<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): FEBRUARY 2, 1999
UNIONBANCAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 0-28118 94-1234979
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification
of incorporation) Number)
</TABLE>
<TABLE>
<S> <C>
350 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104
(Address of principal executive
offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (415) 765-2969
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<PAGE>
ITEM 5. OTHER EVENTS.
UnionBanCal Corporation (the "Company") recently filed two registration
statements with the Securities and Exchange Commission. One relates to a $750
million secondary offering of the Company's common stock by The Bank of
Tokyo-Mitsubishi, Ltd. and the other relates to the offering of up to $750
million in certain securities of the Company and its trust subsidiaries.
The Company hereby reports the following events to make generally available
certain information in connection with the filing of the registration statements
and to avail itself of the safe harbor provided in Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, with respect to any written or oral "forward-looking statements"
that may be made by the Company, its subsidiaries or their respective officers,
directors or employees.
Some of the forward-looking statements can be identified by the use of
forward-looking words, such as "believes," "expects," "may," "will," "should,"
"seeks," "approximately," "intends," "plans," "estimates," or "anticipates" or
the negative of those words or other comparable terminology. Forward-looking
statements involve inherent risks and uncertainties. A number of important
factors could cause actual results to differ materially from those in the
forward-looking statements. Some factors include fluctuations in interest rates,
inflation, government regulations, and economic conditions and competition in
the geographic and business areas in which the Company conducts its operations.
For a discussion of factors that could cause actual results to differ, please
see the discussion under "Risk Factors" contained in the registration statements
and in other information contained in the Company's publicly available SEC
filings.
UnionBanCal Corporation (the "Company") hereby reports the following events:
1. On February 2, 1999, the Company's independent auditors completed an
audit of the Company's September 30, 1998 consolidated financial statements.
These audited consolidated financial statements are attached hereto as Exhibit
No. 99.1.
2. On January 20, 1999, the Company issued a press release to report its
financial results for the year and for the quarter ended December 31, 1998. The
audit of the Company's 1998 financial statements is not yet complete. The press
release is attached hereto as Exhibit No. 99.2.
3. The Company has updated its progress with respect to its year 2000
project and the milestones that it has achieved since the filing of its
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. A
description of that progress follows.
YEAR 2000
The year 2000 problem exists because many computer programs use only the
last two digits to refer to a year. This convention could affect date-sensitive
calculations that treat "00" as the year 1900, rather than as the year 2000.
Another issue is that the year 2000 is a leap year and some programs may not
properly provide for February 29, 2000.
This discussion of the implications of the year 2000 problem for us contains
numerous forward-looking statements based on inherently uncertain information.
The cost of the project and the date on which we plan to complete the internal
year 2000 modifications are based on management's best estimates of future
events. The material assumptions underlying the estimated cost are:
- the continued availability of internal and external resources,
- the cost of these resources,
- the time required to accomplish the tasks, and
- the cost of needed equipment.
2
<PAGE>
We cannot guarantee, however, that we will achieve these estimates, and
actual results could differ. Moreover, although management believes it will be
able to make the necessary modifications in advance, failure to modify the
systems may have a material adverse effect on us.
In addition, we place a high degree of reliance on computer systems of third
parties, such as customers, vendors, and other financial and governmental
institutions. Although we are assessing the readiness of these third parties and
preparing contingency plans, the failure of these third parties to modify their
systems in advance of December 31, 1999, may have a material adverse effect on
us.
We estimate that the total cost of our year 2000 project will be
approximately $50 million, of which $10 million relates to capital expenditures
that we will capitalize and depreciate over their useful lives. We will include
the remaining $40 million in noninterest expense in the period incurred. As of
December 31, 1998, we had spent $24 million on our year 2000 project, $2 million
in 1997 and $22 million in 1998. Of the $24 million spent as of December 31,
1998, $6 million related to capital expenditures, $1 million in 1997 and $5
million in 1998. Of the estimated $26 million remaining to be spent, an
estimated $4 million is expected to be for capital expenditures and $22 million
is expected to be included in noninterest expense over the next two years. Of
the $22 million to be included in noninterest expense, we have assumed that
approximately $14 million will be spent on salaries and contract labor. This
assumes that the current mix of internal staff and contract labor remains the
same, the hours and the person-days needed to complete the projects are not
materially exceeded and that preparations for the year 2000 remain on schedule.
The remaining $8 million is expected to relate to other operating expenses. We
are funding the cost of our year 2000 project with normal operating cash and are
staffing it with external resources as well as internal staff re-deployed from
less time-sensitive assignments. Estimated total cost could change further as
analysis continues.
READINESS PREPARATION
Resolution of the year 2000 problem is among our highest priorities, and we
are preparing for the century change with a comprehensive enterprise-wide year
2000 program. We have identified all of the major systems and have sought
external and internal resources to renovate and test the systems. We are testing
purchased software, internally developed systems and systems supported by
external parties as part of the program. We are evaluating customers and vendors
that have significant relationships with us to determine whether they are
adequately preparing for the year 2000. In addition, we are developing
contingency plans to reduce the impact of some potential events that may occur.
We cannot guarantee, however, that the systems of vendors or customers with whom
we do business will be completed on a timely basis, or that contingency plans
will shield operations from failures that may occur.
Our year 2000 program is comprised of numerous individual projects that
address the following broad areas:
- data processing systems,
- telecommunications and data networks,
- building facilities and security systems,
- vendor risk,
- customer risk,
- contingency planning, and
- communications.
We have identified over 2,000 individual projects. The projects vary in
size, importance and materiality, from large undertakings, such as remediating
complicated data systems, to smaller, but still important projects, such as
installing compliant computer utility systems or assuring that building
equipment will
3
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perform properly. The program continues to evolve as we identify new projects to
keep up with increased understanding of year 2000 implications and evolving
external requirements. Virtually all of the projects currently identified have
begun, and approximately two-thirds have been completed.
We assign projects a priority, indicating the importance of the function to
our continuing operation. This prioritization facilitates reporting on projects
based on their relative importance. We have prioritized projects as "Critical"
and "Non-Critical." Critical projects are further prioritized as "Mission
Critical" and "Other Critical."
Mission Critical projects are defined as:
- systems vital to the continuance of a broad core business activity;
- functions, the interruption of which for longer than 3 days would threaten
our viability; or
- functions that provide the environment and infrastructure necessary to
continue the broad core business activities.
Other Critical projects are defined as:
- other customer and accounting systems;
- functions supporting delivery of information and service to customers;
- administrative systems, the interruption of which for longer than 2 weeks
would cause severe business impact; or
- functions that provide the environment and infrastructure necessary for
delivery of the above systems and functions.
We plan to complete all projects currently identified prior to the year
2000, with special emphasis placed on those prioritized as Mission Critical or
Other Critical. Failure to complete an Other Critical project would not
necessarily have a material adverse effect on us.
The most important projects are the Mission Critical application systems
upon which we rely for our principal business functions. We have renovated and
tested all of these systems. However, outside servicers operate three of them.
The outside servicers have renovated and tested each of these systems, but we
still need to validate them.
The following table presents actual and estimated progress with Mission
Critical projects.
MISSION CRITICAL APPLICATION COMPLETION
<TABLE>
<CAPTION>
% COMPLETED:
---------------
<S> <C>
Actual:
June 1998.................................................................... 10%
September 1998............................................................... 38
December 1998................................................................ 90
Estimated:
March 1999................................................................... 100%
</TABLE>
We have also achieved substantial progress with systems prioritized as Other
Critical. As of December 31, 1998, 63% of these systems were complete.
Substantially all are expected to be complete by March 31, 1999.
In addition to testing individual systems, we have begun integrated
contingency testing of our Mission Critical and many other systems in a separate
computer environment where dates are set forward in order
4
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to identify and correct problems that might not otherwise become evident until
the actual end of the century.
We do not significantly rely on "embedded technology" in our critical
processes. Embedded technology, which means microprocessor-controlled devices as
opposed to multi-purpose computers, does control some building security and
operations, such as power management, ventilation, and building access. All
building facilities are presently being evaluated, and we expect all systems
using embedded technology to be confirmed as year 2000 ready by June 1999.
We rely on vendors and customers, and we are addressing year 2000 issues
with both groups. We have identified over 300 vendors and have made inquiries
about their year 2000 readiness plans and status. Approximately 35% of these
vendors are rated as critical. We have completed risk assessments on the
critical and non-critical vendors, and we are undertaking appropriate measures
to minimize risk as much as possible for those vendors that we have assigned a
risk rating of medium or high. Among the critical vendors, presently 72% are
rated as low risk, 19% as medium risk, and 9% as high risk.
We plan to have the medium and high risk vendor situations resolved in June
1999. We have, however, no viable alternatives for some suppliers, such as power
distribution and local telephone companies. We are still evaluating these
companies, and we will use the results as information for system-wide
contingency planning. As with all financial institutions, we place a high degree
of reliance on the systems of other institutions, including governmental
agencies, to settle transactions. We will test principal settlement methods
associated with major payment systems as part of their associated system
projects.
We also rely on our customers to make necessary preparations for the year
2000 so that their business operations will not be interrupted, thus threatening
their ability to honor their financial commitments. We have identified over
2,500 borrowers, capital market counterparties, funding sources, and large
depositors that constitute our customers as having financial volumes
sufficiently large to warrant our inquiry and assessment of their year 2000
preparation. The financial volumes included loans and unused commitments,
collected deposit balances, automated clearing house transactions, foreign
exchange, and derivatives. We have completed inquiries and initial written
assessments for 97% of the identified financial volumes.
Our borrowers, the population of customers with loans and unused commitments
outstanding, pose the highest level of concern. As of December 31, 1998, our
assessment of these borrowers resulted in the following assignments of risk: 79%
low risk, 18% medium risk and 3% high risk. We have established individual risk
mitigation plans for substantially all of the customers rated as high risk. The
risk mitigation plans evaluate whether year 2000 issues will materially affect
the customer's cash flow, asset values, and collateral pledged to us. The risk
mitigation plans use the normal credit process that we employ to manage credit
risk and require the concurrence of a credit administrator.
We will make ongoing assessments of customers at all levels of risk. Those
with low risk will be reassessed semi-annually, while customers with medium and
high risk will be reassessed quarterly.
RISKS
The principal risks associated with the year 2000 problem can be grouped
into three categories:
- we do not successfully ready our operations for the next century,
- disruption of our operations due to operational failures of third parties,
and
- business interruption among fund providers and obligors such that expected
funding and repayment does not take place.
The only risk largely under our control is preparing our internal operations
for the year 2000. We, like other financial institutions, are heavily dependent
on our computer systems. The complexity of these
5
<PAGE>
systems and their interdependence make it impractical to convert to alternative
systems without interruptions if necessary modifications are not completed on
schedule. Management believes we will be able to make the necessary
modifications on schedule.
Failure of third parties may jeopardize our operations, but the seriousness
of this risk depends on the nature and duration of the failures. The most
serious impact on our operations from vendors would result if basic services
such as telecommunications, electric power, and services provided by other
financial institutions and governmental agencies were disrupted. Some public
disclosure about readiness preparation among basic infrastructure and other
suppliers is now available. We are unable, however, to estimate the likelihood
of significant disruptions among our basic infrastructure suppliers. In view of
the unknown probability of occurrence and impact on operations, we consider the
loss of basic infrastructure services to be the most reasonably likely worst
case year 2000 scenario.
Operational failures among our customers could affect their ability to
continue to provide funding or meet obligations when due. The information we
develop in the customer assessments described earlier allows us to identify
those customers that exhibit a risk of not making adequate preparations for the
century change. We are taking appropriate actions to manage these risks.
PROGRAM ASSESSMENT
Our Year 2000 Program Office reports on progress monthly to our Executive
Management Committee and quarterly to the Audit and Examination Committee of our
Board of Directors. Our Internal Audit Division and the National Bank Examiners
regularly assess our year 2000 preparations and report quarterly to the Audit
and Examination Committee.
CONTINGENCY PLANS
We are developing year 2000 remediation contingency plans and business
resumption contingency plans specific to the year 2000. Remediation contingency
plans address the actions we would take if the current approach to remediating a
system is falling behind schedule or otherwise appears in jeopardy of failing to
deliver a year 2000-ready system when needed. Business resumption contingency
plans address the actions that we would take if critical business functions
cannot be carried out in the normal manner upon entering the next century due to
system or supplier failure.
Our business resumption contingency planning is following a four-phase
process:
- Organizational Planning Guidelines,
- Business Impact Analysis,
- Plan Development and
- Validation of Plans.
During the first two phases, which have been completed, we assigned
responsibilities, specified scenarios and determined which scenarios were
significant for each critical business unit. The second two phases call for the
development of plans to meet the significant scenarios and testing the
effectiveness of the plans.
We are developing plans for system-wide or regional failures and for
individual critical operating units where necessary. We expect to complete
development of plans for the operating units and their validation in June 1999.
We expect to complete development of plans to address system-wide or regional
failures, and their validation, in September 1999.
6
<PAGE>
To determine where plans are necessary for individual operating units, we
identified the following areas of concern, assigned to each a level of potential
risk and a probability of occurrence. The areas of concern are:
- telecommunications or data network outage,
- enterprise information systems failure,
- operational disruptions,
- vendor or service provider failure,
- staff unavailability,
- utility or facility failure, and
- personal computer or local area network failure.
We rated the level of potential risk as high, moderate or low, and we rated
the probability of occurrence as high, moderate or low. Critical operating units
with a low or moderate level of potential risk and a low probability of
occurrence do not require a contingency plan for the area of concern. For any
other combination, the development of a contingency plan is required.
OTHER RELATED DISCLOSURES
HighMark Capital Management, Inc. is a registered investment adviser and
UBOC Investment Services, Inc. is a broker-dealer. Each of these subsidiaries
makes publicly available separate year 2000 reports. You can find additional
year 2000 information in those reports.
4. The following presents certain financial information for the Company's
four primary business segments:
As used in the tables on the following pages, "performance center earnings"
represent the allocation of net interest income, noninterest income and
noninterest expense between the business segments for products and services
originated in one segment but managed by another. "Total loans" and "total
deposits" represent loans and deposits for each business segment before
allocation between the segments of loans and deposits originated in one segment
but managed by another. "Net interest income" and "income before income taxes"
are presented on a taxable-equivalent basis.
