<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 19, 1999
REGISTRATION NO. 333-67579
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 5
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
UNIONBANCAL CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 94-1234979
(State or other (I.R.S. employer
jurisdiction of identification
incorporation or number)
organization)
</TABLE>
350 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104
415-765-2969
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
JOHN H. MCGUCKIN, JR.
EXECUTIVE VICE PRESIDENT
UNIONBANCAL CORPORATION
400 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104
415-765-2969
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C> <C>
GREGG A. NOEL JEFFREY SMALL DAVID K. LAKHDHIR
Skadden, Arps, Slate, Meagher & Flom LLP Davis Polk & Wardwell Paul, Weiss, Rifkind, Wharton & Garrison
300 South Grand Avenue, Suite 3400 450 Lexington Avenue 1285 Avenue of the Americas
Los Angeles, California 90071 New York, NY 10017 New York, NY 10019
(213) 687-5000 (212) 450-4000 (212) 373-3000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
---------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans,
please check the following box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
other than securities being offered only in connection with dividend or interest
reinvestment plans, please check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of shares of our common
stock to be offered in the United States and Canada (the "U.S. Offering") and
shares of our common stock to be offered in a concurrent offering outside the
United States and Canada (the "International Offering"). The complete form of
prospectus relating to the U.S. Offering (the "U.S. Prospectus") follows
immediately after this explanatory note. The form of prospectus relating to the
International Offering (the "International Prospectus") will be identical in all
respects to the U.S. Prospectus, except that the International Prospectus will
contain a different front cover page. The form of the U.S. Prospectus included
herein is followed by the front cover page of the International Prospectus. The
International Prospectus front cover page is labeled "Alternate Page for
International Prospectus."
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SHAREHOLDER MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND THE SELLING SHAREHOLDER
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE SUCH OFFER
OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED FEBRUARY 19, 1999
22,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------
THE BANK OF TOKYO-MITSUBISHI, LTD. IS OFFERING 22,000,000 SHARES OF COMMON STOCK
OF UNIONBANCAL CORPORATION. THE BANK OF TOKYO-MITSUBISHI, LTD. CURRENTLY
OWNS 81.5% OF OUR COMMON STOCK AND WILL OWN 68.5% AFTER
THE OFFERING.
-------------------
OUR COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"UNBC". ON FEBRUARY 18, 1999, THE LAST REPORTED SALE PRICE OF OUR COMMON STOCK
WAS $36 1/16 PER SHARE.
-------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
-----------------
PRICE $ A SHARE
-------------------
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<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS SHAREHOLDER
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER SHARE.......................................... $ $ $
TOTAL.............................................. $ $ $
</TABLE>
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THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE BANK OF TOKYO-MITSUBISHI, LTD. HAS GRANTED THE UNDERWRITERS THE RIGHT TO
PURCHASE UP TO AN ADDITIONAL 3,300,000 SHARES TO COVER OVER-ALLOTMENTS. MORGAN
STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON
, 1999.
-------------------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
J.P. MORGAN & CO.
SALOMON SMITH BARNEY
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 10
Forward-Looking Statements..................... 14
The Transactions............................... 15
Recent Developments............................ 16
Use of Proceeds................................ 19
Price Range of Common Stock and Dividend
Policy....................................... 19
Capitalization................................. 20
Selected Consolidated Financial and Operating
Data......................................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 24
<CAPTION>
PAGE
---------
<S> <C>
Business....................................... 75
Management..................................... 86
Selling Shareholder............................ 93
Description of Capital Stock................... 94
United States Federal Tax Consequences to
Non-United States Holders.................... 96
Underwriters................................... 98
Legal Matters.................................. 101
Experts........................................ 101
Where You Can Find More Information............ 102
Index to Consolidated Financial Statements..... F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY WITH THE MORE DETAILED INFORMATION
ABOUT US AND OUR FINANCIAL STATEMENTS, INCLUDING THE NOTES TO THOSE FINANCIAL
STATEMENTS, INCLUDED IN THIS PROSPECTUS AND IN THE DOCUMENTS INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE RESTATED ALL FINANCIAL INFORMATION IN THIS
PROSPECTUS TO REFLECT THE 3-FOR-1 COMMON STOCK SPLIT THAT OCCURRED IN DECEMBER
1998.
UNIONBANCAL CORPORATION
We are a California-based commercial bank holding company. Our principal
subsidiary is Union Bank of California, N.A., which:
- was formed through the combination of Union Bank and BanCal Tri-State
Corporation in 1996,
- is the third largest commercial bank in California, based on total assets
and total deposits in California,
- is one of the 30 largest banks in the United States,
- is one of the oldest banks on the West Coast, dating back to 1864,
- has customers located primarily in California, the nation's most populous
state, and
- had, at September 30, 1998, 244 full-service branches in California, 6
full-service branches in Oregon and Washington, 2 facilities in Texas and
New York and 18 offices abroad.
At September 30, 1998 we had:
- total assets of $31.4 billion,
- total deposits of $23.7 billion, and
- total shareholders' equity of $3.0 billion.
For the nine months ended September 30, 1998, we had:
- net income of $352.4 million and
- net income per diluted common share of $2.01; net income per diluted
common share is our net income per share if all outstanding stock options,
for which the average market price during the period exceeded the exercise
price, had been converted into common shares.
We are presently approximately 82% owned by The Bank of Tokyo-Mitsubishi, Ltd.
THE STRATEGIC REPOSITIONING
THE TRANSACTIONS.
- The Bank of Tokyo-Mitsubishi is offering to sell 22 million shares of our
common stock to the public.
- We are seeking to repurchase approximately $250 million in shares of our
common stock from The Bank of Tokyo-Mitsubishi.
- We are also seeking to repurchase 2.1 million shares of our common stock
from Meiji Life Insurance Company.
- We expect to repurchase the shares of our common stock from The Bank of
Tokyo-Mitsubishi and Meiji Life Insurance Company at the public offering
price on the cover page of this prospectus, less underwriting discounts
and commissions.
3
<PAGE>
- We intend to use the net proceeds of an offering of trust preferred
securities, which we completed on February 19, 1999, to finance both of
the repurchases.
- We anticipate closing the remaining transactions in the first quarter of
1999.
EFFECTS OF THE TRANSACTIONS.
These transactions are designed to:
- improve our return on average common equity and earnings per share and to
increase the number of shares available for trading by investors and
- raise proceeds for, and increase the amount of equity capital of, The Bank
of Tokyo-Mitsubishi.
If we had made the repurchases and had completed the offering of trust
preferred securities on January 1, 1998, and everything else had remained the
same, we would have:
- increased our return on average common equity from 16.87% to 18.36% at
September 30, 1998 and
- increased our net income per diluted share from $2.01 to $2.03 for the
nine months ended September 30, 1998.
These transactions will not result in a material change to our ratios of
capital to assets by which bank regulators monitor the adequacy of our capital
levels.
THE SELLING SHAREHOLDER--THE BANK OF TOKYO-MITSUBISHI, LTD.
The Bank of Tokyo-Mitsubishi:
- is Japan's largest bank based on total assets,
- has a domestic network of 350 branches, sub-branches and agencies,
- has an overseas network that includes more than 400 facilities, and
- is the majority shareholder of UnionBanCal Corporation, its largest
overseas subsidiary.
The Bank of Tokyo-Mitsubishi has stated that it intends to maintain its
majority stake in UnionBanCal Corporation after the closing of this offering and
the related transactions.
BANKING SERVICES
Our operations are divided into four primary segments:
COMMUNITY BANKING GROUP:
- provides a full line of checking and savings, investment, loan and
fee-based banking products,
- has the fifth largest branch network among depository institutions in
California, and
- had average assets of $10.3 billion and average deposits of $12.3 billion
for the nine months ended September 30, 1998.
4
<PAGE>
COMMERCIAL FINANCIAL SERVICES GROUP:
- provides commercial and project loans, real estate financing, commercial
financing based on accounts receivable, inventory, or other short-term
assets, lease financing, customized cash management services, selected
capital markets products and short-term financing of export/import
transactions, including letters of credit and
- had average assets of $12.0 billion and average deposits of $5.8 billion
for the nine months ended September 30, 1998.
TRUST & PRIVATE FINANCIAL SERVICES GROUP:
- provides investment management and administration services for a broad
range of individuals and institutions, including through HighMark Capital
Management, Inc. and its family of proprietary HighMark mutual funds and
- had over $90 billion in assets under administration as of September 30,
1998.
INTERNATIONAL BANKING GROUP:
- provides products and services to financial institutions worldwide,
particularly in Asia, to facilitate the financing of export/import
transactions and payments between the parties to those transactions and
- had average assets of $2.1 billion and average deposits of $864 million
for the nine months ended September 30, 1998.
UnionBanCal Corporation reduced cross-border outstandings to Japan, Taiwan,
Korea, Malaysia, Thailand, Vietnam, Singapore, Indonesia, the Philippines, China
and Hong Kong by $1.0 billion to $1.5 billion at September 30, 1998 compared to
$2.5 billion at December 31, 1997, largely related to the International Banking
Group.
OPERATING STRATEGY
Our operating strategy is to:
- capitalize on our strong position in core California market,
- strengthen our consumer banking franchise,
- focus our commercial banking efforts on specific industries and companies,
- diversify our revenue sources and expand our fee-based business,
- emphasize our quality customer service,
- maintain our high lending standards and our strong asset quality profile,
- identify strategic businesses and consider potential acquisitions or
divestitures,
- improve our operating efficiency,
- achieve competitive financial performance targets, and
- align our senior management compensation with shareholders' interests.
5
<PAGE>
RECENT DEVELOPMENTS -- OUR 1998 RESULTS
On January 20, 1999, we announced our financial results for 1998. The audit
of our 1998 financial statements is not yet complete. The following presents
important financial results for 1998:
- Net interest income, on a taxable-equivalent basis, of $1.3 billion,
compared to $1.2 billion in 1997. A taxable-equivalent basis means as
adjusted to treat non-taxable income and income on which we receive
beneficial tax treatment as if each were taxable at our effective tax
rate.
- Provision for credit losses of $45.0 million, compared to no provision in
1997.
- Noninterest income of $533.5 million, compared to $463.0 million in 1997.
- Noninterest expense of $1.1 billion, compared to $1.0 billion in 1997.
- Income before taxes, on a taxable-equivalent basis, of $676.0 million,
compared to $655.3 million in 1997.
- Net income of $466.5 million, compared to $411.3 million in 1997.
See "Recent Developments" on page 16 for a more detailed discussion of our
1998 financial results.
-------------------
Our principal executive offices are located at 350 California Street, San
Francisco, California, 94104, and our telephone number is (415) 765-2969.
6
<PAGE>
THE OFFERING
THE FOLLOWING SUMMARIZES THE BANK OF TOKYO-MITSUBISHI'S OFFERING OF OUR
COMMON STOCK. WE ARE PRESENTING THE INFORMATION AS IF THE UNDERWRITERS DID NOT
EXERCISE THE OVER-ALLOTMENT OPTION.
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<S> <C>
Common stock offered by The Bank
of Tokyo-Mitsubishi............. 22,000,000 shares
Over-allotment option............. 3,300,000 shares
Common stock offered in:
U.S. offering................... 17,600,000 shares
International offering.......... 4,400,000 shares
Total......................... 22,000,000 shares
Common stock to be repurchased in
connection with this offering... 9,261,580 shares, based on a repurchase price
for our common stock of $36 1/16, less
underwriting discounts and commissions of 3.2%.
Common stock to be outstanding
after this offering and the
repurchases..................... 166,010,656 shares, based on shares outstanding
as of January 29, 1999. This does not include
1,728,180 shares of our common stock that are
issuable upon exercise of stock options that we
have granted under our stock incentive plans, of
which options to purchase 909,385 shares are
currently outstanding and exercisable.
Use of proceeds................... We will not receive any of the net proceeds from
this offering.
Nasdaq National Market symbol..... UNBC
</TABLE>
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary financial and other data as of December 31, 1996 and 1997 and
September 30, 1998 and for the years ended December 31, 1995, 1996 and 1997 and
for the nine-month period ended September 30, 1998 are calculated from our
audited consolidated financial statements included in this prospectus. The
summary financial and other data as of December 31, 1995 are calculated from our
audited consolidated financial statements that are not included in this
prospectus. The summary financial and other data as of September 30, 1997 and
for the nine-month period ended September 30, 1997 are calculated from our
unaudited consolidated financial statements included in this prospectus, which,
in the opinion of our management, include all adjustments necessary for a fair
presentation of our financial position at such date and the results of
operations for such interim periods. The results for the nine-month period ended
September 30, 1998 are not necessarily indicative of the results to be expected
of the full fiscal year.
You should read the following data with the more detailed information
contained in "Selected Consolidated Financial and Operating Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the notes to the consolidated
financial statements, each included in this prospectus.
You should read the following information with the data in the table on the
next page:
- We have presented net interest income and income before income taxes on a
taxable-equivalent basis using the federal statutory tax rate of 35
percent.
- We have annualized return on average assets, return on average common
equity, net interest margin and net loans charged off to average total
loans for the nine-month periods.
- Noninterest expense includes merger and integration expense, which was
$117 million for 1996, $6 million for 1997 and $6 million for the nine
months ended September 30, 1997.
- The efficiency ratio is noninterest expense not including foreclosed asset
expense, or income, as a percentage of the sum of net interest income and
noninterest income.
- The Tier 1 risk-based capital ratio is computed by dividing Tier 1
capital, which is total shareholders' equity less net unrealized gains and
losses on securities available for sale and intangible assets, by risk
weighted period-end assets. Risk weighted period-end assets is the balance
at risk less the portion of the allowance for credit losses which exceeds
1.25% of the balance at risk. The balance at risk is calculated by
applying risk weight percentages per regulatory guidelines to total assets
and off-balance sheet items.
- The total risk-based capital ratio is total capital, which includes Tier 1
capital, subordinated debt, and 1.25% of the balance at risk, divided by
risk weighted period-end assets.
8
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net interest income................................ $ 1,153 $ 1,175 $ 1,237 $ 917 $ 983
Provision for credit losses........................ 53 40 -- -- 45
Noninterest income................................. 395 419 463 343 400
Noninterest expense................................ 978 1,135 1,045 762 836
---------- ---------- ---------- ---------- ----------
Income before income taxes......................... 517 419 655 498 502
Taxable-equivalent adjustment...................... 11 7 5 4 4
Income tax expense................................. 193 163 239 175 146
---------- ---------- ---------- ---------- ----------
Net income......................................... $ 313 $ 249 $ 411 $ 319 $ 352
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK................ $ 302 $ 238 $ 404 $ 311 $ 352
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER COMMON SHARE:
Net income -- basic................................ $ 1.74 $ 1.37 $ 2.31 $ 1.78 $ 2.01
Net income -- diluted.............................. 1.73 1.36 2.30 1.78 2.01
Common shares outstanding (end of period, in
thousands)........................................ 174,180 174,458 174,918 174,848 175,208
BALANCE SHEET DATA (END OF PERIOD):
Total assets....................................... $ 27,547 $ 29,234 $ 30,585 $ 30,982 $ 31,407
Total loans........................................ 20,432 21,050 22,741 22,298 23,498
Nonperforming assets............................... 247 157 130 133 81
Total deposits..................................... 19,655 21,533 23,296 22,974 23,663
Common equity...................................... 2,349 2,360 2,679 2,615 2,985
OTHER DATA:
Return on average assets........................... 1.22% 0.89% 1.39% 1.45% 1.56%
Return on average common equity.................... 13.73 10.24 16.05 16.85 16.87
Efficiency ratio................................... 63.39 71.02 61.53 60.55 60.51
Net interest margin................................ 5.05 4.75 4.70 4.70 4.86
Tier 1 risk-based capital ratio.................... 9.35 9.08 8.96 8.92 9.53
Total risk-based capital ratio..................... 11.70 11.17 11.05 11.02 11.51
Net loans charged off to average total loans....... 0.32 0.34 0.33 0.28 0.12
Nonperforming assets to total loans and foreclosed
assets............................................ 1.21 0.74 0.57 0.60 0.35
</TABLE>
9
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AS WELL AS THE OTHER
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS BEFORE
PURCHASING THE COMMON STOCK.
POOR ECONOMIC CONDITIONS IN CALIFORNIA MAY CAUSE US TO INCUR LOSSES
A substantial majority of our assets and deposits are generated in
California. As a result, poor economic conditions in California may cause us to
incur losses associated with higher default rates and decreased collateral
values in our loan portfolio. In the early 1990s, the California economy
experienced an economic recession that resulted in increases in the level of
delinquencies and losses for us and many of the state's financial institutions.
If California were to experience another recession, we expect that our level of
problem assets would increase accordingly. The current economic crisis in Asia
and the unstable economic conditions in Latin America are expected to continue
to negatively impact the economic conditions in California, which could
adversely affect our business.
POOR ECONOMIC CONDITIONS AFFECTING PARTICULAR INDUSTRIES COULD HAVE AN ADVERSE
EFFECT ON OUR CUSTOMERS AND THEIR ABILITY TO MAKE PAYMENTS TO US
We are also affected by certain industry-specific economic factors. For
example, a portion of our total loan portfolio is related to real estate
obligations, and a portion of our recent growth has been fueled by the general
real estate recovery in California. Accordingly, a downturn in the real estate
industry in California could have an adverse effect on our operations.
Similarly, a portion of our total loan portfolio is to borrowers in the
agricultural industry. Last year's weather effects of "El Nino," combined with
low commodity prices, may adversely affect the agricultural industry and,
consequently, may impact our business negatively.
WE MAY NOT ATTAIN OUR LONG-TERM FINANCIAL PERFORMANCE GOALS DUE TO ADVERSE
FACTORS
In connection with our strategic repositioning, we have developed long-term
financial performance goals, which we expect to result from the successful
implementation of our operating strategies. We cannot assure you that we will be
successful in achieving these long-term goals or that our operating strategies
will be successful. Achieving success in these areas is dependent upon a number
of factors, many of which are beyond our direct control. Factors that may
adversely affect our ability to attain our long-term financial performance goals
include:
- deterioration of our asset quality;
- our inability to reduce non-interest expenses;
- our inability to increase non-interest income;
- our inability to decrease reliance on asset revenues;
- regulatory and other impediments associated with making acquisitions;
- deterioration in general economic conditions, especially in our core
markets;
- decreases in net interest rate margins;
- increases in competition;
- adverse regulatory developments;
- unexpected increased costs related to any potential acquisitions;
- unexpected increased costs associated with implementation of the
efficiency improvement project; and
- unavailability of stock to repurchase at acceptable prices.
10
<PAGE>
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS
Significant increases in market interest rates, or the perception that an
increase may occur, could adversely affect both our ability to originate new
loans and our ability to grow. Conversely, a decrease in interest rates could
result in an acceleration in the prepayment of loans. In addition, changes in
market interest rates, or changes in the relationships between short-term and
long-term market interest rates, or changes in the relationships between
different interest rate indices, could affect the interest rates charged on
interest-earning assets differently than the interest rates paid on
interest-bearing liabilities. This difference could result in an increase in
interest expense relative to interest income. An increase in market interest
rates also could adversely affect the ability of our floating-rate borrowers to
meet their higher payment obligations. If this occurred, it could cause an
increase in non-performing assets and net charge-offs, which could adversely
affect our business.
FAILURE TO COMPLETE ANY OF THE TRANSACTIONS COULD RESULT IN CANCELLATION OF THIS
OFFERING AND FEWER BENEFITS TO US
Although UnionBanCal Corporation and The Bank of Tokyo-Mitsubishi intend to
complete this offering and the repurchases during the first quarter of 1999,
these transactions may not occur. This offering and the repurchases are
dependent upon each other. Accordingly, if either of the repurchases does not
occur, then the parties to this offering are not required to complete this
offering. Even if the parties to this offering decided to proceed with the
offering without one or both of the repurchases, we would not recognize the
anticipated benefits of the transactions as a whole.
THE BANK OF TOKYO-MITSUBISHI, LTD. ELECTS ALL OF OUR DIRECTORS AND CONTROLS
SHAREHOLDER VOTES;
YOUR INTERESTS MAY NOT BE THE SAME AS THE BANK OF TOKYO-MITSUBISHI'S INTERESTS
Upon completion of this offering and the repurchases, The Bank of
Tokyo-Mitsubishi will continue to own a majority of the outstanding shares of
our common stock. The Bank of Tokyo-Mitsubishi will continue to be able to elect
all of our directors and effectively to control the vote on all matters,
including determinations such as:
- approval of mergers or other business combinations;
- sales of all or substantially all of our assets;
- any matters submitted to a vote of our shareholders;
- issuance of any additional common stock or other equity securities;
- incurrence of debt other than in the ordinary course of business;
- the selection and tenure of our Chief Executive Officer;
- payment of dividends on common stock or other equity securities; and
- matters that might be favorable to The Bank of Tokyo-Mitsubishi.
The Bank of Tokyo-Mitsubishi's ability to prevent an unsolicited bid for
UnionBanCal Corporation or any other change in control could have an adverse
effect on the market price for our common stock. A majority of UnionBanCal
Corporation's directors are not officers or employees of UnionBanCal Corporation
or any of its affiliates, including The Bank of Tokyo-Mitsubishi. However,
because of The Bank of Tokyo-Mitsubishi's control over the election of our
directors, it could change the composition of our Board of Directors so that it
would not have a majority of outside directors.
11
<PAGE>
A DETERIORATION IN THE BANK OF TOKYO-MITSUBISHI, LTD.'S FINANCIAL CONDITION
COULD RESULT IN AN INCREASE IN OUR BORROWING COSTS AND COULD OTHERWISE
ADVERSELY AFFECT OUR OPERATIONS
Although we fund our operations independently of The Bank of
Tokyo-Mitsubishi and believe our business is not necessarily closely related to
its business or outlook, its credit ratings may affect our credit ratings. The
Bank of Tokyo-Mitsubishi's credit ratings were downgraded in October 1998 by
Standard and Poor's Corporation, in January 1999 by Moody's Investors Service,
Inc. and in February 1999 by Fitch IBCA, Inc. Any future downgrading of its
credit rating could adversely affect our credit ratings. Therefore, as long as
The Bank of Tokyo-Mitsubishi maintains a majority interest in UnionBanCal
Corporation, a deterioration in The Bank of Tokyo-Mitsubishi's financial
condition could result in an increase in our borrowing costs and could impair
our access to the public and private capital markets. The Bank of
Tokyo-Mitsubishi is also governed by regulatory oversight and review. Our
business operations and expansion plans could be negatively affected by
regulatory concerns related to the Japanese financial system and The Bank of
Tokyo-Mitsubishi.
POTENTIAL CONFLICTS OF INTEREST WITH THE BANK OF TOKYO-MITSUBISHI, LTD. COULD
LIMIT OUR ABILITY TO APPROVE SPECIFIED CREDITS AND CATEGORIES OF CUSTOMERS AND
COULD OTHERWISE ADVERSELY AFFECT OUR OPERATIONS
As part of The Bank of Tokyo-Mitsubishi's normal risk management processes,
it manages its global credit risks and concentrations on an aggregate basis,
including UnionBanCal Corporation. Therefore, at some levels, our ability to
approve specified credits and categories of customers is dependent upon
concurrence by The Bank of Tokyo-Mitsubishi. We may wish to extend credit to the
same customer as The Bank of Tokyo-Mitsubishi. Our ability to do so may be
limited for various reasons, including The Bank of Tokyo-Mitsubishi's aggregate
credit risk and marketing policies.
Our directors' and officers' ownership interests in The Bank of
Tokyo-Mitsubishi's common stock or service as a director or officer or other
employee of both UnionBanCal Corporation and The Bank of Tokyo-Mitsubishi could
create or appear to create potential conflicts of interest, especially since
both of us compete in the United States banking industry.
SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD HAVE A NEGATIVE
EFFECT ON OUR BUSINESS
Banking is a highly competitive business. We compete actively for loan,
deposit, and other financial services business in California, as well as
nationally and internationally. Our competitors include a large number of state
and national banks, thrift institutions and major foreign-affiliated or foreign
banks, as well as many financial and nonfinancial firms that offer services
similar to those offered by us. Some of our competitors are community banks that
have strong local market positions. Other competitors include large financial
institutions, such as Bank of America, California Federal, Washington Mutual,
and Wells Fargo, that have substantial capital, technology and marketing
resources. Such large financial institutions may have greater access to capital
at a lower cost than we do, which may adversely affect our ability to compete
effectively.
In addition, there have been a number of recent mergers involving financial
institutions located in California. Some of the merged banks, such as Wells
Fargo after its merger with Norwest, employ a strong community-based banking
model of doing business that may increase competition with our distinctive
combination of traditional community bank service coupled with a large branch
network.
STATUTORY RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS FROM OUR
SUBSIDIARIES AND OUR SUBSIDIARIES' OBLIGATIONS TO PAY CREDITORS COULD LIMIT
AMOUNTS OUR SUBSIDIARIES MAY PAY TO US
A substantial portion of our cash flow typically comes from dividends that
our bank and nonbank subsidiaries pay to us. Various statutory provisions
restrict the amount of dividends our subsidiaries can pay
12
<PAGE>
to us without regulatory approval. In addition, if any of our subsidiaries
liquidates, that subsidiary's creditors will be entitled to receive
distributions from the assets of that subsidiary to satisfy their claims against
it before we, as a holder of an equity interest in the subsidiary, will be
entitled to receive any of the assets of the subsidiary. If, however, we are a
creditor of the subsidiary with recognized claims against it, we would be in the
same position as other creditors.
ADVERSE EFFECTS OF BANKING REGULATIONS OR CHANGES IN BANKING REGULATIONS COULD
ADVERSELY AFFECT OUR BUSINESS
We are governed by significant federal and state regulation and supervision,
which is primarily for the benefit and protection of our customers and not for
the benefit of our investors. In the past, our business has been materially
affected by these regulations. This trend is likely to continue in the future.
Laws, regulations or policies currently affecting us and our subsidiaries may
change at any time. Regulatory authorities may also change their interpretation
of these statutes and regulations. Therefore, our business may be adversely
affected by any future changes in laws, regulations, policies or
interpretations.
Additionally, our international activities may be regulated by the laws and
regulations of the jurisdiction where business is being conducted. International
laws, regulations and policies affecting us and our subsidiaries may change at
any time and affect our business opportunities and competitiveness in these
jurisdictions. Due to The Bank of Tokyo-Mitsubishi's controlling ownership of
UnionBanCal Corporation, laws, regulations and policies adopted or enforced by
the Government of Japan may adversely affect our activities and investments and
those of our subsidiaries in the future.
Under a long-standing policy of the Board of Governors of the Federal
Reserve System, a bank holding company is expected to act as a source of
financial strength for its subsidiary banks. As a result of that policy, we may
be required to commit financial and other resources to our subsidiary bank in
circumstances where we might not otherwise do so.
THE YEAR 2000 PROBLEM COULD DISRUPT OUR BUSINESS
The year 2000 problem results from an inability of computer systems to
accurately recognize dates on and after the year 2000. The year 2000 problem is
a broad business issue that extends beyond computer failures to possible
failures of entire infrastructures, such as telecommunications and data
networks, building facilities and security systems and systems of other
institutions, including governmental agencies, to settle transactions.
Many of our critical operations are not presently ready to operate normally
in the year 2000 and beyond, although preparations are underway to correct this.
We are preparing for the century change with an enterprise-wide year 2000
program. As part of the program, we have identified all of the major application
and processing systems and have sought external and internal resources to
replace and test the systems. We are testing purchased software, internally
developed systems and systems supported by external parties as part of the
program. We are evaluating customers and vendors that have significant
relationships with us to determine whether they are adequately preparing for the
year 2000. In addition, we are developing contingency plans to reduce the impact
of some potential events that may occur. However, we cannot guarantee that the
systems of vendors or customers with whom we do business will be year 2000
compliant on a timely basis, or that contingency plans will shield operations
from failures that may occur.
The year 2000 problem poses the following principal risks to our business:
- disruption of our business due to our failure to achieve year 2000
readiness;
- disruption of our business due to failure of third parties to achieve year
2000 readiness; and
- disruption in our funding and repayment operations due to failure of fund
providers and obligors to achieve year 2000 readiness.
13
<PAGE>
We estimate that the total cost of the year 2000 project will be
approximately $50 million. We are funding the cost of the year 2000 project by
normal operating cash flow. We are staffing the year 2000 project with external
people as well as internal staff re-deployed from less time-sensitive
assignments. Our estimated total cost could change further as analysis
continues. Because of the range of possible issues and the large number of
variables involved, however, we cannot definitively quantify the potential
costs. For example, our remediation efforts or the efforts of third parties may
be unsuccessful. Any failure of such remediation efforts could result in a loss
of business, damage to our reputation or legal liability. Consequently, such
failures could have a material adverse effect on our business.
POSSIBLE FUTURE SALES OF SHARES OF OUR COMMON STOCK BY THE BANK OF
TOKYO-MITSUBISHI, LTD. COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO
DECREASE OR COULD ADVERSELY AFFECT OUR CREDIT RATINGS
Although The Bank of Tokyo-Mitsubishi has announced its intention to
maintain its majority ownership in UnionBanCal Corporation, it may sell shares
of our common stock in compliance with the federal securities laws after the
completion of this offering and the repurchase of our common stock from them.
The federal securities laws and the restrictions discussed below will be the
only restrictions on The Bank of Tokyo-Mitsubishi's ability to sell. They have
agreed not to sell any shares of our common stock, except for the shares they
are selling to us in the repurchase, for 180 days after the date of this
prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated. By virtue of its current control of UnionBanCal Corporation, The
Bank of Tokyo-Mitsubishi could sell large amounts of its shares of our common
stock by causing us to file a registration statement that would allow them to
sell shares more easily. In addition, The Bank of Tokyo-Mitsubishi could sell
its shares of our common stock without registration under Rule 144 of the
Securities Act. Although we can make no prediction as to the effect, if any,
that such sales would have on the market price of our common stock, sales of
substantial amounts of our common stock, or the perception that such sales could
occur, could adversely affect market prices or could adversely affect our credit
ratings. If The Bank of Tokyo-Mitsubishi sells or transfers its shares of our
common stock as a block, another person or entity could become the controlling
shareholder of UnionBanCal Corporation.
FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference includes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The
discussions on page 85 regarding our intention to attain new financial
performance targets and to improve our operating efficiency are forward-looking
statements. In addition, some of the forward-looking statements can be
identified by the use of forward-looking words such as "believes," "expects,"
"may," "will," "should," "seeks," "approximately," "intends," "plans,"
"estimates," or "anticipates" or the negative of those words or other comparable
terminology. Forward-looking statements involve inherent risks and
uncertainties. A number of important factors could cause actual results to
differ materially from those in the forward-looking statements. Some factors
include fluctuations in interest rates, inflation, government regulations, and
economic conditions and competition in the geographic and business areas in
which we conduct our operations. For a discussion of factors that could cause
actual results to differ, please see the discussion under "Risk Factors"
contained in this prospectus and in other information contained in our publicly
available SEC filings.
14
<PAGE>
THE TRANSACTIONS
The Bank of Tokyo-Mitsubishi is offering to sell 22 million shares of our
common stock to the public. In addition, we are seeking to repurchase $250
million in shares of our common stock from The Bank of Tokyo-Mitsubishi and 2.1
million shares from Meiji Life Insurance Company at the same time as this
offering. We expect to repurchase the shares at the public offering price set
forth on the cover page of this prospectus, less the underwriting discounts and
commissions. We intend to use the net proceeds of an offering of trust preferred
securities, which we completed on February 19, 1999, to finance both of the
repurchases. We anticipate closing the remaining transactions in the first
quarter of 1999.
These transactions are designed to:
- improve our return on average common equity and earnings per share and
to increase the number of shares available for trading by investors.
- raise proceeds for, and increase the amount of equity capital of, The
Bank of Tokyo-Mitsubishi.
If we had made the repurchases and had completed the offering of trust
preferred securities on January 1, 1998, and everything else had remained the
same, we would have:
- increased our return on average common equity from 16.87% to 18.29% at
September 30, 1998; and
- increased our net income per diluted common share from $2.01 to $2.03
for the nine months ended September 30, 1998; net income per diluted
common share is our net income per share if all outstanding stock
options, for which the average market price during the period exceeded
the exercise price, had been converted into common shares.
We believe these transactions will provide us with additional benefits. They
should increase the level of market research coverage we receive from equity
analysts and should make it easier for us to use shares of our common stock to
pay for acquisitions.
These transactions will not result in a material change to our ratios of
capital to assets by which bank regulators monitor the adequacy of our capital
levels.
15
<PAGE>
RECENT DEVELOPMENTS
On January 20, 1999, we announced our financial results for 1998. The audit
of our 1998 financial statements is not yet complete. The following table
presents important financial results for 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998
------------- -------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
RESULTS OF OPERATIONS:
Net interest income, on a taxable-equivalent basis............................ $ 1,237,010 $ 1,322,655
Provision for credit losses................................................... -- 45,000
Noninterest income............................................................ 463,001 533,531
Noninterest expense........................................................... 1,044,665 1,135,218
Income before taxes, on a taxable-equivalent basis............................ 655,346 675,968
Net income.................................................................... 411,296 466,461
BALANCE SHEET DATA (END OF PERIOD):
Total assets.................................................................. $ 30,585,265 $ 32,276,316
Total loans................................................................... 22,741,408 24,296,111
Total deposits................................................................ 23,296,374 24,507,879
Common equity................................................................. 2,679,299 3,058,244
</TABLE>
- - Net income was $466.5 million in 1998, or $2.65 per diluted common share. In
1997, net income was $411.3 million, and net income applicable to common stock
was $403.7 million, or $2.30 per diluted common share.
- Excluding a tax benefit of $60.2 million related to a reduction in
California state franchise taxes, which arises from our filing a worldwide
unitary tax return with The Bank of Tokyo-Mitsubishi, net income for 1998
was $406.3 million, or $2.31 per diluted common share.
- Excluding an after-tax refund from the California Franchise Tax Board
received in the third quarter of 1997, net income applicable to common
stock in 1997 was $379.0 million, or $2.16 per diluted common share.
- - For 1998, return on average assets was 1.53 percent and return on average
common equity was 16.39 percent compared to 1.39 percent for return on average
assets and 16.05 percent for return on average common equity for 1997.
- - Net interest income, on a taxable-equivalent basis, increased 6.9 percent to
$1.3 billion in 1998, primarily due to a $1.2 billion, or 4.5 percent,
increase in average earning assets, resulting primarily from a $1.4 billion,
or 6.2 percent, increase in average loans. A taxable-equivalent basis means as
adjusted to treat non-taxable income and income on which we receive beneficial
tax treatment as if each was taxable at our effective tax rate.
- - Net interest margin in 1998 was 4.81 percent, up from 4.70 percent in 1997.
The increase in net interest margin was primarily due to a $1.1 billion, or
14.7 percent, increase in average noninterest bearing deposits, which funded a
significant portion of the growth in average loans.
- - Noninterest income in 1998 was $533.5 million, up $70.5 million, or 15.2
percent, from 1997.
- Service charges on deposit accounts grew $24.2 million, or 21.1 percent,
reflecting strong growth in deposit balances and an expansion of products
and services.
16
<PAGE>
- Trust and investment management fees increased $13.7 million, or 12.7
percent, on strong growth in trust accounts and assets under management.
- International fees and commissions increased $5.9 million, or 8.9 percent.
- Other noninterest income increased $26.7 million in 1998, primarily due to
a $17.1 million gain from the sale of the credit card portfolio in second
quarter 1998.
- - Noninterest expense was $1.1 billion in 1998, up $90.6 million, or 8.7
percent, from 1997. Personnel-related expenses increased $45.9 million, or 8.0
percent, primarily due to higher performance-based incentive compensation and
regular merit increases. Other noninterest expense increased $40.8 million, or
12.3 percent, comprised primarily of:
- an $8.7 million increase in professional fees due to additional costs
related to the year 2000 program,
- an increase of $8.3 million in expenses incurred to support higher deposit
volumes,
- an increase of $8.2 million in other outside service expenses, and
- an increase of $3.2 million in marketing expenses.
- - The 1998 effective tax rate was 30.5 percent, compared with 36.7 percent for
1997. The primary reason for the lower 1998 effective tax rate was the filing
of our 1997, and our intention to file our 1998, California franchise tax
returns on a worldwide unitary basis, which incorporates the results of The
Bank of Tokyo-Mitsubishi and its worldwide affiliates.
- The reductions in income tax expense related to the unitary filings for
1998 were approximately $60.2 million.
- The effective tax rate for 1997 was favorably affected by an after-tax
refund of $24.7 million from the California Franchise Tax Board for tax
years 1975-1987.
- Excluding the state tax reduction in 1998 and the California Franchise Tax
Board refund in 1997, the effective tax rate for 1998 would have been 39.5
percent and 40.5 percent for 1997.
- - Nonperforming assets at December 31, 1998 were $89.9 million, down $40.0
million, or 30.8 percent, from December 31, 1997. Nonperforming assets were
0.28 percent of total assets on December 31, 1998, down from 0.42 percent from
a year earlier.
- - Net loans charged off as a percentage of average total loans were 0.15 percent
in 1998 down from 0.33 percent in 1997.
- - The provision for credit losses for 1998 was $45.0 million, compared to no
provision made for full year 1997.
- The provision for credit losses is charged to income to bring the
allowance for credit losses to a level deemed appropriate by management
based on the various factors that are used to determine the adequacy of
the allowance based on losses inherent in the loan and lease portfolio.
- At December 31, 1998, the allowance for credit losses as a percent of
total loans was 1.89 percent and as a percent of nonaccrual loans was
585.5 percent. These ratios compare with 1.99 percent and 413.1 percent at
December 31, 1997.
- - Tangible common equity to assets was 9.3% as of December 31, 1998.
- Tangible common equity to assets is computed by dividing period end common
equity less unamortized goodwill, which was $63.3 million, by total assets
less unamortized goodwill.
17
<PAGE>
- - The following presents important financial information for our four primary
business segments as of December 31, 1998. As used in the following table,
"performance center earnings" represent the allocation of net interest income,
noninterest income and noninterest expense between the business segments for
products and services originated in one segment but managed by another. "Total
loans" and "total deposits" represent loans and deposits for each business
segment before allocation between the segments of loans and deposits
originated in one segment but managed by another. "Net interest income" and
"income before income taxes" are presented on a taxable-equivalent basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------
TRUST &
INTERNATIONAL PRIVATE
COMMUNITY COMMERCIAL FINANCIAL BANKING FINANCIAL
BANKING GROUP SERVICES GROUP GROUP SERVICES GROUP
-------------- -------------------- ------------ ----------------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
(IN THOUSANDS)
Net interest income...................... $ 673,463 $ 494,713 $ 55,741 $ 22,979
Noninterest income....................... 178,208 109,520 65,834 145,593
-------------- -------- ------------ --------
Total.................................... 851,671 604,233 121,575 168,572
-------------- -------- ------------ --------
Noninterest expense...................... 596,714 257,124 66,967 134,977
Credit expense........................... 4,300 21,316 11,304 345
Performance center earnings (losses)..... 7,769 2,270 (4,087) 122
Income before income tax expense......... 258,426 328,063 39,217 33,372
BALANCE SHEET DATA (PERIOD AVERAGE):
(IN MILLIONS)
Total loans before performance centers... $ 9,328 $ 11,164 $ 1,356 $ 258
Total assets............................. 10,270 12,414 2,070 315
Total deposits before performance
centers................................. 12,444 5,985 851 675
OTHER DATA:
Return on average assets................. 1.52% 1.61% 1.18% 6.43%
Efficiency ratio......................... 70.06 42.55 55.07 80.08
</TABLE>
18
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by The Bank of Tokyo-Mitsubishi from the
sale of common stock in the offering, after deducting estimated expenses of
$1,820,000 and underwriting discounts and commissions of 3.2%, are estimated to
be approximately $766,167,000, assuming a public offering price of $36 1/16,
which was the last reported sale price of our common stock on the Nasdaq
National Market on February 18, 1999.
All net proceeds from the sale of the shares of our common stock in this
offering will go to The Bank of Tokyo-Mitsubishi. Accordingly, we will not
receive any of the proceeds from this sale of shares of our common stock.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is quoted on the Nasdaq National Market under the symbol
"UNBC". The following table sets forth the high and low closing sale prices for
our common stock for the periods indicated, as reported by the Nasdaq National
Market, and the cash dividends declared on the common stock during such periods.
<TABLE>
<CAPTION>
COMMON STOCK CASH
PRICE(1) DIVIDENDS
-------------------- DECLARED PER
HIGH LOW SHARE(1)
--------- --------- -------------
<S> <C> <C> <C>
Year ended December 31, 1997
First quarter................................................................. $ 21.00 $ 17.63 $ 0.117
Second quarter................................................................ 25.96 16.92 0.117
Third quarter................................................................. 29.50 23.92 0.140
Fourth quarter................................................................ 35.83 27.83 0.140
Year ended December 31, 1998
First quarter................................................................. 35.67 27.83 0.140
Second quarter................................................................ 38.33 29.83 0.140
Third quarter................................................................. 34.33 23.88 0.140
Fourth quarter................................................................ 35.25 24.67 0.190
Year ended December 31, 1999
First quarter (through February 18, 1999)..................................... 37.50 33.31 --
</TABLE>
- ---------
(1) The prices and dividends in this table have been adjusted to reflect the
December 1998 3-for-1 stock split.
A recent reported last sale price for our common stock as reported on the
Nasdaq National Market is set forth on the cover page of this prospectus. On
January 29, 1999, there were approximately 2,271 holders of record of our common
stock.
On November 18, 1998, our Board of Directors approved a 36% increase in our
quarterly common stock dividend for the fourth quarter of 1998 from $0.14 per
share to $0.19 per share. Future dividends will depend upon our earnings,
financial condition, capital requirements and other factors as our Board of
Directors may deem relevant.
19
<PAGE>
CAPITALIZATION
The following table presents our short-term debt and total capitalization on
a consolidated basis at September 30, 1998. The "As Adjusted for The
Transactions" column presents our capitalization at September 30, 1998, as if
this offering, the offering of the trust preferred securities and the repurchase
of shares of our common stock from The Bank of Tokyo-Mitsubishi and Meiji Life
Insurance Company had already occurred.
We have assumed that UnionBanCal Corporation repurchases 9,261,580 shares of
its common stock at a price of $36 1/16, less underwriting discounts and
commissions of 3.2%. The repurchases are financed through a $350 million
offering of trust preferred securities with an interest rate of 7 3/8%. We have
also assumed that the expenses will be amortized over a 5-year period and the
excess proceeds will be used to pay UnionBanCal's expenses and reduce
liabilities which are costing 5%. We assume an effective tax rate of 35%.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------
AS ADJUSTED
FOR
ACTUAL THE TRANSACTIONS
------------- ----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Federal funds purchased and securities sold under repurchase agreements........ $ 1,574,163 $ 1,574,163
Commercial paper............................................................... 1,417,077 1,417,077
Other borrowed funds........................................................... 339,340 339,340
------------- ----------------
Total short-term debt...................................................... $ 3,330,580 $ 3,330,580
------------- ----------------
------------- ----------------
Long-term debt:
UnionBanCal Corporation-obligated mandatorily redeemable preferred securities
of subsidiary grantor trust(1)................................................ $ -- $ 350,000
Subordinated capital notes..................................................... 298,000 298,000
------------- ----------------
Total long-term debt....................................................... 298,000 648,000
------------- ----------------
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, none outstanding................. -- --
Common stock, 300,000,000 shares authorized, 175,208,037 shares outstanding,
165,946,457 as adjusted....................................................... 292,013 276,577
Additional paid-in capital..................................................... 1,430,539 1,122,667
Retained earnings.............................................................. 1,233,068 1,222,973
Accumulated other comprehensive income......................................... 29,330 29,330
------------- ----------------
Total shareholders' equity................................................. 2,984,950 2,651,547
------------- ----------------
Total capitalization..................................................... $ 3,282,950 $ 3,299,547
------------- ----------------
------------- ----------------
Tier 1 risk-based capital ratio.................................................. 9.53% 9.58%
Total risk-based capital ratio................................................... 11.51 11.57
Return on average common equity.................................................. 16.87 18.36
</TABLE>
- ---------
(1) The sole asset of the subsidiary trust is the $360,824,750 aggregate
principal amount of the junior subordinated debentures.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected financial and other data as of December 31, 1996 and 1997 and
September 30, 1998 and for the years ended December 31, 1995, 1996 and 1997 and
for the nine-month period ended September 30, 1998 are calculated from our
audited consolidated financial statements included in this prospectus. The
selected financial and other data for the year ending December 31, 1994 and as
of December 31, 1995 are calculated from our audited consolidated financial
statements that are not included in this prospectus. The selected financial and
other data as of December 31, 1993 and 1994 and for the year ended December 31,
1993 are calculated from the combined historical financial information of Union
Bank and BanCal Tri-State Corporation and its banking subsidiary, The Bank of
California, N.A. Such combined historical information was, in turn, calculated
from the separate audited consolidated financial statements of Union Bank and
BanCal Tri-State for those periods that are not included in this prospectus. The
selected financial and other data as of September 30, 1997 and for the
nine-month period ended September 30, 1997 are calculated from our unaudited
consolidated financial statements included in this prospectus, which, in the
opinion of our management, include all adjustments necessary for a fair
presentation of our financial position at such date and the results of
operations for such interim period. The results for the nine-month period ended
September 30, 1998 are not necessarily indicative of the results to be expected
of the full fiscal year.
We have presented all historical financial information as if the combination
of Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The
Bank of California, N.A., which occurred on April 1, 1996, had been in effect
for all periods presented.
You should read the following data with the more detailed information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
to the consolidated financial statements, each included in this prospectus.
You should read the following information with the data in the table on the
next page:
- We have presented net interest income and income before income taxes on a
taxable-equivalent basis using the federal statutory tax rate of 35
percent.
- We have annualized return on average assets, return on average common
equity, net interest margin and net loans charged off to average total
loans for the nine-month periods.
- The Tier 1 risk-based capital ratio is computed by dividing Tier 1
capital, which is total shareholders' equity less net unrealized gains and
losses on securities available for sale and intangible assets, by risk
weighted period-end assets. Risk weighted period-end assets is the balance
at risk less the portion of the allowance for credit losses which exceeds
1.25% of the balance at risk. The balance at risk is calculated by
applying risk weight percentages per regulatory guidelines to total assets
and off-balance sheet items.
- The total risk-based capital ratio is total capital, which includes Tier 1
capital, subordinated debt, and 1.25% of the balance at risk, divided by
risk weighted period-end assets.
21
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30
---------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net interest income................... $ 986 $ 1,008 $ 1,153 $ 1,175 $ 1,237 $ 917 $ 983
Provision for credit losses........... 151 73 53 40 -- -- 45
Noninterest income.................... 406 360 395 419 463 343 400
Noninterest expense(1)................ 1,055 1,037 978 1,135 1,045 762 836
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
cumulative effect of accounting
change............................... 186 258 517 419 655 498 502
Taxable-equivalent adjustment......... 15 13 11 7 5 4 4
Income tax expense.................... 64 120 193 163 239 175 146
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
accounting change.................... 107 125 313 249 411 319 352
Cumulative effect of accounting
change(2)............................. 193 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............................ $ 300 $ 125 $ 313 $ 249 $ 411 $ 319 $ 352
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK... $ 289 $ 114 $ 302 $ 238 $ 404 $ 311 $ 352
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
PER COMMON SHARE:(3)
Net income -- basic................... $ 1.73 $ 0.67 $ 1.74 $ 1.37 $ 2.31 $ 1.78 $ 2.01
Net income -- diluted................. 1.73 0.67 1.73 1.36 2.30 1.78 2.01
Pro forma earnings -- basic, excluding
after tax merger and integration
expense and cumulative effect of
accounting change(1)................. 0.58 0.67 1.74 1.78 2.33 1.80 2.01
Pro forma earnings -- diluted,
excluding after tax merger and
integration expense and cumulative
effect of accounting change(1)....... 0.58 0.67 1.73 1.77 2.32 1.80 2.01
Dividends(4).......................... 0.47 0.47 0.47 0.47 0.51 0.37 0.42
Book value (end of period)............ 11.64 11.88 13.49 13.53 15.32 14.96 17.04
Common shares outstanding (end of
period, in thousands)................ 169,990 172,044 174,180 174,458 174,918 174,848 175,208
Weighted average common shares
outstanding -- basic (in thousands).. 166,857 171,089 173,806 174,391 174,683 174,615 175,091
Weighted average common shares
outstanding -- diluted
(in thousands)....................... 166,917 171,150 174,099 174,784 175,189 175,071 175,729
BALANCE SHEET DATA (END OF PERIOD):
Total assets.......................... $ 24,006 $ 24,569 $ 27,547 $ 29,234 $ 30,585 $ 30,982 $ 31,407
Total loans........................... 17,759 18,066 20,432 21,050 22,741 22,298 23,498
Nonperforming assets.................. 1,193 421 247 157 130 133 81
Total deposits........................ 16,978 17,410 19,655 21,533 23,296 22,974 23,663
Subordinated capital notes............ 726 656 501 382 348 382 298
Preferred stock....................... 135 135 135 135 -- -- --
Common equity......................... 1,978 2,044 2,349 2,360 2,679 2,615 2,985
BALANCE SHEET DATA (PERIOD AVERAGE):
Total assets.......................... $ 23,927 $ 23,693 $ 25,565 $ 27,900 $ 29,693 $ 29,452 $ 30,131
Total loans........................... 18,219 17,616 18,975 20,728 21,856 21,693 22,917
Earning assets........................ 21,176 21,047 22,849 24,717 26,292 26,066 27,003
Total deposits........................ 17,160 16,826 17,970 20,102 22,067 21,824 22,386
Common equity......................... 1,918 1,981 2,197 2,325 2,515 2,470 2,793
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30
------------------------------------------------------------------ -----------
1993 1994 1995 1996 1997 1997
-------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Return on average assets.............. 1.26% 0.53% 1.22% 0.89% 1.39% 1.45%
Pro forma return on average assets,
excluding after-tax merger and
integration expense and cumulative
effect of accounting change(1)...... 0.45 0.53 1.22 1.15 1.40 1.46
Return on average common equity...... 15.08 5.76 13.73 10.24 16.05 16.85
Pro forma return on average common
equity, excluding after-tax merger
and integration expense and
cumulative effect of accounting
change(1)........................... 5.03 5.76 13.73 13.33 16.20 17.04
Efficiency ratio(5).................. 66.92 70.39 63.39 71.02 61.53 60.55
Pro forma efficiency ratio, excluding
merger and integration
expense(1)(5)....................... 66.92 70.39 63.39 63.65 61.17 60.07
Net interest margin.................. 4.66 4.79 5.05 4.75 4.70 4.70
Dividend payout ratio................ 27.17 70.15 27.01 34.31 22.08 20.79
Tier 1 risk-based capital ratio...... 8.88 9.24 9.35 9.08 8.96 8.92
Total risk-based capital ratio....... 12.07 12.03 11.70 11.17 11.05 11.02
Leverage ratio....................... 8.26 8.67 8.70 8.41 8.53 8.39
Allowances for credit losses to total
loans............................... 3.90 3.12 2.72 2.49 1.99 2.15
Allowance for credit losses to
nonaccrual loans.................... 84.82 161.08 266.56 408.48 413.12 435.92
Net loans charged off to average
total loans......................... 1.37 1.15 0.32 0.34 0.33 0.28
Nonperforming assets to total loans
and foreclosed assets............... 6.58 2.32 1.21 0.74 0.57 0.60
Nonperforming assets to total
assets............................... 4.97 1.71 0.90 0.54 0.42 0.43
<CAPTION>
1998
-----------
<S> <C>
OTHER DATA:
Return on average assets.............. 1.56%
Pro forma return on average assets,
excluding after-tax merger and
integration expense and cumulative
effect of accounting change(1)...... 1.56
Return on average common equity...... 16.87
Pro forma return on average common
equity, excluding after-tax merger
and integration expense and
cumulative effect of accounting
change(1)........................... 16.87
Efficiency ratio(5).................. 60.51
Pro forma efficiency ratio, excluding
merger and integration
expense(1)(5)....................... 60.51
Net interest margin.................. 4.86
Dividend payout ratio................ 20.90
Tier 1 risk-based capital ratio...... 9.53
Total risk-based capital ratio....... 11.51
Leverage ratio....................... 9.37
Allowances for credit losses to total
loans............................... 2.02
Allowance for credit losses to
nonaccrual loans.................... 697.19
Net loans charged off to average
total loans......................... 0.12
Nonperforming assets to total loans
and foreclosed assets............... 0.35
Nonperforming assets to total
assets............................... 0.26
</TABLE>
- ----------
(1) Merger and integration expense included in noninterest expense was $117
million for 1996 and $6 million for 1997, and after-tax merger and
integration expense was $72 million for 1996 and $4 million for 1997. Merger
and integration expense was $6 million ($4 million after-tax) for the nine
months ended September 30, 1997. "Pro forma" means that the amounts
presented do not include the effects of the cumulative change in accounting
and merger and integration expense for the period presented. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year Ended December 31, 1997 Compared to Year Ended December
31, 1996" for a description of merger accounting and pro forma
presentations.
