures. These policies require an extensive evaluation of
credit requests and continuing review of existing credits in order to promptly
identify, monitor and quantify evidence of deterioration of asset credit quality
or potential loss.
As another part of the control process, an independent internal credit
review and examination function provides quality assurance that loans and
commitments are made and maintained as prescribed by the Company's credit
policies and that the assets are appropriately and timely risk graded. This
includes a review of compliance with the Company's underwriting policies when
the loan is initially extended and subsequent on-site examinations to ensure
continued compliance.
LOANS
The following table shows loans outstanding at year-end by loan type. Loans
outstanding by loan type as a percentage of total loans is shown for 1997
through 1993.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1997 1996 1995 1994 1993
- ------------------------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and
industrial................ $10,747 47% $ 9,496 45% $ 9,684 47% $ 8,547 47% $ 8,135 46%
Construction................ 293 1 358 2 370 2 464 3 877 5
Mortgage:
Residential............... 2,961 13 2,961 14 2,642 13 2,253 12 1,964 11
Commercial................ 2,952 13 2,598 12 2,143 10 1,778 10 2,088 12
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total mortgage.......... 5,913 26 5,559 26 4,785 23 4,031 22 4,052 23
Consumer:
Installment............... 2,091 9 2,063 10 1,812 9 1,644 9 1,351 8
Home equity............... 993 5 1,113 5 1,222 6 1,222 7 1,302 7
Credit card and other
lines of credit......... 270 1 303 1 309 2 219 1 207 1
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total consumer.......... 3,354 15 3,479 16 3,343 17 3,085 17 2,860 16
Lease financing............. 875 4 800 4 845 4 829 5 831 4
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total loans in domestic
offices............... 21,182 93 19,692 93 19,027 93 16,956 94 16,755 94
Loans originated in foreign
branches..................... 1,559 7 1,358 7 1,405 7 1,110 6 1,004 6
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total loans............. $22,741 100% $21,050 100% $20,432 100% $18,066 100% $17,759 100%
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
</TABLE>
F-11
<PAGE>
The Company's lending activities are predominantly domestic, with such loans
comprising approximately 93 percent of the portfolio at December 31, 1997. Total
loans at December 31, 1997 were $22.7 billion, an increase of $1,691 million, or
8 percent, from one year earlier. The increase was primarily attributable to
growth in the commercial, financial and industrial loan portfolio, which
increased $1,251 million from 1996, and to growth in the commercial mortgage
loan portfolio, which increased $354 million.
COMMERCIAL, FINANCIAL AND INDUSTRIAL LOANS
Commercial, financial and industrial loans represent the largest category in
the loan portfolio. These loans are extended principally to major corporations,
middle market businesses, and small businesses, with no industry concentration
exceeding ten percent of total commercial, financial and industrial loans.
The Company's commercial market lending originates primarily through its
banking office network. These offices, which rely extensively on relationship
oriented banking, provide many services including cash management services,
lines of credit, accounts receivable and inventory financing. Separately, the
Company originates or participates in a wide variety of financial services to
major corporations. These services include traditional commercial banking and
specialized financing tailored to the needs of each customer's specific
industry. Presently, the Company is active in the communications and media,
energy related services, retailing and financial services industries.
At December 31, 1997, the commercial, financial and industrial loan
portfolio was $10,747 million, or 47 percent, of the total loan portfolio. The
increase of $1,251 million, or 13 percent, from the previous year-end was
primarily attributable to loans extended to large corporations in industries
where the Bank has specialized lending expertise.
CONSTRUCTION AND COMMERCIAL MORTGAGE LOANS
The Company engages in nonresidential real estate lending which includes
commercial mortgage loans and construction loans secured by deeds of trust.
Construction loans are made primarily to residential builders and to commercial
property developers.
At December 31, 1997, construction loans were $293 million, $65 million
lower than at the end of the previous year. Commercial mortgage loans were
$2,952 million, an increase of $354 million, or 14 percent, from a year earlier.
This increase was primarily attributable to a strong recovery in the California
real estate market reflecting the continuing improvement in the West Coast
economy, particularly in the real estate sector.
RESIDENTIAL MORTGAGE LOANS
The Company originates residential loans through its branch network in
California, Oregon, and Washington, and periodically purchases loans in its
market area.
At December 31, 1997, residential loans were $2,961 million, unchanged from
the prior year.
CONSUMER LOANS
Through its branch network, the Company originates consumer loans, such as
vehicle-secured installment loans, home equity lines where advances are
generally secured by second deeds of trust on residential real estate, and
credit card loans.
At December 31, 1997, consumer loans were $3,354 million, or 15 percent of
total loans, compared with $3,479 million, or 16 percent of total loans, at
year-end 1996.
F-12
<PAGE>
LEASE FINANCING
The Company enters into direct financing and leveraged leases through an
agreement with a subsidiary of BTM. In addition, the Company originates auto
leases.
At December 31, 1997, lease financing outstandings were $875 million, an
increase of $75 million from the end of 1996.
LOANS ORIGINATED IN FOREIGN BRANCHES
The Company's loans originated in foreign branches consist primarily of
short-term credit extensions to financial institutions located primarily in Asia
and short-term commercial and industrial loans to major Japanese, Korean, and
Taiwanese corporations.
At December 31, 1997, loans originated in foreign branches totaled $1,559
million, or 7 percent of the total loan portfolio, compared with $1,358 million,
or 7 percent of total loans, at December 31, 1996.
CROSS-BORDER OUTSTANDINGS
The Company's cross-border outstandings reflect certain additional economic
and political risks that are not reflected in domestic outstandings. These risks
include those arising from exchange rate fluctuations and restrictions on the
transfer of funds. The following table sets forth the Company's cross-border
outstandings as of December 31, 1997, 1996 and 1995 for each country where such
outstandings exceeded one percent of total assets. The cross-border outstandings
were compiled based upon category and domicile of ultimate risk and are
comprised of balances with banks, trading securities, securities available for
sale, securities purchased under resale agreements, loans, accrued interest
receivable, acceptances outstanding and investments with foreign entities. The
amounts outstanding for each country exclude local currency outstandings. The
Corporation does not have significant local currency outstandings to the
individual countries listed in the following table that are not hedged or are
not funded by local currency borrowings.
<TABLE>
<CAPTION>
PUBLIC CORPORATIONS
FINANCIAL SECTOR AND OTHER TOTAL
(DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS
- -------------------------------------------------------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1997
Japan......................................................... $ 401 $ -- $ 438 $ 839
Korea......................................................... 561 10 257 828
Thailand...................................................... 320 -- -- 320
December 31, 1996
Japan......................................................... 1,373 -- 452 1,825
Korea......................................................... 574 8 330 912
December 31, 1995
Japan......................................................... 1,111 -- 567 1,678
Korea......................................................... 641 -- 269 910
</TABLE>
The economic condition and the ability of some countries, to which the
Company has cross-border exposure, to manage their external debt obligations
have been impacted by the Asian economic crisis beginning in the second half of
1997. The events leading to the crisis included currency devaluations, business
failures, principally caused by excessive debt levels and overcapacity, and some
loss of confidence in the banking system in the affected countries, resulting
mainly from past lending practices and the associated impact of internal and
external economic conditions. The crisis resulted in a substantial erosion of
international confidence, rapid declines in stock market valuations, steep
increases in interest rates and further pressure on the debt structures of the
corporate and financial market participants. International Monetary Fund
programs have been established or are in the process of being established which,
in co-operation with steps being taken by the local governments and other global
institutions, are designed to restore confidence. The success of these programs
is still being evaluated.
F-13
<PAGE>
The Company is managing its exposures in these and other impacted countries
very cautiously with a view to minimizing risk and supporting its long term and
viable customer relationships. High risk situations are being identified and
reduced where possible, and additional reserves against potential credit losses
have been identified and allocated, as determined by management at year end.
None of the Company's cross-border exposure has been subject to the recently
announced debt restructuring program with South Korea.
Although management cannot predict the ultimate impact of the crisis on the
Company's financial position and results of operations since much depends on the
effect of the stabilizing activities already under way, management believes that
the continuation of internal supervision, monitoring and portfolio risk
management practices will be effective in minimizing the impact over and above
that already identified. Increases in non-accrual loans, together with some
related increases in charge-off activity, may occur as events unfold.
Management, in accordance with its established risk management practices,
will also continue to review the impact of the crisis on the stability of other
countries and the potential impact on domestic business activities, particularly
in our core West Coast markets.
PROVISION FOR CREDIT LOSSES
The Company did not record a provision for credit losses during 1997,
compared with a $40 million provision that was recorded in 1996. Provisions for
credit losses are charged to income to bring the Company's allowance for credit
losses to a level deemed appropriate by management based on the factors
discussed under "--Allowance for Credit Losses" below. No provision for credit
losses was recorded in 1997 because, based on its review of such factors,
management believed that the allowance for credit losses was adequate to cover
probable losses inherent in the loan and lease portfolio and firm commitments at
each quarter end, including December 31, 1997.
ALLOWANCE FOR CREDIT LOSSES
The Company maintains an allowance for credit losses to absorb losses
inherent in the loan and lease portfolio. The allowance is based on ongoing,
quarterly assessments of the probable estimated losses inherent in the loan and
lease portfolio, and to a lesser extent, unused commitments to provide
financing. The Company's methodology for assessing the appropriateness of the
allowance consists of several key elements, which include the formula allowance,
specific allowances for identified problem loans and portfolio segments and the
unallocated allowance. In addition, the allowance incorporates the results of
measuring impaired loans as provided in Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures." These accounting standards prescribe the
measurement methods, income recognition and disclosures related to impaired
loans.
The formula allowance is calculated by applying loss factors to outstanding
loans and leases and certain unused commitments, in each case based on the
internal risk grade of such loans, pools of loans, leases or commitments.
Changes in risk grades of both performing and nonperforming loans affect the
amount of the formula allowance. Loss factors are based on the Company's
historical loss experience and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Loss factors are described as follows:
- Problem graded loan loss factors are derived from a migration model that
tracks four years of historical loss experience. The Company is exploring
changes to the migration model to track historical loss experience over an
eight-year period, which management believes approximates a business
cycle.
- Pass graded loan loss factors are based on the average annual net
chargeoff rate over a six-year period.
F-14
<PAGE>
- Pooled loan loss factors (not individually graded loans) are based on
expected net chargeoffs for one year. Pooled loans are loans and leases
that are homogeneous in nature, such as consumer installment and
residential mortgage loans and automobile leases.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance.
The unallocated allowance is composed of two elements. The first element,
which is based on the Company's credit policy, consists of an amount that is at
least 20% to 25% of the formula allowance and the specific allowance. This
element recognizes the model and estimation risk associated with the formula and
specific allowances. The second element is based upon management's evaluation of
various conditions, the effects of which are not directly measured in the
determination of the formula and specific allowances. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific problem credits or
portfolio segments. The conditions evaluated in connection with the unallocated
allowance include the following conditions that existed as of the balance sheet
date:
- then-existing general economic and business conditions affecting the key
lending areas of the Company,
- credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
- collateral values,
- loan volumes and concentrations,
- seasoning of the loan portfolio,
- specific industry conditions within portfolio segments,
- recent loss experience in particular segments of the portfolio,
- duration of the current business cycle,
- bank regulatory examination results and
- findings of the Company's internal credit examiners.
Executive management reviews these conditions quarterly in discussion with the
Company's senior credit officers. To the extent that any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management's estimate of the effect of such condition
may be reflected as a specific allowance applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss related to such condition is
reflected in the unallocated allowance.
The allowance for credit losses is based upon estimates of probable losses
inherent in the loan and lease portfolio. The amount actually observed in
respect of these losses can vary significantly from the estimated amounts. The
Company's methodology includes several features which are intended to reduce the
differences between estimated and actual losses. The loss migration model that
is used to establish the loan loss factors for problem graded loans is designed
to be self-correcting by taking into account the Company's recent loss
experience. Similarly, by basing the pass graded loan loss factors on loss
experience over the last six years, the methodology is designed to take the
Company's recent loss experience into account. Pooled loan loss factors are
adjusted quarterly based upon the level of net chargeoffs expected by management
in the next twelve months. Furthermore, the Company's methodology permits
adjustments to any loss factor used in the computation of the formula allowance
in the event that, in management's
F-15
<PAGE>
judgment, significant factors which affect the collectibility of the portfolio
as of the evaluation date are not reflected in the loss factors. By assessing
the probable estimated losses inherent in the loan and lease portfolio on a
quarterly basis, the Company is able to adjust specific and inherent loss
estimates based upon any more recent information that has become available.
The following table sets forth the allocation of the allowance for credit
losses. The percentages reflect the allowance allocated to each respective loan
category at period end, as a percentage of the total period end balance of that
loan category, as set forth in the "Loans" table at F-11.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and industrial............. $ 123,610 1.15% $ 166,100 1.75% $ 174,146 1.80%
Construction..................................... 3,221 1.10 5,700 1.59 24,752 6.69
Mortgage:
Residential.................................... 2,700 0.09 4,000 0.14 5,466 0.21
Commercial..................................... 60,680 2.06 39,000 1.50 59,931 2.80
---------- ---------- ----------
Total mortgage............................... 63,380 1.07 43,000 0.77 65,397 1.37
Consumer:
Installment.................................... 11,400 0.55 10,400 0.50 13,200 0.73
Home equity.................................... 3,600 0.36 4,900 0.44 5,532 0.45
Credit card and other lines of credit.......... 30,500 11.30 34,000 11.22 32,799 10.61
---------- ---------- ----------
Total consumer............................... 45,500 1.36 49,300 1.42 51,531 1.54
Lease financing.................................. 4,862 0.56 5,300 0.66 1,300 0.15
---------- ---------- ----------
Total domestic allowance..................... 240,573 1.14 269,400 1.37 317,126 1.67
Foreign allowance.................................. 39,313 2.52 9,394 0.69 13,968 0.99
Unallocated........................................ 171,806 245,152 224,055
---------- ---------- ----------
Total allowance for credit losses............ $ 451,692 1.99% $ 523,946 2.49% $ 555,149 2.72%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
(DOLLARS IN THOUSANDS) 1994 1993
- ------------------------------------------------------------------------ --------------------- ---------------------
<S> <C> <C> <C> <C>
Domestic:
Commercial, financial and industrial.................................. $ 146,784 1.72% $ 205,398 2.52%
Construction.......................................................... 69,787 15.04 106,398 12.13
Mortgage:
Residential......................................................... 23,581 1.05 31,409 1.60
Commercial.......................................................... 70,130 3.94 139,303 6.67
---------- ----------
Total mortgage.................................................... 93,711 2.32 170,712 4.21
Consumer:
Installment......................................................... 12,500 0.76 13,100 0.97
Home equity......................................................... 7,143 0.58 6,062 0.47
Credit card and other lines of credit............................... 17,101 7.81 15,171 7.33
---------- ----------
Total consumer.................................................... 36,744 1.19 34,333 1.20
Lease financing....................................................... 10,000 1.21 12,500 1.50
---------- ----------
Total domestic allowance.......................................... 357,026 2.11 529,341 3.16
Foreign allowance....................................................... 15,330 1.38 14,293 1.42
Unallocated............................................................. 190,786 148,950
---------- ----------
Total allowance for credit losses................................. $ 563,142 3.12% $ 692,584 3.90%
---------- ----------
---------- ----------
</TABLE>
F-16
<PAGE>
The following table sets forth a reconciliation of changes in the Company's
allowance for credit losses.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year................................... $ 523,946 $ 555,149 $ 563,142 $ 692,584 $ 790,479
Loans charged off:
Commercial, financial and industrial..................... 58,664 42,134 47,524 105,774 99,280
Construction............................................. 120 3,249 9,401 32,151 58,835
Mortgage................................................. 5,058 13,483 29,330 100,613 113,791
Consumer................................................. 55,336 56,361 44,627 31,806 39,576
Lease financing.......................................... 3,601 2,623 2,422 2,940 11,432
Foreign(1)............................................... -- 1,250 295 533 201
--------- --------- --------- --------- ---------
Total loans charged off................................ 122,779 119,100 133,599 273,817 323,115
Recoveries of loans previously charged off:
Commercial, financial and industrial..................... 23,371 22,341 39,178 39,177 41,552
Construction............................................. 9,054 132 3,195 5,868 2,955
Mortgage................................................. 3,292 12,277 18,500 16,228 6,201
Consumer................................................. 14,946 12,906 10,924 8,915 8,872
Lease financing.......................................... 351 368 311 435 3,353
Foreign(1)............................................... -- -- 295 627 11,229
--------- --------- --------- --------- ---------
Total recoveries of loans previously charged off....... 51,014 48,024 72,403 71,250 74,162
--------- --------- --------- --------- ---------
Net loans charged off................................ 71,765 71,076 61,196 202,567 248,953
Provision for credit losses.................................. -- 40,000 53,250 73,000 151,000
Foreign translation adjustment and other net additions
(deductions)................................................ (489) (127) (47) 125 58
--------- --------- --------- --------- ---------
Balance, end of year......................................... $ 451,692 $ 523,946 $ 555,149 $ 563,142 $ 692,584
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Allowance for credit losses to total loans................... 1.99% 2.49% 2.72% 3.12% 3.90%
Provision for credit losses to net loans
charged off................................................. -- 56.28 87.02 36.04 60.65
Recoveries of loans to loans charged off in the previous
year........................................................ 42.83 35.95 26.44 22.05 24.38
Net loans charged off to average loans outstanding........... 0.33 0.34 0.32 1.15 1.37
Allowance for credit losses to nonaccrual loans.............. 413.12 408.48 266.56 161.08 84.82
</TABLE>
- ---------------
(1) Foreign loans are those loans originated in foreign branches.
At December 31, 1997, the Company's allowance for credit losses was $452
million, or 1.99% of the total loan portfolio, and 413% of total nonaccrual
loans. This compares with an allowance for credit losses of $524 million, or
2.49% of the total loan portfolio, and 408% of total nonaccrual loans at
December 31, 1996. At year-end 1997, the unallocated portion of the allowance
for credit losses was $172 million compared with $245 million at the end of
1996. At December 31, 1997, the allocated portion of the allowance for credit
losses included $108 million related to special mention and classified credits,
compared to $134 million at December 31, 1996. Special mention and classified
credits are those that are internally risk graded as "special mention,"
"substandard" or "doubtful." Special mention credits are potentially weak, as
the borrower has begun to exhibit deteriorating trends which, if not corrected,
could jeopardize repayment of the loan and result in further downgrade.
Substandard credits have well-defined weaknesses which, if not corrected, could
jeopardize the full satisfaction of the debt. A credit classified as "doubtful"
has critical weaknesses that make full collection improbable.
During 1997, there were no changes in estimation methods or assumptions that
affected the Company's methodology for assessing the appropriateness of the
allowance for credit losses, except that the Company extended the average annual
net chargeoff rate for pass graded loans from 4.75 years to 6 years. The impact
of this change resulted in an increase of approximately $13 million in the
formula allowance. The Company extended the average annual net chargeoff rate in
order to better reflect the business cycle. Changes in assumptions regarding the
effects of economic and business conditions on borrowers and other factors,
which are described below, affected the assessment of the unallocated allowance.
In addition, as described below, the Company allocated a portion of the
unallocated allowance to foreign loans amid concerns that the Asian financial
turmoil had adversely impacted companies and financial institutions in Asian
markets in which the Company operates.
F-17
<PAGE>
During 1997, the Company had net loans charged off of $72 million compared
to net loans charged off of $71 million in 1996. Recoveries of loans previously
charged off increased by $3 million, and the percentage of current year
recoveries to loans charged off in the previous year increased from 35.95% in
1996 to 42.83% in 1997. Loans charged off in 1997 increased by $4 million,
primarily due to a $17 million increase in commercial, financial and industrial
loans charged off, partially offset by a $8 million decrease in mortgage loans
charged off. Chargeoffs reflect the realization of losses in the portfolio that
were recognized previously through provisions for credit losses. At December 31,
1997, the allowance for credit losses exceeded the net loans charged off during
1997, reflecting management's belief, based on the foregoing analysis, that
there are additional losses inherent in the portfolio.
At December 31, 1997, the Company's average annual net chargeoffs for the
past five years were $131.2 million, compared with $166.4 million at December
31, 1996. These net chargeoffs represent 3.4 years and 3.1 years of losses based
on the level of the allowance for credit losses at December 31, 1997 and 1996,
respectively. Historical net chargeoffs are not necessarily indicative of the
amount of net chargeoffs that the Company will realize in the future.
The Company did not record a provision for credit losses during 1997. The
decision not to record a provision was based upon management's application of
the allowance methodology and the factors described above, in particular, the
level of net chargeoffs and the decline in the level of nonperforming loans.
Although management determined that no provision for credit losses was necessary
in 1997, it noted that certain factors could necessitate the resumption of
provisioning in the future. In particular, management noted that although net
chargeoffs were relatively stable from 1996 to 1997, net chargeoffs were higher
in the last three quarters of 1997. Furthermore, management noted that although
the level of net chargeoffs and the decline in nonperforming loans favorably
impacted the Company's asset quality ratios, the total portfolio of commercial,
financial and industrial loans and commercial mortgage loans was increasing.