7
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL FINANCIAL
SERVICES GROUP
COMMUNITY BANKING GROUP --------------------
-----------------------------------------------------
AS OF AND FOR THE AS OF AND FOR THE
AS OF AND FOR THE YEARS ENDED NINE MONTHS ENDED YEARS ENDED DECEMBER
DECEMBER 31, SEPTEMBER 30, 31,
------------------------------- -------------------- --------------------
1996 1997 1998 1997 1998 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
(IN THOUSANDS)
Revenues
Net interest income.............................. $ 658,144 $ 682,782 $ 673,463 $ 511,212 $ 504,709 $ 401,912 $ 440,804
Noninterest income............................... 133,559 142,944 178,208 105,991 136,101 78,238 100,316
--------- --------- --------- --------- --------- --------- ---------
Total............................................ 791,703 825,726 851,671 617,203 640,810 480,150 541,120
Noninterest expense.............................. 577,655 568,031 596,714 419,050 439,927 201,870 231,906
Credit expense (income).......................... 35,644 57,870 4,300 40,975 (3,059) 14,362 18,872
Performance center earnings (losses)............. 7,688 10,040 7,769 6,558 6,403 4,141 3,926
Income before income taxes....................... 186,092 209,865 258,426 163,736 210,345 268,059 294,268
BALANCE SHEET DATA (PERIOD AVERAGE):
(IN MILLIONS)
Total loans before performance centers........... $ 9,877 $ 9,672 $ 9,328 $ 9,691 $ 9,389 $ 8,292 $ 9,336
Total assets..................................... 10,911 10,626 10,270 10,632 10,329 9,287 10,513
Total deposits before performance centers........ 11,131 11,757 12,444 11,646 12,322 3,959 4,875
OTHER DATA:
Return on average assets....................... 1.02% 1.17% 1.52% 1.23% 1.63% 1.72% 1.65%
Efficiency ratio............................... 72.96% 68.79% 70.06% 67.90% 68.65% 42.04% 42.86%
INTERNATIONAL
TRUST & PRIVATE FINANCIAL SERVICES GROUP BANKING GROUP
----------------------------------------------------- --------------------
RESULTS OF OPERATIONS:
(IN THOUSANDS)
Revenues
Net interest income.............................. $ 11,539 $ 20,995 $ 22,979 $ 14,332 $ 16,770 $ 48,175 $ 49,405
Noninterest income............................... 110,182 128,100 145,593 91,951 106,843 62,373 62,238
--------- --------- --------- --------- --------- --------- ---------
Total............................................ 121,721 149,095 168,572 106,283 123,613 110,548 111,643
Noninterest expense.............................. 108,495 123,102 134,977 89,581 96,897 72,719 64,874
Credit expense (income).......................... 927 155 345 102 249 (4,361) 234
Performance center earnings (losses)............. (674) (1,472) 122 (929) 105 (6,917) (3,759)
Income before income taxes....................... 11,625 24,366 33,372 15,671 26,572 35,273 42,776
BALANCE SHEET DATA (PERIOD AVERAGE):
(IN MILLIONS)
Total loans before performance centers........... $ 62 $ 229 $ 258 $ 236 $ 245 $ 1,443 $ 1,631
Total assets..................................... 94 303 315 322 297 2,210 2,631
Total deposits before performance centers........ 425 708 675 625 679 1,080 959
OTHER DATA:
Return on average assets....................... 7.36% 4.74% 6.43% 3.90% 7.34% 0.95% 0.96%
Efficiency ratio............................... 89.13% 82.57% 80.07% 84.29% 78.39% 65.78% 58.11%
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
(IN THOUSANDS)
Revenues
Net interest income.............................. $ 494,713 $ 321,600 $ 360,625
Noninterest income............................... 109,520 75,450 82,638
--------- --------- ---------
Total............................................ 604,233 397,050 443,263
Noninterest expense.............................. 257,124 166,305 188,328
Credit expense (income).......................... 21,316 15,065 15,963
Performance center earnings (losses)............. 2,270 2,968 2,037
Income before income taxes....................... 328,063 218,648 241,009
BALANCE SHEET DATA (PERIOD AVERAGE):
(IN MILLIONS)
Total loans before performance centers........... $ 11,164 $ 9,178 $ 10,783
Total assets..................................... 12,414 10,344 12,005
Total deposits before performance centers........ 5,985 4,684 5,844
OTHER DATA:
Return on average assets....................... 1.61% 1.69% 1.63%
Efficiency ratio............................... 42.55% 41.89% 42.49%
RESULTS OF OPERATIONS:
(IN THOUSANDS)
Revenues
Net interest income.............................. $ 55,741 $ 35,990 $ 42,487
Noninterest income............................... 65,834 46,887 49,758
--------- --------- ---------
Total............................................ 121,575 82,877 92,245
Noninterest expense.............................. 66,967 48,942 48,765
Credit expense (income).......................... 11,304 216 2,915
Performance center earnings (losses)............. (4,087) (3,171) (2,394)
Income before income taxes....................... 39,217 30,548 38,171
BALANCE SHEET DATA (PERIOD AVERAGE):
(IN MILLIONS)
Total loans before performance centers........... $ 1,356 $ 1,423 $ 1,385
Total assets..................................... 2,070 2,563 2,123
Total deposits before performance centers........ 851 980 864
OTHER DATA:
Return on average assets....................... 1.18% 0.96% 1.45
Efficiency ratio............................... 55.08% 59.05% 52.86
</TABLE>
8
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2 Consent of Arthur Andersen LLP, Independent Accountants
99.1 UnionBanCal Corporation and Subsidiaries
Consolidated Financial Statements
99.2......................................................................................... Press Release, dated January 20, 1999
</TABLE>
9
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
<TABLE>
<S> <C> <C>
UNIONBANCAL CORPORATION
Date: February 5, 1999 By: /s/ DAVID I. MATSON
-----------------------------------------
David I. Matson
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
</TABLE>
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-3-3040 and Amendment No. 3 to Registration Statement Nos. 333-67579,
333-67581, 333-67581-01, 333-67581-02, 333-67581-03, and 333-67581-04 on Form
S-3 and Registration Statement Nos. 33-3-3042, 33-3-3044 and 333-27987 on
Form S-8 of UnionBanCal Corporation of our report dated February 2, 1999
appearing in this Form 8-K of UnionBanCal Corporation.
San Francisco, California
February 4, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 24, 1996 on the consolidated financial
statements of Union Bank and subsidiaries for the year ended December 31,
1995 (not presented herein), included in Form 8-K of UnionBanCal Corporation
to be dated February 5, 1999, in Registration Statement File No. 33-3-3040
and Amendment No. 3 to Registration Statement Nos. 333-67579, 333-67581,
333-67581-01, 333-67581-02, 333-67581-03 and 333-67581-04 on Form S-3 and
Registration Statement File Nos. 33-3-3042, 33-3-3044 and 333-27987 on Form
S-8. It should be noted that we have not audited any financial statements of
Union Bank and subsidiaries subsequent to December 31, 1995 or performed any
audit procedures subsequent to the date of our report.
San Francisco, California
February 4, 1999
<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, 1995, 1996 and 1997 and for the Nine
Months Ended September 30, 1997 (unaudited) and 1998................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998...................... F-3
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1996
and 1997 and for the Nine Months Ended September 30, 1998.............................................. F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 and for the
Nine Months Ended September 30, 1997 (unaudited) and 1998.............................................. F-5
Notes to Consolidated Financial Statements............................................................... F-6
Independent Auditors' Reports............................................................................ F-54
</TABLE>
F-1
<PAGE>
UNIONBANCAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE ---------------------------------- ------------------------
DATA) 1995 1996 1997 1998
- ---------------------------------------- ---------- ---------- ---------- 1997 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans................................... $1,613,376 $1,687,977 $1,763,277 $1,311,337 $1,365,285
Securities.............................. 132,802 143,412 167,440 123,075 145,390
Interest bearing deposits in banks...... 58,201 52,709 56,748 43,404 14,187
Federal funds sold and securities
purchased under resale agreements..... 22,247 30,246 26,079 18,727 11,784
Trading account assets.................. 20,567 12,960 19,917 13,388 19,976
---------- ---------- ---------- ----------- ----------
Total interest income............... 1,847,193 1,927,304 2,033,461 1,509,931 1,556,622
---------- ---------- ---------- ----------- ----------
INTEREST EXPENSE
Domestic deposits....................... 358,049 460,130 520,583 386,699 353,283
Foreign deposits........................ 96,109 71,437 75,398 55,156 66,455
Federal funds purchased and securities
sold under repurchase agreements...... 78,908 47,095 58,544 44,053 59,667
Commercial paper........................ 86,695 87,411 89,912 66,543 67,719
Subordinated capital notes.............. 42,538 30,104 22,850 17,180 15,883
Other borrowed funds.................... 42,561 62,549 34,492 26,999 13,976
---------- ---------- ---------- ----------- ----------
Total interest expense.............. 704,860 758,726 801,779 596,630 576,983
---------- ---------- ---------- ----------- ----------
NET INTEREST INCOME..................... 1,142,333 1,168,578 1,231,682 913,301 979,639
Provision for credit losses............. 53,250 40,000 -- -- 45,000
---------- ---------- ---------- ----------- ----------
Net interest income after provision
for credit losses................. 1,089,083 1,128,578 1,231,682 913,301 934,639
---------- ---------- ---------- ----------- ----------
NONINTEREST INCOME
Service charges on deposit accounts..... 95,177 101,975 114,647 84,699 101,288
Trust and investment management fees.... 87,743 93,479 107,527 76,737 88,806
International commissions and fees...... 68,621 66,108 66,122 49,593 54,516
Merchant transaction processing fees.... 45,767 49,778 57,128 42,653 42,988
Merchant banking fees................... 24,483 23,929 24,924 19,899 24,083
Securities gains (losses), net.......... (702) 4,502 2,711 2,098 5,579
Other................................... 74,230 78,905 89,942 66,948 82,689
---------- ---------- ---------- ----------- ----------
Total noninterest income............ 395,319 418,676 463,001 342,627 399,949
---------- ---------- ---------- ----------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits.......... 536,671 557,247 571,644 418,970 459,592
Net occupancy........................... 92,863 103,335 85,630 64,133 67,294
Equipment............................... 55,056 55,942 56,137 41,206 41,842
Foreclosed asset expense (income)....... (3,213) 2,889 (1,268) (696) (746)
Merger and integration.................. -- 117,464 6,037 6,037 --
Other................................... 296,724 298,027 326,485 232,558 268,196
---------- ---------- ---------- ----------- ----------
Total noninterest expense........... 978,101 1,134,904 1,044,665 762,208 836,178
---------- ---------- ---------- ----------- ----------
Income before income taxes.............. 506,301 412,350 650,018 493,720 498,410
Income tax expense...................... 193,359 162,892 238,722 174,869 146,045
---------- ---------- ---------- ----------- ----------
NET INCOME.............................. $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
NET INCOME APPLICABLE TO COMMON STOCK... $ 301,637 $ 238,152 $ 403,696 $ 311,251 $ 352,365
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
NET INCOME PER COMMON SHARE --
BASIC(1).............................. $ 1.74 $ 1.37 $ 2.31 $ 1.78 $ 2.01
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
NET INCOME PER COMMON SHARE --
DILUTED(1)............................ $ 1.73 $ 1.36 $ 2.30 $ 1.78 $ 2.01
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -- BASIC(1)............... 173,806 174,391 174,683 174,615 175,091
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -- DILUTED(1)............. 174,099 174,784 175,189 175,071 175,729
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</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-2
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE ----------------------------- SEPTEMBER 30,
DATA) 1996 1997 1998
- ---------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks................. $ 2,268,771 $ 2,541,699 $ 2,211,595
Interest bearing deposits in banks...... 1,131,216 633,421 133,165
Federal funds sold and securities
purchased under resale agreements..... 537,710 24,335 629,784
------------- ------------- -------------
Total cash and cash equivalents..... 3,937,697 3,199,455 2,974,544
Trading account assets.................. 465,782 394,313 357,515
Securities available for sale........... 2,164,197 2,538,386 3,200,376
Securities held to maturity (fair value:
December 31, 1996, $274,405; December
31, 1997, $193,115; September 30,
1998, $165,807)....................... 268,196 188,775 162,018
Loans (net of allowance for credit
losses: December 31, 1996, $523,946;
December 31, 1997, $451,692; September
30, 1998, $473,717)................... 20,525,841 22,289,716 23,024,128
Due from customers on acceptances....... 778,378 773,339 464,581
Premises and equipment, net............. 410,621 406,299 407,863
Other assets............................ 683,347 794,982 816,293
------------- ------------- -------------
Total assets........................ $ 29,234,059 $ 30,585,265 $ 31,407,318
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES
Domestic deposits:
Noninterest bearing................... $ 7,381,078 $ 8,574,515 $ 9,427,080
Interest bearing...................... 12,607,691 12,666,458 12,379,167
Foreign deposits:
Noninterest bearing................... 274,031 275,029 247,038
Interest bearing...................... 1,270,160 1,780,372 1,609,844
------------- ------------- -------------
Total deposits...................... 21,532,960 23,296,374 23,663,129
Federal funds purchased and securities
sold under repurchase agreements...... 1,322,654 1,335,884 1,574,163
Commercial paper........................ 1,495,463 966,575 1,417,077
Other borrowed funds.................... 749,422 476,010 339,340
Acceptances outstanding................. 778,378 773,339 464,581
Other liabilities....................... 478,249 709,784 666,078
Subordinated capital notes.............. 382,000 348,000 298,000
------------- ------------- -------------
Total liabilities................... 26,739,126 27,905,966 28,422,368
------------- ------------- -------------
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 300,000,000 shares, issued
174,457,603 shares as of December
31, 1996, 174,917,674 shares as of
December 31, 1997, and 175,208,037
shares as of September 30, 1998..... 290,762 291,529 292,013
Additional paid-in capital.............. 1,413,076 1,422,680 1,430,539
Retained earnings....................... 645,214 957,662 1,233,068
Accumulated other comprehensive
income................................ 10,881 7,428 29,330
------------- ------------- -------------
Total shareholders' equity.......... 2,494,933 2,679,299 2,984,950
------------- ------------- -------------
Total liabilities and shareholders'
equity............................ $ 29,234,059 $ 30,585,265 $ 31,407,318
------------- ------------- -------------
------------- ------------- -------------
</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-3
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER
------------------------------------------ 30,
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998
- ---------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PREFERRED STOCK
Balance, beginning of period............ $ 135,000 $ 135,000 $ 135,000 $ --
Redemption of preferred stock........... -- -- (135,000) --
------------ ------------ ------------ ------------
Balance, end of period................ $ 135,000 $ 135,000 $ -- $ --
------------ ------------ ------------ ------------
COMMON STOCK
Balance, beginning of period............ $ 286,739 $ 290,300 $ 290,762 $ 291,529
Dividend reinvestment plan.............. 3,103 121 6 6
Deferred compensation -- restricted
stock awards.......................... 379 207 279 281
Stock options exercised................. 79 134 482 197
------------ ------------ ------------ ------------
Balance, end of period................ $ 290,300 $ 290,762 $ 291,529 $ 292,013
------------ ------------ ------------ ------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period............ $ 1,390,925 $ 1,408,960 $ 1,413,076 $ 1,422,680
Dividend reinvestment plan.............. 15,238 1,041 (43) 10
Deferred compensation -- restricted
stock awards.......................... 2,268 2,148 3,478 5,217
Stock options exercised................. 529 927 6,169 2,632
------------ ------------ ------------ ------------
Balance, end of period................ $ 1,408,960 $ 1,413,076 $ 1,422,680 $ 1,430,539
------------ ------------ ------------ ------------
RETAINED EARNINGS
Balance, beginning of period............ $ 376,468 $ 626,172 $ 645,214 $ 957,662
Net income(1)........................... 312,942 249,458 411,296 352,365
Dividends on common stock(2)(3)......... (50,989) (73,932) (89,848) (73,632)
Dividends on preferred stock............ (11,305) (11,306) (7,600) --
Dividend to MBL......................... -- (144,890) -- --
Deferred compensation -- restricted
stock awards.......................... (944) (288) (1,400) (3,327)
------------ ------------ ------------ ------------
Balance, end of period................ $ 626,172 $ 645,214 $ 957,662 $ 1,233,068
------------ ------------ ------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period............ $ (9,930) $ 23,660 $ 10,881 $ 7,428
------------ ------------ ------------ ------------
Net income(1)........................... 312,942 249,458 411,296 352,365
Other comprehensive income.............. 33,590 (12,779) (3,453) 21,902
------------ ------------ ------------ ------------
Total comprehensive income.............. 346,532 236,679 407,843 374,267
Less: net income included in retained
earnings.............................. (312,942) (249,458) (411,296) (352,365)
------------ ------------ ------------ ------------
Balance, end of period................ $ 23,660 $ 10,881 $ 7,428 $ 29,330
------------ ------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 2,484,092 $ 2,494,933 $ 2,679,299 $ 2,984,950
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
- ---------------
(1) Includes dividends applicable to preferred shareholders of $11.3 million
for the years ended December 31, 1995 and 1996, respectively, and $7.6
million for the year ended December 31, 1997.
(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
$0.47 in 1995 and 1996, respectively, $0.51 in 1997, and $0.42 for the nine
months ended September 30, 1998, and are based on the Company's shares
outstanding as of the declaration date.