(2) 1993 net income includes the cumulative effect of the adoption of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
(3) Amounts have been restated to give retroactive effect to the December 1998
3-for-1 stock split.
(4) Dividends per share reflect dividends declared on our common stock
outstanding as of the declaration date. Amounts prior to the merger on April
1, 1996 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.
(5) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income
(taxable-equivalent) and noninterest income. Foreclosed asset expense
(income) was $123.3 million for the year ended 1993, $73.7 million for the
year ended 1994, $(3.2) million for the year ended 1995, $2.9 million for
the year ended 1996 and $(1.3) million for the year ended 1997. For the nine
months ended September 30, 1997 and 1998, foreclosed asset expense (income)
was $(0.7) million in each period.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL
CONDITION AND THE RESULTS OF OUR OPERATIONS TOGETHER WITH OUR FINANCIAL
STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS INCLUDED IN THIS
PROSPECTUS. AMOUNTS FOR PRIOR PERIODS HAVE BEEN RECLASSIFIED TO CONFORM TO
CURRENT FINANCIAL STATEMENT PRESENTATION AS INDICATED BELOW.
INTRODUCTION
We are a California-based commercial bank holding company with consolidated
assets of $31.4 billion at September 30, 1998. Based on total assets,
UnionBanCal Corporation, together with its consolidated subsidiaries, was the
third largest bank holding company in California and among the 30 largest in the
United States. At September 30, 1998, we operated 244 full-service branches in
California, six banking offices in Oregon and Washington, and 18 overseas
facilities.
The combination of Union Bank with BanCal Tri-State Corporation and its
banking subsidiary, The Bank of California, N.A., was completed on April 1, 1996
(the "Merger"), resulting in UnionBanCal Corporation and its banking subsidiary,
Union Bank of California, N.A. The combination was accounted for as a
reorganization of entities under common control, similar to a pooling of
interests. Accordingly, all historical financial information has been restated
as if the combination had been in effect for all periods presented.
On August 10, 1998, UnionBanCal Corporation and its consolidated
subsidiaries exchanged 10.2 million shares of its common stock for the 7.2
million shares of the common stock of Union Bank of California, N.A. owned
directly by The Bank of Tokyo-Mitsubishi, Ltd. This share exchange provided
UnionBanCal Corporation with a 100 percent ownership interest in Union Bank of
California, N.A. In addition, it increased The Bank of Tokyo-Mitsubishi's
ownership percentage of UnionBanCal Corporation 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 our common shareholders for
all periods presented.
On November 18, 1998, our 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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
SUMMARY
Net income for the first nine months of 1998 was $352.4 million, compared to
$318.9 million for the first nine months of 1997. Net income applicable to
common stock was $352.4 million, or $2.01 per diluted common share, for the
first nine months of 1998, compared with $311.3 million, or $1.78 per diluted
common share, for the first nine months of 1997. Excluding the tax benefit of
$52.4 million, net of federal tax, recorded in the first nine months of 1998,
net income applicable to common stock was $299.9 million, or $1.71 per diluted
common share. Excluding the $24.7 million tax refund for the first nine months
of 1997, net income applicable to common stock was $286.6 million, or $1.64 per
diluted common share.
Other highlights of the first nine months of 1998 include:
- Net interest income, on a taxable-equivalent basis, was $983.1 million for
the first nine months of 1998, a $65.6 million, or 7 percent, increase
from the comparable period one year earlier. The
24
<PAGE>
increase in net interest income was primarily due to a 16 basis point
increase in the net interest margin and a $936.6 million, or 4 percent,
increase in average earning assets, resulting primarily from a $1.2
billion, or 6 percent, increase in average loans, largely funded by a $1.1
billion, or 15 percent, increase in average noninterest bearing deposits.
- A provision for credit losses of $45.0 million was recorded for the first
nine months of 1998, compared with no provision in 1997. Net charge-offs
for the nine months ended September 30, 1998 were $21.0 million. This
resulted from management's regular quarterly assessments of overall credit
quality, loan growth and economic conditions in relation to the level of
the allowance for credit losses.
- Noninterest income was $399.9 million, an increase of $57.3 million, or 17
percent, over the first nine months of 1997. This increase includes the
$17.1 million gain from the sale of the credit card portfolio in the
second quarter of 1998. Service charges on deposit accounts grew $16.6
million, or 20 percent, reflecting growth in average deposits; trust and
investment management fees increased $12.1 million, or 16 percent, on
growth in assets under management; international commissions and fees
increased $4.9 million; and securities gains, net increased $3.5 million,
primarily from the sale of securities available for sale.
- Noninterest expense was $836.2 million for the first nine months of 1998,
compared with $762.2 million for the first nine months of 1997, an
increase of $74.0 million, or 10 percent. Personnel-related expense
increased $40.6 million, or 10 percent, primarily due to increases in
salaries, a portion of which relates to increases in staffing,
performance-based incentive compensation as well as a decline in the fair
value of assets underlying postretirement benefit plans, caused by the
downturn in the financial markets. Professional fees increased $6.1
million, or 32 percent, primarily due to additional costs related to the
year 2000 effort. Other noninterest expense increased $24.4 million, or 22
percent, primarily attributable to additional expenses incurred to support
higher deposit volumes.
- The effective tax rate for the first nine months of 1998 was 29 percent,
compared with 35 percent for the first nine months of 1997. The lower
effective tax rate for the first nine months of 1998 was the result of a
total reduction of $52.4 million, net of federal tax, in state income tax
liabilities. Excluding this state tax reduction, the effective tax rate
for the first nine months of 1998 was 40 percent. Excluding the $24.7
million after-tax refund from the State of California Franchise Tax Board,
the effective tax rate for the first nine months of 1997 was 40 percent.
- The return on average assets for the first nine months of 1998 increased
to 1.56 percent, compared to 1.45 percent for the first nine months of
1997. The return on average common equity increased slightly to 16.87
percent for the first nine months of 1998, compared to 16.85 percent for
the first nine months of 1997.
- Total loans at September 30, 1998 increased $756.4 million, or 3 percent,
over December 31, 1997, primarily due to growth in the commercial,
financial and industrial portfolio.
- Our Tier 1 and total risk-based capital ratios were 9.53 percent and 11.51
percent at September 30, 1998, compared with 8.96 percent and 11.05
percent at December 31, 1997. Our September 30, 1998 leverage ratio was
9.37 percent, compared with 8.53 percent at December 31, 1997.
25
<PAGE>
NET INTEREST INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
-------------------------------------- --------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1)
------------ ----------- ----------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans:(2)
Domestic............................ $ 20,218,298 $ 1,245,658 8.23% $ 21,569,891 $ 1,297,483 8.04%
Foreign(3).......................... 1,475,031 66,578 6.03 1,347,101 68,380 6.79
Securities -- taxable(4).............. 2,476,970 116,715 6.29 2,949,151 139,720 6.32
Securities -- tax-exempt(4)........... 126,634 9,567 10.07 106,783 8,348 10.42
Interest bearing deposits in banks.... 996,710 43,404 5.82 279,938 14,187 6.78
Federal funds sold and securities
purchased under resale agreements.... 450,603 18,727 5.56 281,565 11,784 5.60
Trading account assets................ 322,028 13,389 5.56 468,450 20,137 5.75
------------ ----------- ------------ -----------
Total earning assets.............. 26,066,274 1,514,038 7.76 27,002,879 1,560,039 7.72
------------ ----------- ------------ -----------
Allowance for credit losses........... (514,043) (471,384)
Cash and due from banks............... 2,005,177 1,903,155
Premises and equipment, net........... 413,024 402,197
Other assets.......................... 1,481,296 1,294,046
------------ ------------
Total assets...................... $ 29,451,728 $ 30,130,893
------------ ------------
------------ ------------
LIABILITIES:
Domestic deposits:
Interest bearing.................... $ 5,274,137 $ 111,457 2.83% $ 5,447,712 $ 115,626 2.84%
Savings and consumer time........... 2,956,493 83,695 3.78 3,176,898 90,713 3.82
Large time............................ 4,691,506 191,547 5.46 3,606,182 146,945 5.45
Foreign deposits(3)................... 1,560,149 55,156 4.73 1,723,282 66,454 5.16
------------ ----------- ------------ -----------
Total interest bearing deposits... 14,482,285 441,855 4.08 13,954,074 419,738 4.02
------------ ----------- ------------ -----------
Federal funds purchased and securities
sold under repurchase agreements..... 1,106,180 44,053 5.32 1,481,809 59,667 5.38
Subordinated capital notes............ 353,429 17,180 6.50 335,179 15,883 6.34
Commercial paper...................... 1,631,056 66,543 5.45 1,641,425 67,720 5.52
Other borrowed funds.................. 673,359 26,999 5.36 323,082 13,975 5.78
------------ ----------- ------------ -----------
Total borrowed funds.............. 3,764,024 154,775 5.50 3,781,495 157,245 5.56
------------ ----------- ------------ -----------
Total interest bearing
liabilities...................... 18,246,309 596,630 4.37 17,735,569 576,983 4.35
----------- -----------
Noninterest bearing deposits.......... 7,341,239 8,432,086
Other liabilities..................... 1,274,000 1,170,511
------------ ------------
Total liabilities................. $ 26,861,548 $ 27,338,166
------------ ------------
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock....................... 120,659 --
Common equity......................... 2,469,521 2,792,727
------------ ------------
Total shareholders' equity........ 2,590,180 2,792,727
------------ ------------
Total liabilities and
shareholders' equity............. $ 29,451,728 $ 30,130,893
------------ ------------
------------ ------------
Net interest income/margin (taxable-
equivalent basis).................... 917,408 4.70% 983,056 4.86%
Less: taxable-equivalent adjustment... 4,107 3,417
----------- -----------
Net interest income............... $ 913,301 $ 979,639
----------- -----------
----------- -----------
</TABLE>
- ----------
(1) Yields and interest income are presented on a taxable-equivalent basis using
the federal statutory tax rate of 35 percent.
(2) Average balances on loans outstanding include all nonperforming and
renegotiated loans. The amortized portion of net loan origination fees
(costs) is included in interest income on loans, representing an adjustment
to the yield.
(3) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
(4) Yields on securities available for sale are based on fair value. The
difference between these yields and those based on amortized cost was not
significant.
26
<PAGE>
Net interest income is interest earned on loans and investments less
interest expense on deposit accounts and borrowings. Primary factors affecting
the level of net interest income include the margin between the yield earned on
interest earning assets and the rate paid on interest bearing liabilities, as
well as the volume and composition of average interest earning assets and
average interest bearing liabilities.
For the first nine months of 1998, net interest income, on a taxable
equivalent basis, was $983.1 million, compared with $917.4 million in the
comparable period one year earlier. The increase of $65.6 million, or 7 percent,
was primarily attributable to a $936.6 million, or 4 percent, increase in
average earning assets largely funded by a $1.1 billion, or 15 percent, increase
in average noninterest bearing deposits. In addition, the net interest margin
increased 16 basis points to 4.86 percent. Although the differential between the
decrease in the yield on average earning assets and the decrease in the rate of
average interest bearing liabilities was a negative 2 basis points, the negative
impact on the net interest margin of these two factors was more than offset by
the increase in the proportion of funding provided by average noninterest
bearing deposits.
Average earning assets were $26.1 billion for the nine months ended
September 30, 1997 and $27.0 billion for the nine months ended September 30,
1998. Most of this increase was attributable to growth in average loans, which
increased $1.2 billion, or 6 percent, and average securities, which were $452.3
million, or 17 percent, higher. This increase was partially offset by a $716.8
million decrease in average interest bearing deposits in banks. The growth in
average loans outstanding was attributable to the increase in average
commercial, financial and industrial loans of $1.5 billion, partly offset by the
decrease in average consumer loans of $337.4 million, which was primarily
related to the sale of the credit card portfolio. See "Loans" on page 30 for
additional commentary on growth in the loan portfolio. The increase in primarily
fixed rate securities reflected interest rate risk management actions to reduce
our exposure to declines in interest rates.
NONINTEREST INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------- PERCENT
1997 1998 CHANGE
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts.................................... $ 84,699 $ 101,288 19.59%
Trust and investment management fees................................... 76,737 88,806 15.73
International commissions and fees..................................... 49,593 54,516 9.93
Merchant transaction processing fees................................... 42,653 42,988 0.79
Merchant banking fees.................................................. 19,899 24,083 21.03
Brokerage commissions and fees......................................... 11,529 14,188 23.06
Foreign exchange trading gains, net.................................... 11,249 14,159 25.87
Securities gains, net.................................................. 2,098 5,579 165.92
Gain on sale of credit card portfolio.................................. -- 17,056 nm
Other.................................................................. 44,170 37,286 (15.59)
---------- ----------
Total noninterest income............................................. $ 342,627 $ 399,949 16.73%
---------- ----------
---------- ----------
</TABLE>
- ---------
nm = not meaningful
For the first nine months of 1997, noninterest income was $342.6 million,
compared with $399.9 million for the same period in 1998. This increase of $57.3
million, or 17 percent, includes the second quarter 1998 gain of $17.1 million
from the sale of the credit card portfolio, a $16.6 million increase in service
charges on deposit accounts, reflecting a 3 percent increase in average deposits
coupled with the expansion of several products and services, a $12.1 million
increase in trust and investment management fees, largely due to growth of
assets under management, a $4.9 million increase in international commissions
and fees, a $3.5 million increase in securities gains, net, and a $6.8 million
increase related to brokerage commissions and merchant banking fees. In
contrast, other noninterest income decreased $6.9 million, or 16 percent, due to
a
27
<PAGE>
$7.7 million nonrecurring gain recognized in 1997 related to a real estate joint
venture and the $2.9 million trading loss in 1998, partially offset by the $4.8
million gain recognized in the second quarter of 1998 from the sale of
commercial real estate loans.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------- PERCENT
1997 1998 CHANGE
---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and other compensation........................................ $ 337,401 $ 369,715 9.58%
Employee benefits...................................................... 81,569 89,877 10.19
---------- ----------
Personnel-related expense............................................ 418,970 459,592 9.70
Net occupancy.......................................................... 64,133 67,294 4.93
Equipment.............................................................. 41,206 41,842 1.54
Merchant transaction processing........................................ 31,269 33,008 5.56
Communications......................................................... 31,135 31,515 1.22
Professional services.................................................. 19,062 25,186 32.13
Advertising and public relations....................................... 20,759 22,419 8.00
Data processing........................................................ 19,115 20,462 7.05
Printing and office supplies........................................... 17,646 19,112 8.31
Software............................................................... 12,358 14,536 17.62
Travel................................................................. 11,321 13,041 15.19
Intangible asset amortization.......................................... 10,014 10,069 0.55
Armored car............................................................ 9,160 8,989 (1.87)
Foreclosed asset expense (income)...................................... (696) (746) nm
Merger and integration expense......................................... 6,037 -- nm
Other.................................................................. 50,719 69,859 37.74
---------- ----------
Total noninterest expense............................................ $ 762,208 $ 836,178 9.70%
---------- ----------
---------- ----------
</TABLE>
- ---------
nm = not meaningful
Noninterest expense was $762.2 million for the first nine months of 1997,
compared with $836.2 million for the first nine months of 1998, an increase of
$74.0 million, or 10 percent. Personnel-related expense increased $40.6 million,
or 10 percent, primarily due to a $16.7 million increase in performance-based
incentive compensation, a 4 percent increase in the workforce, to support
increased revenue growth, and a $4.8 million increase in benefits expense
arising from a loss in the fair value of assets underlying postretirement
benefit plans. Professional services increased $6.1 million, or 32 percent, due
to additional costs related to the year 2000 effort. In addition, other
noninterest expense increased $19.1 million, primarily attributable to
additional expenses incurred to support higher deposit volumes.
We continue to make preparations for the year 2000. For a detailed
discussion of our year 2000 program, see "Year 2000" on page 70. The total cost
of our year 2000 project is estimated to be approximately $50 million, of which
$10 million relates to capital expenditures which we will capitalize and
depreciate over their useful lives. The remaining $40 million will be included
in noninterest expense in the period incurred. As of September 30, 1998, we
spent $19 million on our year 2000 project, $2 million in 1997 and $17 million
in 1998. Of the $19 million spent, as of September 30, 1998, $6 million relates
to capital expenditures, $1 million in 1997 and $5 million in 1998. Of the
estimated $31 million remaining to be spent, an estimated $4 million is for
capital expenditures. The cost of the year 2000 project is being funded by
normal operating cash and staffed by external resources as well as internal
staff re-deployed from less time-sensitive assignments. Estimated total cost
could change further as analysis continues.
28
<PAGE>
The combination of Union Bank and BanCal Tri-State Corporation on April 1,
1996 resulted in the recording of a total of $123.5 million in merger and
integration expense. The remaining liability balance at September 30, 1998 was
$10.6 million. The balance includes amounts primarily for lease payments that
are continuing over the expected term of the leases. Merger and integration
expense of $6.0 million was recorded for the first nine months of 1997, compared
with none for the first nine months of 1998.
INCOME TAX EXPENSE
The effective tax rate for the nine months ended September 30, 1997 was
reduced as a result of an after-tax refund from the State of California
Franchise Tax Board of $24.7 million in settlement of litigation, administration
and audit disputes covering the years 1975-1987. The effective tax rate for the
nine months ended September 30, 1997 was 35 percent. The effective tax rate for
the nine months ended September 30, 1998 was 29 percent. The decrease in the
effective tax rate for 1998 was the result of a reduction of California
franchise taxes for 1997 and 1998 from our ability to file California franchise
tax returns on a worldwide unitary basis, which incorporates the financial
results of The Bank of Tokyo-Mitsubishi and its worldwide affiliates. The total
reduction of $52.4 million, net of federal tax, was reflected in the third
quarter of 1998. Of this amount, $29 million related to the reversal of
previously accrued 1997 state income tax liabilities and $23.4 million related
to a lower state tax provision in 1998. Excluding these reductions, the
effective tax rates for all periods would have been 40 percent.
At this time, we anticipate that we will continue to file our California
franchise tax return on the worldwide basis for 1999. Our anticipated 1999 tax
rate will be dependent on our proportionate share of The Bank of
Tokyo-Mitsubishi financial results for that year, and is expected to be within
the range of 35 to 40 percent.
29
<PAGE>
LOANS
The following table shows loans outstanding by loan type.
<TABLE>
<CAPTION>
PERCENT CHANGE TO
SEPTEMBER 30, 1998 FROM:
---------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1998 1997 1997
------------- ------------- ------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and
industrial......................... $ 10,405,299 $ 10,747,179 $ 12,151,210 16.78% 13.06%
Construction........................ 312,318 293,333 420,267 34.56 43.27
Mortgage:
Residential....................... 2,966,326 2,961,233 2,742,451 (7.55) (7.39)
Commercial........................ 2,851,838 2,951,807 2,980,371 4.51 0.97
------------- ------------- -------------
Total mortgage.................. 5,818,164 5,913,040 5,722,822 (1.64) (3.22)
Consumer:
Installment....................... 2,075,065 2,090,752 2,026,441 (2.34) (3.08)
Home equity....................... 1,027,147 992,916 844,256 (17.81) (14.97)
Credit card and other lines of
credit........................... 275,258 270,097 -- nm nm
------------- ------------- -------------
Total consumer.................. 3,377,470 3,353,765 2,870,697 (15.00) (14.40)
Lease financing..................... 863,745 874,860 1,013,772 17.37 15.88
------------- ------------- -------------
Total loans in domestic
offices........................ 20,776,996 21,182,177 22,178,768 6.75 4.70
Loans originated in foreign
branches............................ 1,520,728 1,559,231 1,319,077 (13.26) (15.40)
------------- ------------- -------------
Total loans..................... $ 22,297,724 $ 22,741,408 $ 23,497,845 5.38% 3.33%
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ---------
nm = not meaningful
Our lending activities are predominantly domestic, with such loans and
leases comprising 94 percent of the portfolio at September 30, 1998. Total loans
at September 30, 1998 were $23.5 billion, an increase of $756.4 million, or 3
percent, from December 31, 1997. The increase was primarily attributable to
growth in the commercial, financial and industrial loan portfolio, which
increased $1.4 billion from December 31, 1997, partly offset by the consumer
loan portfolio, which decreased $483.1 million.
Commercial, financial and industrial loans represent the largest category in
the loan portfolio. These loans are extended principally to major corporations,
middle market businesses, and small businesses, with no industry concentration
exceeding 10 percent of total commercial, financial and industrial loans. At
year-end 1997, the commercial, financial and industrial loan portfolio was $10.7
billion, or 47 percent of total loans, and at September 30, 1998, it was $12.2
billion, or 52 percent of total loans. The increase of $1.4 billion, or 13
percent, from year-end 1997 was primarily attributable to continued growth in
loans extended to large corporations.
The construction loan portfolio totaled $293.3 million, or 1 percent of
total loans, at December 31, 1997, compared with $420.3 million, or 2 percent of
total loans, at September 30, 1998. This growth is primarily attributable to the
favorable California real estate market coupled with the continuing improvement
in the West Coast economy.
Mortgage loans were $5.9 billion, or 26 percent of total loans, at December
31, 1997, compared with $5.7 billion, or 24 percent of total loans, at September
30, 1998. The mortgage loan portfolio consists of loans
30
<PAGE>
on commercial and industrial projects and loans secured by one to four family
residential properties, primarily in California. Despite the sale of $123.0
million in commercial real estate mortgages during the second quarter of 1998,
commercial mortgage loans increased $28.6 million from December 31, 1997,
primarily attributable to the favorable California real estate market coupled
with the continuing improvement in the West Coast economy. Residential mortgage
loans decreased $218.8 million due to prepayments arising from the favorable
interest rate environment and to sales in the secondary market.
Consumer loans totaled $3.4 billion, or 15 percent of total loans, at
December 31, 1997, compared with $2.9 billion, or 12 percent of total loans, at
September 30, 1998. The decrease of $483.1 million was attributable to the sale
of the $253.0 million credit card loan portfolio in April 1998, and to a
reduction in home equity loans as customers refinanced to take advantage of
favorable long-term, fixed rate mortgages.
Lease financing totaled $874.9 million, or 4 percent of total loans, at
December 31, 1997, compared with $1 billion, or 4 percent of total loans, at
September 30, 1998.
Loans originated in foreign branches totaled $1.6 billion, or 7 percent of
total loans, at December 31, 1997 and $1.3 billion, or 6 percent of total loans,
at September 30, 1998.
CROSS-BORDER OUTSTANDINGS
Our cross-border outstandings reflect additional economic and political
risks that are not reflected in domestic outstandings. These risks include those
arising from exchange rate fluctuations and restrictions on the transfer of
funds. The following table sets forth our cross-border outstandings as of
September 30, 1997, December 31, 1997, and September 30, 1998, for each country
where such outstandings exceeded 1 percent of total assets. The cross-border
outstandings were compiled based upon category and domicile of ultimate risk and
are comprised of balances with banks, trading account assets, securities
available for sale, securities purchased under resale agreements, loans, accrued
interest receivable, acceptances outstanding and investments with foreign
entities. The amounts outstanding for each country exclude local currency
outstandings. We do not have significant local currency outstandings to the
individual countries listed in the following table that are not hedged or are
not funded by local currency borrowings.
<TABLE>
<CAPTION>
PUBLIC CORPORATIONS
FINANCIAL SECTOR AND OTHER TOTAL
INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS
------------- ----------- --------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
September 30, 1997
Japan....................................................... $ 939 $ -- $ 403 $ 1,342
Korea....................................................... 691 36 293 1,020
December 31, 1997
Japan....................................................... 401 -- 438 839
Korea....................................................... 561 10 257 828
Thailand.................................................... 320 -- -- 320
September 30, 1998
Japan....................................................... 115 -- 469 584
Korea....................................................... 376 -- 139 515
</TABLE>
The economic condition and the ability of some countries, to which we have
cross-border exposure, to manage their external debt obligations have been
impacted by the Asian economic crisis which began in the second half of 1997.
The impact of the Asian crisis appears to be spreading to other global markets.
Our exposure in all affected countries continues to be short-term in nature and
substantially related to the finance of trade. Although the extent of risk will
vary from country to country, and institution to institution, these short-term
exposures are characterized by management to be in the low to moderate range.
31
<PAGE>
Cross-border exposures, other than those referred to in the table above,
include total outstandings as of September 30, 1998 of $133 million in Brazil.
Since Japan is the second largest trading nation in the world, its
political, economic and financial markets situation is being closely monitored.
The situation in Japan is worsening, and the depressed conditions in that
country are impacting other areas which are highly dependent on trade relations
with it. There is considerable concern that the United States is not immune to
the effects of the depressed economic conditions in Japan and to the Asian
crisis. Management is monitoring our portfolio accordingly.
Although management cannot predict the ultimate impact of the global
financial crisis on our financial position and results of operations since much
depends on the effect of the stabilizing activities already under way,
management believes that the continuation of internal supervision, monitoring
and portfolio risk management practices will be effective in minimizing the
impact over and above that already identified. Increases in nonaccrual loans,
together with some related increases in charge-off activity, may occur as events
unfold.
PROVISION FOR CREDIT LOSSES
During the third quarter of 1998, we recorded a $10.0 million provision for
credit losses, bringing the total provision for credit losses recorded during
the nine months ended September 30, 1998 to $45.0 million, compared with no
provision for the three and nine month periods ended September 30, 1997.
Provisions for credit losses are charged to income to bring our allowance for
credit losses to a level deemed appropriate by management based on the factors
discussed under "--Allowance for Credit Losses" below.
ALLOWANCE FOR CREDIT LOSSES
We maintain an allowance for credit losses to absorb losses inherent in the
loan and lease portfolio. The allowance is based on ongoing, quarterly
assessments of the probable estimated losses inherent in the loan and lease
portfolio, and to a lesser extent, unused commitments to provide financing. Our
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include:
- the formula allowance,
- specific allowances for identified problem loans and portfolio segments
- and the unallocated allowance.
In addition, the allowance incorporates the results of measuring impaired loans
as provided in:
- Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting
by Creditors for Impairment of a Loan," and
- SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures."
These accounting standards prescribe the measurement methods, income recognition
and disclosures concerning impaired loans.
The formula allowance is calculated by applying loss factors to outstanding
loans and leases and certain unused commitments, in each case based on the
internal risk grade of those loans, pools of loans, leases or commitments.
Changes in risk grades of both performing and nonperforming loans affect the
amount of the formula allowance. Loss factors are based on our historical loss
experience and may be adjusted for significant factors that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation date.
Loss factors are described as follows:
32
<PAGE>
- Problem graded loan loss factors are obtained from a migration model that
tracks four years of historical loss experience. We are exploring changes
to the migration model to track historical loss experience over an
eight-year period, which management believes approximates a business
cycle.
- Pass graded loan loss factors are based on the average annual net
chargeoff rate over an eight-year period.
- Pooled loan loss factors, not individually graded loans, are based on
expected net chargeoffs for one year. Pooled loans are loans and leases
that are homogeneous in nature, such as consumer installment and
residential mortgage loans and automobile leases.
Specific allowances are established where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance.
The unallocated allowance is composed of two elements. The first element,
which is based on our credit policy, consists of an amount that is at least 20%
to 25% of the formula allowance and the specific allowance. This element
recognizes the model and estimation risk associated with the formula and
specific allowances. The second element is based upon management's evaluation of
various conditions, the effects of which are not directly measured in
determining the formula and specific allowances. The evaluation of the inherent
loss regarding these conditions involves a higher degree of uncertainty because
they are not identified with specific problem credits or portfolio segments. The
conditions evaluated in connection with the unallocated allowance include the
following conditions that existed as of the balance sheet date:
- then-existing general economic and business conditions affecting our key
lending areas,
- credit quality trends, including trends in nonperforming loans expected to
result from existing conditions,
- collateral values,
- loan volumes and concentrations,
- seasoning of the loan portfolio,
- specific industry conditions within portfolio segments,
- recent loss experience in particular segments of the portfolio,
- duration of the current business cycle,
- bank regulatory examination results and
- findings of our internal credit examiners.
Executive management reviews these conditions quarterly in discussion with our
senior credit officers. If any of these conditions is evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's estimate of the effect of this condition may be
reflected as a specific allowance applicable to this credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss concerning this condition is
reflected in the unallocated allowance.
The allowance for credit losses is based upon estimates of probable losses
inherent in the loan and lease portfolio. The amount actually observed for these
losses can vary significantly from the estimated amounts. Our methodology
includes several features that are intended to reduce the differences between
estimated and actual losses. The loss migration model that is used to establish
the loan loss factors for problem graded loans is designed to be self-correcting
by taking into account our recent loss experience. Similarly, by basing the pass
graded loan loss factors on loss experience over the last eight years, the
methodology is designed to take our recent loss experience into account. Pooled
loan loss factors are adjusted quarterly based upon the
33
<PAGE>
level of net chargeoffs expected by management in the next twelve months.
Furthermore, our methodology permits adjustments to any loss factor used in the
computation of the formula allowance in the event that, in management's
judgment, significant factors that affect the collectibility of the portfolio as
of the evaluation date are not reflected in the loss factors. By assessing the
probable estimated losses inherent in the loan and lease portfolio on a
quarterly basis, we are able to adjust specific and inherent loss estimates
based upon any more recent information that has become available.
At September 30, 1998, our allowance for credit losses was $473.7 million,
or 2.02 percent of total loans, and 697.2 percent of total nonaccrual loans,
compared with an allowance for credit losses at September 30, 1997 of $478.5
million, or 2.15 percent of total loans, and 435.9 percent of total nonaccrual
loans.
During the first nine months of 1998, there were no changes in estimation
methods or assumptions that affected our methodology for assessing the
appropriateness of the allowance for credit losses, except that we extended the
average annual net chargeoff rate for pass graded loans from six years to eight
years. The impact of this change resulted in an increase of approximately $17
million in the formula allowance. We extended the average annual net chargeoff
rate to better reflect the business cycle. Changes in assumptions regarding the
effects of economic and business conditions on borrowers and other factors,
which are described below, affect the assessment of the unallocated allowance.
As of March 31, 1998, we changed the method of determining the quantified losses
on Asia/Pacific loans from one based on total corporate exposure in the segment
to one based on total country exposure to countries receiving assistance from
the International Monetary Fund. As of March 31, 1998, this change resulted in a
$9 million decrease in the allowance allocated to foreign loans.
In the third quarter 1998, we reclassified a $1.9 million previously
established allowance for credit losses related to interest rate derivatives and
foreign exchange contracts from the unallocated portion of the allowance for
credit losses. The reserve for derivative and foreign exchange contracts is
presented as an offset to trading account assets. Future changes in that reserve
as a result of changes in the positive replacement cost of those contracts will
be provided as an offset to trading gains and losses.
We evaluate our loan portfolio for impairment as defined by SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", as amended. At September 30,
1998, total impaired loans were $67.9 million and the associated impairment
allowance was $7.5 million, compared with total impaired loans of $108.4 million
and an associated impairment allowance of $9.4 million at December 31, 1997.
We resumed recording provisions in 1998 to bring our allowance for credit
losses to a level deemed appropriate by management based upon management's
application of the loan loss allowance methodology discussed above. In
particular, in the assessment as of September 30, 1998, management focused on
factors affecting elements of the oil and gas, agriculture and technology
industries, as well as the continued effects of the Asian financial turmoil on
companies and financial institutions in domestic and foreign markets in which we
operate and the growth in, and changes in the composition of, the loan and lease
portfolio.
- Regarding the oil and gas industry, where we had $529.0 million of loans
outstanding at September 30, 1998, management considered the effects of
the decline in oil prices on the cash flows of borrowers in the oil and
gas industry.
- Regarding the agriculture industry, where we had $531.4 million of loans
outstanding at September 30, 1998, management considered the effects of
abnormal weather conditions, commonly referred to as "El Nino", and export
market conditions on agricultural borrowers.
- Regarding the technology industry, where we had $834.2 million of loans
outstanding at September 30, 1998, management considered the effects of
export market conditions and cyclical overcapacity on borrowers in the
technology industry.
34
<PAGE>
- Regarding cross-border loans and acceptances to Japan, Korea, Malaysia,
Thailand, Vietnam, Singapore, Indonesia, the Philippines, China, Taiwan
and Hong Kong, where we had outstandings of $1.5 billion at September 30,
1998, management considered the continued effects of the global financial
turmoil.
- Regarding cross-border loans and acceptances to Latin American countries,
where we had outstandings of $292 million at September 30, 1998,
management considered the continued effects of the global financial
turmoil.
Although in some instances, the downgrading of a loan resulting from these
effects has been reflected in the formula allowance, management believes that in
most instances, the impact of these events on the collectibility of the
applicable loans and leases has not yet been reflected in the level of
nonperforming loans or in the internal risk grading process regarding these
loans and leases. Accordingly, our evaluation of the probable losses related to
these factors is reflected in the unallocated allowance. The evaluations of the
inherent losses concerning these factors involve higher degrees of uncertainty
because they are not identified with specific problem credits.
At September 30, 1998, our allowance for credit losses was $473.7 million,
consisting of a $196 million formula allowance, a $30 million specific allowance
and a $247 million unallocated allowance. We do not weight the unallocated
allowance among segments of the portfolio. The following factors are reflected
in management's estimate of the unallocated allowance:
- the approximately $45 million to $57 million margin for model and
estimation risk prescribed by our credit policy,
- the effects of the decline in oil prices on borrowers in the oil and gas
industry, which could be in the range of $10 million to $20 million,
- the effects of abnormal weather conditions and export market conditions on
agricultural borrowers, which could be in the range of $10 million to $20
million,
- the effects of export market conditions and cyclical overcapacity on
borrowers in the technology industry, which could be in the range of $20
million to $30 million,
- the continued effects of the global financial turmoil on borrowers in
Asia/Pacific countries, which could be in the range of $65 million to $90
million and
- the continued effects of the global financial turmoil on borrowers in
Latin American countries, which could be in the range of $15 million to
$20 million.
There can be no assurance that the adverse impact of any of these conditions on
us will not be in excess of the range set forth above. See "Forward Looking
Statements" on page 14 for more information on risks and uncertainties affecting
our estimates.
Despite the foregoing factors, management reduced the size of the provision
in each of the second and third quarters of 1998 based upon certain mitigating
factors, including the continued decline in the level of nonperforming loans,
the lower levels of net chargeoffs, the sale of the credit card portfolio, the
real estate note sale and the results of our efforts to limit our exposure and
counterparty risk in Asia.
35
<PAGE>
The table below presents a reconciliation of changes in the allowance for
credit losses.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period............................................................ $ 523,946 $ 451,692
Loans charged off:
Commercial, financial and industrial.................................................. 40,618 21,966
Construction.......................................................................... 120 3
Mortgage.............................................................................. 4,481 4,992
Consumer.............................................................................. 38,864 24,206
Lease financing....................................................................... 2,502 1,971
---------- ----------
Total loans charged off............................................................. 86,585 53,138
Recoveries of loans previously charged off:
Commercial, financial and industrial.................................................. 18,473 17,788
Construction.......................................................................... 9,054 3
Mortgage.............................................................................. 2,833 2,705
Consumer.............................................................................. 10,575 11,389
Lease financing....................................................................... 284 273
---------- ----------
Total recoveries of loans previously charged off.................................... 41,219 32,158
---------- ----------
Net loans charged off............................................................. 45,366 20,980
Provision for credit losses............................................................. -- 45,000
Transfer of reserve for trading account assets.......................................... -- (1,911)
Foreign translation adjustment and other net additions (deductions)..................... (126) (84)
---------- ----------
Balance, end of period.................................................................. $ 478,454 $ 473,717
---------- ----------
---------- ----------
Allowance for credit losses to total loans.............................................. 2.15% 2.02%
Provision for credit losses to net loans charged off.................................... nm 214.49
Net loans charged off to average loans outstanding for the period(1).................... 0.28 0.12
</TABLE>
- ---------
(1) Annualized.
nm = not meaningful
During the third quarter of 1998, net loans charged off were $12.5 million,
compared with $23.6 million in the third quarter of 1997. Loans charged off in
the third quarter of 1998 decreased by $17.0 million, primarily due to a
- $12.1 million decrease in commercial, financial and industrial loans
charged off as portfolio quality improved, and
- $7.7 million decrease in consumer loans charged off primarily due to the
sale of the credit card portfolio in April of 1998.
Recoveries of loans previously charged off decreased by $5.9 million, and the
percentage of net loans charged off to average loans decreased from 0.42 percent
in the third quarter of 1997 to 0.21 percent in the third quarter of 1998.
Net loans charged off were $21.0 million for the nine months ended September
30, 1998 and $45.4 million for the nine months ended September 30, 1997. Loans
charged off in 1998 decreased by $33.4 million primarily due to a
- $18.7 million decrease in commercial, financial and industrial loans
charged off as portfolio quality improved, and
36
<PAGE>
- $14.7 million decrease in consumer loans charged off primarily due to the
sale of the credit card portfolio in April of 1998.
Recoveries of loans previously charged off decreased by $9.1 million, and the
percentage of net loans charged off to average loans decreased from 0.28 percent
for the nine months ended September 30, 1997 to 0.12 percent for the nine months
ended September 30, 1998. Chargeoffs reflect the realization of losses in the
portfolio that were recognized previously through provisions for credit losses.
At September 30, 1998, the allowance for credit losses exceeded the net loans
charged off during the first three quarters of 1998, reflecting management's
belief, based on the foregoing analysis, that there are additional losses
inherent in the portfolio.
At September 30, 1998, our average annual net chargeoffs for the past five
years and the nine months ended September 30, 1998, was $117.7 million, which
represents 4.0 years of losses based on the level of the allowance for credit
losses at that date. Historical net chargeoffs are not necessarily indicative of
the amount of net chargeoffs that we will realize in the future.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1997 1998
------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial, financial and industrial................................. $ 54,087 $ 46,392 $ 55,407
Construction......................................................... 4,579 4,071 4,377
Mortgage:
Residential........................................................ 1,133 954 --
Commercial......................................................... 49,959 57,921 8,163
------------- ------------ -------------
Total mortgage................................................... 51,092 58,875 8,163
------------- ------------ -------------
Total nonaccrual loans........................................... 109,758 109,338 67,947
Foreclosed assets.................................................... 23,216 20,471 13,452
------------- ------------ -------------
Total nonperforming assets....................................... $ 132,974 $ 129,809 $ 81,399
------------- ------------ -------------
------------- ------------ -------------
Allowance for credit losses.......................................... $ 478,454 $ 451,692 $ 473,717
------------- ------------ -------------
------------- ------------ -------------
Nonaccrual loans to total loans...................................... 0.49% 0.48% 0.29%
Allowance for credit losses to nonaccrual loans...................... 435.92 413.12 697.19
Nonperforming assets to total loans and foreclosed assets............ 0.60 0.57 0.35
Nonperforming assets to total assets................................. 0.43 0.42 0.26
</TABLE>
At September 30, 1998, nonperforming assets totaled $81.4 million, a
decrease of $48.4 million, or 37 percent, from December 31, 1997. The decrease
was primarily the result of reductions of $49.8 million in nonaccrual commercial
mortgage loans due to a combination of note sales, repayments and restorations
to accrual and $7.0 million in foreclosed assets due to sales of individual
assets. The decline in nonaccrual loans was reflected in an improvement in the
overall risk grades of the portfolio, which contributed to a reduction in the
formula allowance.
Nonaccrual loans as a percentage of total loans were 0.29 percent at
September 30, 1998, compared with 0.48 percent at December 31, 1997.
Nonperforming assets as a percentage of total loans and foreclosed assets were
0.35 percent at September 30, 1998, compared with 0.57 percent at December 31,
1997.
37
<PAGE>
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1997 1998
------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial, financial and industrial................................. $ 3,682 $ 450 $ 1,403
Mortgage:
Residential........................................................ 9,606 10,170 9,223
Commercial......................................................... 2,284 1,660 370
------------- ------------ -------------
Total mortgage................................................... 11,890 11,830 9,593
Consumer and other................................................... 10,010 7,712 4,299
------------- ------------ -------------
Total loans 90 days or more past due and still accruing............ $ 25,582 $ 19,992 $ 15,295
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
REGULATORY CAPITAL
The following table summarizes our risk-based capital, risk-weighted assets,
and risk-based capital ratios.
<TABLE>
<CAPTION>
MINIMUM
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, REGULATORY
1997 1997 1998 REQUIREMENT
------------- ------------- ------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CAPITAL COMPONENTS:
Tier 1 capital...................................... $ 2,520,589 $ 2,587,071 $ 2,876,605
Tier 2 capital...................................... 593,865 601,102 598,027
------------- ------------- -------------
Total risk-based capital.......................... $ 3,114,454 $ 3,188,173 $ 3,474,632
------------- ------------- -------------
Risk-weighted assets................................ $ 28,249,379 $ 28,862,340 $ 30,176,967
------------- ------------- -------------
------------- ------------- -------------
Quarterly average assets............................ $ 30,037,626 $ 30,334,507 $ 30,696,414
------------- ------------- -------------
------------- ------------- -------------
CAPITAL RATIOS:
Total risk-based capital............................ 11.02% 11.05% 11.51% 8.0%
Tier 1 risk-based capital........................... 8.92 8.96 9.53 4.0
Leverage ratio(1)................................... 8.39 8.53 9.37 4.0
</TABLE>
- ---------
(1) Tier 1 capital divided by quarterly average assets, excluding goodwill.
UnionBanCal Corporation and its bank must comply with various regulations
issued by Federal banking agencies, including minimum capital requirements.
UnionBanCal Corporation and its bank are required to maintain minimum ratios of
total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average assets, which is the leverage ratio.
Compared with December 31, 1997, our Tier 1 risk-based capital ratio at
September 30, 1998 increased 57 basis points to 9.53 percent, the total
risk-based capital ratio increased 46 basis points to 11.51 percent, and the
leverage ratio increased 84 basis points to 9.37 percent. The increase in the
capital ratios was primarily attributable to retained earnings growing faster
than both risk-weighted assets and average assets, partly offset by the
reduction of $50.0 million in subordinated capital notes.
As of September 30, 1998, management believes the capital ratios of our bank
met all regulatory minimums of a "well-capitalized" institution.
38
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
To facilitate the discussion of the results of operations, the Selected
Consolidated Financial and Operating Data table on page 21 includes pro forma
earnings disclosures and ratios. These "pro forma" presentations supplement the
Consolidated Statements of Income on page F-2, which are prepared in accordance
with generally accepted accounting principles, primarily regarding the treatment
of merger and integration expense. Pro forma means that the amounts presented do
not include the effects of the cumulative change in accounting and merger and
integration expense for the period presented. We believe that it is meaningful
to understand the operating results and trends excluding these expenses and,
therefore, have included information in the tables referred to above and in the
discussion that follows, that presents income before merger and integration
expense and income taxes and related pro forma ratio and per share calculations.
SUMMARY
Net income in 1997 was $411 million, including $4 million (after-tax) of
merger and integration related expense. Net income in 1996 was $249 million,
including $72 million (after-tax) of merger and integration related expense. Net
income applicable to common stock was $404 million, or $2.30 per diluted common
share, in 1997 compared with $238 million, or $1.36 per diluted common share, in
1996. Excluding after-tax merger and integration expense, pro forma earnings for
1997 were $415 million, an increase of 29 percent from $321 million a year
earlier. Pro forma earnings applicable to common stock were $407 million, or
$2.32 per diluted common share, in 1997 compared with $310 million, or $1.77 per
diluted common share, in 1996. This increase of 31 percent over the comparable
figures for 1996 was due to a 5 percent increase in net interest income, an 11
percent increase in noninterest income, a decrease in the effective income tax
rate, and a $40 million reduction in the provision for credit losses, partially
offset by a 2 percent increase in noninterest expense (excluding merger and
integration expense). Other highlights for 1997 include:
- Net interest income, on a taxable-equivalent basis, was $1,237 million in
1997, an increase of $62 million, or 5 percent, over 1996 primarily due to
a $1.6 billion, or 6 percent, increase in average earning assets,
resulting primarily from a $1.1 billion, or 5 percent, increase in average
loans and largely funded by an $851 million, or 13 percent, increase in
average demand deposits. Partially offsetting the positive impact of the
growth in earning assets and demand deposits on net interest income was a
5 basis point decline in the net interest margin to 4.70%. The decline in
net interest margin was primarily due to a 14 basis point decrease in the
spread between the average yield on earning assets and the average rate
paid on interest bearing liabilities.
- No provision for credit losses was recorded in 1997 compared with $40
million in 1996, reflecting improvement in the quality of our loan
portfolio and a reduction in nonaccrual loans. Nonperforming assets
declined $27 million, or 17 percent, from December 31, 1996 to $130
million at December 31, 1997. Nonperforming assets as a percent of total
assets declined to 0.42% at December 31, 1997 compared with 0.54% a year
earlier. Total nonaccrual loans were $109 million at December 31, 1997
compared with $128 million at year-end 1996, resulting in a reduction in
the ratio of nonaccrual and renegotiated loans to total loans from 0.61%
at December 31, 1996 to 0.48% at year-end 1997. The allowance for credit
losses was $452 million, or 413% of total nonaccrual loans, at December
31, 1997 compared with $524 million, or 408% of total nonaccrual loans, at
December 31, 1996.
- Noninterest income was $463 million in 1997, an increase of $44 million,
or 11 percent, over 1996. Service charges on deposit accounts grew $13
million, or 12 percent, reflecting growth in deposit balances while trust
and investment management fees increased $14 million, or 15 percent, on
growth in trust accounts and assets under management.
- Excluding merger and integration expense, noninterest expense was $1,039
million in 1997, an increase of $21 million, or 2 percent, over 1996. This
increase was primarily attributable to an increase of $14 million, or 3
percent, in personnel-related expense, a significant portion of which was
due to
39
<PAGE>
severance payments related to realignment of departments and to higher
performance-related incentive compensation, and an increase of $14
million, or 25 percent, in other expenses. These increases were partially
offset by a decline of $18 million in net occupancy expense, reflecting a
$12 million charge recorded in 1996 related to former banking facilities,
as well as merger efficiencies realized in 1997. Excluding the $12 million
charge in 1996 and merger and integration expense, noninterest expense
increased $33 million over 1996.
- The effective tax rate for 1997 was 37% compared with 40% for 1996.
Excluding the $25 million after-tax refund from the State of California
Franchise Tax Board, the effective tax rate in 1997 was 41%. Excluding a
$5 million after-tax benefit from the settlement of a unitary tax issue
with the State of California Franchise Tax Board, the effective tax rate
in 1996 was also 41%.
- The return on average assets for 1997 increased to 1.39% compared to 0.89%
for 1996. Excluding the after-tax effect of merger and integration
expense, the pro forma return on average assets was 1.40% for 1997
compared to 1.15% for 1996. The return on average common equity for 1997
was 16.05% compared to 10.24% for 1996. Excluding the after-tax effect of
merger and integration expense, the pro forma return on average common
equity was 16.20% for 1997 compared to 13.33% for 1996.
- Total loans at December 31, 1997 were $22.7 billion, an increase of $1.7
billion, or 8 percent, over year-end 1996, primarily from growth in the
commercial, financial and industrial loan portfolio.
- At December 31, 1997, our Tier 1 risk-based capital ratio was 8.96%,
exceeding the minimum regulatory guidelines for bank holding companies of
4%, and the total risk-based capital ratio was 11.05%, exceeding the
minimum regulatory guidelines of 8%. The Tier 1 and total risk-based
capital ratios for our bank at December 31, 1997 exceeded the regulatory
guidelines for "well-capitalized" banks. Our leverage ratio was 8.53% at
December 31, 1997, exceeding the minimum regulatory guideline for bank
holding companies.