Losses inherent in both of these types of credits are more difficult to assess
because historically they have been more volatile than losses from other
credits.
Management also considered the effect on global economic conditions of the
Asian financial crisis. At December 31, 1997, cross-border loans and acceptances
to Japan, Korea, Malaysia, Thailand, Vietnam, Singapore, Indonesia, the
Philippines, China, Taiwan and Hong Kong totaled $2.1 billion. Although at
December 31, 1997, the Company had not identified any specific losses related to
its Asia/Pacific exposures, management believed that it was probable that the
Asian financial turmoil had adversely impacted companies and financial
institutions in Asia/Pacific markets in which the Company operates. In light of
this concern, the Company allocated $29 million from the unallocated portion of
the allowance at December 31, 1997 to foreign loans. The allocated amount was
based upon the total amount of foreign loans to corporate borrowers in Asian
countries, and management's assessment of the quantified losses inherent in the
Asia/Pacific portfolio segment. In addition, the Company believes that the
historical loss factors for the Asia/Pacific exposures failed to estimate the
total probable inherent losses because the Company had not suffered any credit
losses in the foreign loan portfolio during the four-year historical loss cycle
used to establish the problem loan loss factors. Based upon this concern, as
well as the other factors described in "Cross-Border Outstandings" above,
including the magnitude of the Company's exposure to the Asia/Pacific segment,
management does not believe that the $29 million allocated to foreign loans is
sufficient to cover all of the losses inherent in the foreign loan portfolio
and, accordingly, these factors were considered by management in its overall
assessment of the unallocated allowance.
In addition to the impact of the Asian financial turmoil on companies and
financial institutions in Asian markets in which the Company operates,
management considered the effects of the Asian turmoil on companies and
financial institutions in the domestic (primarily California) and foreign (other
than Asia/ Pacific) markets in which the Company operates. As of December 31,
1997, management believed that the impact of the Asian financial turmoil on the
collectibility of loans and leases to domestic and foreign (non-Asia/Pacific)
borrowers was not generally reflected in the level of nonperforming loans or in
the internal risk grading process with respect to such loans and leases.
Accordingly, the Company's evaluation of these
F-18
<PAGE>
probable losses is reflected in the unallocated allowance. The evaluations of
these inherent losses are subject to higher degrees of uncertainty because they
are not identified with specific problem credits.
At December 31, 1997, the Company's allowance for credit losses was $452
million, consisting of a $212 million formula allowance, a $68 million specific
allowance and a $172 million unallocated allowance. This compares with an
allowance for credit losses of $524 million at December 31, 1996, which
consisted of a $237 million formula allowance, a $42 million specific allowance
and a $245 million unallocated allowance. The decrease of $25 million in the
formula allowance relates primarily to a reduction in the level of criticized
loans and the reflection of lower historical losses in the loss factors, which
was partially offset by loan growth, by changes to conform the various risk
grade definitions after the combination of Bank of California and Union Bank and
by the extension of the average annual net chargeoff rate for pass graded loans.
The increase of $26 million in the specific allowance relates primarily to the
reallocation for the Asian exposure which is described above. The unallocated
allowance decreased by $73 million at December 31, 1997, because management
believed that the inherent losses related to certain conditions considered in
its evaluation of the unallocated allowance at December 31, 1996 had been
recognized through chargeoffs, had been reflected in the formula or specific
allowance or had declined. From December 31, 1996 to December 31, 1997, there
was no change in the component of the unallocated allowance related to the 20%
to 25% margin for model and estimation risk prescribed by the Company's credit
policy. Included among those conditions that management believed gave rise to
lower inherent losses at December 31, 1997 compared to December 31, 1996 were:
- reduced concerns regarding the lingering effects of the California
recession on, and the sustainability of the recovery in, the California
commercial real estate and construction market,
- reduced concerns regarding consumer debt burdens and rising levels of
consumer bankruptcies,
- resolution of uncertainties related to assimilating data for the formula
allowance that resulted from combining the loan portfolios of Bank of
California and Union Bank and inconsistencies in the risk grading systems
of the Company's predecessor banks,
- reduced concerns related to consolidation and restructuring in the retail
industry and
- reduced concerns regarding the sustainability of perceived improvements in
economic conditions.
The Company does not weight the unallocated allowance among segments of the
portfolio. In evaluating the appropriateness of the unallocated allowance at
December 31, 1997, the Company considered, in addition to the factors described
above:
- the approximately $56 million to $70 million margin for model and
estimation risk prescribed by the Company's credit policy and
- the Company's estimate that the adverse impact of the Asian financial
turmoil on the Company could be in the range of $100 million to $105
million.
The following factors are reflected in management's estimate of the
unallocated allowance at December 31, 1996:
- the approximately $56 million to $70 million margin for model and
estimation risk prescribed by the Company's credit policy,
- the lingering effects of the California recession on, and the
sustainability of the recovery in, the California commercial real estate
and construction market, which could be in the range of $45 million to $70
million,
- the effects of consumer debt burdens and rising levels of consumer
bankruptcies, which could be in the range of $25 million to $40 million,
F-19
<PAGE>
- the effects of uncertainties related to assimilating data for the formula
allowance that resulted from combining the loan portfolios of Bank of
California and Union Bank and inconsistencies in the risk grading systems
of the Company's predecessor banks, which could be in the range of $15
million to $30 million,
- the effects of consolidation and restructuring in the retail industry,
which could be in the range of $5 million to $10 million and
- the effects of adverse economic and business conditions in Japan, which
could be in the range of $5 million to $10 million.
There can be no assurance that the adverse impact of any such condition on the
Company will not be in excess of the foregoing ranges. See paragraph on forward
looking statements on page F-2.
F-20
<PAGE>
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, renegotiated loans, and
foreclosed assets. Nonaccrual loans are those for which management has
discontinued accrual of interest because there exists significant uncertainty as
to the full and timely collection of either principal or interest or such loans
have become contractually past due 90 days with respect to principal or
interest. For a more detailed discussion of the accounting for nonaccrual loans,
see Note 1 to the Company's Consolidated Financial Statements.
Renegotiated loans are those accruing loans for which, for reasons related
to the borrower's financial difficulties, the Company has amended the terms of
the original loan agreement and the borrower is performing according to the
renegotiated terms.
Foreclosed assets includes property where the Company acquired title through
foreclosure or "deed in lieu" of foreclosure. On an ongoing basis, foreclosed
asset values are reviewed and any decline in value is recognized as noninterest
expense in the current period.
The following table sets forth an analysis of nonperforming assets.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
- --------------------------------------------------- ---------- ---------- ---------- ---------- ------------
Commercial, financial and industrial............... $ 46,392 $ 56,864 $ 84,336 $ 106,447 $ 145,907
Construction....................................... 4,071 7,349 40,026 73,643 231,148
Mortgage:
Residential...................................... 954 11,214 19,220 17,020 61,809
Commercial....................................... 57,921 52,593 63,836 145,207 367,072
---------- ---------- ---------- ---------- ------------
Total mortgage............................. 58,875 63,807 83,056 162,227 428,881
Other.............................................. -- 247 849 7,285 7,288
Foreign(1)......................................... -- -- -- -- 3,331
---------- ---------- ---------- ---------- ------------
Total nonaccrual loans..................... 109,338 128,267 208,267 349,602 816,555
Renegotiated loans................................. -- -- 1,612 14,843 4,617
Nonperforming real estate ventures................. -- -- -- -- 23,256
Foreclosed assets.................................. 20,471 28,517 36,992 56,782 349,022
---------- ---------- ---------- ---------- ------------
Total nonperforming assets................. $ 129,809 $ 156,784 $ 246,871 $ 421,227 $ 1,193,450
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Allowance for credit losses........................ $ 451,692 $ 523,946 $ 555,149 $ 563,142 $ 692,584
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
Nonaccrual and renegotiated loans to total loans... 0.48% 0.61% 1.03% 2.02% 4.62%
Nonaccrual loans to allowance for credit losses.... 24.21 24.48 37.52 62.08 117.90
Nonperforming assets to total loans, real estate
ventures and foreclosed assets.................... 0.57 0.74 1.21 2.32 6.58
Nonperforming assets to total assets............... 0.42 0.54 0.90 1.71 4.97
</TABLE>
- ---------------
(1) Foreign loans are those loans originated in foreign branches.
The following table sets forth an analysis of loans contractually past due
90 days or more as to interest or principal, but not included in nonaccrual
loans above.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
- --------------------------------------------------- ---------- ---------- ---------- ---------- ------------
Commercial, financial and industrial............... $ 450 $ 4,527 $ 3,752 $ 3,690 $ 12,116
Construction....................................... -- -- 1,063 5,735 10,711
Mortgage:
Residential...................................... 10,170 8,969 8,479 2,123 14,602
Commercial....................................... 1,660 168 3,592 -- 35,071
---------- ---------- ---------- ---------- ------------
Total mortgage............................. 11,830 9,137 12,071 2,123 49,673
Consumer and other................................. 7,712 10,028 8,854 8,573 8,481
---------- ---------- ---------- ---------- ------------
Total loans 90 days or more past due and
still accruing........................... $ 19,992 $ 23,692 $ 25,740 $ 20,121 $ 80,981
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
</TABLE>
F-21
<PAGE>
At December 31, 1997, nonaccrual loans totaled $109 million, a decrease of
$19 million, or 15%, from year-end 1996. The decline was primarily attributable
to a $10 million reduction in nonaccrual commercial, financial and industrial
loans and a $10 million reduction in nonaccrual residential mortgage loans. The
reduction in nonaccrual residential mortgage loans was due in part to a
reclassification of certain loans from nonaccrual to 90-days past due and still
accruing. The decline in nonaccrual loans was reflected in an improvement in the
overall risk grades of the portfolio, which contributed to a reduction in the
formula allowance. Foreclosed assets, primarily other real estate owned,
decreased by $8 million due to sales of individual assets.
Nonaccrual and renegotiated loans as a percentage of total loans were 0.48%
at December 31, 1997 compared with 0.61% one year earlier. Nonperforming assets
as a percentage of total loans, real estate ventures and foreclosed assets
improved to 0.57% at year-end 1997 from 0.74% at December 31, 1996. At December
31, 1997, approximately 58% of nonaccrual loans were real estate related.
Total loans 90 days or more past due and still accruing were $20 million at
December 31, 1997 compared with $24 million at December 31, 1996.
At December 31 1997, impaired loans were $108 million and the associated
impairment allowance was $9 million compared with $114 million and $21 million,
respectively, at December 31, 1996.
INTEREST FOREGONE
Interest foregone during 1997 and 1996 for loans that were on nonaccrual
status at December 31, 1997 and 1996 was $6 million and $9 million,
respectively. The Company recognized interest income during 1997 and 1996 for
loans that were on nonaccrual status at December 31, 1997 and 1996 of $3 million
and $5 million, respectively.
F-22
<PAGE>
SECURITIES
The following tables summarize the composition of the securities portfolio
and the gross unrealized gains and losses within the portfolio.
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------ ------------------------------------------------ 1995
GROSS GROSS GROSS GROSS ----------
(DOLLARS IN AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR FAIR
THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE VALUE
- ------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury..... $ 987,374 $10,793 $ 170 $ 997,997 $1,137,992 $ 4,993 $1,933 $1,141,052 $ 994,492
Other U.S.
government....... 709,536 6,005 67 715,474 687,717 4,993 779 691,931 364,584
Mortgage-backed
securities....... 679,692 3,331 265 682,758 193,531 400 274 193,657 448,173
State and
municipal........ 90,937 13,236 -- 104,173 101,006 13,749 -- 114,755 132,698
Corporate debt
securities....... 2,698 311 1 3,008 -- -- -- -- --
Equity
securities....... 28,881 1,596 672 29,805 19,041 2,553 -- 21,594 16,539
Foreign
securities....... 5,132 39 -- 5,171 1,136 72 -- 1,208 4,065
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total securities
available for
sale.......... $2,504,250 $35,311 $1,175 $2,538,386 $2,140,423 $26,760 $2,986 $2,164,197 $1,960,551
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1997 1996
---------------------------------------------- ---------------------------------------------- 1995
GROSS GROSS GROSS GROSS ---------
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE COST
- ----------------------- --------- ----------- ----------- --------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury.......... $ 40,092 $ 1,333 $ -- $ 41,425 $ 50,109 $ 1,735 $ -- $ 51,844 $ 51,125
Other U.S. government.. 99,520 2,568 -- 102,088 139,188 4,412 -- 143,600 138,816
Mortgage-backed
securities............ 24,477 1,745 14 26,208 41,985 2,019 68 43,936 124,375
State and municipal.... 24,686 75 1,367 23,394 36,914 310 2,199 35,025 48,971
--------- ----------- ----------- --------- --------- ----------- ----------- --------- ---------
Total securities held
to maturity........ $ 188,775 $ 5,721 $ 1,381 $ 193,115 $ 268,196 $ 8,476 $ 2,267 $ 274,405 $ 363,287
--------- ----------- ----------- --------- --------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- --------- ----------- ----------- --------- ---------
</TABLE>
Management of the securities portfolio involves the maximization of return
while maintaining prudent levels of quality and liquidity. At December 31, 1997,
approximately 98 percent of total securities were investment grade.
During the quarter ended December 31, 1995, in accordance with guidance
issued by the Financial Accounting Standards Board (FASB), the Company
reclassified from securities held to maturity to securities available for sale
approximately $285 million at amortized cost of U.S. Treasury Notes (fair value
$285 million) and $64 million at amortized cost of municipal bonds (fair value
$72 million).
F-23
<PAGE>
ANALYSIS OF SECURITIES PORTFOLIO
The following tables show the remaining contractual maturities and expected
yields of the securities portfolio.
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MATURITY
-----------------------------------------------------------------------------
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
WITHIN AND WITHIN AND WITHIN AFTER TOTAL
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS AMORTIZED COST
----------------- ------------------- ---------------- ---------------- -------------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4)
- ------------------------- -------- ------- ---------- ------- ------- ------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury............ $150,048 6.22% $ 837,326 6.31% $ -- -- % $ -- -- % $ 987,374 6.30%
Other U.S. government.... 99,940 6.49 609,596 6.38 -- -- -- -- 709,536 6.40
Mortgage-backed
securities(1)........... 53,108 6.82 626,584 6.41 -- -- -- -- 679,692 6.44
State and municipal(2)... 14,944 10.49 26,409 9.90 12,971 11.09 36,613 11.33 90,937 10.74
Corporate debt
securities.............. -- -- 1,432 17.31 1,266 12.42 -- -- 2,698 15.02
Equity securities(3)..... -- -- -- -- -- -- -- -- 28,881 --
Foreign securities....... 3,419 14.30 -- -- 1,713 6.29 -- -- 5,132 11.63
-------- ---------- ------- ------- ----------
Total securities
available for
sale............... $321,459 6.69% $2,101,347 6.41% $15,950 10.68% $36,613 11.33% $2,504,250 6.48%
-------- ---------- ------- ------- ----------
-------- ---------- ------- ------- ----------
</TABLE>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MATURITY
--------------------------------------------------------------------------------------------------
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
WITHIN AND WITHIN AND WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
---------------------- ---------------------- ------------------------ ------------------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4)
- ---------------------------- --------- ----------- --------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury............... $ -- --% $ 40,092 7.56% $ -- --% $ -- --%
Other U.S. government....... 10,000 8.00 89,520 7.72 -- -- -- --
Mortgage-backed
securities(1).............. 3,622 4.88 20,855 9.03 -- -- -- --
State and municipal(2)...... 9,077 9.19 -- -- 2,596 6.35 13,013 5.77
--------- --------- ----------- -----------
Total securities held to
maturity.............. $ 22,699 7.98% $ 150,467 7.86% $ 2,596 6.35% $ 13,013 5.77%
--------- --------- ----------- -----------
--------- --------- ----------- -----------
<CAPTION>
<S> <C> <C>
TOTAL
AMORTIZED COST
----------------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4)
- ---------------------------- --------- -----------
<S> <C> <C>
U.S. Treasury............... $ 40,092 7.56%
Other U.S. government....... 99,520 7.75
Mortgage-backed
securities(1).............. 24,477 8.42
State and municipal(2)...... 24,686 7.09
---------
Total securities held to
maturity.............. $ 188,775 7.71%
---------
---------
</TABLE>
- ------------
(1) Expected maturities may differ from contractual maturities because
borrowers have the right to call or prepay obligations, with or without call
or prepayment penalties.
(2) Yields on tax-exempt municipal securities are presented on a
taxable-equivalent basis using the current federal statutory rate of 35
percent.
(3) Equity securities do not have a stated maturity and are included in the
total column only.
(4) Yields are based on amortized cost.
F-24
<PAGE>
LOAN MATURITIES
The following table presents the Company's loans by maturity.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
<S> <C> <C> <C> <C>
AFTER
ONE YEAR
WITHIN AND WITHIN AFTER
(DOLLARS IN THOUSANDS) ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------- ------------ ------------ ------------ -------------
Domestic:
Commercial, financial and industrial.................. $ 4,102,910 $ 4,477,317 $ 2,166,952 $ 10,747,179
Construction.......................................... 173,504 119,829 -- 293,333
Mortgage:
Residential......................................... 4,230 32,000 2,925,003 2,961,233
Commercial.......................................... 228,955 1,085,913 1,636,939 2,951,807
------------ ------------ ------------ -------------
Total mortgage.................................... 233,185 1,117,913 4,561,942 5,913,040
Consumer:
Installment......................................... 136,264 1,801,620 152,868 2,090,752
Home equity......................................... 2,816 38,570 951,530 992,916
Credit card and other lines of credit............... 270,045 52 -- 270,097
------------ ------------ ------------ -------------
Total consumer.................................... 409,125 1,840,242 1,104,398 3,353,765
Lease financing....................................... 83,478 606,904 184,478 874,860
------------ ------------ ------------ -------------
Total loans in domestic offices................... 5,002,202 8,162,205 8,017,770 21,182,177
Loans originated in foreign branches.................... 1,515,844 25,627 17,760 1,559,231
------------ ------------ ------------ -------------
Total loans....................................... $ 6,518,046 $ 8,187,832 $ 8,035,530 22,741,408
------------ ------------ ------------
------------ ------------ ------------
Allowance for credit losses..................... 451,692
-------------
Loans, net........................................ $ 22,289,716
-------------
-------------
Total fixed rate loans due after one year............... $ 5,353,709
Total variable rate loans due after one year............ 10,869,653
-------------
Total loans due after one year.................... $ 16,223,362
-------------
-------------
</TABLE>
CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
The following table presents domestic certificates of deposit of $100,000
and over by maturity.
<TABLE>
<CAPTION>
DECEMBER 31,
(DOLLARS IN THOUSANDS) 1997
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
Three months or less................................................................................ $2,684,438
Over three months through six months................................................................ 1,163,014
Over six months through twelve months............................................................... 261,739
Over twelve months.................................................................................. 154,948
------------
Total domestic certificates of deposit of $100,000 and over..................................... $4,264,139
------------
------------
</TABLE>
The Company offers certificates of deposit of $100,000 and over at market
rates of interest. Many of these certificates are issued to customers, both
public and private, who have done business with the Company for an extended
period. The Company expects that as these deposits come due, the majority will
continue to be renewed at market rates of interest.
Substantially all of the Company's deposits in foreign branches are
certificates of deposit of $100,000 and over and mature in less than one year.
F-25
<PAGE>
BORROWED FUNDS
The following table presents information on the Company's borrowed funds.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------ ------------ ------------ ------------
Federal funds purchased and securities sold under repurchase agreements
with weighted average interest rates of 5.38%, 5.09% and 4.96% at
December 31, 1997, 1996 and 1995, respectively......................... $ 1,335,884 $ 1,322,654 $ 1,195,058
Commercial paper, with weighted average interest rates of 5.64%, 5.34%
and 5.75% at December 31, 1997, 1996 and 1995, respectively............ 966,575 1,495,463 1,389,870
Other borrowed funds, with weighted average interest rates of 6.23%,
5.66% and 5.78% at December 31, 1997, 1996 and 1995, respectively...... 476,010 749,422 1,064,472
------------ ------------ ------------
Total borrowed funds................................................ $ 2,778,469 $ 3,567,539 $ 3,649,400
------------ ------------ ------------
------------ ------------ ------------
Federal funds purchased and securities sold under repurchase agreements:
Maximum outstanding at any month end.................................. $ 1,575,930 $ 1,322,654 $ 1,517,999
Average balance during the year....................................... 1,097,707 933,433 1,384,762
Weighted average interest rate during the year........................ 5.33% 5.05% 5.70%
Commercial paper:
Maximum outstanding at any month end.................................. $ 1,876,135 $ 1,854,576 $ 1,591,712
Average balance during the year....................................... 1,637,070 1,620,087 1,448,739
Weighted average interest rate during the year........................ 5.49% 5.40% 5.98%
Other borrowed funds:
Maximum outstanding at any month end.................................. $ 851,694 $ 1,697,236 $ 1,319,444
Average balance during the year....................................... 635,900 1,119,051 731,759
Weighted average interest rate during the year........................ 5.42% 5.59% 5.82%
</TABLE>
CAPITAL ADEQUACY AND DIVIDENDS
The Company's principal capital objectives are to support future growth, to
protect depositors, to absorb any unanticipated losses and to comply with
various regulatory requirements. Management believes that the Company has
retained its capital at a level which supports the risk structure of the
Company, as well as providing for anticipated growth of current business
activities and strategic expansion.