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------------- -----------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1997 1998
- ---------------------------------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses......... 53,250 40,000 -- -- 45,000
Depreciation, amortization and
accretion......................... 61,767 65,092 65,469 49,285 50,528
Provision for deferred income
taxes............................. 50,841 50,658 59,814 38,734 7,409
(Gain) loss on sales of securities
available for sale................ 801 (4,502) (2,711) (2,098) (5,579)
Merger and integration costs in
excess of (less than) cash
utilized.......................... -- 54,344 (31,414) (27,200) (12,350)
Net (increase) decrease in trading
account assets.................... 82,541 (359,234) 52,743 (40,382) 36,798
Other, net.......................... 157,244 52,101 173,706 92,393 (24,839)
------------- ------------- ------------- ------------- -------------
Total adjustments................... 406,444 (101,541) 317,607 110,732 96,967
------------- ------------- ------------- ------------- -------------
Net cash provided by operating
activities.......................... 719,386 147,917 728,903 429,583 449,332
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available for sale.................. 240,731 19,536 171,629 3,920 418,456
Proceeds from matured and called
securities available for sale....... 764,853 757,463 587,034 326,833 196,358
Purchase of securities available for
sale................................ (1,452,339) (995,479) (1,112,080) (777,281) (1,253,529)
Proceeds from matured and called
securities held to maturity......... 213,337 95,829 79,828 36,121 26,960
Purchase of securities held to
maturity............................ (123,886) -- -- -- --
Net increase in loans................. (2,478,608) (741,335) (1,788,179) (1,312,241) (797,343)
Other, net............................ (34,902) (54,120) (56,584) (19,986) (42,032)
------------- ------------- ------------- ------------- -------------
Net cash used by investing
activities........................ (2,870,814) (918,106) (2,118,352) (1,742,634) (1,451,130)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.............. 2,245,306 1,877,917 1,763,414 1,441,228 366,755
Net increase (decrease) in federal
funds purchased and securities sold
under repurchase agreements......... (287,387) 127,596 13,230 (27,711) 238,279
Net increase (decrease) in commercial
paper and other borrowed funds...... 623,612 (201,214) (797,464) 94,601 313,832
Maturity and redemption of
subordinated debt................... (154,490) (119,369) (234,000) (200,000) (50,000)
Proceeds from issuance of subordinated
debt................................ -- -- 200,000 200,000 --
Payments of cash dividends............ (62,044) (222,533) (93,303) (68,787) (73,631)
Redemption of preferred stock......... -- -- (135,000) (135,000) --
Repayment of borrowing to support
corporate owned life insurance...... (10,638) (95,475) -- -- --
Other, net............................ 485 (882) (2,661) 2,642 2,471
------------- ------------- ------------- ------------- -------------
Net cash provided by financing
activities........................ 2,354,844 1,366,040 714,216 1,306,973 797,706
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents........................... 203,416 595,851 (675,233) (6,078) (204,092)
Cash and cash equivalents at beginning
of period............................. 3,153,713 3,352,423 3,937,697 3,937,697 3,199,455
Effect of exchange rate changes on cash
and cash equivalents.................. (4,706) (10,577) (63,009) (16,910) (20,819)
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end of
period................................ $ 3,352,423 $ 3,937,697 $ 3,199,455 $ 3,914,709 $ 2,974,544
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
CASH PAID DURING THE PERIOD FOR:
Interest.............................. $ 739,300 $ 764,327 $ 820,355 $ 611,347 $ 588,487
Income taxes.......................... 91,717 172,451 113,588 47,359 189,411
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Loans transferred to foreclosed assets
(OREO).............................. $ 48,397 $ 44,557 $ 23,114 $ 19,033 $ 13,882
Securities transferred from held to
maturity to available for sale...... 348,717 -- -- -- --
Dividends declared but unpaid......... 12,788 20,383 24,528 24,518 24,529
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS
UnionBanCal Corporation (a commercial bank holding company) and subsidiaries
(the Company), is 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 The Bank of Tokyo-Mitsubishi, Ltd.. This share exchange
provided the Company with a 100 percent ownership interest in the Bank. In
addition, it increased The Bank of Tokyo-Mitsubishi, Ltd.'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 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-6
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
The unaudited consolidated financial statements of the Company as of
September 30, 1997 have been prepared in accordance with GAAP for interim
financial reporting. However, they do not include all of the disclosures
necessary for annual financial statements in conformity with GAAP.
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
F-7
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
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.
Interest accruals are continued for certain small business loans that are
processed centrally, consumer loans, 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 when cash is received.
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.
F-8
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
The Company offers primarily 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.
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 allowance is increased by the provision for credit losses, which
is charged against current period operating results and decreased by the amount
of chargeoffs, net of recoveries. The Company's methodology for assessing the
appropriateness of the allowance consists of several key elements, which include
the formula allowance, specific allowances and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and leases and certain unused commitments. 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. The Company derives the loss factors for problem graded
loans from a loss migration model; for pass graded loans by using historical
average net chargeoffs during a business cycle, and for pooled loans by using
expected net chargeoffs for one year. Pooled loans are homogenous in nature and
include consumer installment, residential mortgage, automobile leases and other
loans and 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
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 that are not directly measured in the determination of the
formula and specific allowances. The conditions evaluated in connection with the
unallocated allowance may include existing general economic and business
conditions affecting the key lending areas of the Company, credit quality
trends, 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.
The allowance also 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. A loan is considered impaired when
management determines that it
F-9
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
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. 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.
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
write-down at the date of transfer is charged to the allowance for credit
losses. 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,
F-10
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
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.
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 re-measured
into U.S. dollars using a combination of current and historical exchange rates.
The resulting gains or losses are included in shareholders' equity, as a
component of other comprehensive income, 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 were postponed under SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125". SFAS No. 127 deferred for one year the effective date of implementation
for transactions related to repurchase agreements, dollar-roll repurchase
agreements, securities lending and similar transactions. Management determined
that the effect of adoption of SFAS No. 125 on the Company's financial
statements was not material.
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
F-11
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
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.
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. During 1998 the Company adopted
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", and accordingly has revised the disclosures for pensions and other
postretirement benefits. Adoption of SFAS No. 132 does not impact the
consolidated financial position, results of operations, or cash flows, and any
effect is limited to the form and content of its disclosures. As required by the
provisions of SFAS No. 132, all prior period data presented has been restated.
STOCK-BASED COMPENSATION
As allowed under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", 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.
F-12
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. SFAS No. 133
requires that derivative instruments used to hedge be identified specifically to
assets, liabilities, firm commitments or anticipated transactions and measured
as effective and ineffective when hedging changes in fair value or cash flows.
Derivative instruments that do not qualify as either a fair value or cash flow
hedge will be valued at fair value with the resultant gain or loss recognized in
current earnings. Changes in the effective portion of fair value hedges will be
recognized in current earnings along with the change in fair value of the hedged
item. Changes in the effective portion of the fair value of cash flow hedges
will be recognized in other comprehensive income until realization of the cash
flows of the hedged item through current earnings. Any ineffective portion of
hedges will be recognized in current earnings. Management believes that,
depending upon the accumulated net gain or loss of the effective portion of cash
flow hedges at the date of adoption, the impact of SFAS No. 133 could have a
material impact on other comprehensive income. However, Management believes that
any ineffective portion of cash flow hedges or any other hedges will not have a
material impact on the Company's financial position or results of operations.
This Statement is effective for fiscal years beginning after June 15, 1999, with
earlier application encouraged. The Company expects to adopt SFAS No. 133 as of
January 1, 2000.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". This Statement amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities", which established
accounting and reporting standards for certain activities of mortgage banking
and other similar enterprises. After securitization of mortgage loans held for
sale, SFAS No. 134 requires an entity to classify the resulting mortgage-backed
securities or other retained interests, based on its ability or intent to sell
or hold those investments. Management believes that the adoption of SFAS No. 134
will have no impact on the Company's financial position or results of
operations. This Statement is effective for fiscal years beginning after
December 15, 1998, with earlier application permitted. The Company expects to
adopt SFAS No. 134 on January 1, 1999.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires the
capitalization of eligible costs of specified activities related to computer
software developed or obtained for internal use. Management believes that the
adoption of SOP 98-1 will not have a material effect on the Company's financial
position or results of operations. The Statement is
F-13
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
effective for fiscal years beginning after December 15, 1998, with earlier
adoption encouraged. The Company expects to adopt SOP 98-1 on January 1, 1999.
In June 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires that entities expense start-up costs and
organization costs as they are incurred. Management believes that the adoption
of SOP 98-5 will not have a material effect on the Company's financial position
or results of operations. The Statement is effective for fiscal years beginning
after December 15, 1998, with earlier adoption encouraged. The Company expects
to adopt SOP 98-5 on January 1, 1999.
F-14
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
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, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury................................................ $ 1,137,992 $ 4,993 $ 1,933 $ 1,141,052
Other U.S. government........................................ 687,717 4,993 779 691,931
Mortgage-backed securities................................... 193,531 400 274 193,657
State and municipal.......................................... 101,006 13,749 -- 114,755
Corporate debt securities.................................... -- -- -- --
Equity securities............................................ 19,041 2,553 -- 21,594
Foreign securities........................................... 1,136 72 -- 1,208
------------ ----------- ----------- ------------
Total securities available for sale........................ $ 2,140,423 $ 26,760 $ 2,986 $ 2,164,197
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury................................................ $ 987,374 $ 10,793 $ 170 $ 997,997
Other U.S. government........................................ 709,536 6,005 67 715,474
Mortgage-backed securities................................... 679,692 3,331 265 682,758
State and municipal.......................................... 90,937 13,236 -- 104,173
Corporate debt securities.................................... 2,698 311 1 3,008
Equity securities............................................ 28,881 1,596 672 29,805
Foreign securities........................................... 5,132 39 -- 5,171
------------ ----------- ----------- ------------
Total securities available for sale........................ $ 2,504,250 $ 35,311 $ 1,175 $ 2,538,386
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury................................................ $ 757,831 $ 20,162 $ -- $ 777,993
Other U.S. government........................................ 806,573 17,703 -- 824,276
Mortgage-backed securities................................... 1,459,141 18,466 -- 1,477,607
State and municipal.......................................... 83,018 12,580 -- 95,598
Corporate debt securities.................................... 8,069 -- -- 8,069
Equity securities............................................ 15,055 139 -- 15,194
Foreign securities........................................... 1,594 45 -- 1,639
------------ ----------- ----------- ------------
Total securities available for sale........................ $ 3,131,281 $ 69,095 $ -- $ 3,200,376
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
F-15
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 2 -- SECURITIES (CONTINUED)
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury.................................................... $ 50,109 $ 1,735 $ -- $ 51,844
Other U.S. government............................................ 139,188 4,412 -- 143,600
Mortgage-backed securities....................................... 41,985 2,019 68 43,936
State and municipal.............................................. 36,914 310 2,199 35,025
---------- ----------- ----------- ----------
Total securities held to maturity.............................. $ 268,196 $ 8,476 $ 2,267 $ 274,405
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury.................................................... $ 40,092 $ 1,333 $ -- $ 41,425
Other U.S. government............................................ 99,520 2,568 -- 102,088
Mortgage-backed securities....................................... 24,477 1,745 14 26,208
State and municipal.............................................. 24,686 75 1,367 23,394
---------- ----------- ----------- ----------
Total securities held to maturity.............................. $ 188,775 $ 5,721 $ 1,381 $ 193,115
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury.................................................... $ 40,054 $ 1,324 $ -- $ 41,378
Other U.S. government............................................ 89,707 2,090 -- 91,797
Mortgage-backed securities....................................... 16,651 1,252 -- 17,903
State and municipal.............................................. 15,606 -- 877 14,729
---------- ----------- ----- ----------
Total securities held to maturity.............................. $ 162,018 $ 4,666 $ 877 $ 165,807
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>
F-16
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
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(1) HELD TO MATURITY(1)
-------------------------- ----------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
-------------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ------------------------------------------------------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less...................................... $ 503,104 $ 508,419 $ 69,875 $ 71,232
Due after one year through five years........................ 1,192,511 1,227,837 62,361 64,459
Due after five years through ten years....................... 334,509 341,550 3,902 4,041
Due after ten years.......................................... 1,086,102 1,107,376 25,880 26,075
Equity securities............................................ 15,055 15,194 -- --
------------ ------------ ---------- ----------
Total securities......................................... $ 3,131,281 $ 3,200,376 $ 162,018 $ 165,807
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
- ------------
(1) The remaining contractual maturities of mortgage-backed securities were
allocated assuming no prepayments. The contractual maturity of these
securities is not a reliable indicator of their expected life because
borrowers have the right to repay their obligations at any time.
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). During the years ended December 31,
1996 and 1997, and during the nine months ended September 30, 1997 and 1998,
there were no sales or transfers from the securities held to maturity portfolio.
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. 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
1997, proceeds from sales of securities available for sale were $172 million
with gross realized gains of $3 million and no gross realized losses. For the
nine months ended September 30, 1997, proceeds from sales of securities
available for sale were $4 million with gross realized gains of $2 million and
no gross realized losses. For the nine months ended September 30, 1998, proceeds
from sales of securities available for sale were $418 million with gross
realized gains of $6 million and no gross realized losses.
F-17
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES
A summary of loans net of unearned interest and fees of $150 million, $128
million and $127 million at December 31, 1996 and 1997, and September 30, 1998,
respectively, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Domestic:
Commercial, financial and industrial.............................. $ 9,495,592 $ 10,747,179 $ 12,151,210
Construction...................................................... 357,817 293,333 420,267
Mortgage:
Residential..................................................... 2,960,908 2,961,233 2,742,451
Commercial...................................................... 2,597,616 2,951,807 2,980,371
------------- ------------- -------------
Total mortgage................................................ 5,558,524 5,913,040 5,722,822
Consumer:
Installment..................................................... 2,063,434 2,090,752 2,026,441
Home equity..................................................... 1,113,269 992,916 844,256
Credit card and other lines of credit........................... 303,235 270,097 --
------------- ------------- -------------
Total consumer................................................ 3,479,938 3,353,765 2,870,697
Lease financing................................................... 800,048 874,860 1,013,772
------------- ------------- -------------
Total loans in domestic offices............................... 19,691,919 21,182,177 22,178,768
Loans originated in foreign branches................................ 1,357,868 1,559,231 1,319,077
------------- ------------- -------------
Total loans................................................... 21,049,787 22,741,408 23,497,845
Allowance for credit losses................................. 523,946 451,692 473,717
------------- ------------- -------------
Loans, net.................................................... $ 20,525,841 $ 22,289,716 $ 23,024,128
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------- -----------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1997 1998
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period..................... $ 563,142 $ 555,149 $ 523,946 $ 523,946 $ 451,692
Loans charged off................................ (133,599) (119,100) (122,779) (86,585) (53,138)
Loan loss recoveries............................. 72,403 48,024 51,014 41,219 32,158
----------- ----------- ----------- ----------- ----------
Total net loans charged off.................... (61,196) (71,076) (71,765) (45,366) (20,980)
Provision for credit losses...................... 53,250 40,000 -- -- 45,000
Transfer of reserve for trading account assets... -- -- -- -- (1,911)
Foreign translation adjustment and other net
deductions..................................... (47) (127) (489) (126) (84)
----------- ----------- ----------- ----------- ----------
Balance, end of period........................... $ 555,149 $ 523,946 $ 451,692 $ 478,454 $ 473,717
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
</TABLE>
F-18
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
In 1998, the Company reclassified a $1.9 million previously established
reserve for credit losses related to interest rate derivatives and foreign
exchange contracts from the unallocated portion of the allowance for credit
losses. The reserve for derivative and foreign exchange contracts is presented
as an offset to trading account assets. Future changes in the reserve as a
result of changes in the positive replacement cost of those contracts will be
provided as an offset to trading gains and losses.
Nonaccrual loans totaled $128 million, $109 million and $68 million at
December 31, 1996 and 1997, and September 30, 1998, respectively. There were no
renegotiated loans at December 31, 1996 and 1997, and September 30, 1998.
Interest foregone on loans designated as nonaccrual at December 31, 1995, 1996
and 1997, and at September 30, 1997 and 1998 was $18 million, $9 million, $6
million, $5 million and $3 million, respectively.
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.