40
<PAGE>
NET INTEREST INCOME
The table below shows the major components of net interest income and net
interest margin.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1995 1996 1997
------------------------------------ ------------------------------------ ----------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE
BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) BALANCE
---------- ----------- ----------- ---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans: (2)
Domestic.................... $17,783,993 $1,540,694 8.66% $19,328,752 $1,604,799 8.30% $20,332,494
Foreign(3).................. 1,190,547 76,723 6.44 1,398,825 84,693 6.05 1,523,417
Securities -- taxable(4)...... 2,055,504 120,210 5.85 2,138,282 133,170 6.23 2,521,339
Securities -- tax-exempt(4)... 185,934 18,984 10.21 151,970 15,451 10.17 124,174
Interest bearing deposits in
banks........................ 930,999 58,201 6.25 911,575 52,709 5.78 968,966
Federal funds sold and
securities purchased under
resale agreements............ 368,684 22,247 6.03 547,547 30,246 5.52 466,321
Trading account assets........ 333,468 20,578 6.17 240,375 12,960 5.39 355,111
---------- ----------- ---------- ----------- ----------
Total earning assets...... 22,849,129 1,857,637 8.13 24,717,326 1,934,028 7.82 26,291,822
----------- -----------
Allowance for credit losses... (573,648) (544,806) (503,126)
Cash and due from banks....... 1,617,715 1,926,050 2,006,038
Premises and equipment, net... 411,794 425,943 411,302
Other assets.................. 1,259,853 1,375,221 1,486,956
---------- ---------- ----------
Total assets.............. $25,564,843 $27,899,734 $29,692,992
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES:
Domestic deposits:
Interest bearing............ $4,955,750 129,860 2.62 $5,001,060 135,821 2.72 $5,340,661
Savings and consumer time... 2,738,588 99,215 3.62 2,837,198 105,350 3.71 2,970,370
Large time.................. 2,474,685 128,974 5.21 4,095,222 218,959 5.35 4,652,293
Foreign deposits(3)........... 1,806,820 96,109 5.32 1,504,067 71,437 4.75 1,589,303
---------- ----------- ---------- ----------- ----------
Total interest bearing
deposits................. 11,975,843 454,158 3.79 13,437,547 531,567 3.96 14,552,627
---------- ----------- ---------- ----------- ----------
Federal funds purchased and
securities sold under
repurchase agreements........ 1,384,762 78,908 5.70 933,433 47,095 5.05 1,097,707
Subordinated capital notes.... 615,868 42,538 6.91 458,966 30,104 6.56 354,575
Commercial paper.............. 1,448,739 86,695 5.98 1,620,087 87,411 5.40 1,637,070
Other borrowed funds.......... 731,759 42,561 5.82 1,119,051 62,549 5.59 635,900
---------- ----------- ---------- ----------- ----------
Total borrowed funds...... 4,181,128 250,702 6.00 4,131,537 227,159 5.50 3,725,252
---------- ----------- ---------- ----------- ----------
Total interest bearing
liabilities.............. 16,156,971 704,860 4.36 17,569,084 758,726 4.32 18,277,879
----------- -----------
Demand deposits............... 5,994,129 6,663,997 7,514,528
Other liabilities............. 1,081,267 1,206,216 1,295,728
---------- ---------- ----------
Total liabilities......... 23,232,367 25,439,297 27,088,135
SHAREHOLDER'S EQUITY:
Preferred stock............... 135,000 135,000 90,247
Common equity(5).............. 2,197,476 2,325,437 2,514,610
---------- ---------- ----------
Total shareholders'
equity................... 2,332,476 2,460,437 2,604,857
---------- ---------- ----------
Total liabilities and
shareholders' equity..... $25,564,843 $27,899,734 $29,692,992
---------- ---------- ----------
---------- ---------- ----------
Net interest income/margin
(taxable-equivalent basis).... 1,152,777 5.05% 1,175,302 4.75%
Less: taxable-equivalent
adjustment.................... 10,444 6,724
----------- -----------
Net interest income............. $1,142,333 $1,168,578
----------- -----------
----------- -----------
<CAPTION>
INTEREST AVERAGE
INCOME/ YIELD/
EXPENSE(1) RATE(1)
----------- -----------
<S> <C> <C>
ASSETS:
Loans: (2)
Domestic.................... $1,672,006 8.22%
Foreign(3).................. 92,420 6.07
Securities -- taxable(4)...... 158,950 6.30
Securities -- tax-exempt(4)... 12,669 10.20
Interest bearing deposits in
banks........................ 56,748 5.86
Federal funds sold and
securities purchased under
resale agreements............ 26,079 5.59
Trading account assets........ 19,917 5.61
-----------
Total earning assets...... 2,038,789 7.75
-----------
Allowance for credit losses...
Cash and due from banks.......
Premises and equipment, net...
Other assets..................
Total assets..............
LIABILITIES:
Domestic deposits:
Interest bearing............ 151,768 2.84
Savings and consumer time... 112,808 3.80
Large time.................. 256,007 5.50
Foreign deposits(3)........... 75,398 4.74
-----------
Total interest bearing
deposits................. 595,981 4.10
-----------
Federal funds purchased and
securities sold under
repurchase agreements........ 58,544 5.33
Subordinated capital notes.... 22,850 6.44
Commercial paper.............. 89,912 5.49
Other borrowed funds.......... 34,492 5.42
-----------
Total borrowed funds...... 205,798 5.52
-----------
Total interest bearing
liabilities.............. 801,779 4.39
-----------
Demand deposits...............
Other liabilities.............
Total liabilities.........
SHAREHOLDER'S EQUITY:
Preferred stock...............
Common equity(5)..............
Total shareholders'
equity...................
Total liabilities and
shareholders' equity.....
Net interest income/margin
(taxable-equivalent basis).... 1,237,010 4.70%
Less: taxable-equivalent
adjustment.................... 5,328
-----------
Net interest income............. $1,231,682
-----------
-----------
</TABLE>
- ------------
(1) Yields and interest income are presented on a taxable-equivalent basis using
the federal statutory tax rate of 35 percent.
(2) Average balances on loans outstanding include all nonperforming and
renegotiated loans. The amortized portion of net loan origination fees
(costs) is included in interest income on loans, representing an adjustment
to the yield.
(3) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
(4) Yields on securities available for sale were based on fair value. The
difference between these yields and those based on amortized cost was not
significant.
(5) Amounts restated to give retroactive effect to the exchange referred to in
Note 1 of the accompanying Notes to Consolidated Financial Statements.
41
<PAGE>
Net interest income is interest earned on loans and investments less
interest expense on deposit accounts and borrowings. Primary factors affecting
the level of net interest income include the margin between the yield earned on
interest earning assets and the rate paid on interest bearing liabilities, as
well as the volume and composition of average interest earning assets and
average interest bearing liabilities.
Excluding the provision for credit losses, net interest income on a
taxable-equivalent basis was $1,175 million in 1996, compared with $1,237
million in 1997. The increase of $62 million, or 5 percent, was primarily
attributable to a $1.6 billion, or 6 percent, increase in average earning assets
largely funded by an $851 million, or 13 percent, increase in average demand
deposits. Partially offsetting the positive impact of the growth in earning
assets and demand deposits on net interest income was a 5 basis point decline in
the net interest margin to 4.70%, primarily as a result of both a 14 basis point
increase in the cost of interest bearing deposits due to a 25 basis point
increase in the Federal Funds rate in March 1997, and a decrease in the average
yield on domestic loans of 8 basis points.
Average earning assets were $24.7 billion in 1996 compared with $26.3
billion in 1997. This growth was primarily attributable to a $1.1 billion, or 5
percent, increase in average loans and a $355 million, or 16 percent, increase
in average securities. Average commercial, financial and industrial loans, which
increased $582 million, and average commercial mortgage loans, which increased
$437 million, contributed most of the loan growth. See "Loans" on page 48 for
additional commentary on loan portfolio growth. The increase in primarily fixed
rate securities reflected interest rate risk management actions to reduce our
exposure to declines in interest rates.
The $1.6 billion, or 6 percent, increase in average earning assets over 1996
was primarily funded by increases in average demand deposits and average
interest bearing core deposits. Increases in these categories were: demand
deposits $851 million, or 13 percent; interest bearing domestic deposits $340
million, or 7 percent; and savings and consumer time deposits $133 million, or 5
percent. The increase in demand deposits in 1997 was partially due to an influx
of new customer relationships, arising from the recent merger and acquisition
activities of other financial institutions in the California market during the
year.
42
<PAGE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table shows the changes in the components of net interest
income on a taxable-equivalent basis. The changes in net interest income between
periods have been reflected as attributable either to volume or rate changes.
For purposes of this table, changes which are not solely due to volume or rate
changes are allocated to rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 VERSUS 1995 1997 VERSUS 1996
---------------------------------- ----------------------------------
INCREASE (DECREASE) DUE TO CHANGE INCREASE (DECREASE) DUE TO
IN CHANGE IN
---------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE NET
VOLUME RATE NET CHANGE VOLUME RATE CHANGE
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CHANGES IN INTEREST INCOME:
Loans:
Domestic...................................... $ 133,776 $ (69,671) $ 64,105 $ 83,311 $ (16,104) $ 67,207
Foreign(1).................................... 13,413 (5,443) 7,970 7,538 189 7,727
Securities -- taxable........................... 4,843 8,117 12,960 23,856 1,924 25,780
Securities -- tax-exempt........................ (3,468) (65) (3,533) (2,826) 44 (2,782)
Interest bearing deposits in banks.............. (1,214) (4,278) (5,492) 3,317 722 4,039
Federal funds sold and securities purchased
under resale agreements........................ 10,785 (2,786) 7,999 (4,484) 317 (4,167)
Trading account assets.......................... (5,744) (1,874) (7,618) 6,184 773 6,957
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets........................ 152,391 (76,000) 76,391 116,896 (12,135) 104,761
---------- ---------- ---------- ---------- ---------- ----------
CHANGES IN INTEREST EXPENSE:
Domestic deposits:
Interest bearing.............................. 1,187 4,774 5,961 9,237 6,710 15,947
Savings and consumer time..................... 3,572 2,563 6,135 4,941 2,517 7,458
Large time.................................... 84,458 5,527 89,985 29,803 7,245 37,048
Foreign deposits(1)............................. (16,104) (8,568) (24,672) 4,049 (88) 3,961
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing deposits............. 73,113 4,296 77,409 48,030 16,384 64,414
---------- ---------- ---------- ---------- ---------- ----------
Federal funds purchased and securities sold
under repurchase agreements.................... (25,718) (6,095) (31,813) 8,296 3,153 11,449
Subordinated capital notes...................... (10,837) (1,597) (12,434) (6,848) (406) (7,254)
Commercial paper................................ 10,254 (9,538) 716 916 1,585 2,501
Other borrowed funds............................ 22,526 (2,538) 19,988 (27,006) (1,051) (28,057)
---------- ---------- ---------- ---------- ---------- ----------
Total borrowed funds........................ (3,775) (19,768) (23,543) (24,642) 3,281 (21,361)
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities.......... 69,338 (15,472) 53,866 23,388 19,665 43,053
---------- ---------- ---------- ---------- ---------- ----------
Changes in net interest income.............. $ 83,053 $ (60,528) $ 22,525 $ 93,508 $ (31,800) $ 61,708
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- ---------
(1) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
Interest income on a taxable-equivalent basis increased $105 million in
1997, primarily due to growth in interest income from domestic loans and
securities, which reflected higher average balances outstanding, partially
offset by a lower average yield primarily on domestic loans.
43
<PAGE>
Interest expense increased $43 million in 1997 due to higher interest
expense on interest bearing deposits, primarily reflecting higher average
deposit balances and higher average rates. Interest expense on borrowed funds
declined $21 million in 1997, reflecting lower volumes, offset by a 2 basis
point increase in the average rate paid.
NONINTEREST INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
----------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------
YEARS ENDED DECEMBER 31, 1996 VERSUS 1995 1997 VERSUS 1996
---------------------------------- ---------------------- ----------------------
1995 1996 1997 AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit
accounts.......................... $ 95,177 $ 101,975 $ 114,647 $ 6,798 7% $ 12,672 12%
Trust and investment management
fees.............................. 87,743 93,479 107,527 5,736 7 14,048 15
International commissions and
fees.............................. 68,621 66,108 66,122 (2,513) (4) 14 --
Credit card merchant fees........... 45,767 49,778 57,128 4,011 9 7,350 15
Merchant banking fees............... 24,483 23,929 24,924 (554) (2) 995 4
Foreign exchange trading gains,
net............................... 19,043 13,255 16,268 (5,788) (30) 3,013 23
Brokerage commissions and fees...... 9,270 12,932 15,569 3,662 40 2,637 20
Securities gains (losses), net...... (702) 4,502 2,711 5,204 nm (1,791) (40)
Other............................... 45,917 52,718 58,105 6,801 15 5,387 10
---------- ---------- ---------- --------- ---------
Total noninterest income........ $ 395,319 $ 418,676 $ 463,001 $ 23,357 6% $ 44,325 11%
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
- ---------
nm = not meaningful
Noninterest income in 1997 was $463 million, an increase of $44 million, or
11 percent, over 1996. This included a $13 million increase in revenue from
service charges on deposit accounts, a $14 million increase in trust and
investment management fees, a $7 million increase in credit card merchant fees,
a $3 million increase in foreign exchange trading gains, net, a $3 million
increase in brokerage commissions and fees, and a $5 million increase in other
noninterest income, partially offset by a $2 million decrease in securities
gains, net.
Revenue from service charges on deposit accounts was $115 million in 1997,
an increase of 12 percent over 1996. The increase was primarily attributable to
an increase in the volume of non-credit services provided.
Trust and investment management fees were $108 million in 1997, 15 percent
higher than in 1996, primarily due to an increase in assets under management,
which resulted in higher mutual fund management fees and personal trust fees.
Credit card merchant fees were $57 million in 1997, an increase of 15
percent over 1996. The increase was primarily due to an increase in the volume
of credit card drafts deposited by merchants.
Foreign exchange trading gains, net increased $3 million, or 23 percent, in
1997, primarily due to more volatility in the foreign exchange markets in 1997.
44
<PAGE>
Brokerage commissions and fees were $16 million in 1997, an increase of 20
percent over 1996. The increase was primarily attributable to brokerage
commissions on non-proprietary mutual fund sales.
Other noninterest income in 1997 was $5 million, or 10 percent, higher than
in 1996. Included in other noninterest income in 1997 was an $8 million gain
related to a real estate joint venture, compared with gains of $2 million
related to a real estate joint venture and $2 million related to a non-recurring
insurance refund recognized in 1996.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
YEARS ENDED DECEMBER 31, 1996/1995 1997/1996
-------------------------------------- ----------------------- ------------------------
1995 1996 1997 AMOUNT PERCENT AMOUNT PERCENT
---------- ------------ ------------ ---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and other
compensation.................. $ 432,581 $ 448,793 $ 461,915 $ 16,212 4% $ 13,122 3%
Employee benefits............... 104,090 108,454 109,729 4,364 4 1,275 1
---------- ------------ ------------ ---------- -----------
Personnel-related expense..... 536,671 557,247 571,644 20,576 4 14,397 3
Net occupancy................... 92,863 103,335 85,630 10,472 11 (17,705) (17)
Equipment....................... 55,056 55,942 56,137 886 2 195 --
Communications.................. 35,806 40,133 42,372 4,327 12 2,239 6
Credit card processing.......... 31,288 37,091 42,274 5,803 19 5,183 14
Advertising and public
relations..................... 20,911 28,788 28,664 7,877 38 (124) --
Professional services........... 26,197 24,342 28,075 (1,855) (7) 3,733 15
Data processing................. 18,557 22,140 25,973 3,583 19 3,833 17
Printing and office supplies.... 22,626 27,085 24,098 4,459 20 (2,987) (11)
Software........................ 13,839 15,895 16,562 2,056 15 667 4
Travel.......................... 12,183 14,936 15,763 2,753 23 827 6
Intangible asset
amortization.................. 13,353 13,335 13,352 (18) -- 17 --
Armored car..................... 13,792 13,296 12,209 (496) (4) (1,087) (8)
Regulatory authority
assessments................... 23,431 4,048 5,778 (19,383) (83) 1,730 43
Foreclosed asset expense
(income)...................... (3,213) 2,889 (1,268) 6,102 nm (4,157) nm
Other........................... 64,741 56,938 71,365 (7,803) (12) 14,427 25
---------- ------------ ------------ ---------- -----------
Noninterest expense, excluding
merger and integration
expense...................... 978,101 1,017,440 1,038,628 39,339 4 21,188 2
Merger and integration
expense....................... -- 117,464 6,037 117,464 nm (111,427) (95)
---------- ------------ ------------ ---------- -----------
Total noninterest expense... $ 978,101 $ 1,134,904 $ 1,044,665 $ 156,803 16 % $ (90,239) (8)%
---------- ------------ ------------ ---------- -----------
---------- ------------ ------------ ---------- -----------
</TABLE>
- ---------
nm = not meaningful
45
<PAGE>
Noninterest expense, excluding merger and integration expense, was $1,039
million in 1997, an increase of $21 million, or 2 percent, over 1996. This
included a $14 million increase in personnel-related expense, a $5 million
increase in credit card processing expense, a $4 million increase in data
processing expense, and a $14 million increase in other noninterest expense,
partially offset by an $18 million decrease in net occupancy expense and a $4
million decrease in foreclosed asset expense.
Personnel-related expense was $572 million in 1997, an increase of $14
million, or 3 percent, compared to 1996. This increase was primarily due to the
increase in salaries and other compensation expense, a significant portion of
which was due to severance payments related to realignment of departments and to
higher performance-related incentive compensation.
Credit card processing expense was $42 million in 1997, an increase of $5
million, or 14 percent, over 1996 due to higher merchant volumes.
Data processing expense was $26 million in 1997, an increase of $4 million,
or 17 percent, over 1996 due to increased activity in data processing systems
supporting the growth in deposits.
Other noninterest expense increased $14 million in 1997. Of the total
increase, $7.5 million reflected additional expenses incurred to support higher
deposit volumes.
Net occupancy expense was $86 million in 1997, $18 million, or 17 percent,
lower than the previous year. The decrease in net occupancy expense was
primarily due to a $12 million charge related to former banking facilities in
1996. Excluding this charge, net occupancy expense in 1997 declined 6 percent
due to merger-related efficiencies realized in 1997.
Foreclosed asset expense decreased $4 million in 1997. The decrease was
primarily due to lower write-downs and maintenance and selling expenses,
reflecting a 28 percent reduction in the portfolio of foreclosed assets.
MERGER AND INTEGRATION EXPENSE
Merger and integration expense of $124 million in total was recorded in 1996
and 1997 to cover $38 million of personnel expense for severance, retention and
other employee related costs, $54 million for facilities expense related to
redundant banking facilities and $32 million in professional services and other
expense as a result of the combination of Union Bank and BanCal Tri-State
Corporation.
The following table presents merger and integration expense provisions in
1996 and 1997, the cash and noncash utilization of those expense provisions
during the periods, and the resulting liability balances as of December 31, 1996
and 1997.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1996 1997
---------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Balance, accrued merger and integration expense, beginning of period....................... $ -- $ 54,344
Provision for merger and integration costs................................................. 117,464 6,037
Utilization for the period:
Cash..................................................................................... 40,155 35,809
Noncash.................................................................................. 22,965 1,642
---------- ---------
Total utilization...................................................................... 63,120 37,451
---------- ---------
Balance, accrued merger and integration expense, end of period............................. $ 54,344 $ 22,930
---------- ---------
---------- ---------
</TABLE>
At December 31, 1997, the liability balance included amounts primarily for
severance payments that are being paid on a periodic basis and for lease
payments that are continuing over the expected term of the leases.
46
<PAGE>
INCOME TAX EXPENSE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes................................................... $ 506,301 $ 412,350 $ 650,018
Income tax expense........................................................... 193,359 162,892 238,722
Effective tax rate........................................................... 38% 40% 37%
</TABLE>
Our effective tax rate in 1996 was 40% compared with 37% in 1997. Excluding
a $5 million after-tax benefit recognized in 1996 from a settlement with the
State of California Franchise Tax Board for 1985 and 1986, the effective tax
rate in 1996 was 41%. The lower 1997 effective tax rate was the result of an
after-tax refund from the State of California Franchise Tax Board of
approximately $25 million to settle litigation, administration, and audit
disputes covering the years 1975-1987. Excluding the State of California
Franchise Tax Board refund, the effective tax rate for 1997 was also 41%.
CREDIT RISK MANAGEMENT
Our principal business activity is the extension of credit in the form of
loans or other credit substitutes to individuals and businesses. Our policies
and applicable laws and regulations governing the extension of credit require
risk analysis as well as ongoing portfolio and credit management through loan
product diversification, lending limit constraints, credit review and approval
policies, and extensive internal monitoring.
We manage and control credit risk through diversification of the portfolio
by type of loan, industry concentration, dollar limits on multiple loans to the
same borrower, geographic distribution and type of borrower. Geographic
diversification of loans originated through our branch network is generally
within California, Oregon and Washington, which we consider to be our principal
markets. In addition, we will continue to originate and participate in lending
activities outside these states, as well as internationally.
In analyzing our existing loan portfolios, we apply specific monitoring
policies and procedures which vary according to the relative risk profile and
other characteristics of the loans within the various portfolios. Our
residential and consumer loans are relatively homogeneous and no single loan is
individually significant in terms of its size or potential risk of loss.
Therefore, we review our residential and consumer portfolios by analyzing their
performance as a pool of loans. In contrast, our monitoring process for the
commercial, financial and industrial; construction; commercial mortgage; and
foreign loan portfolios includes a periodic review of individual loans. Loans
that are performing but have shown some signs of weakness are evaluated under
more stringent reporting and oversight. We review these loans to assess the
ability of the borrowing entity to continue to service all of its interest and
principal obligations and as a result may adjust the risk grade accordingly. In
the event that we believe that full collection of principal and interest is not
reasonably assured, the loan will be appropriately downgraded and, if warranted,
placed on nonaccrual status, even though the loan may be current as to principal
and interest payments.
We have a Credit Policy Forum, composed of the Chief Credit Officer, senior
credit officers, and appropriate line officers who establish policy, credit
quality criteria, portfolio guidelines and other controls. Credit
Administration, together with a series of loan committees, has the
responsibility for administering the credit approval process, as well as the
implementation and administration of our credit policies and lending practices
and procedures. These policies require an extensive evaluation of credit
requests and continuing review of existing credits in order to promptly
identify, monitor and quantify evidence of deterioration of asset credit quality
or potential loss.
As another part of the control process, an independent internal credit
review and examination function provides quality assurance that loans and
commitments are made and maintained as prescribed by our credit
47
<PAGE>
policies and that the assets are appropriately and timely risk graded. This
includes a review of compliance with our underwriting policies when the loan is
initially extended and subsequent on-site examinations to ensure continued
compliance.
LOANS
The following table shows loans outstanding at year-end by loan type. Loans
outstanding by loan type as a percentage of total loans is shown for 1993
through 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------------- -------------------- -------------------- -------------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and
industrial.................. $ 8,135 46% $ 8,547 47% $ 9,684 47% $ 9,496 45% $ 10,747
Construction................. 877 5 464 3 370 2 358 2 293
Mortgage:
Residential................ 1,964 11 2,253 12 2,642 13 2,961 14 2,961
Commercial................. 2,088 12 1,778 10 2,143 10 2,598 12 2,952
--------- --- --------- --- --------- --- --------- --- ---------
Total mortgage........... 4,052 23 4,031 22 4,785 23 5,559 26 5,913
Consumer:
Installment................ 1,351 8 1,644 9 1,812 9 2,063 10 2,091
Home equity................ 1,302 7 1,222 7 1,222 6 1,113 5 993
Credit card and other
lines of credit.......... 207 1 219 1 309 2 303 1 270
--------- --- --------- --- --------- --- --------- --- ---------
Total consumer........... 2,860 16 3,085 17 3,343 17 3,479 16 3,354
Lease financing.............. 831 4 829 5 845 4 800 4 875
--------- --- --------- --- --------- --- --------- --- ---------
Total loans in domestic
offices................ 16,755 94 16,956 94 19,027 93 19,692 93 21,182
--------- --------- --------- --------- ---------
Loans originated in foreign
branches..................... 1,004 6 1,110 6 1,405 7 1,358 7 1,559
--------- --- --------- --- --------- --- --------- --- ---------
Total loans.............. $ 17,759 100% $ 18,066 100% $ 20,432 100% $ 21,050 100% $ 22,741
--------- --- --------- --- --------- --- --------- --- ---------
--------- --- --------- --- --------- --- --------- --- ---------
<CAPTION>
<S> <C>
Domestic:
Commercial, financial and
industrial.................. 47%
Construction................. 1
Mortgage:
Residential................ 13
Commercial................. 13
---
Total mortgage........... 26
Consumer:
Installment................ 9
Home equity................ 5
Credit card and other
lines of credit.......... 1
---
Total consumer........... 15
Lease financing.............. 4
---
Total loans in domestic
offices................ 93
Loans originated in foreign
branches..................... 7
---
Total loans.............. 100%
---
---
</TABLE>
Our lending activities are predominantly domestic, with such loans
comprising approximately 93 percent of the portfolio at December 31, 1997. Total
loans at December 31, 1997 were $22.7 billion, an increase of $1,691 million, or
8 percent, from one year earlier. The increase was primarily attributable to
growth in the commercial, financial and industrial loan portfolio, which
increased $1,251 million from 1996, and to growth in the commercial mortgage
loan portfolio, which increased $354 million.
COMMERCIAL, FINANCIAL AND INDUSTRIAL LOANS. Commercial, financial and
industrial loans represent the largest category in the loan portfolio. These
loans are extended principally to major corporations, middle market businesses,
and small businesses, with no industry concentration exceeding ten percent of
total commercial, financial and industrial loans.
Our commercial market lending originates primarily through its banking
office network. These offices, which rely extensively on relationship oriented
banking, provide many services including cash management services, lines of
credit, accounts receivable and inventory financing. Separately, we originate or
participate in a wide variety of financial services to major corporations. These
services include traditional commercial banking and specialized financing
tailored to the needs of each customer's specific industry. Presently, we are
active in the communications and media, energy related services, retailing and
financial services industries.
48
<PAGE>
At December 31, 1997, the commercial, financial and industrial loan
portfolio was $10,747 million, or 47 percent, of the total loan portfolio. The
increase of $1,251 million, or 13 percent, from the previous year-end was
primarily attributable to loans extended to large corporations in industries
where our bank has specialized lending expertise.
CONSTRUCTION AND COMMERCIAL MORTGAGE LOANS. We engage in nonresidential
real estate lending which includes commercial mortgage loans and construction
loans secured by deeds of trust. Construction loans are made primarily to
residential builders and to commercial property developers.
At December 31, 1997, construction loans were $293 million, $65 million
lower than at the end of the previous year. Commercial mortgage loans were
$2,952 million, an increase of $354 million, or 14 percent, from a year earlier.
This increase was primarily attributable to a strong recovery in the California
real estate market reflecting the continuing improvement in the West Coast
economy, particularly in the real estate sector.
RESIDENTIAL MORTGAGE LOANS. We originate residential loans through its
branch network in California, Oregon, and Washington, and periodically purchases
loans in its market area.
At December 31, 1997, residential loans were $2,961 million, unchanged from
the prior year.
CONSUMER LOANS. Through our branch network, we originate consumer loans,
such as vehicle-secured installment loans, home equity lines where advances are
generally secured by second deeds of trust on residential real estate, and
credit card loans.
At December 31, 1996, consumer loans were $3,479 million, or 16 percent of
total loans, compared with $3,354 million, or 15 percent of total loans, at
year-end 1997.
LEASE FINANCING. We enter into direct financing and leveraged leases
through an agreement with a subsidiary of The Bank of Tokyo-Mitsubishi. In
addition, we originate auto leases.
At December 31, 1997, lease financing outstandings were $875 million, an
increase of $75 million from the end of 1996.
LOANS ORIGINATED IN FOREIGN BRANCHES. Our loans originated in foreign
branches consist primarily of short-term credit extensions to financial
institutions located primarily in Asia and short-term commercial and industrial
loans to major Japanese, Korean, and Taiwanese corporations.
At December 31, 1996, loans originated in foreign branches totaled $1,358
million, or 7 percent of the total loan portfolio, compared with $1,559 million,
or 7 percent of total loans, at December 31, 1997.
CROSS-BORDER OUTSTANDINGS
Our cross-border outstandings reflect additional economic and political
risks that are not reflected in domestic outstandings. These risks include those
arising from exchange rate fluctuations and restrictions on the transfer of
funds. The following table sets forth our cross-border outstandings as of
December 31, 1995, 1996 and 1997 for each country where such outstandings
exceeded one percent of total assets. The cross-border outstandings were
compiled based upon category and domicile of ultimate risk and are comprised of
balances with banks, trading securities, securities available for sale,
securities purchased under resale agreements, loans, accrued interest
receivable, acceptances outstanding and investments with foreign
49
<PAGE>
entities. The amounts outstanding for each country exclude local currency
outstandings. We do not have significant local currency outstanding to the
individual countries listed in the following table that are not hedged or are
not funded by local currency borrowings.
<TABLE>
<CAPTION>
PUBLIC CORPORATIONS
FINANCIAL SECTOR AND OTHER TOTAL
INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS
----------- ----------- --------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
December 31, 1995
Japan....................................................... $ 1,111 $ -- $ 567 $ 1,678
Korea....................................................... 641 -- 269 910
December 31, 1996
Japan....................................................... 1,373 -- 452 1,825
Korea....................................................... 574 8 330 912
December 31, 1997
Japan....................................................... 401 -- 438 839
Korea....................................................... 561 10 257 828
Thailand.................................................... 320 -- -- 320
</TABLE>
The economic condition and the ability of some countries, to which we have
cross-border exposure, to manage their external debt obligations have been
impacted by the Asian economic crisis beginning in the second half of 1997. The
events leading to the crisis included currency devaluations, business failures,
principally caused by excessive debt levels and overcapacity, and some loss of
confidence in the banking system in the affected countries, resulting mainly
from past lending practices and the associated impact of internal and external
economic conditions. The crisis resulted in a substantial erosion of
international confidence, rapid declines in stock market valuations, steep
increases in interest rates and further pressure on the debt structures of the
corporate and financial market participants. International Monetary Fund
programs have been established or are in the process of being established which,
in cooperation with steps being taken by the local governments and other global
institutions, are designed to restore confidence. The success of these programs
is still being evaluated.
We are managing our exposures in these and other impacted countries very
cautiously with a view to minimizing risk and supporting its long-term and
viable customer relationships. High risk situations are being identified and
reduced where possible, and additional reserves against potential credit losses
have been identified and allocated, as determined by management at year end.
None of our cross-border exposure has been affected by the recently announced
debt restructuring program with South Korea.
Although management cannot predict the ultimate impact of the crisis on our
financial position and results of operations since much depends on the effect of
the stabilizing activities already under way, management believes that the
continuation of internal supervision, monitoring and portfolio risk management
practices will be effective in minimizing the impact over and above that already
identified. Increases in non-accrual loans, together with some related increases
in charge-off activity, may occur as events unfold.
Management, in accordance with its established risk management practices,
will also continue to review the impact of the crisis on the stability of other
countries and the potential impact on domestic business activities, particularly
in our core West Coast markets.
PROVISION FOR CREDIT LOSSES
We did not record a provision for credit losses during 1997, compared with a
$40 million provision that was recorded in 1996. Provisions for credit losses
are charged to income to bring our allowance for credit losses to a level deemed
appropriate by management based on the factors discussed under "--Allowance for
Credit Losses" below. We did not record a provision for credit losses in 1997
because, based on a review of
50
<PAGE>
the factors, management believed that the allowance for credit losses was
adequate to cover probable losses inherent in the loan and lease portfolio and
firm commitments at each quarter end, including December 31, 1997.
ALLOWANCE FOR CREDIT LOSSES
We maintain an allowance for credit losses to absorb losses inherent in the
loan and lease portfolio. The allowance is based on ongoing, quarterly
assessments of the probable estimated losses inherent in the loan and lease
portfolio, and to a lesser extent, unused commitments to provide financing. Our
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include:
- the formula allowance,
- specific allowances for identified problem loans and portfolio segments,
and
- the unallocated allowance.
In addition, the allowance incorporates the results of measuring impaired loans
as provided in:
- Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting
by Creditors for Impairment of a Loan," and
- SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures."
These accounting standards prescribe the measurement methods, income recognition
and disclosures concerning impaired loans.
The formula allowance is calculated by applying loss factors to outstanding
loans and leases and certain unused commitments, in each case based on the
internal risk grade of these loans, pools of loans, leases or commitments.
Changes in risk grades of both performing and nonperforming loans affect the
amount of the formula allowance. Loss factors are based on our historical loss
experience and may be adjusted for significant factors that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation date.
Loss factors are described as follows:
- Problem graded loan loss factors are obtained from a migration model that
tracks four years of historical loss experience. We are exploring changes
to the migration model to track historical loss experience over an
eight-year period, which management believes approximates a business
cycle.
- Pass graded loan loss factors are based on the average annual net charge
off rate over a six-year period.
- Pooled loan loss factors, not individually graded loans, are based on
expected net chargeoffs for one year. Pooled loans are loans and leases
that are homogeneous in nature, such as consumer installment and
residential mortgage loans and automobile leases.
Specific allowances are established where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance.
The unallocated allowance is composed of two elements. The first element,
which is based on our credit policy, consists of an amount that is at least 20%
to 25% of the formula allowance and the specific allowance. This element
recognizes the model and estimation risk associated with the formula and
specific allowances. The second element is based upon management's evaluation of
various conditions, the effects of which are not directly measured in
determining the formula and specific allowances. The evaluation of the inherent
loss regarding these conditions involves a higher degree of uncertainty because
they are not identified with specific problem credits or portfolio segments. The
conditions evaluated in connection with the unallocated allowance include the
following conditions that existed as of the balance sheet date:
51
<PAGE>
- then-existing general economic and business conditions affecting our key
lending areas,
- credit quality trends, including trends in nonperforming loans expected to
result from existing conditions,
- collateral values,
- loan volumes and concentrations,
- seasoning of the loan portfolio,
- specific industry conditions within portfolio segments,
- recent loss experience in particular segments of the portfolio,
- duration of the current business cycle,
- bank regulatory examination results and
- findings of our internal credit examiners.
Executive management reviews these conditions quarterly in discussion with our
senior credit officers. If any of these conditions is evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's estimate of the effect of this condition may be
reflected as a specific allowance applicable to this credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss concerning this condition is
reflected in the unallocated allowance.
The allowance for credit losses is based upon estimates of probable losses
inherent in the loan and lease portfolio. The amount actually observed for these
losses can vary significantly from the estimated amounts. Our methodology
includes several features that are intended to reduce the differences between
estimated and actual losses. The loss migration model that is used to establish
the loan loss factors for problem graded loans is designed to be self-correcting
by taking into account our recent loss experience. Similarly, by basing the pass
graded loan loss factors on loss experience over the last six years, the
methodology is designed to take our recent loss experience into account. Pooled
loan loss factors are adjusted quarterly based upon the level of net chargeoffs
expected by management in the next twelve months. Furthermore, our methodology
permits adjustments to any loss factor used in the computation of the formula
allowance in the event that, in management's judgment, significant factors that
affect the collectibility of the portfolio as of the evaluation date are not
reflected in the loss factors. By assessing the probable estimated losses
inherent in the loan and lease portfolio on a quarterly basis, we are able to
adjust specific and inherent loss estimates based upon any more recent
information that has become available.
52
<PAGE>
The following table presents the allocation of the allowance for credit
losses. The percentages reflect the allowance allocated to each respective loan
category at period end, as a percentage of the total period end balance of that
loan category, as set forth in the "Loans" table on page 48.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------------- -------------------- -------------------- -------------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and
industrial.............. $ 205,398 2.52% $ 146,784 1.72% $ 174,146 1.80% $ 166,100 1.75% $ 123,610
Construction............. 106,398 12.13 69,787 15.04 24,752 6.69 5,700 1.59 3,221
Mortgage:
Residential............ 31,409 1.60 23,581 1.05 5,466 0.21 4,000 0.14 2,700
Commercial............. 139,303 6.67 70,130 3.94 59,931 2.80 39,000 1.50 60,680
--------- --------- --------- --------- ---------
Total mortgage....... 170,712 4.21 93,711 2.32 65,397 1.37 43,000 0.77 63,380
Consumer:
Installment............ 13,100 0.97 12,500 0.76 13,200 0.73 10,400 0.50 11,400
Home equity............ 6,062 0.47 7,143 0.58 5,532 0.45 4,900 0.44 3,600
Credit card and other
lines of credit....... 15,171 7.33 17,101 7.81 32,799 10.61 34,000 11.22 30,500
--------- --------- --------- --------- ---------
Total consumer....... 34,333 1.20 36,744 1.19 51,531 1.54 49,300 1.42 45,500
Lease financing.......... 12,500 1.50 10,000 1.21 1,300 0.15 5,300 0.66 4,862
--------- --------- --------- --------- ---------
Total domestic
allowance........... 529,341 3.16 357,026 2.11 317,126 1.67 269,400 1.37 240,573
Foreign allowance.......... 14,293 1.42 15,330 1.38 13,968 0.99 9,394 0.69 39,313
Unallocated................ 148,950 190,786 224,055 245,152 171,806
--------- --------- --------- --------- ---------
Total allowance for
credit losses....... $ 692,584 3.90% $ 563,142 3.12% $ 555,149 2.72% $ 523,946 2.49% $ 451,692
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
<S> <C>
Domestic:
Commercial, financial and
industrial.............. 1.15%
Construction............. 1.10
Mortgage:
Residential............ 0.09
Commercial............. 2.06
Total mortgage....... 1.07
Consumer:
Installment............ 0.55
Home equity............ 0.36
Credit card and other
lines of credit....... 11.30
Total consumer....... 1.36
Lease financing.......... 0.56
Total domestic
allowance........... 1.14
Foreign allowance.......... 2.52
Unallocated................
Total allowance for
credit losses....... 1.99%
</TABLE>
53
<PAGE>
The following table presents a reconciliation of changes in our allowance
for credit losses.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year........................... $ 790,479 $ 692,584 $ 563,142 $ 555,149 $ 523,946
Loans charged off:
Commercial, financial and industrial............... 99,280 105,774 47,524 42,134 58,664
Construction....................................... 58,835 32,151 9,401 3,249 120
Mortgage........................................... 113,791 100,613 29,330 13,483 5,058
Consumer........................................... 39,576 31,806 44,627 56,361 55,336
Lease financing.................................... 11,432 2,940 2,422 2,623 3,601
Foreign(1)......................................... 201 533 295 1,250 --
---------- ---------- ---------- ---------- ----------
Total loans charged off.......................... 323,115 273,817 133,599 119,100 122,779
Recoveries of loans previously charged off:
Commercial, financial and industrial............... 41,552 39,177 39,178 22,341 23,371
Construction....................................... 2,955 5,868 3,195 132 9,054
Mortgage........................................... 6,201 16,228 18,500 12,277 3,292
Consumer........................................... 8,872 8,915 10,924 12,906 14,946
Lease financing.................................... 3,353 435 311 368 351
Foreign(1)......................................... 11,229 627 295 -- --
---------- ---------- ---------- ---------- ----------
Total recoveries of loans previously charged
off............................................. 74,162 71,250 72,403 48,024 51,014
---------- ---------- ---------- ---------- ----------
Net loans charged off.......................... 248,953 202,567 61,196 71,076 71,765
Provision for credit losses.......................... 151,000 73,000 53,250 40,000 --
Foreign translation adjustment and other net
additions (deductions)............................. 58 125 (47) (127) (489)
---------- ---------- ---------- ---------- ----------
Balance, end of year................................. $ 692,584 $ 563,142 $ 555,149 $ 523,946 $ 451,692
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance for credit losses to total loans........... 3.90% 3.12% 2.72% 2.49% 1.99%
Provision for credit losses to net loans charged
off................................................ 60.65 36.04 87.02 56.28 --
Recoveries of loans to loans charged off in the
previous year...................................... 24.38 22.05 26.44 35.95 42.83
Net loans charged off to average loans outstanding... 1.37 1.15 0.32 0.34 0.33
Allowance for credit losses to nonaccrual
loans.............................................. 84.82 161.08 266.56 408.48 413.12
</TABLE>
- ---------
(1) Foreign loans are those loans originated in foreign branches.
At December 31, 1997, our allowance for credit losses was $452 million, or
1.99% of the total loan portfolio, and 413% of total nonaccrual loans. This
compares with an allowance for credit losses of $524 million, or 2.49% of the
total loan portfolio, and 408% of total nonaccrual loans at December 31, 1996.
At year-end 1997, the unallocated portion of the allowance for credit losses was
$172 million compared with $245 million at the end of 1996. At December 31,
1997, the allocated portion of the allowance for credit losses included $108
million related to special mention and classified credits, compared to $134
million at December 31, 1996. Special mention and classified credits are those
that are internally risk graded as "special mention," "substandard" or
"doubtful." Special mention credits are potentially weak, as the borrower has
begun to exhibit deteriorating trends which, if not corrected, could jeopardize
repayment of
54
<PAGE>
the loan and result in further downgrade. Substandard credits have well-defined
weaknesses which, if not corrected, could jeopardize the full satisfaction of
the debt. A credit classified as "doubtful" has critical weaknesses that make
full collection improbable.
During 1997, there were no changes in estimation methods or assumptions that
affected our methodology for assessing the appropriateness of the allowance for
credit losses, except that we extended the average annual net chargeoff rate for
pass graded loans from 4.75 years to 6 years. The impact of this change resulted
in an increase of approximately $13 million in the formula allowance. We
extended the average annual net chargeoff rate to better reflect the business
cycle. Changes in assumptions regarding the effects of economic and business
conditions on borrowers and other factors, which are described below, affected
the assessment of the unallocated allowance. In addition, as described below, we
allocated a portion of the unallocated allowance to foreign loans amid concerns
that the Asian financial turmoil had adversely impacted companies and financial
institutions in Asian markets in which we operate.
During 1997, we had net loans charged off of $72 million compared to net
loans charged off of $71 million in 1996. Recoveries of loans previously charged
off increased by $3 million, and the percentage of current year recoveries to
loans charged off in the previous year increased from 35.95% in 1996 to 42.83%
in 1997. Loans charged off in 1997 increased by $4 million, primarily due to a
$17 million increase in commercial, financial and industrial loans charged off,
partially offset by a $8 million decrease in mortgage loans charged off.
Chargeoffs reflect the realization of losses in the portfolio that were
recognized previously through provisions for credit losses. At December 31,
1997, the allowance for credit losses exceeded the net loans charged off during
1997, reflecting management's belief, based on the foregoing analysis, that
there are additional losses inherent in the portfolio.
At December 31, 1997, our average annual net chargeoffs for the past five
years were $131.2 million, compared with $166.4 million at December 31, 1996.
These net chargeoffs represent 3.4 years of losses based on the level of the
allowance for credit losses at December 31, 1997 and 3.1 years of losses based
on the level of the allowance for credit losses at December 31, 1996. Historical
net chargeoffs are not necessarily indicative of the amount of net chargeoffs
that we will realize in the future.
We did not record a provision for credit losses during 1997. The decision
not to record a provision was based upon management's application of the
allowance methodology and the factors described above, particularly, the level
of net chargeoffs and the decline in the level of nonperforming loans. Although
management determined that no provision for credit losses was necessary in 1997,
it noted that particular factors could necessitate the resumption of
provisioning in the future. In particular, management noted that although net
chargeoffs were relatively stable from 1996 to 1997, net chargeoffs were higher
in the last three quarters of 1997. Furthermore, management noted that although
the level of net chargeoffs and the decline in nonperforming loans favorably
impacted our asset quality ratios, the total portfolio of commercial, financial
and industrial loans and commercial mortgage loans was increasing. Losses
inherent in both of these types of credits are more difficult to assess because
historically they have been more volatile than losses from other credits.
Management also considered the effect on global economic conditions of the
Asian financial crisis. At December 31, 1997, cross-border loans and acceptances
to Japan, Korea, Malaysia, Thailand, Vietnam, Singapore, Indonesia, the
Philippines, China, Taiwan and Hong Kong totaled $2.1 billion. Although at
December 31, 1997, we had not identified any specific losses related to our
Asia/Pacific exposures, management believed that it was probable that the Asian
financial turmoil had adversely impacted companies and financial institutions in
Asia/Pacific markets in which we operate. In light of this concern, we allocated
$29 million from the unallocated portion of the allowance at December 31, 1997
to foreign loans. The allocated amount was based upon the total amount of
foreign loans to corporate borrowers in Asian countries, and management's
assessment of the quantified losses inherent in the Asia/Pacific portfolio
segment. In addition, we believe that the historical loss factors for the
Asia/Pacific exposures failed to estimate the total probable inherent losses
because we had not suffered any credit losses in the foreign loan
55
<PAGE>
portfolio during the four-year historical loss cycle used to establish the
problem loan loss factors. Based upon this concern, as well as the other factors
described in "Cross-Border Outstandings" above, including the magnitude of our
exposure to the Asia/Pacific segment, management does not believe that the $29
million allocated to foreign loans is sufficient to cover all of the losses
inherent in the foreign loan portfolio and, accordingly, these factors were
considered by management in its overall assessment of the unallocated allowance.
In addition to the impact of the Asian financial turmoil on companies and
financial institutions in Asian markets in which we operate, management
considered the effects of the Asian turmoil on companies and financial
institutions in the domestic, primarily California, and foreign, other than
Asia/Pacific, markets in which we operate. As of December 31, 1997, management
believed that the impact of the Asian financial turmoil on the collectibility of
loans and leases to domestic and foreign, other than Asia/Pacific, borrowers,
was not generally reflected in the level of nonperforming loans or in the
internal risk grading process regarding these loans and leases. Accordingly, our
evaluation of these probable losses is reflected in the unallocated allowance.
The evaluations of these inherent losses are subject to higher degrees of
uncertainty because they are not identified with specific problem credits.
At December 31, 1997, our allowance for credit losses was $452 million,
consisting of a:
- $212 million formula allowance,
- $68 million specific allowance and
- $172 million unallocated allowance.
This compares with an allowance for credit losses of $524 million at December
31, 1996, which consisted of a:
- $237 million formula allowance,
- $42 million specific allowance and
- $245 million unallocated allowance.
The decrease of $25 million in the formula allowance relates primarily to:
- a reduction in the level of criticized loans,
- the reflection of lower historical losses in the loss factors, which was
partially offset by loan growth,
- changes to conform the various risk grade definitions after the
combi-nation of Bank of California and Union Bank and
- the extension of the average annual net chargeoff rate for pass graded
loans.
The increase of $26 million in the specific allowance relates primarily to the
reallocation for the Asian exposure described above. The unallocated allowance
decreased by $73 million at December 31, 1997, because management believed that
the inherent losses related to conditions considered in its evaluation of the
unallocated allowance at December 31, 1996 had:
- been recognized through charge-offs,
- been reflected in the formula or specific allowance or
- declined.
From December 31, 1996 to December 31, 1997, there was no change in the
component of the unallocated allowance related to the 20% to 25% margin for
model and estimation risk prescribed by our credit policy. Included among those
conditions that management believed gave rise to lower inherent losses at
December 31, 1997 compared to December 31, 1996 were:
56
<PAGE>
- reduced concerns regarding the lingering effects of the California
recession on, and the sustainability of the recovery in, the California
commercial real estate and construction market,
- reduced concerns regarding consumer debt burdens and rising levels of
consumer bankruptcies,
- resolution of uncertainties related to assimilating data for the formula
allowance that resulted from combining the loan portfolios of Bank of
California and Union Bank and inconsistencies in the risk grading systems
of UnionBanCal Corporation's predecessor banks,
- reduced concerns related to consolidation and restructuring in the retail
industry and
- reduced concerns regarding the sustainability of perceived improvements in
economic conditions.
We do not weight the unallocated allowance among segments of the portfolio.
In evaluating the appropriateness of the unallocated allowance at December 31,
1997, we considered, in addition to the factors described above:
- the approximately $56 million to $70 million margin for model and
estimation risk prescribed by our credit policy and
- our estimate that the adverse impact of the Asian financial turmoil on us
could be in the range of $100 million to $105 million.
The following factors are reflected in management's estimate of the unallocated
allowance at December 31, 1996:
- the approximately $56 million to $70 million margin for model and
estimation risk prescribed by our credit policy,
- the lingering effects of the California recession on, and the
sustainability of the recovery in, the California commercial real estate
and construction market, which could be in the range of $45 million to $70
million,
- the effects of consumer debt burdens and rising levels of consumer
bankruptcies, which could be in the range of $25 million to $40 million,
- the effects of uncertainties related to assimilating data for the formula
allowance that resulted from combining the loan portfolios of Bank of
California and Union Bank and inconsistencies in the risk grading systems
of UnionBanCal Corporation's predecessor banks, which could be in the
range of $15 million to $30 million,
- the effects of consolidation and restructuring in the retail industry,
which could be in the range of $5 million to $10 million and
- the effects of adverse economic and business conditions in Japan, which
could be in the range of $5 million to $10 million.
We cannot assure you that the adverse impact of any of these conditions on us
will not be in excess of the foregoing ranges. See "Forward Looking Statements"
on page 14 for more information on risks and uncertainties affecting our
estimates.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, renegotiated loans, and
foreclosed assets. Nonaccrual loans are those for which management has
discontinued accrual of interest because there exists significant uncertainty as
to the full and timely collection of either principal or interest or such loans
have become contractually past due 90 days in the payment of principal or
interest. For a more detailed discussion of the accounting for nonaccrual loans,
see Note 1 to our Consolidated Financial Statements.
57
<PAGE>
Renegotiated loans are those accruing loans for which, for reasons related
to the borrower's financial difficulties, we have amended the terms of the
original loan agreement and the borrower is performing according to the
renegotiated terms.
Foreclosed assets includes property where we acquired title through
foreclosure or "deed in lieu" of foreclosure. On an ongoing basis, foreclosed
asset values are reviewed and any decline in value is recognized as noninterest
expense in the current period.
The following table presents an analysis of nonperforming assets.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial and industrial............... $ 145,907 $ 106,447 $ 84,336 $ 56,864 $ 46,392
Construction....................................... 231,148 73,643 40,026 7,349 4,071
Mortgage:
Residential...................................... 61,809 17,020 19,220 11,214 954
Commercial....................................... 367,072 145,207 63,836 52,593 57,921
------------ ---------- ---------- ---------- ----------
Total mortgage................................. 428,881 162,227 83,056 63,807 58,875
Other.............................................. 7,288 7,285 849 247 --
Foreign(1)......................................... 3,331 -- -- -- --
------------ ---------- ---------- ---------- ----------
Total nonaccrual loans......................... 816,555 349,602 208,267 128,267 109,338
Renegotiated loans................................. 4,617 14,843 1,612 -- --
Nonperforming real estate ventures................. 23,256 -- -- -- --
Foreclosed assets.................................. 349,022 56,782 36,992 28,517 20,471
------------ ---------- ---------- ---------- ----------
Total nonperforming assets..................... $ 1,193,450 $ 421,227 $ 246,871 $ 156,784 $ 129,809
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Allowance for credit losses........................ $ 692,584 $ 563,142 $ 555,149 $ 523,946 $ 451,692
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Nonaccrual and renegotiated loans to total loans... 4.62% 2.02% 1.03% 0.61% 0.48%
Nonaccrual loans to allowance for credit losses.... 117.90 62.08 37.52 24.48 24.21
Nonperforming assets to total loans, real estate
ventures and foreclosed assets................... 6.58 2.32 1.21 0.74 0.57
Nonperforming assets to total assets............... 4.97 1.71 0.90 0.54 0.42
</TABLE>
- ---------
(1) Foreign loans are those loans originated in foreign branches.