Total shareholders' equity was $2,679 million at December 31, 1997, an
increase of $184 million from year-end 1996. This change was primarily a result
of $411 million of net income for 1997, offset by the redemption of $135 million
in preferred stock and dividends on common and preferred stock of $97 million.
The Company offers a dividend reinvestment plan that allows shareholders to
reinvest dividends in the Company's common stock at 5 percent below the market
price. At December 31, 1997, BTM was not a participant in the plan.
Capital adequacy depends on a variety of factors including asset quality and
risk profile, liquidity, stability of earnings, competitive and economic
conditions, and management. The Company believes that the current level of
profitability, coupled with a prudent dividend policy, is adequate to support
normal growth in operations while meeting regulatory capital guidelines.
F-26
<PAGE>
The following table summarizes risk-based capital, risk-weighted assets, and
risk-based capital ratios for the Company.
<TABLE>
<CAPTION>
DECEMBER 31, MINIMUM
------------------------------------------------------------------------- REGULATORY
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 REQUIREMENT
- ------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL COMPONENTS
Tier 1 capital........... $ 2,587,071 $ 2,395,580 $ 2,355,057 $ 2,070,554 $ 1,952,045
Tier 2 capital........... 601,102 551,074 591,266 626,903 702,652
------------- ------------- ------------- ------------- -------------
Total risk-based
capital................. $ 3,188,173 $ 2,946,654 $ 2,946,323 $ 2,697,457 $ 2,654,697
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Risk-weighted assets..... $ 28,862,340 $ 26,390,288 $ 25,179,489 $ 22,419,516 $ 21,992,647
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Quarterly average
assets.................. $ 30,334,507 $ 28,496,355 $ 27,073,158 $ 23,868,729 $ 23,624,622
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
CAPITAL RATIOS
Total risk-based
capital................. 11.05% 11.17% 11.70% 12.03% 12.07% 8.0%
Tier 1 risk-based
capital................. 8.96 9.08 9.35 9.24 8.88 4.0
Leverage ratio(1)........ 8.53 8.41 8.70 8.67 8.26 4.0
</TABLE>
- ---------------
(1) Tier 1 capital divided by quarterly average assets (excluding intangible
assets).
For regulatory purposes, the Company's capital computations are based on
risk-adjusted Tier 1 and total capital. The Company's Tier 1 and total
risk-based capital ratios were 8.96% and 11.05%, respectively, at December 31,
1997 compared to 9.08% and 11.17%, respectively, at December 31, 1996. The
decrease in the capital ratios was attributable to the redemption of $135
million of preferred stock in the third quarter of 1997, partly offset by
retained earnings growing faster than both risk-weighted assets and average
assets. As of December 31, 1997, management believes the capital ratios of the
Bank met all regulatory minimums of a "well-capitalized" institution.
COMPARISON OF 1996 VERSUS 1995
Net income in 1996 was $249 million compared with $313 million in 1995.
Excluding the effects of the $72 million after-tax charge for merger-integration
expense, net income improved as a result of higher net interest income, higher
noninterest income, and lower credit loss provision expense than in 1995.
Net income applicable to common stock was $238 million, or $1.36 per diluted
common share, in 1996 compared with $302 million, or $1.73 per diluted common
share, in 1995.
The return on average assets was 0.89% in 1996 versus 1.22% in 1995. The
return on average common equity was 10.24% in 1996 compared with 13.73% in 1995.
Net interest income on a taxable-equivalent basis increased by $23 million,
or 2 percent, over 1995. Average loans increased $1,753 million, or 9 percent,
and the net interest margin decreased 30 basis points to 4.75%.
Noninterest income increased by $23 million, or 6 percent, over 1995.
Service charges on deposits, trust and investment management fees, credit card
merchant fees, brokerage commissions and fees, securities gains, and other
revenue collectively grew 11 percent and accounted for $32 million of the growth
in noninterest income. This increase was partially offset by a $6 million
decrease in foreign exchange trading gains.
F-27
<PAGE>
The provision for credit losses was $40 million in 1996, $13 million, or 25
percent, lower than in 1995, reflecting the improved quality of the loan
portfolio.
Noninterest expense, excluding merger and integration expense, increased by
$39 million, or 4 percent, from 1995. Personnel-related expense increased $21
million, or 4 percent, due partially to increased contract labor used to augment
staffing requirements as a residual effect of the merger. Net occupancy expense
increased $10 million, or 11 percent, due to a $12 million one-time charge in
1996 related to former banking facilities. This was offset by a 2 percent
decrease in net occupancy expense due to the closure of 20 branches late in the
third quarter of 1996. Credit card processing expense increased $6 million, or
19 percent, in 1996 due to higher merchant volumes. Advertising and public
relations expense increased $8 million, or 38 percent, over 1995 due primarily
to expanded activities in 1996 to increase awareness of the Bank, following the
April 1, 1996 combination of Union Bank and BanCal Tri-State Corporation and its
subsidiary. In 1996, regulatory authority assessments expense declined $19
million, or 83 percent, primarily because the Federal Deposit Insurance
Corporation decided to eliminate insurance assessments for all of 1996. Merger
and integration expense was $117 million in 1996.
Income tax expense was $30 million lower in 1996 than in 1995, primarily due
to lower taxable income. The effective rate increased from 38% in 1995 to 40% in
1996 primarily due to a $3 million after-tax benefit recognized in 1995 from a
favorable settlement of an Internal Revenue Service examination of 1989 and
1990.
Total loans at December 31, 1996 were $21.0 billion, an increase of $0.6
billion, or 3 percent, over year-end 1995. Commercial, financial and industrial
loans declined $188 million, or 2 percent, from the previous year, primarily due
to planned reductions from a portfolio overlap arising from the merger and a
reduction in certain low margin lending. At year-end 1996, construction loans
decreased $12 million, or 3 percent, while commercial mortgages increased $455
million, or 21 percent, from 1995. This increase in commercial mortgages
reflected the continuing improvement in the West Coast economy, particularly the
real estate sector. It was primarily attributable to new originations of
mini-perm loans, ranging in size from $1 million to $10 million, resulting from
a vigorous marketing program. At December 31, 1996 residential loans were $319
million, or 12 percent, higher than the previous year as the favorable interest
rate environment and a stronger housing market continued to generate significant
opportunities for residential mortgage lenders. Consumer loans increased $136
million, or 4 percent, from 1995 due primarily to increases in direct and
indirect auto loans for used vehicles, partially offset by a decrease in home
equity balances.
Total nonperforming assets were $157 million at December 31, 1996, $90
million, or 36 percent, lower than one year earlier. The decline was primarily
attributable to a $27 million, or 33 percent, reduction in nonaccrual
commercial, financial and industrial loans and a $33 million, or 82 percent,
reduction in nonaccrual construction loans, due to a combination of note sales,
payoffs, and upgrades. Foreclosed assets, primarily other real estate owned,
decreased by $8 million, or 23 percent, from 1995, due to sales of individual
assets. Net loan charge-offs in 1996 were $71 million compared to net loans
charged off of $61 million in 1995. Recoveries of loans previously charged off
decreased by $24 million, despite an increase in the percentage of recoveries in
1996 to loans charged off in the previous year from 26.44% in 1995 to 35.95% in
1996. Loans charged off in 1996 decreased by $14 million due to a reduction in
new nonperforming assets in 1996 and a reduction in nonaccrual and
underperforming loans, partly offset by a $12 million increase in consumer loans
charged off, primarily attributable to credit card loans.
At December 31, 1996, the Tier 1 risk-based capital ratio was 9.08% and the
total risk-based capital ratio was 11.17% compared with ratios of 9.35% and
11.70%, respectively, at December 31, 1995.
F-28
<PAGE>
RECENT ACCOUNTING DEVELOPMENTS
In addition to the new accounting pronouncements disclosed in Note 1 to the
Consolidated Financial Statements, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" in February 1998.
The Standard revises the disclosure requirements for pensions and other
postretirement benefits. This Statement is effective for fiscal years beginning
after December 15, 1997. Adoption of this Statement will not impact the
Company's consolidated financial position, results of operations, or cash flows,
and any effect will be limited to the form and content of its disclosures.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
Market risk is the risk of loss to future earnings, to fair values, or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices and other market changes that affect market risk sensitive
instruments. Market risk is attributed to all market risk sensitive financial
instruments, including securities, loans, deposits, borrowings, as well as
derivative instruments. The Company's exposure to market risk is a function of
its asset and liability management activities, its trading activities for its
own account, and its role as a financial intermediary in customer-related
transactions. The objective of market risk management is to avoid excessive
exposure of the Company's earnings and equity to loss and to reduce the
volatility inherent in certain financial instruments.
The management of market risk is governed by policies reviewed and approved
annually by the Company's Board of Directors (Board). The Board delegates
responsibility for market risk management to the Asset & Liability Management
Committee (ALCO), who reports quarterly to the Board on activities related to
the management of market risk. As part of the management of the Company's market
risk, the ALCO may direct changes in the mix of assets and liabilities and the
use of derivative instruments such as interest rate swaps, caps and floors. The
ALCO also reviews and approves all major funding, market risk-management
programs, and market risk limits. The Chief Financial Officer (CFO), as chairman
of the ALCO, is responsible for companywide management of market risk. The
Treasurer is responsible for implementing funding, investment, and hedging
strategies designed to manage this risk. On a day-to-day basis, the oversight of
market risk management takes place at a centralized level within the Risk
Monitoring Unit (RMU). The RMU is responsible for measuring risks to ensure
compliance with all market risk limits and guidelines incorporated within the
policies and procedures established by the ALCO. The RMU reports monthly to the
ALCO on the effectiveness of the Company's hedging activities, on trading risk
exposures, and on compliance with policy limits. In addition, periodic reviews
by internal audit, regulators and independent accountants provide further
evaluation of controls over the risk management process.
The Company has separate and distinct methods for managing the market risk
associated with its trading activities and its asset and liability management
activities, as described below.
INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING)
The Company engages in asset and liability management activities with the
objective of reducing adverse changes in earnings as a result of changes in
interest rates. The management of interest rate risk relates to the timing and
magnitude of the repricing of assets compared to liabilities and has, as its
objective, the control of risks associated with movements in interest rates.
The Asset & Liability Management (ALM) Policy approved by the Board requires
monthly monitoring of interest rate risk by ALCO. As part of the management of
the Company's interest rate risk, ALCO may direct changes in the composition of
the balance sheet and the extent to which the Company utilizes off-balance sheet
derivative instruments such as interest rate swaps, floors, and caps.
F-29
<PAGE>
The Company's balance sheet is "asset-sensitive", which means that assets
generally reprice more quickly than liabilities. An asset-sensitive balance
sheet tends to reduce net interest income when interest rates decline and to
increase net interest income when interest rates rise.
One method of measuring interest rate risk is by measuring the interest rate
sensitivity gap, which is the difference between earning assets and liabilities
maturing or repricing within specified periods. The table on F-32 presents such
an analysis, which reflects certain assumptions as to the rate sensitivity of
deposits without contractual maturities or repricing dates. These include demand
deposits, money market demand accounts, and savings deposits. Additional
assumptions such as prepayment estimates for residential mortgages and
mortgage-backed securities are made to reflect the probable behavior of those
assets. The section of the table on F-32 entitled Interest Rate Risk Management
Positions presents the effects of the securities portfolio and of derivatives
used for hedging, such as interest rate swaps and floors, in reducing the
interest rate sensitivity gap primarily for LIBOR-based loans.
The table on F-32 shows that the Company's assets that are rate sensitive
within one year exceeded liabilities within that same period by $4.9 billion at
December 31, 1997. Adjusted for the effects of the securities portfolio and
derivatives used for hedging, this cumulative gap was reduced to $2.5 billion.
Gap analysis has significant limitations as a method for measuring interest
rate risk since changes in interest rates do not affect all categories of assets
and liabilities in the same way. To address these limitations, the Company uses
a simulation model to quantify the impact of changing interest rates on net
interest income (NII). A frequency distribution of simulated 12-month NII
outcomes based on rate scenarios produced through a Monte Carlo rate generation
process is prepared monthly to determine statistically the mean NII. The amount
of Earnings at Risk (EaR), defined as the potential negative change in NII, is
measured at a 97.5 percent confidence level and is managed within the limit
established in the Board's ALM Policy at 5 percent of mean NII. Based on the
December 31, 1997 balance sheet, the EaR was $23.0 million or 1.80% of mean NII.
An additional limit established by the Board's ALM Policy is that the
negative change in simulated net interest income for 12 months under single
interest rate shock scenarios, up or down 200 basis points, must be no more than
8 percent of the mean NII. Based on the December 31, 1997 balance sheet, the
negative change for a downward shock of 200 basis points was $51.8 million or
4.05% of mean NII.
TRADING ACTIVITIES
The Company enters into trading account activities primarily as a financial
intermediary for customers, and, to a lesser extent, for its own account. By
acting as a financial intermediary, the Company is able to provide its customers
with access to a wide range of products from the securities, foreign exchange,
and derivatives markets. In acting for its own account, the Company may take
positions in some of these instruments with the objective of generating trading
profits. These activities expose the Company to two primary types of market
risk: interest rate and foreign currency exchange risk.
In order to manage interest rate and foreign currency exchange risk
associated with its trading activities, the Company utilizes a variety of
non-statistical methods including: position limits for each trading activity,
daily marking of all positions to market, daily profit and loss statements,
position reports, and independent verification of all inventory pricing.
Additionally, the RMU reports positions and profits and losses daily to the
Treasurer and trading managers and weekly to the CFO. ALCO is provided reports
on a monthly basis. The Company believes that these procedures, which stress
timely communication between the RMU and senior management, are the most
important elements of the risk management process.
The Company uses a form of Value at Risk (VaR) methodology to measure the
overall market risk inherent in its trading account activities. Under this
methodology, management statistically calculates, with 97.5 percent confidence,
the potential loss in fair value that the Company might experience if an adverse
F-30
<PAGE>
shift in market prices were to occur within a period of 5 business days. The
amount of VaR is managed within limits well below the maximum limit established
by Board policy at 0.5% of shareholders' equity. The VaR model incorporates a
number of key assumptions, including assumed holding period and historical
volatility based on 3 years of historical market data updated quarterly.
During 1997 the Company's foreign exchange trading VaR averaged $73 thousand
and peaked at $147 thousand. The low VaR was $32 thousand. Correspondingly, the
Company's securities trading VaR averaged $558 thousand and peaked at $717
thousand. The low VaR was $439 thousand.
The Company's interest rate derivatives contracts include $2.4 billion of
derivative contracts entered into as an accommodation for customers. The Company
acts as an intermediary and matches these contracts at a profit with contracts
with BTM or other dealers, thus neutralizing the related market risk. The
Company maintains responsibility for the credit risk associated with these
contracts.
LIQUIDITY RISK
Liquidity risk represents the potential for loss as a result of limitations
on 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 ALM Policy approved by the Board requires quarterly reviews of the
Company's liquidity by the ALCO, which is composed of bank senior executives.
The Company's liquidity draws upon the strength of its extensive retail and
commercial market business franchise, coupled with the ability to obtain funds
for various terms in a variety of domestic and international money markets.
Liquidity is managed through the funding and investment functions of the
Treasury Division.
Core deposits provide the Company with a sizable source of relatively stable
and low-cost funds. The Company's average core deposits, which include demand
deposits, money market demand accounts, and savings and consumer time deposits,
combined with average common shareholder's equity, funded 61 percent of average
total assets of $29.7 billion for the year ended December 31, 1997. Most of the
remaining funding was provided by short-term borrowings in the form of
negotiable certificates of deposit, foreign deposits, federal funds purchased
and securities sold under repurchase agreements, commercial paper and other
borrowings.
Liquidity may also be provided by the sale or maturity of assets. Such
assets include interest bearing deposits in banks, federal funds sold and
securities purchased under resale agreements, and trading account securities.
The aggregate of these assets averaged $1.8 billion during 1997. Additional
liquidity may be provided by investment securities available for sale which
amounted to $2.5 billion at December 31, 1997, and by loan maturities. At
December 31, 1997, $6.5 billion of loans were scheduled to mature within one
year.
F-31
<PAGE>
The following table summarizes the Company's interest rate sensitivity based
on expected repricings in the time frames indicated for the balance sheet and
interest rate derivatives as of December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------
AMOUNTS MATURING OR REPRICING IN
----------------------------------------------------------
(DOLLARS IN THOUSANDS) 0-12 MONTHS >1-5 YEARS AFTER 5 YEARS TOTAL
- ----------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Federal funds sold and securities purchased under
resale agreements................................... $ 24,335 $ -- $ -- $ 24,335
Interest bearing deposits in banks................... 633,421 -- -- 633,421
Trading account assets............................... 394,313 -- -- 394,313
Loans................................................ 17,320,010 3,926,152 1,495,246 22,741,408
Other assets(1)(2)................................... 1,217,060 1,111,518 1,736,049 4,064,627
------------- ------------- ------------- -------------
Total assets (except securities)................. 19,589,139 5,037,670 3,231,295 27,858,104
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Interest bearing checking(1)(3).................... 180,074 1,260,520 -- 1,440,594
Money market demand accounts(1)(3)................. 1,353,636 2,671,392 -- 4,025,028
Savings(1)(3)...................................... 166,562 1,165,932 -- 1,332,494
Other time deposits(1)............................. 7,208,342 434,309 6,063 7,648,714
Federal funds purchased and securities sold under
repurchase agreements............................... 1,335,884 -- -- 1,335,884
Other borrowed funds................................. 1,442,585 -- -- 1,442,585
Subordinated capital notes........................... 348,000 -- -- 348,000
Demand deposit accounts(1)(4)........................ 2,654,863 6,194,681 -- 8,849,544
Other liabilities(1)(2).............................. -- -- 1,483,123 1,483,123
Shareholders' equity(2).............................. -- -- 2,679,299 2,679,299
------------- ------------- ------------- -------------
Total liabilities and shareholders' equity....... $ 14,689,946 $ 11,726,834 $ 4,168,485 $ 30,585,265
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Gap before risk management positions................. $ 4,899,193 $ (6,689,164) $ (937,190) $ (2,727,161)
Cumulative gap before risk management positions...... $ 4,899,193 $ (1,789,971) $ (2,727,161)
INTEREST RATE RISK MANAGEMENT POSITIONS
Securities(1)...................................... 366,467 2,214,199 146,495 2,727,161
Interest rate swaps................................ (425,000) 425,000 -- --
Interest rate floors(5)............................ (2,350,000) 2,350,000 -- --
------------- ------------- ------------- -------------
Gap adjusted for risk management positions........... $ 2,490,660 $ (1,699,965) $ (790,695) $ --
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Cumulative gap adjusted for risk management
positions........................................... $ 2,490,660 $ 790,695 $ -- $ --
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
- ---------------
(1) Certain balance sheet classifications used for interest rate sensitivity
analysis do not conform to the Consolidated Balance Sheets on F-35.
(2) Items that neither reprice nor mature are included in the "After 5 years"
column.
(3) Interest rate sensitivity of non-maturity deposit accounts are based on
assumptions for a declining interest rate scenario since the Company's
balance sheet is asset-sensitive.
(4) 70 percent of the demand deposit account balance is assumed to be "core"
deposits, which are not sensitive to interest rate changes.
(5) Floors purchased affect interest rate sensitivity in a declining interest
rate scenario.
