<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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): JANUARY 8, 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 No.)
of incorporation)
</TABLE>
<TABLE>
<S> <C>
350 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA
(Address of principal executive 94104
offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (415) 765-2969
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS.
On November 18, 1998, the Board of Directors of UnionBanCal Corporation
("UNBC") declared a 3-for-1 split of UNBC's common stock, payable on December
21, 1998 to holders of record on December 7, 1998. UNBC has restated its
Consolidated Financial Statements for the years ended December 31, 1995, 1996
and 1997, and for the nine months ended September 30, 1997 (unaudited) and
September 30, 1998 (unaudited), to give retroactive effect to the 3-for-1 common
stock split.
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
</TABLE>
2
<PAGE>
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: January 8, 1999 By: /s/ DAVID I. MATSON
-----------------------------------------
David I. Matson
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
</TABLE>
3
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-3-3040 and Amendment No. 1 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 January 30, 1998 (November
18, 1998 as to the exchange of common stock referred to in Note 1, paragraphs 3
and 4, and the adoption of SFAS No. 130, "Reporting Comprehensive Income"
referred to in Notes 1 and 18, and December 7, 1998 as to the stock split
referred to in Note 1, paragraph 5), appearing in this Form 8-K of UnionBanCal
Corporation.
DELOITTE & TOUCHE LLP
San Francisco, California
January 7, 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 and
subsidiaries, in Registration Statement File No. 33-3-3040 and Amendment No. 1
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 33-3-27987 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.
ARTHUR ANDERSEN LLP
San Francisco, California
January 7, 1999
<PAGE>
EXHIBIT 99.1
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 (unaudited)....................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998 (unaudited).......... 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 (unaudited).................................. 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 (unaudited).................................. F-5
Notes to Consolidated Financial Statements............................................................... F-6
Independent Auditors' Reports............................................................................ F-50
</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 1997 1998
- ----------------------------------------------------------- --------- --------- --------- ----------- ---------
(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 DATA) 1996 1997
- ------------------------------------------------------------------------- ---------- ---------- SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<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
(unaudited))........................................................... 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
(unaudited))........................................................... 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
---------- ---------- -------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock:
Authorized 5,000,000 shares 8 3/8% Noncumulative, Series A, issued
1,350,000 shares in 1996............................................ 135,000 -- --
Common stock(1)--$5 stated value:
Authorized 300,000,000 shares, issued 174,457,602 shares as of
December 31, 1996, 174,917,673 shares as of December 31, 1997 and
175,208,037 shares as of September 30, 1998 (unaudited)............. 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>
YEARS ENDED DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
- --------------------------------------------------------------- --------- --------- --------- FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<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, (unaudited) 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 16,018
(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 (37,045) 36,798
Other, net................................................ 157,244 52,101 173,706 92,393 (33,448)
---------- --------- ---------- ----------- ----------
Total adjustments......................................... 406,444 (101,541) 317,607 114,069 96,967
---------- --------- ---------- ----------- ----------
Net cash provided by operating activities................... 719,386 147,917 728,903 432,920 449,332
---------- --------- ---------- ----------- ----------
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) (1,315,578) (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) (1,745,971) (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, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
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 54,402,081 shares of Union
Bank common stock in exchange for all the outstanding common shares of BanCal
Tri-State Corporation. Information pretaining to merger and intergration expense
is presented in Note 7.
On August 10, 1998, the Company exchanged 10.2 million shares of its common
stock for 7.2 million shares of Union Bank of California, N.A. (the Bank) common
stock owned directly by BTM. This share exchange provided the Company with a 100
percent ownership interest in the Bank. In addition, it increased BTM's
ownership percentage of the Company to 82 percent from 81 percent.
The exchange of shares was accounted for as a reorganization of entities
under common control. Accordingly, amounts previously reported as Parent Direct
Interest in Bank Subsidiary, including the proportionate share of net income,
dividends, and other comprehensive income have been reclassified to combine them
with the corresponding amounts attributable to the Company's common shareholders
for all periods presented.
On November 18, 1998, the 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, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
The unaudited consolidated financial statements of UnionBanCal Corporation
and subsidiaries (the Company) as of September 30, 1997 and 1998 have been
prepared in accordance with generally accepted accounting principles (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
F-7
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
the loan term using a method that generally produces a level yield on the unpaid
loan balance. Nonrefundable fees and direct loan origination costs related to
loans held for sale are deferred and recognized as a component of the gain or
loss on sale. Interest income is accrued principally on a simple interest basis.
Nonaccrual loans are those for which management has discontinued accrual of
interest because there exists significant uncertainty as to the full and timely
collection of either principal or interest or such loans have become
contractually past due 90 days with respect to principal or interest.
Interest accruals are continued for certain small business loans that are
processed centrally, consumer loans, credit cards, and one-to-four family
residential real estate loans. These loans are charged off or written down to
their net realizable value based on delinquency time frames that range from 120
to 270 days, depending on the type of credit that has been extended. Interest
accruals are also continued for loans that are both well-secured and in the
process of collection. For this purpose, loans are considered well-secured if
they are collateralized by property having a net realizable value in excess of
the amount of principal and accrued interest outstanding or are guaranteed by a
financially responsible and willing party. Loans are considered "in the process
of collection" if collection is proceeding in due course either through legal
action or other actions that are reasonably expected to result in the prompt
repayment of the debt or in its restoration to current status.
When a loan is placed on nonaccrual, all previously accrued but uncollected
interest is reversed against current period operating results. All subsequent
payments received are first applied to unpaid principal and then to uncollected
interest. Interest income is accrued at such time as the loan is brought fully
current as to both principal and interest, and, in management's judgment, such
loans are considered to be fully collectible. However, Company policy also
allows management to continue the recognition of interest income on certain
loans designated as nonaccrual. This portion of the nonaccrual portfolio is
referred to as "Cash Basis Nonaccrual" loans. This policy only applies to loans
that are well secured and in management's judgment are considered to be fully
collectible. Although the accrual of interest is suspended, any payments
received may be applied to the loan according to its contractual terms and
interest income recognized 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
F-8
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
have not met specific performance standards for payment are classified as
renegotiated loans within the classification of nonperforming assets. Upon
payment performance, such loans may be transferred from nonperforming status to
accrual status.
The Company offers 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's allowance for credit losses is maintained at a level
considered by management to be adequate to absorb estimated credit losses and
other credit-related charges. The allowance for credit losses is increased by
the provision for credit losses, which is charged against current period
operating results and decreased by the amount of credit losses, net of
recoveries. Losses are fully or partially charged against the allowance for
credit losses when, in management's judgment, the uncollectible portion of a
loan's principal balance is determined. While management has segmented the
allowance to various credit-related products, the allowance is general in nature
and is available for all extension of credits, including off-balance sheet
instruments.
In evaluating the adequacy of the allowance for credit losses, management
estimates the amount of the potential risk of loss for each loan that has been
identified as having more than standard credit risk. Those estimates give
consideration to general economic conditions and their effects on the borrower's
industry, financial and management abilities and to current valuations of
collateral where appropriate. An estimate for potential credit loss content is
calculated for all loans not so identified based upon the risk characteristics
of particular categories of loans and historical loss experience in the
portfolio, adjusted, as appropriate, for the estimated effects of current
economic conditions. Further consideration for the allocation is based on credit
risk concentrations in the portfolio and commitments and contingent obligations
under off-balance sheet commercial and standby letters of credit. For analytical
purposes only, management attributes portions of the allowance for credit losses
to individual loans or groups of loans. Although the allowance for credit losses
is allocated to various portfolio segments, it is general in nature and is
available for the loan portfolio in its entirety. Although management believes
that the allowance for possible credit losses is adequate, future provisions
will be subject to continuing evaluation of inherent risk in the loan portfolio
and other credit exposures.