58
<PAGE>
The following table presents an analysis of loans contractually past due 90
days or more as to interest or principal, but not included in nonaccrual loans
above.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial and industrial....................... $ 12,116 $ 3,690 $ 3,752 $ 4,527 $ 450
Construction............................................... 10,711 5,735 1,063 -- --
Mortgage:
Residential.............................................. 14,602 2,123 8,479 8,969 10,170
Commercial............................................... 35,071 -- 3,592 168 1,660
--------- --------- --------- --------- ---------
Total mortgage......................................... 49,673 2,123 12,071 9,137 11,830
Consumer and other......................................... 8,481 8,573 8,854 10,028 7,712
--------- --------- --------- --------- ---------
Total loans 90 days or more past due and still
accruing.............................................. $ 80,981 $ 20,121 $ 25,740 $ 23,692 $ 19,992
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
At December 31, 1997, nonaccrual loans totaled $109 million, a decrease of
$19 million, or 15%, from year-end 1996. The decline was primarily attributable
to a $10 million reduction in nonaccrual commercial, financial and industrial
loans and a $10 million reduction in nonaccrual residential mortgage loans. The
reduction in nonaccrual residential mortgage loans was partly due to a
reclassification of particular loans from nonaccrual to 90-days past due and
still accruing. The decline in nonaccrual loans was reflected in an improvement
in the overall risk grades of the portfolio, which contributed to a reduction in
the formula allowance. Foreclosed assets, primarily other real estate owned,
decreased by $8 million due to sales of individual assets.
Nonaccrual and renegotiated loans as a percentage of total loans were 0.48%
at December 31, 1997 compared with 0.61% one year earlier. Nonperforming assets
as a percentage of total loans, real estate ventures and foreclosed assets
improved to 0.57% at year-end 1997 from 0.74% at December 31, 1996. At December
31, 1997, approximately 58% of nonaccrual loans were real estate related.
Total loans 90 days or more past due and still accruing were $20 million at
December 31, 1997 compared with $24 million at December 31, 1996.
At December 31 1997, impaired loans were $108 million and the associated
impairment allowance was $9 million compared with impaired loans of $114 million
and the associated impairment allowance of $21 million at December 31, 1996.
INTEREST FOREGONE
Interest foregone during 1996 and 1997 for loans that were on nonaccrual
status at December 31, 1996 was $9 million and at December 31, 1997 was $6
million. We recognized interest income during 1996 and 1997 for loans that were
on nonaccrual status at December 31, 1996 of $5 million and at December 31, 1997
of $3 million.
59
<PAGE>
SECURITIES
The following tables summarize the composition of the securities portfolio
and the gross unrealized gains and losses within the portfolio.
SECURITIES AVAILABLE FOR SALE.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1996 1997
1995 ---------------------------------------------- ----------------------------------------------
--------- GROSS GROSS GROSS GROSS
FAIR AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
VALUE COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- --------- ----------- ----------- --------- --------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury..... $ 994,492 $1,137,992 $ 4,993 $ 1,933 $1,141,052 $ 987,374 $ 10,793 $ 170 $ 997,997
Other U.S.
government...... 364,584 687,717 4,993 779 691,931 709,536 6,005 67 715,474
Mortgage-backed
securities...... 448,173 193,531 400 274 193,657 679,692 3,331 265 682,758
State and
municipal....... 132,698 101,006 13,749 -- 114,755 90,937 13,236 -- 104,173
Corporate debt
securities...... -- -- -- -- -- 2,698 311 1 3,008
Equity
securities...... 16,539 19,041 2,553 -- 21,594 28,881 1,596 672 29,805
Foreign
securities...... 4,065 1,136 72 -- 1,208 5,132 39 -- 5,171
--------- --------- ----------- ----------- --------- --------- ----------- ----------- ---------
Total securities
available for
sale........... $1,960,551 $2,140,423 $ 26,760 $ 2,986 $2,164,197 $2,504,250 $ 35,311 $ 1,175 $2,538,386
--------- --------- ----------- ----------- --------- --------- ----------- ----------- ---------
--------- --------- ----------- ----------- --------- --------- ----------- ----------- ---------
</TABLE>
SECURITIES HELD TO MATURITY.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------
1996 1997
1995 ------------------------------------------------ -------------------------------------
----------- GROSS GROSS GROSS GROSS
AMORTIZED AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED
COST COST GAINS LOSSES VALUE COST GAINS LOSSES
----------- ----------- ----------- ----------- --------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury........ $ 51,125 $ 50,109 $ 1,735 $ -- $ 51,844 $ 40,092 $ 1,333 $ --
Other U.S.
government......... 138,816 139,188 4,412 -- 143,600 99,520 2,568 --
Mortgage-backed
securities......... 124,375 41,985 2,019 68 43,936 24,477 1,745 14
State and
municipal.......... 48,971 36,914 310 2,199 35,025 24,686 75 1,367
----------- ----------- ----------- ----------- --------- ----------- ----------- -----------
Total securities
held to
maturity.......... $ 363,287 $ 268,196 $ 8,476 $ 2,267 $ 274,405 $ 188,775 $ 5,721 $ 1,381
----------- ----------- ----------- ----------- --------- ----------- ----------- -----------
----------- ----------- ----------- ----------- --------- ----------- ----------- -----------
<CAPTION>
FAIR
VALUE
---------
<S> <C>
U.S. Treasury........ $ 41,425
Other U.S.
government......... 102,088
Mortgage-backed
securities......... 26,208
State and
municipal.......... 23,394
---------
Total securities
held to
maturity.......... $ 193,115
---------
---------
</TABLE>
Management of the securities portfolio involves the maximization of return
while maintaining prudent levels of quality and liquidity. At December 31, 1997,
approximately 98 percent of total securities were investment grade.
During the quarter ended December 31, 1995, in accordance with guidance
issued by the Financial Accounting Standards Board, we 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).
60
<PAGE>
ANALYSIS OF SECURITIES PORTFOLIO
The following tables show the remaining contractual maturities and expected
yields of the securities portfolio.
SECURITIES AVAILABLE FOR SALE.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------------------------------
MATURITY
-------------------------------------------------------------------------------------
AFTER ONE YEAR AND AFTER FIVE YEARS AND
WITHIN WITHIN WITHIN AFTER TEN
ONE YEAR FIVE YEARS TEN YEARS YEARS
---------------------- ---------------------- ------------------------ -----------
AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT
--------- ----------- --------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury....................... $ 150,048 6.22% $ 837,326 6.31% $ -- -- % $ --
Other U.S. government............... 99,940 6.49 609,596 6.38 -- -- --
Mortgage-backed securities(1)....... 53,108 6.82 626,584 6.41 -- -- --
State and municipal(2).............. 14,944 10.49 26,409 9.90 12,971 11.09 36,613
Corporate debt securities........... -- -- 1,432 17.31 1,266 12.42 --
Equity securities(3)................ -- -- -- -- -- -- --
Foreign securities.................. 3,419 14.30 -- -- 1,713 6.29 --
--------- --------- ----------- -----------
Total securities available for
sale........................... $ 321,459 6.69% $2,101,347 6.41% $ 15,950 10.68% $ 36,613
--------- --------- ----------- -----------
--------- --------- ----------- -----------
<CAPTION>
TOTAL AMORTIZED
----------------------
YIELD(4) AMOUNT YIELD(4)
----------- --------- -----------
<S> <C> <C> <C>
U.S. Treasury....................... -- % $ 987,374 6.30%
Other U.S. government............... -- 709,536 6.40
Mortgage-backed securities(1)....... -- 679,692 6.44
State and municipal(2).............. 11.33 90,937 10.74
Corporate debt securities........... -- 2,698 15.02
Equity securities(3)................ -- 28,881 --
Foreign securities.................. -- 5,132 11.63
---------
Total securities available for
sale........................... 11.33% $2,504,250 6.48%
---------
---------
</TABLE>
SECURITIES HELD TO MATURITY.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------------
MATURITY
---------------------------------------------------------------------------------------
AFTER ONE YEAR AND AFTER FIVE YEARS AND
WITHIN WITHIN WITHIN AFTER TEN
ONE YEAR FIVE YEARS TEN YEARS YEARS
------------------------ ---------------------- ------------------------ -----------
AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT
----------- ----------- --------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury.......................... $ -- -- % $ 40,092 7.56% $ -- -- % $ --
Other U.S. government.................. 10,000 8.00 89,520 7.72 -- -- --
Mortgage-backed securities(1).......... 3,622 4.88 20,855 9.03 -- -- --
State and municipal(2)................. 9,077 9.19 -- -- 2,596 6.35 13,013
----------- --------- ----------- -----------
Total securities held to maturity.... $ 22,699 7.98% $ 150,467 7.86% $ 2,596 6.35% $ 13,013
----------- --------- ----------- -----------
----------- --------- ----------- -----------
<CAPTION>
TOTAL AMORTIZED
----------------------
YIELD(4) AMOUNT YIELD(4)
----------- --------- -----------
<S> <C> <C> <C>
U.S. Treasury.......................... -- % $ 40,092 7.56%
Other U.S. government.................. -- 99,520 7.75
Mortgage-backed securities(1).......... -- 24,477 8.42
State and municipal(2)................. 5.77 24,686 7.09
---------
Total securities held to maturity.... 5.77% $ 188,775 7.71%
---------
---------
</TABLE>
- ------------
(1) Expected maturities may differ from contractual maturities because borrowers
have the right to call or prepay obligations, with or without call or
prepayment penalties.
(2) Yields on tax-exempt municipal securities are presented on a
taxable-equivalent basis using the current federal statutory rate of 35
percent.
(3) Equity securities do not have a stated maturity and are included in the
total column only.
(4) Yields are based on amortized cost.
61
<PAGE>
LOAN MATURITIES
The following table presents our loans by maturity.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------
AFTER
ONE YEAR
WITHIN AND WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Domestic:
Commercial, financial and industrial................. $ 4,102,910 $ 4,477,317 $ 2,166,952 $ 10,747,179
Construction......................................... 173,504 119,829 -- 293,333
Mortgage:
Residential........................................ 4,230 32,000 2,925,003 2,961,233
Commercial......................................... 228,955 1,085,913 1,636,939 2,951,807
------------- ------------ ------------ -------------
Total mortgage................................... 233,185 1,117,913 4,561,942 5,913,040
Consumer:
Installment........................................ 136,264 1,801,620 152,868 2,090,752
Home equity........................................ 2,816 38,570 951,530 992,916
Credit card and other lines of credit.............. 270,045 52 -- 270,097
------------- ------------ ------------ -------------
Total consumer................................... 409,125 1,840,242 1,104,398 3,353,765
Lease financing...................................... 83,478 606,904 184,478 874,860
------------- ------------ ------------ -------------
Total loans in domestic offices.................. 5,002,202 8,162,205 8,017,770 21,182,177
Loans originated in foreign branches................... 1,515,844 25,627 17,760 1,559,231
------------- ------------ ------------ -------------
Total loans...................................... $ 6,518,046 $ 8,187,832 $ 8,035,530 22,741,408
------------- ------------ ------------
------------- ------------ ------------
Allowance for credit losses.................... 451,692
-------------
Loans, net....................................... $ 22,289,716
-------------
-------------
Total fixed rate loans due after one year.............. $ 5,353,709
Total variable rate loans due after one year........... 10,869,653
-------------
Total loans due after one year................... $ 16,223,362
-------------
-------------
</TABLE>
CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
The following table presents domestic certificates of deposit of $100,000
and over by maturity.
<TABLE>
<CAPTION>
DECEMBER 31,
1997
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Three months or less........................................................................ $ 2,684,438
Over three months through six months........................................................ 1,163,014
Over six months through twelve months....................................................... 261,739
Over twelve months.......................................................................... 154,948
-----------
Total domestic certificates of deposit of $100,000 and over............................. $ 4,264,139
-----------
-----------
</TABLE>
We offer certificates of deposit of $100,000 and over at market rates of
interest. Many of these certificates are issued to customers, both public and
private, who have done business with us for an extended period. We expect that
as these deposits become due, the majority will continue to be renewed at market
rates of interest.
Substantially all of our deposits in foreign branches are certificates of
deposit of $100,000 and over and mature in less than one year.
62
<PAGE>
BORROWED FUNDS
The following table presents information on our borrowed funds, excluding
subordinated capital notes.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal funds purchased and securities sold under repurchase agreements
with weighted average interest rates of 4.96% at December 31, 1995,
5.09% at December 31, 1996 and 5.38% at December 31, 1997............. $ 1,195,058 $ 1,322,654 $ 1,335,884
Commercial paper, with weighted average interest rates of 5.75% at
December 31, 1995, 5.34% at December 31, 1996 and 5.64% at December
31, 1997.............................................................. 1,389,870 1,495,463 966,575
Other borrowed funds, with weighted average interest rates of 5.78% at
December 31, 1995, 5.66% at December 31, 1996 and 6.23% at December
31, 1997.............................................................. 1,064,472 749,422 476,010
------------ ------------ ------------
Total borrowed funds................................................ $ 3,649,400 $ 3,567,539 $ 2,778,469
------------ ------------ ------------
------------ ------------ ------------
Federal funds purchased and securities sold under repurchase agreements:
Maximum outstanding at any month end.................................. $ 1,517,999 $ 1,322,654 $ 1,575,930
Average balance during the year....................................... 1,384,762 933,433 1,097,707
Weighted average interest rate during the year........................ 5.70% 5.05% 5.33%
Commercial paper:
Maximum outstanding at any month end.................................. $ 1,591,712 $ 1,854,576 $ 1,876,135
Average balance during the year....................................... 1,448,739 1,620,087 1,637,070
Weighted average interest rate during the year........................ 5.98% 5.40% 5.49%
Other borrowed funds:
Maximum outstanding at any month end.................................. $ 1,319,444 $ 1,697,236 $ 851,694
Average balance during the year....................................... 731,759 1,119,051 635,900
Weighted average interest rate during the year........................ 5.82% 5.59% 5.42%
</TABLE>
CAPITAL ADEQUACY AND DIVIDENDS
Our principal capital objectives are to support future growth, to protect
depositors, to absorb any unanticipated losses and to comply with various
regulatory requirements. Management believes that we have retained our capital
at a level which supports our risk structure, as well as providing for
anticipated growth of current business activities and strategic expansion.
Total shareholders' equity was $2,679 million at December 31, 1997, an
increase of $184 million from year-end 1996. This change was primarily a result
of $411 million of net income for 1997, offset by the redemption of $135 million
in preferred stock and dividends on common and preferred stock of $97 million.
We offer a dividend reinvestment plan that allows shareholders to reinvest
dividends in our common stock at 5 percent below the market price. At December
31, 1997, The Bank of Tokyo-Mitsubishi was not a participant in the plan.
Capital adequacy depends on a variety of factors including asset quality and
risk profile, liquidity, stability of earnings, competitive and economic
conditions, and management. We believe that the current level of profitability,
coupled with a prudent dividend policy, is adequate to support normal growth in
operations while meeting regulatory capital guidelines.
63
<PAGE>
The following table summarizes our risk-based capital, risk-weighted assets,
and risk-based capital ratios.
<TABLE>
<CAPTION>
DECEMBER 31, MINIMUM
------------------------------------------------------------------------- REGULATORY
1993 1994 1995 1996 1997 REQUIREMENT
------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CAPITAL COMPONENTS:
Tier 1 capital................. $ 1,952,045 $ 2,070,554 $ 2,355,057 $ 2,395,580 $ 2,587,071
Tier 2 capital................. 702,652 626,903 591,266 551,074 601,102
------------- ------------- ------------- ------------- -------------
Total risk-based capital..... $ 2,654,697 $ 2,697,457 $ 2,946,323 $ 2,946,654 $ 3,188,173
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Risk-weighted assets........... $ 21,992,647 $ 22,419,516 $ 25,179,489 $ 26,390,288 $ 28,862,340
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Quarterly average assets....... $ 23,624,622 $ 23,868,729 $ 27,073,158 $ 28,496,355 $ 30,334,507
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
CAPITAL RATIOS:
Total risk-based capital....... 12.07% 12.03% 11.70% 11.17% 11.05% 8.0%
Tier 1 risk-based capital...... 8.88 9.24 9.35 9.08 8.96 4.0
Leverage ratio(1).............. 8.26 8.67 8.70 8.41 8.53 4.0
</TABLE>
- ---------
(1) Tier 1 capital divided by quarterly average assets, excluding goodwill.
For regulatory purposes, our capital computations are based on risk-adjusted
Tier 1 and total capital. Our Tier 1 risk-based capital ratio was 9.08% and our
total risk-based capital ratio was 11.17% at December 31, 1996 compared to 8.96%
for our Tier 1 risk-based capital ratio and 11.05% for our total risk-based
capital ratio at December 31, 1997. The decrease in the capital ratios was
attributable to the redemption of $135 million of preferred stock in the third
quarter of 1997, partly offset by retained earnings growing faster than both
risk-weighted assets and average assets. As of December 31, 1997, management
believes the capital ratios of our bank met all regulatory minimums of a
"well-capitalized" institution.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net income in 1996 was $249 million compared with $313 million in 1995.
Excluding the effects of the $72 million after-tax charge for merger-integration
expense, net income improved as a result of higher net interest income, higher
noninterest income, and lower credit loss provision expense than in 1995.
Net income applicable to common stock was $238 million, or $1.36 per diluted
common share, in 1996 compared with $302 million, or $1.73 per diluted common
share, in 1995.
The return on average assets was 0.89% in 1996 versus 1.22% in 1995. The
return on average common equity was 10.24% in 1996 compared with 13.73% in 1995.
Net interest income on a taxable-equivalent basis increased by $23 million,
or 2 percent, over 1995. Average loans increased $1,753 million, or 9 percent,
and the net interest margin decreased 30 basis points to 4.75%.
Noninterest income increased by $23 million, or 6 percent, over 1995.
Service charges on deposits, trust and investment management fees, credit card
merchant fees, brokerage commissions and fees, securities gains, and other
revenue collectively grew 11 percent and accounted for $32 million of the growth
in noninterest income. This increase was partially offset by a $6 million
decrease in foreign exchange trading gains.
The provision for credit losses was $40 million in 1996, $13 million, or 25
percent, lower than in 1995, reflecting the improved quality of the loan
portfolio.
64
<PAGE>
Noninterest expense, excluding merger and integration expense, increased by
$39 million, or 4 percent, from 1995. Personnel-related expense increased $21
million, or 4 percent, due partially to increased contract labor used to augment
staffing requirements as a residual effect of the merger. Net occupancy expense
increased $10 million, or 11 percent, due to a $12 million one-time charge in
1996 related to former banking facilities. This was offset by a 2 percent
decrease in net occupancy expense due to the closure of 20 branches late in the
third quarter of 1996. Credit card processing expense increased $6 million, or
19 percent, in 1996 due to higher merchant volumes. Advertising and public
relations expense increased $8 million, or 38 percent, over 1995 due primarily
to expanded activities in 1996 to increase awareness of our bank, following the
April 1, 1996 combination of Union Bank and BanCal Tri-State Corporation and its
subsidiary. In 1996, regulatory authority assessments expense declined $19
million, or 83 percent, primarily because the Federal Deposit Insurance
Corporation decided to eliminate insurance assessments for all of 1996. Merger
and integration expense was $117 million in 1996.
Income tax expense was $30 million lower in 1996 than in 1995, primarily due
to lower taxable income. The effective rate increased from 38% in 1995 to 40% in
1996 primarily due to a $3 million after-tax benefit recognized in 1995 from a
favorable settlement of an Internal Revenue Service examination of 1989 and
1990.
Total loans at December 31, 1996 were $21.0 billion, an increase of $0.6
billion, or 3 percent, over year-end 1995. Commercial, financial and industrial
loans declined $188 million, or 2 percent, from the previous year, primarily due
to planned reductions from a portfolio overlap arising from the merger and a
reduction in low margin lending. At year-end 1996, construction loans decreased
$12 million, or 3 percent, while commercial mortgages increased $455 million, or
21 percent, from 1995. This increase in commercial mortgages reflected the
continuing improvement in the West Coast economy, particularly the real estate
sector. It was primarily attributable to new originations of mini-perm loans,
ranging in size from $1 million to $10 million, resulting from a vigorous
marketing program. At December 31, 1996 residential loans were $319 million, or
12 percent, higher than the previous year as the favorable interest rate
environment and a stronger housing market continued to generate significant
opportunities for residential mortgage lenders. Consumer loans increased $136
million, or 4 percent, from 1995 due primarily to increases in direct and
indirect auto loans for used vehicles, partially offset by a decrease in home
equity balances.
Total nonperforming assets were $157 million at December 31, 1996, $90
million, or 36 percent, lower than one year earlier. The decline was primarily
attributable to a $27 million, or 33 percent, reduction in nonaccrual
commercial, financial and industrial loans and a $33 million, or 82 percent,
reduction in nonaccrual construction loans, due to a combination of note sales,
payoffs, and upgrades. Foreclosed assets, primarily other real estate owned,
decreased by $8 million, or 23 percent, from 1995, due to sales of individual
assets. Net loan charge-offs in 1996 were $71 million compared to net loans
charged off of $61 million in 1995. Recoveries of loans previously charged off
decreased by $24 million, despite an increase in the percentage of recoveries in
1996 to loans charged off in the previous year from 26.44% in 1995 to 35.95% in
1996. Loans charged off in 1996 decreased by $14 million due to a reduction in
new nonperforming assets in 1996 and a reduction in nonaccrual and
underperforming loans, partly offset by a $12 million increase in consumer loans
charged off, primarily attributable to credit card loans.
At December 31, 1996, the Tier 1 risk-based capital ratio was 9.08% and the
total risk-based capital ratio was 11.17% compared with a Tier 1 risk-based
capital ratio of 9.35% and a total risk-based capital ratio of 11.70% at
December 31, 1995.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
Market risk is the risk of loss to future earnings, to fair values, or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices and
65
<PAGE>
other market changes that affect market risk sensitive instruments. Market risk
is attributed to all market risk sensitive financial instruments, including
securities, loans, deposits, borrowings, as well as derivative instruments. Our
exposure to market risk is a function of its asset and liability management
activities, its trading activities for its own account, and its role as a
financial intermediary in customer-related transactions. The objective of market
risk management is to avoid excessive exposure of our earnings and equity to
loss and to reduce the volatility inherent in financial instruments.
The management of market risk is governed by policies reviewed and approved
annually by our Board of Directors. Our Board of Directors delegates
responsibility for market risk management to the Asset & Liability Management
Committee (the "A&L Management Committee"), who reports quarterly to our Board
of Directors on activities related to the management of market risk. As part of
the management of our market risk, the A&L Management Committee may direct
changes in the mix of assets and liabilities and the use of derivative
instruments such as interest rate swaps, caps and floors. The A&L Management
Committee also reviews and approves all major funding, market risk-management
programs, and market risk limits. The Chief Financial Officer, as chairman of
the A&L Management Committee, is responsible for companywide management of
market risk. The Treasurer is responsible for implementing funding, investment,
and hedging strategies designed to manage this risk. On a day-to-day basis, the
oversight of market risk management takes place at a centralized level within
the Risk Monitoring Unit. The Risk Monitoring Unit is responsible for measuring
risks to ensure compliance with all market risk limits and guidelines
incorporated within the policies and procedures established by the A&L
Management Committee. The Risk Monitoring Unit reports monthly to the A&L
Management Committee on the effectiveness of our hedging activities, on trading
risk exposures, and on compliance with policy limits. In addition, periodic
reviews by internal audit, regulators and independent accountants provide
further evaluation of controls over the risk management process.
We have separate and distinct methods for managing the market risk
associated with our trading activities and our asset and liability management
activities, as described below.
INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING)
We engage in asset and liability management activities with the objective of
reducing adverse changes in earnings as a result of changes in interest rates.
The management of interest rate risk relates to the timing and magnitude of the
repricing of assets compared to liabilities and has, as its objective, the
control of risks associated with movements in interest rates.
The Asset & Liability Management Policy approved by our Board of Directors
requires monthly monitoring of interest rate risk by the A&L Management
Committee. As part of the management of our interest rate risk, the A&L
Management Committee may direct changes in the composition of the balance sheet
and the extent to which we utilize off-balance sheet derivative instruments such
as interest rate swaps, floors, and caps.
Our balance sheet is "asset-sensitive", which means that assets generally
reprice more quickly than liabilities. An asset-sensitive balance sheet tends to
reduce net interest income when interest rates decline and to increase net
interest income when interest rates rise.
One method of measuring interest rate risk is by measuring the interest rate
sensitivity gap, which is the difference between earning assets and liabilities
maturing or repricing within specified periods. The table on page 69 presents
such an analysis, which reflects assumptions as to the rate sensitivity of
deposits without contractual maturities or repricing dates. These include demand
deposits, money market demand accounts, and savings deposits. Additional
assumptions such as prepayment estimates for residential mortgages and
mortgage-backed securities are made to reflect the probable behavior of those
assets. The section of the table on page 69 entitled "Interest Rate Risk
Management Positions" presents the effects of the securities portfolio and of
derivatives used for hedging, such as interest rate swaps and floors, in
reducing the interest rate sensitivity gap primarily for LIBOR-based loans.
66
<PAGE>
The table on page 69 shows that our assets that are rate sensitive within
one year exceeded liabilities within that same period by $4.9 billion at
December 31, 1997. Adjusted for the effects of the securities portfolio and
derivatives used for hedging, this cumulative gap was reduced to $2.5 billion.
Gap analysis has significant limitations as a method for measuring interest
rate risk since changes in interest rates do not affect all categories of assets
and liabilities in the same way. To address these limitations, we use a
simulation model to quantify the impact of changing interest rates on net
interest income. A frequency distribution of simulated 12-month net interest
income outcomes based on rate scenarios produced through a Monte Carlo rate
generation process is prepared monthly to determine statistically the mean net
interest income. The amount of Earnings at Risk, defined as the potential
negative change in net interest income, is measured at a 97.5 percent confidence
level and is managed within the limit established in our Board of Director's
Asset & Liability Policy at 5 percent of mean net interest income. Based on the
December 31, 1997 balance sheet, the Earnings at Risk was $23.0 million or 1.80%
of mean net interest income.
An additional limit established by our Board of Director's Asset & Liability
Policy is that the negative change in simulated net interest income for 12
months under single interest rate shock scenarios, up or down 200 basis points,
must be no more than 8 percent of the mean net interest income. Based on the
December 31, 1997 balance sheet, the negative change for a downward shock of 200
basis points was $51.8 million or 4.05% of mean net interest income.
TRADING ACTIVITIES
We enter into trading account activities primarily as a financial
intermediary for customers, and, to a lesser extent, for our own account. By
acting as a financial intermediary, we are able to provide our customers with
access to a wide range of products from the securities, foreign exchange, and
derivatives markets. In acting for our own account, we may take positions in
some of these instruments with the objective of generating trading profits.
These activities expose us to two primary types of market risk: interest rate
and foreign currency exchange risk.
In order to manage interest rate and foreign currency exchange risk
associated with our trading activities, we use a variety of non-statistical
methods including: position limits for each trading activity, daily marking of
all positions to market, daily profit and loss statements, position reports, and
independent verification of all inventory pricing. Additionally, the Risk
Management Unit reports positions and profits and losses daily to the Treasurer
and trading managers and weekly to the Chief Financial Officer. The A&L
Management Committee is provided reports on a monthly basis. We believe that
these procedures, which stress timely communication between the Risk Management
Unit and senior management, are the most important elements of the risk
management process.
We use a form of Value at Risk methodology to measure the overall market
risk inherent in our trading account activities. Under this methodology,
management statistically calculates, with 97.5 percent confidence, the potential
loss in fair value that we might experience if an adverse shift in market prices
were to occur within a period of 5 business days. The amount of Value at Risk is
managed within limits well below the maximum limit established by Board policy
at 0.5% of shareholders' equity. The Value at Risk model incorporates a number
of key assumptions, including assumed holding period and historical volatility
based on 3 years of historical market data updated quarterly.
During 1997, our foreign exchange trading Value at Risk averaged $73
thousand and peaked at $147 thousand. The low Value at Risk was $32 thousand.
Correspondingly, our securities trading Value at Risk averaged $558 thousand and
peaked at $717 thousand. The low Value at Risk was $439 thousand.
67
<PAGE>
Our interest rate derivatives contracts include $2.4 billion of derivative
contracts entered into as an accommodation for customers. We act as an
intermediary and we match these contracts at a profit with contracts with The
Bank of Tokyo-Mitsubishi or other dealers, thus neutralizing the related market
risk. We maintain responsibility for the credit risk associated with these
contracts.
LIQUIDITY RISK
Liquidity risk represents the potential for loss as a result of limitations
on our ability to adjust its future cash flows to meet the needs of depositors
and borrowers and to fund operations on a timely and cost-effective basis. The
Asset & Liability Management Policy approved by our Board of Directors requires
quarterly reviews of our liquidity by the A&L Management Committee, which is
composed of bank senior executives. Our liquidity draws upon the strength of our
extensive retail and commercial market business franchise, coupled with the
ability to obtain funds for various terms in a variety of domestic and
international money markets. Liquidity is managed through the funding and
investment functions of the Treasury Division.
Core deposits provide us with a sizable source of relatively stable and
low-cost funds. In the third quarter of 1998, lower cost sources of funds, which
include noninterest bearing deposits and interest bearing core deposits, funded
63 percent of average earning assets. Most of the remaining funding was provided
by short-term borrowing in the form of negotiable certificates of deposit,
foreign deposits, federal funds purchased and securities sold under repurchase
agreements, and other borrowings. In the third quarter 1998, we increased our
commercial paper program by $100 million.
Our average core deposits, which include demand deposits, money market
demand accounts, and savings and consumer time deposits, combined with average
common shareholder's equity, funded 61 percent of average total assets of $29.7
billion for the year ended December 31, 1997. Most of the remaining funding was
provided by short-term borrowings in the form of negotiable certificates of
deposit, foreign deposits, federal funds purchased and securities sold under
repurchase agreements, commercial paper and other borrowings.
Liquidity may also be provided by the sale or maturity of assets. Such
assets include interest bearing deposits in banks, federal funds sold and
securities purchased under resale agreements, and trading account securities.
The aggregate of these assets averaged $1.8 billion during 1997. Additional
liquidity may be provided by investment securities available for sale which
amounted to $2.5 billion at December 31, 1997, and by loan maturities. At
December 31, 1997, $6.5 billion of loans were scheduled to mature within one
year.
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<PAGE>
The following table summarizes our interest rate sensitivity based on
expected repricings in the time frames indicated for the balance sheet and
interest rate derivatives as of December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------
AMOUNTS MATURING OR REPRICING IN
----------------------------------------------------------
0-12 MONTHS 1-5 YEARS AFTER 5 YEARS TOTAL
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Federal funds sold and securities purchased under
resale agreements................................. $ 24,335 $ -- $ -- $ 24,335
Interest bearing deposits in banks................. 633,421 -- -- 633,421
Trading account assets............................. 394,313 -- -- 394,313
Loans.............................................. 17,320,010 3,926,152 1,495,246 22,741,408
Other assets(1)(2)................................. 1,217,060 1,111,518 1,736,049 4,064,627
------------- ------------- ------------- -------------
Total assets (except securities)............... $ 19,589,139 $ 5,037,670 $ 3,231,295 $ 27,858,104
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits:
Interest bearing checking(1)(3).................. 180,074 1,260,520 -- 1,440,594
Money market demand accounts(1)(3)............... 1,353,636 2,671,392 -- 4,025,028
Savings(1)(3).................................... 166,562 1,165,932 -- 1,332,494
Other time deposits(1)........................... 7,208,342 434,309 6,063 7,648,714
Federal funds purchased and securities sold under
repurchase agreements............................. 1,335,884 -- -- 1,335,884
Other borrowed funds............................... 1,442,585 -- -- 1,442,585
Subordinated capital notes......................... 348,000 -- -- 348,000
Demand deposit accounts(1)(4)...................... 2,654,863 6,194,681 -- 8,849,544
Other liabilities(1)(2)............................ -- -- 1,483,123 1,483,123
Shareholders' equity(2)............................ -- -- 2,679,299 2,679,299
------------- ------------- ------------- -------------
Total liabilities and shareholders' equity..... $ 14,689,946 $ 11,726,834 $ 4,168,485 $ 30,585,265
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Gap before risk management positions............... $ 4,899,193 $ (6,689,164) $ (937,190) $ (2,727,161)
Cumulative gap before risk management positions.... $ 4,899,193 $ (1,789,971) $ (2,727,161)
INTEREST RATE RISK MANAGEMENT POSITIONS:
Securities(1)...................................... 366,467 2,214,199 146,495 2,727,161
Interest rate swaps................................ (425,000) 425,000 -- --
Interest rate floors(5)............................ (2,350,000) 2,350,000 -- --
------------- ------------- ------------- -------------
Gap adjusted for risk management positions......... $ 2,490,660 $ (1,699,965) $ (790,695) $ --
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Cumulative gap adjusted for risk management
positions......................................... $ 2,490,660 $ 790,695 $ -- $ --
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
- ---------
(1) These balance sheet classifications do not conform to the classifications on
the Consolidated Balance Sheets on F-3.
(2) Items that neither reprice nor mature are included in the "After 5 Years"
column.
(3) Interest rate sensitivity of non-maturity deposit accounts are based on
assumptions for a declining interest rate scenario since our balance sheet
is asset-sensitive.
(4) 70 percent of the demand deposit account balance is assumed to be "core"
deposits, which are not sensitive to interest rate changes.
(5) Floors purchased affect interest rate sensitivity in a declining interest
rate scenario.
69
<PAGE>
YEAR 2000
The year 2000 problem exists because many computer programs use only the
last two digits to refer to a year. This convention could affect date-sensitive
calculations that treat "00" as the year 1900, rather than as the year 2000.
Another issue is that the year 2000 is a leap year and some programs may not
properly provide for February 29, 2000.
This discussion of the implications of the year 2000 problem for us contains
numerous forward-looking statements based on inherently uncertain information.
The cost of the project and the date on which we plan to complete the internal
year 2000 modifications are based on management's best estimates of future
events. The material assumptions underlying the estimated cost are:
- the continued availability of internal and external resources,
- the cost of these resources,
- the time required to accomplish the tasks, and
- the cost of needed equipment.
We cannot guarantee, however, that we will achieve these estimates, and
actual results could differ. Moreover, although management believes it will be
able to make the necessary modifications in advance, failure to modify the
systems may have a material adverse effect on us.
In addition, we place a high degree of reliance on computer systems of third
parties, such as customers, vendors, and other financial and governmental
institutions. Although we are assessing the readiness of these third parties and
preparing contingency plans, the failure of these third parties to modify their
systems in advance of December 31, 1999, may have a material adverse effect on
us.
We estimate that the total cost of our year 2000 project will be
approximately $50 million, of which $10 million relates to capital expenditures
that we will capitalize and depreciate over their useful lives. We will include
the remaining $40 million in noninterest expense in the period incurred. As of
December 31, 1998, we had spent $24 million on our year 2000 project, $2 million
in 1997 and $22 million in 1998. Of the $24 million spent as of December 31,
1998, $6 million related to capital expenditures, $1 million in 1997 and $5
million in 1998. Of the estimated $26 million remaining to be spent, an
estimated $4 million is expected to be for capital expenditures and $22 million
is expected to be included in noninterest expense over the next two years. Of
the $22 million to be included in noninterest expense, we have assumed that
approximately $14 million will be spent on salaries and contract labor. This
assumes that the current mix of internal staff and contract labor remains the
same, the hours and the person-days needed to complete the projects are not
materially exceeded and that preparations for the year 2000 remain on schedule.
The remaining $8 million is expected to relate to other operating expenses. We
are funding the cost of our year 2000 project with normal operating cash and are
staffing it with external resources as well as internal staff re-deployed from
less time-sensitive assignments. Estimated total cost could change further as
analysis continues.
READINESS PREPARATION
Resolution of the year 2000 problem is among our highest priorities, and we
are preparing for the century change with a comprehensive enterprise-wide year
2000 program. We have identified all of the major systems and have sought
external and internal resources to renovate and test the systems. We are testing
purchased software, internally developed systems and systems supported by
external parties as part of the program. We are evaluating customers and vendors
that have significant relationships with us to determine whether they are
adequately preparing for the year 2000. In addition, we are developing
contingency plans to reduce the impact of some potential events that may occur.
We cannot guarantee, however, that the systems of vendors or customers with whom
we do business will be completed on a timely basis, or that contingency plans
will shield operations from failures that may occur.
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<PAGE>
Our year 2000 program is comprised of numerous individual projects that
address the following broad areas:
- data processing systems,
- telecommunications and data networks,
- building facilities and security systems,
- vendor risk,
- customer risk,
- contingency planning, and
- communications.
We have identified over 2,000 individual projects. The projects vary in
size, importance and materiality, from large undertakings, such as remediating
complicated data systems, to smaller, but still important projects, such as
installing compliant computer utility systems or assuring that building
equipment will perform properly. The program continues to evolve as we identify
new projects to keep up with increased understanding of year 2000 implications
and evolving external requirements. Virtually all of the projects currently
identified have begun, and approximately two-thirds have been completed.
We assign projects a priority, indicating the importance of the function to
our continuing operation. This prioritization facilitates reporting on projects
based on their relative importance. We have prioritized projects as "Critical"
and "Non-Critical." Critical projects are further prioritized as "Mission
Critical" and "Other Critical."
Mission Critical projects are defined as:
- systems vital to the continuance of a broad core business activity;
- functions, the interruption of which for longer than 3 days would threaten
our viability; or
- functions that provide the environment and infrastructure necessary to
continue the broad core business activities.
Other Critical projects are defined as:
- other customer and accounting systems;
- functions supporting delivery of information and service to customers;
- administrative systems, the interruption of which for longer than 2 weeks
would cause severe business impact; or
- functions that provide the environment and infrastructure necessary for
delivery of the above systems and functions.
We plan to complete all projects currently identified prior to the year
2000, with special emphasis placed on those prioritized as Mission Critical or
Other Critical. Failure to complete an Other Critical project would not
necessarily have a material adverse effect on us.
The most important projects are the Mission Critical application systems
upon which we rely for our principal business functions. We have renovated and
tested all of these systems. However, outside servicers operate three of them.
The outside servicers have renovated and tested each of these systems, but we
still need to validate them.
The following table presents actual and estimated progress with Mission
Critical projects.
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<PAGE>
MISSION CRITICAL APPLICATION COMPLETION
<TABLE>
<CAPTION>
% COMPLETED:
-----------------
<S> <C>
Actual:
June 1998.................................................................... 10%
September 1998............................................................... 38
December 1998................................................................ 90
Estimated:
March 1999................................................................... 100%
</TABLE>
We have also achieved substantial progress with systems prioritized as Other
Critical. As of December 31, 1998, 63% of these systems were complete.
Substantially all are expected to be complete by March 31, 1999.
In addition to testing individual systems, we have begun integrated
contingency testing of our Mission Critical and many other systems in a separate
computer environment where dates are set forward in order to identify and
correct problems that might not otherwise become evident until the actual end of
the century.
We do not significantly rely on "embedded technology" in our critical
processes. Embedded technology, which means microprocessor-controlled devices as
opposed to multi-purpose computers, does control some building security and
operations, such as power management, ventilation, and building access. All
building facilities are presently being evaluated, and we expect all systems
using embedded technology to be confirmed as year 2000 ready by June 1999.
We rely on vendors and customers, and we are addressing year 2000 issues
with both groups. We have identified over 300 vendors and have made inquiries
about their year 2000 readiness plans and status. Approximately 35% of these
vendors are rated as critical. We have completed risk assessments on the
critical and non-critical vendors, and we are undertaking appropriate measures
to minimize risk as much as possible for those vendors that we have assigned a
risk rating of medium or high. Among the critical vendors, presently 72% are
rated as low risk, 19% as medium risk, and 9% as high risk.
We plan to have the medium and high risk vendor situations resolved in June
1999. We have, however, no viable alternatives for some suppliers, such as power
distribution and local telephone companies. We are still evaluating these
companies, and we will use the results as information for system-wide
contingency planning. As with all financial institutions, we place a high degree
of reliance on the systems of other institutions, including governmental
agencies, to settle transactions. We will test principal settlement methods
associated with major payment systems as part of their associated system
projects.
We also rely on our customers to make necessary preparations for the year
2000 so that their business operations will not be interrupted, thus threatening
their ability to honor their financial commitments. We have identified over
2,500 borrowers, capital market counterparties, funding sources, and large
depositors that constitute our customers as having financial volumes
sufficiently large to warrant our inquiry and assessment of their year 2000
preparation. The financial volumes included loans and unused commitments,
collected deposit balances, automated clearing house transactions, foreign
exchange, and derivatives. We have completed inquiries and initial written
assessments for 97% of the identified financial volumes.
Our borrowers, the population of customers with loans and unused commitments
outstanding, pose the highest level of concern. As of December 31, 1998, our
assessment of these borrowers resulted in the following assignments of risk: 79%
low risk, 18% medium risk and 3% high risk. We have established individual risk
mitigation plans for substantially all of the customers rated as high risk. The
risk mitigation plans evaluate whether year 2000 issues will materially affect
the customer's cash flow, asset values, and collateral pledged to us. The risk
mitigation plans use the normal credit process that we employ to manage credit
risk and require the concurrence of a credit administrator.
72
<PAGE>
We will make ongoing assessments of customers at all levels of risk. Those
with low risk will be reassessed semi-annually, while customers with medium and
high risk will be reassessed quarterly.
RISKS
The principal risks associated with the year 2000 problem can be grouped
into three categories:
- we do not successfully ready our operations for the next century,
- disruption of our operations due to operational failures of third parties,
and
- business interruption among fund providers and obligors such that expected
funding and repayment does not take place.
The only risk largely under our control is preparing our internal operations
for the year 2000. We, like other financial institutions, are heavily dependent
on our computer systems. The complexity of these systems and their
interdependence make it impractical to convert to alternative systems without
interruptions if necessary modifications are not completed on schedule.
Management believes we will be able to make the necessary modifications on
schedule.
Failure of third parties may jeopardize our operations, but the seriousness
of this risk depends on the nature and duration of the failures. The most
serious impact on our operations from vendors would result if basic services
such as telecommunications, electric power, and services provided by other
financial institutions and governmental agencies were disrupted. Some public
disclosure about readiness preparation among basic infrastructure and other
suppliers is now available. We are unable, however, to estimate the likelihood
of significant disruptions among our basic infrastructure suppliers. In view of
the unknown probability of occurrence and impact on operations, we consider the
loss of basic infrastructure services to be the most reasonably likely worst
case year 2000 scenario.
Operational failures among our customers could affect their ability to
continue to provide funding or meet obligations when due. The information we
develop in the customer assessments described earlier allows us to identify
those customers that exhibit a risk of not making adequate preparations for the
century change. We are taking appropriate actions to manage these risks.
PROGRAM ASSESSMENT
Our Year 2000 Program Office reports on progress monthly to our Executive
Management Committee and quarterly to the Audit and Examination Committee of our
Board of Directors. Our Internal Audit Division and the National Bank Examiners
regularly assess our year 2000 preparations and report quarterly to the Audit
and Examination Committee.
CONTINGENCY PLANS
We are developing year 2000 remediation contingency plans and business
resumption contingency plans specific to the year 2000. Remediation contingency
plans address the actions we would take if the current approach to remediating a
system is falling behind schedule or otherwise appears in jeopardy of failing to
deliver a year 2000-ready system when needed. Business resumption contingency
plans address the actions that we would take if critical business functions
cannot be carried out in the normal manner upon entering the next century due to
system or supplier failure.
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<PAGE>
Our business resumption contingency planning is following a four-phase
process:
- Organizational Planning Guidelines,
- Business Impact Analysis,
- Plan Development and
- Validation of Plans.
During the first two phases, which have been completed, we assigned
responsibilities, specified scenarios and determined which scenarios were
significant for each critical business unit. The second two phases call for the
development of plans to meet the significant scenarios and testing the
effectiveness of the plans.
We are developing plans for system-wide or regional failures and for
individual critical operating units where necessary. We expect to complete
development of plans for the operating units and their validation in June 1999.
We expect to complete development of plans to address system-wide or regional
failures, and their validation, in September 1999.
To determine where plans are necessary for individual operating units, we
identified the following areas of concern, assigned to each a level of potential
risk and a probability of occurrence. The areas of concern are:
- telecommunications or data network outage,
- enterprise information systems failure,
- operational disruptions,
- vendor or service provider failure,
- staff unavailability,
- utility or facility failure, and
- personal computer or local area network failure.
We rated the level of potential risk as high, moderate or low, and we rated
the probability of occurrence as high, moderate or low. Critical operating units
with a low or moderate level of potential risk and a low probability of
occurrence do not require a contingency plan for the area of concern. For any
other combination, the development of a contingency plan is required.
OTHER RELATED DISCLOSURES
HighMark Capital Management, Inc. is a registered investment adviser and
UBOC Investment Services, Inc. is a broker-dealer. Each of these subsidiaries
makes publicly available separate year 2000 reports. You can find additional
year 2000 information in those reports.
EURO CONVERSION
On January 1, 1999, 11 European countries who joined the Economic and
Monetary Union transitioned into a single currency called the "Euro", and a
single central bank -- the European Central Bank. On that date, the exchange
rates of the national currencies of the 11 countries were fixed and all
financial transactions will be settled in Euros.
We have completed our analysis of the bank-wide impact and have implemented
a project plan that addresses the Euro conversion. We are now fully operational
to settle transactions in the Euro.
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<PAGE>
BUSINESS
We are a California-based bank holding company. Our principal subsidiary is
Union Bank of California, N.A. Union Bank of California is:
- the third largest commercial bank in California, based on both total
assets and total deposits in California,
- one of the 30 largest banks in the United States, and
- one of the oldest banks on the West Coast.
At September 30, 1998, we had:
- 244 full-service branches in California,
- 6 full-service branches in Oregon and Washington,
- 2 facilities in Texas and New York, and
- 18 offices abroad.
Our bank was formed through the combination of Union Bank and BanCal
Tri-State Corporation in 1996. We are presently approximately 82% owned by The
Bank of Tokyo-Mitsubishi.
We provide a wide range of financial products and services to retail
customers, small businesses, middle-market companies and large corporations.
Most of our customers are located in California, the nation's most populous
state with over 32 million residents.
As of September 30, 1998, we had total assets of $31.4 billion, total
deposits of $23.7 billion and total shareholders' equity of $3.0 billion. We had
net income for the nine months ended September 30, 1998 of $352.4 million, and
net income per diluted common share of $2.01.
BANKING SERVICES
Our operations are divided into four primary segments:
- Community Banking Group,
- Commercial Financial Services Group,
- Trust and Private Financial Services Group, and
- International Banking Group.
As used in the tables on the following pages, "performance center earnings"
represent the allocation of net interest income, noninterest income and
noninterest expense between the business segments for products and services
originated in one segment but managed by another. "Total loans" and "total
deposits" represent loans and deposits for each business segment before
allocation between the segments of loans and deposits originated in one segment
but managed by another. "Net interest income" and "income before income taxes"
are presented on a taxable-equivalent basis.
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COMMUNITY BANKING GROUP
The following table presents the historical results of operations for the
Community Banking Group:
<TABLE>
<CAPTION>
COMMUNITY BANKING GROUP
----------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
(IN THOUSANDS)
Net interest income...................................... $ 658,144 $ 682,782 $ 511,212 $ 504,709
Noninterest income....................................... 133,559 142,944 105,991 136,101
---------- ---------- ---------- ----------
Total.................................................... 791,703 825,726 617,203 640,810
Noninterest expense...................................... 577,655 568,031 419,050 439,927
Credit expense (income).................................. 35,644 57,870 40,975 (3,059)
Performance center earnings.............................. 7,688 10,040 6,558 6,403
Income before income taxes............................... 186,092 209,865 163,736 210,345
BALANCE SHEET DATA (PERIOD AVERAGE):
(IN MILLIONS)
Total loans before performance centers................... $ 9,877 $ 9,672 $ 9,691 $ 9,389
Total assets............................................. 10,911 10,626 10,632 10,329
Total deposits before performance centers................ 11,131 11,757 11,646 12,322
OTHER DATA:................................................
Return on average assets................................. 1.02% 1.17% 1.23% 1.63%
Efficiency ratio......................................... 73.96 68.79 67.90 68.65
</TABLE>
The Community Banking Group provides its customers with a full line of
checking and savings, investment, loan and fee-based banking products. For the
nine months ended September 30, 1998, average assets in this group were $10.3
billion, and average deposits were $12.3 billion.
The group focuses on four major markets:
- consumers
- businesses with sales under $3 million
- businesses with sales between $3 million and $20 million
- middle-market companies, including agricultural firms, in central
California and in selected parts of Oregon and Washington
Community Banking serves over one million consumer households and businesses
through its 244 branches in California, six branches in Oregon and Washington
and its network of over 380 proprietary ATMs. Customers may also access our
services 24 hours a day by telephone or personal computer. In addition,
Community Banking offers automated teller and point-of-sale debit services
through our founding membership in the Star System, the largest shared ATM
network in the Western United States.
The group is organized by service delivery method, by markets and by
geography. The primary sub-units of the group are:
- community banking branches, which serve consumers, businesses and affluent
individuals
- business banking centers, which serve businesses with sales between $3
million and $20 million
- in-store branches, which also serve consumers and businesses
76
<PAGE>
- middle market and agricultural lending offices
- the Consumer Asset Management division, which is responsible for indirect
auto finance, auto leasing, and residential real estate lending
Through alliances with other financial institutions, the group offers
additional products and services, such as credit cards, leasing and financing
based on accounts receivable, inventory or other short-term assets.
Community Banking competes with larger banks by providing service quality
superior to that of its major competitors. We are recognized as among the
highest rated banks in California for customer service quality and satisfaction.
The group's primary means of competing with community banks include its
large and convenient branch network and its reputation for innovative use of
technology to deliver banking services. We have the fifth largest branch network
among depository institutions in California. We also offer convenient banking
hours to consumers through our drive-through banking locations and selected
branches that are open seven days a week.
Community Banking continues to enhance its customer service through the
innovative use of technology. We were among the first banks to team with Intuit
and Microsoft in the launches of their personal financial management software
products, Quicken-Registered Trademark- and Money-Registered Trademark- for
on-line banking. In 1996, we joined America Online's Banking Center as a charter
member. We also worked with Sony to develop the first interactive video banking
application of its kind on the West Coast. In December 1998, we jointly
announced with IBM the first of its kind comprehensive on-line banking system
using Lotus Notes-Registered Trademark- and Domino-Registered Trademark-.
These services and enhancements have enabled us to increase our share of the
consumer and small business markets. From June 30, 1994 to June 30, 1998,
UnionBanCal Corporation's share of the California deposit market increased from
4.0% to 5.1%, representing an annual growth rate of 6.3%. Similarly, since April
1996, Community Banking has increased the number of households it serves by
approximately 5% annually.
The group's strategies include continuing to build upon the more than one
million households and businesses it serves and broadening the range of
financial products and services it provides to existing customers. The group
uses direct mail marketing methods targeted at specific consumers to supplement
its traditional mass media advertising. We are also introducing a new
computer-driven sales system designed to foster cross-selling of our products.
The new system uses improved software to prompt sales staff to offer customers
additional products and services, based on a customer profile. We have installed
the new system in 40 of our branches, and we anticipate full implementation
within 18 months.
The group will continue to use varied pricing strategies to encourage
customers to use lower-cost methods of delivery to receive our products and
services. Community Banking is emphasizing further development of existing
lower-cost product and service delivery methods, such as the Internet, video
kiosks and loans-by-phone, and is expanding its Direct Banking Center, which
offers products, services and technical support for home banking via the
telephone and computer.