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,
---------------------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998
- -------------------------------------------------------------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Impaired loans with an allowance.............................. $ 58,584 $ 69,886 $ 59,351 $ 40,288
Impaired loans without an allowance(1)........................ 114,611 43,962 49,033 27,594
---------- ---------- ---------- -------------
Total impaired loans(2)..................................... $ 173,195 $ 113,848 $ 108,384 $ 67,882
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Allowance for impaired loans.................................. $ 15,837 $ 21,260 $ 9,418 $ 7,470
Average balance of impaired loans during the year............. $ 277,955 $ 145,351 $ 120,096 $ 98,700
</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: $64 million, $38 million, $27 million, and $40 million was
evaluated using the present value of the expected future cash flows at
December 31, 1995, 1996 and 1997, and September 30, 1998, respectively; $95
million, $45 million, $53 million, and $8 million was evaluated using the
fair value of the collateral at December 31, 1995, 1996 and 1997, and
September 30, 1998, respectively; $14 million, $31 million, $28 million, and
$20 million was evaluated using historical loss factors at December 31,
1995, 1996 and 1997, and September 30, 1998, respectively.
F-19
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
Interest income recognized on nonaccrual loans was $11 million, $5 million,
$3 million, $3 million, and $1 million for the years ended December 31, 1995,
1996 and 1997, and for the nine months ended September 30, 1997 and 1998,
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,
1996, related party loans outstanding to individuals who served as directors or
executive officers at anytime during the year totaled $79 million as compared to
$38 million and $54 million at December 31, 1997 and September 30, 1998,
respectively. 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 the years ended December 31, 1996 and 1997, and the nine months ended
September 30, 1998, there were no loans to related parties which were charged
off. Additionally, at December 31, 1996 and 1997, and September 30, 1998, there
were no loans to related parties which were nonperforming.
NOTE 4 -- PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. As of December 31, 1996 and 1997, and September 30, 1998, the
amounts were:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1996 1997 SEPTEMBER 30, 1998
------------------------------------ ------------------------------------ -----------------------
ACCUMULATED ACCUMULATED ACCUMULATED
DEPRECIATION DEPRECIATION DEPRECIATION
AND NET BOOK AND NET BOOK AND
(DOLLARS IN THOUSANDS) COST AMORTIZATION VALUE COST AMORTIZATION VALUE COST AMORTIZATION
- ------------------------ --------- ------------ ----------- --------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Land.................... $ 73,309 $ -- $ 73,309 $ 69,290 $ -- $ 69,290 $ 68,598 $ --
Premises................ 264,545 98,785 165,760 253,752 101,997 151,755 252,489 105,754
Leasehold improvements.. 124,065 75,264 48,801 135,609 80,019 55,590 140,347 83,249
Furniture, fixtures and
equipment............. 362,063 239,312 122,751 400,774 271,110 129,664 428,656 293,224
--------- ------------ ----------- --------- ------------ ----------- --------- ------------
Total................. $ 823,982 $ 413,361 $ 410,621 $ 859,425 $ 453,126 $ 406,299 $ 890,090 $ 482,227
--------- ------------ ----------- --------- ------------ ----------- --------- ------------
--------- ------------ ----------- --------- ------------ ----------- --------- ------------
<CAPTION>
NET BOOK
(DOLLARS IN THOUSANDS) VALUE
- ------------------------ -----------
<S> <C>
Land.................... $ 68,598
Premises................ 146,735
Leasehold improvements.. 57,098
Furniture, fixtures and
equipment............. 135,432
-----------
Total................. $ 407,863
-----------
-----------
</TABLE>
F-20
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 4 -- PREMISES AND EQUIPMENT (CONTINUED)
Rental, depreciation and amortization expense were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1997 1998
- -------------------------------------------------------- --------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Rental expense of premises.............................. $ 53,493 $ 66,189 $ 46,556 $ 34,955 $ 37,824
Less: rental income..................................... 11,050 11,904 11,049 8,363 8,638
--------- --------- --------- ----------- ---------
Net rental expense.................................... $ 42,443 $ 54,285 $ 35,507 $ 26,592 $ 29,186
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Other net rental expense (income), primarily for
equipment............................................. $ 2,705 $ 2,218 $ 298 $ 262 $ (269)
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Depreciation and amortization of premises and
equipment............................................. $ 49,036 $ 51,821 $ 53,652 $ 39,843 $ 41,643
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
Future minimum operating lease payments are as follows.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------
<S> <C>
Three months ending December 31, 1998............................................. $ 12,716
Years ending December 31,
1999............................................................................ 49,473
2000............................................................................ 45,214
2001............................................................................ 42,314
2002............................................................................ 34,594
2003............................................................................ 29,857
Later years..................................................................... $ 120,318
----------
Total minimum operating lease payments............................................ $ 334,486
----------
----------
Minimum rental income due in the future under noncancellable subleases............ $ 48,923
----------
----------
</TABLE>
Included in other liabilities in the accompanying September 30, 1998
Consolidated Balance Sheet is $11 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 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 September 30, 1998, the Company had $397 million in domestic interest
bearing time deposits with a remaining term of greater than one year, of which
$108 million exceeded $100,000. Maturity information
F-21
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 5 -- DEPOSITS (CONTINUED)
for all domestic interest bearing time deposits with a remaining term of greater
than one year is summarized below.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1998
- -------------------------------------------------------------------------- ------------------
<S> <C>
Due after one year through two years...................................... $ 187,900
Due after two years through three years................................... 88,373
Due after three years through four years.................................. 76,538
Due after four years through five years................................... 36,941
Due after five years...................................................... 6,794
--------
Total................................................................... $ 396,546
--------
--------
</TABLE>
Substantially all of the foreign interest bearing time deposits exceeding
$100,000 mature in less than one year.
NOTE 6 -- EMPLOYMENT BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT
BENEFITS
RETIREMENT PLANS
The Company maintains the Union Bank of California, N.A. Retirement Plan
(the Plan), which is a noncontributory defined benefit plan covering
substantially all of the employees of the Company. The plan 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. 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.
In 1996, the Company maintained a second plan for former BanCal Tri-State
Corporation employees. The plan which was terminated effective January 1, 1997,
was a defined contribution plan. The Company's expense for pension contributions
for the year ended December 31, 1996 was $5 million.
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.
F-22
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 6 -- EMPLOYMENT BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT
BENEFITS (CONTINUED)
The following table sets forth the funded status of the Company's defined
benefit pension plan and its other postretirement benefit plans.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------------- -------------------------------------
YEARS ENDED DECEMBER FOR THE NINE YEARS ENDED DECEMBER FOR THE NINE
31, MONTHS ENDED 31, MONTHS ENDED
---------------------- SEPTEMBER 30, ---------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998 1996 1997 1998
- --------------------------------------------- ---------- ---------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of period...... $ 298,597 $ 323,646 $ 400,958 $ 76,728 $ 80,274 $ 79,308
Service cost................................. 12,651 20,667 17,023 1,741 3,123 2,300
Interest cost................................ 22,043 25,049 21,356 5,581 5,150 3,801
Plan participants' contributions............. -- -- -- 798 570 706
Amendments................................... -- 10,926 -- -- -- --
Actuarial (gain) loss........................ 422 31,588 48,822 32 (5,452) (309)
Benefits paid................................ (10,067) (10,918) (9,335) (4,606) (4,357) (3,828)
---------- ---------- ------------- ---------- ---------- -------------
Benefit obligation, end of period............ $ 323,646 $ 400,958 $ 478,824 $ 80,274 $ 79,308 $ 81,978
---------- ---------- ------------- ---------- ---------- -------------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of
period..................................... $ 332,412 $ 381,194 $ 460,501 $ 16,690 $ 21,703 $ 31,136
Actual return on plan assets................. 44,642 66,765 10,354 2,590 4,445 (577)
Employer contribution........................ 14,207 23,460 23,234 6,509 8,775 8,025
Plan participants' contributions............. -- -- -- 520 570 706
Benefits paid................................ (10,067) (10,918) (9,335) (4,606) (4,357) (3,828)
---------- ---------- ------------- ---------- ---------- -------------
Fair value of plan assets, end of period..... $ 381,194 $ 460,501 $ 484,754 $ 21,703 $ 31,136 $ 35,462
---------- ---------- ------------- ---------- ---------- -------------
Funded status................................ $ 57,548 $ 59,543 $ 5,930 $ (58,571) $ (48,172) $ (46,516)
Unrecognized transition amount............... -- -- -- 63,800 59,813 56,822
Unrecognized net actuarial (gain) loss....... (29,660) (37,717) 24,184 (14,829) (21,119) (17,482)
Unrecognized prior service cost.............. 4,806 12,705 9,740 -- -- --
---------- ---------- ------------- ---------- ---------- -------------
Prepaid (accrued) benefit cost............... $ 32,694 $ 34,531 $ 39,854 $ (9,600) $ (9,478) $ (7,176)
---------- ---------- ------------- ---------- ---------- -------------
---------- ---------- ------------- ---------- ---------- -------------
</TABLE>
F-23
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 6 -- EMPLOYMENT BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT
BENEFITS (CONTINUED)
The following table summarizes the assumptions used in computing the present
value of the projected benefit obligation and the net pension expense.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------------------------------------------- ------------------------
YEARS ENDED DECEMBER 31, FOR THE NINE YEARS ENDED DECEMBER 31,
MONTHS ENDED
------------------------------------- SEPTEMBER 30, ------------------------
1995 1996 1997 1998 1995 1996
----- ----- ----- ----------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Discount rate in determining expense...... 7.50% 7.50% 7.50% 7.00% 7.50% 7.50%
Discount rate in determining benefit
obligations at end of period............ 7.50 7.50 7.00 6.50 7.50 7.50
Rate of increase in future compensation
levels for determining expense.......... 5.50 5.50 5.50 5.00 -- --
Rate of increase in future compensation
levels for determining benefit
obligations at end of period............ 5.50 5.50 5.00 5.00 -- --
Expected return on plan assets............ 8.25 8.25 8.25 8.25 8.00 8.00
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1997 1998
----- -----------------
<S> <C> <C>
Discount rate in determining expense...... 7.00% 6.50%
Discount rate in determining benefit
obligations at end of period............ 7.00 6.50
Rate of increase in future compensation
levels for determining expense.......... -- --
Rate of increase in future compensation
levels for determining benefit
obligations at end of period............ -- --
Expected return on plan assets............ 8.00 8.00
</TABLE>
The following table sets forth the components of postretirement benefit
expense.
<TABLE>
<CAPTION>
OTHER BENEFITS
PENSION BENEFITS -------------------------------
----------------------------------------------
FOR THE NINE YEARS ENDED DECEMBER 31,
YEARS ENDED DECEMBER 31, MONTHS ENDED
------------------------------- SEPTEMBER 30, -------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998 1995 1996 1997
- ------------------------------------ --------- --------- --------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT
COST
Service cost........................ $ 10,516 $ 12,651 $ 20,667 $ 17,023 $ 1,792 $ 1,741 $ 3,123
Interest cost....................... 19,637 22,043 25,049 21,356 6,091 5,581 5,150
Expected return on plan assets...... (21,018) (23,877) (27,119) (23,736) (885) (1,335) (1,736)
Amortization of prior service
cost.............................. 2,108 2,108 3,175 2,381 -- -- --
Amortization of transition amount... (149) (149) (149) (112) 3,988 3,988 3,987
Recognized net actuarial (gain)
loss.............................. -- -- -- 998 (881) (846) (1,870)
--------- --------- --------- ------------- --------- --------- ---------
Net periodic benefit cost......... $ 11,094 $ 12,776 $ 21,623 $ 17,910 $ 10,105 $ 9,129 $ 8,654
--------- --------- --------- ------------- --------- --------- ---------
--------- --------- --------- ------------- --------- --------- ---------
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1998
- ------------------------------------ ---------------
<S> <C>
COMPONENTS OF NET PERIODIC BENEFIT
COST
Service cost........................ $ 2,300
Interest cost....................... 3,801
Expected return on plan assets...... (1,868)
Amortization of prior service
cost.............................. --
Amortization of transition amount... 2,990
Recognized net actuarial (gain)
loss.............................. (1,500)
-------
Net periodic benefit cost......... $ 5,723
-------
-------
</TABLE>
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
F-24
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 6 -- EMPLOYMENT BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT
BENEFITS (CONTINUED)
rate for the indemnity plan gradually decreased from 11.5 percent to 5.5 percent
in 2003 and remained level thereafter.
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 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 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.
For 1998, 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 7
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 that level thereafter. The rate for the HMO plan was expected to gradually
decrease to 5.5 percent in the year 2007 and remain at that level thereafter.
The healthcare cost trend rate assumption has a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the following effects.
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
(DOLLARS IN THOUSANDS) POINT INCREASE POINT DECREASE
- ------------------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Effect on total of service and interest cost components.................. 788 (699)
Effect on postretirement benefit obligation.............................. 9,479 (7,915)
</TABLE>
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 $23 million and $25 million for the years ended
December 31, 1996 and 1997, and $25 million for the period ended September 30,
1998. The Company's expense relating to the ESBP's was $3 million for each of
the years ended December 31, 1995, 1996 and 1997 and $2 million for the period
ended September 30, 1998.
F-25
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 6 -- EMPLOYMENT BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT
BENEFITS (CONTINUED)
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 $9
million, $9 million, $13 million and $9.5 million for the years ended December
31, 1995, 1996 and 1997 and the period ended September 30, 1998, respectively.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 revised the
disclosures for pensions and other postretirement benefits. Adoption of SFAS No.
132 did not impact the Company's consolidated financial position, results of
operations or cash flows, and any effect was limited to the form and content of
its disclosures. SFAS No. 132 is effective for fiscal years beginning after
December 15, 1997.
NOTE 7 -- OTHER EXPENSES
The detail of other expenses is as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- -----------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1997 1998
- --------------------------------------------------- ---------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Data processing.................................... $ 18,557 $ 22,140 $ 25,973 $ 19,115 $ 20,462
Advertising and public relations................... 20,911 28,788 28,664 20,759 22,419
Printing and office supplies....................... 22,626 27,085 24,098 17,646 19,112
Regulatory assessments............................. 23,431 4,048 5,778 4,281 4,561
Professional services.............................. 26,197 24,342 28,075 19,062 25,186
Merchant transaction processing fees............... 31,288 37,091 42,274 31,269 33,008
Communications..................................... 35,806 40,133 42,372 31,135 31,515
Other.............................................. 117,908 114,400 129,251 89,291 111,933
---------- ---------- ---------- ----------- ----------
Total other expenses............................. $ 296,724 $ 298,027 $ 326,485 $ 232,558 $ 268,196
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</TABLE>
F-26
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 7 -- OTHER EXPENSES (CONTINUED)
In connection with the Merger, the Company incurred merger and integration
expense of $117 million and $6 million for the years ended 1996 and 1997 and
none for the nine months ended September 30, 1997, as summarized in the
following table.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER FOR THE NINE MONTHS
31, ENDED SEPTEMBER 30,
--------------------- ----------------------
(DOLLARS IN THOUSANDS) 1996 1997 1997 1998
- ------------------------------------------------------------------ ---------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, accrued merger and integration expense, beginning of
period.......................................................... $ -- $ 54,344 $ 54,344 $ 22,930
Provision for merger and integration costs........................ 117,464 6,037 6,037 --
Utilization:
Cash............................................................ 40,155 35,809 32,351 2,901
Noncash......................................................... 22,965 1,642 886 9,449
---------- --------- ----------- ---------
Total utilization............................................. 63,120 37,451 33,237 12,350
---------- --------- ----------- ---------
Balance, accrued merger and integration expense, end of period.... $ 54,344 $ 22,930 $ 27,144 $ 10,580
---------- --------- ----------- ---------
---------- --------- ----------- ---------
</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
September 30, 1998, the liability balance included amounts primarily for
operating lease payments related to redundant banking facilities which are
continuing over the expected term of the leases.