F-32
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995.......................................................................... F-34
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... F-35
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995.......................................................................... F-36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................................................................... F-37
Notes to Consolidated Financial Statements................................................................. F-38
Management Statement....................................................................................... F-77
Independent Auditors' Reports.............................................................................. F-78
</TABLE>
F-33
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE ---------------------------------------------
DATA) 1997 1996 1995
- ---------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME
Loans................................... $ 1,763,277 $ 1,687,977 $ 1,613,376
Securities.............................. 167,440 143,412 132,802
Interest bearing deposits in banks...... 56,748 52,709 58,201
Federal funds sold and securities
purchased under resale agreements...... 26,079 30,246 22,247
Trading account assets.................. 19,917 12,960 20,567
------------- ------------- -------------
Total interest income............... 2,033,461 1,927,304 1,847,193
------------- ------------- -------------
INTEREST EXPENSE
Domestic deposits....................... 520,583 460,130 358,049
Foreign deposits........................ 75,398 71,437 96,109
Federal funds purchased and securities
sold under repurchase agreements....... 58,544 47,095 78,908
Commercial paper........................ 89,912 87,411 86,695
Subordinated capital notes.............. 22,850 30,104 42,538
Other borrowed funds.................... 34,492 62,549 42,561
------------- ------------- -------------
Total interest expense.............. 801,779 758,726 704,860
------------- ------------- -------------
NET INTEREST INCOME..................... 1,231,682 1,168,578 1,142,333
Provision for credit losses............. -- 40,000 53,250
------------- ------------- -------------
Net interest income after provision
for credit losses.................. 1,231,682 1,128,578 1,089,083
------------- ------------- -------------
NONINTEREST INCOME
Service charges on deposit accounts..... 114,647 101,975 95,177
Trust and investment management fees.... 107,527 93,479 87,743
International commissions and fees...... 66,122 66,108 68,621
Credit card merchant fees............... 57,128 49,778 45,767
Merchant banking fees................... 24,924 23,929 24,483
Securities gains (losses), net.......... 2,711 4,502 (702)
Other................................... 89,942 78,905 74,230
------------- ------------- -------------
Total noninterest income............ 463,001 418,676 395,319
------------- ------------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits.......... 571,644 557,247 536,671
Net occupancy........................... 85,630 103,335 92,863
Equipment............................... 56,137 55,942 55,056
Foreclosed asset expense (income)....... (1,268) 2,889 (3,213)
Merger and integration.................. 6,037 117,464 --
Other................................... 326,485 298,027 296,724
------------- ------------- -------------
Total noninterest expense........... 1,044,665 1,134,904 978,101
------------- ------------- -------------
Income before income taxes.............. 650,018 412,350 506,301
Income tax expense...................... 238,722 162,892 193,359
------------- ------------- -------------
NET INCOME.............................. $ 411,296 $ 249,458 $ 312,942
------------- ------------- -------------
------------- ------------- -------------
NET INCOME APPLICABLE TO COMMON STOCK... $ 403,696 $ 238,152 $ 301,637
------------- ------------- -------------
------------- ------------- -------------
NET INCOME PER COMMON SHARE --
BASIC(1)............................... $ 2.31 $ 1.37 $ 1.74
------------- ------------- -------------
------------- ------------- -------------
NET INCOME PER COMMON SHARE --
DILUTED(1)............................. $ 2.30 $ 1.36 $ 1.73
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARE
OUTSTANDING -- BASIC(1)................ 174,683 174,391 173,806
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARE
OUTSTANDING -- DILUTED(1).............. 175,189 174,784 174,099
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- -----------------
(1) Amounts restated to give retroactive effect to the stock split referred to
in Note 1 of the accompanying Notes to Consolidated Financial Statements.
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE ------------------------
DATA) 1997 1996
- ---------------------------------------- ----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks................. $ 2,541,699 $ 2,268,771
Interest bearing deposits in banks...... 633,421 1,131,216
Federal funds sold and securities
purchased under resale agreements...... 24,335 537,710
----------- -----------
Total cash and cash equivalents..... 3,199,455 3,937,697
Trading account assets.................. 394,313 465,782
Securities available for sale........... 2,538,386 2,164,197
Securities held to maturity (market
value: 1997, $193,115; 1996,
$274,405).............................. 188,775 268,196
Loans (net of allowance for credit
losses: 1997, $451,692; 1996,
$523,946).............................. 22,289,716 20,525,841
Due from customers on acceptances....... 773,339 778,378
Premises and equipment, net............. 406,299 410,621
Other assets............................ 794,982 683,347
----------- -----------
Total assets........................ $30,585,265 $29,234,059
----------- -----------
----------- -----------
LIABILITIES
Domestic deposits:
Noninterest bearing................... $ 8,574,515 $ 7,381,078
Interest bearing...................... 12,666,458 12,607,691
Foreign deposits:
Noninterest bearing................... 275,029 274,031
Interest bearing...................... 1,780,372 1,270,160
----------- -----------
Total deposits...................... 23,296,374 21,532,960
Federal funds purchased and securities
sold under repurchase agreements....... 1,335,884 1,322,654
Commercial paper........................ 966,575 1,495,463
Other borrowed funds.................... 476,010 749,422
Acceptances outstanding................. 773,339 778,378
Other liabilities....................... 709,784 478,249
Subordinated capital notes.............. 348,000 382,000
----------- -----------
Total liabilities................... 27,905,966 26,739,126
----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock:
Authorized 5,000,000 shares 8 3/8%
Noncumulative, Series A, issued
1,350,000 shares in 1996............ -- 135,000
Common stock(1) -- $1.67 stated value:
Authorized 100,000,000 shares, issued
174,917,674 shares in 1997 and
174,457,603 shares in 1996.......... 291,529 290,762
Additional paid-in capital.............. 1,422,680 1,413,076
Retained earnings....................... 957,662 645,214
Accumulated other comprehensive
income................................. 7,428 10,881
----------- -----------
Total shareholders' equity.......... 2,679,299 2,494,933
----------- -----------
Total liabilities and shareholders'
equity............................. $30,585,265 $29,234,059
----------- -----------
----------- -----------
</TABLE>
- ---------------
(1) Amounts restated to give retroactive effect to the stock split referred to
in Note 1 of the accompanying Notes to Consolidated Financial Statements.
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
PREFERRED STOCK
Balance, beginning of year.............. $ 135,000 $ 135,000 $ 135,000
Redemption of preferred stock........... (135,000) -- --
------------ ------------ ------------
Balance, end of year.................. $ -- $ 135,000 $ 135,000
------------ ------------ ------------
COMMON STOCK............................
Balance, beginning of year.............. $ 290,762 $ 290,300 $ 286,739
Dividend reinvestment plan.............. 6 121 3,103
Deferred compensation -- restricted
stock awards........................... 279 207 379
Stock options exercised................. 482 134 79
------------ ------------ ------------
Balance, end of year.................. $ 291,529 $ 290,762 $ 290,300
------------ ------------ ------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year.............. $ 1,413,076 $ 1,408,960 $ 1,390,925
Dividend reinvestment plan.............. (43) 1,041 15,238
Deferred compensation -- restricted
stock awards........................... 3,478 2,148 2,268
Stock options exercised................. 6,169 927 529
------------ ------------ ------------
Balance, end of year $ 1,422,680 $ 1,413,076 $ 1,408,960
------------ ------------ ------------
RETAINED EARNINGS
Balance, beginning of year.............. $ 645,214 $ 626,172 $ 376,468
Net income(1)........................... 411,296 249,458 312,942
Dividends on common stock(2)(3)......... (89,848) (73,932) (50,989)
Dividends on preferred stock............ (7,600) (11,306) (11,305)
Dividend to MBL......................... -- (144,890) --
Deferred compensation -- restricted
stock awards........................... (1,400) (288) (944)
------------ ------------ ------------
Balance, end of year.................. $ 957,662 $ 645,214 $ 626,172
------------ ------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period............ $ 10,881 $ 23,660 $ (9,930)
------------ ------------ ------------
Net income(1)........................... 411,296 249,458 312,942
Other comprehensive income.............. (3,453) (12,779) 33,590
------------ ------------ ------------
Total comprehensive income.............. 407,843 236,679 346,532
Less: net income included in retained
earnings............................... (411,296) (249,458) (312,942)
------------ ------------ ------------
Balance, end of period................ $ 7,428 $ 10,881 $ 23,660
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 2,679,299 $ 2,494,933 $ 2,484,092
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- ---------------
(1) Includes dividends applicable to preferred shareholders of $7.6 million in
1997 and $11.3 million in 1996 and 1995, respectively.
(2) Dividends per share in 1996 were based on historical Union Bank common cash
dividends declared and did not include the $145 million dividend paid to The
Mitsubishi Bank, Limited (MBL) in the first quarter of 1996 by BanCal
Tri-State Corporation and The Bank of California, N.A.
(3) Dividends per share, after giving effect to the stock split referred to in
Note 1 of the accompanying Notes to Consolidated Financial Statements, were
$0.51 in 1997 and $0.47 in 1996 and 1995, respectively, and are based on the
Company's shares outstanding at the declaration date.
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 411,296 $ 249,458 $ 312,942
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses......... -- 40,000 53,250
Depreciation, amortization and
accretion......................... 65,469 65,092 61,767
Provision for deferred income
taxes............................. 59,814 50,658 50,841
(Gain) loss on sales of securities
available for sale................ (2,711) (4,502) 801
Merger and integration costs in
excess of (less than) cash
utilized.......................... (31,414) 54,344 --
Other, net.......................... 226,449 (307,133) 239,785
---------- ---------- ----------
Net cash provided by operating
activities.......................... 728,903 147,917 719,386
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available for sale.................. 171,629 19,536 240,731
Proceeds from matured and called
securities available for sale....... 587,034 757,463 764,853
Purchase of securities available for
sale................................ (1,112,080) (995,479) (1,452,339)
Proceeds from matured and called
securities held to maturity......... 79,828 95,829 213,337
Purchase of securities held to
maturity............................ -- -- (123,886)
Net increase in loans................. (1,788,179) (741,335) (2,478,608)
Other, net............................ (56,584) (54,120) (34,902)
---------- ---------- ----------
Net cash used by investing
activities........................ (2,118,352) (918,106) (2,870,814)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.............. 1,763,414 1,877,917 2,245,306
Net increase (decrease) in federal
funds purchased and securities sold
under repurchase agreements......... 13,230 127,596 (287,387)
Net increase (decrease) in commercial
paper and other borrowed funds...... (797,464) (201,214) 623,612
Redemption and maturity of
subordinated debt................... (234,000) (119,369) (154,490)
Proceeds from issuance of subordinated
debt................................ 200,000 -- --
Redemption of preferred stock......... (135,000) -- --
Dividends paid........................ (93,303) (222,533) (62,044)
Repayment of borrowing to support
corporate owned life insurance...... -- (95,475) (10,638)
Other, net............................ (2,661) (882) 485
---------- ---------- ----------
Net cash provided by financing
activities........................ 714,216 1,366,040 2,354,844
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................ (675,233) 595,851 203,416
Cash and cash equivalents at beginning
of year................................ 3,937,697 3,352,423 3,153,713
Effect of exchange rate changes on cash
and cash equivalents................... (63,009) (10,577) (4,706)
---------- ---------- ----------
Cash and cash equivalents at end of
year................................... $3,199,455 $3,937,697 $3,352,423
---------- ---------- ----------
---------- ---------- ----------
CASH PAID DURING THE YEAR FOR:
Interest.............................. $ 820,355 $ 764,327 $ 739,300
Income taxes.......................... 113,588 172,451 91,717
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Loans transferred to foreclosed assets
(OREO).............................. $ 23,114 $ 44,557 $ 48,397
Securities transferred from held to
maturity to available for sale...... -- -- 348,717
Dividends declared but unpaid......... 24,528 20,383 12,788
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS
UnionBanCal Corporation (the Company) is a commercial bank holding company,
82 percent owned by The Bank of Tokyo-Mitsubishi, Ltd. (BTM) and 18 percent
owned by other shareholders.
On April 1, 1996, the Company was created by the combination of Union Bank
with BanCal Tri-State Corporation and its banking subsidiary, The Bank of
California, N.A. The combination was accounted for as a reorganization of
entities under common control (similar to a business combination under the
pooling of interests method). Accordingly, all historical financial information
has been restated as if the combination had been in effect for all periods
presented. The merger was effected by the issuance of 54.4 million shares of
Union Bank common stock in exchange for all the outstanding common shares of
BanCal Tri-State Corporation. Information pertaining to merger and integration
expense is presented in Note 7.
On August 10, 1998, the Company exchanged 10.2 million shares of its common
stock for 7.2 million shares of Union Bank of California, N.A. (the Bank) common
stock owned directly by BTM. This share exchange provides the Company with a 100
percent ownership interest in the Bank. In addition, it increases BTM's
ownership percentage of the Company to 82 percent from 81 percent.
The exchange of shares was accounted for as a reorganization of entities
under common control. Accordingly, amounts previously reported as Parent Direct
Interest in Bank Subsidiary, including the proportionate share of net income,
dividends, and other comprehensive income have been reclassified to combine them
with the corresponding amounts attributable to the Company's common shareholders
for all periods presented.
On November 18, 1998, the Company's Board of Directors approved the
declaration of a 3-for-1 stock split effective for shareholders of record on
December 7, 1998. Accordingly, all historical financial information has been
restated as if the stock split had been in effect for all periods presented.
The Company provides a wide range of financial services to consumers, small
businesses, middle market companies and major corporations, primarily in
California, Oregon and Washington, but also nationally and internationally.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting and reporting policies of the Company conform to generally
accepted accounting principles (GAAP) and general practice within the banking
industry. Those policies that materially affect the determination of financial
position, results of operations, and cash flows are summarized below.
The Consolidated Financial Statements include the accounts of the Company.
All material intercompany transactions and balances have been eliminated. 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain amounts for prior periods have been reclassified to conform with current
financial statement presentation.
F-38
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest bearing deposits in banks and federal funds sold
and securities purchased under resale agreements, substantially all of which
have maturities less than 90 days.
TRADING ACCOUNT ASSETS
Trading account assets are those financial instruments that management
acquires with the intent to hold for short periods of time in order to take
advantage of anticipated changes in market values. Substantially all of these
assets are securities with a high degree of liquidity and a readily determinable
market value. Interest earned, paid or accrued, on trading account assets is
included in interest income using a method that generally produces a level
yield. Realized gains and losses from the close out of trading account positions
and unrealized market value adjustments are recognized in noninterest income.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
The Company's securities portfolios consist of debt and equity securities
that are classified either as securities available for sale or securities held
to maturity.
Debt securities for which the Company has the positive intent and ability to
hold until maturity are classified as securities held to maturity and carried at
amortized cost.
Debt securities and equity securities with readily determinable market
values that are not classified as either held to maturity securities or trading
account assets are classified as securities available for sale and carried at
fair value, with the unrealized gains or losses reported net of taxes as a
separate component of shareholders' equity until realized.
Realized gains and losses arising from the sale of securities are based upon
the specific identification method and included in noninterest income as
securities gains (losses), net.
Interest income on debt securities includes the amortization of premiums and
the accretion of discounts using the effective interest method and is included
in interest income on securities. Dividend income on equity securities is
included in noninterest income.
LOANS
Loans are reported at the principal amounts outstanding, net of unamortized
nonrefundable loan fees and related direct loan origination costs. Deferred net
fees and costs are recognized in interest income over the loan term using a
method that generally produces a level yield on the unpaid loan balance.
Nonrefundable fees and direct loan origination costs related to loans held for
sale are deferred and recognized as a component of the gain or loss on sale.
Interest income is accrued principally on a simple interest basis.
Nonaccrual loans are those for which management has discontinued accrual of
interest because there exists significant uncertainty as to the full and timely
collection of either principal or interest or such loans have become
contractually past due 90 days with respect to principal or interest.
F-39
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
Interest accruals are continued for certain small business loans that are
processed centrally, consumer loans, credit cards, and one-to-four family
residential real estate loans. These loans are charged off or written down to
their net realizable value based on delinquency time frames that range from 120
to 270 days, depending on the type of credit that has been extended. Interest
accruals are also continued for loans that are both well secured and in the
process of collection. For this purpose, loans are considered well secured if
they are collateralized by property having a net realizable value in excess of
the amount of principal and accrued interest outstanding or are guaranteed by a
financially responsible and willing party. Loans are considered "in the process
of collection" if collection is proceeding in due course either through legal
action or other actions that are reasonably expected to result in the prompt
repayment of the debt or in its restoration to current status.
When a loan is placed on nonaccrual, all previously accrued but uncollected
interest is reversed against current period operating results. All subsequent
payments received are first applied to unpaid principal and then to uncollected
interest. Interest income is accrued at such time as the loan is brought fully
current as to both principal and interest, and, in management's judgment, such
loans are considered to be fully collectible. However, Company policy also
allows management to continue the recognition of interest income on certain
loans designated as nonaccrual. This portion of the nonaccrual portfolio is
referred to as "Cash Basis Nonaccrual" loans. This policy only applies to loans
that are well secured and in management's judgment are considered to be fully
collectible. Although the accrual of interest is suspended, any payments
received may be applied to the loan according to its contractual terms and
interest income recognized accordingly.
Loans are considered impaired when, based on current information, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement, including interest payments.
Impaired loans are carried at the lower of the recorded investment in the loan,
the estimated present value of total expected future cash flows, discounted at
the loan's effective rate, or the fair value of the collateral, if the loan is
collateral dependent. Additionally, some impaired loans with commitments of less
than $1 million are aggregated for the purpose of measuring impairment using
historical loss factors as a means of measurement. Excluded from the impairment
analysis are large groups of smaller balance homogeneous loans such as consumer
and residential mortgage loans.
Renegotiated loans are those in which the Company has formally restructured
a significant portion of the loan. The remaining portion is normally charged
off, with a concession either in the form of below market rate financing, or
debt forgiveness on the charged off portion. Loans that have been renegotiated
and have not met specific performance standards for payment are classified as
renegotiated loans within the classification of nonperforming assets. Upon
payment performance, such loans may be transferred from nonperforming status to
accrual status.
The Company offers two types of leases to customers: 1) direct financing
leases where the assets leased are acquired without additional financing from
other sources, and 2) leveraged leases where a substantial portion of the
financing is provided by debt with no recourse to the Company. Direct financing
leases are carried net of unearned income, unamortized nonrefundable fees and
related direct costs associated with the origination or purchase of leases.
Leveraged leases are carried net of nonrecourse debt.
F-40
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
ALLOWANCE FOR CREDIT LOSSES
The Company's allowance for credit losses is maintained at a level
considered by management to be adequate to absorb estimated credit losses and
other credit-related charges. The allowance for credit losses is increased by
the provision for credit losses, which is charged against current period
operating results and decreased by the amount of credit losses, net of
recoveries. Losses are fully or partially charged against the allowance for
credit losses when, in management's judgment, the uncollectible portion of a
loan's principal balance is determined. While management has segmented the
allowance to various credit-related products, the allowance is general in nature
and is available for all extension of credits, including off-balance sheet
instruments.
In evaluating the adequacy of the allowance for credit losses, management
estimates the amount of the potential risk of loss for each loan that has been
identified as having more than standard credit risk. Those estimates give
consideration to general economic conditions and their effects on the borrower's
industry, financial and management abilities and to current valuations of
collateral where appropriate. An estimate for potential credit loss content is
calculated for all loans not so identified based upon the risk characteristics
of particular categories of loans and historical loss experience in the
portfolio, adjusted, as appropriate, for the estimated effects of current
economic conditions. Further consideration for the allocation is based on credit
risk concentrations in the portfolio and commitments and contingent obligations
under off-balance sheet commercial and standby letters of credit. For analytical
purposes only, management attributes portions of the allowance for credit losses
to individual loans or groups of loans. Although the allowance for credit losses
is allocated to various portfolio segments, it is general in nature and is
available for the loan portfolio in its entirety. Although management believes
that the allowance for possible credit losses is adequate, future provisions
will be subject to continuing evaluation of inherent risk in the loan portfolio
and other credit exposures.
A loan is considered impaired when management determines that it is probable
that the Company will be unable to collect all amounts due according to the
original contractual terms of the loan agreement. Impairment is measured by the
difference between the recorded investment in the loan (including accrued
interest, net deferred loan fees or costs and unamortized premium or discount)
and the estimated present value of total expected future cash flows, discounted
at the loan's effective rate, or the fair value of the collateral, if the loan
is collateral dependent. An impairment is recognized by adjusting an allocation
of the existing allowance for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful life of each asset. Lives of
premises range from ten to forty years; lives of furniture and equipment range
from three to eight years. Leasehold improvements are amortized over the term of
the respective lease or 10 years, whichever is shorter.
F-41
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
OTHER ASSETS
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of acquired companies and is reported as intangible
assets. Goodwill is amortized using the straight-line method, generally over 15
years.
Other real estate owned (OREO) represents the collateral acquired through
foreclosure in full or partial satisfaction of the related loan. OREO is
recorded at the lower of the loan's unpaid principal balance or its fair value
as established by a current appraisal, adjusted for disposition costs. Any
writedown at the date of transfer is charged to the allowance for credit losses.
On an ongoing basis, OREO values, recorded in other assets, are reviewed
annually and any decline in value is recognized as foreclosed asset expense in
the current period. The net operating results from these assets are included in
the current period in noninterest expense as foreclosed asset expense (income).
DERIVATIVE INSTRUMENTS HELD FOR TRADING OR CUSTOMER ACCOMMODATION
The Company enters into a variety of interest rate derivative contracts,
primarily swaps and options and foreign exchange contracts, which include spot,
futures, forward, swap and option positions either for trading purposes, based
on management's intent at inception, or as an accommodation to customers.
Derivatives held or issued for trading or customer accommodation are carried
at fair value, with realized and unrealized changes in fair values on contracts
included in noninterest income in the period in which the changes occur.
Unrealized gains and losses are reported gross and included in trading account
assets and other liabilities, respectively. Cash flows are reported net as
operating activities.