Community Banking competes with a number of commercial banks, savings
associations and credit unions, as well as more specialized financial services
providers, such as investment brokerage companies, consumer finance companies,
and residential real estate lenders. The group's primary competitors are other
major depository institutions such as Bank of America, California Federal,
Washington Mutual and Wells Fargo, as well as smaller community banks in the
markets in which we operate.
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COMMERCIAL FINANCIAL SERVICES GROUP
The following table presents the historical results of operations for the
Commercial Financial Services Group:
<TABLE>
<CAPTION>
COMMERCIAL FINANCIAL SERVICES GROUP
----------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
(IN THOUSANDS)
Net interest income...................................... $ 401,912 $ 440,804 $ 321,600 $ 360,625
Noninterest income....................................... 78,238 100,316 75,450 82,638
---------- ---------- ---------- ----------
Total.................................................... 480,150 541,120 397,050 443,263
Noninterest expense...................................... 201,870 231,906 166,305 188,328
Credit expense (income).................................. 14,362 18,872 15,065 15,963
Performance center earnings.............................. 4,141 3,926 2,968 2,037
Income before income taxes............................... 268,059 294,268 218,648 241,009
BALANCE SHEET DATA (PERIOD AVERAGE):
(IN MILLIONS)
Total loans before performance centers................... $ 8,292 $ 9,336 $ 9,178 $ 10,783
Total assets............................................. 9,287 10,513 10,344 12,005
Total deposits before performance centers................ 3,959 4,875 4,684 5,844
OTHER DATA:................................................
Return on average assets................................. 1.72% 1.65% 1.69% 1.63%
Efficiency ratio......................................... 42.04 42.86 41.89 42.49
</TABLE>
The Commercial Financial Services Group offers a variety of commercial
financial services, including:
- commercial and project loans,
- real estate financing,
- commercial financing based on accounts receivable, inventory, or other
short term assets,
- trade finance, which is the short-term extension of credit to support
export/import transactions, including letters of credit,
- lease financing,
- customized cash management services, and
- selected capital markets products.
The group's customers provide a significant source of opportunities for us
to sell products and services of other units of the bank, including treasury,
trust, and retail banking services. For the nine months ended September 30,
1998, average assets in this group were $12.0 billion, and average deposits were
$5.8 billion.
Commercial Financial Services is divided into the following business units,
which serve specific markets and industries:
- The Commercial Banking Group, which serves California middle-market
companies and larger companies most often headquartered in the Western
United States;
- The Real Estate Industries Group, which serves real estate developers and
real estate investment trusts;
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- The Specialized Lending Group, which serves companies operating in various
industries, including oil and gas, utilities, media, communications,
healthcare, finance and retailing; and
- The Institutional and Deposit Markets Group, which serves title and escrow
companies, financial institutions, retailers, bankruptcy trustees and
other customers with large pools of deposits.
The Commercial Customer Service Unit supports these business units by
providing centralized customer service support.
The group competes with other banks primarily on the basis of its reputation
as a "business bank," the quality of its relationship managers, and the delivery
of superior customer service. We are recognized in California as having a
superior "business banking" reputation relative to other large banks. We are
also rated among the highest for our cash management services and systems.
Commercial Financial Services relationship managers are among the most
experienced in the industries that we target, and are trained to be consultative
advisers to our customers.
The group's main strategy is to target industries and companies for which
the group can reasonably expect to be one of a customer's primary banks.
Consistent with its strategy, the group attempts to serve a large part of its
targeted customers' credit and depository needs.
One result of this strategy is increased loan syndication activity. The
group has successfully increased noninterest revenue by expanding its loan
syndication activities, and it plans to continue to emphasize its operations in
this area. Loan syndication revenues increased by $6.2 million to $12.6 million
through the first nine months of 1998 compared to $6.4 million in 1996. This
increase is largely a result of our acting more frequently as agent and/or
underwriter in syndicated loans to middle-market, real estate, and Specialized
Lending Group customers.
We believe that an additional source of increased noninterest income will
come from our expanded participation in capital market transactions. As of
September 30, 1998, UnionBanCal Corporation had approximately $58 million
committed to a private capital investment program, with plans to expand our
investments in 1999. Commercial Financial Services generally makes investments
in funds and companies with proven operating histories and in industries in
which the group specializes. We will seek to earn more fee income from loan
securitizations, particularly from commercial mortgages.
As the group increasingly allocates its resources to those industries and
companies that fit its strategy, it will simultaneously de-emphasize efforts to
build banking relationships with companies outside of its target markets. We
expect to move away from junior syndicate roles in the market for large
corporate credits and toward the purchase of selected credits from the secondary
market for bank loans.
In addition, Commercial Financial Services intends to use improved
technology to enhance the efficiency of its operations and the productivity of
its bankers and support staff. Among its planned system improvements are
enhancements to loan automation technology, improved software to measure
customer profitability, and enhanced information and contact management systems
for relationship officers.
The group competes with a variety of other financial services companies.
Competitors include other major California banks, as well as regional, national
and international banks. In addition, we compete with investment banks,
commercial finance companies, leasing companies and insurance companies.
79
<PAGE>
TRUST & PRIVATE FINANCIAL SERVICES GROUP
The following table presents the historical results of operations for the
Trust & Private Financial Services Group:
<TABLE>
<CAPTION>
TRUST & PRIVATE FINANCIAL SERVICES GROUP
----------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
(IN THOUSANDS)
Net interest income...................................... $ 11,539 $ 20,995 $ 14,332 $ 16,770
Noninterest income....................................... 110,182 128,100 91,951 106,843
---------- ---------- ---------- ----------
Total.................................................... 121,721 149,095 106,283 123,613
Noninterest expense...................................... 108,495 123,102 89,581 96,897
Credit expense (income).................................. 927 155 102 249
Performance center earnings (losses)..................... (674) (1,472) (929) 105
Income before income taxes............................... 11,625 24,366 15,671 26,572
BALANCE SHEET DATA (PERIOD AVERAGE):
(IN MILLIONS)
Total loans before performance centers................... $ 62 $ 229 $ 236 $ 245
Total assets............................................. 94 303 322 297
Total deposits before performance centers................ 425 708 625 679
OTHER DATA:................................................
Return on average assets................................. 7.36% 4.74% 3.90% 7.34%
Efficiency ratio......................................... 89.13 82.57 84.29 78.39
</TABLE>
The Trust & Private Financial Services Group offers investment management
and administration services for a broad range of individuals and institutions.
The group:
- services individual client needs through its trust and private banking,
investment management and brokerage products and services,
- services institutional client needs through traditional employee benefit
and 401(k) programs, global and domestic securities custody programs,
securities lending programs and corporate trust products, and
- provides investment management services for both individual and
institutional clients through HighMark Capital Management, Inc. and its
family of proprietary HighMark mutual funds.
As of September 30, 1998, the group had over $90 billion in assets under
administration.
The group is organized into five business divisions:
- The Private Bank division focuses primarily on delivering integrated and
customized financial services to high net worth individuals with
sophisticated financial needs. Specific products and services include
trust and estate services, investment account management services,
offshore trust services and customized deposit and credit products. The
Private Bank's strategy is to expand its business by increasing its
geographic market coverage and the breadth of its products and services.
To support that strategy, The Private Bank expanded from nine offices to
14 during 1998. In addition, it has shifted sales staff training efforts
toward increased cross-selling of all of the bank's available products and
services.
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- HighMark Capital Management, Inc., a registered investment advisor,
manages our proprietary HighMark family of mutual funds. It also provides
investment management services to institutions, pension plans and
individuals, including to clients of other divisions. HighMark Capital
Management's strategy is to expand distribution of its mutual funds by
targeting its marketing efforts at registered investment advisors and
regional broker/dealers. In addition, HighMark is working with The Bank of
Tokyo-Mitsubishi and other third parties to establish mutual funds
offshore which HighMark will advise and which will be offered to non-U.S.
investors. HighMark also serves as a sub-advisor for funds managed by
Tokyo-Mitsubishi Asset Management, Limited in Japan.
- The Business Trust division provides businesses, government agencies,
unions and non-profit organizations with trustee services, investment
management and 401(k) valuation and record keeping services. Business
Trust's strategy is to expand its third-party distribution network to
include insurance companies, investment managers, brokers and mutual
funds.
- The Investment Services division consists of UBOC Insurance Services and
UBOC Investment Services, Inc., a registered broker/dealer offering a full
line of investment products to individuals and institutional clients. The
division's primary strategy is to further penetrate UnionBanCal
Corporation's existing client base.
- The Securities Services division is engaged in domestic and global
securities custody, safekeeping, mutual fund accounting, securities
lending and corporate trust services. Its client base includes financial
institutions, businesses, government agencies, unions, investment managers
and non-profit organizations. Securities Services is the only West Coast
based provider of a full range of institutional financial services.
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INTERNATIONAL BANKING GROUP
The following table presents the historical results of operations for the
International Banking Group:
<TABLE>
<CAPTION>
INTERNATIONAL BANKING GROUP
----------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
(IN THOUSANDS)
Net interest income...................................... $ 48,175 $ 49,405 $ 35,990 $ 42,487
Noninterest income....................................... 62,373 62,238 46,887 49,758
---------- ---------- ---------- ----------
Total.................................................... 110,548 111,643 82,877 92,245
Noninterest expense...................................... 72,719 64,874 48,942 48,765
Credit expense (income).................................. (4,361) 234 216 2,915
Performance center earnings (losses)..................... (6,917) (3,759) (3,171) (2,394)
Income before income taxes............................... 35,273 42,776 30,548 38,171
BALANCE SHEET DATA (PERIOD AVERAGE):
(IN MILLIONS)
Total loans before performance centers................... $ 1,443 $ 1,631 $ 1,423 $ 1,385
Total assets............................................. 2,210 2,631 2,563 2,123
Total deposits before performance centers................ 1,080 959 980 864
OTHER DATA:................................................
Return on average assets................................. 0.95% 0.96% 0.96% 1.45%
Efficiency ratio......................................... 65.78 58.11 59.05 52.86
</TABLE>
The International Banking Group primarily provides correspondent banking and
trade finance-related products and services to financial institutions worldwide,
including in Brazil, Hong Kong, Japan, Korea and Taiwan. This includes the
provision of products and services that facilitate trade finance transactions,
including payments, collection and the extension of short-term credit. It also
serves selected foreign firms and U.S. corporate clients in selected countries
worldwide, particularly in Asia. In the United States, International Banking
serves subsidiaries and affiliates of non-Japanese Asian companies and U.S.
branches and agencies of foreign banks. It also provides international services
to domestic corporate clients along the West Coast. For the nine months ended
September 30, 1998, average assets in this group were $2.1 billion and average
deposits were $864 million.
This group has a long and stable history of providing correspondent and
trade-related services to international financial institutions. We believe that
we have achieved a leading market position and strong customer loyalty in the
Asia/Pacific correspondent banking market because we provide high quality,
customized products and services at competitive prices. The group maintains
branches in Tokyo, Taipei, Seoul, Manila and Hong Kong, representative offices
in other parts of Asia and Latin America, and an international banking
subsidiary in New York.
One of International Banking's primary services is international trade
finance. Trade finance is typically short term, which means it generally has a
lower credit risk. Despite this relatively lower credit risk compared to some
other forms of commercial credit, we have reduced the amount of credit we have
extended to our customers and the average maturity of this portfolio in response
to recent instability in global markets.
UnionBanCal Corporation has substantially reduced its cross-border
outstandings. We reduced outstandings to Japan, Korea, Taiwan, Malaysia,
Thailand, Vietnam, Singapore, Indonesia, the Philippines, China and Hong Kong by
$1.0 billion to $1.5 billion at September 30, 1998 compared to $2.5 billion at
December 31, 1997. A substantial portion of the outstandings are related to the
International Banking
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Group. In addition, our outstandings to Latin America were only $295 million at
September 30, 1998, $133 million of which was attributable to Brazil. Management
continues to closely monitor the amount of credit we have extended to our
customers in international markets.
International Banking's strategy is to improve its global operations by
reducing costs and improving productivity. It competes with both U.S. and
foreign banks. Approximately 25 U.S. banks compete with the group to provide
correspondent banking and trade-related services to Asian banks. The group's
primary competitors include First Union, Bank of New York, Chase Manhattan,
Citibank, Bank of America, and Bank of Hawaii.
OTHER BUSINESS ACTIVITIES
We also conduct business activities with customers through other
organizational units of the bank.
The Pacific Rim Corporate Group specializes in providing a range of credit,
deposit, and investment management products and services to companies in the
United States that are affiliated with companies headquartered outside the
United States, mostly in Japan. For the nine months ended September 1998,
average assets were $811 million.
The Global Markets Group conducts business activities primarily to support
the previously described business groups and their customers. This group offers
a broad range of risk management products, such as foreign exchange, interest
rate swaps, caps and floors. Additionally, it originates debt instruments for
bank eligible issuers, places debt securities, as well as the bank's own
liabilities, with institutional investors and trades debt instruments in the
secondary market. This group also manages our market-related risks as part of
its responsibilities for asset/liability management. It is also responsible for
maintaining the bank's investment securities portfolio.
OPERATING STRATEGY
Our operating strategy is to:
- CAPITALIZE ON OUR STRONG POSITION IN CORE CALIFORNIA MARKET. We believe
that one of our primary strategic strengths is our established position
in the attractive California bank market. Based on both total assets
and total deposits in California, we are the third largest commercial
bank in California, and we are among the oldest banks on the West
Coast. We serve approximately one million households and small
businesses, with 244 full-service branches in California.
- STRENGTHEN OUR CONSUMER BANKING FRANCHISE. We are seeking to increase
the number of consumer households we serve, and we are simultaneously
broadening the range of financial products and services we provide to
existing customers. We are adding to the number of households we serve
by offering product and service delivery alternatives, including online
banking, video kiosks and telephone-based services. We are also
obtaining new customers with the successful use of targeted direct mail
promotions. In an effort to offer our customers more loan and deposit
products, we have installed a new computer-driven sales system designed
to foster cross-selling. The new system has been installed in 40 of our
branches, and we anticipate full implementation within 18 months. We
also plan to expand the franchise through new branch openings and the
possible acquisition of community banks in targeted markets.
- FOCUS OUR COMMERCIAL BANKING EFFORTS ON SPECIFIC INDUSTRIES AND
COMPANIES. We are targeting our commercial banking activities on those
industries and companies that we believe will make us one of their
principal banks. Our emphasis is on relationship management and meeting
a large part of our targeted customers' credit and depository needs.
Our commercial banking activities include industry specialties, such as
communications, media and energy. We have been successful in increasing
our role as agent and/or underwriter in syndicated loans to these
specialized industry customers. We intend to broaden our syndication
efforts to include other
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markets we serve, such as real estate finance and middle-market
companies. We also provide depository and cash management services to
niche markets, including title and escrow companies, financial
institutions, retailers and bankruptcy trustees.
- DIVERSIFY OUR REVENUE SOURCES AND EXPAND OUR FEE-BASED BUSINESS. We are
seeking to diversify our revenue sources by expanding our fee-based
businesses, with a particular emphasis on our trust and asset
management businesses. We are working with The Bank of Tokyo-Mitsubishi
and other third parties to offer our proprietary HighMark mutual funds
offshore to non-U.S. residents and to serve as a sub-advisor for funds
managed by Tokyo-Mitsubishi Asset Management, Limited in Japan. We
intend to expand the activities of our brokerage and insurance
businesses by further penetrating our existing client base. We expanded
our private banking business in 1998 to include 14 offices. We also
intend to expand our distribution of 401(k) valuation and record-
keeping services to insurance companies, investment managers, brokers
and mutual funds. Our noninterest income, net of gain on the sale of
our credit card portfolio, has increased from 26% of total revenue in
1995 to 28% of total revenue for the nine-month period ended September
30, 1998. For the nine-month period ended September 30, 1997 to the
nine-month period ended September 30, 1998, noninterest income, net of
gain on the sale of our credit card portfolio, increased from $342.6
million to $382.9 million.
- EMPHASIZE OUR QUALITY CUSTOMER SERVICE. We seek to continue to provide
highly responsive customer service to create and maintain long-term
relationships with clients who are often underserved by larger banks.
We intend to continue to capitalize on the high quality of our customer
service, taking advantage of any changes in service levels caused by
recent increases in bank merger activity in the California market.
- MAINTAIN OUR HIGH LENDING STANDARDS AND OUR STRONG ASSET QUALITY
PROFILE. We strive to maintain strong asset quality through our
underwriting standards, credit policies and ongoing credit reviews of
our existing loan portfolio. These criteria, along with the recent
strength of the California economy, have resulted in our current high
quality portfolio. At September 30, 1998, our ratio of non-performing
assets to total assets was 0.26%, or the seventh lowest of the 30
largest commercial banks in the United States. In addition, as of
September 30, 1998, our ratio of reserves to total loans was 2.02%, or
the eighth highest of the 30 largest commercial banks in the United
States. At September 30, 1998, no industry concentration exceeded 10%
of our total commercial, financial and industrial loans. Additionally,
at September 30, 1998, we had a limited number of borrowers with larger
loans. We had only 10 borrowers with total outstanding balances of over
$50 million, and only one borrower with a total outstanding balance of
over $75 million.
- IDENTIFY STRATEGIC BUSINESSES AND CONSIDER POTENTIAL ACQUISITIONS OR
DIVESTITURES. We view selective acquisitions, divestitures, and
internal growth as the primary means to increase and enhance our core
businesses. We will consider acquisitions of banks and other financial
service businesses that will increase our presence in existing markets
or allow us to expand into contiguous markets. We will also consider
acquisitions in other complementary financial service businesses in
which we believe there exists superior growth potential. In addition,
we will consider exiting businesses that do not meet our core business
criteria. Our strategic business evaluation process focuses on
historical financial performance, the competitive environment, future
growth potential and regulatory considerations.
- IMPROVE OUR OPERATING EFFICIENCY. We plan to improve our operating
efficiency by undertaking a comprehensive review of all our lines of
business and our product, customer support and administrative
departments. To assist us in this effort, we expect to employ a
consultant with
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demonstrated success in realizing long-term efficiency improvements at
other major financial institutions. Our aim is to begin an efficiency
improvement project during the second quarter of 1999 and to have it
fully implemented by late 2000.
- ACHIEVE COMPETITIVE FINANCIAL PERFORMANCE TARGETS. In connection with
our strategic repositioning, we have developed long-term financial
performance goals. These goals will serve as a tool for measuring the
long-term success of our operating strategies, based on normal business
operations, without including nonrecurring events that may occur from
time to time. Our long-term financial performance goals include:
<TABLE>
<CAPTION>
PERFORMANCE RATIO GOAL
<S> <C>
- - Return on average common equity 15% to 17%
- - Earnings per share growth 10% to 12%
- - Efficiency ratio 54% to 56%
- - Tangible common equity to assets 7.5% to 8.5%
</TABLE>
Although we believe these goals are realizable given our proposed
operating strategies and our current asset quality, we cannot assure you
that we will attain these long-term financial performance goals at any
particular time. See "Risk Factors--Adverse Factors Could Impact Our
Ability to Attain Our Long-Term Financial Performance Goals" on page 10.
- ALIGN OUR SENIOR MANAGEMENT COMPENSATION WITH SHAREHOLDERS'
INTERESTS. Our senior management compensation philosophy is to pay
competitively and to pay for performance. In connection with our
strategic repositioning, we have taken steps to align senior management
compensation more directly with shareholders' interests.
To this end, we have made several changes to our senior management
compensation programs. We have linked our Senior Management Bonus Plan
to our return on average common equity performance target and net
income. In addition, we have increased the percentage of stock-based
compensation, including options, restricted stock, and performance
shares, that makes up our senior management's total compensation, with
increased emphasis on stock options. We believe that the level of
compensation, as well as the percentage of stock to total compensation
paid to senior management, are competitive with our peers in the banking
industry.
We intend to institute stock ownership guidelines for our U.S. senior
managers and Board members by the end of this year.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table presents pertinent information concerning our directors
and executive officers as of the date of this prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --------- ----------------------------------------------------------
<S> <C> <C>
Kaoru Hayama........................ 64 Chairman of the Board
Takahiro Moriguchi.................. 54 President and Chief Executive Officer
Yoshihiko Someya.................... 51 Deputy Chairman of the Board
Richard C. Hartnack................. 53 Vice Chairman of the Board
Robert M. Walker.................... 57 Vice Chairman of the Board
Peter R. Butcher.................... 59 Executive Vice President and Chief Credit Officer
Katsuyoshi Hamahashi................ 50 Executive Vice President and Treasurer
David I. Matson..................... 54 Executive Vice President and Chief Financial Officer
Magan C. Patel...................... 61 Executive Vice President
Charles L. Pedersen................. 55 Executive Vice President
Michael A.C. Spilsbury.............. 49 Executive Vice President
Ikuzo Sugiyama...................... 49 Executive Vice President
Philip M. Wexler.................... 60 Executive Vice President
Richard D. Farman................... 63 Director
Stanley F. Farrar................... 55 Director
Herman E. Gallegos.................. 68 Director
Jack L. Hancock..................... 68 Director
Harry W. Low........................ 67 Director
Mary S. Metz........................ 61 Director
Raymond E. Miles.................... 66 Director
J. Fernando Niebla.................. 59 Director
Sidney R. Petersen.................. 68 Director
Carl W. Robertson................... 62 Director
Henry T. Swigert.................... 68 Director
Tsuneo Wakai........................ 72 Director
Hiroshi Watanabe.................... 58 Director
Blenda J. Wilson.................... 58 Director
Kenji Yoshizawa..................... 66 Director
</TABLE>
KAORU HAYAMA. Mr. Hayama has served as Chairman of UnionBanCal Corporation
and the bank since September 1998. Prior to that he served as Deputy President
of The Bank of Tokyo-Mitsubishi from April 1996 until June 1998. From June 1994
to April 1996, Mr. Hayama served as Deputy President of the former The Bank of
Tokyo, Ltd., and from June 1992 to June 1994, he served as Senior Managing
Director of the Americas for the former The Bank of Tokyo, Ltd. and as Chairman
and CEO of the Bank of Tokyo Trust Company. From June 1986 to June 1992, he
served as General Manager of the former The Bank of Tokyo Ltd.'s Planning
Division. Mr. Hayama was elected to the former The Bank of Tokyo, Ltd.'s Board
of Directors in June 1986, and he was elected Managing Director in June 1988 and
Senior Managing Director in June 1992.
TAKAHIRO MORIGUCHI. Mr. Moriguchi has served as President and Chief
Executive Officer of UnionBanCal Corporation and the bank since May 1997. Prior
to that he served as Vice Chairman and Chief Financial Officer of UnionBanCal
Corporation and the bank from April 1996 to May 1997 and as Vice Chairman and
Chief Financial Officer of the former Union Bank from June 1993 until March
1996. From May 1992 to May 1993, Mr. Moriguchi served as General Manager of the
former The Bank of Tokyo, Ltd.'s
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Capital Markets Division No. 2, and from July 1988 to April 1992, as President
and Managing Director of the former Bank of Tokyo Capital Markets, Ltd., London.
He has served as a director of The Bank of Tokyo-Mitsubishi since April 1996 and
he served as a director of the former The Bank of Tokyo, Ltd. from June 1995 to
April 1996. Mr. Moriguchi has served as a director of UnionBanCal Corporation
since June 1993.
YOSHIHIKO SOMEYA. Mr. Someya has served as Deputy Chairman and head of
Credit and Administration and Trust and Private Financial Services Group since
July 1998. He served as Executive Vice President, Credit Management and Support
Liaison from March 1998 to July 1998. Prior to that he served as Deputy General
Manager, The Bank of Tokyo-Mitsubishi Osaka Branch from May 1996 to March 1998.
From May 1995 to May 1996, Mr. Someya served as the General Manager of The Bank
of Tokyo-Mitsubishi's Financial Institutions Division, and from May 1993 to May
1995, he served as Director and General Manager, Management Planning Division of
DC Card Co., Ltd., a subsidiary of The Mitsubishi Bank, Limited. In addition,
Mr. Someya served as General Manager of The Mitsubishi Bank's Tameike Branch
from May 1991 to May 1993, and from May 1987 to January 1991, he served as Vice
President, Corporate Management, of the former Bank of California, N.A.
RICHARD C. HARTNACK. Mr. Hartnack has served as Vice Chairman and head of
the Community Banking Group of UnionBanCal Corporation and the bank since April
1996. Prior to that he served as Vice Chairman of the former Union Bank from
June 1991 until March 1996, and from mid-1987 to June 1991, he served as
Executive Vice President and head of the Community Bank Group, The First
National Bank of Chicago. Mr. Hartnack has served as a director of UnionBanCal
Corporation since June 1991.
ROBERT M. WALKER. Mr. Walker has served as Vice Chairman and head of the
Commercial Financial Services Group for UnionBanCal Corporation and the bank
since April 1996 and as head of the Corporate and Real Estate Banking Group for
UnionBanCal Corporation and the bank since July 1996. Prior to that Mr. Walker
served as Vice Chairman and head of the Commercial Financial Services Group of
the former Union Bank from July 1992 until March 1996. From February 1992 to
July 1992, he served as Vice Chairman and Chief Credit Officer of Valley
National Bank, and from August 1988 to February 1992, he served as Senior
Executive Vice President and Chief Credit Officer, Valley National Bank. Mr.
Walker has served as a director of UnionBanCal Corporation since July 1992.
PETER R. BUTCHER. Mr. Butcher has served as Executive Vice President,
Credit Management Group, of UnionBanCal Corporation and the bank since April
1996 and as Chief Credit Officer since July 1998. Prior to that he served as
Executive Vice President and Chief Credit Officer of the former BanCal Tri-State
Corporation and former Bank of California, N.A. from July 1993 until March 1996,
and from March 1992 to July 1993, Mr. Butcher served as Executive Vice President
of Society National Bank. From 1990 to 1992, he served as Executive Vice
President and Chief Credit Policy Officer, Ameritrust Corporation. He also
served as Principal of ICON Associates from 1989 to 1990, and he served in
various positions with Midland Bank PLC, London, England, from 1956 to 1988.
KATSUYOSHI HAMAHASHI. Mr. Hamahashi has served as head of the Global
Markets Group of UnionBanCal Corporation and the bank since October 1998. He
also has served as Executive Vice President and Treasurer of UnionBanCal
Corporation and the bank since April 1996. Prior to that he served as Executive
Vice President and Treasurer of the former Union Bank from February 1996 to
March 1996 and as Senior Vice President and Treasurer of the former Union Bank
from February 1993 to February 1996. From October 1989 to January 1993, Mr.
Hamahashi served as Deputy General Manager, Money Market Planning Division of
the former The Bank of Tokyo, Ltd.
DAVID I. MATSON. Mr. Matson has served as Executive Vice President of
UnionBanCal Corporation and the bank since August 1997 and as Chief Financial
Officer since July 1998. Prior to that he served as Director of Finance of
UnionBanCal Corporation and the bank from August 1997 until July 1998 and as
Executive Vice President and head of the Institutional and Deposit Markets
Division from April 1996 until July 1997. From January 1994 to March 1996, Mr.
Matson served in the same capacity at the former Union
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Bank. Mr. Matson held various positions at the former Union Bank, including in
the middle market, corporate, leasing, merchant banking and cash management
divisions, beginning in 1976. He also served as Controller of the former Union
Bank for seven years during that time.
MAGAN C. PATEL. Mr. Patel has served as Executive Vice President and head
of the International Banking Group of UnionBanCal Corporation and the bank since
April 1996. Prior to that he served as Executive Vice President, International
Banking Group, of the former Bank of California, N.A. from 1985 to 1996.
CHARLES L. PEDERSEN. Mr. Pedersen has served as Executive Vice President
and head of the Systems, Technology and Item Processing Group of UnionBanCal
Corporation and the bank since April 1996. Prior to that he served as Senior
Vice President and head of the Bank Operations and Automation Group of the
former Union Bank from February 1991 to March 1996, becoming Executive Vice
President in September 1992. He served as a division head for the former Union
Bank's Systems and Item Processing in the Bank Operations and Automation Group
from November 1988 to February 1991.
MICHAEL A. C. SPILSBURY. Mr. Spilsbury has served as Executive Vice
President and head of the Operations and Services Group of UnionBanCal
Corporation and the bank since April 1996. Prior to that he served as Executive
Vice President, Resources and Services, with the former Bank of California, N.A.
from January 1992 through March 1996. Mr. Spilsbury served as Senior Vice
President in the Banking Group of the former Bank of California, N.A. from
January 1989 to January 1992.
IKUZO SUGIYAMA. Mr. Sugiyama has served as Executive Vice President and
head of the Pacific Rim Corporate Group of UnionBanCal Corporation and the bank
and as General Manager of the Los Angeles Branch of The Bank of Tokyo-Mitsubishi
since July 1997. Prior to that he served as Chief Manager, Corporate Banking
Division No. 3 under Corporate Banking Group No. 1 of The Bank of
Tokyo-Mitsubishi from April 1996 to July 1997. From April 1994 to March 1996,
Mr. Sugiyama served as Deputy General Manager of the Marunouchi Office of the
former The Bank of Tokyo, Ltd., and from May 1991 to March 1994, he served as
Deputy General Manager of the Los Angeles Agency of the former The Bank of
Tokyo, Ltd. and as Senior Vice President of the Japanese Corporate Department-LA
of the former Union Bank. From August 1989 to May 1991, he served as Manager,
Loan Department, of the former The Bank of Tokyo, Ltd.'s Los Angeles Office, and
from September 1988 to August 1989, he served as Vice President, Japanese
Corporate Department of California First Bank in Los Angeles.
PHILIP M. WEXLER. Mr. Wexler has served as Executive Vice President and
head of the Specialized Lending Group of UnionBanCal Corporation and the bank
since April 1996. Prior to that he served as Executive Vice President and
General Manager of the Specialized Lending Group of the former Union Bank from
October 1987 through March 1996.
RICHARD D. FARMAN. Mr. Farman has served as Chairman and Chief Executive
Officer of Sempra Energy since July 1998 and as President and Chief Operating
Officer of Pacific Enterprises since September 1993. Prior to that Mr. Farman
served as Chief Executive Officer of Southern California Gas Company, a
subsidiary of Pacific Enterprises, from January 1989 through December 1994. Mr.
Farman has been a director of UnionBanCal Corporation since November 1988, and
has served as a director of Catellus Development Corporation since May 1997.
STANLEY F. FARRAR. Mr. Farrar has been a partner of Sullivan & Cromwell
since October 1984. He served as a director of the former BanCal Tri-State
Corporation and the former Bank of California, N.A. from June 1984 until March
1996. Mr. Farrar has been a director of UnionBanCal Corporation since April
1996.
HERMAN E. GALLEGOS. Mr. Gallegos has been an independent management
consultant since January 1982. He has served as a director of SBC Communications
Inc. and its predecessors since 1974 and The California Endowment since May
1996. Mr. Gallegos has been a director of UnionBanCal Corporation since November
1988.
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JACK L. HANCOCK. Mr. Hancock was Executive Vice President of Pacific Bell
from February 1988 until December 1993. He has been a director of Interline
Technology since December 1987, Persistence Software since September 1993,
Whittaker Corporation since February 1994 and of MGC Communications and Bankers,
LLP, since July 1996. Mr. Hancock has been a director of UnionBanCal Corporation
since July 1994.
HARRY W. LOW. Justice Low has been a mediator and arbitrator with Judicial
Arbitration & Mediation Services/Endispute, Inc. (JAMS/Endispute) since March
1992. He was the Presiding Justice for the State of California Court of Appeal,
1st District, Division 5, from 1982 until his retirement in January 1992.
Justice Low has been a director of UnionBanCal Corporation since January 1993.
MARY S. METZ. Dr. Metz has served as President and Chief Executive Officer
of the S.H. Cowell Foundation since January 5, 1999. Prior to that she served as
the Dean of University Extension, University of California, Berkeley, from July
1991 to September 1998 and as President of Mills College from 1981 to June 1990.
Dr. Metz has served as a director of SBC Communications, Inc. and its
predecessors since July 1986, Pacific Gas & Electric Co. since March 1986, and
Longs Drugs Stores since February 1991. Dr. Metz has been director of
UnionBanCal Corporation since November 1988.
RAYMOND E. MILES. Professor Miles has been a Professor at the Haas School
of Business at the University of California, Berkeley, since July 1963. He
served as a director of the former BanCal Tri-State Corporation and the former
Bank of California, N.A. from January 1987 to March 1996. He has served as a
director of Granite Construction Co., Inc. since May 1988. Professor Miles has
been a director of UnionBanCal Corporation since April 1996.
J. FERNANDO NIEBLA. Mr. Niebla has served as Chairman of Infotec Commercial
Systems since December 1995 and also served as Chief Executive Officer until
June 1998. From September 1979 to June 1996, he served as Chairman and Chief
Executive Officer of Infotec Development, Inc. He also served as a director of
the former BanCal Tri-State Corporation and the former Bank of California, N.A.
from July 1994 through March 1996. Mr. Niebla has been a director of UnionBanCal
Corporation since April 1996.
SIDNEY R. PETERSEN. Mr. Petersen has been a consultant and private investor
since August 1984. He served as Chairman and Chief Executive Officer of Getty
Oil Company until his retirement in July 1984. He has been a director of Avery
Dennison Corporation since December 1981, NICOR, Inc. since May 1987, Seagull
Energy Corporation since October 1996 and Sypris Solutions, Inc. since March
1998. Mr. Petersen has been a director of UnionBanCal Corporation since November
1988.
CARL W. ROBERTSON. Mr. Robertson has been the Managing Director of Warland
Investments Company since January 1985. He served as a director of the former
BanCal Tri-State Corporation and the former Bank of California, N.A. from April
1975 to March 1996. Mr. Robertson has been a director of UnionBanCal Corporation
since April 1996.
HENRY T. SWIGERT. Mr. Swigert has served as Chairman of ESCO Corporation
since January 1979. From April 1989 until April 1996, he served as a director of
the former BanCal Tri-State Corporation and the former Bank of California, N.A.
Mr. Swigert has been a director of UnionBanCal Corporation since April 1996.
TSUNEO WAKAI. Mr. Wakai has been the Senior Advisor of The Bank of
Tokyo-Mitsubishi since January 1998. Prior to that he was Chairman of the Board
of The Bank of Tokyo-Mitsubishi from April 1996 through December 1997, and the
President of the former The Mitsubishi Bank, Ltd. from June 1990 through March
1996. Mr. Wakai has been a director of UnionBanCal Corporation since April 1996.
HIROSHI WATANABE. Mr. Watanabe has served as Managing Director and Chief
Executive Officer of The Bank of Tokyo-Mitsubishi, Ltd., Headquarters for the
Americas, since July 1998. Prior to that he served as Managing Director and
General Manager, Corporate Planning Division, of The Bank of Tokyo-Mitsubishi
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from April 1996 to July 1998, and he served in the same capacity in the Planning
Division of the former The Bank of Tokyo, Ltd. from June 1995 to April 1996. Mr.
Watanabe served as a director and General Manager of the former The Bank of
Tokyo, Ltd. from June 1992 to June 1995, as General Manager, Planning Division
of the former The Bank of Tokyo, Ltd. from June 1991 to June 1992, and as
General Manager, Shinjuku Office, from February 1990 to June 1991. Mr. Watanabe
served as Managing Director, Bank of Tokyo International Limited and as Senior
Counselor for the Resident Senior Managing Director for Europe from April 1988
to February 1990.
BLENDA J. WILSON. Dr. Wilson has served as the President of California
State University, Northridge, since September 1992. She served as Chancellor of
the University of Michigan-Dearborn from 1988 to 1992. Dr. Wilson has been a
director of UnionBanCal Corporation since July 1993.
KENJI YOSHIZAWA. Mr. Yoshizawa has served as the Deputy President and
director of The Bank of Tokyo-Mitsubishi, Ltd. since April 1996. Prior to that
he served as Deputy President and director of the former The Bank of Tokyo, Ltd.
from June 1990 through March 1996 and as Chairman and Chief Executive Officer of
the former Bank of Tokyo Trust Company from September 1989 to September 1990.
Mr. Yoshizawa served as a Senior Managing Director of the former The Bank of
Tokyo, Ltd. from June 1988 to June 1990, and as Managing Director thereof from
April 1986 to June 1988. Mr. Yoshizawa has been a director of UnionBanCal
Corporation since September 1989.
EXECUTIVE COMPENSATION
SPECIFIED OFFICERS
The following summarizes the compensation that we paid to our President and
Chief Executive Officer, the Deputy Chairman and two Vice Chairmen of the Board
(collectively, the "Specified Officers") in 1998 and 1997. The Executive
Compensation and Benefits Committee of the Board approves all elements of the
compensation and benefits for these individuals, as well as other of our
executive officers. Messrs. Moriguchi and Someya are serving as executive
officers on a rotational assignment from The Bank of Tokyo-Mitsubishi. The
Committee therefore takes into account the applicable compensation policies of
The Bank of Tokyo-Mitsubishi when determining their compensation during their
tenure with us. As expatriate officers, they are not eligible to receive annual
bonuses, restricted stock awards, stock option grants, or performance share
awards.
Mr. Moriguchi was elected President and Chief Executive Officer in May 1997,
replacing Mr. Kanetaka Yoshida. Mr. Moriguchi's salary totaled $329,735 in 1998,
and $378,785 in 1997.
Mr. Someya was elected Deputy Chairman of the Board in July 1998, replacing
Mr. Minoru Noda. Mr. Someya's salary for the period March 1998 through December
1998 totaled $269,497. Mr. Someya was employed by The Bank of Tokyo-Mitsubishi
prior to that time.
Messrs. Hartnack and Walker have been serving as Vice Chairmen since April
1996. Mr. Hartnack's salary totaled $415,000 for 1998 and Mr. Walker's was
$415,000 for 1998. Neither of these amounts include bonuses, as we will not
determine such compensation until first quarter of 1999. In 1998, Messrs.
Hartnack and Walker each received a grant of 19,500 stock options and a target
award of 6,600 performance shares, each on a post-split basis. Mr. Walker also
was awarded 18,000 shares, on a post-split basis, of restricted stock. In 1997,
we paid each of Messrs. Hartnack and Walker $353,842 in salary, $240,000 in
bonuses and $53,100 in restricted stock awards.
COMPENSATION COMPONENTS
The following summarizes the main components of our compensation package
offered to our executive officers, including the Specified Officers and a number
of our Executive and Senior Vice Presidents.
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BASE SALARY. The Executive Compensation and Benefits Committee establishes
base salaries for the Specified Officers as well as for other of our executives.
The Committee considers comparable positions at other banks, taking into account
the relative responsibilities of the executives involved. In general, we target
base salaries at the median competitive levels to attract and retain highly
experienced and qualified executives. Where the responsibilities of executive
positions at UnionBanCal Corporation exceed those typically found among other
banks, or if the executive plays a particularly critical role at UnionBanCal
Corporation, we may target base salaries above median competitive levels. In
determining salaries, the Executive Compensation and Benefits Committee also
takes into account individual leadership and vision, experience and performance,
as well as internal equity relative to other positions within UnionBanCal
Corporation, and specific issues particular to UnionBanCal Corporation and the
position involved.
ANNUAL BONUSES. The purpose of the annual bonus plan is to provide a median
competitive annual incentive opportunity at target performance levels. Target
awards under the plan represent the median of the competitive market for
comparable executive positions at banks of similar size and focus. Actual awards
are determined based on our performance and the individual participant.
Participants under the Senior Management Bonus Plan include all executives
at the Senior Vice President level and above, other than expatriate officers,
with responsibility for matters that impact our overall performance. We assign
participants target bonuses comparable to median competitive levels. The size of
the bonus fund is based on our performance on two measures relative to our
annual financial plan. In 1998, those two measures were return on average assets
and net income. For 1999, we have changed our Senior Management Bonus Plan,
substituting return on average common equity in place of return on average
assets. We believe changing the Senior Management Bonus Plan to include return
on average common equity provides a stronger link between compensation and
shareholder value creation. The bonus fund size may vary up to two times the
aggregate for target bonuses, based on our performance on the two measures. In
addition, the Executive Compensation and Benefits Committee may increase or
decrease the bonus fund within limits, based on our performance in other areas,
including strategic and organizational achievements, other financial measures,
and relative performance against our peers. We base individual bonus awards on
individual performance and contributions.
LONG TERM INCENTIVE PROGRAM. We provide long-term incentive awards to
individuals who can directly impact our long-term performance and value. Target
awards are comparable to median competitive levels. Eligible participants may
receive grants consisting of one or more types of long-term incentives,
including stock options, restricted stock, and performance shares. We base
grants on an individual's scope and level of responsibilities. The grants
reflect competitive practices for similar positions in peer companies. We
determine performance share awards based on our performance compared to the
performance of our peers.
STOCK OPTIONS AND RESTRICTED STOCK. We believe in tying rewards for
eligible executives directly to our long-term success and increases in
shareholder value through stock option grants and restricted stock awards. These
rewards also enable executives to develop and maintain a stock ownership
position in our common stock. We target the amounts of long-term incentives at
median competitive levels, taking into account the responsibilities of the
officers involved. It is our intention to place greater emphasis on the use of
stock options rather than restricted stock in future incentive awards.
The UnionBanCal Corporation Management Stock Plan authorizes us to issue up
to 6,600,000 shares of our common stock to specified employees as grants of
stock options and awards of restricted stock. The 6,600,000 share maximum
represented approximately 3.8 percent of our common stock outstanding as of
December 31, 1998. Canceled or forfeited options and restricted stock become
available for future grants. Expatriate officers are not eligible to participate
in the UnionBanCal Corporation Management Stock Plan.
The Executive Compensation and Benefits Committee determines the term of
each stock option grant, up to a maximum of ten years from the date of grant.
The exercise price must not be less than the fair market
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value on the grant date. Options vest in thirds over three years, provided that
the employee has completed the specified continuous service requirement, or
earlier if the employee dies or is permanently and totally disabled or retires
under specified grant, age and service conditions.
In general, awards of restricted stock vest in fourths over four years from
the grant date, provided that the employee has completed the specified
continuous service requirement, or earlier if the employee dies or is
permanently and totally disabled or retires under specified grant, age and
service conditions. Restricted stockholders have the right to vote their
restricted shares and to receive dividends.
1997 UNIONBANCAL CORPORATION PERFORMANCE SHARE PLAN. In 1997, we adopted
the 1997 UnionBanCal Corporation 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 our common stock, and (2) performance as measured on
return on assets, a performance measure closely linked to value creation.
Expatriate officers are not eligible to participate in the UnionBanCal
Corporation Performance Share Plan.
EMPLOYMENT AGREEMENTS
Mr. Hartnack entered into a new Employment Agreement with the bank in
January 1998, which replaced the agreement he entered into when he began
employment with us in 1991. In addition to other benefits, Mr. Hartnack is
entitled to severance benefits including separation pay and benefits for a
minimum of two years treatment as though he were eligible for early retirement
benefits, if not yet eligible, and vesting in full of the target award amount
under his outstanding grants of performance shares under the UnionBanCal
Corporation Performance Share Plan. Additionally, Mr. Hartnack will receive a
pension supplement which will provide the actuarial equivalent of the extra
amount Mr. Hartnack would receive under the Union Bank of California Retirement
Plan if the limitations on benefits set forth in Sections 415 and 401(a)(17) of
the Internal Revenue Code did not otherwise apply. In addition, the supplement
will provide the actuarial equivalent of the extra amount Mr. Hartnack would
receive if the Union Bank of California Retirement Plan had taken into account
Mr. Hartnack's nine previous years of service with The First National Bank of
Chicago. The supplement will be reduced by the actuarial equivalent of the lump
sum distributions Mr. Hartnack has received from the qualified and non-qualified
plans of The First National Bank of Chicago.
Mr. Walker entered into a new Employment Agreement with the bank in January
1998, which replaced the agreement he entered into when he began employment with
us in 1992. In addition to other benefits, Mr. Walker is entitled to severance
benefits consisting of separation pay benefits for a minimum of two years and
vesting in full of the target award amount under his outstanding grants of
performance shares under the UnionBanCal Corporation Performance Shares Plan.
Additionally, Mr. Walker will receive a supplemental pension which will provide
the actuarial equivalent of the extra amount Mr. Walker would receive under the
Union Bank of California Retirement Plan if the limitations on benefits set
forth in Sections 415 and 401(a)(17) of the Internal Revenue Code did not
otherwise apply. This supplement also credits Mr. Walker with an additional five
years of credited service.
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SELLING SHAREHOLDER
The selling shareholder is The Bank of Tokyo-Mitsubishi, Ltd. We are The
Bank of Toyko-Mitsubishi's largest overseas subsidiary. The Bank of
Tokyo-Mitsubishi was created through the merger, on April 1, 1996, of The Bank
of Tokyo, Ltd. and The Mitsubishi Bank, Limited. In connection with that merger,
on April 1, 1996, Union Bank, formerly majority owned by The Bank of Tokyo,
combined with BanCal Tri-State Corporation, formerly wholly owned by The
Mitsubishi Bank. As a result, The Bank of Tokyo-Mitsubishi came to own over 80%
of UnionBanCal Corporation. The Bank of Tokyo-Mitsubishi has stated that it
intends to maintain its majority stake in UnionBanCal Corporation after the
closing of this offering and the related transactions. Since 1996, a number of
officers of The Bank of Tokyo-Mitsubishi have served in management positions
with us and/or served on our Board of Directors. The following table presents
pertinent information about the shares of our common stock that are owned by The
Bank of Tokyo-Mitsubishi as of the date of this prospectus. We are presenting
the information in the table as if the underwriters did not exercise the
over-allotment option and as if the repurchase of 7,161,580 shares of common
stock from The Bank of Tokyo-Mitsubishi and 2,100,000 shares of common stock
from Meiji Life Insurance Company had occurred.
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
-------------------------- SHARES BEING --------------------------
NAME OF SELLING SHAREHOLDER NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------------------------------- ------------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
The Bank of Tokyo-Mitsubishi, Ltd................. 142,925,616 81.5% 22,000,000 113,764,036 68.5%
7-1, Marunouchi 2-chome,
Chiyoda-ku, Tokyo, 100, Japan
</TABLE>
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DESCRIPTION OF CAPITAL STOCK
The following descriptions of our capital stock are not complete. You should
also read our Amended and Restated Articles of Incorporation, our Bylaws and the
California General Corporation Law ("CGCL"). We have filed copies of our
Articles of Incorporation and Bylaws with the SEC. These documents are
incorporated by reference into the registration statement of which this
prospectus is a part.
We have 305,000,000 shares of capital stock authorized, of which 300,000,000
shares are common stock and 5,000,000 shares are preferred stock. As of January
29, 1999, we had 175,272,236 shares of common stock issued and outstanding, and
no shares of preferred stock issued or outstanding.
COMMON STOCK
Each holder of shares of our common stock is entitled to one vote for each
share held on all matters to be voted upon by our shareholders. The holders of
outstanding shares of our common stock are entitled to receive ratably such
dividends out of assets legally available therefor as our Board of Directors may
determine. Upon our liquidation or dissolution, the holders of our common stock
will be entitled to share ratably in our assets that are legally available for
distribution to shareholders after payment of liabilities. If we have any
preferred stock outstanding, holders of the preferred stock may be entitled to
dividend and/or liquidation preferences. In either such case, we must pay the
applicable distribution to the holders of our preferred stock before we may pay
them to the holders of our common stock. Holders of our common stock have no
conversion, sinking fund, redemption, preemptive or subscription rights. In
addition, holders of our common stock do not have cumulative voting rights. We
cannot further call or assess shares of our common stock.
PREFERRED STOCK
We are authorized to issue 5,000,000 shares of preferred stock, none of
which currently is issued or outstanding. Our Board of Directors has the
authority to determine and alter the rights, preferences, privileges and
restrictions granted to or imposed upon any unissued series of our preferred
stock and to fix the number of shares, dividend rights, conversion or exchange
rights, voting rights, redemption rights, liquidation preferences, and sinking
funds of any series of our preferred stock. The authorized shares of our
preferred stock will be available for issuance without further action by our
shareholders, unless shareholder action is required by applicable law or by the
rules of a stock exchange on which any series of our stock may be listed. The
holders of our preferred stock will have the right to vote separately as a class
on any proposal involving fundamental changes in the rights of those holders as
provided by the CGCL.
This authority of our Board of Directors gives it the power to approve the
issuance of a series of preferred stock that could, depending on its terms,
either impede or facilitate the completion of a merger, tender offer or other
takeover attempt. For example, the issuance of new shares might impede a
business combination if the terms of those shares include voting rights that
would enable a holder to block business combinations. Conversely, the issuance
of new shares might facilitate a business combination if those shares have
general voting rights sufficient to satisfy an applicable percentage vote
requirement.
If applicable, the terms on which our preferred stock may be convertible
into or exchangeable for our common stock or our other securities will be
described in the applicable Certificate of Determination. The terms will include
provisions as to whether conversion or exchange is mandatory, at the option of
the holder, or at our option, and may include provisions that adjust the number
of shares of our common stock or other securities of ours that the holders of
our preferred stock may receive.
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WRITTEN CONSENTS
Our Bylaws provide that any shareholder action can be taken by written
consent of the shareholders. As a result, The Bank of Tokyo-Mitsubishi, which
owns a majority of shares of our common stock, can take action by written
consent.
DIRECTORS' LIABILITY
Our Articles of Incorporation provide for indemnification of directors to
the fullest extent authorized by California law. Section 317 of the CGCL
contains provisions permitting, and in some situations requiring, California
corporations to provide indemnification to their directors and officers for
losses and litigation expenses incurred in connection with their service to the
corporation in those capacities.
TRANSFER AGENT AND REGISTRAR
Harris Trust Company of California acts as transfer agent and registrar for
our common stock.
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UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
This is a general discussion of United States federal tax consequences of
the acquisition, ownership, and disposition of our common stock by a holder
that, for United States federal income tax purposes, is not a "United States
person" as we define that term below (a "Non-United States Holder"). We have
based this summary upon the United States federal tax law in effect as of the
date of this prospectus. These laws may change, possibly retroactively.
We do not discuss all aspects of United States federal taxation that may be
important to you in light of your individual investment circumstances, such as
if special tax rules apply to you, for example, if you are a financial
institution, insurance company, broker-dealer, or tax-exempt organization. We
urge you to consult your tax advisor about the United States federal tax
consequences of acquiring, holding, and disposing of our common stock, as well
as any tax consequences that may arise under the laws of any foreign, state,
local, or other taxing jurisdiction.
For purposes of this discussion, a "United States person" means:
- a citizen or resident of the United States,
- a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision of the United States,
- an estate, the income of which is includible in gross income for United
States federal income tax purposes regardless of its source, or
- a trust, the administration of which is subject to the primary supervision
of a United States court and that has one or more United States persons
who have the authority to control all substantial decisions of the trust.