A loan is considered impaired when management determines that it is probable
that the Company will be unable to collect all amounts due according to the
original contractual terms of the loan agreement. Impairment is measured by the
difference between the recorded investment in the loan (including accrued
interest, net deferred loan fees or cost and unamortized premium or discount)
and the estimated present
F-9
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
value of total expected future cash flows, discounted at the loan's effective
rate, or the fair value of the collateral, if the loan is collateral dependent.
An impairment is recognized by adjusting an allocation of the existing allowance
for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful life of each asset. Lives of
premises range from ten to forty years; lives of furniture and equipment range
from three to eight years. Leasehold improvements are amortized over the term of
the respective lease or 10 years, whichever is shorter.
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. On an ongoing basis, OREO values, recorded in other assets, are reviewed
annually and any decline in value is recognized as foreclosed asset expense in
the current period. The net operating results from these assets are included in
the current period in noninterest expense as foreclosed asset expense (income).
DERIVATIVE INSTRUMENTS HELD FOR TRADING OR CUSTOMER ACCOMMODATION
The Company enters into a variety of interest rate derivative contracts,
primarily swaps and options and foreign exchange contracts, which include spot,
futures, forward, swap and option positions either for trading purposes, based
on management's intent at inception, or as an accommodation to customers.
Derivatives held or issued for trading or customer accommodation are carried
at fair value, with realized and unrealized changes in fair values on contracts
included in noninterest income in the period in which the changes occur.
Unrealized gains and losses are reported gross and included in trading account
assets and other liabilities, respectively. Cash flows are reported net as
operating activities.
DERIVATIVE INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
The Company enters into a variety of derivative contracts as a means of
reducing the Company's interest rate and foreign exchange exposures. At
inception these contracts are evaluated in order to determine if they qualify
for hedge accounting treatment and are accounted for either on a deferral,
accrual or market value basis, depending on the nature of the Company's hedge
strategy and the method used to
F-10
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
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, on a net of
tax basis.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". The Statement establishes standards
for when transfers of financial assets, including those with continuing
involvement by the transferor, should be considered a sale. SFAS No. 125 also
establishes standards for when a liability should be considered extinguished.
This Statement is effective for transfers of assets and extinguishments of
liabilities occurring after December 31, 1996 and has been applied
prospectively. Certain provisions of SFAS No. 125 have been postponed under SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125". 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. 127 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
F-11
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
purposes and the period in which they affect taxable income, are included in the
amounts provided for income taxes. Under this method, the computation of the net
deferred tax liability or asset gives current recognition to changes in the tax
laws.
NET INCOME PER COMMON SHARE
Basic earnings per share (EPS) is computed by dividing net income after
preferred dividends by the weighted average number of common shares outstanding
during the period. Diluted EPS incorporates the dilutive effect of common stock
equivalents outstanding on an average basis during the period. Stock options
(see Note 12) are a common stock equivalent.
The Company adopted the provisions of SFAS No. 128, "Earnings per Share",
for the year ended December 31, 1997. As required by the provisions of the
Statement, all prior period and interim period EPS data presented have been
restated. This Statement simplifies the standards for computing EPS and makes
them comparable to international EPS standards. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In addition, all
entities with complex capital structures are required to provide a dual
disclosure of basic and diluted EPS on the face of the income statement and a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Also see Note 17.
COMPREHENSIVE INCOME
The Company has retroactively adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the period
from non-owner sources. The adoption of this Statement resulted in a change in
the financial statement presentation, but did not have an impact on the
Company's consolidated financial position, results of operations or cash flows.
EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company provides a variety of benefit and incentive compensation plans
for eligible employees and retirees. Provisions for the costs of these employee
benefit and incentive plans and postretirement benefit plans are accrued and
charged to expense when the benefit is earned.
STOCK-BASED COMPENSATION
The Company adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation", on January 1, 1996. SFAS No. 123 establishes
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based compensation plans.
As allowed under the provisions of SFAS No. 123, the Company has chosen to
continue to recognize compensation expense using the intrinsic value-based
method of valuing stock options prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
F-12
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
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.
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 February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". The Standard revises the
disclosure requirements for pensions and other postretirement benefits. This
Statement is effective for fiscal years beginning after December 15, 1997.
Adoption of this Statement will 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.
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
F-13
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
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 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.
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
(DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR 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>
F-14
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 2 -- SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR 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>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR 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
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES FAIR 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>
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.
F-15
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 2 -- SECURITIES (CONTINUED)
MATURITY SCHEDULE OF SECURITIES
<TABLE>
<CAPTION>
SECURITIES SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------- ----------------------
DECEMBER 31, 1997 DECEMBER 31, 1997
-------------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ------------------------------------------------------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less...................................... $ 321,459 $ 322,592 $ 22,699 $ 22,801
Due after one year through five years........................ 2,101,347 2,122,154 150,467 156,069
Due after five years through ten years....................... 15,950 18,508 2,596 2,536
Due after ten years.......................................... 36,613 45,327 13,013 11,709
Equity securities............................................ 28,881 29,805 -- --
------------ ------------ ---------- ----------
Total securities........................................... $ 2,504,250 $ 2,538,386 $ 188,775 $ 193,115
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
During the 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, 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.
F-16
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES
A summary of loans net of unearned interest and fees of $150 million and
$128 million at December 31, 1996 and 1997, respectively, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
(DOLLARS IN THOUSANDS) 1996 1997
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Domestic:
Commercial, financial and industrial............................................. $ 9,495,592 $ 10,747,179
Construction..................................................................... 357,817 293,333
Mortgage:
Residential.................................................................... 2,960,908 2,961,233
Commercial..................................................................... 2,597,616 2,951,807
------------- -------------
Total mortgage............................................................... 5,558,524 5,913,040
Consumer:
Installment.................................................................... 2,063,434 2,090,752
Home equity.................................................................... 1,113,269 992,916
Credit card and other lines of credit.......................................... 303,235 270,097
------------- -------------
Total consumer............................................................... 3,479,938 3,353,765
Lease financing.................................................................. 800,048 874,860
------------- -------------
Total loans in domestic offices.............................................. 19,691,919 21,182,177
Loans originated in foreign branches............................................... 1,357,868 1,559,231
------------- -------------
Total loans.................................................................. 21,049,787 22,741,408
Allowance for credit losses................................................ 523,946 451,692
------------- -------------
Loans, net................................................................... $ 20,525,841 $ 22,289,716
------------- -------------
------------- -------------
</TABLE>
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
- --------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year................................................. $ 563,142 $ 555,149 $ 523,946
Loans charged off.......................................................... (133,599) (119,100) (122,779)
Loan loss recoveries....................................................... 72,403 48,024 51,014
----------- ----------- -----------
Total net loans charged off............................................ (61,196) (71,076) (71,765)
Provision for credit losses................................................ 53,250 40,000 --
Transfer of reserve for trading account assets............................. -- -- --
Foreign translation adjustment and other net deductions.................... (47) (127) (489)
----------- ----------- -----------
Balance, end of year....................................................... $ 555,149 $ 523,946 $ 451,692
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-17
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
Nonaccrual loans totaled $128 million and $109 million at December 31, 1996
and 1997, respectively. A significant portion of these loans were real estate
related. There were no renegotiated loans at December 31, 1996 and 1997.