DERIVATIVE INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
The Company enters into a variety of derivative contracts as a means of
reducing the Company's interest rate and foreign exchange exposures. At
inception these contracts are evaluated in order to determine if they qualify
for hedge accounting treatment and are accounted for either on a deferral,
accrual or market value basis, depending on the nature of the Company's hedge
strategy and the method used to account for the hedged item. Hedge criteria
include demonstrating the manner in which the hedge will reduce risk,
identifying the specific asset, liability or firm commitment being hedged, and
citing the time horizon being hedged. A monthly evaluation is performed to
ensure that continuing correlation exists between the hedge and the item being
hedged.
Net interest settlements on interest rate swap, cap and floor agreements are
recognized on an accrual basis as interest income or expense of the related
asset or liability over the lives of the agreements. Premiums paid or received
for interest rate caps and floors are amortized either to interest income or to
expense of the related asset or liability over the lives of the agreements. If
an agreement is terminated early, any resulting gain or loss is deferred and
amortized as interest income or expense of the related asset or liability over
the remaining life of the original agreement. Net settlement amounts are
reported gross as other assets and other liabilities. Cash flows are reported
net as operating activities.
F-42
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Assets, liabilities and results of operations for foreign branches are
recorded based on the functional currency of each branch. Since the functional
currency of the branches is the local currency, the net assets are remeasured
into U.S. dollars using a combination of current and historical exchange rates.
The resulting gains or losses are included in shareholders' equity, on a net of
tax basis.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". The 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 occurring after December 31, 1996 and has been applied
prospectively. Certain provisions of SFAS No. 125 have been postponed under SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125". Also see "PENDING ACCOUNTING PRONOUNCEMENTS".
INCOME TAXES
The Company files consolidated federal and combined state income tax
returns. Amounts provided for income tax expense are based on income reported
for financial statement purposes and do not necessarily represent amounts
currently payable under tax laws. Deferred taxes, which arise principally from
temporary differences between the period in which certain income and expenses
are recognized for financial accounting purposes and the period in which they
affect taxable income, are included in the amounts provided for income taxes.
Under this method, the computation of the net deferred tax liability or asset
gives current recognition to changes in the tax laws.
NET INCOME PER COMMON SHARE
Basic earnings per share (EPS) is computed by dividing net income after
preferred dividends by the weighted average number of common shares outstanding
during the period. Diluted EPS incorporates the dilutive effect of common stock
equivalents outstanding on an average basis during the period. Stock options
(see Note 12) are a common stock equivalent.
The Company adopted the provisions of SFAS No. 128, "Earnings per Share",
for the year ended December 31, 1997. As required by the provisions of the
Statement, all prior period and interim period EPS data presented have been
restated. This Statement simplifies the standards for computing 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. Also see Note 17.
F-43
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
COMPREHENSIVE INCOME
The Company has retroactively adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the period
from non-owner sources. The adoption of this Statement resulted in a change in
the financial statement presentation, but did not have an impact on the
Company's consolidated financial position, results of operations or cash flows.
EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company provides a variety of benefit and incentive compensation plans
for eligible employees and retirees. Provisions for the costs of these employee
benefit and incentive plans and postretirement benefit plans are accrued and
charged to expense when the benefit is earned.
STOCK-BASED COMPENSATION
The Company adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation", on January 1, 1996. SFAS No. 123 establishes
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based compensation plans.
As allowed under the provisions of SFAS No. 123, the Company has chosen to
continue to recognize compensation expense using the intrinsic value-based
method of valuing stock options prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations. Under the intrinsic value-based method, compensation cost is
measured as the amount by which the quoted market price of the Company's stock
at the date of grant exceeds the stock option exercise price.
Compensation cost associated with the Company's unvested restricted stock
issued under the management stock plan is measured based on the market price of
the stock at the grant date and is expensed over the vesting period.
PENDING ACCOUNTING PRONOUNCEMENTS
In December 1996, the Financial Accounting Standards Board (FASB) issued
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125", which defers the implementation of SFAS No. 125 for
transactions related to repurchase agreements, dollar-roll repurchase
agreements, securities lending and similar transactions until January 1, 1998.
Management believes that the effect of adoption of SFAS No. 125, for those
transactions covered under SFAS No. 127, on the Company's Consolidated Financial
Statements will not be material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of this Statement will not impact the Company's consolidated financial
position, results of operations, or cash flows, and any effect will be limited
to the form and content of its disclosures. The Statement is effective with the
year-end 1998 financial statements.
F-44
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 2 -- SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
fair values of securities are presented below.
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996
------------------------------------------------ ------------------------------------------------
<CAPTION>
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- ------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury............ $ 987,374 $10,793 $ 170 $ 997,997 $1,137,992 $ 4,993 $1,933 $1,141,052
Other U.S. government.... 709,536 6,005 67 715,474 687,717 4,993 779 691,931
Mortgage-backed
securities.............. 679,692 3,331 265 682,758 193,531 400 274 193,657
State and municipal...... 90,937 13,236 -- 104,173 101,006 13,749 -- 114,755
Corporate debt
securities.............. 2,698 311 1 3,008 -- -- -- --
Equity securities........ 28,881 1,596 672 29,805 19,041 2,553 -- 21,594
Foreign securities....... 5,132 39 -- 5,171 1,136 72 -- 1,208
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total securities
available for sale... $2,504,250 $35,311 $1,175 $2,538,386 $2,140,423 $26,760 $2,986 $2,164,197
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996
------------------------------------------------ ------------------------------------------------
<CAPTION>
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- ------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury............ $ 40,092 $ 1,333 $-- $ 41,425 $ 50,109 $ 1,735 $-- $ 51,844
Other U.S. government.... 99,520 2,568 -- 102,088 139,188 4,412 -- 143,600
Mortgage-backed
securities.............. 24,477 1,745 14 26,208 41,985 2,019 68 43,936
State and municipal...... 24,686 75 1,367 23,394 36,914 310 2,199 35,025
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total securities held
to maturity.......... $ 188,775 $ 5,721 $1,381 $ 193,115 $ 268,196 $ 8,476 $2,267 $ 274,405
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
F-45
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 2 -- SECURITIES (CONTINUED)
The amortized cost and fair value of securities, by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations, with or
without call or prepayment penalties.
MATURITY SCHEDULE OF SECURITIES
<TABLE>
<CAPTION>
SECURITIES SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY
---------------------- --------------------
DECEMBER 31, 1997 DECEMBER 31, 1997
---------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ---------------------------------------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Due in one year or less................. $ 321,459 $ 322,592 $ 22,699 $ 22,801
Due after one year through five years... 2,101,347 2,122,154 150,467 156,069
Due after five years through ten
years.................................. 15,950 18,508 2,596 2,536
Due after ten years..................... 36,613 45,327 13,013 11,709
Equity securities....................... 28,881 29,805 -- --
---------- ---------- --------- --------
Total securities.................... $2,504,250 $2,538,386 $188,775 $193,115
---------- ---------- --------- --------
---------- ---------- --------- --------
</TABLE>
During the years ended December 31, 1997 and 1996, there were no sales or
transfers from the securities held to maturity portfolio. During the quarter
ended December 31, 1995, in accordance with guidance issued by the FASB, the
Company reclassified from securities held to maturity to securities available
for sale approximately $285 million at amortized cost of U.S. Treasury Notes
(fair value $285 million) and $64 million at amortized cost of municipal bonds
(fair value $72 million).
In 1997, proceeds from sales of securities available for sale were $172
million with gross realized gains of $3 million and no gross realized losses. In
1996, proceeds from sales of securities available for sale were $20 million with
gross realized gains of $5 million and no gross realized losses. In 1995,
proceeds from sales of securities available for sale were $241 million with
gross realized gains of $2 million and gross realized losses of $3 million.
F-46
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES
A summary of loans net of unearned interest and fees of $128 million and
$150 million at December 31, 1997 and 1996, respectively, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
(DOLLARS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Domestic:
Commercial, financial and industrial................................... $ 10,747,179 $ 9,495,592
Construction........................................................... 293,333 357,817
Mortgage:
Residential.......................................................... 2,961,233 2,960,908
Commercial........................................................... 2,951,807 2,597,616
------------- -------------
Total mortgage..................................................... 5,913,040 5,558,524
Consumer:
Installment.......................................................... 2,090,752 2,063,434
Home equity.......................................................... 992,916 1,113,269
Credit card and other lines of credit................................ 270,097 303,235
------------- -------------
Total consumer..................................................... 3,353,765 3,479,938
Lease financing........................................................ 874,860 800,048
------------- -------------
Total loans in domestic offices.................................... 21,182,177 19,691,919
Loans originated in foreign branches..................................... 1,559,231 1,357,868
------------- -------------
Total loans........................................................ 22,741,408 21,049,787
Allowance for credit losses...................................... 451,692 523,946
------------- -------------
Loans, net......................................................... $ 22,289,716 $ 20,525,841
------------- -------------
------------- -------------
</TABLE>
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year..................................... $ 523,946 $ 555,149 $ 563,142
Loans charged off.............................................. (122,779) (119,100) (133,599)
Loan loss recoveries........................................... 51,014 48,024 72,403
----------- ----------- -----------
Total net loans charged off................................ (71,765) (71,076) (61,196)
Provision for credit losses.................................... -- 40,000 53,250
Foreign translation adjustment and other net deductions........ (489) (127) (47)
----------- ----------- -----------
Balance, end of year........................................... $ 451,692 $ 523,946 $ 555,149
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Nonaccrual loans totaled $109 million and $128 million at December 31, 1997
and 1996, respectively. A significant portion of these loans were real estate
related. There were no renegotiated loans at December 31, 1997 and 1996.
Interest foregone on loans designated as nonaccrual at December 31, 1997,
1996 and 1995 was $6 million, $9 million and $18 million, respectively.
F-47
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
LOAN IMPAIRMENT
Impaired loans of the Company include commercial, financial and industrial,
construction and commercial mortgage loans designated as nonaccrual. When the
value of an impaired loan is less than the recorded investment in the loan, a
portion of the Company's allowance for credit losses is allocated as an
impairment allowance.
Effective January 1, 1995, the Company's policy for recognition of interest
income, charge-offs of loans, and application of payments on impaired loans is
the same as the policy applied to nonaccrual loans.
The following table sets forth information about the Company's impaired
loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Impaired loans with an allowance............................................. $ 59,351 $ 69,886 $ 58,584
Impaired loans without an allowance(1)....................................... 49,033 43,962 114,611
---------- ---------- ----------
Total impaired loans(2).................................................. $ 108,384 $ 113,848 $ 173,195
---------- ---------- ----------
---------- ---------- ----------
Allowance for impaired loans................................................. $ 9,418 $ 21,260 $ 15,837
Average balance of impaired loans during the year............................ $ 120,096 $ 145,351 $ 277,955
Interest income recognized on nonaccrual loans during the year............... $ 2,506 $ 4,795 $ 10,685
</TABLE>
- ------------
(1) These loans do not require an allowance for credit losses since the fair
values of the impaired loans equal or exceed the recorded investments in the
loans.
(2) This amount was evaluated for impairment using three measurement methods as
follows: $27 million, $38 million, and $64 million was evaluated using the
present value of the expected future cash flows at December 31, 1997, 1996
and 1995, respectively; $53 million, $45 million, and $95 million was
evaluated using the fair value of the collateral at December 31, 1997, 1996
and 1995, respectively; and $28 million, $31 million, and $14 million was
evaluated using historical loss factors at December 31, 1997, 1996 and 1995,
respectively.
RELATED PARTY LOANS
The Company in some cases makes loans to related parties including its
directors, executive officers and their affiliated companies. At December 31,
1997, related party loans outstanding to individuals who served as directors or
executive officers at anytime during the year totaled $38 million as compared to
$79 million at December 31, 1996. In the opinion of management, these related
party loans were made on substantially the same terms, including interest rates
and collateral requirements, as those terms prevailing at the date these loans
were made. During 1997 and 1996, there were no loans to related parties which
were charged off. Additionally, at December 31, 1997 and 1996, there were no
loans to related parties which were nonperforming.
F-48
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 4 -- PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. As of December 31, 1997 and 1996, the amounts were:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
1997 1996
------------------------------------------- -------------------------------------------
ACCUMULATED ACCUMULATED
DEPRECIATION AND NET BOOK DEPRECIATION AND NET BOOK
(DOLLARS IN THOUSANDS) COST AMORTIZATION VALUE COST AMORTIZATION VALUE
- ------------------------------------ ----------- ----------------- ----------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Land................................ $ 69,290 $ -- $ 69,290 $ 73,309 $ -- $ 73,309
Premises............................ 253,752 101,997 151,755 264,545 98,785 165,760
Leasehold improvements.............. 135,609 80,019 55,590 124,065 75,264 48,801
Furniture, fixtures and equipment... 400,774 271,110 129,664 362,063 239,312 122,751
----------- ----------------- ----------- ----------- ----------------- -----------
Total............................. $ 859,425 $ 453,126 $ 406,299 $ 823,982 $ 413,361 $ 410,621
----------- ----------------- ----------- ----------- ----------------- -----------
----------- ----------------- ----------- ----------- ----------------- -----------
</TABLE>
Rental, depreciation and amortization expense were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------- --------- --------- ---------
Rental expense of premises....................................................... $ 46,556 $ 66,189 $ 53,493
Less: rental income.............................................................. 11,049 11,904 11,050
--------- --------- ---------
Net rental expense............................................................. $ 35,507 $ 54,285 $ 42,443
--------- --------- ---------
--------- --------- ---------
Other net rental expense, primarily for equipment................................ $ 298 $ 2,218 $ 2,705
--------- --------- ---------
--------- --------- ---------
Depreciation and amortization of premises and equipment.......................... $ 53,652 $ 51,821 $ 49,036
--------- --------- ---------
--------- --------- ---------
</TABLE>
Future minimum operating lease payments are as follows.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Years Ending December 31,
1998....................................................................................... $ 48,156
1999....................................................................................... 46,564
2000....................................................................................... 38,078
2001....................................................................................... 33,793
2002....................................................................................... 23,654
Later years................................................................................ 127,654
--------
Total minimum operating lease payments......................................................... $ 317,899
--------
--------
Minimum rental income due in the future under noncancellable subleases......................... $ 36,349
--------
--------
</TABLE>
Included in other liabilities in the accompanying December 31, 1997
Consolidated Balance Sheet is $13 million of future operating lease payments
accrued in connection with the Merger (also see Note 7).
A majority of the leases provide for the payment of taxes, maintenance,
insurance and certain other expenses applicable to the leased premises. Many of
the leases contain extension provisions, escalation
F-49
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 4 -- PREMISES AND EQUIPMENT (CONTINUED)
clauses and purchase options. There are no restrictions on paying dividends,
incurring additional debt or negotiating additional leases under the terms of
the present lease agreements.
NOTE 5 -- DEPOSITS
At December 31, 1997, the Company had $155 million in domestic interest
bearing time deposits exceeding $100,000 with a remaining term of greater than
one year. Maturity information for those deposits is summarized below.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
Due after one year through two years................................................. $ 82,707
Due after two years through three years.............................................. 30,064
Due after three years through four years............................................. 21,854
Due after four years through five years.............................................. 17,642
Due after five years................................................................. 2,681
--------
Total............................................................................ $ 154,948
--------
--------
</TABLE>
Substantially all of the foreign interest bearing time deposits exceeding
$100,000 mature in less than one year.
NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
RETIREMENT PLANS
Between April 1, 1996 and December 31, 1996, the Company maintained two
retirement plans, one covering former Union Bank employees and the other
covering former BanCal Tri-State Corporation employees. Effective January 1,
1997, the Union Bank Retirement Plan was amended and renamed the Union Bank of
California, N.A. Retirement Plan (the Plan). In addition, the plan covering
former BanCal Tri-State Corporation employees was terminated and all account
balances became fully vested. Employees of the former BanCal Tri-State
Corporation entered the Plan on January 1, 1997.
The Plan is a noncontributory defined benefit plan that provides retirement
benefits based on years of credited service and the final average compensation
amount, as defined in the Plan. Employees become eligible for this plan after
one year of service and become fully vested after five years of service. Prior
Bank of California participants received credited service from date of hire for
vesting, eligibility and early retirement purposes, but only received service
from January 1, 1997 for benefit purposes. The Company's funding policy is to
make contributions equal to the maximum deductible amount as allowed by the
Internal Revenue Code. Contributions are intended to provide not only for
benefits attributed to services to date, but also for those expected to be
earned in the future. Plan assets are invested in U.S. government securities,
corporate bonds, and commingled investment funds.
F-50
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
The following sets forth the funded status of the Plan and the amounts
recognized in the Company's Consolidated Balance Sheets at December 31, 1997 and
1996.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------ ----------- -----------
Accumulated benefit obligation:
Actuarial present value of benefits for services rendered to date:
Vested.................................................................... $ (297,646) $ (241,188)
Non-vested................................................................ (30,858) (27,821)
----------- -----------
Total................................................................... $ (328,504) $ (269,009)
----------- -----------
----------- -----------
Projected benefit obligation.................................................. $ (400,958) $ (323,646)
Fair value of plan assets..................................................... 460,501 381,194
----------- -----------
Projected benefit obligation less than plan assets.......................... 59,543 57,548
Prior service cost not yet recognized in net periodic pension cost............ 12,915 5,165
Unrecognized net gain due to change of assumptions and experience different
from assumptions made........................................................ (37,717) (29,660)
Unrecognized transition asset at January 1, 1986, being recognized over 13.4
years........................................................................ (210) (359)
----------- -----------
Prepaid pension costs included in other assets.......................... $ 34,531 $ 32,694
----------- -----------
----------- -----------
</TABLE>
The following items are components of net pension expense.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------- ---------- ---------- ----------
Service cost -- present value of benefits earned.................... $ 20,667 $ 12,651 $ 10,516
Interest cost on projected benefit obligation....................... 25,049 22,043 19,637
Less return on plan assets:
Actual gain....................................................... (66,819) (44,210) (63,304)
Gains in excess of expected return on plan assets................. 39,700 20,333 42,286
---------- ---------- ----------
Expected return on plan assets.................................. (27,119) (23,877) (21,018)
Amortization of prior service cost.................................. 3,175 2,108 2,108
Amortization of transition asset.................................... (149) (149) (149)
---------- ---------- ----------
Net pension expense............................................. $ 21,623 $ 12,776 $ 11,094
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-51
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
The following summarizes the assumptions used in computing the present value
of the accumulated benefit obligation, the present value of the projected
benefit obligation and the net pension expense.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Discount rate in determining expense.......................................... 7.50% 7.50% 7.50%
Discount rate in determining benefit obligations at year end.................. 7.00 7.50 7.50
Rate of increase in future compensation levels for determining expense........ 5.50 5.50 5.50
Rate of increase in future compensation levels for determining benefit
obligations at year end...................................................... 5.00 5.50 5.50
Expected return on plan assets................................................ 8.25 8.25 8.25
</TABLE>
The former BanCal Tri-State Corporation retirement plan, which was
terminated effective January 1, 1997, was a defined contribution plan. The
Company's expense for pension contributions for the years ended December 31,
1996 and 1995 was $5 million and $6 million, respectively.
EXECUTIVE SUPPLEMENTAL BENEFIT PLANS
The Company has several Executive Supplemental Benefit Plans (ESBP) which
provide eligible employees with supplemental retirement benefits. The plans are
unfunded. The accrued liability for ESBP's included in other liabilities in the
Consolidated Balance Sheets was $39 million at December 31, 1997 and $35 million
at December 31, 1996. The Company's expense relating to the ESBP's was $4
million for each of the years ended December 31, 1997 and 1996 and $3 million
for the year ended December 31, 1995.
SECTION 401(K) SAVINGS PLANS
The Company has a defined contribution plan authorized under Section 401(k)
of the Internal Revenue Code. All benefits-eligible employees with at least one
year of service are eligible to participate in the plan. Employees may
contribute up to 16 percent of their pre-tax covered compensation or up to 10
percent of their after-tax covered compensation through salary deductions. The
Company contributes 50 percent of every pre-tax dollar an employee contributes
up to the first 6 percent of the employee's pre-tax covered compensation.
Effective January 1, 1997, employees are fully vested in the employer's
contributions immediately. In addition, the Company may make a discretionary
annual profit-sharing contribution up to 2.5 percent of an employee's pay. This
profit-sharing contribution is for all eligible employees, regardless of whether
an employee is participating in the 401(k) plan, and depends on the Bank's
annual financial performance. All employer contributions are tax deductible by
the Company. The Company's combined matching contribution expense was $13
million, $9 million and $9 million for the years ended December 31, 1997, 1996
and 1995, respectively.
F-52
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
OTHER POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits for its
retired employees. The health care cost is shared between the Company and the
retiree. The life insurance plan is noncontributory. The accounting for the
health care plan anticipates future cost-sharing changes to the written plan
that are consistent with the Company's intent to maintain a level of
cost-sharing at approximately 25 percent. Assets set aside to cover such
obligations are primarily invested in mutual funds.