DIVIDENDS
Dividends paid to a Non-United States Holder will generally be subject to
withholding of United States federal income tax at the rate of 30%. If, however,
the dividend is effectively connected with the conduct of a trade or business in
the United States by the Non-United States Holder, the dividend will be subject
to the United States federal income tax imposed on net income on the same basis
that applies to United States persons generally, and, for corporate holders and
under certain circumstances, the branch profits tax. Non-United States Holders
should consult any applicable income tax treaties that may provide for a
reduction of, or exemption from, withholding taxes. For purposes of determining
whether tax is to be withheld at a reduced rate as specified by a treaty, we
generally will presume that dividends we pay on or before December 31, 1999, to
an address in a foreign country are paid to a resident of that country.
Under recently finalized Treasury regulations, which in general apply to
dividends that we pay after December 31, 1999, to obtain a reduced rate of
withholding under a treaty, a Non-United States Holder generally will be
required to provide an Internal Revenue Service Form W-8 certifying as to that
Non-United States Holder's entitlement to treaty benefits. These regulations
also provide special rules to determine whether, for treaty applicability
purposes, dividends that we pay to a Non-United States Holder that is an entity
should be treated as paid to holders of interests in such entity.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
federal income tax, including by way of withholding, on gain recognized on a
sale or other disposition of our common stock unless:
- the gain is effectively connected with the conduct of a trade or business
in the United States by the Non-United States Holder or
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- in the case of a Non-United States Holder who is a nonresident alien
individual and who holds our common stock as a capital asset, that holder
is present in the United States for 183 or more days in the taxable year
of the disposition and certain other requirements are met.
Gain that is effectively connected with the conduct of a trade or business
in the United States by the Non-United States Holder will be subject to the
United States federal income tax imposed on net income on the same basis that
applies to United States persons generally, and, for corporate holders and under
certain circumstances, the branch profits tax, but will not be subject to
withholding. Non-United States Holders should consult any applicable income tax
treaties that may provide for different rules.
UNITED STATES FEDERAL ESTATE TAXES
Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident, as specially defined for United States federal estate
tax purposes, of the United States on the date of that person's death will be
included in his or her estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the United States Internal Revenue
Service and to each Non-United States Holder the amount of dividends that we
paid to a holder, and the amount of tax that we withheld on such dividends. This
information may also be made available to the tax authorities of a country in
which the Non-United States Holder resides.
Under current United States Treasury regulations, United States information
reporting requirements and backup withholding tax will generally not apply to
dividends that we pay on our common stock to a Non-United States Holder at an
address outside the United States. Payments by a United States office of a
broker of the proceeds of a sale of our common stock are subject to both backup
withholding at a rate of 31% and information reporting, unless the holder
certifies as to its Non-United States Holder status under penalties of perjury
or otherwise establishes an exemption.
Information reporting requirements, but not backup withholding, will also
apply to payments of the proceeds from sales of our common stock by foreign
offices of United States brokers, or foreign brokers with certain types of
relationships to the United States, unless the broker has documentary evidence
in its records that the holder is a Non-United States Holder and certain other
conditions are met, or the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
Non-United States Holder's United States federal income tax liability, if
certain required information is furnished to the United States Internal Revenue
Service.
The United States Treasury Department has promulgated final regulations
regarding the withholding and information reporting rules discussed above. In
general, those regulations do not significantly alter the substantive
withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. The final
regulations are generally effective for payments made after December 31, 1999,
subject to transition rules.
97
<PAGE>
UNDERWRITERS
Under the terms and conditions of the Underwriting Agreement dated the date
of this prospectus, the U.S. underwriters named below, for whom Morgan Stanley &
Co. Incorporated, Lehman Brothers Inc., J.P. Morgan Securities Inc. and Salomon
Smith Barney Inc. are acting as U.S. representatives, and the international
underwriters named below for whom Morgan Stanley & Co. International Limited,
Lehman Brothers International (Europe), J.P. Morgan Securities Ltd., Salomon
Brothers International Limited and Tokyo-Mitsubishi International plc. are
acting as international representatives, have severally agreed to purchase, and
the selling shareholder has agreed to sell to them, severally, the number of
shares indicated below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.................................................................
Lehman Brothers Inc...............................................................................
J.P. Morgan Securities Inc........................................................................
Salomon Smith Barney Inc..........................................................................
------------
Subtotal........................................................................................ 17,600,000
------------
International Underwriters:
Morgan Stanley & Co. International Limited........................................................
Lehman Brothers International (Europe)............................................................
J.P. Morgan Securities Ltd........................................................................
Salomon Brothers International Limited............................................................
Tokyo-Mitsubishi International plc................................................................
------------
Subtotal........................................................................................ 4,400,000
------------
Total......................................................................................... 22,000,000
------------
------------
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from the selling shareholder and subject to prior sale.
The Underwriting Agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares are conditioned on the
delivery of legal opinions by their counsel. The underwriters are obligated to
purchase all of the shares, except those covered by the U.S. underwriters'
over-allotment option described below, if any are purchased.
In the Agreement between U.S. and International Underwriters, each U.S.
underwriter has represented and agreed that (1) it is not purchasing any shares
for the account of anyone other than a United States or Canadian person and (2)
it has not offered or sold, and will not offer or sell any shares or distribute
any prospectus relating to the shares outside the United States or Canada or to
anyone other than a United States or Canadian person. Each international
underwriter has represented and agreed that (1) it is not purchasing any shares
for the account of any United States or Canadian person and (2) it has not
offered or sold, and will not offer or sell any shares or distribute any
prospectus relating to the shares in the United States or Canada or to any
United States or Canadian person. For any underwriter that is both a U.S.
underwriter and an international underwriter, these representations and
agreements (1) made by it in its capacity as a U.S. underwriter apply only to it
in its capacity as a U.S. underwriter and (2) made by it in its capacity as an
international underwriter apply only to it in its capacity as an international
underwriter. The limitations described above do not apply to, among other
things, stabilization transactions or to other transactions specified in the
Agreement between U.S. and International Underwriters. As used in this section,
"United States or Canadian person" means any national or resident of the United
States or Canada, or any corporation, pension, profit-sharing or other trust or
other entity organized under the laws of the United States or Canada or of any
political subdivision of the United States or Canada, other than a branch
98
<PAGE>
located outside the United States and Canada of any United States or Canadian
person. "United States or Canadian person" includes any United States or
Canadian branch of an entity who is otherwise not a United States or Canadian
person.
In the Agreement between U.S. and International Underwriters, sales of
shares may be made between U.S. underwriters and international underwriters. The
price of any shares so sold will be the public offering price set forth on the
cover page hereof, in United States dollars, less an amount not greater than
$ a share.
In the Agreement between U.S. and International Underwriters, each U.S.
underwriter has represented that it has not offered or sold, and has agreed not
to offer or sell, any shares in any province or territory of Canada or to, or
for the benefit of, any resident of any province or territory of Canada in
contravention of the securities laws of Canada. Each U.S. underwriter has
represented that any offer or sale of shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which the offer or sale is made. Each U.S.
underwriter has further agreed to send to any dealer who purchases from it any
of the shares a notice stating that, by purchasing the shares, the dealer agrees
that any offer or sale of shares in Canada will be made only pursuant to an
exemption from the requirement to file a prospectus in the province or territory
of Canada in which the offer or sale is made. Each dealer will deliver to any
other dealer to whom it sells any shares a notice containing substantially the
same Canadian selling restrictions.
In the Agreement between U.S. and International Underwriters, each
international underwriter has represented and agreed that:
- it has not offered or sold and, prior to the date six months after the
closing date for the sale of the shares to the international underwriters,
will not offer or sell, any shares to persons in the United Kingdom,
except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments for the purposes of their
businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986; and
- it has and will distribute any document relating to the shares in the
United Kingdom only to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 (as amended) or is a person to whom such document
may otherwise lawfully be distributed.
In the Agreement between U.S. and International Underwriters, each
international underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell in Japan or to or for the account of
any resident of Japan any of the shares. This limitation does not apply to
offers or sales to Japanese international underwriters or dealers and offers and
sales pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law. Each international underwriter has further agreed to
send to any dealer who purchases from it any of the shares a notice stating
that, by purchasing the shares, the dealer agrees that any offer or sale of the
shares in Japan will be made only to Japanese international underwriters or
dealers or under an exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law. Each dealer will send to any other dealer to whom it
sells any shares a notice containing substantially the same Japanese selling
restrictions.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus. The underwriters may also offer the shares to
securities dealers at a price that represents a concession not in excess of
$ a share under the public offering price. Any underwriter may allow, and
dealers may reallow, a concession not in excess of
99
<PAGE>
$ a share to other underwriters or to securities dealers. After the initial
offering of the shares of common stock, the offering price and other selling
terms may from time to time be changed by the representatives.
The U.S. underwriters have an option to purchase from the selling
shareholder up to an aggregate of 3,300,000 additional shares of common stock at
the public offering price set forth on the cover page of this prospectus, less
underwriting discounts and commissions. The U.S. underwriters' option is
exercisable for 30 days from the date of this prospectus. The U.S. underwriters
may exercise this option only for the purpose of covering over-allotments, if
any, made in connection with this offering. If this option is exercised, each
U.S. underwriter will become obligated to purchase the same percentage of
additional shares of common stock as set forth in the preceding table. If the
U.S. underwriter's option is exercised in full, the total price to the public
for this offering would be $ , the total underwriting discounts and
commissions would be $ and the total proceeds to The Bank of
Tokyo-Mitsubishi would be $ .
Each of UnionBanCal Corporation, The Bank of Tokyo-Mitsubishi and our
directors and certain of our executive officers has agreed, subject to limited
exceptions relating primarily to the issuance of options or common stock under
employee or director benefit plans of which the underwriters have been advised
in writing, that it will not, during the period ending 180 days after the date
of this prospectus, and Meiji Life Insurance Company has agreed that it will
not, during the period ending 90 days after the date of this prospectus, in
either case, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right, or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another person,
in whole or in part, any of the economic consequences of ownership of the
common stock,
whether any transaction described above is to be settled by delivery of common
stock or other securities, in cash, or otherwise.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of our common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in our common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of our common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
shares in the offering, if the syndicate repurchases previously distributed
shares in transactions to cover syndicate short positions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of our common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
The underwriters have agreed to reimburse The Bank of Tokyo-Mitsubishi for a
portion of its expenses incurred in connection with this offering.
From time to time, some of the U.S. and international underwriters and their
affiliates have engaged in, and may in the future engage in, commercial banking
and investment banking transactions with us and the selling shareholder and our
affiliates.
UnionBanCal Corporation, The Bank of Tokyo-Mitsubishi and the underwriters
have agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act.
100
<PAGE>
LEGAL MATTERS
The validity of the securities being offered hereby is being passed upon for
UnionBanCal Corporation by John H. McGuckin, Jr., General Counsel to UnionBanCal
Corporation, and other matters for UnionBanCal Corporation will be passed upon
by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California. Matters
for the underwriters will be passed upon by Davis Polk & Wardwell.
EXPERTS
The consolidated financial statements included herein and incorporated in
this prospectus by reference from Form 8-K of UnionBanCal Corporation dated
February 5, 1999, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report also included herein and incorporated by
reference in this prospectus, and have been so included and incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing. The consolidated financial statements give retroactive
effect to the 1996 merger of BanCal Tri-State Corporation and Union Bank which
has been accounted for as a pooling-of-interests. The consolidated statements of
income, changes in shareholders' equity, and cash flows of Union Bank and
subsidiaries for the year ended December 31, 1995 (not presented separately in
Form 8-K) were audited by Arthur Andersen LLP, independent public accountants,
as stated in their report also included and incorporated by reference herein, in
reliance upon the authority of such firm as experts in giving said report.
101
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements, and other information with the SEC. You
can read and copy these reports, proxy statements, and other information
concerning us at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room. The SEC maintains an internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC,
including ourselves. Our common stock is quoted on the Nasdaq National Market.
These reports, proxy statements and other information are also available for
inspection at the offices of the National Association of Securities Dealers,
Inc., Report Section, 1735 K Street N.W., Washington, D.C. 20006.
This prospectus is part of a registration statement that we filed with the
SEC. You can obtain the full registration statement from the SEC as indicated
above, or from us.
The SEC allows us to "incorporate by reference" the information we file with
the SEC. This permits us to disclose important information to you by referring
to these filed documents. Any information referred to in this way is considered
part of this prospectus, and any information that we file with the SEC after the
date of this prospectus will automatically be deemed to update and supersede
this information. We incorporate by reference the following documents that have
been filed with the SEC:
- Annual Report on Form 10-K for the year ended December 31, 1997 and all
amendments thereto (except for Item 8, "Financial Statements and
Supplementary Data," which has been updated, included and incorporated by
reference elsewhere in this prospectus);
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998, June
30, 1998 and September 30, 1998 and all amendments thereto;
- Current Report on Form 8-K dated August 10, 1998;
- Current Report on Form 8-K dated December 7, 1998;
- Current Report on Form 8-K dated January 11, 1999 (except for Item 7,
"Consolidated Financial Statements" and Exhibits which have been updated,
included and incorporated by reference in this prospectus);
- Current Report on Form 8-K dated February 5, 1999; and
- Current Report on Form 8-K dated February 11, 1999.
We also incorporate by reference any future filings made with the SEC
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until we file
a post-effective amendment that indicates the termination of the offering of the
securities made by this prospectus.
We will provide without charge upon written or oral request, a copy of any
or all of the documents that are incorporated by reference into this prospectus.
Requests should be directed to Investor Relations, UnionBanCal Corporation, 400
California Street, San Francisco, California 94104 (telephone number
415-765-2969).
102
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997 and for the Nine
Months Ended September 30, 1997 (unaudited) and 1998................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998...................... F-3
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1996
and 1997 and for the Nine Months Ended September 30, 1998.............................................. F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 and for the
Nine Months Ended September 30, 1997 (unaudited) and 1998.............................................. F-5
Notes to Consolidated Financial Statements............................................................... F-6
Independent Auditors' Reports............................................................................ F-54
</TABLE>
F-1
<PAGE>
UNIONBANCAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE ---------------------------------- ------------------------
DATA) 1995 1996 1997 1998
- ---------------------------------------- ---------- ---------- ---------- 1997 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans................................... $1,613,376 $1,687,977 $1,763,277 $1,311,337 $1,365,285
Securities.............................. 132,802 143,412 167,440 123,075 145,390
Interest bearing deposits in banks...... 58,201 52,709 56,748 43,404 14,187
Federal funds sold and securities
purchased under resale agreements..... 22,247 30,246 26,079 18,727 11,784
Trading account assets.................. 20,567 12,960 19,917 13,388 19,976
---------- ---------- ---------- ----------- ----------
Total interest income............... 1,847,193 1,927,304 2,033,461 1,509,931 1,556,622
---------- ---------- ---------- ----------- ----------
INTEREST EXPENSE
Domestic deposits....................... 358,049 460,130 520,583 386,699 353,283
Foreign deposits........................ 96,109 71,437 75,398 55,156 66,455
Federal funds purchased and securities
sold under repurchase agreements...... 78,908 47,095 58,544 44,053 59,667
Commercial paper........................ 86,695 87,411 89,912 66,543 67,719
Subordinated capital notes.............. 42,538 30,104 22,850 17,180 15,883
Other borrowed funds.................... 42,561 62,549 34,492 26,999 13,976
---------- ---------- ---------- ----------- ----------
Total interest expense.............. 704,860 758,726 801,779 596,630 576,983
---------- ---------- ---------- ----------- ----------
NET INTEREST INCOME..................... 1,142,333 1,168,578 1,231,682 913,301 979,639
Provision for credit losses............. 53,250 40,000 -- -- 45,000
---------- ---------- ---------- ----------- ----------
Net interest income after provision
for credit losses................. 1,089,083 1,128,578 1,231,682 913,301 934,639
---------- ---------- ---------- ----------- ----------
NONINTEREST INCOME
Service charges on deposit accounts..... 95,177 101,975 114,647 84,699 101,288
Trust and investment management fees.... 87,743 93,479 107,527 76,737 88,806
International commissions and fees...... 68,621 66,108 66,122 49,593 54,516
Merchant transaction processing fees.... 45,767 49,778 57,128 42,653 42,988
Merchant banking fees................... 24,483 23,929 24,924 19,899 24,083
Securities gains (losses), net.......... (702) 4,502 2,711 2,098 5,579
Other................................... 74,230 78,905 89,942 66,948 82,689
---------- ---------- ---------- ----------- ----------
Total noninterest income............ 395,319 418,676 463,001 342,627 399,949
---------- ---------- ---------- ----------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits.......... 536,671 557,247 571,644 418,970 459,592
Net occupancy........................... 92,863 103,335 85,630 64,133 67,294
Equipment............................... 55,056 55,942 56,137 41,206 41,842
Foreclosed asset expense (income)....... (3,213) 2,889 (1,268) (696) (746)
Merger and integration.................. -- 117,464 6,037 6,037 --
Other................................... 296,724 298,027 326,485 232,558 268,196
---------- ---------- ---------- ----------- ----------
Total noninterest expense........... 978,101 1,134,904 1,044,665 762,208 836,178
---------- ---------- ---------- ----------- ----------
Income before income taxes.............. 506,301 412,350 650,018 493,720 498,410
Income tax expense...................... 193,359 162,892 238,722 174,869 146,045
---------- ---------- ---------- ----------- ----------
NET INCOME.............................. $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
NET INCOME APPLICABLE TO COMMON STOCK... $ 301,637 $ 238,152 $ 403,696 $ 311,251 $ 352,365
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
NET INCOME PER COMMON SHARE --
BASIC(1).............................. $ 1.74 $ 1.37 $ 2.31 $ 1.78 $ 2.01
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
NET INCOME PER COMMON SHARE --
DILUTED(1)............................ $ 1.73 $ 1.36 $ 2.30 $ 1.78 $ 2.01
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -- BASIC(1)............... 173,806 174,391 174,683 174,615 175,091
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -- DILUTED(1)............. 174,099 174,784 175,189 175,071 175,729
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</TABLE>
- ------------
(1) Amounts restated to give retroactive effect to the stock split referred to
in Note 1 of the accompanying notes to Consolidated Financial Statements.
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE ----------------------------- SEPTEMBER 30,
DATA) 1996 1997 1998
- ---------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks................. $ 2,268,771 $ 2,541,699 $ 2,211,595
Interest bearing deposits in banks...... 1,131,216 633,421 133,165
Federal funds sold and securities
purchased under resale agreements..... 537,710 24,335 629,784
------------- ------------- -------------
Total cash and cash equivalents..... 3,937,697 3,199,455 2,974,544
Trading account assets.................. 465,782 394,313 357,515
Securities available for sale........... 2,164,197 2,538,386 3,200,376
Securities held to maturity (fair value:
December 31, 1996, $274,405; December
31, 1997, $193,115; September 30,
1998, $165,807)....................... 268,196 188,775 162,018
Loans (net of allowance for credit
losses: December 31, 1996, $523,946;
December 31, 1997, $451,692; September
30, 1998, $473,717)................... 20,525,841 22,289,716 23,024,128
Due from customers on acceptances....... 778,378 773,339 464,581
Premises and equipment, net............. 410,621 406,299 407,863
Other assets............................ 683,347 794,982 816,293
------------- ------------- -------------
Total assets........................ $ 29,234,059 $ 30,585,265 $ 31,407,318
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES
Domestic deposits:
Noninterest bearing................... $ 7,381,078 $ 8,574,515 $ 9,427,080
Interest bearing...................... 12,607,691 12,666,458 12,379,167
Foreign deposits:
Noninterest bearing................... 274,031 275,029 247,038
Interest bearing...................... 1,270,160 1,780,372 1,609,844
------------- ------------- -------------
Total deposits...................... 21,532,960 23,296,374 23,663,129
Federal funds purchased and securities
sold under repurchase agreements...... 1,322,654 1,335,884 1,574,163
Commercial paper........................ 1,495,463 966,575 1,417,077
Other borrowed funds.................... 749,422 476,010 339,340
Acceptances outstanding................. 778,378 773,339 464,581
Other liabilities....................... 478,249 709,784 666,078
Subordinated capital notes.............. 382,000 348,000 298,000
------------- ------------- -------------
Total liabilities................... 26,739,126 27,905,966 28,422,368
------------- ------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock:
Authorized 5,000,000 shares 8 3/8%
Noncumulative, Series A, issued
1,350,000 shares in 1996............ 135,000 -- --
Common stock(1) -- $1.67 stated value:
Authorized 300,000,000 shares, issued
174,457,603 shares as of December
31, 1996, 174,917,674 shares as of
December 31, 1997, and 175,208,037
shares as of September 30, 1998..... 290,762 291,529 292,013
Additional paid-in capital.............. 1,413,076 1,422,680 1,430,539
Retained earnings....................... 645,214 957,662 1,233,068
Accumulated other comprehensive
income................................ 10,881 7,428 29,330
------------- ------------- -------------
Total shareholders' equity.......... 2,494,933 2,679,299 2,984,950
------------- ------------- -------------
Total liabilities and shareholders'
equity............................ $ 29,234,059 $ 30,585,265 $ 31,407,318
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------
(1) Amounts restated to give retroactive effect to the stock split referred to
in Note 1 of the accompanying notes to Consolidated Financial Statements.
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER
------------------------------------------ 30,
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998
- ---------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PREFERRED STOCK
Balance, beginning of period............ $ 135,000 $ 135,000 $ 135,000 $ --
Redemption of preferred stock........... -- -- (135,000) --
------------ ------------ ------------ ------------
Balance, end of period................ $ 135,000 $ 135,000 $ -- $ --
------------ ------------ ------------ ------------
COMMON STOCK
Balance, beginning of period............ $ 286,739 $ 290,300 $ 290,762 $ 291,529
Dividend reinvestment plan.............. 3,103 121 6 6
Deferred compensation -- restricted
stock awards.......................... 379 207 279 281
Stock options exercised................. 79 134 482 197
------------ ------------ ------------ ------------
Balance, end of period................ $ 290,300 $ 290,762 $ 291,529 $ 292,013
------------ ------------ ------------ ------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period............ $ 1,390,925 $ 1,408,960 $ 1,413,076 $ 1,422,680
Dividend reinvestment plan.............. 15,238 1,041 (43) 10
Deferred compensation -- restricted
stock awards.......................... 2,268 2,148 3,478 5,217
Stock options exercised................. 529 927 6,169 2,632
------------ ------------ ------------ ------------
Balance, end of period................ $ 1,408,960 $ 1,413,076 $ 1,422,680 $ 1,430,539
------------ ------------ ------------ ------------
RETAINED EARNINGS
Balance, beginning of period............ $ 376,468 $ 626,172 $ 645,214 $ 957,662
Net income(1)........................... 312,942 249,458 411,296 352,365
Dividends on common stock(2)(3)......... (50,989) (73,932) (89,848) (73,632)
Dividends on preferred stock............ (11,305) (11,306) (7,600) --
Dividend to MBL......................... -- (144,890) -- --
Deferred compensation -- restricted
stock awards.......................... (944) (288) (1,400) (3,327)
------------ ------------ ------------ ------------
Balance, end of period................ $ 626,172 $ 645,214 $ 957,662 $ 1,233,068
------------ ------------ ------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period............ $ (9,930) $ 23,660 $ 10,881 $ 7,428
------------ ------------ ------------ ------------
Net income(1)........................... 312,942 249,458 411,296 352,365
Other comprehensive income.............. 33,590 (12,779) (3,453) 21,902
------------ ------------ ------------ ------------
Total comprehensive income.............. 346,532 236,679 407,843 374,267
Less: net income included in retained
earnings.............................. (312,942) (249,458) (411,296) (352,365)
------------ ------------ ------------ ------------
Balance, end of period................ $ 23,660 $ 10,881 $ 7,428 $ 29,330
------------ ------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 2,484,092 $ 2,494,933 $ 2,679,299 $ 2,984,950
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
- ------------
(1) Includes dividends applicable to preferred shareholders of $11.3 million
for the years ended December 31, 1995 and 1996, respectively, and $7.6
million for the year ended December 31, 1997.
(2) Dividends per share in 1996 were based on historical Union Bank common
cash dividends declared and did not include the $145 million dividend paid
to The Mitsubishi Bank, Limited (MBL) in the first quarter of 1996 by BanCal
Tri-State Corporation and The Bank of California, N.A.
(3) Dividends per share, after giving effect to the stock split referred to in
Note 1 of the accompanying notes to Consolidated Financial Statements, were
$0.47 in 1995 and 1996, respectively, $0.51 in 1997, and $0.42 for the nine
months ended September 30, 1998, and are based on the Company's shares
outstanding as of the declaration date.
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------------- -----------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1997
- ---------------------------------------- ------------- ------------- ------------- ------------- 1998
(UNAUDITED) -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses......... 53,250 40,000 -- -- 45,000
Depreciation, amortization and
accretion......................... 61,767 65,092 65,469 49,285 50,528
Provision for deferred income
taxes............................. 50,841 50,658 59,814 38,734 7,409
(Gain) loss on sales of securities
available for sale................ 801 (4,502) (2,711) (2,098) (5,579)
Merger and integration costs in
excess of (less than) cash
utilized.......................... -- 54,344 (31,414) (27,200) (12,350)
Net (increase) decrease in trading
account assets.................... 82,541 (359,234) 52,743 (40,382) 36,798
Other, net.......................... 157,244 52,101 173,706 92,393 (24,839)
------------- ------------- ------------- ------------- -------------
Total adjustments................... 406,444 (101,541) 317,607 110,732 96,967
------------- ------------- ------------- ------------- -------------
Net cash provided by operating
activities.......................... 719,386 147,917 728,903 429,583 449,332
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available for sale.................. 240,731 19,536 171,629 3,920 418,456
Proceeds from matured and called
securities available for sale....... 764,853 757,463 587,034 326,833 196,358
Purchase of securities available for
sale................................ (1,452,339) (995,479) (1,112,080) (777,281) (1,253,529)
Proceeds from matured and called
securities held to maturity......... 213,337 95,829 79,828 36,121 26,960
Purchase of securities held to
maturity............................ (123,886) -- -- -- --
Net increase in loans................. (2,478,608) (741,335) (1,788,179) (1,312,241) (797,343)
Other, net............................ (34,902) (54,120) (56,584) (19,986) (42,032)
------------- ------------- ------------- ------------- -------------
Net cash used by investing
activities........................ (2,870,814) (918,106) (2,118,352) (1,742,634) (1,451,130)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.............. 2,245,306 1,877,917 1,763,414 1,441,228 366,755
Net increase (decrease) in federal
funds purchased and securities sold
under repurchase agreements......... (287,387) 127,596 13,230 (27,711) 238,279
Net increase (decrease) in commercial
paper and other borrowed funds...... 623,612 (201,214) (797,464) 94,601 313,832
Maturity and redemption of
subordinated debt................... (154,490) (119,369) (234,000) (200,000) (50,000)
Proceeds from issuance of subordinated
debt................................ -- -- 200,000 200,000 --
Payments of cash dividends............ (62,044) (222,533) (93,303) (68,787) (73,631)
Redemption of preferred stock......... -- -- (135,000) (135,000) --
Repayment of borrowing to support
corporate owned life insurance...... (10,638) (95,475) -- -- --
Other, net............................ 485 (882) (2,661) 2,642 2,471
------------- ------------- ------------- ------------- -------------
Net cash provided by financing
activities........................ 2,354,844 1,366,040 714,216 1,306,973 797,706
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents........................... 203,416 595,851 (675,233) (6,078) (204,092)
Cash and cash equivalents at beginning
of period............................. 3,153,713 3,352,423 3,937,697 3,937,697 3,199,455
Effect of exchange rate changes on cash
and cash equivalents.................. (4,706) (10,577) (63,009) (16,910) (20,819)
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end of
period................................ $ 3,352,423 $ 3,937,697 $ 3,199,455 $ 3,914,709 $ 2,974,544
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
CASH PAID DURING THE PERIOD FOR:
Interest.............................. $ 739,300 $ 764,327 $ 820,355 $ 611,347 $ 588,487
Income taxes.......................... 91,717 172,451 113,588 47,359 189,411
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Loans transferred to foreclosed assets
(OREO).............................. $ 48,397 $ 44,557 $ 23,114 $ 19,033 $ 13,882
Securities transferred from held to
maturity to available for sale...... 348,717 -- -- -- --
Dividends declared but unpaid......... 12,788 20,383 24,528 24,518 24,529
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS
UnionBanCal Corporation (a commercial bank holding company) and subsidiaries
(the Company), is 82 percent owned by The Bank of Tokyo-Mitsubishi, Ltd. (BTM)
and 18 percent owned by other shareholders.
On April 1, 1996, the Company was created by the combination of Union Bank
with BanCal Tri-State Corporation and its banking subsidiary, The Bank of
California, N.A. The combination was accounted for as a reorganization of
entities under common control (similar to a business combination under the
pooling of interests method). Accordingly, all historical financial information
has been restated as if the combination had been in effect for all periods
presented. The merger was effected by the issuance of 54.4 million shares of
Union Bank common stock in exchange for all the outstanding common shares of
BanCal Tri-State Corporation. Information pertaining to merger and integration
expense is presented in Note 7.
On August 10, 1998, the Company exchanged 10.2 million shares of its common
stock for 7.2 million shares of Union Bank of California, N.A. (the Bank) common
stock owned directly by The Bank of Tokyo-Mitsubishi, Ltd.. This share exchange
provided the Company with a 100 percent ownership interest in the Bank. In
addition, it increased The Bank of Tokyo-Mitsubishi, Ltd.'s ownership percentage
of the Company to 82 percent from 81 percent.
The exchange of shares was accounted for as a reorganization of entities
under common control. Accordingly, amounts previously reported as Parent Direct
Interest in Bank Subsidiary, including the proportionate share of net income,
dividends, and other comprehensive income have been reclassified to combine them
with the corresponding amounts attributable to the Company's common shareholders
for all periods presented.
On November 18, 1998, the Board of Directors approved the declaration of a
3-for-1 stock split effective for shareholders of record on December 7, 1998.
Accordingly, all historical financial information has been restated as if the
stock split had been in effect for all periods presented.
The Company provides a wide range of financial services to consumers, small
businesses, middle market companies and major corporations, primarily in
California, Oregon and Washington, but also nationally and internationally.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting and reporting policies of the Company conform to generally
accepted accounting principles (GAAP) and general practice within the banking
industry. Those policies that materially affect the determination of financial
position, results of operations, and cash flows are summarized below.
The Consolidated Financial Statements include the accounts of the Company.
All material intercompany transactions and balances have been eliminated. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain amounts for prior periods have been reclassified to conform with current
financial statement presentation.
F-6
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
The unaudited consolidated financial statements of the Company as of
September 30, 1997 have been prepared in accordance with GAAP for interim
financial reporting. However, they do not include all of the disclosures
necessary for annual financial statements in conformity with GAAP.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest bearing deposits in banks and federal funds sold
and securities purchased under resale agreements, substantially all of which
have maturities less than 90 days.
TRADING ACCOUNT ASSETS
Trading account assets are those financial instruments that management
acquires with the intent to hold for short periods of time in order to take
advantage of anticipated changes in market values. Substantially all of these
assets are securities with a high degree of liquidity and a readily determinable
market value. Interest earned, paid, or accrued on trading account assets is
included in interest income using a method that generally produces a level
yield. Realized gains and losses from the close out of trading account positions
and unrealized market value adjustments are recognized in noninterest income.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
The Company's securities portfolios consist of debt and equity securities
that are classified either as securities available for sale or securities held
to maturity.
Debt securities for which the Company has the positive intent and ability to
hold until maturity are classified as securities held to maturity and carried at
amortized cost.
Debt securities and equity securities with readily determinable market
values that are not classified as either held to maturity securities or trading
account assets are classified as securities available for sale and carried at
fair value, with the unrealized gains or losses reported net of taxes as a
separate component of shareholders' equity until realized.
Realized gains and losses arising from the sale of securities are based upon
the specific identification method and included in noninterest income as
securities gains (losses), net.
Interest income on debt securities includes the amortization of premiums and
the accretion of discounts using the effective interest method and is included
in interest income on securities. Dividend income on equity securities is
included in noninterest income.
LOANS
Loans are reported at the principal amounts outstanding, net of unamortized
nonrefundable loan fees and related direct loan origination costs. Deferred net
fees and costs are recognized in interest income over the loan term using a
method that generally produces a level yield on the unpaid loan balance.
Nonrefundable fees and direct loan origination costs related to loans held for
sale are deferred and
F-7
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
recognized as a component of the gain or loss on sale. Interest income is
accrued principally on a simple interest basis.
Nonaccrual loans are those for which management has discontinued accrual of
interest because there exists significant uncertainty as to the full and timely
collection of either principal or interest or such loans have become
contractually past due 90 days with respect to principal or interest.
Interest accruals are continued for certain small business loans that are
processed centrally, consumer loans, and one-to-four family residential real
estate loans. These loans are charged off or written down to their net
realizable value based on delinquency time frames that range from 120 to 270
days, depending on the type of credit that has been extended. Interest accruals
are also continued for loans that are both well-secured and in the process of
collection. For this purpose, loans are considered well-secured if they are
collateralized by property having a net realizable value in excess of the amount
of principal and accrued interest outstanding or are guaranteed by a financially
responsible and willing party. Loans are considered "in the process of
collection" if collection is proceeding in due course either through legal
action or other actions that are reasonably expected to result in the prompt
repayment of the debt or in its restoration to current status.
When a loan is placed on nonaccrual, all previously accrued but uncollected
interest is reversed against current period operating results. All subsequent
payments received are first applied to unpaid principal and then to uncollected
interest. Interest income is accrued at such time as the loan is brought fully
current as to both principal and interest, and, in management's judgment, such
loans are considered to be fully collectible. However, Company policy also
allows management to continue the recognition of interest income on certain
loans designated as nonaccrual. This portion of the nonaccrual portfolio is
referred to as "Cash Basis Nonaccrual" loans. This policy only applies to loans
that are well secured and in management's judgment are considered to be fully
collectible. Although the accrual of interest is suspended, any payments
received may be applied to the loan according to its contractual terms and
interest income recognized when cash is received.
Loans are considered impaired when, based on current information, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement, including interest payments.
Impaired loans are carried at the lower of the recorded investment in the loan,
the estimated present value of total expected future cash flows, discounted at
the loan's effective rate, or the fair value of the collateral, if the loan is
collateral dependent. Additionally, some impaired loans with commitments of less
than $1 million are aggregated for the purpose of measuring impairment using
historical loss factors as a means of measurement. Excluded from the impairment
analysis are large groups of smaller balance homogeneous loans such as consumer
and residential mortgage loans.
Renegotiated loans are those in which the Company has formally restructured
a significant portion of the loan. The remaining portion is normally charged
off, with a concession either in the form of below market rate financing, or
debt forgiveness on the charged off portion. Loans that have been renegotiated
and have not met specific performance standards for payment are classified as
renegotiated loans within the classification of nonperforming assets. Upon
payment performance, such loans may be transferred from nonperforming status to
accrual status.
F-8
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
The Company offers primarily two types of leases to customers: 1) direct
financing leases where the assets leased are acquired without additional
financing from other sources, and 2) leveraged leases where a substantial
portion of the financing is provided by debt with no recourse to the Company.
Direct financing leases are carried net of unearned income, unamortized
nonrefundable fees and related direct costs associated with the origination or
purchase of leases. Leveraged leases are carried net of nonrecourse debt.
ALLOWANCE FOR CREDIT LOSSES
The Company maintains an allowance for credit losses to absorb losses
inherent in the loan and lease portfolio. The allowance is based on ongoing,
quarterly assessments of the probable estimated losses inherent in the loan and
lease portfolio, and to a lesser extent, unused commitments to provide
financing. The allowance is increased by the provision for credit losses, which
is charged against current period operating results and decreased by the amount
of chargeoffs, net of recoveries. The Company's methodology for assessing the
appropriateness of the allowance consists of several key elements, which include
the formula allowance, specific allowances and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and leases and certain unused commitments. Loss factors are based on the
Company's historical loss experience and may be adjusted for significant factors
that, in management's judgment, affect the collectibility of the portfolio as of
the evaluation date. The Company derives the loss factors for problem graded
loans from a loss migration model; for pass graded loans by using historical
average net chargeoffs during a business cycle, and for pooled loans by using
expected net chargeoffs for one year. Pooled loans are homogenous in nature and
include consumer installment, residential mortgage, automobile leases and other
loans and leases.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance.
The unallocated allowance is composed of two elements. The first element
recognizes the model and estimation risk associated with the formula and
specific allowances. The second element is based upon management's evaluation of
various conditions that are not directly measured in the determination of the
formula and specific allowances. The conditions evaluated in connection with the
unallocated allowance may include existing general economic and business
conditions affecting the key lending areas of the Company, credit quality
trends, collateral values, loan volumes and concentrations, seasoning of the
loan portfolio, specific industry conditions within portfolio segments, recent
loss experience in particular segments of the portfolio, duration of the current
business cycle, bank regulatory examination results and findings of the
Company's internal credit examiners.
The allowance also incorporates the results of measuring impaired loans as
provided in Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosures."
These accounting standards prescribe the measurement methods, income recognition
and disclosures related to impaired loans. A loan is considered impaired when
management determines that it
F-9
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
is probable that the Company will be unable to collect all amounts due according
to the original contractual terms of the loan agreement. Impairment is measured
by the difference between the recorded investment in the loan (including accrued
interest, net deferred loan fees or costs and unamortized premium or discount)
and the estimated present value of total expected future cash flows, discounted
at the loan's effective rate, or the fair value of the collateral, if the loan
is collateral dependent. Impairment is recognized by adjusting an allocation of
the existing allowance for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful life of each asset. Lives of
premises range from ten to forty years; lives of furniture and equipment range
from three to eight years. Leasehold improvements are amortized over the term of
the respective lease or 10 years, whichever is shorter.
OTHER ASSETS
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of acquired companies and is reported as intangible
assets. Goodwill is amortized using the straight-line method, generally over 15
years.
Other real estate owned (OREO) represents the collateral acquired through
foreclosure in full or partial satisfaction of the related loan. OREO is
recorded at the lower of the loan's unpaid principal balance or its fair value
as established by a current appraisal, adjusted for disposition costs. Any
write-down at the date of transfer is charged to the allowance for credit
losses. OREO values, recorded in other assets, are reviewed annually and any
decline in value is recognized as foreclosed asset expense in the current
period. The net operating results from these assets are included in the current
period in noninterest expense as foreclosed asset expense (income).
DERIVATIVE INSTRUMENTS HELD FOR TRADING OR CUSTOMER ACCOMMODATION
The Company enters into a variety of interest rate derivative contracts,
primarily swaps and options and foreign exchange contracts, which include spot,
futures, forward, swap and option positions either for trading purposes, based
on management's intent at inception, or as an accommodation to customers.
Derivatives held or issued for trading or customer accommodation are carried
at fair value, with realized and unrealized changes in fair values on contracts
included in noninterest income in the period in which the changes occur.
Unrealized gains and losses are reported gross and included in trading account
assets and other liabilities, respectively. Cash flows are reported net as
operating activities.
DERIVATIVE INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
The Company enters into a variety of derivative contracts as a means of
reducing the Company's interest rate and foreign exchange exposures. At
inception these contracts are evaluated in order to determine if they qualify
for hedge accounting treatment and are accounted for either on a deferral,
F-10
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
accrual or market value basis, depending on the nature of the Company's hedge
strategy and the method used to account for the hedged item. Hedge criteria
include demonstrating the manner in which the hedge will reduce risk,
identifying the specific asset, liability or firm commitment being hedged, and
citing the time horizon being hedged. A monthly evaluation is performed to
ensure that continuing correlation exists between the hedge and the item being
hedged.
Net interest settlements on interest rate swap, cap and floor agreements are
recognized on an accrual basis as interest income or expense of the related
asset or liability over the lives of the agreements. Premiums paid or received
for interest rate caps and floors are amortized either to interest income or to
expense of the related asset or liability over the lives of the agreements. If
an agreement is terminated early, any resulting gain or loss is deferred and
amortized as interest income or expense of the related asset or liability over
the remaining life of the original agreement. Net settlement amounts are
reported gross as other assets and other liabilities. Cash flows are reported
net as operating activities.
FOREIGN CURRENCY TRANSLATION
Assets, liabilities and results of operations for foreign branches are
recorded based on the functional currency of each branch. Since the functional
currency of the branches is the local currency, the net assets are re-measured
into U.S. dollars using a combination of current and historical exchange rates.
The resulting gains or losses are included in shareholders' equity, as a
component of other comprehensive income, on a net of tax basis.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". The Statement establishes standards
for when transfers of financial assets, including those with continuing
involvement by the transferor, should be considered a sale. SFAS No. 125 also
establishes standards for when a liability should be considered extinguished.
This Statement is effective for transfers of assets and extinguishments of
liabilities occurring after December 31, 1996 and has been applied
prospectively. Certain provisions of SFAS No. 125 were postponed under SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125". SFAS No. 127 deferred for one year the effective date of implementation
for transactions related to repurchase agreements, dollar-roll repurchase
agreements, securities lending and similar transactions. Management determined
that the effect of adoption of SFAS No. 125 on the Company's financial
statements was not material.
INCOME TAXES
The Company files consolidated federal and combined state income tax
returns. Amounts provided for income tax expense are based on income reported
for financial statement purposes and do not necessarily represent amounts
currently payable under tax laws. Deferred taxes, which arise principally from
temporary differences between the period in which certain income and expenses
are recognized for financial accounting purposes and the period in which they
affect taxable income, are included in the
F-11
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
amounts provided for income taxes. Under this method, the computation of the net
deferred tax liability or asset gives current recognition to changes in the tax
laws.
NET INCOME PER COMMON SHARE
Basic earnings per share (EPS) is computed by dividing net income after
preferred dividends by the weighted average number of common shares outstanding
during the period. Diluted EPS incorporates the dilutive effect of common stock
equivalents outstanding on an average basis during the period. Stock options
(see Note 12) are a common stock equivalent.
COMPREHENSIVE INCOME
The Company has retroactively adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the period
from non-owner sources. The adoption of this Statement resulted in a change in
the financial statement presentation, but did not have an impact on the
Company's consolidated financial position, results of operations or cash flows.
EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company provides a variety of benefit and incentive compensation plans
for eligible employees and retirees. Provisions for the costs of these employee
benefit and incentive plans and postretirement benefit plans are accrued and
charged to expense when the benefit is earned. During 1998 the Company adopted
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", and accordingly has revised the disclosures for pensions and other
postretirement benefits. Adoption of SFAS No. 132 does not impact the
consolidated financial position, results of operations, or cash flows, and any
effect is limited to the form and content of its disclosures. As required by the
provisions of SFAS No. 132, all prior period data presented has been restated.
STOCK-BASED COMPENSATION
As allowed under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company has chosen to continue to recognize compensation
expense using the intrinsic value-based method of valuing stock options
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations. Under the intrinsic
value-based method, compensation cost is measured as the amount by which the
quoted market price of the Company's stock at the date of grant exceeds the
stock option exercise price.
Compensation cost associated with the Company's unvested restricted stock
issued under the management stock plan is measured based on the market price of
the stock at the grant date and is expensed over the vesting period.
F-12
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
which establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of this Statement will not
impact the Company's consolidated financial position, results of operations, or
cash flows, and any effect will be limited to the form and content of its
disclosures. The Statement is effective with the year-end 1998 financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. SFAS No. 133
requires that derivative instruments used to hedge be identified specifically to
assets, liabilities, firm commitments or anticipated transactions and measured
as effective and ineffective when hedging changes in fair value or cash flows.
Derivative instruments that do not qualify as either a fair value or cash flow
hedge will be valued at fair value with the resultant gain or loss recognized in
current earnings. Changes in the effective portion of fair value hedges will be
recognized in current earnings along with the change in fair value of the hedged
item. Changes in the effective portion of the fair value of cash flow hedges
will be recognized in other comprehensive income until realization of the cash
flows of the hedged item through current earnings. Any ineffective portion of
hedges will be recognized in current earnings. Management believes that,
depending upon the accumulated net gain or loss of the effective portion of cash
flow hedges at the date of adoption, the impact of SFAS No. 133 could have a
material impact on other comprehensive income. However, Management believes that
any ineffective portion of cash flow hedges or any other hedges will not have a
material impact on the Company's financial position or results of operations.
This Statement is effective for fiscal years beginning after June 15, 1999, with
earlier application encouraged. The Company expects to adopt SFAS No. 133 as of
January 1, 2000.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". This Statement amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities", which established
accounting and reporting standards for certain activities of mortgage banking
and other similar enterprises. After securitization of mortgage loans held for
sale, SFAS No. 134 requires an entity to classify the resulting mortgage-backed
securities or other retained interests, based on its ability or intent to sell
or hold those investments. Management believes that the adoption of SFAS No. 134
will have no impact on the Company's financial position or results of
operations. This Statement is effective for fiscal years beginning after
December 15, 1998, with earlier application permitted. The Company expects to
adopt SFAS No. 134 on January 1, 1999.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires the
capitalization of eligible costs of specified activities related to computer
software developed or obtained for internal use. Management believes that the
adoption of SOP 98-1 will not have a material effect on the Company's financial
position or results of operations. The Statement is
F-13
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (CONTINUED)
effective for fiscal years beginning after December 15, 1998, with earlier
adoption encouraged. The Company expects to adopt SOP 98-1 on January 1, 1999.
In June 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 requires that entities expense start-up costs and
organization costs as they are incurred. Management believes that the adoption
of SOP 98-5 will not have a material effect on the Company's financial position
or results of operations. The Statement is effective for fiscal years beginning
after December 15, 1998, with earlier adoption encouraged. The Company expects
to adopt SOP 98-5 on January 1, 1999.
F-14
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 2 -- SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
fair values of securities are presented below.
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury................................................ $ 1,137,992 $ 4,993 $ 1,933 $ 1,141,052
Other U.S. government........................................ 687,717 4,993 779 691,931
Mortgage-backed securities................................... 193,531 400 274 193,657
State and municipal.......................................... 101,006 13,749 -- 114,755
Corporate debt securities.................................... -- -- -- --
Equity securities............................................ 19,041 2,553 -- 21,594
Foreign securities........................................... 1,136 72 -- 1,208
------------ ----------- ----------- ------------
Total securities available for sale........................ $ 2,140,423 $ 26,760 $ 2,986 $ 2,164,197
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury................................................ $ 987,374 $ 10,793 $ 170 $ 997,997
Other U.S. government........................................ 709,536 6,005 67 715,474
Mortgage-backed securities................................... 679,692 3,331 265 682,758
State and municipal.......................................... 90,937 13,236 -- 104,173
Corporate debt securities.................................... 2,698 311 1 3,008
Equity securities............................................ 28,881 1,596 672 29,805
Foreign securities........................................... 5,132 39 -- 5,171
------------ ----------- ----------- ------------
Total securities available for sale........................ $ 2,504,250 $ 35,311 $ 1,175 $ 2,538,386
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury................................................ $ 757,831 $ 20,162 $ -- $ 777,993
Other U.S. government........................................ 806,573 17,703 -- 824,276
Mortgage-backed securities................................... 1,459,141 18,466 -- 1,477,607
State and municipal.......................................... 83,018 12,580 -- 95,598
Corporate debt securities.................................... 8,069 -- -- 8,069
Equity securities............................................ 15,055 139 -- 15,194
Foreign securities........................................... 1,594 45 -- 1,639
------------ ----------- ----------- ------------
Total securities available for sale........................ $ 3,131,281 $ 69,095 $ -- $ 3,200,376
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
F-15
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 2 -- SECURITIES (CONTINUED)
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury.................................................... $ 50,109 $ 1,735 $ -- $ 51,844
Other U.S. government............................................ 139,188 4,412 -- 143,600
Mortgage-backed securities....................................... 41,985 2,019 68 43,936
State and municipal.............................................. 36,914 310 2,199 35,025
---------- ----------- ----------- ----------
Total securities held to maturity.............................. $ 268,196 $ 8,476 $ 2,267 $ 274,405
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury.................................................... $ 40,092 $ 1,333 $ -- $ 41,425
Other U.S. government............................................ 99,520 2,568 -- 102,088
Mortgage-backed securities....................................... 24,477 1,745 14 26,208
State and municipal.............................................. 24,686 75 1,367 23,394
---------- ----------- ----------- ----------
Total securities held to maturity.............................. $ 188,775 $ 5,721 $ 1,381 $ 193,115
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury.................................................... $ 40,054 $ 1,324 $ -- $ 41,378
Other U.S. government............................................ 89,707 2,090 -- 91,797
Mortgage-backed securities....................................... 16,651 1,252 -- 17,903
State and municipal.............................................. 15,606 -- 877 14,729
---------- ----------- ----- ----------
Total securities held to maturity.............................. $ 162,018 $ 4,666 $ 877 $ 165,807
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>
F-16
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 2 -- SECURITIES (CONTINUED)
The amortized cost and fair value of securities, by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations, with or
without call or prepayment penalties.
MATURITY SCHEDULE OF SECURITIES
<TABLE>
<CAPTION>
SECURITIES SECURITIES
AVAILABLE FOR SALE(1) HELD TO MATURITY(1)
-------------------------- ----------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
-------------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ------------------------------------------------------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less...................................... $ 503,104 $ 508,419 $ 69,875 $ 71,232
Due after one year through five years........................ 1,192,511 1,227,837 62,361 64,459
Due after five years through ten years....................... 334,509 341,550 3,902 4,041
Due after ten years.......................................... 1,086,102 1,107,376 25,880 26,075
Equity securities............................................ 15,055 15,194 -- --
------------ ------------ ---------- ----------
Total securities......................................... $ 3,131,281 $ 3,200,376 $ 162,018 $ 165,807
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
- ---------
(1) The remaining contractual maturities of mortgage-backed securities were
allocated assuming no prepayments. The contractual maturity of these
securities is not a reliable indicator of their expected life because
borrowers have the right to repay their obligations at any time.
During the quarter ended December 31, 1995, in accordance with guidance
issued by the FASB, the Company reclassified from securities held to maturity to
securities available for sale approximately $285 million at amortized cost of
U.S. Treasury Notes (fair value $285 million) and $64 million at amortized cost
of municipal bonds (fair value $72 million). During the years ended December 31,
1996 and 1997, and during the nine months ended September 30, 1997 and 1998,
there were no sales or transfers from the securities held to maturity portfolio.
In 1995, proceeds from sales of securities available for sale were $241
million with gross realized gains of $2 million and gross realized losses of $3
million. In 1996, proceeds from sales of securities available for sale were $20
million with gross realized gains of $5 million and no gross realized losses. In
1997, proceeds from sales of securities available for sale were $172 million
with gross realized gains of $3 million and no gross realized losses. For the
nine months ended September 30, 1997, proceeds from sales of securities
available for sale were $4 million with gross realized gains of $2 million and
no gross realized losses. For the nine months ended September 30, 1998, proceeds
from sales of securities available for sale were $418 million with gross
realized gains of $6 million and no gross realized losses.