Interest foregone on loans designated as nonaccrual at December 31, 1995, 1996
and 1997 was $18 million, $9 million and $6 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.
Effective January 1, 1995, the Company's policy for recognition of interest
income, charge-offs of loans, and application of payments on impaired loans is
the same as the policy applied to nonaccrual loans.
The following table sets forth information about the Company's impaired
loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
- ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Impaired loans with an allowance............................................. $ 58,584 $ 69,886 $ 59,351
Impaired loans without an allowance(1)....................................... 114,611 43,962 49,033
---------- ---------- ----------
Total impaired loans(2).................................................. $ 173,195 $ 113,848 $ 108,384
---------- ---------- ----------
---------- ---------- ----------
Allowance for impaired loans................................................. $ 15,837 $ 21,260 $ 9,418
Average balance of impaired loans during the year............................ $ 277,955 $ 145,351 $ 120,096
</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, and $27 million was evaluated using the
present value of the expected future cash flows at December 31, 1995, 1996
and 1997, respectively; $95 million, $45 million, and $53 million was
evaluated using the fair value of the collateral at December 31, 1995, 1996
and 1997, respectively; $14 million, $31 million, and $28 million was
evaluated using historical loss factors at December 31, 1995, 1996 and 1997,
respectively.
Interest income recognized on nonaccrual loans was $11 million, $5 million
and $3 million for the years ended December 31, 1995, 1996 and 1997,
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 at December 31, 1997. In the opinion of management, these related
party loans were made on substantially the
F-18
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
same terms, including interest rates and collateral requirements, as those terms
prevailing at the date these loans were made. During 1996 and 1997, there were
no loans to related parties which were charged off. Additionally, at December
31, 1996 and 1997, 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, the amounts were:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1996 1997
------------------------------------ ------------------------------------
ACCUMULATED ACCUMULATED
DEPRECIATION DEPRECIATION
AND NET BOOK AND NET BOOK
(DOLLARS IN THOUSANDS) COST AMORTIZATION VALUE COST AMORTIZATION VALUE
- --------------------------------------------------- --------- ------------ ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Land............................................... $ 73,309 $ -- $ 73,309 $ 69,290 $ -- $ 69,290
Premises........................................... 264,545 98,785 165,760 253,752 101,997 151,755
Leasehold improvements............................. 124,065 75,264 48,801 135,609 80,019 55,590
Furniture, fixtures and equipment.................. 362,063 239,312 122,751 400,774 271,110 129,664
--------- ------------ ----------- --------- ------------ -----------
Total............................................ $ 823,982 $ 413,361 $ 410,621 $ 859,425 $ 453,126 $ 406,299
--------- ------------ ----------- --------- ------------ -----------
--------- ------------ ----------- --------- ------------ -----------
</TABLE>
Rental, depreciation and amortization expense were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Rental expense of premises....................................................... $ 53,493 $ 66,189 $ 46,556
Less: rental income.............................................................. 11,050 11,904 11,049
--------- --------- ---------
Net rental expense............................................................. $ 42,443 $ 54,285 $ 35,507
--------- --------- ---------
--------- --------- ---------
Other net rental expense (income), primarily for equipment....................... $ 2,705 $ 2,218 $ 298
--------- --------- ---------
--------- --------- ---------
Depreciation and amortization of premises and equipment.......................... $ 49,036 $ 51,821 $ 53,652
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-19
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 4 -- PREMISES AND EQUIPMENT (CONTINUED)
Future minimum operating lease payments are as follows.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Years ending December 31,
1998......................................................................................... $ 48,156
1999......................................................................................... 46,564
2000......................................................................................... 38,078
2001......................................................................................... 33,793
2002......................................................................................... 23,654
Later years.................................................................................. 127,654
--------
Total minimum operating lease payments......................................................... $ 317,899
--------
--------
Minimum rental income due in the future under noncancellable subleases......................... $ 36,349
--------
--------
</TABLE>
Included in other liabilities in the accompanying December 31, 1997
Consolidated Balance Sheet is $13 million of future operating lease payments
accrued in connection with the Merger (also see Note 7).
A majority of the leases provide for the payment of taxes, maintenance,
insurance and certain other expenses applicable to the leased premises. Many of
the leases contain extension provisions, escalation clauses and purchase
options. There are no restrictions on paying dividends, incurring additional
debt or negotiating additional leases under the terms of the present lease
agreements.
NOTE 5 -- DEPOSITS
At December 31, 1997, the Company had $155 million in domestic interest
bearing time deposits exceeding $100,000 with a remaining term of greater than
one year. Maturity information for those deposits is summarized below.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Due after one year through two years........................................................... $ 82,707
Due after two years through three years........................................................ 30,064
Due after three years through four years....................................................... 21,854
Due after four years through five years........................................................ 17,642
Due after five years........................................................................... 2,681
--------
Total...................................................................................... $ 154,948
--------
--------
</TABLE>
Substantially all of the foreign interest bearing time deposits exceeding
$100,000 mature in less than one year.
F-20
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
RETIREMENT PLANS
Between April 1, 1996 and December 31, 1996, the Company maintained two
retirement plans, one covering former Union Bank employees and the other
covering former BanCal Tri-State Corporation employees. Effective January 1,
1997, the Union Bank Retirement Plan was amended and renamed the Union Bank of
California, N.A. Retirement Plan (the Plan). In addition, the plan covering
former BanCal Tri-State Corporation employees was terminated and all account
balances became fully vested. Employees of the former BanCal Tri-State
Corporation entered the Plan on January 1, 1997.
The Plan is a noncontributory defined benefit plan that provides retirement
benefits based on years of credited service and the final average compensation
amount, as defined in the Plan. Employees become eligible for this plan after
one year of service and become fully vested after five years of service. Prior
Bank of California participants received credited service from date of hire for
vesting, eligibility and early retirement purposes, but only received service
from January 1, 1997 for benefit purposes. The Company's funding policy is to
make contributions equal to the maximum deductible amount as allowed by the
Internal Revenue Code. Contributions are intended to provide not only for
benefits attributed to services to date, but also for those expected to be
earned in the future. Plan assets are invested in U.S. government securities,
corporate bonds, and commingled investment funds.