The following table sets forth the plan's combined funded status recognized.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
(DOLLARS IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................. $ (48,519) $ (48,747)
Fully eligible plan participants......................................... (12,208) (11,876)
Other active plan participants........................................... (18,581) (19,651)
------------ ------------
Accumulated postretirement obligation.................................. (79,308) (80,274)
Fair value of plan assets.................................................. 31,136 21,703
------------ ------------
Accumulated postretirement obligation in excess of plan assets........... (48,172) (58,571)
Unrecognized net gain due to change in assumption and experience different
from assumptions made..................................................... (21,119) (14,829)
Unrecognized transition obligation......................................... 59,813 63,800
------------ ------------
Accrued postretirement benefit cost.................................... $ (9,478) $ (9,600)
------------ ------------
------------ ------------
</TABLE>
The following table sets forth the components of postretirement benefit
expense.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Service cost................................................ $ 3,123 $ 1,741 $ 1,792
Interest cost............................................... 5,150 5,581 6,091
Actual return on plan assets................................ (4,445) (2,590) (3,337)
Net amortization and deferral............................... 4,826 4,397 5,559
------------ ------------ ------------
Net periodic postretirement benefit cost.................. $ 8,654 $ 9,129 $ 10,105
------------ ------------ ------------
------------ ------------ ------------
Postretirement benefit claims paid for the year............. $ 3,787 $ 3,808 $ 5,309
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The unrecognized transition obligation recorded on January 1, 1993 is being
amortized over 20 years.
For 1997, the Company assumed a 9 percent annual rate of increase in the per
capita cost of postretirement medical benefits for the indemnity plan and a 4
percent annual rate of increase was assumed for the health maintenance
organization (HMO) plan. For future periods, the rate for the indemnity plan was
expected to gradually decrease from 9 percent to 5.5 percent in 2007 and remain
at
F-53
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
that level thereafter. The rate for the HMO plan was expected to increase after
one year of being at a low rate and then gradually decrease to 5.5 percent in
the year 2007 and thereafter.
The healthcare cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1997 by $11 million and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year then ended by $1 million.
For 1996, the Company assumed a 9 percent annual rate of increase in the per
capita cost of postretirement medical benefits for the indemnity plan and a 4
percent annual rate of increase was assumed for the HMO plan. For future periods
the assumed rate for the indemnity plan gradually decreased from 9 percent to
5.5 percent in 2007 and remained level thereafter. The assumed rate of change on
the HMO plan increased to 7 percent in 1997 and then gradually decreased to 5.5
percent in the year 2007 and thereafter.
For 1995, the former Union Bank assumed a 9 percent annual rate of increase
in the per capita cost of postretirement medical benefits for the indemnity plan
and a 4 percent annual rate of increase was assumed for the HMO plan. For future
periods the assumed rate for the indemnity plan gradually decreased from 9
percent to 5.5 percent in 2007 and remained level thereafter. The assumed rate
of change on the HMO plan increased for the remainder of the decade, then
gradually decreased to 5.5 percent in the year 2007 and thereafter.
For 1995, former BanCal Tri-State Corporation assumed an 11.5 percent annual
rate of increase in the per capita cost of postretirement medical benefits for
the indemnity plan. For future periods, the assumed rate for the indemnity plan
gradually decreased from 11.5 percent to 5.5 percent in 2003 and remained level
thereafter.
The discount rate used in determining the actuarial present value of the
accumulated postretirement benefit obligation was 7.00% as of December 31, 1997
and 7.50% as of December 31, 1996 and 1995. The estimated rate of return on plan
assets was 8.00% as of December 31, 1997, 1996 and 1995.
F-54
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 7 -- OTHER EXPENSES
The detail of other expenses is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------- ---------- ---------- ----------
Communications..................................................... $ 42,372 $ 40,133 $ 35,806
Credit card processing............................................. 42,274 37,091 31,288
Advertising and public relations................................... 28,664 28,788 20,911
Professional services.............................................. 28,075 24,342 26,197
Data processing.................................................... 25,973 22,140 18,557
Printing and office supplies....................................... 24,098 27,085 22,626
Regulatory assessments............................................. 5,778 4,048 23,431
Other.............................................................. 129,251 114,400 117,908
---------- ---------- ----------
Total other expenses........................................... $ 326,485 $ 298,027 $ 296,724
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Merger and integration expense of $6 million and $117 million, as summarized
in the following table, was incurred in 1997 and 1996, respectively, in
connection with the Merger.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
(DOLLARS IN THOUSANDS) 1997 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........................................................................... 35,809 40,155
Noncash........................................................................ 1,642 22,965
--------- ----------
Total utilization............................................................ 37,451 63,120
--------- ----------
Balance, accrued merger and integration expense, end of period................... $ 22,930 $ 54,344
--------- ----------
--------- ----------
</TABLE>
Total merger and integration expense of $124 million was recorded to cover
$38 million of personnel expense for severance, retention and other employee
related costs, $54 million for facilities expense related to redundant banking
facilities, and $32 million in professional services and other expense. At
December 31, 1997, the liability balance included amounts primarily for
severance payments that are being paid on a periodic basis and for operating
lease payments related to redundant banking facilities which are continuing over
the expected term of the leases.
F-55
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 8 -- INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------- ---------- ---------- ----------
Taxes currently payable:
Federal.......................................................... $ 168,375 $ 86,159 $ 96,732
State............................................................ 8,441 23,180 42,356
Foreign.......................................................... 2,092 2,895 3,430
---------- ---------- ----------
Total currently payable........................................ 178,908 112,234 142,518
---------- ---------- ----------
Taxes deferred:
Federal.......................................................... 49,437 47,575 34,839
State............................................................ 10,499 3,455 16,005
Foreign.......................................................... (122) (372) (3)
---------- ---------- ----------
Total deferred................................................. 59,814 50,658 50,841
---------- ---------- ----------
Total income tax expense....................................... $ 238,722 $ 162,892 $ 193,359
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of the net deferred tax balances of the Company were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses................................................... $ 169,769 $ 195,128
Accrued income & expense...................................................... 21,987 31,964
Accrued merger expense........................................................ 15,641 22,051
Deferred state taxes.......................................................... 21,063 13,572
Other......................................................................... 7,585 2,567
---------- ----------
Total deferred tax assets................................................... 236,045 265,282
---------- ----------
Deferred tax liabilities:
Leasing....................................................................... 297,891 276,922
Depreciation.................................................................. 17,192 13,809
Unrealized gain on securities available for sale.............................. 13,536 9,711
---------- ----------
Total deferred tax liabilities.............................................. 328,619 300,442
---------- ----------
Net deferred tax liability................................................ $ 92,574 $ 35,160
---------- ----------
---------- ----------
</TABLE>
F-56
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 8 -- INCOME TAXES (CONTINUED)
The following table is an analysis of the effective tax rate.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
<S> <C> <C> <C>
1997 1996 1995
--- --- ---
Federal income tax rate..................................... 35% 35% 35%
Net tax effects of:
State income taxes, net of federal income tax benefit..... 2 4 5
Tax-exempt interest income................................ (1) (1) (1)
Amortization of intangibles............................... 1 1 1
Other..................................................... -- 1 (2)
--- --- ---
Effective tax rate...................................... 37% 40% 38%
--- --- ---
--- --- ---
</TABLE>
During 1997 the Company received a refund from the State of California
Franchise Tax Board of approximately $25 million (net of federal taxes of $17
million) in settlement of litigation, administration and audit disputes covering
the years 1975-1987. The refund was recorded as a reduction to state income tax
expense.
Federal and state tax returns for several years are under or subject to
examination by the respective taxing authorities. Although the ultimate outcome
of such examinations cannot be determined at this time, management believes that
the resolution of issues that have been or may be raised will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
F-57
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 9 -- BORROWED FUNDS
The following is a summary of the major categories of borrowed funds.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996
- ---------------------------------------- -------------- --------------
Federal funds purchased and securities
sold under repurchase agreements with
weighted average interest rates of
5.38% and 5.09% at December 31, 1997
and 1996, respectively................. $ 1,335,884 $ 1,322,654
Commercial paper, with weighted average
interest rates of 5.64% and 5.34% at
December 31, 1997 and 1996,
respectively........................... 966,575 1,495,463
Other borrowed funds, with weighted
average interest rates of 6.23% and
5.66% at December 31, 1997 and 1996,
respectively........................... 476,010 749,422
-------------- --------------
Total borrowed funds................ $ 2,778,469 $ 3,567,539
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<S> <C> <C>
Federal funds purchased and securities
sold under repurchase agreements:
Maximum outstanding at any month
end................................. $ 1,575,930 $ 1,322,654
Average balance during the year....... 1,097,707 933,433
Weighted average interest rate during
the year............................ 5.33% 5.05%
Commercial paper:
Maximum outstanding at any month
end................................. $ 1,876,135 $ 1,854,576
Average balance during the year....... 1,637,070 1,620,087
Weighted average interest rate during
the year............................ 5.49% 5.40%
Other borrowed funds:
Maximum outstanding at any month
end................................. $ 851,694 $ 1,697,236
Average balance during the year....... 635,900 1,119,051
Weighted average interest rate during
the year............................ 5.42% 5.59%
</TABLE>
F-58
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 10 -- SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK
The following is a summary of capital notes which are subordinated to other
obligations of the Company.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------- ---------- ----------
Floating rate notes due June 2007. These notes bear interest at 0.325% above
3-month London Interbank Offered Rate (LIBOR) and are payable to the holder of
the note (BTM at December 31, 1997)............................................ $ 200,000 $ --
Floating rate notes due July 2000. These notes bear interest at 0.30% above
3-month LIBOR.................................................................. 98,000 98,000
Floating rate notes due July 1997 and July 1998. These notes bear interest at
0.25% above 3-month LIBOR and are payable to BTM............................... 50,000 100,000
8.00% fixed rate notes due February 2002. The notes were called at par on
February 25, 1997.............................................................. -- 100,000
6.67% fixed rate notes due August 2002. The notes were called at par on August
20, 1997....................................................................... -- 50,000
Fixed rate and floating rate notes matured in October 1997, with $23,000 bearing
interest at fixed rates of 10.05% to 10.14% and notes totaling $11,000 bearing
interest at 0.375% above 3-month LIBOR......................................... -- 34,000
---------- ----------
Total subordinated capital notes............................................ $ 348,000 $ 382,000
---------- ----------
---------- ----------
</TABLE>
All of the above notes qualify as Tier 2 risk-based capital under the
Federal Reserve guidelines for assessing regulatory capital. For the total
risk-based capital ratio, the amount of notes which qualify as capital is
reduced as the notes approach maturity. At December 31, 1997 and 1996, $239
million and $219 million, respectively, of the notes qualified as risk-based
capital.
Provisions of several of the notes restrict the use of the Company's
property as security for borrowings, and place limitations on leases,
indebtedness, distributions to shareholders, mergers, sales of certain assets,
transactions with affiliates and changes in majority stock ownership of the
Company.
The following table presents the maturities of subordinated capital notes.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997
- --------------------------------------------------------------------------- -----------------
<S> <C>
Years ending December 31,
1998..................................................................... $ 50,000
2000..................................................................... 98,000
Years after 2002......................................................... 200,000
--------
Total.................................................................. $ 348,000
--------
--------
</TABLE>
At December 31, 1996, the Company had outstanding 1,350,000 shares (or
5,400,000 depositary shares) of 8 3/8% Noncumulative Preferred Stock, Series A
(Preferred Stock) totaling $135 million. On September 3, 1997, the Company
redeemed all 1,350,000 outstanding shares of its Preferred Stock, reducing
shareholders' equity by $135 million. The redemption price was equal to the
stated value of $100 per share of Preferred Stock (equivalent to $25 per
depositary share), plus $2 million in accrued and
F-59
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 10 -- SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK (CONTINUED)
unpaid dividends to the redemption date. The redemption was funded by proceeds
from the issuance of $200 million in subordinated capital notes in June 1997.
NOTE 11 -- DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has a dividend reinvestment and stock purchase plan for
shareholders. The plan allows shareholders to automatically reinvest all or part
of their dividends in additional shares of the Company's common stock at a cost
of 5 percent below the market price. Participating shareholders also have the
option of purchasing additional shares at the full market price with cash
payments of $25 to $3,000 per quarter. The Company obtains shares required for
reinvestment through open market purchases or by the issuance of new shares from
its authorized but unissued stock. During 1997, 1996 and 1995, 131,127; 155,724
and, 1,862,034 shares, respectively, were required for dividend reinvestment
purposes, of which 3,687; 71,706 and, 1,862,034 shares were considered new
issuances during 1997, 1996 and 1995, respectively. BTM discontinued its
participation in the plan after the quarter ended March 31, 1995 and did not
participate in the plan as of December 31, 1997.
NOTE 12 -- MANAGEMENT STOCK PLAN
The Company has a management stock plan (the Stock Plan) which has 6,600,000
shares of the Company's common stock authorized to be awarded to key employees
and outside directors of the Company and its subsidiaries at the discretion of
the Executive Compensation and Benefits Committee of the Board of Directors (the
Committee). The combined number of shares that are granted under the Stock Plan
cannot exceed 6,600,000 shares of the Company's common stock. Committee members
and employees on rotational assignment from BTM are not eligible for stock
awards.
The Committee determines the term of each stock option grant, up to a
maximum of ten years from the date of grant. The exercise price of the options
issued under the Stock Plan shall not be less than the fair market value on the
date the option is granted. Unvested restricted stock issued under the Stock
Plan is shown as a reduction to retained earnings. The value of the restricted
shares at the date of grant is amortized to compensation expense over its
vesting period. All cancelled or forfeited options and restricted stock become
available for future grants.
In 1997, 1996 and 1995, the Company granted options to various key
employees, including principal officers, under the Stock Plan. The stock options
vest pro rata on each anniversary of the grant date and become fully exercisable
three years from the grant date, provided that the employee has completed the
specified continuous service requirement. They vest earlier if the employee
dies, is permanently and totally disabled, or retires under certain grant, age
and service conditions.
F-60
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
The following is a summary of stock option transactions under the Stock
Plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- ---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of
year............... 1,263,807 $ 12.13 1,082,106 $ 10.42 740,502 $ 9.94
Granted........... 441,900 22.13 277,200 18.29 389,100 11.25
Exercised......... (289,029) 10.84 (80,496) 10.69 (47,496) 9.83
Forfeited......... (19,500) 22.13 (15,003) -- -- --
---------- ---------- ----------
Options outstanding,
end of year........ 1,397,178 $ 15.41 1,263,807 $ 12.13 1,082,106 $ 10.42
---------- ---------- ----------
---------- ---------- ----------
Options exercisable,
end of year........ 712,107 $ 11.50 686,145 $ 10.38 407,466 $ 9.78
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The weighted-average fair value of options granted was $6.94 during 1997,
$6.00 during 1996, and $3.13 during 1995.
The following table summarizes information about stock options outstanding.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT DECEMBER 31, 1997 OPTIONS EXERCISABLE AT
------------------------------------------------ DECEMBER 31, 1997
WEIGHTED-AVERAGE ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------- ----------- ---------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$6.67 - 9.08 267,408 5.0 years $ 8.34 267,408 $ 8.34
11.25 - 12.83 456,114 6.2 11.76 348,867 11.92
18.29 251,256 7.7 18.29 83,832 18.29
22.13 422,400 9.1 22.13 12,000 22.13
----------- -----------
1,397,178 712,107
----------- -----------
----------- -----------
</TABLE>
In 1997, 1996 and 1995, the Company also granted 178,320; 133,440 and,
231,210 shares, respectively, of restricted stock to key officers, including
executive officers, under the Stock Plan. The awards of restricted stock vest
pro rata on each anniversary of the grant date and become fully vested four
years from the grant date, provided that the employee has completed the
specified continuous service requirement. They vest earlier if the employee
dies, is permanently and totally disabled, or retires under certain grant, age
and service conditions. Restricted shareholders have the right to vote their
restricted shares and receive dividends.
F-61
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
The following is a summary of restricted stock transactions under the Stock
Plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NUMBER OF GRANT DATE NUMBER OF GRANT DATE NUMBER OF GRANT DATE
SHARES FAIR VALUE SHARES FAIR VALUE SHARES FAIR VALUE
---------- ----------------- ---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Restricted stock
awards outstanding,
beginning of year... 1,166,820 $ 10.04 1,044,951 $ 8.99 817,608 $ 8.25
Granted............ 178,320 22.18 133,440 18.29 231,210 11.61
Cancelled.......... (7,923) 20.08 (11,571) 10.78 (3,867) 9.72
---------- ---------- ----------
Restricted stock
awards outstanding,
end of year......... 1,337,217 $ 11.59 1,166,820 $ 10.04 1,044,951 $ 8.99
---------- ---------- ----------
---------- ---------- ----------
Restricted stock
awards vested, end
of year............. 942,738 $ 9.17 764,670 $ 8.35 568,449 $ 7.81
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
At December 31, 1997, 1996 and 1995, 3,365,586, 958,383 and 1,342,449
shares, respectively, were available for future grants as either stock options
or restricted stock under the Stock Plan.
The Company follows the intrinsic value based method in accounting for its
employee stock-based compensation plan. Accordingly, no compensation cost has
been recognized for its stock option grants. Had compensation cost for the
Company's stock-based plan been determined based on the fair value at the grant
dates for awards under that plan consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and net
income per share would have decreased to the pro forma amounts indicated in the
following table. Options that were granted prior to January 1, 1995 with vesting
periods in 1995 and later are excluded from the pro forma results indicated for
1996 and 1995 in the following table.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- ------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income............................................... As reported $ 411,296 $ 249,458 $ 312,942
Pro forma 410,068 248,874 312,691
Net income applicable to common stock.................... As reported $ 403,696 $ 238,152 $ 301,637
Pro forma 402,468 237,568 301,386
Net income per common share -- basic..................... As reported $ 2.31 $ 1.37 $ 1.74
Pro forma 2.30 1.36 1.73
Net income per common share -- diluted................... As reported $ 2.30 $ 1.36 $ 1.73
Pro forma 2.30 1.36 1.73
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants made in 1997, 1996 and
F-62
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
1995: risk-free interest rates of 6.6% in 1997, 6.3% in 1996 and 7.1% in 1995;
expected volatility of 26% in 1997, 28% in 1996 and 28% in 1995; expected lives
of 6, 7 and 7 years for 1997, 1996 and 1995, respectively, and expected dividend
yields of 2.1% in 1997, 2.6% in 1996 and 4.2% in 1995.
Effective January 1, 1997, the Company established a Performance Share Plan.
Eligible participants may earn performance share awards to be redeemed in cash
three years after the date of grant. Performance shares are linked to
shareholder value in two ways: (1) the market price of the Company's common
stock, and (2) return on assets, a performance measure closely linked to value
creation. Eligible participants generally receive grants of performance shares
annually. The total number of performance shares granted under the plan cannot
exceed 600,000 and in 1997 the Company granted 14,400 shares. The value of a
performance share is equal to the market price of the Company's common stock.
All cancelled or forfeited performance shares become available for future
grants.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. All of the fair values presented
below have been made under this definition of fair value unless otherwise
disclosed.
It is management's belief that the fair values presented below are
reasonable based on the valuation techniques and data available to the Company
as of December 31, 1997 and 1996, as more fully described below. It should be
noted that the operations of the Company are managed on a going concern basis
and not a liquidation basis. As a result, the ultimate value realized for the
financial instruments presented could be substantially different when actually
recognized over time through the normal course of operations. Additionally, a
substantial portion of an institution's inherent value is its capitalization and
franchise value. Neither of these components have been given consideration in
the presentation of fair values which follow.
F-63
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The table below presents the carrying value and fair value of the specified
assets and liabilities held by the Company.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 1996
----------------------------- -----------------------------
<CAPTION>
(DOLLARS IN THOUSANDS) CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
- --------------------------------------------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 3,199,455 $ 3,199,455 $ 3,937,697 $ 3,937,697
Trading account assets............................. 394,313 394,313 465,782 465,782
Securities available for sale...................... 2,538,386 2,538,386 2,164,197 2,164,197
Securities held to maturity........................ 188,775 193,115 268,196 274,405
Loans, net of allowance for credit losses.......... 22,289,716 22,511,510 20,525,841 20,803,651
LIABILITIES
Deposits:
Noninterest bearing.............................. 8,849,544 8,849,544 7,655,109 7,655,109
Interest bearing................................. 14,446,830 14,453,029 13,877,851 13,885,504
-------------- ------------- -------------- -------------
Total deposits................................. 23,296,374 23,302,573 21,532,960 21,540,613
Borrowed funds..................................... 2,778,469 2,775,531 3,567,539 3,567,836
Subordinated capital notes......................... 348,000 348,000 382,000 388,388
</TABLE>
The Company is also a party to financial instruments that are not reflected
on the balance sheet but represent obligations of the Company in the normal
course of business. For information regarding the fair value of off-balance
sheet financial instruments, see Note 14.
The following methods and assumptions were used to estimate fair value of
each class of financial instruments for which it is practicable to estimate that
value.