F-17
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES
A summary of loans net of unearned interest and fees of $150 million, $128
million and $127 million at December 31, 1996 and 1997, and September 30, 1998,
respectively, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Domestic:
Commercial, financial and industrial.............................. $ 9,495,592 $ 10,747,179 $ 12,151,210
Construction...................................................... 357,817 293,333 420,267
Mortgage:
Residential..................................................... 2,960,908 2,961,233 2,742,451
Commercial...................................................... 2,597,616 2,951,807 2,980,371
------------- ------------- -------------
Total mortgage................................................ 5,558,524 5,913,040 5,722,822
Consumer:
Installment..................................................... 2,063,434 2,090,752 2,026,441
Home equity..................................................... 1,113,269 992,916 844,256
Credit card and other lines of credit........................... 303,235 270,097 --
------------- ------------- -------------
Total consumer................................................ 3,479,938 3,353,765 2,870,697
Lease financing................................................... 800,048 874,860 1,013,772
------------- ------------- -------------
Total loans in domestic offices............................... 19,691,919 21,182,177 22,178,768
Loans originated in foreign branches................................ 1,357,868 1,559,231 1,319,077
------------- ------------- -------------
Total loans................................................... 21,049,787 22,741,408 23,497,845
Allowance for credit losses................................. 523,946 451,692 473,717
------------- ------------- -------------
Loans, net.................................................... $ 20,525,841 $ 22,289,716 $ 23,024,128
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------- -----------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1997 1998
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period..................... $ 563,142 $ 555,149 $ 523,946 $ 523,946 $ 451,692
Loans charged off................................ (133,599) (119,100) (122,779) (86,585) (53,138)
Loan loss recoveries............................. 72,403 48,024 51,014 41,219 32,158
----------- ----------- ----------- ----------- ----------
Total net loans charged off.................... (61,196) (71,076) (71,765) (45,366) (20,980)
Provision for credit losses...................... 53,250 40,000 -- -- 45,000
Transfer of reserve for trading account assets... -- -- -- -- (1,911)
Foreign translation adjustment and other net
deductions..................................... (47) (127) (489) (126) (84)
----------- ----------- ----------- ----------- ----------
Balance, end of period........................... $ 555,149 $ 523,946 $ 451,692 $ 478,454 $ 473,717
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
</TABLE>
F-18
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
In 1998, the Company reclassified a $1.9 million previously established
reserve for credit losses related to interest rate derivatives and foreign
exchange contracts from the unallocated portion of the allowance for credit
losses. The reserve for derivative and foreign exchange contracts is presented
as an offset to trading account assets. Future changes in the reserve as a
result of changes in the positive replacement cost of those contracts will be
provided as an offset to trading gains and losses.
Nonaccrual loans totaled $128 million, $109 million and $68 million at
December 31, 1996 and 1997, and September 30, 1998, respectively. There were no
renegotiated loans at December 31, 1996 and 1997, and September 30, 1998.
Interest foregone on loans designated as nonaccrual at December 31, 1995, 1996
and 1997, and at September 30, 1997 and 1998 was $18 million, $9 million, $6
million, $5 million and $3 million, respectively.
LOAN IMPAIRMENT
Impaired loans of the Company include commercial, financial and industrial,
construction and commercial mortgage loans designated as nonaccrual. When the
value of an impaired loan is less than the recorded investment in the loan, a
portion of the Company's allowance for credit losses is allocated as an
impairment allowance.
The Company's policy for recognition of interest income, charge-offs of
loans, and application of payments on impaired loans is the same as the policy
applied to nonaccrual loans.
The following table sets forth information about the Company's impaired
loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998
- -------------------------------------------------------------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Impaired loans with an allowance.............................. $ 58,584 $ 69,886 $ 59,351 $ 40,288
Impaired loans without an allowance(1)........................ 114,611 43,962 49,033 27,594
---------- ---------- ---------- -------------
Total impaired loans(2)..................................... $ 173,195 $ 113,848 $ 108,384 $ 67,882
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Allowance for impaired loans.................................. $ 15,837 $ 21,260 $ 9,418 $ 7,470
Average balance of impaired loans during the year............. $ 277,955 $ 145,351 $ 120,096 $ 98,700
</TABLE>
- ---------
(1) These loans do not require an allowance for credit losses since the fair
values of the impaired loans equal or exceed the recorded investments in the
loans.
(2) This amount was evaluated for impairment using three measurement methods
as follows: $64 million, $38 million, $27 million, and $40 million was
evaluated using the present value of the expected future cash flows at
December 31, 1995, 1996 and 1997, and September 30, 1998, respectively; $95
million, $45 million, $53 million, and $8 million was evaluated using the
fair value of the collateral at December 31, 1995, 1996 and 1997, and
September 30, 1998, respectively; $14 million, $31 million, $28 million, and
$20 million was evaluated using historical loss factors at December 31,
1995, 1996 and 1997, and September 30, 1998, respectively.
F-19
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
Interest income recognized on nonaccrual loans was $11 million, $5 million,
$3 million, $3 million, and $1 million for the years ended December 31, 1995,
1996 and 1997, and for the nine months ended September 30, 1997 and 1998,
respectively.
RELATED PARTY LOANS
The Company in some cases makes loans to related parties including its
directors, executive officers and their affiliated companies. At December 31,
1996, related party loans outstanding to individuals who served as directors or
executive officers at anytime during the year totaled $79 million as compared to
$38 million and $54 million at December 31, 1997 and September 30, 1998,
respectively. In the opinion of management, these related party loans were made
on substantially the same terms, including interest rates and collateral
requirements, as those terms prevailing at the date these loans were made.
During the years ended December 31, 1996 and 1997, and the nine months ended
September 30, 1998, there were no loans to related parties which were charged
off. Additionally, at December 31, 1996 and 1997, and September 30, 1998, there
were no loans to related parties which were nonperforming.
NOTE 4 -- PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. As of December 31, 1996 and 1997, and September 30, 1998, the
amounts were:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
1996 1997 SEPTEMBER 30, 1998
------------------------------------ ------------------------------------ -----------------------
ACCUMULATED ACCUMULATED ACCUMULATED
DEPRECIATION DEPRECIATION DEPRECIATION
AND NET BOOK AND NET BOOK AND
(DOLLARS IN THOUSANDS) COST AMORTIZATION VALUE COST AMORTIZATION VALUE COST AMORTIZATION
- ------------------------ --------- ------------ ----------- --------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Land.................... $ 73,309 $ -- $ 73,309 $ 69,290 $ -- $ 69,290 $ 68,598 $ --
Premises................ 264,545 98,785 165,760 253,752 101,997 151,755 252,489 105,754
Leasehold improvements.. 124,065 75,264 48,801 135,609 80,019 55,590 140,347 83,249
Furniture, fixtures and
equipment............. 362,063 239,312 122,751 400,774 271,110 129,664 428,656 293,224
--------- ------------ ----------- --------- ------------ ----------- --------- ------------
Total................. $ 823,982 $ 413,361 $ 410,621 $ 859,425 $ 453,126 $ 406,299 $ 890,090 $ 482,227
--------- ------------ ----------- --------- ------------ ----------- --------- ------------
--------- ------------ ----------- --------- ------------ ----------- --------- ------------
<CAPTION>
NET BOOK
(DOLLARS IN THOUSANDS) VALUE
- ------------------------ -----------
<S> <C>
Land.................... $ 68,598
Premises................ 146,735
Leasehold improvements.. 57,098
Furniture, fixtures and
equipment............. 135,432
-----------
Total................. $ 407,863
-----------
-----------
</TABLE>
F-20
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 4 -- PREMISES AND EQUIPMENT (CONTINUED)
Rental, depreciation and amortization expense were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1997 1998
- -------------------------------------------------------- --------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Rental expense of premises.............................. $ 53,493 $ 66,189 $ 46,556 $ 34,955 $ 37,824
Less: rental income..................................... 11,050 11,904 11,049 8,363 8,638
--------- --------- --------- ----------- ---------
Net rental expense.................................... $ 42,443 $ 54,285 $ 35,507 $ 26,592 $ 29,186
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Other net rental expense (income), primarily for
equipment............................................. $ 2,705 $ 2,218 $ 298 $ 262 $ (269)
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Depreciation and amortization of premises and
equipment............................................. $ 49,036 $ 51,821 $ 53,652 $ 39,843 $ 41,643
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
Future minimum operating lease payments are as follows.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------
<S> <C>
Three months ending December 31, 1998............................................. $ 12,716
Years ending December 31,
1999............................................................................ 49,473
2000............................................................................ 45,214
2001............................................................................ 42,314
2002............................................................................ 34,594
2003............................................................................ 29,857
Later years..................................................................... $ 120,318
----------
Total minimum operating lease payments............................................ $ 334,486
----------
----------
Minimum rental income due in the future under noncancellable subleases............ $ 48,923
----------
----------
</TABLE>
Included in other liabilities in the accompanying September 30, 1998
Consolidated Balance Sheet is $11 million of future operating lease payments
accrued in connection with the Merger (also see Note 7).
A majority of the leases provide for the payment of taxes, maintenance,
insurance and certain other expenses applicable to the leased premises. Many of
the leases contain extension provisions, escalation clauses and purchase
options. There are no restrictions on paying dividends, incurring additional
debt or negotiating additional leases under the terms of the present lease
agreements.
NOTE 5 -- DEPOSITS
At September 30, 1998, the Company had $397 million in domestic interest
bearing time deposits with a remaining term of greater than one year, of which
$108 million exceeded $100,000. Maturity information
F-21
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 5 -- DEPOSITS (CONTINUED)
for all domestic interest bearing time deposits with a remaining term of greater
than one year is summarized below.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1998
- -------------------------------------------------------------------------- ------------------
<S> <C>
Due after one year through two years...................................... $ 187,900
Due after two years through three years................................... 88,373
Due after three years through four years.................................. 76,538
Due after four years through five years................................... 36,941
Due after five years...................................................... 6,794
--------
Total................................................................... $ 396,546
--------
--------
</TABLE>
Substantially all of the foreign interest bearing time deposits exceeding
$100,000 mature in less than one year.
NOTE 6 -- EMPLOYMENT BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT
BENEFITS
RETIREMENT PLANS
The Company maintains the Union Bank of California, N.A. Retirement Plan
(the Plan), which is a noncontributory defined benefit plan covering
substantially all of the employees of the Company. The plan provides retirement
benefits based on years of credited service and the final average compensation
amount, as defined in the Plan. Employees become eligible for this plan after
one year of service and become fully vested after five years of service. The
Company's funding policy is to make contributions equal to the maximum
deductible amount as allowed by the Internal Revenue Code. Contributions are
intended to provide not only for benefits attributed to services to date, but
also for those expected to be earned in the future. Plan assets are invested in
U.S. government securities, corporate bonds, and commingled investment funds.
In 1996, the Company maintained a second plan for former BanCal Tri-State
Corporation employees. The plan which was terminated effective January 1, 1997,
was a defined contribution plan. The Company's expense for pension contributions
for the year ended December 31, 1996 was $5 million.
OTHER POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits for its
retired employees. The health care cost is shared between the Company and the
retiree. The life insurance plan is noncontributory. The accounting for the
health care plan anticipates future cost-sharing changes to the written plan
that are consistent with the Company's intent to maintain a level of
cost-sharing at approximately 25 percent. Assets set aside to cover such
obligations are primarily invested in mutual funds.
F-22
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 6 -- EMPLOYMENT BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT
BENEFITS (CONTINUED)
The following table sets forth the funded status of the Company's defined
benefit pension plan and its other postretirement benefit plans.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------------- -------------------------------------
YEARS ENDED DECEMBER FOR THE NINE YEARS ENDED DECEMBER FOR THE NINE
31, MONTHS ENDED 31, MONTHS ENDED
---------------------- SEPTEMBER 30, ---------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998 1996 1997 1998
- --------------------------------------------- ---------- ---------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of period...... $ 298,597 $ 323,646 $ 400,958 $ 76,728 $ 80,274 $ 79,308
Service cost................................. 12,651 20,667 17,023 1,741 3,123 2,300
Interest cost................................ 22,043 25,049 21,356 5,581 5,150 3,801
Plan participants' contributions............. -- -- -- 798 570 706
Amendments................................... -- 10,926 -- -- -- --
Actuarial (gain) loss........................ 422 31,588 48,822 32 (5,452) (309)
Benefits paid................................ (10,067) (10,918) (9,335) (4,606) (4,357) (3,828)
---------- ---------- ------------- ---------- ---------- -------------
Benefit obligation, end of period............ $ 323,646 $ 400,958 $ 478,824 $ 80,274 $ 79,308 $ 81,978
---------- ---------- ------------- ---------- ---------- -------------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of
period..................................... $ 332,412 $ 381,194 $ 460,501 $ 16,690 $ 21,703 $ 31,136
Actual return on plan assets................. 44,642 66,765 10,354 2,590 4,445 (577)
Employer contribution........................ 14,207 23,460 23,234 6,509 8,775 8,025
Plan participants' contributions............. -- -- -- 520 570 706
Benefits paid................................ (10,067) (10,918) (9,335) (4,606) (4,357) (3,828)
---------- ---------- ------------- ---------- ---------- -------------
Fair value of plan assets, end of period..... $ 381,194 $ 460,501 $ 484,754 $ 21,703 $ 31,136 $ 35,462
---------- ---------- ------------- ---------- ---------- -------------
Funded status................................ $ 57,548 $ 59,543 $ 5,930 $ (58,571) $ (48,172) $ (46,516)
Unrecognized transition amount............... -- -- -- 63,800 59,813 56,822
Unrecognized net actuarial (gain) loss....... (29,660) (37,717) 24,184 (14,829) (21,119) (17,482)
Unrecognized prior service cost.............. 4,806 12,705 9,740 -- -- --
---------- ---------- ------------- ---------- ---------- -------------
Prepaid (accrued) benefit cost............... $ 32,694 $ 34,531 $ 39,854 $ (9,600) $ (9,478) $ (7,176)
---------- ---------- ------------- ---------- ---------- -------------
---------- ---------- ------------- ---------- ---------- -------------
</TABLE>
F-23
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 6 -- EMPLOYMENT BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT
BENEFITS (CONTINUED)
The following table summarizes the assumptions used in computing the present
value of the projected benefit obligation and the net pension expense.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------------------------------------------- ------------------------
YEARS ENDED DECEMBER 31, FOR THE NINE YEARS ENDED DECEMBER 31,
MONTHS ENDED
------------------------------------- SEPTEMBER 30, ------------------------
1995 1996 1997 1998 1995 1996
----- ----- ----- ----------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Discount rate in determining expense...... 7.50% 7.50% 7.50% 7.00% 7.50% 7.50%
Discount rate in determining benefit
obligations at end of period............ 7.50 7.50 7.00 6.50 7.50 7.50
Rate of increase in future compensation
levels for determining expense.......... 5.50 5.50 5.50 5.00 -- --
Rate of increase in future compensation
levels for determining benefit
obligations at end of period............ 5.50 5.50 5.00 5.00 -- --
Expected return on plan assets............ 8.25 8.25 8.25 8.25 8.00 8.00
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1997 1998
----- -----------------
<S> <C> <C>
Discount rate in determining expense...... 7.00% 6.50%
Discount rate in determining benefit
obligations at end of period............ 7.00 6.50
Rate of increase in future compensation
levels for determining expense.......... -- --
Rate of increase in future compensation
levels for determining benefit
obligations at end of period............ -- --
Expected return on plan assets............ 8.00 8.00
</TABLE>
The following table sets forth the components of postretirement benefit
expense.
<TABLE>
<CAPTION>
OTHER BENEFITS
PENSION BENEFITS -------------------------------
----------------------------------------------
FOR THE NINE YEARS ENDED DECEMBER 31,
YEARS ENDED DECEMBER 31, MONTHS ENDED
------------------------------- SEPTEMBER 30, -------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998 1995 1996 1997
- ------------------------------------ --------- --------- --------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT
COST
Service cost........................ $ 10,516 $ 12,651 $ 20,667 $ 17,023 $ 1,792 $ 1,741 $ 3,123
Interest cost....................... 19,637 22,043 25,049 21,356 6,091 5,581 5,150
Expected return on plan assets...... (21,018) (23,877) (27,119) (23,736) (885) (1,335) (1,736)
Amortization of prior service
cost.............................. 2,108 2,108 3,175 2,381 -- -- --
Amortization of transition amount... (149) (149) (149) (112) 3,988 3,988 3,987
Recognized net actuarial (gain)
loss.............................. -- -- -- 998 (881) (846) (1,870)
--------- --------- --------- ------------- --------- --------- ---------
Net periodic benefit cost......... $ 11,094 $ 12,776 $ 21,623 $ 17,910 $ 10,105 $ 9,129 $ 8,654
--------- --------- --------- ------------- --------- --------- ---------
--------- --------- --------- ------------- --------- --------- ---------
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1998
- ------------------------------------ ---------------
<S> <C>
COMPONENTS OF NET PERIODIC BENEFIT
COST
Service cost........................ $ 2,300
Interest cost....................... 3,801
Expected return on plan assets...... (1,868)
Amortization of prior service
cost.............................. --
Amortization of transition amount... 2,990
Recognized net actuarial (gain)
loss.............................. (1,500)
-------
Net periodic benefit cost......... $ 5,723
-------
-------
</TABLE>
For 1995, the former Union Bank assumed a 9 percent annual rate of increase
in the per capita cost of postretirement medical benefits for the indemnity plan
and a 4 percent annual rate of increase was assumed for the HMO plan. For future
periods the assumed rate for the indemnity plan gradually decreased from 9
percent to 5.5 percent in 2007 and remained level thereafter. The assumed rate
of change on the HMO plan increased for the remainder of the decade, then
gradually decreased to 5.5 percent in the year 2007 and thereafter.
For 1995, former BanCal Tri-State Corporation assumed an 11.5 percent annual
rate of increase in the per capita cost of postretirement medical benefits for
the indemnity plan. For future periods, the assumed
F-24
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 6 -- EMPLOYMENT BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT
BENEFITS (CONTINUED)
rate for the indemnity plan gradually decreased from 11.5 percent to 5.5 percent
in 2003 and remained level thereafter.
For 1996, the Company assumed a 9 percent annual rate of increase in the per
capita cost of postretirement medical benefits for the indemnity plan and a 4
percent annual rate of increase was assumed for the HMO plan. For future periods
the assumed rate for the indemnity plan gradually decreased from 9 percent to
5.5 percent in 2007 and remained level thereafter. The assumed rate of change on
the HMO plan increased to 7 percent in 1997 and then gradually decreased to 5.5
percent in the year 2007 and thereafter.
For 1997, the Company assumed a 9 percent annual rate of increase in the per
capita cost of postretirement medical benefits for the indemnity plan and a 4
percent annual rate of increase was assumed for the health maintenance
organization (HMO) plan. For future periods, the rate for the indemnity plan was
expected to gradually decrease from 9 percent to 5.5 percent in 2007 and remain
at that level thereafter. The rate for the HMO plan was expected to increase
after one year of being at a low rate and then gradually decrease to 5.5 percent
in the year 2007 and thereafter.
For 1998, the Company assumed a 9 percent annual rate of increase in the per
capita cost of postretirement medical benefits for the indemnity plan and a 7
percent annual rate of increase was assumed for the health maintenance
organization (HMO) plan. For future periods, the rate for the indemnity plan was
expected to gradually decrease from 9 percent to 5.5 percent in 2007 and remain
at that level thereafter. The rate for the HMO plan was expected to gradually
decrease to 5.5 percent in the year 2007 and remain at that level thereafter.
The healthcare cost trend rate assumption has a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the following effects.
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
(DOLLARS IN THOUSANDS) POINT INCREASE POINT DECREASE
- ------------------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Effect on total of service and interest cost components.................. $ 788 $ (699)
Effect on postretirement benefit obligation.............................. 9,479 (7,915)
</TABLE>
EXECUTIVE SUPPLEMENTAL BENEFIT PLANS
The Company has several Executive Supplemental Benefit Plans (ESBP) which
provide eligible employees with supplemental retirement benefits. The plans are
unfunded. The accrued liability for ESBP's included in other liabilities in the
Consolidated Balance Sheets was $23 million and $25 million for the years ended
December 31, 1996 and 1997, and $25 million for the period ended September 30,
1998. The Company's expense relating to the ESBP's was $3 million for each of
the years ended December 31, 1995, 1996 and 1997 and $2 million for the period
ended September 30, 1998.
F-25
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 6 -- EMPLOYMENT BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT
BENEFITS (CONTINUED)
SECTION 401(k) SAVINGS PLANS
The Company has a defined contribution plan authorized under Section 401(k)
of the Internal Revenue Code. All benefits-eligible employees with at least one
year of service are eligible to participate in the plan. Employees may
contribute up to 16 percent of their pre-tax covered compensation or up to 10
percent of their after-tax covered compensation through salary deductions. The
Company contributes 50 percent of every pre-tax dollar an employee contributes
up to the first 6 percent of the employee's pre-tax covered compensation.
Effective January 1, 1997, employees are fully vested in the employer's
contributions immediately. In addition, the Company may make a discretionary
annual profit-sharing contribution up to 2.5 percent of an employee's pay. This
profit-sharing contribution is for all eligible employees, regardless of whether
an employee is participating in the 401(k) plan, and depends on the Bank's
annual financial performance. All employer contributions are tax deductible by
the Company. The Company's combined matching contribution expense was $9
million, $9 million, $13 million and $9.5 million for the years ended December
31, 1995, 1996 and 1997 and the period ended September 30, 1998, respectively.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 revised the
disclosures for pensions and other postretirement benefits. Adoption of SFAS No.
132 did not impact the Company's consolidated financial position, results of
operations or cash flows, and any effect was limited to the form and content of
its disclosures. SFAS No. 132 is effective for fiscal years beginning after
December 15, 1997.
NOTE 7 -- OTHER EXPENSES
The detail of other expenses is as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- -----------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1997 1998
- --------------------------------------------------- ---------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Data processing.................................... $ 18,557 $ 22,140 $ 25,973 $ 19,115 $ 20,462
Advertising and public relations................... 20,911 28,788 28,664 20,759 22,419
Printing and office supplies....................... 22,626 27,085 24,098 17,646 19,112
Regulatory assessments............................. 23,431 4,048 5,778 4,281 4,561
Professional services.............................. 26,197 24,342 28,075 19,062 25,186
Merchant transaction processing fees............... 31,288 37,091 42,274 31,269 33,008
Communications..................................... 35,806 40,133 42,372 31,135 31,515
Other.............................................. 117,908 114,400 129,251 89,291 111,933
---------- ---------- ---------- ----------- ----------
Total other expenses............................. $ 296,724 $ 298,027 $ 326,485 $ 232,558 $ 268,196
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</TABLE>
F-26
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 7 -- OTHER EXPENSES (CONTINUED)
In connection with the Merger, the Company incurred merger and integration
expense of $117 million and $6 million for the years ended 1996 and 1997 and
none for the nine months ended September 30, 1998, as summarized in the
following table.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER FOR THE NINE MONTHS
31, ENDED SEPTEMBER 30,
--------------------- ----------------------
(DOLLARS IN THOUSANDS) 1996 1997 1997 1998
- ------------------------------------------------------------------ ---------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, accrued merger and integration expense, beginning of
period.......................................................... $ -- $ 54,344 $ 54,344 $ 22,930
Provision for merger and integration costs........................ 117,464 6,037 6,037 --
Utilization:
Cash............................................................ 40,155 35,809 32,351 2,901
Noncash......................................................... 22,965 1,642 886 9,449
---------- --------- ----------- ---------
Total utilization............................................. 63,120 37,451 33,237 12,350
---------- --------- ----------- ---------
Balance, accrued merger and integration expense, end of period.... $ 54,344 $ 22,930 $ 27,144 $ 10,580
---------- --------- ----------- ---------
---------- --------- ----------- ---------
</TABLE>
Total merger and integration expense of $124 million was recorded to cover
$38 million of personnel expense for severance, retention and other employee
related costs, $54 million for facilities expense related to redundant banking
facilities, and $32 million in professional services and other expense. At
September 30, 1998 the liability balance included amounts primarily for
operating lease payments related to redundant banking facilities which are
continuing over the expected term of the leases.
F-27
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 8 -- INCOME TAXES
The components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1997 1998
- --------------------------------------------------- ---------- ---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Taxes currently payable:
Federal.......................................... $ 96,732 $ 86,159 $ 168,375 $ 133,625 $ 176,517
State............................................ 42,356 23,180 8,441 870 (40,741)
Foreign.......................................... 3,430 2,895 2,092 1,640 2,860
---------- ---------- ---------- ----------- ----------
Total currently payable........................ 142,518 112,234 178,908 136,135 138,636
---------- ---------- ---------- ----------- ----------
Taxes deferred:
Federal.......................................... 34,839 47,575 49,437 34,451 9,780
State............................................ 16,005 3,455 10,499 4,283 (2,371)
Foreign.......................................... (3) (372) (122) -- --
---------- ---------- ---------- ----------- ----------
Total deferred................................. 50,841 50,658 59,814 38,734 7,409
---------- ---------- ---------- ----------- ----------
Total income tax expense....................... $ 193,359 $ 162,892 $ 238,722 $ 174,869 $ 146,045
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</TABLE>
The components of the net deferred tax balances of the Company were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998
- -------------------------------------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for credit losses............................................. $ 195,128 $ 169,769 $ 182,125
Accrued income & expense................................................ 31,964 21,987 39,863
Accrued merger expense.................................................. 22,051 15,641 8,006
Deferred state taxes.................................................... 13,572 21,063 3,101
Other................................................................... 2,567 7,585 6,930
---------- ---------- -------------
Total deferred tax assets............................................. 265,282 236,045 240,025
---------- ---------- -------------
Deferred tax liabilities:
Leasing................................................................. 276,922 297,891 317,263
Depreciation............................................................ 13,809 17,192 9,151
Unrealized gain on securities available for sale........................ 9,711 13,536 27,342
---------- ---------- -------------
Total deferred tax liabilities........................................ 300,442 328,619 353,756
---------- ---------- -------------
Net deferred tax liability.......................................... $ 35,160 $ 92,574 $ 113,731
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-28
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 8 -- INCOME TAXES (CONTINUED)
The following table is an analysis of the effective tax rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------- -----------------
1995 1996 1997
----- ----- ----- 1997
-----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal income tax rate............................................... 35% 35% 35% 35%
Net tax effects of:
State income taxes, net of federal income tax benefit............... 5 4 2 1
Tax-exempt interest income.......................................... (1) (1) (1) (1)
Amortization of intangibles......................................... 1 1 1 1
Other............................................................... (2) 1 -- (1)
-- -- -- --
Effective tax rate................................................ 38% 40% 37% 35%
-- -- -- --
-- -- -- --
<CAPTION>
1998
-----
<S> <C>
Federal income tax rate............................................... 35%
Net tax effects of:
State income taxes, net of federal income tax benefit............... (6)
Tax-exempt interest income.......................................... (1)
Amortization of intangibles......................................... 1
Other............................................................... --
--
Effective tax rate................................................ 29%
--
--
</TABLE>
During 1997, the Company received a refund from the State of California
Franchise Tax Board of approximately $25 million (net of federal taxes of $17
million) in settlement of litigation, administration and audit disputes covering
the years 1975-1987. The refund was recorded as a reduction to state income tax
expense.
During the nine months ended September 30, 1998, a reduction in state income
tax liabilities of approximately $52 million, net of federal tax, was recorded.
Of the $52 million reduction, $29 million related to the reversal of previously
accrued 1997 state income tax liabilities and $23 million related to a lower tax
provision in 1998. The decrease in the effective tax rate in 1998 resulted from
the Company's ability to file California franchise tax returns on a worldwide
unitary basis, which incorporates the financial results of The Bank of
Tokyo-Mitsubishi, Ltd. and its worldwide affiliates.
Federal and state tax returns for several years are under or subject to
examination by the respective taxing authorities. Although the ultimate outcome
of such examinations cannot be determined at this time, management believes that
the resolution of issues that have been or may be raised will not have a
material adverse effect on the Company's consolidated financial position, cash
flows or results of operations.
F-29
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 9 -- BORROWED FUNDS
The following is a summary of the major categories of borrowed funds.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998
- ------------------------------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Federal funds purchased and securities sold under repurchase
agreements with weighted average interest rates of 5.09%,
5.38%, and 5.42% at December 31, 1996 and 1997, and
September 30, 1998, respectively........................... $ 1,322,654 $ 1,335,884 $ 1,574,163
Commercial paper, with weighted average interest rates of
5.34%, 5.64%, and 5.46% at December 31, 1996 and 1997, and
September 30, 1998, respectively........................... 1,495,463 966,575 1,417,077
Other borrowed funds, with weighted average interest rates of
5.66%, 6.23%, and 6.03% at December 31, 1996 and 1997, and
September 30, 1998, respectively........................... 749,422 476,010 339,340
------------ ------------ -------------
Total borrowed funds..................................... $ 3,567,539 $ 2,778,469 $ 3,330,580
------------ ------------ -------------
------------ ------------ -------------
Federal funds purchased and securities sold under repurchase
agreements:
Maximum outstanding at any month end....................... $ 1,322,654 $ 1,575,930 $ 1,797,737
Average balance during the period.......................... 933,433 1,097,707 1,481,809
Weighted average interest rate during the period........... 5.05% 5.33% 5.38%
Commercial paper:
Maximum outstanding at any month end....................... $ 1,854,576 $ 1,876,135 $ 1,918,700
Average balance during the period.......................... 1,620,087 1,637,070 1,641,425
Weighted average interest rate during the period........... 5.40% 5.49% 5.52%
Other borrowed funds:
Maximum outstanding at any month end....................... $ 1,697,236 $ 851,694 $ 438,151
Average balance during the period.......................... 1,119,051 635,900 323,082
Weighted average interest rate during the period........... 5.59% 5.42% 5.78%
</TABLE>
F-30
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 10 -- SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK
The following is a summary of capital notes which are subordinated to other
obligations of the Company.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998
- ---------------------------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Floating rate notes due June 2007. These notes bear interest at
0.325% above 3-month London Interbank Offered Rate (LIBOR) and
are payable to The Bank of Tokyo-Mitsubishi, Ltd.............. $ -- $ 200,000 $ 200,000
Floating rate notes due July 2000. These notes bear interest at
0.30% above 3-month LIBOR..................................... 98,000 98,000 98,000
Floating rate notes due July 1997 and July 1998. These notes
bear interest at 0.25% above 3-month LIBOR and are payable to
The Bank of Tokyo-Mitsubishi, Ltd............................. 100,000 50,000 --
8.00% fixed rate notes due February 2002. The notes were called
at par on February 25, 1997................................... 100,000 -- --
6.67% fixed rate notes due August 2002. The notes were called at
par on August 20, 1997........................................ 50,000 -- --
Fixed rate and floating rate notes matured in October 1997, with
$23,000 bearing interest at fixed rates of 10.05% to 10.14%
and notes totaling $11,000 bearing interest at 0.375% above
3-month LIBOR................................................. 34,000 -- --
---------- ---------- -------------
Total subordinated capital notes............................ $ 382,000 $ 348,000 $ 298,000
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
All of the above notes qualify as Tier 2 risk-based capital under the
Federal Reserve guidelines for assessing regulatory capital. For the total
risk-based capital ratio, the amount of notes which qualify as capital is
reduced as the notes approach maturity. At December 31, 1996 and 1997, and
September 30, 1998, $219 million, $239 million and $220 million, respectively,
of the notes qualified as risk-based capital.
Provisions of several of the notes restrict the use of the Company's
property as security for borrowings, and place limitations on leases,
indebtedness, distributions to shareholders, mergers, sales of certain assets,
transactions with affiliates and changes in majority stock ownership of the
Company.
The following table presents the maturities of subordinated capital notes.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------
<S> <C>
Years ending December 31,
2000............................................................................ $ 98,000
Years after 2003................................................................ 200,000
----------
Total......................................................................... $ 298,000
----------
----------
</TABLE>
F-31
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 10 -- SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK (CONTINUED)
At December 31, 1996, the Company had outstanding 1,350,000 shares (or
5,400,000 depositary shares) of 8 3/8% Noncumulative Preferred Stock, Series A
(Preferred Stock) totaling $135 million. On September 3, 1997, the Company
redeemed all 1,350,000 outstanding shares of its Preferred Stock, reducing
shareholders' equity by $135 million. The redemption price was equal to the
stated value of $100 per share of Preferred Stock (equivalent to $25 per
depositary share), plus $2 million in accrued and unpaid dividends to the
redemption date. The redemption was funded by proceeds from the issuance of $200
million in subordinated capital notes in June 1997.
NOTE 11 -- DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has a dividend reinvestment and stock purchase plan for
shareholders. The plan allows shareholders to automatically reinvest all or part
of their dividends in additional shares of the Company's common stock at a cost
of 5 percent below the market price. Participating shareholders also have the
option of purchasing additional shares at full market price with cash payments
of $25 to $3,000 per quarter. The Company obtains shares required for
reinvestment through open market purchases or by the issuance of new shares from
its authorized but unissued stock. During the years ended December 31, 1995,
1996, and 1997, 1,862,034; 155,724 and 131,127 shares, respectively, were
required for dividend reinvestment purposes, of which 1,862,034; 71,706 and
3,687 shares were considered new issuances, respectively. For the nine months
ended September 30, 1997 and 1998, 112,383 and 64,488 shares, respectively, were
required for dividend reinvestment purposes, of which 1,443 and 3,738 shares
were considered new issuances, respectively. The Bank of Tokyo-Mitsubishi, Ltd.
discontinued its participation in the plan after the quarter ended March 31,
1995 and did not participate in the plan as of September 30, 1998.
NOTE 12 -- MANAGEMENT STOCK PLAN
The Company has a management stock plan (the Stock Plan) which has 6,600,000
shares of the Company's common stock authorized to be awarded to key employees
and outside directors of the Company and its subsidiaries at the discretion of
the Executive Compensation and Benefits Committee of the Board of Directors (the
Committee). The combined number of shares that are granted under the Stock Plan
cannot exceed 6,600,000 shares of the Company's common stock. Committee members
and employees on rotational assignment from The Bank of Tokyo-Mitsubishi, Ltd.
are not eligible for stock awards.
The Committee determines the term of each stock option grant, up to a
maximum of ten years from the date of grant. The exercise price of the options
issued under the Stock Plan shall not be less than the fair market value on the
date the option is granted. Unvested restricted stock issued under the Stock
Plan is shown as a reduction to retained earnings. The value of the restricted
shares at the date of grant is amortized to compensation expense over its
vesting period. All cancelled or forfeited options and restricted stock become
available for future grants.
In the years ended 1995, 1996 and 1997, and the nine months ended September
30, 1997 and 1998, the Company granted options to various key employees,
including principal officers, under the Stock Plan. The stock options vest pro
rata on each anniversary of the grant date and become fully exercisable three
years from the grant date, provided that the employee has completed the
specified continuous service requirement. They vest earlier if the employee
dies, is permanently and totally disabled, or retires under certain grant, age
and service conditions.
F-32
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
The following is a summary of stock option transactions under the Stock
Plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1995 1996 1997
----------------------------- ----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- ---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning
of year..................... 740,502 $ 9.94 1,082,106 $ 10.42 1,263,807 $ 12.13
Granted..................... 389,100 11.25 277,200 18.29 441,900 22.13
Exercised................... (47,496) 9.83 (80,496) 10.69 (289,029) 10.84
Forfeited................... -- -- (15,003) -- (19,500) 22.13
---------- ---------- ------ ----------
Options outstanding, end of
year........................ 1,082,106 $ 10.42 1,263,807 $ 12.13 1,397,178 $ 15.41
---------- ---------- ----------
---------- ---------- ----------
Options exercisable, end of
year........................ 407,466 $ 9.78 686,145 $ 10.38 712,107 $ 11.50
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
1997 1998
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- ---------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Options outstanding, beginning
of period.................... 1,263,807 $ 12.13 1,397,178 $ 15.41
Granted...................... 441,900 22.13 533,850 35.08
Exercised.................... (220,332) 10.88 (118,245) 12.12
Forfeited.................... (19,500) 22.13 (9,501) 30.03
---------- ----------
Options outstanding, end of
period....................... 1,465,875 $ 15.19 1,803,282 $ 21.38
---------- ----------
---------- ----------
Options exercisable, end of
period....................... 753,303 $ 11.18 938,679 $ 13.72
---------- ----------
---------- ----------
</TABLE>
The weighted-average fair value of options granted was $3.13, $6.00, and
$6.94 for the years ended 1995, 1996 and 1997, respectively, and $6.94 and
$11.99 for the nine months ended September 30, 1997 and 1998.
F-33
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
The following table summarizes information about stock options outstanding.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT SEPTEMBER 30, 1998 OPTIONS EXERCISABLE AT
------------------------------------------------ SEPTEMBER 30, 1998
WEIGHTED-AVERAGE ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------- ----------- ---------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$6.67-9.08 229,008 4.5 years $ 8.54 229,008 $ 8.54
11.25-12.83 403,254 5.6 11.78 403,254 11.78
18.29-22.13 643,470 7.7 20.72 306,417 20.15
35.08 527,550 9.6 35.08 -- --
----------- -----------
1,803,282 938,679
----------- -----------
----------- -----------
</TABLE>
In the years ended 1995, 1996 and 1997, and nine months ended September 30,
1997 and 1998, the Company also granted 231,210, 133,440, 178,320, 176,970 and
181,785 shares, respectively, of restricted stock to key officers, including
executive officers, under the Stock Plan. The awards of restricted stock vest
pro rata on each anniversary of the grant date and become fully vested four
years from the grant date, provided that the employee has completed the
specified continuous service requirement. They vest earlier if the employee
dies, is permanently and totally disabled, or retires under certain grant, age
and service conditions. Restricted shareholders have the right to vote their
restricted shares and receive dividends.
F-34
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
The following is a summary of restricted stock transaction under the Stock
Plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1995 1996 1997
----------------------------- ----------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NUMBER OF GRANT DATE NUMBER OF GRANT DATE NUMBER OF GRANT DATE
SHARES FAIR VALUE SHARES FAIR VALUE SHARES FAIR VALUE
---------- ----------------- ---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Restricted stock awards
outstanding, beginning of
year......................... 817,608 $ 8.25 1,044,951 $ 8.99 1,166,820 $ 10.04
Granted..................... 231,210 11.61 133,440 18.29 178,320 22.18
Cancelled................... (3,867) 9.72 (11,571) 10.78 (7,923) 20.08
---------- ---------- ----------
Restricted stock awards
outstanding, end of year..... 1,044,951 $ 8.99 1,166,820 $ 10.04 1,337,217 $ 11.59
---------- ---------- ----------
---------- ---------- ----------
Restricted stock awards
vested, end of year.......... 568,449 $ 7.81 764,670 $ 8.35 942,738 $ 9.17
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
1997 1998
----------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NUMBER OF GRANT DATE NUMBER OF GRANT DATE
SHARES FAIR VALUE SHARES FAIR VALUE
---------- ----------------- ---------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Restricted stock awards
outstanding, beginning of
period....................... 1,166,820 $ 10.04 1,337,217 $ 11.59
Granted..................... 176,970 22.13 181,785 33.46
Cancelled................... (4,845) 19.98 (13,404) 22.61
---------- ----------
Restricted stock awards
outstanding, end of period... 1,338,945 11.60 1,505,598 14.13
---------- ----------
---------- ----------
Restricted stock awards
vested, end of period........ 932,856 9.10 1,105,791 10.07
---------- ----------
---------- ----------
</TABLE>
At December 31, 1995, 1996 and 1997, and September 30, 1997 and 1998,
1,342,449, 958,383, 3,365,586, 3,363,858, and 2,672,856 shares, respectively,
were available for future grants as either stock options or restricted stock
under the Stock Plan.
The Company follows the intrinsic value based method in accounting for its
employee stock-based compensation plan. Accordingly, no compensation cost has
been recognized for its stock option grants. Had compensation cost for the
Company's stock-based plan been determined based on the fair value at the grant
dates for awards under that plan consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and net
income per share would have decreased to the
F-35
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED)
pro forma amounts indicated in the following table. Options that were granted
prior to January 1, 1995 with vesting periods in 1995 and later are excluded
from the pro forma results indicated for 1996 and 1995 in the following table.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE ---------------------------------- -----------------------
DATA) 1995 1996 1997 1998
- -------------------------------------------- ---------- ---------- ---------- 1997 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net income.................. As reported $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365
Pro forma 312,691 248,874 410,068 317,771 350,257
Net income applicable to
common stock............... As reported $ 301,637 $ 238,152 $ 403,696 $ 311,251 $ 352,365
Pro forma 301,386 237,568 402,468 310,171 350,257
Net income per common share
-- basic................... As reported $ 1.74 $ 1.37 $ 2.31 $ 1.78 $ 2.01
Pro forma 1.73 1.36 2.30 1.78 2.00
Net income per common share
-- diluted................. As reported $ 1.73 $ 1.36 $ 2.30 $ 1.78 $ 2.01
Pro forma 1.73 1.36 2.30 1.77 1.99
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants made in the years ended 1995, 1996 and 1997, and
nine months ended September 30, 1997 and 1998: risk-free interest rates of 7.1%,
6.3%, 6.6%, 6.6% and 5.8% in the years ended 1995, 1996 and 1997 and nine months
ended September 30, 1997 and 1998, respectively; expected volatility of 28%,
28%, 26%, 26% and 29% in the years ended 1995, 1996 and 1997, and the nine
months ended September 30, 1997 and 1998, respectively; expected lives of 7
years for the years ended 1995 and 1996, respectively, and 6 years for the year
ended 1997 and nine months ended September 30, 1997 and 1998; and expected
dividend yields of 4.2%, 2.6%, 2.1%, 2.1% and 1.5% in the years ended 1995, 1996
and 1997, and nine months ended September 30, 1997 and 1998, respectively.
Effective January 1, 1997, the Company established a Performance Share Plan.
Eligible participants may earn performance share awards to be redeemed in cash
three years after the date of grant. Performance shares are linked to
shareholder value in two ways: (1) the market price of the Company's common
stock, and (2) return on assets, a performance measure closely linked to value
creation. Eligible participants generally receive grants of performance shares
annually. The total number of performance shares granted under the plan cannot
exceed 600,000 and the Company granted 14,400 and 24,900 shares in the year
ended 1997 and nine months ended September 30, 1998, respectively. For the nine
months ended September 30, 1998, 2,400 performance shares were forfeited. The
value of a performance share is equal to the market price of the Company's
common stock. All cancelled or forfeited performance shares become available for
future grants.
F-36
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount which would be
exchanged between willing parties, other than in a forced or liquidation sale.
All of the fair values presented below are as of their respective period ends
and have been made under this definition of fair value unless otherwise
disclosed.
It is management's belief that the fair values presented below are
reasonable based on the valuation techniques and data available to the Company
as of December 31, 1996 and 1997, and September 30, 1998, as more fully
described below. It should be noted that the operations of the Company are
managed on a going concern basis and not a liquidation basis. As a result, the
ultimate value realized for the financial instruments presented could be
substantially different when actually recognized over time through the normal
course of operations. Additionally, a substantial portion of an institution's
inherent value is its capitalization and franchise value. Neither of these
components have been given consideration in the presentation of fair values
which follow.
The table below presents the carrying value and fair value of the specified
assets and liabilities held by the Company.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1996 1997
----------------------------- -----------------------------
CARRYING CARRYING
(DOLLARS IN THOUSANDS) VALUE FAIR VALUE VALUE FAIR VALUE
- ---------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 3,937,697 $ 3,937,697 $ 3,199,455 $ 3,199,455
Trading account assets.................. 465,782 465,782 394,313 394,313
Securities available for sale........... 2,164,197 2,164,197 2,538,386 2,538,386
Securities held to maturity............. 268,196 274,405 188,775 193,115
Loans, net of allowance for credit
losses(1)............................. 19,725,793 20,003,603 21,414,856 21,636,650
LIABILITIES
Deposits:
Noninterest bearing................... 7,655,109 7,655,109 8,849,544 8,849,544
Interest bearing...................... 13,877,851 13,885,504 14,446,830 14,453,029
------------- ------------- ------------- -------------
Total deposits...................... 21,532,960 21,540,613 23,296,374 23,302,573
Borrowed funds.......................... 3,567,539 3,567,836 2,778,469 2,775,531
Subordinated capital notes.............. 382,000 388,388 348,000 348,000
<CAPTION>
SEPTEMBER 30,
1998
-----------------------------
CARRYING
(DOLLARS IN THOUSANDS) VALUE FAIR VALUE
- ---------------------------------------- ------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............... $ 2,974,544 $ 2,974,544
Trading account assets.................. 357,515 357,515
Securities available for sale........... 3,200,376 3,200,376
Securities held to maturity............. 162,018 165,807
Loans, net of allowance for credit
losses(1)............................. 22,010,357 22,821,780
LIABILITIES
Deposits:
Noninterest bearing................... 9,674,118 9,674,118
Interest bearing...................... 13,989,011 14,001,157
------------- -------------
Total deposits...................... 23,663,129 23,675,275
Borrowed funds.......................... 3,330,580 3,328,780
Subordinated capital notes.............. 298,000 298,000
</TABLE>
- ---------
(1) Excludes the book value of leases of $800 million, $875 million and $1,014
million at December 31, 1996 and 1997, and September 30, 1998, respectively.
The Company is also a party to financial instruments that are not reflected
on the balance sheet but represent obligations of the Company in the normal
course of business. For information regarding the fair value of off-balance
sheet financial instruments, see Note 14.
The following methods and assumptions were used to estimate fair value of
each class of financial instruments for which it is practicable to estimate that
value.
CASH AND CASH EQUIVALENTS: The book value of cash and cash equivalents is
considered a reasonable estimate of fair value.
F-37
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
TRADING ACCOUNT ASSETS: Trading account assets are short term in nature and
valued at market based on quoted market prices or dealer quotes. If a quoted
market price is not available, the recorded amounts are estimated using quoted
market prices for similar securities. Thus, carrying value is considered a
reasonable estimate of fair value for these financial instruments.
SECURITIES: The fair value of securities is based on quoted market prices
or dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. Available for sale
securities are carried at their aggregate fair value, while held to maturity
securities are carried at amortized cost.
LOANS: The fair value for performing fixed and non-reference rate loans was
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for
similar remaining maturities.
The fair value of performing loans tied to the Company's reference rate with
normal credit risk is assumed to approximate their book value. The fair value
for these floating rate loans with increasing credit risk was estimated by
calculating their present value using a yield the Company would currently
require for loans with similar terms to borrowers with similar credit quality.
Loans which are on nonaccrual status were not included in the loan valuation
methods discussed previously. The fair value of these assets was estimated
assuming these loans were sold on a liquidation basis.
The fair value of performing mortgage loans was based on quoted market
prices for loans with similar credit and interest rate risk characteristics.
The fair value of performing credit card loans and credit lines is assumed
to approximate their book value. The fair value was estimated for credit lines
which were past due at December 31, 1996 and 1997, and September 30, 1998, and
credit card loans which were past due at December 31, 1996 and 1997, by
segregating them according to their past due status and then discounting them
based on the Company's historical probability of loss.
NONINTEREST BEARING DEPOSITS: The fair value of noninterest bearing
deposits is the amount payable on demand at the reporting date. The fair value
of the demand deposit intangible has not been estimated.
INTEREST BEARING DEPOSITS: The fair value of savings accounts and certain
money market accounts is the amount payable on demand at the reporting date. The
fair value of fixed maturity certificates of deposit was estimated using rates
currently being offered on certificates with similar maturities.
BORROWED FUNDS: The book values of federal funds purchased, securities sold
under repurchase agreements and other short-term borrowings are assumed to
approximate their fair value due to their limited duration characteristics. The
fair value for commercial paper and term federal funds purchased was estimated
using market quotes.
F-38
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
SUBORDINATED CAPITAL NOTES: The fair value of fixed-rate subordinated
capital notes was estimated using discounted cash flows based on market rates
for A-rated bank borrowings. The book values for variable-rate subordinated
capital notes are assumed to approximate fair market value.
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Company is a party to certain derivative and other financial instruments
that are not reflected on the balance sheet but represent obligations or assets
of the Company in the normal course of business. These financial instruments are
used for trading activities of the Company, to meet the needs of customers and
to reduce the impact on the Company's operating results due to market
fluctuations in currency or interest rates.
These financial instruments involve, to varying degrees, elements of credit
and market risk which are not recognized on the balance sheet. Credit risk is
defined as the possibility that a loss may occur from the failure of another
party to perform in accordance with the terms of the contract which exceeds the
value of the existing collateral, if any. Market risk is the possibility that
future changes in market conditions may make the financial instrument less
valuable.
DERIVATIVE INSTRUMENTS
The fair value of the derivative financial instruments was calculated based
on quoted market prices where available or if quoted market prices were not
available, the Company used the estimated amount it would receive or pay to
offset or terminate the agreements based upon the terms of such contracts
relative to prevailing interest rates.
TRADING ACTIVITIES IN DERIVATIVE INSTRUMENTS
The following table reflects the Company's positions relating to trading
activities in derivative instruments. Trading activities include both activities
for the Company's own account and for customers. At December 31, 1996 and 1997,
and September 30, 1998, the majority of the Company's derivative transactions
for customers are hedged with essentially offsetting contracts with other
counterparties. The average fair value of derivatives held or written for
trading purposes during the periods is not significant. The notional amount of
derivative instruments reflects the extent of the Company's involvement in these
instruments. For interest rate swap, cap and floor agreements, notional amounts
do not represent exposure to credit or market risk. Notional amounts are not
exchanged, but serve as a point of reference for calculating payments.