The following sets forth the funded status of the Plan and the amounts
recognized in the Company's Consolidated Balance Sheets at December 31, 1996 and
1997.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS) 1996 1997
- ------------------------------------------------------------------------------ ----------- -----------
Accumulated benefit obligation:
Actuarial present value of benefits for services rendered to date:
Vested.................................................................... $ (241,188) $ (297,646)
Non-vested................................................................ (27,821) (30,858)
----------- -----------
Total................................................................... $ (269,009) $ (328,504)
----------- -----------
----------- -----------
Projected benefit obligation.................................................. $ (323,646) $ (400,958)
Fair value of plan assets..................................................... 381,194 460,501
----------- -----------
Projected benefit obligation less than plan assets.......................... 57,548 59,543
Prior service cost not yet recognized in net periodic pension cost............ 5,165 12,915
Unrecognized net gain due to change of assumptions and experience different
from assumptions made........................................................ (29,660) (37,717)
Unrecognized transition asset at January 1, 1986, being recognized over 13.4
years........................................................................ (359) (210)
----------- -----------
Prepaid pension costs included in other assets.......................... $ 32,694 $ 34,531
----------- -----------
----------- -----------
</TABLE>
F-21
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
The following items are components of net pension expense.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS) 1995 1996 1997
- -------------------------------------------------------------------- ---------- ---------- ----------
Service cost -- present value of benefits earned.................... $ 10,516 $ 12,651 $ 20,667
Interest cost on projected benefit obligation....................... 19,637 22,043 25,049
Less return on plan assets:
Actual gain....................................................... (63,304) (44,210) (66,819)
Gains in excess of expected return on plan assets................. 42,286 20,333 39,700
---------- ---------- ----------
Expected return on plan assets.................................. (21,018) (23,877) (27,119)
Amortization of prior service cost.................................. 2,108 2,108 3,175
Amortization of transition asset.................................... (149) (149) (149)
---------- ---------- ----------
Net pension expense............................................. $ 11,094 $ 12,776 $ 21,623
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following summarizes the assumptions used in computing the present value
of the accumulated benefit obligation, the present value of the projected
benefit obligation and the net pension expense.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Discount rate in determining expense.......................................... 7.50% 7.50% 7.50%
Discount rate in determining benefit obligations at year end.................. 7.50 7.50 7.00
Rate of increase in future compensation levels for determining expense........ 5.50 5.50 5.50
Rate of increase in future compensation levels for determining benefit
obligations at year end...................................................... 5.50 5.50 5.00
Expected return on plan assets................................................ 8.25 8.25 8.25
</TABLE>
The former BanCal Tri-State Corporation retirement plan, which was
terminated effective January 1, 1997, was a defined contribution plan. The
Company's expense for pension contributions for the years ended December 31,
1995 and 1996 was $6 million and $5 million, respectively.
EXECUTIVE SUPPLEMENTAL BENEFIT PLANS
The Company has several Executive Supplemental Benefit Plans (ESBP) which
provide eligible employees with supplemental retirement benefits. The plans are
unfunded. The accrued liability for ESBP's included in other liabilities in the
Consolidated Balance Sheets was $35 million at December 31, 1996 and $39 million
at December 31, 1997. The Company's expense relating to the ESBP's was $3
million for the year ended December 31, 1995 and $4 million for each of the
years ended December 31, 1996 and 1997.
F-22
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 6 -- EMPLOYEE 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 and $13 million for the years ended December 31, 1995, 1996
and 1997, respectively.
OTHER POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits for its
retired employees. The health care cost is shared between the Company and the
retiree. The life insurance plan is noncontributory. The accounting for the
health care plan anticipates future cost-sharing changes to the written plan
that are consistent with the Company's intent to maintain a level of
cost-sharing at approximately 25 percent. Assets set aside to cover such
obligations are primarily invested in mutual funds.
The following table sets forth the plan's combined funded status recognized.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
(DOLLARS IN THOUSANDS) 1996 1997
- --------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................. $ (48,747) $ (48,519)
Fully eligible plan participants......................................... (11,876) (12,208)
Other active plan participants........................................... (19,651) (18,581)
------------ ------------
Accumulated postretirement obligation.................................. (80,274) (79,308)
Fair value of plan assets.................................................. 21,703 31,136
------------ ------------
Accumulated postretirement obligation in excess of plan assets........... (58,571) (48,172)
Unrecognized net gain due to change in assumption and experience different
from assumptions made..................................................... (14,829) (21,119)
Unrecognized transition obligation......................................... 63,800 59,813
------------ ------------
Accrued postretirement benefit cost.................................... $ (9,600) $ (9,478)
------------ ------------
------------ ------------
</TABLE>
F-23
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
The following table sets forth the components of postretirement benefit
expense.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
- ------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Service cost................................................ $ 1,792 $ 1,741 $ 3,123
Interest cost............................................... 6,091 5,581 5,150
Actual return on plan assets................................ (3,337) (2,590) (4,445)
Net amortization and deferral............................... 5,559 4,397 4,826
------------ ------------ ------------
Net periodic postretirement benefit cost.................. $ 10,105 $ 9,129 $ 8,654
------------ ------------ ------------
------------ ------------ ------------
Postretirement benefit claims paid for the year............. $ 5,309 $ 3,808 $ 3,787
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The unrecognized transition obligation recorded on January 1, 1993 is being
amortized over 20 years.
For 1995, the former Union Bank assumed a 9 percent annual rate of increase
in the per capita cost of postretirement medical benefits for the indemnity plan
and a 4 percent annual rate of increase was assumed for the HMO plan. For future
periods the assumed rate for the indemnity plan gradually decreased from 9
percent to 5.5 percent in 2007 and remained level thereafter. The assumed rate
of change on the HMO plan increased for the remainder of the decade, then
gradually decreased to 5.5 percent in the year 2007 and thereafter.
For 1995, former BanCal Tri-State Corporation assumed an 11.5 percent annual
rate of increase in the per capita cost of postretirement medical benefits for
the indemnity plan. For future periods, the assumed rate for the indemnity plan
gradually decreased from 11.5 percent to 5.5 percent in 2003 and remained level
thereafter.
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.
The healthcare cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would
F-24
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
increase the accumulated postretirement benefit obligation as of December 31,
1997 by $11 million and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year then ended
by $1 million.
The discount rate used in determining the actuarial present value of the
accumulated postretirement benefit obligation was 7.50% as of December 31, 1995
and 1996 and 7.00% as of December 31, 1997. The estimated rate of return on plan
assets was 8.00% as of December 31, 1995, 1996 and 1997.
NOTE 7 -- OTHER EXPENSES
The detail of other expenses is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
- ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Merchant transaction processing fees......................................... $ 31,288 $ 37,091 $ 42,274
Communications............................................................... 35,806 40,133 42,372
Professional services........................................................ 26,197 24,342 28,075
Advertising and public relations............................................. 20,911 28,788 28,664
Data processing.............................................................. 18,557 22,140 25,973
Printing and office supplies................................................. 22,626 27,085 24,098
Regulatory assessments....................................................... 23,431 4,048 5,778
Other........................................................................ 117,908 114,400 129,251
---------- ---------- ----------
Total other expenses..................................................... $ 296,724 $ 298,027 $ 326,485
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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,
respectively, as summarized in the following table.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
(DOLLARS IN THOUSANDS) 1996 1997
- ------------------------------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
Balance, accrued merger and integration expense, beginning of year......................... $ -- $ 54,344
Provision for merger and integration costs................................................. 117,464 6,037
Utilization:
Cash..................................................................................... 40,155 35,809
Noncash.................................................................................. 22,965 1,642
---------- ---------
Total utilization...................................................................... 63,120 37,451
---------- ---------
Balance, accrued merger and integration expense, end of year............................... $ 54,344 $ 22,930
---------- ---------
---------- ---------
</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
F-25
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 7 -- OTHER EXPENSES (CONTINUED)
to redundant banking facilities, and $32 million in professional services and
other expense. At December 31, 1997, the liability balance included amounts
primarily for severance payments that are being paid on a periodic basis and for
operating lease payments related to redundant banking facilities which are
continuing over the expected term of the leases.