CASH AND CASH EQUIVALENTS: The book value of cash and cash equivalents is
considered a reasonable estimate of fair value.
TRADING ACCOUNT ASSETS: Trading account assets are short term in nature and
valued at market based on quoted market prices or dealer quotes. If a quoted
market price is not available, the recorded amounts are estimated using quoted
market prices for similar securities. Thus, carrying value is considered a
reasonable estimate of fair value for these financial instruments.
SECURITIES: The fair value of securities is based on quoted market prices
or dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. Available for sale
securities are carried at their aggregate fair value, while held to maturity
securities are carried at amortized cost.
LOANS: The fair value for performing fixed and non-reference rate loans was
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for
similar remaining maturities and where available, discount rates were based on
current market rates.
F-64
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of performing loans tied to the Company's reference rate with
normal credit risk is assumed to approximate their book value. The fair value
for these floating rate loans with increasing credit risk was estimated by
calculating their present value using a yield the Company would currently
require for loans with similar terms to borrowers with similar credit quality.
Loans which are on nonaccrual status were not included in the loan valuation
methods discussed previously. The fair value of these assets was estimated
assuming these loans were sold on a liquidation basis.
The fair value of performing mortgage loans was based on quoted market
prices for loans with similar credit and interest rate risk characteristics.
The fair value of performing credit card loans and credit lines is assumed
to approximate their book value. The fair value was estimated for credit card
loans and credit lines which were past due at December 31, 1997 and 1996 by
segregating them according to their past due status and then discounting them
based on the Company's historical probability of loss.
NONINTEREST BEARING DEPOSITS: The fair value of noninterest bearing
deposits is the amount payable on demand at the reporting date. The fair value
of the demand deposit intangible has not been estimated.
INTEREST BEARING DEPOSITS: The fair value of savings accounts and certain
money market accounts is the amount payable on demand at the reporting date. The
fair value of fixed maturity certificates of deposit was estimated using rates
currently being offered on certificates with similar maturities.
BORROWED FUNDS: The book values of federal funds purchased, securities sold
under repurchase agreements and other short-term borrowings are assumed to
approximate their fair value due to their limited duration characteristics. The
fair value for commercial paper and term federal funds purchased was estimated
using market quotes.
SUBORDINATED CAPITAL NOTES: The fair value of fixed-rate subordinated
capital notes was estimated using discounted cash flows based on market rates
for A-rated bank borrowings. The book values for variable-rate subordinated
capital notes are assumed to approximate fair market value.
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Company is a party to certain derivative and other financial instruments
that are not reflected on the balance sheet but represent obligations or assets
of the Company in the normal course of business. These financial instruments are
used for trading activities of the Company, to meet the needs of customers and
to reduce the impact on the Company's operating results due to market
fluctuations in currency or interest rates.
These financial instruments involve, to varying degrees, elements of credit
and market risk which are not recognized on the balance sheet. Credit risk is
defined as the possibility that a loss may occur from the failure of another
party to perform in accordance with the terms of the contract which exceeds the
value of the existing collateral, if any. Market risk is the possibility that
future changes in market conditions may make the financial instrument less
valuable.
F-65
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
DERIVATIVE INSTRUMENTS
The fair value of the derivative financial instruments was calculated based
on quoted market prices where available or if quoted market prices were not
available, the Company used the estimated amount it would receive or pay to
offset or terminate the agreements at December 31, 1997 based upon the terms of
such contracts relative to prevailing interest rates.
TRADING ACTIVITIES IN DERIVATIVE INSTRUMENTS
The following table reflects the Company's positions relating to trading
activities in derivative instruments. Trading activities include both activities
for the Company's own account and for customers. At December 31, 1997 and 1996,
the majority of the Company's derivative transactions for customers are hedged
with essentially offsetting contracts with other counterparties. The average
fair value of derivatives held or written for trading purposes during the year
is not significant. The notional amount of derivative instruments reflects the
extent of the Company's involvement in these instruments. For interest rate
swap, cap and floor agreements, notional amounts do not represent exposure to
credit or market risk. Notional amounts are not exchanged, but serve as a point
of reference for calculating payments.
The following is a summary of derivative instruments held or written for
trading purposes.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1997 1996
----------------------------------- ---------------------------------
NOTIONAL CREDIT ESTIMATED NOTIONAL CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS RISK(1) FAIR VALUE AMOUNTS RISK(1) FAIR VALUE
- --------------------------------------------------- ----------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
HELD OR WRITTEN FOR TRADING PURPOSES AND CUSTOMER
ACCOMMODATIONS
Foreign exchange forward contracts:
Commitments to purchase.......................... $ 531,330 $ 366 $ (34,304) $ 403,602 $ 2,813 $ (11,735)
Commitments to sell.............................. 709,512 40,671 40,274 530,923 18,958 14,759
Foreign exchange OTC options:
Options purchased................................ 46,533 -- (634) -- -- --
Options written.................................. 46,533 637 637 -- -- --
Currency swap agreements:
Commitments to pay............................... 55,725 -- (5,971) 64,817 4,821 3,193
Commitments to receive........................... 55,725 5,971 5,971 38,417 1,628 1,595
Interest rate contracts:
Caps purchased................................... 1,189,791 796 796 994,605 1,858 1,837
Floors purchased................................. 119,000 612 612 147,250 1,149 1,149
Caps written..................................... 1,189,791 -- (796) 994,605 21 (1,838)
Floors written................................... 119,000 -- (612) 147,250 -- (1,149)
Swap contracts:
Pay variable/receive variable.................. 58,000 301 -- 10,000 28 1
Pay fixed/receive variable..................... 976,180 364 (29,579) 788,165 1,064 (17,592)
Pay variable/receive fixed..................... 976,180 30,240 29,926 788,165 19,623 18,674
</TABLE>
- ---------------
(1) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
F-66
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
ASSET AND LIABILITY MANAGEMENT DERIVATIVE INSTRUMENTS
Derivative positions are integral components of the Company's designated
asset and liability management activities. Therefore, the Company does not
believe it is meaningful to separately analyze the derivatives component of its
risk management activities in isolation from related positions. The Company uses
interest rate derivative instruments as part of its management of asset and
liability positions. Derivatives are used to manage interest rate risk relating
to specified groups of assets and liabilities, including LIBOR based commercial
loans, deposit liabilities and certain subordinated capital notes. The Company
uses foreign currency forward contracts as a means of managing foreign exchange
rate risk associated with assets or liabilities denominated in foreign
currencies.
The following table reflects summary information on derivative contracts
used to hedge or modify the Company's risk as of December 31, 1997 and 1996.
Amounts included in the fair value column do not include gains or losses from
changes in the value of the underlying asset or liability being hedged. Notional
amounts are not exchanged, but serve as a point of reference for calculating
payments. For interest rate swap, cap and floor agreements, notional amounts do
not represent exposure to credit or market risk.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------------------
1997 1996
-------------------------------------------------- --------------------------------------------------
UNAMORTIZED UNAMORTIZED
NOTIONAL PREMIUM PAID CREDIT ESTIMATED NOTIONAL PREMIUM PAID CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS (RECEIVED) RISK(1) FAIR VALUE AMOUNTS (RECEIVED) RISK(1) FAIR VALUE
- -------------------------- ----------- ------------- --------- ----------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HELD FOR ASSET AND
LIABILITY MANAGEMENT
PURPOSES
Foreign exchange forward
contracts:
Commitments to
purchase.............. $ 341,298 $ -- $ 862 $ (5,055) $ 129,264 $ -- $ 1,628 $ (2,286)
Commitments to sell..... 51,754 -- 35 (822) 4,142 -- 52 22
Currency swap agreements:
Commitments to pay...... 26,400 -- 2,590 2,590 -- -- -- --
Interest rate contracts:
Caps purchased.......... 15,420 -- -- -- 15,740 -- -- --
Floors purchased........ 3,550,000 11,730 4,040 4,040 2,050,000 6,309 9,750 9,750
Caps written............ 250,000 (335) 273 273 250,000 (709) 509 509
Floors written.......... 1,850,000 (534) -- (1,309) 500,000 (1,016) 391 391
Swap contracts:
Pay fixed/receive
variable............ -- -- -- -- 114,086 -- 241 (851)
Pay variable/receive
fixed............... 575,000 -- 2,302 2,302 847,000 -- 3,775 2,398
</TABLE>
- ---------------
(1) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
F-67
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Commitments to extend credit are legally binding agreements to lend to a
customer provided there are no violations of any condition established in the
contract. Commitments have fixed expiration dates or other termination clauses
and may require payment of a fee or maintenance of compensatory balances. Such
fees are deferred and, upon partial or full exercise of the commitment,
amortized over the life of the loan or, if exercise is deemed remote, amortized
over the commitment period. Since many of the commitments are expected to expire
without being drawn upon, the contractual amounts do not necessarily represent
future cash requirements. With respect to commitments to extend credit and
letters of credit, the Company's exposure to credit risk in the event of
nonperformance by customers is represented by the contractual amount of those
instruments.
Standby letters of credit are provided to customers to assure their
performance to a third party, generally in the production of goods and services
or under contractual commitments in the financial markets. Commercial letters of
credit are issued to customers to facilitate foreign or domestic trade
transactions. The Company charges fees for the issuance of standby and
commercial letters of credit. The majority of these type of commitments have
terms of one year or less and any fees charged are recognized as noninterest
income upon extension of the commitment. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers and is represented by the contractual amount of those
instruments. When deemed necessary, the Company holds appropriate collateral
supporting those commitments. Management does not anticipate any material losses
as a result of these transactions.
The Company uses the same credit underwriting policies in granting or
accepting such commitments or contingent obligations as it does for on-balance
sheet instruments, by evaluating customers' credit-worthiness. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's evaluation of the customer. The nature of the
collateral varies but may include deposits held in financial institutions,
marketable securities, accounts receivable, inventory, property, equipment and
real estate. The Company also provides for potential losses from either
commitments to extend credit or standby letters of credit as a component of its
evaluation in determination of the adequacy of its allowance for credit losses
and resulting level of provision charged against current period earnings.
The Company's pricing of these financial instruments is based on the credit
quality and other covenants or requirements. Management believes that the
current fees assessed on these off-balance sheet items represent market rates
which would be charged for similar agreements. Based on this belief, the Company
feels that the carrying amounts are reasonable estimates of the fair value of
these financial instruments. At December 31, 1997 and 1996, fair value
represents management's estimate of the
F-68
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
unamortized fee income associated with these instruments. The following is a
summary of other financial instruments with off-balance sheet risk.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1996
------------------------ ------------------------
CONTRACTUAL FAIR CONTRACTUAL FAIR
(DOLLARS IN THOUSANDS) AMOUNTS VALUE AMOUNTS VALUE
- ------------------------------------------------------------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Commitments to extend credit................................. $ 15,111,062 $ 27,571 $ 12,500,677 $ 6,185
Standby letters of credit.................................... 2,289,878 5,776 2,610,123 2,808
Other letters of credit...................................... 314,594 -- 336,101 --
</TABLE>
The Company conducts securities lending transactions for institutional
customers as a fully disclosed agent, and, at times, indemnifies its customers
against counterparty default. All lending transactions are collateralized,
primarily by cash. The amount of securities lent with indemnification was $1,268
million and $1,170 million at December 31, 1997 and 1996, respectively. The
market value of the associated collateral was $1,294 million and $1,195 million
at December 31, 1997 and 1996, respectively.
NOTE 15 -- RESTRICTIONS ON CASH AND DUE FROM BANKS, SECURITIES, LOANS AND
DIVIDENDS
Federal Reserve Board regulations require the Bank to maintain reserve
balances based on the types and amounts of deposits received. Average reserve
balances were approximately $339 million and $291 million for the years ended
December 31, 1997 and 1996, respectively.
As of December 31, 1997 and 1996, securities carried at $1.7 billion for
each of the years, and loans of $2.7 billion and $1.8 billion, respectively,
were pledged as collateral for borrowings, to secure public and trust department
deposits, and for repurchase agreements as required by contract or law.
The Federal Reserve Act restricts the extension of credit by the Bank to BTM
and affiliates and to UnionBanCal Corporation and its non-bank subsidiaries and
requires that such loans be secured by certain types of collateral. At December
31, 1997, such extensions of credit were not material.
The payment of dividends by the Bank to UnionBanCal Corporation is subject
to the approval of the Office of the Comptroller of the Currency (OCC) if the
total of all dividends declared in any calendar year exceeds certain calculated
amounts. The payment of dividends is also limited by minimum capital
requirements imposed on national banks by the OCC. At December 31, 1997, the
Bank could have declared dividends aggregating $170 million without prior
regulatory approval.
NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies, including minimum
capital requirements. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
Consolidated Financial Statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of the
F-69
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
Company's and Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's and the Bank's
capital amounts and the Bank's prompt corrective action classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997 and 1996, the most recent notification from the OCC
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well capitalized", the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Company's and the Bank's capital amounts and ratios are presented in the
following tables.
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
---------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
- ----------------------- --------------- ------ --------------- ------
<S> <C> <C> <C> <C>
CAPITAL RATIOS FOR THE
COMPANY:
As of December 31,
1997:
Total capital (to GREATER THAN OR
risk-weighted EQUAL TO GREATER THAN OR%
assets)............ $ 3,188,173 11.05% $2,308,988 EQUAL TO 8.0
Tier 1 capital (to GREATER THAN OR GREATER THAN OR
risk-weighted EQUAL TO EQUAL TO
assets)............ 2,587,071 8.96 1,154,494 4.0
Tier 1 capital (to GREATER THAN OR GREATER THAN OR
quarterly average EQUAL TO EQUAL TO
assets)(1)......... 2,587,071 8.53 1,213,381 4.0
As of December 31,
1996:
Total capital (to GREATER THAN OR
risk-weighted EQUAL TO GREATER THAN OR%
assets)............ $ 2,946,654 11.17% $2,111,223 EQUAL TO 8.0
Tier 1 capital (to GREATER THAN OR GREATER THAN OR
risk-weighted EQUAL TO EQUAL TO
assets)............ 2,395,580 9.08 1,055,612 4.0
Tier 1 capital (to GREATER THAN OR GREATER THAN OR
quarterly average EQUAL TO EQUAL TO
assets)(1)......... 2,395,580 8.41 1,139,855 4.0
</TABLE>
- ------------
(1) Excludes certain intangible assets
F-70
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
----------------- ---------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------- ---------- ----- --------------- ------ --------------- -------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL RATIOS FOR THE
BANK:
As of December 31,
1997:
Total capital GREATER THAN OR GREATER THAN OR
(to risk-weighted EQUAL TO GREATER THAN OR% EQUAL TO GREATER THAN OR%
assets)............ $3,025,030 10.58% $2,286,296 EQUAL TO 8.0 $2,857,870 EQUAL TO 10.0
Tier 1 capital GREATER THAN OR GREATER THAN OR GREATER THAN OR GREATER THAN OR
(to risk-weighted EQUAL TO EQUAL TO EQUAL TO EQUAL TO
assets)............ 2,527,468 8.84 1,143,148 4.0 1,714,722 6.0
Tier 1 capital
(to quarterly GREATER THAN OR GREATER THAN OR GREATER THAN OR GREATER THAN OR
average EQUAL TO EQUAL TO EQUAL TO EQUAL TO
assets)(1)......... 2,527,468 8.35 1,210,898 4.0 1,513,622 5.0
As of December 31,
1996:
Total capital GREATER THAN OR GREATER THAN OR
(to risk-weighted EQUAL TO GREATER THAN OR% EQUAL TO GREATER THAN OR%
assets)............ $2,746,285 10.51% $2,090,910 EQUAL TO 8.0 $2,613,638 EQUAL TO 10.0
Tier 1 capital GREATER THAN OR GREATER THAN OR GREATER THAN OR GREATER THAN OR
(to risk-weighted EQUAL TO EQUAL TO EQUAL TO EQUAL TO
assets)............ 2,208,392 8.45 1,045,455 4.0 1,568,183 6.0
Tier 1 capital
(to quarterly GREATER THAN OR GREATER THAN OR GREATER THAN OR GREATER THAN OR
average EQUAL TO EQUAL TO EQUAL TO EQUAL TO
assets)(1)......... 2,208,392 7.76 1,138,211 4.0 1,422,764 5.0
</TABLE>
- ------------
(1) Excludes certain intangible assets.
NOTE 17 -- EARNINGS PER SHARE
Basic EPS is computed by dividing net income after preferred dividends by
the weighted average number of common shares outstanding during the period.
Diluted EPS is computed based on the weighted average number of common shares
outstanding adjusted for common stock equivalents, which include
F-71
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 17 -- EARNINGS PER SHARE (CONTINUED)
stock options. The following table presents a reconciliation of basic and
diluted EPS for the years ended December 31, 1997, 1996 and 1995 in accordance
with SFAS No. 128:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE ---------------------- ---------------------- ----------------------
DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Income.............................. $ 411,296 $ 411,296 $ 249,458 $ 249,458 $ 312,942 $ 312,942
Less:
Preferred stock dividends............. (7,600) (7,600) (11,306) (11,306) (11,305) (11,305)
---------- ---------- ---------- ---------- ---------- ----------
Income available to common
shareholders.......................... $ 403,696 $ 403,696 $ 238,152 $ 238,152 $ 301,637 $ 301,637
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Weighted average common shares
outstanding........................... 174,683 174,683 174,391 174,391 173,806 173,806
Additional shares due to:
Assumed conversion of dilutive stock
options............................. -- 506 -- 393 -- 293
---------- ---------- ---------- ---------- ---------- ----------
Adjusted weighted average common shares
outstanding........................... 174,683 175,189 174,391 174,784 173,806 174,099
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Net income per share.................... $ 2.31 $ 2.30 $ 1.37 $ 1.36 $ 1.74 $ 1.73
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
Options to purchase 277,200 shares of common stock at $18 per share were
outstanding but not included in the computation of diluted EPS in 1996 because
the options were anti-dilutive.
F-72
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 18 -- COMPREHENSIVE INCOME
The following is a summary of the components of accumulated other
comprehensive income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Net unrealized gain (loss) on available for sale securities, net of
reclassification adjustment:
Beginning balance........................................................... $ 14,064 $ 24,900 $ (8,838)
Net unrealized gain (loss) on available for sale securities during the year,
before tax................................................................ 11,908 (13,409) 53,890
Income tax (expense) benefit................................................ (4,370) 5,297 (20,586)
Less: reclassification adjustment for net realized (gain) loss on available
for sale securities included in net income during the year, before tax.... (2,711) (4,502) 702
Plus: income tax expense (benefit).......................................... 995 1,778 (268)
---------- ---------- ----------
Net activity.................................................................. 5,822 (10,836) 33,738
---------- ---------- ----------
Ending balance................................................................ 19,886 14,064 24,900
---------- ---------- ----------
Foreign currency translation adjustments:
Beginning balance........................................................... (3,183) (1,240) (1,092)
Foreign currency translation adjustments during the year,
before tax................................................................ (14,652) (3,212) (239)
Income tax benefit.......................................................... 5,377 1,269 91
---------- ---------- ----------
Net activity.................................................................. (9,275) (1,943) (148)
---------- ---------- ----------
Ending balance................................................................ (12,458) (3,183) (1,240)
---------- ---------- ----------
Other comprehensive income.................................................... $ (3,453) $ (12,779) $ 33,590
---------- ---------- ----------
---------- ---------- ----------
Accumulated other comprehensive income........................................ $ 7,428 $ 10,881 $ 23,660
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 19 -- CONTINGENCIES
The Company is subject to various pending and threatened legal actions which
arise in the normal course of business. The Company maintains reserves for
losses from legal actions which are both probable and estimable. In the opinion
of management, the disposition of claims currently pending will not have a
material adverse effect on the Company's financial position or results of
operations.
NOTE 20 -- TRANSACTIONS WITH AFFILIATES
The Company has had, and expects to have in the future, banking transactions
and other transactions in the ordinary course of business with BTM and with its
affiliates and associates. During the years ended December 31, 1997, 1996 and
1995, such transactions included, but were not limited to, origination,
participation, servicing and remarketing of loans and leases, purchase and sale
of acceptances and interest rate derivatives, foreign exchange transactions,
funds transfers, custodianships, electronic data processing, investment advice
and management, deposits and credit examination, and trust services. In the
opinion of management, such transactions were made at prevailing rates, terms
and conditions and do not involve more than the normal risk of collectibility or
present other unfavorable features. In addition, some compensation for services
rendered to the Company is paid to the expatriate officers from BTM, and
reimbursed by the Company to BTM under a services agreement.