F-27
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 8 -- INCOME TAXES
The components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1997 1998
- --------------------------------------------------- ---------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Taxes currently payable:
Federal.......................................... $ 96,732 $ 86,159 $ 168,375 $ 133,625 $ 176,517
State............................................ 42,356 23,180 8,441 870 (40,741)
Foreign.......................................... 3,430 2,895 2,092 1,640 2,860
---------- ---------- ---------- ----------- ----------
Total currently payable........................ 142,518 112,234 178,908 136,135 138,636
---------- ---------- ---------- ----------- ----------
Taxes deferred:
Federal.......................................... 34,839 47,575 49,437 34,451 9,780
State............................................ 16,005 3,455 10,499 4,283 (2,371)
Foreign.......................................... (3) (372) (122) -- --
---------- ---------- ---------- ----------- ----------
Total deferred................................. 50,841 50,658 59,814 38,734 7,409
---------- ---------- ---------- ----------- ----------
Total income tax expense....................... $ 193,359 $ 162,892 $ 238,722 $ 174,869 $ 146,045
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</TABLE>
The components of the net deferred tax balances of the Company were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998
- -------------------------------------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for credit losses............................................. $ 195,128 $ 169,769 $ 182,125
Accrued income & expense................................................ 31,964 21,987 39,863
Accrued merger expense.................................................. 22,051 15,641 8,006
Deferred state taxes.................................................... 13,572 21,063 3,101
Other................................................................... 2,567 7,585 6,930
---------- ---------- -------------
Total deferred tax assets............................................. 265,282 236,045 240,025
---------- ---------- -------------
Deferred tax liabilities:
Leasing................................................................. 276,922 297,891 317,263
Depreciation............................................................ 13,809 17,192 9,151
Unrealized gain on securities available for sale........................ 9,711 13,536 27,342
---------- ---------- -------------
Total deferred tax liabilities........................................ 300,442 328,619 353,756
---------- ---------- -------------
Net deferred tax liability.......................................... $ 35,160 $ 92,574 $ 113,731
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-28
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 8 -- INCOME TAXES (CONTINUED)
The following table is an analysis of the effective tax rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------- -----------------
1995 1996 1997
----- ----- ----- 1997
-----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal income tax rate............................................... 35% 35% 35% 35%
Net tax effects of:
State income taxes, net of federal income tax benefit............... 5 4 2 1
Tax-exempt interest income.......................................... (1) (1) (1) (1)
Amortization of intangibles......................................... 1 1 1 1
Other............................................................... (2) 1 -- (1)
-- -- -- --
Effective tax rate................................................ 38% 40% 37% 35%
-- -- -- --
-- -- -- --
<CAPTION>
1998
-----
<S> <C>
Federal income tax rate............................................... 35%
Net tax effects of:
State income taxes, net of federal income tax benefit............... (6)
Tax-exempt interest income.......................................... (1)
Amortization of intangibles......................................... 1
Other............................................................... --
--
Effective tax rate................................................ 29%
--
--
</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.
During the nine months ended September 30, 1998, a reduction in state income
tax liabilities of approximately $52 million, net of federal tax, was recorded.
Of the $52 million reduction, $29 million related to the reversal of previously
accrued 1997 state income tax liabilities and $23 million related to a lower tax
provision in 1998. The decrease in the effective tax rate in 1998 resulted from
the Company's ability to file California franchise tax returns on a worldwide
unitary basis, which incorporates the financial results of The Bank of
Tokyo-Mitsubishi, Ltd. and its worldwide affiliates.
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, cash
flows or results of operations.
F-29
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 9 -- BORROWED FUNDS
The following is a summary of the major categories of borrowed funds.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998
- ------------------------------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Federal funds purchased and securities sold under repurchase
agreements with weighted average interest rates of 5.09%,
5.38%, and 5.42% at December 31, 1996 and 1997, and
September 30, 1998, respectively........................... $ 1,322,654 $ 1,335,884 $ 1,574,163
Commercial paper, with weighted average interest rates of
5.34%, 5.64%, and 5.46% at December 31, 1996 and 1997, and
September 30, 1998, respectively........................... 1,495,463 966,575 1,417,077
Other borrowed funds, with weighted average interest rates of
5.66%, 6.23%, and 6.03% at December 31, 1996 and 1997, and
September 30, 1998, respectively........................... 749,422 476,010 339,340
------------ ------------ -------------
Total borrowed funds..................................... $ 3,567,539 $ 2,778,469 $ 3,330,580
------------ ------------ -------------
------------ ------------ -------------
Federal funds purchased and securities sold under repurchase
agreements:
Maximum outstanding at any month end....................... $ 1,322,654 $ 1,575,930 $ 1,797,737
Average balance during the period.......................... 933,433 1,097,707 1,481,809
Weighted average interest rate during the period........... 5.05% 5.33% 5.38%
Commercial paper:
Maximum outstanding at any month end....................... $ 1,854,576 $ 1,876,135 $ 1,918,700
Average balance during the period.......................... 1,620,087 1,637,070 1,641,425
Weighted average interest rate during the period........... 5.40% 5.49% 5.52%
Other borrowed funds:
Maximum outstanding at any month end....................... $ 1,697,236 $ 851,694 $ 438,151
Average balance during the period.......................... 1,119,051 635,900 323,082
Weighted average interest rate during the period........... 5.59% 5.42% 5.78%
</TABLE>
F-30
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
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,
---------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998
- ---------------------------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
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 (The Bank of
Tokyo-Mitsubishi, Ltd.)....................................... $ -- $ 200,000 $ 200,000
Floating rate notes due July 2000. These notes bear interest at
0.30% above 3-month LIBOR..................................... 98,000 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
The Bank of Tokyo-Mitsubishi, Ltd............................. 100,000 50,000 --
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............................ $ 382,000 $ 348,000 $ 298,000
---------- ---------- -------------
---------- ---------- -------------
</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, 1996 and 1997, and
September 30, 1998, $219 million, $239 million and $220 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)
- ----------------------------------------------------------------------------------
<S> <C>
Years ending December 31,
2000............................................................................ $ 98,000
Years after 2003................................................................ 200,000
----------
Total......................................................................... $ 298,000
----------
----------
</TABLE>
F-31
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 10 -- SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK (CONTINUED)
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 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 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 the years ended December 31, 1995,
1996, and 1997, 1,862,034; 155,724 and 131,127 shares, respectively, were
required for dividend reinvestment purposes, of which 1,862,034; 71,706 and
3,687 shares were considered new issuances, respectively. For the nine months
ended September 30, 1997 and 1998, 112,383 and 64,488 shares, respectively, were
required for dividend reinvestment purposes, of which 1,443 and 3,738 shares
were considered new issuances, respectively. The Bank of Tokyo-Mitsubishi, Ltd.
discontinued its participation in the plan after the quarter ended March 31,
1995 and did not participate in the plan as of September 30, 1998.
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 The Bank of Tokyo-Mitsubishi, Ltd.
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 the years ended 1995, 1996 and 1997, and the nine months ended September
30, 1997 and 1998, 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-32
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
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,
-------------------------------------------------------------------------------------------
1995 1996 1997
----------------------------- ----------------------------- -----------------------------
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..................... 740,502 $ 9.94 1,082,106 $ 10.42 1,263,807 $ 12.13
Granted..................... 389,100 11.25 277,200 18.29 441,900 22.13
Exercised................... (47,496) 9.83 (80,496) 10.69 (289,029) 10.84
Forfeited................... -- -- (15,003) -- (19,500) 22.13
---------- ---------- ------ ----------
Options outstanding, end of
year........................ 1,082,106 $ 10.42 1,263,807 $ 12.13 1,397,178 $ 15.41
---------- ---------- ----------
---------- ---------- ----------
Options exercisable, end of
year........................ 407,466 $ 9.78 686,145 $ 10.38 712,107 $ 11.50
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
1997 1998
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- ---------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Options outstanding, beginning
of period.................... 1,263,807 $ 12.13 1,397,178 $ 15.41
Granted...................... 441,900 22.13 533,850 35.08
Exercised.................... (220,332) 10.88 (118,245) 12.12
Forfeited.................... (19,500) 22.13 (9,501) 30.03
---------- ----------
Options outstanding, end of
period....................... 1,465,875 $ 15.19 1,803,282 $ 21.38
---------- ----------
---------- ----------
Options exercisable, end of
period....................... 753,303 $ 11.18 938,679 $ 13.72
---------- ----------
---------- ----------
</TABLE>
The weighted-average fair value of options granted was $3.13, $6.00, and
$6.94 for the years ended 1995, 1996 and 1997, respectively, and $6.94 and
$11.99 for the nine months ended September 30, 1997 and 1998.
F-33
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
The following table summarizes information about stock options outstanding.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT SEPTEMBER 30, 1998 OPTIONS EXERCISABLE AT
------------------------------------------------ SEPTEMBER 30, 1998
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>
$6.67-9.08 229,008 4.5 years $ 8.54 229,008 $ 8.54
11.25-12.83 403,254 5.6 11.78 403,254 11.78
18.29-22.13 643,470 7.7 20.72 306,417 20.15
35.08 527,550 9.6 35.08 -- --
----------- -----------
1,803,282 938,679
----------- -----------
----------- -----------
</TABLE>
In the years ended 1995, 1996 and 1997, and nine months ended September 30,
1997 and 1998, the Company also granted 231,210, 133,440, 178,320, 176,970 and
181,785 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-34
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
The following is a summary of restricted stock transaction under the Stock
Plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1995 1996 1997
----------------------------- ----------------------------- -----------------------------
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......................... 817,608 $ 8.25 1,044,951 $ 8.99 1,166,820 $ 10.04
Granted..................... 231,210 11.61 133,440 18.29 178,320 22.18
Cancelled................... (3,867) 9.72 (11,571) 10.78 (7,923) 20.08
---------- ---------- ----------
Restricted stock awards
outstanding, end of year..... 1,044,951 $ 8.99 1,166,820 $ 10.04 1,337,217 $ 11.59
---------- ---------- ----------
---------- ---------- ----------
Restricted stock awards
vested, end of year.......... 568,449 $ 7.81 764,670 $ 8.35 942,738 $ 9.17
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
1997 1998
----------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NUMBER OF GRANT DATE NUMBER OF GRANT DATE
SHARES FAIR VALUE SHARES FAIR VALUE
---------- ----------------- ---------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Restricted stock awards
outstanding, beginning of
period....................... 1,166,820 $ 10.04 1,337,217 $ 11.59
Granted..................... 176,970 22.13 181,785 33.46
Cancelled................... (4,845) 19.98 (13,404) 22.61
---------- ----------
Restricted stock awards
outstanding, end of period... 1,338,945 11.60 1,505,598 14.13
---------- ----------
---------- ----------
Restricted stock awards
vested, end of period........ 932,856 9.10 1,105,791 10.07
---------- ----------
---------- ----------
</TABLE>
At December 31, 1995, 1996 and 1997, and September 30, 1997 and 1998,
1,342,449, 958,383, 3,365,586, 3,363,858, and 2,672,856 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
F-35
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
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>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE ---------------------------------- -----------------------
DATA) 1995 1996 1997 1998
- -------------------------------------------- ---------- ---------- ---------- 1997 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net income.................. As reported $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365
Pro forma 312,691 248,874 410,068 317,771 350,257
Net income applicable to
common stock............... As reported $ 301,637 $ 238,152 $ 403,696 $ 311,251 $ 352,365
Pro forma 301,386 237,568 402,468 310,171 350,257
Net income per common share
-- basic................... As reported $ 1.74 $ 1.37 $ 2.31 $ 1.78 $ 2.01
Pro forma 1.73 1.36 2.30 1.78 2.00
Net income per common share
-- diluted................. As reported $ 1.73 $ 1.36 $ 2.30 $ 1.78 $ 2.01
Pro forma 1.73 1.36 2.30 1.77 1.99
</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 the years ended 1995, 1996 and 1997, and
nine months ended September 30, 1997 and 1998: risk-free interest rates of 7.1%,
6.3%, 6.6%, 6.6% and 5.8% in the years ended 1995, 1996 and 1997 and nine months
ended September 30, 1997 and 1998, respectively; expected volatility of 28%,
28%, 26%, 26% and 29% in the years ended 1995, 1996 and 1997, and the nine
months ended September 30, 1997 and 1998, respectively; expected lives of 7
years for the years ended 1995 and 1996, respectively, and 6 years for the year
ended 1997 and nine months ended September 30, 1997 and 1998; and expected
dividend yields of 4.2%, 2.6%, 2.1%, 2.1% and 1.5% in the years ended 1995, 1996
and 1997, and nine months ended September 30, 1997 and 1998, respectively.
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 the Company granted 14,400 and 24,900 shares in the year
ended 1997 and nine months ended September 30, 1998, respectively. For the nine
months ended September 30, 1998 2,400 performance shares were forfeited. 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.
F-36
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount which would be
exchanged between willing parties, other than in a forced or liquidation sale.
All of the fair values presented below are as of their respective period ends
and 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, 1996 and 1997, and September 30, 1998, 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.
The table below presents the carrying value and fair value of the specified
assets and liabilities held by the Company.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1996 1997
----------------------------- -----------------------------
CARRYING CARRYING
(DOLLARS IN THOUSANDS) VALUE FAIR VALUE VALUE FAIR VALUE
- ---------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 3,937,697 $ 3,937,697 $ 3,199,455 $ 3,199,455
Trading account assets.................. 465,782 465,782 394,313 394,313
Securities available for sale........... 2,164,197 2,164,197 2,538,386 2,538,386
Securities held to maturity............. 268,196 274,405 188,775 193,115
Loans, net of allowance for credit
losses(1)............................. 19,725,793 20,003,603 21,414,856 21,636,650
LIABILITIES
Deposits:
Noninterest bearing................... 7,655,109 7,655,109 8,849,544 8,849,544
Interest bearing...................... 13,877,851 13,885,504 14,446,830 14,453,029
------------- ------------- ------------- -------------
Total deposits...................... 21,532,960 21,540,613 23,296,374 23,302,573
Borrowed funds.......................... 3,567,539 3,567,836 2,778,469 2,775,531
Subordinated capital notes.............. 382,000 388,388 348,000 348,000
<CAPTION>
SEPTEMBER 30,
1998
-----------------------------
CARRYING
(DOLLARS IN THOUSANDS) VALUE FAIR VALUE
- ---------------------------------------- ------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............... $ 2,974,544 $ 2,974,544
Trading account assets.................. 357,515 357,515
Securities available for sale........... 3,200,376 3,200,376
Securities held to maturity............. 162,018 165,807
Loans, net of allowance for credit
losses(1)............................. 22,010,357 22,821,780
LIABILITIES
Deposits:
Noninterest bearing................... 9,674,118 9,674,118
Interest bearing...................... 13,989,011 14,001,157
------------- -------------
Total deposits...................... 23,663,129 23,675,275
Borrowed funds.......................... 3,330,580 3,328,780
Subordinated capital notes.............. 298,000 298,000
</TABLE>
- ------------
(1) Excludes the book value of leases of $800 million, $875 million and $1,014
million at December 31, 1996 and 1997, and September 30, 1998, respectively.
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.
F-37
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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 lines
which were past due at December 31, 1996 and 1997, and September 30, 1998, and
credit card loans which were past due at December 31, 1996 and 1997, 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.
F-38
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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 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, 1996 and 1997,
and September 30, 1998, 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 periods 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.