NOTE 8 -- INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
- ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Taxes currently payable:
Federal.................................................................... $ 96,732 $ 86,159 $ 168,375
State...................................................................... 42,356 23,180 8,441
Foreign.................................................................... 3,430 2,895 2,092
---------- ---------- ----------
Total currently payable.................................................. 142,518 112,234 178,908
---------- ---------- ----------
Taxes deferred:
Federal.................................................................... 34,839 47,575 49,437
State...................................................................... 16,005 3,455 10,499
Foreign.................................................................... (3) (372) (122)
---------- ---------- ----------
Total deferred........................................................... 50,841 50,658 59,814
---------- ---------- ----------
Total income tax expense................................................. $ 193,359 $ 162,892 $ 238,722
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-26
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 8 -- INCOME TAXES (CONTINUED)
The components of the net deferred tax balances of the Company were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 1996 1997
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses............................................................. $ 195,128 $ 169,769
Accrued income & expense................................................................ 31,964 21,987
Accrued merger expense.................................................................. 22,051 15,641
Deferred state taxes.................................................................... 13,572 21,063
Other................................................................................... 2,567 7,585
---------- ----------
Total deferred tax assets............................................................. 265,282 236,045
---------- ----------
Deferred tax liabilities:
Leasing................................................................................. 276,922 297,891
Depreciation............................................................................ 13,809 17,192
Unrealized gain on securities available for sale........................................ 9,711 13,536
---------- ----------
Total deferred tax liabilities........................................................ 300,442 328,619
---------- ----------
Net deferred tax liability.......................................................... $ 35,160 $ 92,574
---------- ----------
---------- ----------
</TABLE>
The following table is an analysis of the effective tax rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Federal income tax rate................................................................ 35% 35% 35%
Net tax effects of:
State income taxes, net of federal income tax benefit................................ 5 4 2
Tax-exempt interest income........................................................... (1) (1) (1)
Amortization of intangibles.......................................................... 1 1 1
Other................................................................................ (2) 1 --
-- -- --
Effective tax rate................................................................. 38% 40% 37%
-- -- --
-- -- --
</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 $52.4 million, net of federal tax, was recorded. Of the $52.4
million reduction, $29 million related to the reversal of previously accrued
1997 state income tax liabilities and $23.4 million related to a lower tax
F-27
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 8 -- INCOME TAXES (CONTINUED)
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 BTM 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 or
results of operations.
NOTE 9 -- BORROWED FUNDS
The following is a summary of the major categories of borrowed funds.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
(DOLLARS IN THOUSANDS) 1996 1997
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Federal funds purchased and securities sold under repurchase agreements with weighted
average interest rates of 5.09% and 5.38% at December 31, 1996 and 1997,
respectively........................................................................ $ 1,322,654 $ 1,335,884
Commercial paper with weighted average interest rates of 5.34% and 5.64% at December
31, 1996 and 1997, respectively..................................................... 1,495,463 966,575
Other borrowed funds with weighted average interest rates of 5.66% and 6.23% at
December 31, 1996 and 1997, respectively............................................ 749,422 476,010
------------ ------------
Total borrowed funds.............................................................. $ 3,567,539 $ 2,778,469
------------ ------------
------------ ------------
Federal funds purchased and securities sold under repurchase agreements:
Maximum outstanding at any month end................................................ $ 1,322,654 $ 1,575,930
Average balance during the year..................................................... 933,433 1,097,707
Weighted average interest rate during the year...................................... 5.05% 5.33%
Commercial paper:
Maximum outstanding at any month end................................................ $ 1,854,576 $ 1,876,135
Average balance during the year..................................................... 1,620,087 1,637,070
Weighted average interest rate during the year...................................... 5.40% 5.49%
*Other borrowed funds:
Maximum outstanding at any month end................................................ $ 1,697,236 $ 851,694
Average balance during the year..................................................... 1,119,051 635,900
Weighted average interest rate during the year...................................... 5.59% 5.42%
</TABLE>
F-28
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
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,
----------------------
(DOLLARS IN THOUSANDS) 1996 1997
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <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 (BTM at
December 31, 1997)...................................................................... $ -- $ 200,000
Floating rate notes due July 2000. These notes bear interest at 0.30% above 3-month
LIBOR................................................................................... 98,000 98,000
Floating rate notes due July 1997 and July 1998. These notes bear interest at 0.25% above
3-month LIBOR and are payable to BTM.................................................... 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
---------- ----------
---------- ----------
</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, $219
million and $239 million, respectively, of the notes qualified as risk-based
capital.
Provisions of several of the notes restrict the use of the Company's
property as security for borrowings, and place limitations on leases,
indebtedness, distributions to shareholders, mergers, sales of certain assets,
transactions with affiliates and changes in majority stock ownership of the
Company.
The following table presents the maturities of subordinated capital notes.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997
- --------------------------------------------------------------------------- -----------------
<S> <C>
Years ending December 31,
1998..................................................................... $ 50,000
2000..................................................................... 98,000
Years after 2002......................................................... 200,000
--------
Total.................................................................. $ 348,000
--------
--------
</TABLE>
At December 31, 1996, the Company had outstanding 1,350,000 shares (or
5,400,000 depositary shares) of 8 3/8% Noncumulative Preferred Stock, Series A
(Preferred Stock) totaling $135 million. On September 3, 1997, the Company
redeemed all 1,350,000 outstanding shares of its Preferred Stock, reducing
shareholders'
F-29
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 10 -- SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK (CONTINUED)
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,
3,897 shares were considered new issuances during 1995, 1996 and 1997,
respectively. BTM discontinued its participation in the plan after the quarter
ended March 31, 1995 and did not participate in the plan as of December 31,
1997.
NOTE 12 -- MANAGEMENT STOCK PLAN
The Company has a management stock plan (the Stock Plan) which has 6,600,000
shares of the Company's common stock authorized to be awarded to key employees
and outside directors of the Company and its subsidiaries at the discretion of
the Executive Compensation and Benefits Committee of the Board of Directors (the
Committee). The combined number of shares that are granted under the Stock Plan
cannot exceed 6,600,000 shares of the Company's common stock. Committee members
and employees on rotational assignment from BTM are not eligible for stock
awards.
The Committee determines the term of each stock option grant, up to a
maximum of ten years from the date of grant. The exercise price of the options
issued under the Stock Plan shall not be less than the fair market value on the
date the option is granted. Unvested restricted stock issued under the Stock
Plan is shown as a reduction to retained earnings. The value of the restricted
shares at the date of grant is amortized to compensation expense over its
vesting period. All cancelled or forfeited options and restricted stock become
available for future grants.
In 1995, 1996 and 1997, 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-30
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
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>
The weighted-average fair value of options granted was $3.13 during 1995,
$6.00 during 1996, and $6.94 during 1997.
The following table summarizes information about stock options outstanding.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT DECEMBER 31, 1997 OPTIONS EXERCISABLE AT
------------------------------------------------ DECEMBER 31, 1997
WEIGHTED-AVERAGE ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------- ----------- ---------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$6.66 - 9.08 267,408 5.0 years $ 8.34 267,408 $ 8.34
11.25 - 12.83 456,114 6.2 11.76 348,867 11.92
18.29 251,256 7.7 18.29 83,832 18.29
22.13 422,400 9.1 22.13 12,000 22.13
----------- -----------
1,397,178 712,107
----------- -----------
----------- -----------
</TABLE>
In 1995, 1996 and 1997, the Company also granted 231,210; 133,440; and,
178,320 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-31
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
The following is a summary of restricted stock transactions under the Stock
Plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
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>
At December 31, 1995, 1996 and 1997, 1,342,449; 958,383; and, 3,365,586
shares, respectively, were available for future grants as either stock options
or restricted stock under the Stock Plan.