F-73
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
(DOLLARS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks............................................................. $ 66,872 $ 103,742
Investment in and advances to subsidiaries.......................................... 2,879,898 2,503,706
Other assets........................................................................ 7,971 9,161
------------ ------------
Total assets.................................................................. $ 2,954,741 $ 2,616,609
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Subordinated capital notes.......................................................... $ 250,000 $ 100,000
Other liabilities................................................................... 25,442 21,676
------------ ------------
Total liabilities............................................................. 275,442 121,676
Shareholders' equity................................................................ 2,679,299 2,494,933
------------ ------------
Total liabilities and shareholders' equity.................................... $ 2,954,741 $ 2,616,609
------------ ------------
------------ ------------
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Dividends from bank subsidiary............................................. $ 85,660 $ 270,662 $ 25,062
Dividends from nonbank subsidiaries........................................ -- 421 343
Interest income on advances to subsidiaries and deposits in bank........... 12,217 24,366 52,289
Other income............................................................... 1,040 959 --
---------- ---------- ----------
Total income......................................................... 98,917 296,408 77,694
EXPENSE:
Interest expense........................................................... 11,174 22,220 54,133
Other expense, net......................................................... 1,583 1,072 (212)
---------- ---------- ----------
Total expense........................................................ 12,757 23,292 53,921
---------- ---------- ----------
Income before income taxes and equity in undistributed net income of
subsidiaries................................................................ 86,160 273,116 23,773
Income tax expense (benefit)................................................. 204 889 (694)
---------- ---------- ----------
Income before equity in undistributed net income of subsidiaries............. 85,956 272,227 24,467
Equity in undistributed net income (loss) of subsidiaries:
Bank subsidiary(1)......................................................... 314,739 (32,894) 285,053
Nonbank subsidiaries....................................................... 10,601 10,125 3,422
---------- ---------- ----------
NET INCOME................................................................... $ 411,296 $ 249,458 $ 312,942
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ---------------
(1) In 1996 the amount represents dividends distributed by the Bank in excess
of its 1996 net income.
F-74
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 411,296 $ 249,458 $ 312,942
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed (earnings) losses of subsidiaries................ (325,340) 22,769 (288,475)
Other, net............................................................... 1,059 (3,772) 2,800
----------- ----------- -----------
Net cash provided by operating activities.......................... 87,015 268,455 27,267
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to subsidiaries................................................. (130,805) (12,779) 33,590
Repayment of advances to subsidiaries.................................... 76,104 70,000 70,000
Sales and maturities of securities....................................... -- 322 11,650
----------- ----------- -----------
Net cash provided (used) by investing activities................... (54,701) 57,543 115,240
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short term borrowings......................... -- (632,296) 366
Proceeds from reduction of investment in subsidiary equity............... -- 3,966 --
Proceeds from issuance of subordinated capital notes..................... 200,000 -- --
Repayments of subordinated capital notes and long term debt.............. (50,000) (70,000) (70,000)
Redemption of preferred stock............................................ (135,000) -- --
Dividends paid........................................................... (93,303) (182,652) (62,044)
Other, net............................................................... 9,119 17,813 3,392
----------- ----------- -----------
Net cash used by financing activities.............................. (69,184) (863,169) (128,286)
----------- ----------- -----------
Net increase (decrease) in cash and due from banks....................... (36,870) (537,171) 14,221
Cash and due from banks at beginning of year............................. 103,742 640,913 626,692
----------- ----------- -----------
Cash and due from banks at end of year............................. $ 66,872 $ 103,742 $ 640,913
----------- ----------- -----------
----------- ----------- -----------
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest................................................................. $ 9,814 $ 25,785 $ 52,847
Income taxes............................................................. 1,148 (198) (2,030)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Dividends declared but unpaid............................................ $ 24,528 $ 20,383 $ 12,788
</TABLE>
F-75
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 22 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Certain amounts in the following unaudited quarterly financial information
have been reclassified to conform with current presentation. In the opinion of
management, all adjustments necessary to fairly present the results of
operations have been made.
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
-----------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
- ----------------------------------------------------------- ------------ ------------- --------- -------------
<S> <C> <C> <C> <C>
Interest income............................................ $ 523,530 $ 520,237 $ 504,663 $ 485,031
Interest expense........................................... 205,149 207,983 197,647 191,000
------------ ------------- --------- -------------
Net interest income........................................ 318,381 312,254 307,016 294,031
Provision for credit losses................................ -- -- -- --
Noninterest income......................................... 120,374 116,820 111,021 114,786
Noninterest expense........................................ 282,457 253,317 255,753 253,138
------------ ------------- --------- -------------
Income before income taxes................................. 156,298 175,757 162,284 155,679
Income tax expense......................................... 63,853 45,953 65,739 63,177
------------ ------------- --------- -------------
Net income................................................. $ 92,445 $ 129,804 $ 96,545 $ 92,502
------------ ------------- --------- -------------
------------ ------------- --------- -------------
Net income applicable to common stock...................... $ 92,445 $ 127,857 $ 93,718 $ 89,676
------------ ------------- --------- -------------
------------ ------------- --------- -------------
Net income per common share -- basic....................... $ 0.53 $ 0.73 $ 0.54 $ 0.51
------------ ------------- --------- -------------
------------ ------------- --------- -------------
Net income per common share -- diluted..................... $ 0.53 $ 0.73 $ 0.54 $ 0.51
------------ ------------- --------- -------------
------------ ------------- --------- -------------
Dividends per common share(2).............................. $ 0.14 $ 0.14 $ 0.12 $ 0.12
------------ ------------- --------- -------------
------------ ------------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
1996 QUARTERS ENDED
-----------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
- ----------------------------------------------------------- ------------ ------------- --------- -------------
<S> <C> <C> <C> <C>
Interest income............................................ $ 489,320 $ 481,315 $ 473,601 $ 483,068
Interest expense........................................... 196,236 189,727 185,362 187,401
------------ ------------- --------- -------------
Net interest income........................................ 293,084 291,588 288,239 295,667
Provision for credit losses................................ 10,000 10,000 10,000 10,000
Noninterest income......................................... 102,972 107,280 105,550 102,874
Noninterest expense........................................ 285,021 284,075 313,784 252,024
------------ ------------- --------- -------------
Income before income taxes................................. 101,035 104,793 70,005 136,517
Income tax expense......................................... 41,234 42,810 25,597 53,251
------------ ------------- --------- -------------
Net income................................................. $ 59,801 $ 61,983 $ 44,408 $ 83,266
------------ ------------- --------- -------------
------------ ------------- --------- -------------
Net income applicable to common stock...................... $ 56,975 $ 59,156 $ 41,582 $ 80,440
------------ ------------- --------- -------------
------------ ------------- --------- -------------
Net income per common share -- basic....................... $ 0.33 $ 0.34 $ 0.24 $ 0.46
------------ ------------- --------- -------------
------------ ------------- --------- -------------
Net income per common share -- diluted..................... $ 0.33 $ 0.34 $ 0.24 $ 0.46
------------ ------------- --------- -------------
------------ ------------- --------- -------------
Dividends per common share(1)(2)........................... $ 0.12 $ 0.12 $ 0.12 $ 0.12
------------ ------------- --------- -------------
------------ ------------- --------- -------------
</TABLE>
- ---------------
(1) Amounts prior to merger are based on Union Bank only and do not include the
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.
(2) Dividends per share for 1997 and 1996 are based on the Company's common
stock outstanding as of the declaration date.
F-76
<PAGE>
UNIONBANCAL CORPORATION
MANAGEMENT STATEMENT
The management of UnionBanCal Corporation (the Company) is responsible for the
preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on informed judgments
and estimates made by management.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that transactions are
executed in accordance with management's authorization and recorded properly to
permit the preparation of financial statements in accordance with generally
accepted accounting principles. Management recognizes that even a highly
effective internal control system has inherent risks, including the possibility
of human error and the circumvention or overriding of controls, and that the
effectiveness of an internal control system can change with circumstances.
However, management believes that the internal control system provides
reasonable assurance that errors or irregularities that could be material to the
financial statements would be prevented or detected on a timely basis and
corrected through the normal course of business. As of December 31, 1997,
management believes that the internal controls are in place and operating
effectively.
The Audit and Examining Committee of the Board of Directors is comprised
entirely of outside directors who are independent of the Company's management;
it includes members with banking or related financial management expertise and
who are not large customers of the Bank. The Audit and Examining Committee has
access to outside counsel. The Audit and Examining Committee is responsible for
recommending to the Board of Directors the selection of independent auditors. It
meets periodically with management, the independent auditors, and the internal
auditors to ensure that they are carrying out their responsibilities. The Audit
and Examining Committee is also responsible for performing an oversight role by
reviewing and monitoring the financial, accounting and auditing procedures of
the Company in addition to reviewing the Company's financial reports. The
independent auditors and internal auditors have full and free access to the
Audit and Examining Committee, with or without the presence of management, to
discuss the adequacy of the internal control structure for financial reporting
and any other matters which they believe should be brought to the attention of
the Audit and Examining Committee.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors, who were given unrestricted access to all financial
records and related data, including minutes of all meetings of shareholders, the
Board of Directors and committees of the Board. Management believes that all
representations made to the independent auditors during their audit were valid
and appropriate. The independent auditors' report is presented on Page F-78.
/s/ TAKAHIRO MORIGUCHI
--------------------------------------
Takahiro Moriguchi
President and Chief Executive Officer
/s/ MINORU NODA
--------------------------------------
Minoru Noda
Deputy Chairman, Chief Financial
Officer and Chief Credit Officer
/s/ DAVID I. MATSON
--------------------------------------
David I. Matson
Executive Vice President and Director
of Finance
/s/ DAVID A. ANDERSON
--------------------------------------
David A. Anderson
Senior Vice President and Controller
January 30, 1998
F-77
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of UnionBanCal Corporation:
We have audited the accompanying consolidated balance sheets of UnionBanCal
Corporation and subsidiaries (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of BanCal Tri-State Corporation and Union Bank
on April 1, 1996, which has been accounted for as a pooling of interests as
described in Note 1 to the consolidated financial statements. We did not audit
the consolidated statements of income, changes in shareholders' equity, and cash
flows of Union Bank and subsidiaries for the year ended December 31, 1995, which
statements reflect total net interest income and net income of $832 million and
$207 million, respectively. These statements were audited by other auditors
whose report has been furnished to us, and our opinion expressed herein, insofar
as it relates to the amounts included for Union Bank for 1995, is based solely
upon the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of UnionBanCal Corporation and its
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
[SIG]
Deloitte & Touche LLP
San Francisco, California
January 30, 1998 (November 18, 1998 as to the exchange of
common shares referred to in Note 1, paragraphs 3 and 4,
the adoption of SFAS No. 130, "Reporting Comprehensive Income",
referred to in Notes 1 and 18, and December 7, 1998 as to the stock split
referred to in Note 1, paragraph 5.)
F-78
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Union Bank:
We have audited the consolidated statement of income of Union Bank, a
California state chartered bank and a 71% owned subsidiary of The Bank of Tokyo,
Ltd., and subsidiaries ("the Bank") and the related consolidated statements of
shareholders' equity and cash flows for the year ended December 31, 1995 (not
presented herein). These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows for the year
ended December 31, 1995, of Union Bank and subsidiaries, in conformity with
generally accepted accounting principles.
[SIG]
Arthur Andersen LLP
San Francisco, California
January 24, 1996
F-79
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIONBANCAL CORPORATION (Registrant)
By: ______/s/_TAKAHIRO MORIGUCHI______
-----------------------------------
Takahiro Moriguchi
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Date: February 4, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/RICHARD D. FARMAN
------------------------------------------- Director
Richard D. Farman
/s/STANLEY F. FARRAR
------------------------------------------- Director
Stanley F. Farrar
/s/HERMAN E. GALLEGOS
------------------------------------------- Director
Herman E. Gallegos
/s/JACK L. HANCOCK
------------------------------------------- Director
Jack L. Hancock
/s/RICHARD C. HARTNACK
------------------------------------------- Director
Richard C. Hartnack
/s/KAORU HAYAMA
------------------------------------------- Director
Kaoru Hayama
/s/HARRY W. LOW
------------------------------------------- Director
Harry W. Low
/s/MARY S. METZ
------------------------------------------- Director
Mary S. Metz
/s/RAYMOND E. MILES
------------------------------------------- Director
Raymond E. Miles
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/TAKAHIRO MORIGUCHI
------------------------------------------- Director
Takahiro Moriguchi
/s/J. FERNANDO NIEBLA
------------------------------------------- Director
J. Fernando Niebla
/s/SIDNEY R. PETERSEN
------------------------------------------- Director
Sidney R. Petersen
/s/CARL W. ROBERTSON
------------------------------------------- Director
Carl W. Robertson
/s/YOSHIHIKO SOMEYA
------------------------------------------- Director
Yoshihiko Someya
/s/HENRY T. SWIGERT
------------------------------------------- Director
Henry T. Swigert
/s/TSUNEO WAKAI
------------------------------------------- Director
Tsuneo Wakai
/s/ROBERT M. WALKER
------------------------------------------- Director
Robert M. Walker
/s/HIROSHI WATANABE
------------------------------------------- Director
Hiroshi Watanabe
------------------------------------------- Director
Blenda J. Wilson
------------------------------------------- Director
Kenji Yoshizawa
Dated: February 4, 1999
</TABLE>
II-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND ACCOMPANYING TABLES
OF FORM 10-K, INFORMATION HEREIN IS QUALIFIED BY REFERENCE TO SUCH STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,541,699
<INT-BEARING-DEPOSITS> 633,421
<FED-FUNDS-SOLD> 24,335
<TRADING-ASSETS> 394,313
<INVESTMENTS-HELD-FOR-SALE> 2,538,386
<INVESTMENTS-CARRYING> 188,775
<INVESTMENTS-MARKET> 193,115
<LOANS> 22,741,408
<ALLOWANCE> 451,692
<TOTAL-ASSETS> 30,585,265
<DEPOSITS> 23,296,374
<SHORT-TERM> 2,827,770
<LIABILITIES-OTHER> 709,784
<LONG-TERM> 298,699
0
0
<COMMON> 291,529
<OTHER-SE> 2,387,770
<TOTAL-LIABILITIES-AND-EQUITY> 30,585,265
<INTEREST-LOAN> 1,763,277
<INTEREST-INVEST> 167,440
<INTEREST-OTHER> 102,744
<INTEREST-TOTAL> 2,033,461
<INTEREST-DEPOSIT> 595,981
<INTEREST-EXPENSE> 801,779
<INTEREST-INCOME-NET> 1,231,682
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 2,711
<EXPENSE-OTHER> 1,044,665
<INCOME-PRETAX> 650,018
<INCOME-PRE-EXTRAORDINARY> 411,296
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 411,296
<EPS-PRIMARY> 2.31
<EPS-DILUTED> 2.30
<YIELD-ACTUAL> 4.70
<LOANS-NON> 109,338
<LOANS-PAST> 19,992
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 523,946
<CHARGE-OFFS> 122,779
<RECOVERIES> 51,014
<ALLOWANCE-CLOSE> 451,692
<ALLOWANCE-DOMESTIC> 240,573
<ALLOWANCE-FOREIGN> 39,313
<ALLOWANCE-UNALLOCATED> 171,806
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND THE ACCOMPANYING TABLES
OF FORM 10-Q, INFORMATION HEREIN IS QUALIFIED BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 2,172,478 2,340,247 2,086,873
<INT-BEARING-DEPOSITS> 681,308 919,040 1,064,858
<FED-FUNDS-SOLD> 650,790 262,700 762,978
<TRADING-ASSETS> 496,556 402,842 496,254
<INVESTMENTS-HELD-FOR-SALE> 2,244,233 2,531,733 2,625,490
<INVESTMENTS-CARRYING> 259,430 247,809 232,388
<INVESTMENTS-MARKET> 262,568 252,188 237,102
<LOANS> 21,246,054 22,129,118 22,297,724
<ALLOWANCE> 522,835 502,114 478,454
<TOTAL-ASSETS> 29,423,537 30,171,952 30,982,479
<DEPOSITS> 22,043,925 22,352,919 22,974,188
<SHORT-TERM> 3,118,363 3,482,736 3,867,721
<LIABILITIES-OTHER> 560,909 597,648 638,935
<LONG-TERM> 198,000 398,718 148,708
0 0 0
135,000 135,000 0
<COMMON> 290,801 291,283 291,414
<OTHER-SE> 2,128,475 2,213,574 2,323,913
<TOTAL-LIABILITIES-AND-EQUITY> 29,423,537 30,171,952 30,982,479
<INTEREST-LOAN> 422,518 861,497 1,311,337
<INTEREST-INVEST> 38,047 78,849 123,075
<INTEREST-OTHER> 24,466 49,348 75,519
<INTEREST-TOTAL> 485,031 989,694 1,509,931
<INTEREST-DEPOSIT> 144,314 289,208 441,855
<INTEREST-EXPENSE> 191,000 388,647 596,630
<INTEREST-INCOME-NET> 294,031 601,047 913,301
<LOAN-LOSSES> 0 0 0
<SECURITIES-GAINS> 471 552 2,098
<EXPENSE-OTHER> 253,138 508,891 762,208
<INCOME-PRETAX> 155,679 317,963 493,720
<INCOME-PRE-EXTRAORDINARY> 92,502 189,047 318,851
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 92,502 189,047 318,851
<EPS-PRIMARY> 0.51 1.05 1.78
<EPS-DILUTED> 0.51 1.05 1.78
<YIELD-ACTUAL> 4.69 4.72 4.70
<LOANS-NON> 136,667 146,140 109,758
<LOANS-PAST> 46,059 27,352 25,582
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 523,946 523,946 523,946
<CHARGE-OFFS> 20,571 49,043 86,585
<RECOVERIES> 19,460 27,245 41,219
<ALLOWANCE-CLOSE> 522,835 502,114 478,454
<ALLOWANCE-DOMESTIC> 283,059 273,404 275,335
<ALLOWANCE-FOREIGN> 9,429 9,390 8,866
<ALLOWANCE-UNALLOCATED> 230,347 219,320 194,253
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND THE ACCOMPANYING TABLES
OF FORMS 10-K AND 10-Q. INFORMATION HEREIN IS QUALIFIED BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 2,268,771 1,936,184 1,951,582 2,359,879
<INT-BEARING-DEPOSITS> 1,131,216 696,867 914,087 831,710
<FED-FUNDS-SOLD> 537,710 1,475,558 488,240 471,641
<TRADING-ASSETS> 465,782 409,634 544,551 452,613
<INVESTMENTS-HELD-FOR-SALE> 2,164,197 2,010,992 1,917,089 2,007,074
<INVESTMENTS-CARRYING> 268,196 295,019 309,712 283,566
<INVESTMENTS-MARKET> 274,405 304,891 314,203 289,029
<LOANS> 21,049,787 20,341,335 20,480,678 20,946,765
<ALLOWANCE> 523,946 547,401 545,345 535,087
<TOTAL-ASSETS> 29,234,059 28,167,638 28,114,916 28,679,646
<DEPOSITS> 21,532,960 20,142,698 19,965,508 20,909,390
<SHORT-TERM> 3,751,539 4,197,830 3,838,400 3,573,451
<LIABILITIES-OTHER> 478,249 934,801 1,403,621 1,327,586
<LONG-TERM> 198,000 495,369 495,369 415,000
0 0 0 0
135,000 135,000 135,000 135,000
<COMMON> 290,462 290,625 290,738 290,742
<OTHER-SE> 2,069,171 1,971,315 1,986,280 2,028,477
<TOTAL-LIABILITIES-AND-EQUITY> 29,234,059 28,167,638 28,114,916 28,679,646
<INTEREST-LOAN> 1,687,977 419,805 832,796 1,252,902
<INTEREST-INVEST> 143,412 35,480 70,209 106,641
<INTEREST-OTHER> 95,915 27,783 53,664 78,441
<INTEREST-TOTAL> 1,927,304 483,068 956,669 1,437,984
<INTEREST-DEPOSIT> 531,567 126,340 251,074 385,681
<INTEREST-EXPENSE> 758,726 187,401 372,763 562,490
<INTEREST-INCOME-NET> 1,168,578 295,667 583,906 875,494
<LOAN-LOSSES> 40,000 10,000 20,000 30,000
<SECURITIES-GAINS> 4,502 616 3,237 3,865
<EXPENSE-OTHER> 1,134,904 252,024 565,808 849,883
<INCOME-PRETAX> 412,350 136,517 206,522 311,315
<INCOME-PRE-EXTRAORDINARY> 249,458 136,517 206,522 311,315
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 249,458 83,266 127,674 189,657
<EPS-PRIMARY> 1.37 0.46 0.70 1.03
<EPS-DILUTED> 1.36 0.46 0.70 1.03
<YIELD-ACTUAL> 4.75 4.91 4.84 4.76
<LOANS-NON> 128,267 191,816 191,494 147,775
<LOANS-PAST> 23,692 28,415 16,082 42,699
<LOANS-TROUBLED> 0 0 0 0
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 555,149 555,149 555,149 555,149
<CHARGE-OFFS> 119,227 30,574 53,417 83,057
<RECOVERIES> 48,024 12,826 23,613 32,995
<ALLOWANCE-CLOSE> 523,946 547,401 545,345 535,087
<ALLOWANCE-DOMESTIC> 269,400 273,584 265,271 259,462
<ALLOWANCE-FOREIGN> 9,394 13,372 14,083 14,154
<ALLOWANCE-UNALLOCATED> 245,152 260,445 265,991 261,471
</TABLE>