F-39
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
The following is a summary of derivative instruments held or written for
trading purposes.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1996 1997
--------------------------------------- ---------------------------------------
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............... $ 403,602 $ 2,813 $ (11,735) $ 531,330 $ 366 $ (34,304)
Commitments to sell................... 530,923 18,958 14,759 709,512 40,671 40,274
Foreign exchange OTC options:
Options purchased..................... -- -- -- 46,533 -- (634)
Options written....................... -- -- -- 46,533 637 637
Currency swap agreements:
Commitments to pay.................... 64,817 4,821 3,193 55,725 -- (5,971)
Commitments to receive................ 38,417 1,628 1,595 55,725 5,971 5,971
Interest rate contracts:
Caps purchased........................ 994,605 1,858 1,837 1,189,791 796 796
Floors purchased...................... 147,250 1,149 1,149 119,000 612 612
Caps written.......................... 994,605 21 (1,838) 1,189,791 -- (796)
Floors written........................ 147,250 -- (1,149) 119,000 -- (612)
Swap contracts:
Pay variable/receive variable....... 10,000 28 1 58,000 301 --
Pay fixed/receive variable.......... 788,165 1,064 (17,592) 976,180 364 (29,579)
Pay variable/receive fixed.......... 788,165 19,623 18,674 976,180 30,240 29,926
<CAPTION>
SEPTEMBER 30,
---------------------------------------
1998
---------------------------------------
NOTIONAL CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS RISK(1) FAIR VALUE
- ---------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
HELD OR WRITTEN FOR TRADING PURPOSES AND
CUSTOMER ACCOMMODATIONS
Foreign exchange forward contracts:
Commitments to purchase............... $ 427,961 $ 5,250 $ (7,046)
Commitments to sell................... 562,922 14,594 8,120
Foreign exchange OTC options:
Options purchased..................... 4,000 74 74
Options written....................... 4,000 -- (74)
Currency swap agreements:
Commitments to pay.................... 46,725 -- (6,915)
Commitments to receive................ 46,725 7,031 7,031
Interest rate contracts:
Caps purchased........................ 1,115,260 644 644
Floors purchased...................... 141,314 1,382 1,382
Caps written.......................... 1,115,260 -- (644)
Floors written........................ 141,314 -- (1,382)
Swap contracts:
Pay variable/receive variable....... 58,000 381 --
Pay fixed/receive variable.......... 1,048,142 1,506 (51,803)
Pay variable/receive fixed.......... 1,048,142 55,151 53,697
</TABLE>
- ---------------
(1) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
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.
F-40
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
The following table reflects summary information on derivative contracts
used to hedge or modify the Company's risk as of December 31, 1996 and 1997, and
September 30, 1998. 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, 1996
---------------------------------------------------
UNAMORTIZED
NOTIONAL PREMIUM PAID CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS (RECEIVED) RISK(1) FAIR VALUE
- --------------------------------------------------------------- ------------ ------------- --------- -----------
<S> <C> <C> <C> <C>
HELD FOR ASSET AND LIABILITY MANAGEMENT PURPOSES
Foreign exchange forward contracts:
Commitments to purchase...................................... $ 129,264 $ -- $ 1,628 $ (2,286)
Commitments to sell.......................................... 4,142 -- 52 22
Currency swap agreements:
Commitments to pay........................................... -- -- -- --
Interest rate contracts:
Caps purchased............................................... 15,740 -- -- --
Floors purchased............................................. 2,050,000 6,309 9,750 9,750
Caps written................................................. 250,000 (709) 509 509
Floors written............................................... 500,000 (1,016) 391 391
Swap contracts:
Pay fixed/receive variable................................. 114,086 -- 241 (851)
Pay variable/receive fixed................................. 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-41
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------
UNAMORTIZED
NOTIONAL PREMIUM PAID CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS (RECEIVED) RISK(1) FAIR VALUE
- --------------------------------------------------------------- ------------ ------------- --------- -----------
<S> <C> <C> <C> <C>
HELD FOR ASSET AND LIABILITY MANAGEMENT PURPOSES
Foreign exchange forward contracts:
Commitments to purchase...................................... $ 341,298 $ -- $ 862 $ (5,055)
Commitments to sell.......................................... 51,754 -- 35 (822)
Currency swap agreements:
Commitments to pay........................................... 26,400 -- 2,590 2,590
Interest rate contracts:
Caps purchased............................................... 15,420 -- -- --
Floors purchased............................................. 3,550,000 11,730 4,040 4,040
Caps written................................................. 250,000 (335) 273 273
Floors written............................................... 1,850,000 (534) -- (1,309)
Swap contracts:
Pay fixed/receive variable................................. -- -- -- --
Pay variable/receive fixed................................. 575,000 -- 2,302 2,302
</TABLE>
- ------------
(1) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------------------
UNAMORTIZED
NOTIONAL PREMIUM PAID CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS (RECEIVED) RISK(1) FAIR VALUE
- -------------------------------------------------------------- ------------ ------------- --------- -----------
<S> <C> <C> <C> <C>
HELD FOR ASSET AND LIABILITY MANAGEMENT PURPOSES
Foreign exchange forward contracts:
Commitments to purchase..................................... $ 183,142 $ -- $ 3,724 $ 1,570
Commitments to sell......................................... 61,371 -- 105 (91)
Currency swap agreements:
Commitments to pay.......................................... 26,400 -- 3,501 3,501
Interest rate contracts:
Caps purchased.............................................. -- -- -- --
Floors purchased............................................ 2,800,000 7,125 34,586 34,586
Caps written................................................ 250,000 (55) -- --
Floors written.............................................. 1,600,000 (53) (7,764)
Swap contracts:
Pay fixed/receive variable................................ -- -- --
Pay variable/receive fixed................................ 525,000 -- 14,495
</TABLE>
- ------------
(1) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
F-42
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
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, 1996 and 1997, and September 30,
1998, fair value represents management's
F-43
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
estimate of the 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,
--------------------------------------------------
SEPTEMBER 30,
1996 1997 1998
------------------------ ------------------------ ------------------------
CONTRACTUAL FAIR CONTRACTUAL FAIR CONTRACTUAL FAIR
(DOLLARS IN THOUSANDS) AMOUNTS VALUE AMOUNTS VALUE AMOUNTS VALUE
- ------------------------------------ ------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Commitments to extend credit........ $ 12,500,677 $ 6,185 $ 15,111,062 $ 27,571 $ 15,036,195 $ 29,552
Standby letters of credit........... 2,610,123 2,808 2,289,878 5,776 2,562,523 6,749
Other letters of credit............. 336,101 -- 314,594 -- 282,866 --
</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 $1,170
million, $1,268 million and $1,162 million at December 31, 1996 and 1997, and
September 30, 1998, respectively. The market value of the associated collateral
was $1,195 million, $1,294 million and $1,185 million at December 31, 1996 and
1997, and September 30, 1998, 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 $291 million, $339 million and $241 million for the
years ended December 31, 1996 and 1997, and the nine months ended September 30,
1998, respectively.
As of December 31, 1996 and 1997, and September 30, 1998, securities carried
at $1.7 billion at each date, and loans of $1.8 billion, $2.7 billion and $2.7
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 The
Bank of Tokyo-Mitsubishi, Ltd. and affiliates and to UnionBanCal Corporation and
its non-bank subsidiaries and requires that such loans be secured by certain
types of collateral. At September 30, 1998, 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 September 30, 1998, the
Bank could have declared dividends aggregating $321 million without prior
regulatory approval.
F-44
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
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
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 September
30, 1998, that the Company and the Bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 1996, 1997, and September 30, 1998 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, 1996:
Total capital (to
risk-weighted assets)..... $ 2,946,654 11.17% > or = $ 2,111,223 > or = 8.0%
Tier 1 capital (to
risk-weighted assets)..... 2,395,580 9.08 > or = 1,055,612 > or = 4.0
Tier 1 capital (to quarterly
average assets)(1)........ 2,395,580 8.41 > or = 1,139,855 > or = 4.0
As of December 31, 1997:
Total capital (to
risk-weighted assets)..... $ 3,188,173 11.05% > or = $ 2,308,988 > or = 8.0%
Tier 1 capital (to
risk-weighted assets)..... 2,587,071 8.96 > or = 1,154,494 > or = 4.0
Tier 1 capital (to quarterly
average assets)(1)........ 2,587,071 8.53 > or = 1,213,381 > or = 4.0
As of September 30, 1998:
Total capital (to
risk-weighted assets)..... $ 3,474,632 11.51% > or = $ 2,414,158 > or = 8.0%
Tier 1 capital (to
risk-weighted assets)..... 2,876,605 9.53 > or = 1,207,079 > or = 4.0
Tier 1 capital (to quarterly
average assets)(1)........ 2,876,605 9.37 > or = 1,227,857 > or = 4.0
</TABLE>
- ------------
(1) Excludes certain intangible assets
F-45
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
----------------------------- ------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------- ------------- ------ -------------------- -------------
<S> <C> <C> <C> <C>
CAPITAL RATIOS FOR THE BANK:
As of December 31, 1996:
Total capital (to risk-weighted
assets)............................. $ 2,746,285 10.51% > or = $ 2,090,910 > or =%8.0
Tier 1 capital (to risk-weighted
assets)............................. 2,208,392 8.45 > or = 1,045,455 > or = 4.0
Tier 1 capital (to quarterly average
assets)(1).......................... 2,208,392 7.76 > or = 1,138,211 > or = 4.0
As of December 31, 1997:
Total capital (to risk-weighted
assets)............................. $ 3,025,030 10.58% > or = $ 2,286,296 > or =%8.0
Tier 1 capital (to risk-weighted
assets)............................. 2,527,468 8.84 > or = 1,143,148 > or = 4.0
Tier 1 capital (to quarterly average
assets)(1).......................... 2,527,468 8.35 > or = 1,210,898 > or = 4.0
As of September 30, 1998:
Total capital (to risk-weighted
assets)............................. $ 3,304,538 11.06% > or = $ 2,389,402 > or =%8.0
Tier 1 capital (to risk-weighted
assets)............................. 2,810,368 9.41 > or = 1,194,701 > or = 4.0
Tier 1 capital (to quarterly average
assets)(1).......................... 2,810,368 9.14 > or = 1,230,394 > or = 4.0
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
ACTION PROVISIONS
------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO
- ---------------------------------------- -------------------- -------------
<S> <C> <C>
CAPITAL RATIOS FOR THE BANK:
As of December 31, 1996:
Total capital (to risk-weighted
assets)............................. > or = $ 2,613,638 > or = 10.0%
Tier 1 capital (to risk-weighted
assets)............................. > or = 1,568,183 > or = 6.0
Tier 1 capital (to quarterly average
assets)(1).......................... > or = 1,422,764 > or = 5.0
As of December 31, 1997:
Total capital (to risk-weighted
assets)............................. > or = $ 2,857,870 > or = 10.0%
Tier 1 capital (to risk-weighted
assets)............................. > or = 1,714,722 > or = 6.0
Tier 1 capital (to quarterly average
assets)(1).......................... > or = 1,513,622 > or = 5.0
As of September 30, 1998:
Total capital (to risk-weighted
assets)............................. > or = $ 2,986,753 > or = 10.0%
Tier 1 capital (to risk-weighted
assets)............................. > or = 1,792,052 > or = 6.0
Tier 1 capital (to quarterly average
assets)(1).......................... > or = 1,537,992 > or = 5.0
</TABLE>
- ------------
(1) Excludes certain intangible assets.
F-46
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 17 -- EARNINGS PER SHARE (EPS)
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 stock options.
The following table presents a reconciliation of basic and diluted EPS for the
years ended December 31, 1995, 1996 and 1997, and for the nine months ended
September 30, 1997 and 1998, in accordance with SFAS No. 128:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1995
(AMOUNTS IN THOUSANDS, ------------------
EXCEPT PER SHARE DATA) BASIC DILUTED
- ------------------------------ -------- --------
<S> <C> <C>
Net Income.................... $312,942 $312,942
Less:
Preferred stock dividends... (11,305) (11,305)
-------- --------
Income available to common
shareholders................ $301,637 $301,637
-------- --------
-------- --------
Weighted average common shares
outstanding................. 173,806 173,806
Additional shares due to:
Assumed conversion of
dilutive stock options.... -- 293
-------- --------
Adjusted weighted average
common shares outstanding... 173,806 174,099
-------- --------
-------- --------
Net income per share.......... $ 1.74 $ 1.73
-------- --------
-------- --------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1996 1997 1997 1998
(AMOUNTS IN THOUSANDS, ------------------ ------------------ ------------------ ------------------
EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
- ------------------------------ -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income.................... $249,458 $249,458 $411,296 $411,296 $318,851 $318,851 $352,365 $352,365
Less:
Preferred stock dividends... (11,306) (11,306) (7,600) (7,600) (7,600) (7,600) -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income available to common
shareholders................ $238,152 $238,152 $403,696 $403,696 $311,251 $311,251 $352,365 $352,365
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Weighted average common shares
outstanding................. 174,391 174,391 174,683 174,683 174,615 174,615 175,091 175,091
Additional shares due to:
Assumed conversion of
dilutive stock options.... -- 393 -- 506 -- 456 -- 638
-------- -------- -------- -------- -------- -------- -------- --------
Adjusted weighted average
common shares outstanding... 174,391 174,784 174,683 175,189 174,615 175,071 175,091 175,729
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Net income per share.......... $ 1.37 $ 1.36 $ 2.31 $ 2.30 $ 1.78 $ 1.78 $ 2.01 $ 2.01
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</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. Options to purchase 422,400 shares of common
stock at $22 per share and options to purchase 527,550 shares of common stock at
$35 per share were outstanding but not included in the computation of diluted
EPS for the nine months ended September 30, 1997 and 1998, respectively, because
the options were anti-dilutive.
F-47
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 18 -- COMPREHENSIVE INCOME
The following is a summary of the components of accumulated other
comprehensive income:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- -----------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998
- ------------------------------------------------------------ ---------- ---------- ---------- 1997 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net unrealized gain (loss) on securities available for sale,
net of reclassification adjustment:
Beginning balance......................................... $ (8,838) $ 24,900 $ 14,064 $ 14,064 $ 19,886
Net unrealized gain (loss) on securities available for
sale during the period, before tax...................... 53,890 (13,409) 11,908 10,626 41,378
Income tax (expense) benefit.............................. (20,586) 5,297 (4,370) (4,229) (15,766)
Less: reclassification adjustment for net realized (gain)
loss on securities available for sale included in net
income during the period, before tax.................... 702 (4,502) (2,711) (2,098) (5,579)
Plus: income tax expense (benefit)........................ (268) 1,778 995 857 1,960
---------- ---------- ---------- ----------- ----------
Net activity................................................ 33,738 (10,836) 5,822 5,156 21,993
---------- ---------- ---------- ----------- ----------
Ending balance.............................................. 24,900 14,064 19,886 19,220 41,879
---------- ---------- ---------- ----------- ----------
Foreign currency translation adjustments:
Beginning balance......................................... (1,092) (1,240) (3,183) (3,183) (12,458)
Foreign currency translation adjustments during the
period, before tax...................................... (239) (3,212) (14,652) (2,785) (153)
Income tax benefit........................................ 91 1,269 5,377 1,128 62
---------- ---------- ---------- ----------- ----------
Net activity................................................ (148) (1,943) (9,275) (1,657) (91)
---------- ---------- ---------- ----------- ----------
Ending balance.............................................. (1,240) (3,183) (12,458) (4,840) (12,549)
---------- ---------- ---------- ----------- ----------
Other comprehensive income.................................. $ 33,590 $ (12,779) $ (3,453) $ 3,499 $ 21,902
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
Accumulated other comprehensive income...................... $ 23,660 $ 10,881 $ 7,428 $ 14,380 $ 29,330
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</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 The Bank of
Tokyo-Mitsubishi, Ltd. and with its affiliates and
F-48
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 20 -- TRANSACTIONS WITH AFFILIATES (CONTINUED)
associates. During the years ended December 31, 1995, 1996 and 1997, and nine
months ended September 30, 1997 and 1998, 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 The Bank of Tokyo-Mitsubishi, Ltd., and reimbursed by the Company
to The Bank of Tokyo-Mitsubishi, Ltd. under a services agreement.
NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998
- ----------------------------------------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks.............................................. $ 103,742 $ 66,872 $ 129,513
Investment in and advances to subsidiaries........................... 2,503,706 2,879,898 3,171,235
Other assets......................................................... 9,161 7,971 4,619
------------ ------------ -------------
Total assets................................................... $ 2,616,609 $ 2,954,741 $ 3,305,367
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper..................................................... $ -- $ -- $ 94,026
Subordinated capital notes........................................... 100,000 250,000 200,000
Other liabilities.................................................... 21,676 25,442 26,391
------------ ------------ -------------
Total liabilities.............................................. 121,676 275,442 320,417
Shareholders' equity................................................. 2,494,933 2,679,299 2,984,950
------------ ------------ -------------
Total liabilities and shareholders' equity..................... $ 2,616,609 $ 2,954,741 $ 3,305,367
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-49
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998
- --------------------------------------------------- ---------- ---------- ---------- 1997 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME:
Dividends from bank subsidiary................... $ 25,062 $ 270,662 $ 85,660 $ 61,153 $ 73,592
Dividends from nonbank subsidiaries.............. 343 421 -- -- 23,000
Interest income on advances to subsidiaries and
deposits in bank............................... 52,289 24,366 12,217 9,428 8,402
Other income..................................... -- 959 1,040 1,040 --
---------- ---------- ---------- ----------- ----------
Total income............................... 77,694 296,408 98,917 71,621 104,994
EXPENSE:
Interest expense................................. 54,133 22,220 11,174 7,279 11,306
Other expense, net............................... (212) 1,072 1,583 1,220 1,765
---------- ---------- ---------- ----------- ----------
Total expense.............................. 53,921 23,292 12,757 8,499 13,071
---------- ---------- ---------- ----------- ----------
Income before income taxes and equity in
undistributed net income of subsidiaries......... 23,773 273,116 86,160 63,122 91,923
Income tax expense (benefit)....................... (694) 889 204 804 (1,634)
---------- ---------- ---------- ----------- ----------
Income before equity in undistributed net income of
subsidiaries..................................... 24,467 272,227 85,956 62,318 93,557
Equity in undistributed net income (loss) of
subsidiaries:
Bank subsidiary(1)............................... 285,053 (32,894) 314,739 250,050 273,844
Nonbank subsidiaries(2).......................... 3,422 10,125 10,601 6,483 (15,036)
---------- ---------- ---------- ----------- ----------
NET INCOME......................................... $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</TABLE>
- ------------
(1) In 1996 the amount represents dividends distributed by the Bank in excess
of its 1996 net income.
(2) In the nine months ended September 30, 1998 the amount represents dividends
distributed by nonbank subsidiaries in excess of their net income for the
nine months ended September 30, 1998.
F-50
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998
- ---------------------------------------------------------- ----------- ----------- ---------- 1997 -----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed (earnings) losses of
subsidiaries.......................................... (288,475) 22,769 (325,340) (256,533) (258,808)
Other, net.............................................. 2,800 (3,772) 1,059 2,681 (1,427)
----------- ----------- ---------- ----------- -----------
Net cash provided by operating activities......... 27,267 268,455 87,015 64,999 92,130
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to subsidiaries................................ 33,590 (12,779) (130,805) (107,621) (22,968)
Repayment of advances to subsidiaries................... 70,000 70,000 76,104 75,002 16,604
Sales and maturities of securities...................... 11,650 322 -- -- --
----------- ----------- ---------- ----------- -----------
Net cash provided (used) by investing
activities...................................... 115,240 57,543 (54,701) (32,619) (6,364)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short term borrowings........ 366 (632,296) -- -- 94,026
Proceeds from reduction of investment in subsidiary
equity................................................ -- 3,966 -- -- --
Maturity and redemption of subordinated capital notes
and long term debt.................................... (70,000) (70,000) (50,000) (50,000) (50,000)
Proceeds from issuance of subordinated capital notes.... -- -- 200,000 200,000 --
Payments of cash dividends.............................. (62,044) (182,652) (93,303) (68,787) (73,631)
Redemption of preferred stock........................... -- -- (135,000) (135,000) --
Other, net.............................................. 3,392 17,813 9,119 5,718 6,480
----------- ----------- ---------- ----------- -----------
Net cash used by financing activities............. (128,286) (863,169) (69,184) (48,069) (23,125)
----------- ----------- ---------- ----------- -----------
Net increase (decrease) in cash and due from banks...... 14,221 (537,171) (36,870) (15,689) 62,641
Cash and due from banks at beginning of year............ 626,692 640,913 103,742 103,742 66,872
----------- ----------- ---------- ----------- -----------
Cash and due from banks at end of year............ $ 640,913 $ 103,742 $ 66,872 $ 88,053 $ 129,513
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest................................................ $ 52,847 $ 25,785 $ 9,814 $ 5,986 $ 11,947
Income taxes............................................ (2,030) (198) 1,148 652 (3,921)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Dividends declared but unpaid........................... $ 12,788 $ 20,383 $ 24,528 $ 23,055 $ 24,529
</TABLE>
F-51
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
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>
1996 QUARTERS ENDED
---------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------------------------------------- ----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income................................................ $ 483,068 $ 473,601 $ 481,315 $ 489,320
Interest expense............................................... 187,401 185,362 189,727 196,236
----------- --------- ------------- ------------
Net interest income............................................ 295,667 288,239 291,588 293,084
Provision for credit losses.................................... 10,000 10,000 10,000 10,000
Noninterest income............................................. 102,874 105,550 107,280 102,972
Noninterest expense............................................ 252,024 313,784 284,075 285,021
----------- --------- ------------- ------------
Income before income taxes..................................... 136,517 70,005 104,793 101,035
Income tax expense............................................. 53,251 25,597 42,810 41,234
----------- --------- ------------- ------------
Net income..................................................... $ 83,266 $ 44,408 $ 61,983 $ 59,801
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income applicable to common stock.......................... $ 80,440 $ 41,582 $ 59,156 $ 56,975
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income per common share -- basic........................... $ 0.46 $ 0.24 $ 0.34 $ 0.33
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income per common share -- diluted......................... $ 0.46 $ 0.24 $ 0.34 $ 0.33
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Dividends per common share(1)(2)............................... $ 0.12 $ 0.12 $ 0.12 $ 0.12
----------- --------- ------------- ------------
----------- --------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
---------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------------------------------------- ----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income................................................ $ 485,031 $ 504,663 $ 520,237 $ 523,530
Interest expense............................................... 191,000 197,647 207,983 205,149
----------- --------- ------------- ------------
Net interest income............................................ 294,031 307,016 312,254 318,381
Provision for credit losses.................................... -- -- -- --
Noninterest income............................................. 114,786 111,021 116,820 120,374
Noninterest expense............................................ 253,138 255,753 253,317 282,457
----------- --------- ------------- ------------
Income before income taxes..................................... 155,679 162,284 175,757 156,298
Income tax expense............................................. 63,177 65,739 45,953 63,853
----------- --------- ------------- ------------
Net income..................................................... $ 92,502 $ 96,545 $ 129,804 $ 92,445
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income applicable to common stock.......................... $ 89,676 $ 93,718 $ 127,857 $ 92,445
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income per common share -- basic........................... $ 0.51 $ 0.54 $ 0.73 $ 0.53
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income per common share -- diluted......................... $ 0.51 $ 0.54 $ 0.73 $ 0.53
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Dividends per common share(1).................................. $ 0.12 $ 0.12 $ 0.14 $ 0.14
----------- --------- ------------- ------------
----------- --------- ------------- ------------
</TABLE>
F-52
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 22 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1998 QUARTERS ENDED
-------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30
- ------------------------------------------------------------------------------ ----------- --------- -------------
<S> <C> <C> <C>
Interest income............................................................... $ 508,653 $ 511,996 $ 535,973
Interest expense.............................................................. 191,203 186,440 199,340
----------- --------- -------------
Net interest income........................................................... 317,450 325,556 336,633
Provision for credit losses................................................... 20,000 15,000 10,000
Noninterest income............................................................ 128,030 147,994 123,925
Noninterest expense........................................................... 268,475 277,325 290,378
----------- --------- -------------
Income before income taxes.................................................... 157,005 181,225 160,180
Income tax expense............................................................ 61,428 72,704 11,913
----------- --------- -------------
Net income.................................................................... $ 95,577 $ 108,521 $ 148,267
----------- --------- -------------
----------- --------- -------------
Net income applicable to common stock......................................... $ 95,577 $ 108,521 $ 148,267
----------- --------- -------------
----------- --------- -------------
Net income per common share -- basic.......................................... $ 0.55 $ 0.62 $ 0.85
----------- --------- -------------
----------- --------- -------------
Net income per common share -- diluted........................................ $ 0.54 $ 0.62 $ 0.84
----------- --------- -------------
----------- --------- -------------
Dividends per common share(1)................................................. $ 0.14 $ 0.14 $ 0.14
----------- --------- -------------
----------- --------- -------------
</TABLE>
- ---------------
(1) Dividends per share for 1996, 1997, and 1998 are based on the Company's
common stock outstanding as of the declaration date.
(2) 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.
NOTE 23 -- SUBSEQUENT EVENT
Under a shelf registration filed with the Securities and Exchange Commission
(SEC) on November 19, 1998, the Company may have available for issuance $750
million of senior or subordinated debt securities, common stock or preferred
stock. The timing and sale of any debt or equity securities under this filing
will depend on market conditions. It is anticipated that the Company will issue
up to $500 million, in the first quarter of 1999, of trust preferred securities
which will be utilized to repurchase the Company's common stock held by The Bank
of Tokyo-Mitsubishi, Ltd. and others. The trust preferred securities are
considered Tier 1 capital for regulatory reporting purposes. The Company will
record the securities as debt instruments.
Under a common stock offering filed with the SEC on November 19, 1998, The
Bank of Tokyo-Mitsubishi, Ltd. may sell up to $750 million of the Company's
common stock in the secondary market. The sale of these securities will reduce
the percentage ownership that The Bank of Tokyo-Mitsubishi, Ltd. currently holds
in the Company. The Bank of Tokyo-Mitsubishi, Ltd. will continue to hold a
majority ownership position of the Company. The sale is expected to occur during
the first quarter of 1999.
F-53
<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, 1996 and 1997
and September 30, 1998, 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 and for the nine-month period ended September
30, 1998. 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 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. Those 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 on 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
subsidiaries as of December 31, 1996 and 1997 and September 30, 1998 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 and for the nine-month period ended September
30, 1998, in conformity with generally accepted accounting principles.
[SIG]
Deloitte & Touche LLP
San Francisco, California
February 2, 1999
F-54
<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 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.
[SIGNATURE]
San Francisco, California
January 24, 1996
F-55
<PAGE>
[LETTERHEAD] NEWS RELEASE
FOR IMMEDIATE RELEASE (WEDNESDAY, JANUARY 20, 1999)
Contact: Stephen L. Johnson John A. Rice, Jr.
Public Relations Investor Relations
(415) 765-3252 (415) 765-2998
UNIONBANCAL CORPORATION REPORTS HIGHER NET INCOME FOR FOURTH QUARTER AND FULL
YEAR 1998
SAN FRANCISCO -- UnionBanCal Corporation (NNM: UNBC) today reported fourth
quarter 1998 net income of $114.1 million, an increase of $21.7 million, or 23.4
percent, from the $92.4 million reported for fourth quarter 1997. Net income
for fourth quarter 1998 was $0.65 per diluted common share, which was 22.6
percent higher than the $0.53 per diluted common share reported a year earlier.
For 1998, net income was $466.5 million, or $2.65 per diluted common share. In
1997, net income was $411.3 million, and net income applicable to common stock
was $403.7 million, or $2.30 per diluted common share.
Excluding a tax benefit of $7.8 million related to a reduction in California
state franchise taxes which arises from the Company's filing of a worldwide
unitary tax return with its majority shareholder, net income for the fourth
quarter 1998 was $106.3 million, or $0.60 per diluted common share. Excluding
the full year tax benefit of $60.2 million, net income for 1998 was $406.3
million, or $2.31 per diluted common share. Excluding an after-tax refund from
the California Franchise Tax Board received in the third quarter of 1997, net
income applicable to common stock in 1997 was $379.0 million, or $2.16 per
diluted common share.
Returns on average assets and average common equity were 1.43 percent and 15.07
percent, respectively, for fourth quarter 1998, compared with 1.21 percent and
13.85 percent, respectively, for fourth quarter 1997. For full year 1998, these
returns were 1.53 percent and 16.39 percent, respectively, versus 1.39 percent
and 16.05 percent, respectively, for full year 1997.
"While achieving solid growth in both noninterest income and net interest income
in 1998, we also took several steps to enhance long-term shareholder value,"
said Takahiro Moriguchi, President and Chief Executive Officer. "We increased
our dividend rate by 36 percent and split our stock three-for-one. In addition,
we
<PAGE>
announced a significant capital initiative that we expect to complete in the
first quarter of 1999. Our majority shareholder, The Bank of Tokyo-Mitsubishi,
Ltd. (BTM), intends to sell approximately $750 million of UNBC common stock in a
secondary offering, which will more than double the public float of our common
stock. In conjunction with the secondary offering, we will repurchase $250
million of UNBC common stock from BTM. In addition, we are currently
negotiating with another foreign institutional shareholder regarding the
repurchase of approximately 2.1 million shares of our common stock. These two
purchases are designed to increase earnings per common share and return on
average common equity."
FINANCIAL HIGHLIGHTS
- - Total revenue (taxable-equivalent net interest income plus noninterest
income) in fourth quarter 1998 increased $33.2 million, or 7.5 percent,
over fourth quarter 1997.
- - Period-end total loans increased 6.8 percent from a year earlier.
- - Total assets grew to $32.3 billion at year-end 1998, up 5.5 percent from
year-end 1997.
- - The provision for credit losses for 1998 was $45.0 million, compared to no
provision for credit losses for 1997.
- - Nonperforming assets as a percent of total assets at December 31, 1998,
were 0.28 percent, down from 0.42 percent a year earlier.
NET INTEREST INCOME (TAXABLE-EQUIVALENT)
Net interest income was $339.6 million for fourth quarter 1998, a 6.3 percent
increase from the same quarter a year ago. This growth was primarily
attributable to a $1.6 billion, or 5.8 percent, increase in average earning
assets. The growth in average earning assets was primarily from average loans,
up $1.8 billion, or 7.9 percent, from fourth quarter 1997. Average commercial,
financial and industrial loans, up $2.6 billion, contributed most of the loan
growth and was partially offset by declines in average consumer loans, down
$542.0 million, primarily due to the previously announced sale of the credit
card portfolio, and loans originated in foreign branches, down $407.0 million.
The net interest margin for the quarter was 4.74 percent, up from the 4.71
percent reported for fourth quarter 1997.
For full year 1998, net interest income rose 6.9 percent to $1.3 billion,
primarily due to a $1.2 billion, or 4.5 percent, increase in average earning
assets, resulting primarily from a $1.4 billion, or 6.2 percent, increase in
average loans. Net interest margin for the year was 4.81 percent, up from
4.70 percent in 1997. The increase in net interest margin was primarily due to
a $1.1 billion, or 14.7 percent, increase in average noninterest bearing
deposits, which funded a significant portion of the growth in average loans.
NONINTEREST INCOME
For fourth quarter 1998, noninterest income was $133.6 million, up $13.2
million, or 11.0 percent, from the same quarter a year ago. This improvement
reflected growth in
<PAGE>
service charges on deposit accounts, which increased $7.6 million, or 25.4
percent; trust and investment management fees, which increased $1.6 million,
or 5.3 percent; and other noninterest income, which increased $3.0 million,
or 6.9 percent, primarily due to a $2.3 million increase in merchant banking
fees.
For the year ended December 31, 1998, noninterest income was $533.5 million, up
$70.5 million, or 15.2 percent, from 1997. Service charges on deposit accounts
grew $24.2 million, or 21.1 percent, reflecting strong growth in deposit
balances as well as an expansion of products and services; trust and investment
management fees increased $13.7 million, or 12.7 percent, on strong growth in
trust accounts and assets under management; and international fees and
commissions increased $5.9 million, or 8.9 percent. Other noninterest income
increased $26.7 million in 1998, primarily due to a $17.1 million gain from the
sale of the credit card portfolio in second quarter 1998.
NONINTEREST EXPENSE
Noninterest expense for fourth quarter 1998 was $299.0 million, up $16.6
million, or 5.9 percent, from the same quarter in 1997. This increase was
partially the result of a $5.3 million, or 3.5 percent, increase in salaries and
employee benefits expense. Other noninterest expense increased $11.2 million
over fourth quarter 1997, primarily due to additional expenses incurred to
support higher deposit volumes; increased marketing expenses; and higher
professional services expenses, principally due to additional costs related to
the Year 2000 compliance initiative.