The Company follows the intrinsic value based method in accounting for its
employee stock-based compensation plan. Accordingly, no compensation cost has
been recognized for its stock option grants. Had compensation cost for the
Company's stock-based plan been determined based on the fair value at the grant
dates for awards under that plan consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and net
income per share would have decreased to the pro forma amounts indicated in the
following table. Options that were granted prior to January 1, 1995 with vesting
periods in 1995 and later are excluded from the pro forma results indicated for
1995 and 1996 in the following table.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1996 1997
- ------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income............................................... As reported $ 312,942 $ 249,458 $ 411,296
Pro forma 312,691 248,874 410,068
Net income applicable to common stock.................... As reported $ 301,637 $ 238,152 $ 403,696
Pro forma 301,386 237,568 402,468
Net income per common share -- basic..................... As reported $ 1.74 $ 1.37 $ 2.31
Pro forma 1.73 1.36 2.30
Net income per common share -- diluted................... As reported $ 1.73 $ 1.36 $ 2.30
Pro forma 1.73 1.36 2.30
</TABLE>
F-32
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
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:
risk-free interest rates of 7.1%, 6.3% and 6.6% in the years ended 1995, 1996
and 1997, respectively; expected volatility of 28%, 28% and 26% in the years
ended 1995, 1996 and 1997, respectively; expected lives of 7 years for the years
ended 1995 and 1996, respectively, and 6 years for the year ended 1997; and
expected dividend yields of 4.2%, 2.6% and 2.1% in the years ended 1995, 1996
and 1997.
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 shares in the year ended 1997. The
value of a performance share is equal to the market price of the Company's
common stock. All cancelled or forfeited performance shares become available for
future grants.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. All of the fair values presented
below have been made under this definition of fair value unless otherwise
disclosed.
It is management's belief that the fair values presented below are
reasonable based on the valuation techniques and data available to the Company
as of December 31, 1996 and 1997, as more fully described below. It should be
noted that the operations of the Company are managed on a going concern basis
and not a liquidation basis. As a result, the ultimate value realized for the
financial instruments presented could be substantially different when actually
recognized over time through the normal course of operations. Additionally, a
substantial portion of an institution's inherent value is its capitalization and
franchise value. Neither of these components have been given consideration in
the presentation of fair values which follow.
F-33
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The table below presents the carrying value and fair value of the specified
assets and liabilities held by the Company.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 1997
----------------------------- -----------------------------
<CAPTION>
(DOLLARS IN THOUSANDS) CARRYING VALUE FAIR VALUE CARRYING 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.......... 20,525,841 20,803,651 22,289,716 22,511,510
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
</TABLE>
The Company is also a party to financial instruments that are not reflected
on the balance sheet but represent obligations of the Company in the normal
course of business. For information regarding the fair value of off-balance
sheet financial instruments, see Note 14.
The following methods and assumptions were used to estimate fair value of
each class of financial instruments for which it is practicable to estimate that
value.
CASH AND CASH EQUIVALENTS: The book value of cash and cash equivalents is
considered a reasonable estimate of fair value.
TRADING ACCOUNT ASSETS: Trading account assets are short term in nature and
valued at market based on quoted market prices or dealer quotes. If a quoted
market price is not available, the recorded amounts are estimated using quoted
market prices for similar securities. Thus, carrying value is considered a
reasonable estimate of fair value for these financial instruments.
SECURITIES: The fair value of securities is based on quoted market prices
or dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. Available for sale
securities are carried at their aggregate fair value, while held to maturity
securities are carried at amortized cost.
LOANS: The fair value for performing fixed and non-reference rate loans was
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for
similar remaining maturities and where available, discount rates were based on
current market rates.
F-34
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of performing loans tied to the Company's reference rate with
normal credit risk is assumed to approximate their book value. The fair value
for these floating rate loans with increasing credit risk was estimated by
calculating their present value using a yield the Company would currently
require for loans with similar terms to borrowers with similar credit quality.
Loans which are on nonaccrual status were not included in the loan valuation
methods discussed previously. The fair value of these assets was estimated
assuming these loans were sold on a liquidation basis.
The fair value of performing mortgage loans was based on quoted market
prices for loans with similar credit and interest rate risk characteristics.
The fair value of performing credit card loans and credit lines is assumed
to approximate their book value. The fair value was estimated for credit card
loans and credit lines which were past due at December 31, 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.
SUBORDINATED CAPITAL NOTES: The fair value of fixed-rate subordinated
capital notes was estimated using discounted cash flows based on market rates
for A-rated bank borrowings. The book values for variable-rate subordinated
capital notes are assumed to approximate fair market value.
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Company is a party to certain derivative and other financial instruments
that are not reflected on the balance sheet but represent obligations or assets
of the Company in the normal course of business. These financial instruments are
used for trading activities of the Company, to meet the needs of customers and
to reduce the impact on the Company's operating results due to market
fluctuations in currency or interest rates.
These financial instruments involve, to varying degrees, elements of credit
and market risk which are not recognized on the balance sheet. Credit risk is
defined as the possibility that a loss may occur from the failure of another
party to perform in accordance with the terms of the contract which exceeds the
value of the existing collateral, if any. Market risk is the possibility that
future changes in market conditions may make the financial instrument less
valuable.
F-35
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
DERIVATIVE INSTRUMENTS
The fair value of the derivative financial instruments was calculated based
on quoted market prices where available or if quoted market prices were not
available, the Company used the estimated amount it would receive or pay to
offset or terminate the agreements 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,
the majority of the Company's derivative transactions for customers are hedged
with essentially offsetting contracts with other counterparties. The average
fair value of derivatives held or written for trading purposes during the year
is not significant. The notional amount of derivative instruments reflects the
extent of the Company's involvement in these instruments. For interest rate
swap, cap and floor agreements, notional amounts do not represent exposure to
credit or market risk. Notional amounts are not exchanged, but serve as a point
of reference for calculating payments.
F-36
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
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
(DOLLARS IN THOUSANDS) AMOUNTS RISK(1) FAIR VALUE AMOUNTS RISK(1)
- -------------------------------------------------------------------- --------- --------- ----------- ----------- ---------
<S> <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
Commitments to sell............................................... 530,923 18,958 14,759 709,512 40,671
Foreign exchange OTC options:
Options purchased................................................. -- -- -- 46,533 --
Options written................................................... -- -- -- 46,533 637
Currency swap agreements:
Commitments to pay................................................ 64,817 4,821 3,193 55,725 --
Commitments to receive............................................ 38,417 1,628 1,595 55,725 5,971
Interest rate contracts:
Caps purchased.................................................... 994,605 1,858 1,837 1,189,791 796
Floors purchased.................................................. 147,250 1,149 1,149 119,000 612
Caps written...................................................... 994,605 21 (1,838) 1,189,791 --
Floors written.................................................... 147,250 -- (1,149) 119,000 --
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
Pay variable/receive fixed........................................ 788,165 19,623 18,674 976,180 30,240
<CAPTION>
ESTIMATED
(DOLLARS IN THOUSANDS) FAIR VALUE
- -------------------------------------------------------------------- -----------
<S> <C>
HELD OR WRITTEN FOR TRADING PURPOSES AND CUSTOMER ACCOMMODATIONS
Foreign exchange forward contracts:
Commitments to purchase........................................... $ (34,304)
Commitments to sell............................................... 40,274
Foreign exchange OTC options:
Options purchased................................................. (634)
Options written................................................... 637
Currency swap agreements:
Commitments to pay................................................ (5,971)
Commitments to receive............................................ 5,971
Interest rate contracts:
Caps purchased.................................................... 796
Floors purchased.................................................. 612
Caps written...................................................... (796)
Floors written.................................................... (612)
Swap contracts:
Pay variable/receive variable..................................... --
Pay fixed/receive variable........................................ (29,579)
Pay variable/receive fixed........................................ 29,926
</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.
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.
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.
F-37
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1996 1997
------------------------------------------------------ ----------------------------
UNAMORTIZED UNAMORTIZED
NOTIONAL PREMIUM PAID CREDIT ESTIMATED NOTIONAL PREMIUM PAID
(DOLLARS IN THOUSANDS) AMOUNTS (RECEIVED) RISK(1) FAIR VALUE AMOUNTS (RECEIVED)
- ------------------------------------ ----------- --------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
HELD FOR ASSET AND LIABILITY
MANAGEMENT PURPOSES
Foreign exchange forward contracts:
Commitments to purchase........... $ 129,264 $ -- $ 1,628 $ (2,286) $ 341,298 $ --
Commitments to sell............... 4,142 -- 52 22 51,754 --
Currency swap agreements:
Commitments to pay................ -- -- -- -- 26,400 --
Interest rate contracts:
Caps purchased.................... 15,740 -- -- -- 15,420 --
Floors purchased.................. 2,050,000 6,309 9,750 9,750 3,550,000 11,730
Caps written...................... 250,000 (709) 509 509 250,000 (335)
Floors written.................... 500,000 (1,016) 391 391 1,850,000 (534)
Swap contracts:
Pay fixed/receive variable........ 114,086 -- 241 (851) -- --
Pay variable/receive fixed........ 847,000 -- 3,775 2,398 575,000 --
<CAPTION>
CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) RISK(1) FAIR VALUE
- ------------------------------------ ----------- -----------
<S> <C> <C>
HELD FOR ASSET AND LIABILITY
MANAGEMENT PURPOSES
Foreign exchange forward contracts:
Commitments to purchase........... $ 862 $ (5,055)
Commitments to sell............... 35 (822)
Currency swap agreements:
Commitments to pay................ 2,590 2,590
Interest rate contracts:
Caps purchased.................... -- --
Floors purchased.................. 4,040 4,040
Caps written...................... 273 273
Floors written.................... -- (1,309)
Swap contracts:
Pay fixed/receive variable........ -- --
Pay variable/receive fixed........ 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.
F-38
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
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
F-39
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
December 31, 1996 and 1997, fair value represents management's 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,
--------------------------------------------------
1996 1997
------------------------ ------------------------
CONTRACTUAL FAIR CONTRACTUAL FAIR
(DOLLARS IN THOUSANDS) AMOUNTS VALUE AMOUNTS VALUE
- -------------------------------------------------------------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Commitments to extend credit.................................. $ 12,500,677 $ 6,185 $ 15,111,062 $ 27,571
Standby letters of credit..................................... 2,610,123 2,808 2,289,878 5,776
Other letters of credit....................................... 336,101 -- 314,594 --
</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 and $1,268 million at December 31, 1996 and 1997, respectively. The
market value of the associated collateral was $1,195 million and $1,294 million
at December 31, 1996 and 1997, 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 and $339 million for the periods ended
December 31, 1996 and 1997, respectively.
As of December 31, 1996 and 1997, securities carried at $1.7 billion for
each of the periods, and loans of $1.8 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 BTM
and affiliates and to UnionBanCal Corporation and its non-bank subsidiaries and
requires that such loans be secured by certain types of collateral. At December
31, 1997, such extensions of credit were not material.
The payment of dividends by the Bank to UnionBanCal Corporation is subject
to the approval of the Office of the Comptroller of the Currency (OCC) if the
total of all dividends declared in any calendar year exceeds certain calculated
amounts. The payment of dividends is also limited by minimum capital
requirements imposed on national banks by the OCC. At December 31, 1997, the
Bank could have declared dividends aggregating $170 million without prior
regulatory approval.
NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies, including minimum
capital requirements. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
Consolidated Financial Statements.
F-40
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
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 December 31,
1997, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1996, and 1997, 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% greater than/equal to $2,111,223 greater than/equal to 8.0%
Tier 1 capital (to risk-weighted
assets).............................. 2,395,580 9.08 greater than/equal to 1,055,612 greater than/equal to 4.0
Tier 1 capital (to quarterly average
assets)(1)........................... 2,395,580 8.41 greater than/equal to 1,139,855 greater than/equal to 4.0
As of December 31, 1997:
Total capital (to risk-weighted
assets).............................. $3,188,173 11.05% greater than/equal to $2,308,988 greater than/equal to 8.0%
Tier 1 capital (to risk-weighted
assets).............................. 2,587,071 8.96 greater than/equal to 1,154,494 greater than/equal to 4.0
Tier 1 capital (to quarterly average
assets)(1)........................... 2,587,071 8.53 greater than/equal to 1,213,381 greater than/equal to 4.0
</TABLE>
- ------------------------
(1) Excludes certain intangible assets.
F-41
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
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% greater than/equal to $2,090,910 greater than/equal to 8.0%
Tier 1 capital
(to risk-weighted assets)........... 2,208,392 8.45 greater than/equal to 1,045,455 greater than/equal to 4.0
Tier 1 capital
(to quarterly average assets)(1).... 2,208,392 7.76 greater than/equal to 1,138,211 greater than/equal to 4.0
As of December 31, 1997:
Total capital
(to risk-weighted assets)........... $3,025,030 10.58% greater than/equal to $2,286,296 greater than/equal to 8.0%
Tier 1 capital
(to risk-weighted assets)........... 2,527,468 8.84 greater than/equal to 1,143,148 greater than/equal to 4.0
Tier 1 capital
(to quarterly average assets)(1).... 2,527,468 8.35 greater than/equal to 1,210,898 greater than/equal to 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)........... greater than/equal to $2,613,638 greater than/equal to 10.0%
Tier 1 capital
(to risk-weighted assets)........... greater than/equal to 1,568,183 greater than/equal to 6.0
Tier 1 capital
(to quarterly average assets)(1).... greater than/equal to 1,422,764 greater than/equal to 5.0
As of December 31, 1997:
Total capital
(to risk-weighted assets)........... greater than/equal to $2,857,870 greater than/equal to 10.0%
Tier 1 capital
(to risk-weighted assets)........... greater than/equal to 1,714,722 greater than/equal to 6.0
Tier 1 capital
(to quarterly average assets)(1).... greater than/equal to 1,513,622 greater than/equal to 5.0
</TABLE>
- ------------------------
(1) Excludes certain intangible assets.
NOTE 17 -- EARNINGS PER SHARE
Basic EPS is computed by dividing net income after preferred dividends by
the weighted average number of common shares outstanding during the period.
Diluted EPS is computed based on the weighted average number of common shares
outstanding adjusted for common stock equivalents, which include stock options.