Noninterest expense was $1.1 billion in 1998, up $90.6 million, or 8.7 percent,
from 1997. Personnel-related expense increased $45.9 million, or 8.0 percent,
primarily due to higher performance-based incentive compensation and regular
merit increases. Other noninterest expense increased $40.8 million, or 12.3
percent, comprised primarily of an $8.7 million increase in professional fees
due to additional costs related to the Year 2000 initiative; an increase of $8.3
million in expenses incurred to support higher deposit volumes; an increase of
$8.2 million in other outside service expenses; and an increase of $3.2 million
in marketing expenses.
INCOME TAXES
Income tax expense for fourth quarter 1998 was $59.0 million, a 34.1 percent
effective rate, compared with a 40.9 percent effective rate for the same quarter
a year ago. The full year 1998 effective tax rate was 30.5 percent, compared
with 36.7 percent for 1997. The primary reason for the lower fourth quarter and
full year 1998 effective tax rates was the Company's filing of its 1997, and its
intention to file its 1998, California franchise tax returns on a worldwide
unitary basis, which incorporates the results of its majority shareholder, The
Bank of Tokyo-Mitsubishi and its worldwide affiliates. The reductions in income
tax expense related to the unitary filings for the fourth quarter and full year
1998 were approximately $7.8 million and $60.2 million, respectively.
The effective tax rate for 1997 was favorably affected by an after-tax refund
of $24.7 million from the California Franchise Tax Board (FTB) for tax years
1975-1987.
<PAGE>
Excluding the state tax reduction in 1998 and the FTB refund in 1997, the
effective tax rates for 1998 and 1997 would have been 39.5 percent and 40.5
percent, respectively.
CREDIT QUALITY
Nonperforming assets at December 31,1998, were $89.9 million, down $40.0
million, or 30.8 percent, from December 31, 1997. Nonperforming assets were
0.28 percent of total assets on December 31, 1998, down from 0.42 percent from a
year earlier. Net loans charged off as a percentage of average total loans were
0.24 percent for fourth quarter 1998, down from 0.47 percent for the same
quarter a year ago. For full year 1998, net loans charged off as a percentage of
average total loans were 0.15 percent, down from 0.33 percent in 1997.
There was no provision for credit losses for either fourth quarter 1998 or
fourth quarter 1997. The provision for credit losses for full year 1998 was
$45.0 million, compared to no provision made for full year 1997. The provision
for credit losses is charged to income to bring the allowance for credit losses
to a level deemed appropriate by management based on the various factors that
are used to determine the adequacy of the allowance based on losses inherent in
the loan and lease portfolio.
At December 31, 1998, the allowance for credit losses as a percent of total
loans and as a percent of nonaccrual loans was 1.89 percent and 585.5 percent,
respectively. These ratios compare with 1.99 percent and 413.1 percent,
respectively, at December 31, 1997.
Based in San Francisco, UnionBanCal Corporation is a bank holding company with
assets of $32.3 billion at December 31, 1998. Its primary subsidiary is Union
Bank of California, N.A., the third largest commercial bank in California, and
among the 30 largest banks in the United States. Union Bank of California, N.A.
has 244 banking offices in California, 6 banking offices in Oregon and
Washington and 18 international facilities.
# # #
__________________________________
The following appears in accordance with the Private Securities Litigation
Reform Act:
This press release includes forward-looking statements that involve inherent
risks and uncertainties. A number of important factors could cause actual
results to differ materially from those in the forward-looking statements.
Those factors include fluctuations in interest rates, government regulations,
and economic conditions and competition in the geographic and business areas in
which the Corporation conducts its operations. A complete description of
UnionBanCal Corporation, including related risk factors is discussed in the
Corporation's public filings with the Securities and Exchange Commission which
are available by calling (415) 765-2969 or online at http://www.sec.gov.
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Percent Change To
Three Months Ended December 31, 1998 From:
----------------------------------------------- --------------------------
December 31, September 30, December 31, December 31, September 30,
(Dollars in thousands, except per share data) 1997 (1) 1998 1998 1997 1998
- ----------------------------------------------------------------------- --------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net interest income (2) $ 319,602 $ 337,702 $ 339,599 6.26% 0.56%
Provision for credit losses - 10,000 - - (100.00%)
Noninterest income 120,374 123,925 133,582 10.97% 7.79%
Noninterest expense 282,457 290,378 299,040 5.87% 2.98%
-------------- --------------- ---------------
Income before income taxes (2) 157,519 161,249 174,141 10.55% 8.00%
Taxable-equivalent adjustment 1,221 1,069 1,015 (16.87%) (5.05%)
Income tax expense 63,853 11,913 59,030 (7.55%) 395.51%
-------------- --------------- ---------------
Net income $ 92,445 $ 148,267 $ 114,096 23.42% (23.05%)
-------------- --------------- ---------------
-------------- --------------- ---------------
PER COMMON SHARE(3):
Net income-basic $ 0.53 $ 0.85 $ 0.65 22.64% (23.53%)
Net income-diluted 0.53 0.84 0.65 22.64% (22.62%)
Dividends 0.14 0.14 0.19 35.71% 35.71%
Book value (end of period) 15.32 17.04 17.45 13.90% 2.41%
Common shares outstanding (end of period) 174,917,674 175,208,037 175,259,919 0.20% 0.03%
Weighted average common shares outstanding - basic 174,886,822 175,188,084 175,236,084 0.20% 0.03%
Weighted average common shares outstanding - diluted 175,577,692 175,791,963 175,840,158 0.15% 0.03%
BALANCE SHEET (END OF PERIOD):
Total assets $ 30,585,265 $31,407,318 $ 32,276,316 5.53% 2.77%
Total loans 22,741,408 23,497,845 24,296,111 6.84% 3.40%
Nonperforming assets 129,809 81,399 89,850 (30.78%) 10.38%
Total deposits 23,296,374 23,663,129 24,507,879 5.20% 3.57%
Subordinated capital notes 348,000 298,000 298,000 (14.37%) -
Common equity 2,679,299 2,984,950 3,058,244 14.14% 2.46%
BALANCE SHEET (PERIOD AVERAGE):
Total assets $ 30,407,127 $30,762,880 $ 31,690,292 4.22% 3.01%
Total loans 22,338,355 23,432,772 24,101,304 7.89% 2.85%
Earning assets 26,961,113 27,767,944 28,532,665 5.83% 2.75%
Total deposits 22,790,107 22,571,441 23,451,618 2.90% 3.90%
Common equity 2,648,410 2,866,497 3,003,941 13.42% 4.79%
FINANCIAL RATIOS:
Return on average assets (4) 1.21% 1.91% 1.43%
Return on average common equity (5) 13.85% 20.52% 15.07%
Efficiency ratio (6) 64.33% 62.97% 63.64%
Net interest margin (2) 4.71% 4.84% 4.74%
Dividend payout ratio 26.42% 16.47% 29.23%
Tier 1 risk-based capital ratio (7) 8.96% 9.53% 9.64%
Total risk-based capital ratio (7) 11.05% 11.51% 11.61%
Leverage ratio (7) 8.53% 9.37% 9.38%
Allowance for credit losses to total loans 1.99% 2.02% 1.89%
Allowance for credit losses to nonaccrual loans 413.12% 697.19% 585.50%
Net loans charged off to average total loans (8) 0.47% 0.21% 0.24%
Nonperforming assets to total loans and foreclosed assets 0.57% 0.35% 0.37%
Nonperforming assets to total assets 0.42% 0.26% 0.28%
</TABLE>
- ------------------------------------------------------
(1) Results for the three months ended December 31, 1997, have been
restated to reflect 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.
(2) Taxable-equivalent basis.
(3) Amounts for the three months ended December 31, 1997 and September 30,
1998 have been restated to give retroactive effect to the December 1998
3-for-1 stock split. (4) Based on annualized net income.
(5) Based on annualized net income applicable to common stock. (6)
Noninterest expense excludes foreclosed asset expense (income).
(7) Estimated for December 31, 1998.
(8) Annualized.
nm = not meaningful
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
As of and for the Years Ended
--------------------------------------------- Percent Change
December 31, December 31, From
(Dollars in thousands, except per share data) 1997 1998 December 31, 1997
- -------------------------------------------------------------- ----------------------- --------------------- ----------------------
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Net interest income (1) $ 1,237,010 $ 1,322,655 6.92%
Provision for credit losses - 45,000 nm
Noninterest income 463,001 533,531 15.23%
Noninterest expense 1,044,665 1,135,218 8.67%
----------------------- ---------------------
Income before income taxes (1) 655,346 675,968 3.15%
Taxable-equivalent adjustment 5,328 4,432 (16.82%)
Income tax expense 238,722 205,075 (14.09%)
----------------------- ---------------------
Net income $ 411,296 $ 466,461 13.41%
----------------------- ---------------------
----------------------- ---------------------
PER COMMON SHARE:
Net income-basic $ 2.31 $ 2.66 15.15%
Net income-diluted 2.30 2.65 15.22%
Dividends 0.51 0.61 18.91%
Book value (end of period) 15.32 17.45 13.90%
Common shares outstanding (end of period) 174,917,674 175,259,919 0.20%
Weighted average common shares outstanding - basic 174,683,338 175,127,487 0.25%
Weighted average common shares outstanding - diluted 175,189,078 175,737,303 0.31%
BALANCE SHEET (END OF PERIOD):
Total assets $ 30,585,265 $ 32,276,316 5.53%
Total loans 22,741,408 24,296,111 6.84%
Nonperforming assets 129,809 89,850 (30.78%)
Total deposits 23,296,374 24,507,879 5.20%
Subordinated capital notes 348,000 298,000 (14.37%)
Common equity 2,679,299 3,058,244 14.14%
BALANCE SHEET (PERIOD AVERAGE):
Total assets $ 29,692,992 $ 30,523,806 2.80%
Total loans 21,855,911 23,215,504 6.22%
Earning assets 26,291,822 27,487,390 4.55%
Total deposits 22,067,155 22,654,714 2.66%
Common equity 2,514,610 2,845,964 13.18%
FINANCIAL RATIOS:
Return on average assets (2) 1.39% 1.53%
Return on average common equity (3) 16.05% 16.39%
Efficiency ratio (4) 61.53% 61.31%
Net interest margin (1) 4.70% 4.81%
Dividend payout ratio 22.22% 22.93%
Tier 1 risk-based capital ratio (5) 8.96% 9.64%
Total risk-based capital ratio (5) 11.05% 11.61%
Leverage ratio (5) 8.53% 9.38%
Allowance for credit losses to total loans 1.99% 1.89%
Allowance for credit losses to nonaccrual loans 413.12% 585.50%
Net loans charged off to average total loans 0.33% 0.15%
Nonperforming assets to total loans and foreclosed assets 0.57% 0.37%
Nonperforming assets to total assets 0.42% 0.28%
</TABLE>
- ------------------------------------------------------
(1) Taxable-equivalent basis.
(2) Based on net income.
(3) Based on income applicable to common stock. (4) Noninterest expense
excludes foreclosed asset expense (income).
(5) Estimated for December 31, 1998.
nm = not meaningful
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(TAXABLE-EQUIVALENT BASIS)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Year Ended
December 31, December 31,
---------------------------------------------------------
(Amounts in thousands, except per share data) 1997 1998 1997 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 452,189 $ 460,995 $ 1,764,426 $ 1,826,858
Securities 45,337 55,720 171,619 203,788
Interest bearing deposits in banks 13,344 2,893 56,748 17,080
Other 13,881 9,964 45,996 41,885
---------------------------------------------------------
Total interest income 524,751 529,572 2,038,789 2,089,611
---------------------------------------------------------
INTEREST EXPENSE
Deposits 154,126 135,390 595,981 555,128
Borrowed funds 51,023 54,583 205,798 211,828
---------------------------------------------------------
Total interest expense 205,149 189,973 801,779 766,956
---------------------------------------------------------
NET INTEREST INCOME 319,602 339,599 1,237,010 1,322,655
Provision for credit losses - - - 45,000
---------------------------------------------------------
Net interest income after provision
for credit losses 319,602 339,599 1,237,010 1,277,655
---------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 29,948 37,559 114,647 138,847
Trust and investment management fees 30,790 32,420 107,527 121,226
International commissions and fees 16,529 17,520 66,122 72,036
Other 43,107 46,083 174,705 201,422
---------------------------------------------------------
Total noninterest income 120,374 133,582 463,001 533,531
---------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 152,674 157,972 571,644 617,564
Net occupancy 21,497 23,623 85,630 90,917
Equipment 14,931 14,410 56,137 56,252
Foreclosed asset expense (income) (572) (2,075) (1,268) (2,821)
Other 93,927 105,110 332,522 373,306
---------------------------------------------------------
Total noninterest expense 282,457 299,040 1,044,665 1,135,218
---------------------------------------------------------
Income before income taxes 157,519 174,141 655,346 675,968
Taxable-equivalent adjustment 1,221 1,015 5,328 4,432
Income tax expense 63,853 59,030 238,722 205,075
---------------------------------------------------------
NET INCOME $ 92,445 $ 114,096 $ 411,296 $ 466,461
---------------------------------------------------------
---------------------------------------------------------
NET INCOME APPLICABLE TO:
Common stock $ 92,445 $ 114,096 $ 403,696 $ 466,461
---------------------------------------------------------
---------------------------------------------------------
NET INCOME PER COMMON SHARE - BASIC $ 0.53 $ 0.65 $ 2.31 $ 2.66
---------------------------------------------------------
---------------------------------------------------------
NET INCOME PER COMMON SHARE - DILUTED $ 0.53 $ 0.65 $ 2.30 $ 2.65
---------------------------------------------------------
---------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 174,887 175,236 174,683 175,127
---------------------------------------------------------
---------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 175,578 175,840 175,189 175,737
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
LOANS (UNAUDITED)
<TABLE>
<CAPTION>
Percent Change to
Three Months Ended December 31, 1998 from:
------------------------------------------- -----------------------------
December 31, September 30, December 31, December 31, September 30,
(Dollars in millions) 1997 1998 1998 1997 1998
- -------------------------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
LOANS (PERIOD AVERAGE)
Commercial, financial and industrial $ 10,312 $ 12,175 $ 12,882 24.92% 5.81%
Construction 304 376 439 44.41% 16.76%
Mortgage - Commercial 2,872 2,941 3,011 4.84% 2.38%
Mortgage - Residential 2,950 2,779 2,682 (9.08)% (3.49)%
Consumer 3,365 2,899 2,823 (16.11)% (2.62)%
Lease financing 868 963 1,004 15.67% 4.26%
Loans originated in foreign branches 1,667 1,300 1,260 (24.42)% (3.08)%
-------------------------------------------
Total loans $ 22,338 $ 23,433 $ 24,101 7.89% 2.85%
-------------------------------------------
-------------------------------------------
NONPERFORMING ASSETS (PERIOD END)
Nonaccrual loans:
Commercial, financial and industrial $ 46 $ 56 $ 61 32.61% 8.93%
Construction 4 4 4 - -
Mortgage:
Residential 1 - - (100.00)% -
Commercial 58 8 8 (86.21)% -
-------------------------------------------
Total mortgage 59 8 8 (86.44)% -
Loans originated in foreign branches - - 5 nm nm
Total nonaccrual loans 109 68 78 (28.44)% 14.71%
Foreclosed assets 21 13 12 (42.86)% (7.69)%
-------------------------------------------
Total nonperforming assets $ 130 $ 81 $ 90 (30.77)% 11.11%
-------------------------------------------
-------------------------------------------
Loans 90 Days or More Past Due and
Still Accruing $ 20 $ 15 $ 32 60.00% 113.33%
-------------------------------------------
-------------------------------------------
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
Beginning balance $ 478 $ 478 $ 474
Net loans (charged off) recovered:
Commercial, financial and industrial (13) (7) (10)
Mortgage - (3) (2)
Consumer (12) (1) (2)
Lease financing (1) (1) (1)
-------------------------------------------
Net loans charged off (26) (12) (15)
Provision for credit losses - 10 -
Other - (2) -
-------------------------------------------
Ending balance $ 452 $ 474 $ 459
-------------------------------------------
-------------------------------------------
</TABLE>
- -----------------------------------------------------
nm = not meaningful