The following table presents a reconciliation of basic and diluted EPS for 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:
F-42
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 17 -- EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1995 1996 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE ---------------------- ---------------------- ----------------------
DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Income.............................. $ 312,942 $ 312,942 $ 249,458 $ 249,458 $ 411,296 $ 411,296
Less:
Preferred stock dividends............. (11,305) (11,305) (11,306) (11,306) (7,600) (7,600)
---------- ---------- ---------- ---------- ---------- ----------
Income available to common
shareholders.......................... $ 301,637 $ 301,637 $ 238,152 $ 238,152 $ 403,696 $ 403,696
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Weighted average common shares
outstanding........................... 173,806 173,806 174,391 174,391 174,683 174,683
Additional shares due to:
Assumed conversion of dilutive stock
options.............................. -- 293 -- 393 -- 506
---------- ---------- ---------- ---------- ---------- ----------
Adjusted weighted average common shares
outstanding........................... 173,806 174,099 174,391 174,784 174,683 175,189
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Net income per share.................... $ 1.74 $ 1.73 $ 1.37 $ 1.36 $ 2.31 $ 2.30
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1997 1998
---------------------- ----------------------
(UNAUDITED) (UNAUDITED)
---------------------- ----------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED
- ----------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income....................................................... $ 318,851 $ 318,851 $ 352,365 $ 352,365
Less:
Preferred stock dividends...................................... (7,600) (7,600) -- --
---------- ---------- ---------- ----------
Income available to common shareholders.......................... $ 311,251 $ 311,251 $ 352,365 $ 352,365
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares outstanding....................... 174,615 174,615 175,091 175,091
Additional shares due to:
Assumed conversion of dilutive stock options................... -- 456 -- 638
---------- ---------- ---------- ----------
Adjusted weighted average common shares outstanding.............. 174,615 175,071 175,091 175,729
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share............................................. $ 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-43
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
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 1997 1998
- ----------------------------------------------------- ---------- ---------- ---------- ----------- ----------
(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.
F-44
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 20 -- TRANSACTIONS WITH AFFILIATES
The Company has had, and expects to have in the future, banking transactions
and other transactions in the ordinary course of business with BTM and with its
affiliates and associates. During the years ended December 31, 1995, 1996 and
1997, such transactions included, but were not limited to, origination,
participation, servicing and remarketing of loans and leases, purchase and sale
of acceptances and interest rate derivatives, foreign exchange transactions,
funds transfers, custodianships, electronic data processing, investment advice
and management, deposits and credit examination, and trust services. In the
opinion of management, such transactions were made at prevailing rates, terms
and conditions and do not involve more than the normal risk of collectibility or
present other unfavorable features. In addition, some compensation for services
rendered to the Company is paid to the expatriate officers from BTM, and
reimbursed by the Company to BTM under a services agreement.
NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
(DOLLARS IN THOUSANDS) 1996 1997
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks............................................................. $ 103,742 $ 66,872
Investment in and advances to subsidiaries.......................................... 2,503,706 2,879,898
Other assets........................................................................ 9,161 7,971
------------ ------------
Total assets...................................................................... $ 2,616,609 $ 2,954,741
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper.................................................................... $ -- $ --
Subordinated capital notes.......................................................... 100,000 250,000
Other liabilities................................................................... 21,676 25,442
------------ ------------
Total liabilities................................................................. 121,676 275,442
Shareholders' equity................................................................ 2,494,933 2,679,299
------------ ------------
Total liabilities and shareholders' equity........................................ $ 2,616,609 $ 2,954,741
------------ ------------
------------ ------------
</TABLE>
F-45
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
- ----------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Dividends from bank subsidiary............................................. $ 25,062 $ 270,662 $ 85,660
Dividends from nonbank subsidiaries........................................ 343 421 --
Interest income on advances to subsidiaries and deposits in bank........... 52,289 24,366 12,217
Other income............................................................... -- 959 1,040
---------- ---------- ----------
Total income............................................................. 77,694 296,408 98,917
EXPENSE:
Interest expense........................................................... 54,133 22,220 11,174
Other expense, net......................................................... (212) 1,072 1,583
---------- ---------- ----------
Total expense.......................................................... 53,921 23,292 12,757
---------- ---------- ----------
Income before income taxes and equity in undistributed net income of
subsidiaries............................................................... 23,773 273,116 86,160
Income tax expense (benefit)................................................. (694) 889 204
---------- ---------- ----------
Income before equity in undistributed net income of subsidiaries............. 24,467 272,227 85,956
Equity in undistributed net income (loss) of subsidiaries:
Bank subsidiary(1)......................................................... 285,053 (32,894) 314,739
Nonbank subsidiaries....................................................... 3,422 10,125 10,601
---------- ---------- ----------
NET INCOME................................................................... $ 312,942 $ 249,458 $ 411,296
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) In 1996 the amount represents dividends distributed by the Bank in excess of
its 1996 net income.
F-46
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
- ---------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 312,942 $ 249,458 $ 411,296
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)
Other, net.............................................................. 2,800 (3,772) 1,059
---------- ---------- ----------
Net cash provided by operating activities............................. 27,267 268,455 87,015
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to subsidiaries.................................................. 33,590 (12,779) (130,805)
Repayment of advances to subsidiaries..................................... 70,000 70,000 76,104
Sales and maturities of securities........................................ 11,650 322 --
---------- ---------- ----------
Net cash provided (used) by investing activities...................... 115,240 57,543 (54,701)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short term borrowings.......................... 366 (632,296) --
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)
Proceeds from issuance of subordinated capital notes...................... -- -- 200,000
Payments of cash dividends................................................ (62,044) (182,652) (93,303)
Redemption of preferred stock............................................. -- -- (135,000)
Other, net................................................................ 3,392 17,813 9,119
---------- ---------- ----------
Net cash used by financing activities................................. (128,286) (863,169) (69,184)
---------- ---------- ----------
Net increase (decrease) in cash and due from banks........................ 14,221 (537,171) (36,870)
Cash and due from banks at beginning of year.............................. 626,692 640,913 103,742
---------- ---------- ----------
Cash and due from banks at end of year................................ $ 640,913 $ 103,742 $ 66,872
---------- ---------- ----------
---------- ---------- ----------
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest.................................................................. $ 52,847 $ 25,785 $ 9,814
Income taxes.............................................................. (2,030) (198) 1,148
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Dividends declared but unpaid............................................. $ 12,788 $ 20,383 $ 24,528
</TABLE>
F-47
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
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>
F-48
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997,
AND CONDENSED NOTES FOR
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
NOTE 22 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
<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>
- ------------------------
(1) Dividends per share for 1996 and 1997 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.
F-49
<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 as of December 31, 1996 and 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements give retroactive effect to the
merger of BanCal Tri-State Corporation and Union Bank on April 1, 1996, which
has been accounted for as a pooling of interests as described in Note 1 to the
consolidated financial statements. We did not audit the consolidated statements
of income, changes in shareholders' equity, and cash flows of Union Bank and
subsidiaries for the year ended December 31, 1995, which statements reflect
total net interest income and net income of $832 million and $207 million,
respectively. These statements were audited by other auditors whose report has
been furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for Union Bank for 1995, is based solely upon the report of
such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of UnionBanCal Corporation and its
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
[SIG]
Deloitte & Touche LLP
San Francisco, California
January 30, 1998 (November 18, 1998 as to the exchange of
common shares referred to in Note 1, paragraphs 3 and 4, and
the adoption of SFAS No. 130, "Reporting Comprehensive Income",
referred to in Notes 1 and 18, and December 7, 1998 as to the stock split
referred to in Note 1, paragraph 5.)
F-50
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Union Bank:
We have audited the consolidated statement of income of Union Bank, a California
state chartered bank and a 71% owned subsidiary of The Bank of Tokyo, Ltd., and
subsidiaries ("the Bank") and the related consolidated statements of
shareholders' equity and cash flows for the year ended December 31, 1995 (not
presented herein). These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows for the year
ended December 31, 1995, of Union Bank and subsidiaries, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Francisco, California
January 24, 1996
F-51