F-39
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
The following is a summary of derivative instruments held or written for
trading purposes.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1996 1997
--------------------------------------- ---------------------------------------
NOTIONAL CREDIT ESTIMATED NOTIONAL CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS RISK(1) FAIR VALUE AMOUNTS RISK(1) FAIR VALUE
- ---------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
HELD OR WRITTEN FOR TRADING PURPOSES AND
CUSTOMER ACCOMMODATIONS
Foreign exchange forward contracts:
Commitments to purchase............... $ 403,602 $ 2,813 $ (11,735) $ 531,330 $ 366 $ (34,304)
Commitments to sell................... 530,923 18,958 14,759 709,512 40,671 40,274
Foreign exchange OTC options:
Options purchased..................... -- -- -- 46,533 -- (634)
Options written....................... -- -- -- 46,533 637 637
Currency swap agreements:
Commitments to pay.................... 64,817 4,821 3,193 55,725 -- (5,971)
Commitments to receive................ 38,417 1,628 1,595 55,725 5,971 5,971
Interest rate contracts:
Caps purchased........................ 994,605 1,858 1,837 1,189,791 796 796
Floors purchased...................... 147,250 1,149 1,149 119,000 612 612
Caps written.......................... 994,605 21 (1,838) 1,189,791 -- (796)
Floors written........................ 147,250 -- (1,149) 119,000 -- (612)
Swap contracts:
Pay variable/receive variable....... 10,000 28 1 58,000 301 --
Pay fixed/receive variable.......... 788,165 1,064 (17,592) 976,180 364 (29,579)
Pay variable/receive fixed.......... 788,165 19,623 18,674 976,180 30,240 29,926
<CAPTION>
SEPTEMBER 30,
---------------------------------------
1998
---------------------------------------
NOTIONAL CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS RISK(1) FAIR VALUE
- ---------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
HELD OR WRITTEN FOR TRADING PURPOSES AND
CUSTOMER ACCOMMODATIONS
Foreign exchange forward contracts:
Commitments to purchase............... $ 427,961 $ 5,250 $ (7,046)
Commitments to sell................... 562,922 14,594 8,120
Foreign exchange OTC options:
Options purchased..................... 4,000 74 74
Options written....................... 4,000 -- (74)
Currency swap agreements:
Commitments to pay.................... 46,725 -- (6,915)
Commitments to receive................ 46,725 7,031 7,031
Interest rate contracts:
Caps purchased........................ 1,115,260 644 644
Floors purchased...................... 141,314 1,382 1,382
Caps written.......................... 1,115,260 -- (644)
Floors written........................ 141,314 -- (1,382)
Swap contracts:
Pay variable/receive variable....... 58,000 381 --
Pay fixed/receive variable.......... 1,048,142 1,506 (51,803)
Pay variable/receive fixed.......... 1,048,142 55,151 53,697
</TABLE>
- ------------
(1) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
ASSET AND LIABILITY MANAGEMENT DERIVATIVE INSTRUMENTS
Derivative positions are integral components of the Company's designated
asset and liability management activities. Therefore, the Company does not
believe it is meaningful to separately analyze the derivatives component of its
risk management activities in isolation from related positions. The Company uses
interest rate derivative instruments as part of its management of asset and
liability positions. Derivatives are used to manage interest rate risk relating
to specified groups of assets and liabilities, including LIBOR based commercial
loans, deposit liabilities and certain subordinated capital notes. The Company
uses foreign currency forward contracts as a means of managing foreign exchange
rate risk associated with assets or liabilities denominated in foreign
currencies.
F-40
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
The following table reflects summary information on derivative contracts
used to hedge or modify the Company's risk as of December 31, 1996 and 1997, and
September 30, 1998. Amounts included in the fair value column do not include
gains or losses from changes in the value of the underlying asset or liability
being hedged. Notional amounts are not exchanged, but serve as a point of
reference for calculating payments. For interest rate swap, cap and floor
agreements, notional amounts do not represent exposure to credit or market risk.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
UNAMORTIZED
NOTIONAL PREMIUM PAID CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS (RECEIVED) RISK(1) FAIR VALUE
- --------------------------------------------------------------- ------------ ------------- --------- -----------
<S> <C> <C> <C> <C>
HELD FOR ASSET AND LIABILITY MANAGEMENT PURPOSES
Foreign exchange forward contracts:
Commitments to purchase...................................... $ 129,264 $ -- $ 1,628 $ (2,286)
Commitments to sell.......................................... 4,142 -- 52 22
Currency swap agreements:
Commitments to pay........................................... -- -- -- --
Interest rate contracts:
Caps purchased............................................... 15,740 -- -- --
Floors purchased............................................. 2,050,000 6,309 9,750 9,750
Caps written................................................. 250,000 (709) 509 509
Floors written............................................... 500,000 (1,016) 391 391
Swap contracts:
Pay fixed/receive variable................................. 114,086 -- 241 (851)
Pay variable/receive fixed................................. 847,000 -- 3,775 2,398
</TABLE>
- ---------
(1) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
F-41
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------
UNAMORTIZED
NOTIONAL PREMIUM PAID CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS (RECEIVED) RISK(1) FAIR VALUE
- --------------------------------------------------------------- ------------ ------------- --------- -----------
<S> <C> <C> <C> <C>
HELD FOR ASSET AND LIABILITY MANAGEMENT PURPOSES
Foreign exchange forward contracts:
Commitments to purchase...................................... $ 341,298 $ -- $ 862 $ (5,055)
Commitments to sell.......................................... 51,754 -- 35 (822)
Currency swap agreements:
Commitments to pay........................................... 26,400 -- 2,590 2,590
Interest rate contracts:
Caps purchased............................................... 15,420 -- -- --
Floors purchased............................................. 3,550,000 11,730 4,040 4,040
Caps written................................................. 250,000 (335) 273 273
Floors written............................................... 1,850,000 (534) -- (1,309)
Swap contracts:
Pay fixed/receive variable................................. -- -- -- --
Pay variable/receive fixed................................. 575,000 -- 2,302 2,302
</TABLE>
- ---------
(1) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------------------
UNAMORTIZED
NOTIONAL PREMIUM PAID CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS (RECEIVED) RISK(1) FAIR VALUE
- -------------------------------------------------------------- ------------ ------------- --------- -----------
<S> <C> <C> <C> <C>
HELD FOR ASSET AND LIABILITY MANAGEMENT PURPOSES
Foreign exchange forward contracts:
Commitments to purchase..................................... $ 183,142 $ -- $ 3,724 $ 1,570
Commitments to sell......................................... 61,371 -- 105 (91)
Currency swap agreements:
Commitments to pay.......................................... 26,400 -- 3,501 3,501
Interest rate contracts:
Caps purchased.............................................. -- -- -- --
Floors purchased............................................ 2,800,000 7,125 34,586 34,586
Caps written................................................ 250,000 (55) -- --
Floors written.............................................. 1,600,000 (53) (7,764)
Swap contracts:
Pay fixed/receive variable................................ -- -- --
Pay variable/receive fixed................................ 525,000 -- 14,495
</TABLE>
- ---------
(1) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
F-42
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Commitments to extend credit are legally binding agreements to lend to a
customer provided there are no violations of any condition established in the
contract. Commitments have fixed expiration dates or other termination clauses
and may require payment of a fee or maintenance of compensatory balances. Such
fees are deferred and, upon partial or full exercise of the commitment,
amortized over the life of the loan or, if exercise is deemed remote, amortized
over the commitment period. Since many of the commitments are expected to expire
without being drawn upon, the contractual amounts do not necessarily represent
future cash requirements. With respect to commitments to extend credit and
letters of credit, the Company's exposure to credit risk in the event of
nonperformance by customers is represented by the contractual amount of those
instruments.
Standby letters of credit are provided to customers to assure their
performance to a third party, generally in the production of goods and services
or under contractual commitments in the financial markets. Commercial letters of
credit are issued to customers to facilitate foreign or domestic trade
transactions. The Company charges fees for the issuance of standby and
commercial letters of credit. The majority of these type of commitments have
terms of one year or less and any fees charged are recognized as noninterest
income upon extension of the commitment. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers and is represented by the contractual amount of those
instruments. When deemed necessary, the Company holds appropriate collateral
supporting those commitments. Management does not anticipate any material losses
as a result of these transactions.
The Company uses the same credit underwriting policies in granting or
accepting such commitments or contingent obligations as it does for on-balance
sheet instruments, by evaluating customers' credit-worthiness. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's evaluation of the customer. The nature of the
collateral varies but may include deposits held in financial institutions,
marketable securities, accounts receivable, inventory, property, equipment and
real estate. The Company also provides for potential losses from either
commitments to extend credit or standby letters of credit as a component of its
evaluation in determination of the adequacy of its allowance for credit losses
and resulting level of provision charged against current period earnings.
The Company's pricing of these financial instruments is based on the credit
quality and other covenants or requirements. Management believes that the
current fees assessed on these off-balance sheet items represent market rates
which would be charged for similar agreements. Based on this belief, the Company
feels that the carrying amounts are reasonable estimates of the fair value of
these financial instruments. At December 31, 1996 and 1997, and September 30,
1998, fair value represents management's
F-43
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
estimate of the unamortized fee income associated with these instruments. The
following is a summary of other financial instruments with off-balance sheet
risk.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
SEPTEMBER 30,
1996 1997 1998
------------------------ ------------------------ ------------------------
CONTRACTUAL FAIR CONTRACTUAL FAIR CONTRACTUAL FAIR
(DOLLARS IN THOUSANDS) AMOUNTS VALUE AMOUNTS VALUE AMOUNTS VALUE
- ------------------------------------ ------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Commitments to extend credit........ $ 12,500,677 $ 6,185 $ 15,111,062 $ 27,571 $ 15,036,195 $ 29,552
Standby letters of credit........... 2,610,123 2,808 2,289,878 5,776 2,562,523 6,749
Other letters of credit............. 336,101 -- 314,594 -- 282,866 --
</TABLE>
The Company conducts securities lending transactions for institutional
customers as a fully disclosed agent, and, at times, indemnifies its customers
against counterparty default. All lending transactions are collateralized,
primarily by cash. The amount of securities lent with indemnification was $1,170
million, $1,268 million and $1,162 million at December 31, 1996 and 1997, and
September 30, 1998, respectively. The market value of the associated collateral
was $1,195 million, $1,294 million and $1,185 million at December 31, 1996 and
1997, and September 30, 1998, respectively.
NOTE 15 -- RESTRICTIONS ON CASH AND DUE FROM BANKS, SECURITIES, LOANS AND
DIVIDENDS
Federal Reserve Board regulations require the Bank to maintain reserve
balances based on the types and amounts of deposits received. Average reserve
balances were approximately $291 million, $339 million and $241 million for the
years ended December 31, 1996 and 1997, and the nine months ended September 30,
1998, respectively.
As of December 31, 1996 and 1997, and September 30, 1998, securities carried
at $1.7 billion at each date, and loans of $1.8 billion, $2.7 billion and $2.7
billion, respectively, were pledged as collateral for borrowings, to secure
public and trust department deposits, and for repurchase agreements as required
by contract or law.
The Federal Reserve Act restricts the extension of credit by the Bank to The
Bank of Tokyo-Mitsubishi, Ltd. and affiliates and to UnionBanCal Corporation and
its non-bank subsidiaries and requires that such loans be secured by certain
types of collateral. At September 30, 1998, such extensions of credit were not
material.
The payment of dividends by the Bank to UnionBanCal Corporation is subject
to the approval of the Office of the Comptroller of the Currency (OCC) if the
total of all dividends declared in any calendar year exceeds certain calculated
amounts. The payment of dividends is also limited by minimum capital
requirements imposed on national banks by the OCC. At September 30, 1998, the
Bank could have declared dividends aggregating $321 million without prior
regulatory approval.
F-44
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies, including minimum
capital requirements. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
Consolidated Financial Statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of the
Company's and Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's and the Bank's
capital amounts and the Bank's prompt corrective action classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of September
30, 1998, that the Company and the Bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 1996, 1997, and and September 30, 1998 the most recent
notification from the OCC categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized", the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Company's and the Bank's capital amounts and ratios are presented in the
following tables.
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
-------------------------- -----------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
- ------------------------------ ------------- ---------- -------------------- ------------------------
<S> <C> <C> <C> <C>
CAPITAL RATIOS FOR THE
COMPANY:
As of December 31, 1996:
Total capital (to
risk-weighted assets)..... $ 2,946,654 11.17% > or = $ 2,111,223 > or = 8.0%
Tier 1 capital (to
risk-weighted assets)..... 2,395,580 9.08 > or = 1,055,612 > or = 4.0
Tier 1 capital (to quarterly
average assets)(1)........ 2,395,580 8.41 > or = 1,139,855 > or = 4.0
As of December 31, 1997:
Total capital (to
risk-weighted assets)..... $ 3,188,173 11.05% > or = $ 2,308,988 > or = 8.0%
Tier 1 capital (to
risk-weighted assets)..... 2,587,071 8.96 > or = 1,154,494 > or = 4.0
Tier 1 capital (to quarterly
average assets)(1)........ 2,587,071 8.53 > or = 1,213,381 > or = 4.0
As of September 30, 1998:
Total capital (to
risk-weighted assets)..... $ 3,474,632 11.51% > or = $ 2,414,158 > or = 8.0%
Tier 1 capital (to
risk-weighted assets)..... 2,876,605 9.53 > or = 1,207,079 > or = 4.0
Tier 1 capital (to quarterly
average assets)(1)........ 2,876,605 9.37 > or = 1,227,857 > or = 4.0
</TABLE>
- ---------
(1) Excludes certain intangible assets
F-45
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
(DOLLARS IN ---------------------------- --------------------------------------- ------------------------------------
THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------- ------------- ------ ----------------------- ------------- -------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL RATIOS FOR
THE BANK:
As of December 31,
1996:
Total capital (to
risk-weighted
assets)......... $ 2,746,285 10.51% > or = $ 2,090,910 > or = 8.0% > or = $ 2,613,638 > or = 10.0%
Tier 1 capital (to
risk-weighted
assets)......... 2,208,392 8.45 > or = 1,045,455 > or = 4.0 > or = 1,568,183 > or = 6.0
Tier 1 capital (to
quarterly
average
assets)(1)...... 2,208,392 7.76 > or = 1,138,211 > or = 4.0 > or = 1,422,764 > or = 5.0
As of December 31,
1997:
Total capital (to
risk-weighted
assets)......... $ 3,025,030 10.58% > or = $ 2,286,296 > or = 8.0% > or = $ 2,857,870 > or = 10.0%
Tier 1 capital (to
risk-weighted
assets)......... 2,527,468 8.84 > or = 1,143,148 > or = 4.0 > or = 1,714,722 > or = 6.0
Tier 1 capital (to
quarterly
average
assets)(1)...... 2,527,468 8.35 > or = 1,210,898 > or = 4.0 > or = 1,513,622 > or = 5.0
As of September 30,
1998:
Total capital (to
risk-weighted
assets)......... $ 3,304,538 11.06% > or = $ 2,389,402 > or = 8.0% > or = $ 2,986,753 > or = 10.0%
Tier 1 capital (to
risk-weighted
assets)......... 2,810,368 9.41 > or = 1,194,701 > or = 4.0 > or = 1,792,052 > or = 6.0
Tier 1 capital (to
quarterly
average
assets)(1)...... 2,810,368 9.14 > or = 1,230,394 > or = 4.0 > or = 1,537,992 > or = 5.0
</TABLE>
- ---------
(1) Excludes certain intangible assets.
F-46
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 17 -- EARNINGS PER SHARE (EPS)
Basic EPS is computed by dividing net income after preferred dividends by
the weighted average number of common shares outstanding during the period.
Diluted EPS is computed based on the weighted average number of common shares
outstanding adjusted for common stock equivalents, which include stock options.
The following table presents a reconciliation of basic and diluted EPS for the
years ended December 31, 1995, 1996 and 1997, and for the nine months ended
September 30, 1997 and 1998, in accordance with SFAS No. 128:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1995
(AMOUNTS IN THOUSANDS, ------------------
EXCEPT PER SHARE DATA) BASIC DILUTED
- ------------------------------ -------- --------
<S> <C> <C>
Net Income.................... $312,942 $312,942
Less:
Preferred stock dividends... (11,305) (11,305)
-------- --------
Income available to common
shareholders................ $301,637 $301,637
-------- --------
-------- --------
Weighted average common shares
outstanding................. 173,806 173,806
Additional shares due to:
Assumed conversion of
dilutive stock options.... -- 293
-------- --------
Adjusted weighted average
common shares outstanding... 173,806 174,099
-------- --------
-------- --------
Net income per share.......... $ 1.74 $ 1.73
-------- --------
-------- --------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1996 1997 1997 1998
(AMOUNTS IN THOUSANDS, ------------------ ------------------ ------------------ ------------------
EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
- ------------------------------ -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income.................... $249,458 $249,458 $411,296 $411,296 $318,851 $318,851 $352,365 $352,365
Less:
Preferred stock dividends... (11,306) (11,306) (7,600) (7,600) (7,600) (7,600) -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income available to common
shareholders................ $238,152 $238,152 $403,696 $403,696 $311,251 $311,251 $352,365 $352,365
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Weighted average common shares
outstanding................. 174,391 174,391 174,683 174,683 174,615 174,615 175,091 175,091
Additional shares due to:
Assumed conversion of
dilutive stock options.... -- 393 -- 506 -- 456 -- 638
-------- -------- -------- -------- -------- -------- -------- --------
Adjusted weighted average
common shares outstanding... 174,391 174,784 174,683 175,189 174,615 175,071 175,091 175,729
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Net income per share.......... $ 1.37 $ 1.36 $ 2.31 $ 2.30 $ 1.78 $ 1.78 $ 2.01 $ 2.01
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
Options to purchase 277,200 shares of common stock at $18 per share were
outstanding but not included in the computation of diluted EPS in 1996 because
the options were anti-dilutive. Options to purchase 422,400 shares of common
stock at $22 per share and options to purchase 527,550 shares of common stock at
$35 per share were outstanding but not included in the computation of diluted
EPS for the nine months ended September 30, 1997 and 1998, respectively, because
the options were anti-dilutive.
F-47
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 18 -- COMPREHENSIVE INCOME
The following is a summary of the components of accumulated other
comprehensive income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
- ------------------------------------------------------------ ---------- ---------- ---------- FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
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.
NOTE 20 -- TRANSACTIONS WITH AFFILIATES
The Company has had, and expects to have in the future, banking transactions
and other transactions in the ordinary course of business with The Bank of
Tokyo-Mitsubishi, Ltd. and with its affiliates and
F-48
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 20 -- TRANSACTIONS WITH AFFILIATES (CONTINUED)
associates. During the years ended December 31, 1995, 1996 and 1997, and nine
months ended September 30, 1997 and 1998, such transactions included, but were
not limited to, origination, participation, servicing and remarketing of loans
and leases, purchase and sale of acceptances and interest rate derivatives,
foreign exchange transactions, funds transfers, custodianships, electronic data
processing, investment advice and management, deposits and credit examination,
and trust services. In the opinion of management, such transactions were made at
prevailing rates, terms and conditions and do not involve more than the normal
risk of collectibility or present other unfavorable features. In addition, some
compensation for services rendered to the Company is paid to the expatriate
officers from The Bank of Tokyo-Mitsubishi, Ltd., and reimbursed by the Company
to The Bank of Tokyo-Mitsubishi, Ltd. under a services agreement.
NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1996 1997 1998
- ----------------------------------------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks.............................................. $ 103,742 $ 66,872 $ 129,513
Investment in and advances to subsidiaries........................... 2,503,706 2,879,898 3,171,235
Other assets......................................................... 9,161 7,971 4,619
------------ ------------ -------------
Total assets................................................... $ 2,616,609 $ 2,954,741 $ 3,305,367
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper..................................................... $ -- $ -- $ 94,026
Subordinated capital notes........................................... 100,000 250,000 200,000
Other liabilities.................................................... 21,676 25,442 26,391
------------ ------------ -------------
Total liabilities.............................................. 121,676 275,442 320,417
Shareholders' equity................................................. 2,494,933 2,679,299 2,984,950
------------ ------------ -------------
Total liabilities and shareholders' equity..................... $ 2,616,609 $ 2,954,741 $ 3,305,367
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-49
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998
- --------------------------------------------------- ---------- ---------- ---------- 1997 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME:
Dividends from bank subsidiary................... $ 25,062 $ 270,662 $ 85,660 $ 61,153 $ 73,592
Dividends from nonbank subsidiaries.............. 343 421 -- -- 23,000
Interest income on advances to subsidiaries and
deposits in bank............................... 52,289 24,366 12,217 9,428 8,402
Other income..................................... -- 959 1,040 1,040 --
---------- ---------- ---------- ----------- ----------
Total income............................... 77,694 296,408 98,917 71,621 104,994
EXPENSE:
Interest expense................................. 54,133 22,220 11,174 7,279 11,306
Other expense, net............................... (212) 1,072 1,583 1,220 1,765
---------- ---------- ---------- ----------- ----------
Total expense.............................. 53,921 23,292 12,757 8,499 13,071
---------- ---------- ---------- ----------- ----------
Income before income taxes and equity in
undistributed net income of subsidiaries......... 23,773 273,116 86,160 63,122 91,923
Income tax expense (benefit)....................... (694) 889 204 804 (1,634)
---------- ---------- ---------- ----------- ----------
Income before equity in undistributed net income of
subsidiaries..................................... 24,467 272,227 85,956 62,318 93,557
Equity in undistributed net income (loss) of
subsidiaries:
Bank subsidiary(1)............................... 285,053 (32,894) 314,739 250,050 273,844
Nonbank subsidiaries(2).......................... 3,422 10,125 10,601 6,483 (15,036)
---------- ---------- ---------- ----------- ----------
NET INCOME......................................... $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</TABLE>
- ---------
(1) In 1996 the amount represents dividends distributed by the Bank in excess
of its 1996 net income.
(2) In the nine months ended September 30, 1998 the amount represents
dividends distributed by nonbank subsidiaries in excess of their net income
for the nine months ended September 30, 1998.
F-50
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998
- ---------------------------------------------------------- ----------- ----------- ---------- 1997 -----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 312,942 $ 249,458 $ 411,296 $ 318,851 $ 352,365
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed (earnings) losses of
subsidiaries.......................................... (288,475) 22,769 (325,340) (256,533) (258,808)
Other, net.............................................. 2,800 (3,772) 1,059 2,681 (1,427)
----------- ----------- ---------- ----------- -----------
Net cash provided by operating activities......... 27,267 268,455 87,015 64,999 92,130
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to subsidiaries................................ 33,590 (12,779) (130,805) (107,621) (22,968)
Repayment of advances to subsidiaries................... 70,000 70,000 76,104 75,002 16,604
Sales and maturities of securities...................... 11,650 322 -- -- --
----------- ----------- ---------- ----------- -----------
Net cash provided (used) by investing
activities...................................... 115,240 57,543 (54,701) (32,619) (6,364)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short term borrowings........ 366 (632,296) -- -- 94,026
Proceeds from reduction of investment in subsidiary
equity................................................ -- 3,966 -- -- --
Maturity and redemption of subordinated capital notes
and long term debt.................................... (70,000) (70,000) (50,000) (50,000) (50,000)
Proceeds from issuance of subordinated capital notes.... -- -- 200,000 200,000 --
Payments of cash dividends.............................. (62,044) (182,652) (93,303) (68,787) (73,631)
Redemption of preferred stock........................... -- -- (135,000) (135,000) --
Other, net.............................................. 3,392 17,813 9,119 5,718 6,480
----------- ----------- ---------- ----------- -----------
Net cash used by financing activities............. (128,286) (863,169) (69,184) (48,069) (23,125)
----------- ----------- ---------- ----------- -----------
Net increase (decrease) in cash and due from banks...... 14,221 (537,171) (36,870) (15,689) 62,641
Cash and due from banks at beginning of year............ 626,692 640,913 103,742 103,742 66,872
----------- ----------- ---------- ----------- -----------
Cash and due from banks at end of year............ $ 640,913 $ 103,742 $ 66,872 $ 88,053 $ 129,513
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest................................................ $ 52,847 $ 25,785 $ 9,814 $ 5,986 $ 11,947
Income taxes............................................ (2,030) (198) 1,148 652 (3,921)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Dividends declared but unpaid........................... $ 12,788 $ 20,383 $ 24,528 $ 23,055 $ 24,529
</TABLE>
F-51
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 22 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Certain amounts in the following unaudited quarterly financial information
have been reclassified to conform with current presentation. In the opinion of
management, all adjustments necessary to fairly present the results of
operations have been made.
<TABLE>
<CAPTION>
1996 QUARTERS ENDED
---------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------------------------------------- ----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income................................................ $ 483,068 $ 473,601 $ 481,315 $ 489,320
Interest expense............................................... 187,401 185,362 189,727 196,236
----------- --------- ------------- ------------
Net interest income............................................ 295,667 288,239 291,588 293,084
Provision for credit losses.................................... 10,000 10,000 10,000 10,000
Noninterest income............................................. 102,874 105,550 107,280 102,972
Noninterest expense............................................ 252,024 313,784 284,075 285,021
----------- --------- ------------- ------------
Income before income taxes..................................... 136,517 70,005 104,793 101,035
Income tax expense............................................. 53,251 25,597 42,810 41,234
----------- --------- ------------- ------------
Net income..................................................... $ 83,266 $ 44,408 $ 61,983 $ 59,801
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income applicable to common stock.......................... $ 80,440 $ 41,582 $ 59,156 $ 56,975
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income per common share -- basic........................... $ 0.46 $ 0.24 $ 0.34 $ 0.33
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income per common share -- diluted......................... $ 0.46 $ 0.24 $ 0.34 $ 0.33
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Dividends per common share(1)(2)............................... $ 0.12 $ 0.12 $ 0.12 $ 0.12
----------- --------- ------------- ------------
----------- --------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
---------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------------------------------------- ----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income................................................ $ 485,031 $ 504,663 $ 520,237 $ 523,530
Interest expense............................................... 191,000 197,647 207,983 205,149
----------- --------- ------------- ------------
Net interest income............................................ 294,031 307,016 312,254 318,381
Provision for credit losses.................................... -- -- -- --
Noninterest income............................................. 114,786 111,021 116,820 120,374
Noninterest expense............................................ 253,138 255,753 253,317 282,457
----------- --------- ------------- ------------
Income before income taxes..................................... 155,679 162,284 175,757 156,298
Income tax expense............................................. 63,177 65,739 45,953 63,853
----------- --------- ------------- ------------
Net income..................................................... $ 92,502 $ 96,545 $ 129,804 $ 92,445
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income applicable to common stock.......................... $ 89,676 $ 93,718 $ 127,857 $ 92,445
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income per common share -- basic........................... $ 0.51 $ 0.54 $ 0.73 $ 0.53
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Net income per common share -- diluted......................... $ 0.51 $ 0.54 $ 0.73 $ 0.53
----------- --------- ------------- ------------
----------- --------- ------------- ------------
Dividends per common share(1).................................. $ 0.12 $ 0.12 $ 0.14 $ 0.14
----------- --------- ------------- ------------
----------- --------- ------------- ------------
</TABLE>
F-52
<PAGE>
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997, AND
SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
NOTE 22 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1998 QUARTERS ENDED
-------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30
- ------------------------------------------------------------------------------ ----------- --------- -------------
<S> <C> <C> <C>
Interest income............................................................... $ 508,653 $ 511,996 $ 535,973
Interest expense.............................................................. 191,203 186,440 199,340
----------- --------- -------------
Net interest income........................................................... 317,450 325,556 336,633
Provision for credit losses................................................... 20,000 15,000 10,000
Noninterest income............................................................ 128,030 147,994 123,925
Noninterest expense........................................................... 268,475 277,325 290,378
----------- --------- -------------
Income before income taxes.................................................... 157,005 181,225 160,180
Income tax expense............................................................ 61,428 72,704 11,913
----------- --------- -------------
Net income.................................................................... $ 95,577 $ 108,521 $ 148,267
----------- --------- -------------
----------- --------- -------------
Net income applicable to common stock......................................... $ 95,577 $ 108,521 $ 148,267
----------- --------- -------------
----------- --------- -------------
Net income per common share -- basic.......................................... $ 0.55 $ 0.62 $ 0.85
----------- --------- -------------
----------- --------- -------------
Net income per common share -- diluted........................................ $ 0.54 $ 0.62 $ 0.84
----------- --------- -------------
----------- --------- -------------
Dividends per common share(1)................................................. $ 0.14 $ 0.14 $ 0.14
----------- --------- -------------
----------- --------- -------------
</TABLE>
- ------------
(1) Dividends per share for 1996, 1997, and 1998 are based on the Company's
common stock outstanding as of the declaration date.
(2) Amounts prior to merger are based on Union Bank only and do not include
the dividend of $145 million paid to The Mitsubishi Bank, Limited in the
first quarter of 1996 by BanCal Tri-State Corporation and The Bank of
California, N.A.
NOTE 23 -- SUBSEQUENT EVENT
Under a shelf registration filed with the Securities and Exchange Commission
(SEC) on November 19, 1998, the Company may have available for issuance $750
million of senior or subordinated debt securities, common stock or preferred
stock. The timing and sale of any debt or equity securities under this filing
will depend on market conditions. It is anticipated that the Company will issue
up to $500 million, in the first quarter of 1999, of trust preferred securities
which will be utilized to repurchase the Company's common stock held by The Bank
of Tokyo-Mitsubishi, Ltd. and others. The trust preferred securities are
considered Tier 1 capital for regulatory reporting purposes. The Company will
record the securities as debt instruments.
Under a common stock offering filed with the SEC on November 19, 1998, The
Bank of Tokyo-Mitsubishi, Ltd. may sell up to $750 million of the Company's
common stock in the secondary market. The sale of these securities will reduce
the percentage ownership that The Bank of Tokyo-Mitsubishi, Ltd. currently holds
in the Company. The Bank of Tokyo-Mitsubishi, Ltd. will continue to hold a
majority ownership position of the Company. The sale is expected to occur during
the first quarter of 1999.
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
UnionBanCal Corporation:
We have audited the accompanying consolidated balance sheets of UnionBanCal
Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1997
and September 30, 1998 and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997 and for the nine-month period ended September
30, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of BanCal Tri-State and Union Bank on April 1,
1996, which has been accounted for as a pooling of interests as described in
Note 1 to the consolidated financial statements. We did not audit the
consolidated statements of income, changes in shareholders' equity, and cash
flows of Union Bank and subsidiaries for the year ended December 31, 1995, which
statements reflect total net interest income and net income of $832 million and
$207 million, respectively. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion expressed herein, insofar
as it relates to the amounts included for Union Bank for 1995, is based solely
upon the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of UnionBanCal Corporation and
subsidiaries as of December 31, 1996 and 1997 and September 30, 1998 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 and for the nine-month period ended September
30, 1998 in conformity with generally accepted accounting principles.
[SIGNATURE]
San Francisco, California
February 2, 1999
F-54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Union Bank:
We have audited the consolidated statement of income of Union Bank, a
California state chartered bank and a 71% owned subsidiary of The Bank of Tokyo,
Ltd., and subsidiaries (the "Bank") and the related consolidated statements of
shareholders' equity and cash flows for the year ended December 31, 1995 (not
presented herein). These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows for the year
ended December 31, 1995, of Union Bank and subsidiaries, in conformity with
generally accepted accounting principles.
[SIGNATURE]
San Francisco, California
January 24, 1996
F-55
<PAGE>
[LOGO]
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SHAREHOLDER MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND THE SELLING SHAREHOLDER
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE SUCH OFFER
OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED FEBRUARY 19, 1999
22,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------
THE BANK OF TOKYO-MITSUBISHI, LTD. IS OFFERING 22,000,000 SHARES OF COMMON STOCK
OF UNIONBANCAL
CORPORATION. THE BANK OF TOKYO-MITSUBISHI, LTD. CURRENTLY OWNS 81.5% OF OUR
COMMON STOCK AND WILL OWN 68.3% AFTER THE OFFERING.
-------------------
OUR COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"UNBC". ON FEBRUARY 18, 1999, THE LAST REPORTED SALE PRICE OF OUR COMMON STOCK
WAS $36 1/16 PER SHARE.
-------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
-----------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS SHAREHOLDER
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER SHARE.......................................... $ $ $
TOTAL.............................................. $ $ $
</TABLE>
- ---------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE BANK OF TOKYO-MITSUBISHI, LTD. HAS GRANTED THE UNDERWRITERS THE RIGHT TO
PURCHASE UP TO AN ADDITIONAL 3,300,000 SHARES TO COVER OVER-ALLOTMENTS. MORGAN
STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON
, 1999.
-------------------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
J.P. MORGAN SECURITIES LTD.
SALOMON SMITH BARNEY INTERNATIONAL
TOKYO-MITSUBISHI INTERNATIONAL
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses (other than the SEC registration fee and NASD filing
fee) are estimated.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee........................................................................ $ 243,971
NASD filing fee............................................................................. 30,500
Printing and engraving expenses............................................................. 125,000
Accountants' fees and expenses.............................................................. 750,000
Attorneys' fees and expenses................................................................ 450,000
Miscellaneous............................................................................... 220,529
------------
Total................................................................................... $ 1,820,000
------------
------------
</TABLE>
UnionBanCal Corporation and The Bank of Tokyo-Mitsubishi will each pay 50%
of the registration expenses incurred in connection with the registration of the
shares of UnionBanCal Corporation's common stock. The underwriters have agreed
to reimburse The Bank of Tokyo-Mitsubishi for certain expenses incurred in
connection with this offering.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As authorized by Section 317 of the CGCL, each director and officer of
UnionBanCal Corporation may be indemnified by UnionBanCal Corporation against
expenses (including attorney's fees, judgments, fines and amounts paid in
settlement) actually and reasonably incurred in connection with the defense or
settlement of any threatened, pending or completed legal proceedings in which
such person is involved by reason of the fact that such person is or was a
director or officer of UnionBanCal Corporation if such person acted in good
faith and in a manner that such person reasonably believed to be in the best
interests of UnionBanCal Corporation and, with respect to any criminal action or
proceeding, if such person had no reasonable cause to believe that his conduct
was unlawful. If the legal proceeding, however, is by or in the right of
UnionBanCal Corporation, the director or officer may not be indemnified in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to UnionBanCal Corporation unless a court determines otherwise.
In addition, we maintain a directors' and officers' liability policy.
Article VII of the Articles of Incorporation and Section 55 of the Bylaws
provide that, to the fullest extent permitted by law, directors of UnionBanCal
Corporation will not be liable for monetary damages to UnionBanCal Corporation
or its shareholders for breaches of their fiduciary duties.
II-1
<PAGE>
ITEM 16. EXHIBITS
The following is a list of all exhibits filed as a part of this Registration
Statement on Form S-3, including those incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
4.1* Specimen Certificate representing shares of Common Stock
5.1 Opinion of John H. McGuckin, Jr., General Counsel, as to the legality of the Common Stock
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2 Consent of Arthur Andersen LLP, Independent Accountants
23.3 Consent of John H. McGuckin, Jr. (included in Exhibit 5.1)
24.1* Power of Attorney of certain officers and directors of the Company
</TABLE>
- ---------
* Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions set forth in Item 15, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on this Form S-3 and has duly caused this Amendment No.
5 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Francisco, State of California, on
this 18th day of February, 1999.
<TABLE>
<S> <C> <C>
UNIONBANCAL CORPORATION
By: /s/ YOSHIHIKO SOMEYA
-----------------------------------------
Yoshihiko Someya
DEPUTY CHAIRMAN OF THE BOARD
</TABLE>
Pursuant to the requirements of the Securities Act, this Amendment No. 5 to
Registration Statement has been signed below by the following persons in the
capacities indicated on February 18, 1999.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ------------------------------ --------------------------
<C> <S>
President and Chief
* Executive Officer and
- ------------------------------ Director (Principal
Takahiro Moriguchi Executive Officer)
/s/ YOSHIHIKO SOMEYA
- ------------------------------ Deputy Chairman of the
Yoshihiko Someya Board
Executive Vice President
* and Chief Financial
- ------------------------------ Officer (Principal
David I. Matson Financial Officer)
* Senior Vice President and
- ------------------------------ Controller (Principal
David A. Anderson Accounting Officer)
*
- ------------------------------ Chairman of the Board
Kaoru Hayama
*
- ------------------------------ Vice Chairman of the Board
Richard C. Hartnack
*
- ------------------------------ Vice Chairman of the Board
Robert M. Walker
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ------------------------------ --------------------------
<C> <S>
*
- ------------------------------ Director
Richard D. Farman
*
- ------------------------------ Director
Stanley F. Farrar
*
- ------------------------------ Director
Herman E. Gallegos
*
- ------------------------------ Director
Jack L. Hancock
*
- ------------------------------ Director
Harry W. Low
*
- ------------------------------ Director
Mary S. Metz
*
- ------------------------------ Director
Raymond E. Miles
*
- ------------------------------ Director
J. Fernando Niebla
*
- ------------------------------ Director
Sidney R. Petersen
*
- ------------------------------ Director
Carl W. Robertson
*
- ------------------------------ Director
Henry T. Swigert
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ------------------------------ --------------------------
<C> <S>
*
- ------------------------------ Director
Tsuneo Wakai
*
- ------------------------------ Director
Hiroshi Watanabe
- ------------------------------ Director
Blenda J. Wilson
- ------------------------------ Director
Kenji Yoshizawa
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ YOSHIHIKO SOMEYA
-------------------------
Yoshihiko Someya
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT 1.1
22,000,000 SHARES
UNIONBANCAL CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
__________ __, 1999
<PAGE>
__________ __, 1999
Morgan Stanley & Co. Incorporated
Lehman Brothers Inc.
J.P. Morgan Securities Inc.
Salomon Smith Barney Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Lehman Brothers International (Europe)
J.P. Morgan Securities Ltd.
Salomon Brothers International Limited
Tokyo-Mitsubishi International
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Ladies and Gentlemen:
The Bank of Tokyo-Mitsubishi, Ltd., a Japanese corporation ("BTM"),
proposes to sell to the several Underwriters (as defined below) 22,000,000
shares (the "FIRM SHARES") of the Common Stock, of UnionBanCal Corporation, a
California corporation ("UNBC").
It is understood that, subject to the conditions hereinafter stated,
17,600,000 Firm Shares (the "U.S. FIRM SHARES") will be sold to the several
U.S. Underwriters named in Schedule I hereto (the "U.S. UNDERWRITERS") in
connection with the offering and sale of such U.S. Firm Shares in the United
States and Canada to United States and Canadian Persons (as such terms are
defined in the Agreement Between U.S. and International Underwriters of even
date herewith), and 4,400,000 Firm Shares (the "INTERNATIONAL SHARES") will
be sold to the several International Underwriters named in Schedule II hereto
(the "INTERNATIONAL UNDERWRITERS") in connection with the offering and sale
of such International Shares outside the United States and Canada to persons
other than United States and Canadian Persons. Morgan Stanley & Co.
Incorporated,
<PAGE>
Lehman Brothers Inc., J.P. Morgan Securities Inc. and Salomon Smith Barney
Inc. shall act as representatives (the "U.S. REPRESENTATIVES") of the several
U.S. Underwriters, and Morgan Stanley & Co. International Limited, Lehman
Brothers International (Europe), J.P. Morgan Securities Ltd., Salomon
Brothers International Limited and Tokyo-Mitsubishi International plc. shall
act as representatives (the "INTERNATIONAL REPRESENTATIVES") of the several
International Underwriters. The U.S. Underwriters and the International
Underwriters are hereinafter collectively referred to as the "UNDERWRITERS".
BTM also proposes to sell to the several U.S. Underwriters not more than
an additional 3,300,000 shares (the "ADDITIONAL SHARES") of the Common Stock
of UNBC if and to the extent that the U.S. Representatives shall have
determined to exercise, on behalf of the U.S. Underwriters, the right to
purchase such shares of common stock granted to the U.S. Underwriters in
Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "SHARES". The shares of Common Stock of UNBC
are hereinafter referred to as the "COMMON STOCK".
UNBC has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement relating to the Shares. The
registration statement contains two prospectuses to be used in connection
with the offering and sale of the Shares: the U.S. prospectus, to be used in
connection with the offering and sale of Shares in the United States and
Canada to United States and Canadian Persons, and the international
prospectus, to be used in connection with the offering and sale of Shares
outside the United States and Canada to persons other than United States and
Canadian Persons. The international prospectus is identical to the U.S.
prospectus except that the international prospectus will contain a different
front cover page. The registration statement as amended at the time it
becomes effective, including the information (if any) deemed to be part of
the registration statement at the time of effectiveness pursuant to Rule 430A
under the Securities Act of 1933, as amended (the "SECURITIES ACT"), is
hereinafter referred to as the "REGISTRATION STATEMENT"; the U.S. prospectus
and the international prospectus in the respective forms first used to
confirm sales of Shares are hereinafter collectively referred to as the
"PROSPECTUS". If UNBC has filed an abbreviated registration statement to
register additional shares of Common Stock pursuant to Rule 462(b) under the
Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference
herein to the term "Registration Statement" shall be deemed to include such
Rule 462 Registration Statement. Any reference herein to the term
"Registration Statement" and "Prospectus" shall be deemed to include
documents incorporated therein by reference.
1. REPRESENTATIONS AND WARRANTIES. UNBC represents and warrants
to and agrees with each of the Underwriters that:
2
<PAGE>
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is
in effect, and no proceedings for such purpose are pending before
or, to the knowledge of UNBC, threatened by the Commission.
(b) (i) Each document, if any, filed or to be filed pursuant
to the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT") and incorporated by reference in the Prospectus complied or
will comply when so filed in all material respects with the
Exchange Act and the applicable rules and regulations of the
Commission thereunder, (ii) the Registration Statement, when it
became effective, did not contain and, as amended or supplemented,
if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, (iii)
the Registration Statement and the Prospectus comply and, as
amended or supplemented, if applicable, will comply, when so filed,
in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder and (iv) the
Prospectus, as of its date, did not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement
of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not
apply to statements or omissions in the Registration Statement or
the Prospectus based upon information relating to any Underwriter
furnished to UNBC in writing by such Underwriter through you
expressly for use therein.
(c) UNBC has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing
in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on UNBC and
its subsidiaries, taken as a whole (a "MATERIAL ADVERSE EFFECT");
all of the issued shares of capital stock of each subsidiary of
UNBC have been duly and validly authorized and issued, are fully
paid and non-assessable and are owned directly or indirectly by
UNBC, free and clear of all liens, encumbrances, equities or claims;
3
<PAGE>
(d) Union Bank of California, N.A. ("UBOC") has been duly
organized, is validly existing as an association in good standing
under the laws of the jurisdiction of its organization, has the
power and authority to own its property and to conduct its business
as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a Material
Adverse Effect.
(e) This Agreement has been duly authorized, executed and
delivered by UNBC.
(f) The authorized capital stock of UNBC conforms as to legal
matters to the description thereof contained in the Prospectus
under "Description of Capital Stock".
(g) The shares of Common Stock outstanding have been duly
authorized and are validly issued, fully paid and non-assessable.
(h) The execution and delivery by UNBC of, and the
performance by UNBC of its obligations under, this Agreement will
not contravene any provision of applicable law or the articles of
incorporation or bylaws of UNBC or, except for violations that
individually or in the aggregate would not result in a Material
Adverse Effect, any agreement or other instrument binding upon UNBC
or any of its subsidiaries that is material to UNBC and its
subsidiaries, taken as a whole, or any judgment, order or decree of
any governmental body, agency or court having jurisdiction over
UNBC or any subsidiary, and no consent, approval, authorization or
order of, or qualification with, any governmental body or agency is
required for the performance by UNBC of its obligations under this
Agreement, (i) except such as have been obtained or may be required
by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares by the U.S.
Underwriters, (ii) except such as have been obtained or may be
required under the laws and regulations of jurisdictions outside
the United States in which the International Shares are offered or
(iii) except to the extent that the failure to so obtain would not
individually or in the aggregate have a Material Adverse Effect.
(i) There has not occurred any material adverse change, or
any development involving a prospective material adverse change, in
the condition, financial or otherwise, or in the earnings, business
or operations of UNBC and its subsidiaries, taken as a whole, from
that set forth in the
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Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement).
(j) There are no legal or governmental proceedings pending
or, to the knowledge of UNBC, threatened to which UNBC or any of
its subsidiaries is a party or to which any of the properties of
UNBC or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are
not so described, or any statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(k) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the
Securities Act, complied when so filed in all material respects
with the Securities Act and the applicable rules and regulations of
the Commission thereunder.
(l) UNBC is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as
such term is defined in the Investment Company Act of 1940, as
amended.
(m) UNBC and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety,
the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have
received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where
such noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to comply
with the terms and conditions of such permits, licenses or
approvals would not, singly or in the aggregate, have a Material
Adverse Effect.
(n) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties
or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any
potential liabilities
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to third parties) which would, singly or in the aggregate, have a
Material Adverse Effect.
(o) There are no contracts, agreements or understandings
between UNBC and any person granting such person the right to
require UNBC to file a registration statement under the Securities
Act with respect to any securities of UNBC or to require UNBC to
include such securities with the Shares registered pursuant to the
Registration Statement.
(p) UNBC and each of its subsidiaries possess all material
certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to
conduct their respective businesses, and neither UNBC nor any such
subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization
or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material
adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of UNBC and its subsidiaries,
taken as a whole, except as described in or contemplated by the
Prospectus.
(q) UNBC has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or
operations of UNBC or any of its subsidiaries will be affected by
the "Year 2000 Problem" (that is, any significant risk that UNBC's
computer hardware or software applications and those of its
subsidiaries will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively
as in the case of dates or times periods occurring prior to January
1, 2000); as a result of such review, UNBC has no reason to
believe, and does not believe, that (i) there are any issues
related to UNBC's preparedness to address the Year 2000 Problem
that are of a character required to be described or referred to in
the Registration Statement or the Prospectus which have not been
accurately described in the Registration Statement or the
Prospectus and (ii) the Year 2000 Problem will have a material
adverse effect on the condition, financial or otherwise, or on the
earnings, business or operations of UNBC and its subsidiaries,
taken as a whole, or result in any material loss or interference
with the business or operations of UNBC and it subsidiaries, taken
as a whole.
2. REPRESENTATIONS AND WARRANTIES OF BTM. BTM represents and
warrants to and agrees with each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and
delivered by or on behalf of BTM.
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(b) The execution and delivery by BTM of, and the performance
by BTM of its obligations under, this Agreement will not contravene
any provision of applicable law, or the organizational documents of
BTM, or any agreement or other instrument binding upon BTM or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over BTM, and no consent, approval,
authorization or order of, or qualification with, any governmental
body or agency is required for the performance by BTM of its
obligations under this Agreement, except such as may be required by
the securities or Blue Sky laws of the various states in connection
with the offer and sale of the Shares.
(c) BTM has, and on the Closing Date will have, valid title
to the Shares to be sold by BTM and the legal right and power, and
all authorization and approval required by law, to enter into this
Agreement and to sell, transfer and deliver the Shares to be sold
by BTM.
(d) Delivery of the Shares to be sold by BTM pursuant to this
Agreement against payment thereof, all in accordance with Sections
3 and 5 hereof, will pass title to such Shares free and clear of
any security interests, claims, liens, equities and other
encumbrances.
(e) (i) the Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, (ii) the Registration
Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply when so filed in all
material respects with the Securities Act and the applicable rules
and regulations of the Commission thereunder and (iii) the
Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements
or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to UNBC in
writing by such Underwriter through you expressly for use therein.
3. AGREEMENTS TO SELL AND PURCHASE. BTM hereby agrees to sell to
the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the
conditions hereinafter stated,
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agrees, severally and not jointly, to purchase from BTM the respective
numbers of Firm Shares set forth in Schedules I and II hereto opposite its
names at U.S.$_____ a share ("PURCHASE PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, BTM agrees to sell to the
U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall have
a one-time right to purchase, severally and not jointly, up to 3,300,000
Additional Shares at the Purchase Price. If the U.S. Representatives, on
behalf of the U.S. Underwriters, elect to exercise such option, the U.S.
Representatives shall so notify BTM in writing not later than 30 days after
the date of this Agreement, which notice shall specify the number of
Additional Shares to be purchased by the U.S. Underwriters and the date on
which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor
later than ten business days after the date of such notice. Additional Shares
may be purchased as provided in Section 5 hereof solely for the purpose of
covering over-allotments made in connection with the offering of the Firm
Shares. If any Additional Shares are to be purchased, each U.S. Underwriter
agrees, severally and not jointly, to purchase the number of Additional
Shares (subject to such adjustments to eliminate fractional shares as the
U.S. Representatives may determine) that bears the same proportion to the
total number of Additional Shares to be purchased as the number of U.S. Firm
Shares set forth in Schedule I hereto opposite the name of such U.S.
Underwriter bears to the total number of U.S. Firm Shares.
Each of UNBC and BTM hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters,
it will not, during the period ending 180 days after the date of the
Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii)
enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is
to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (A) the Shares to be
sold hereunder, (B) the issuance by UNBC of shares of Common Stock or options
to purchase Common Stock granted pursuant to employee or director benefit
plans of UNBC of which the Underwriters have been advised in writing, (C)
transactions by any person other than UNBC relating to shares of Common Stock
or other securities acquired in open market transactions after the completion
of the offering of the Shares and (D) the sale of shares of Common
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Stock by BTM to UNBC pursuant to the Repurchase Agreement dated as of
February 8, 1999.
4. TERMS OF PUBLIC OFFERING. Each of UNBC and BTM is advised by
you that the Underwriters propose to make a public offering of their
respective portions of the Shares as soon after the Registration Statement
and this Agreement have become effective as in your judgment is advisable.
Each of UNBC and BTM is further advised by you that the Shares are to be
offered to the public initially at U.S.$_____ a share (the "PUBLIC OFFERING
PRICE") and to certain dealers selected by you at a price that represents a
concession not in excess of U.S.$____ a share under the Public Offering
Price, and that any Underwriter may allow, and such dealers may reallow, a
concession, not in excess of U.S.$____ a share, to any Underwriter or to
certain other dealers.
5. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be
made to BTM in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the
several Underwriters at 10:00 a.m., New York City time, on __________ __,
1999, or at such other time on the same or such other date, not later than
__________ __, 1999, as shall be designated in writing by you. The time and
date of such payment are hereinafter referred to as the "CLOSING DATE."
Payment for any Additional Shares shall be made to BTM in Federal or
other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 a.m., New York City time, on the date specified in the notice described
in Section 3 hereof or at such other time on the same or on such other date,
in any event not later than __________ __, 1999, as shall be designated in
writing by the U.S. Representatives. The time and date of such payment are
hereinafter referred to as the "OPTION CLOSING DATE."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes
payable in connection with the transfer of the Shares to the Underwriters
duly paid, against payment of the Purchase Price therefor.
6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations
of BTM to sell the Shares to the Underwriters and the several obligations of
the
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Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 2:00 p.m., New York City time, on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does
not indicate the direction of the possible change, in the
rating accorded any of UNBC's securities by any "nationally
recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Securities
Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of UNBC and its subsidiaries, taken as a whole,
from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of
this Agreement) that, in your judgment, is material and
adverse and that makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated
in the Prospectus.
(b) The Underwriters shall have received on the Closing Date
a certificate, dated the Closing Date and signed by an executive
officer of UNBC, to the effect set forth in Section 6(a)(i) hereof
and to the effect that the representations and warranties of UNBC
contained in this Agreement are true and correct as of the Closing
Date and that UNBC has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or
satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
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(c) The Underwriters shall have received on the Closing Date
an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special
counsel for UNBC, dated the Closing Date, to the effect set forth
in Exhibit A.
(d) The Underwriters shall have received on the Closing Date
an opinion of John H. McGuckin, Jr., Executive Vice President and
General Counsel of UNBC, dated the Closing Date, to the effect set
forth in Exhibit B.
(e) The Underwriters shall have received on the Closing Date
an opinion of Paul, Weiss, Rifkind, Wharton & Garrison, special
U.S. counsel for BTM, dated the Closing Date, to the effect that:
(i) no consent, approval, authorization or order of, or
qualification with, any Governmental Authority which has not
been obtained, taken or made is required under Applicable Law
for the execution and delivery by BTM of, or the performance
by BTM of its obligations under, this Agreement, except such
as have been obtained, taken or made or may be required by the
securities or Blue Sky laws of the various states in
connection with offer and sale of the Shares; "GOVERNMENTAL
AUTHORITY" means any executive, legislative, judicial,
administrative or regulatory body of the State of New York or
the United States of America; "APPLICABLE LAW" means those
laws, rules and regulations of the State of New York and the
United States of America, in each case which in such counsel's
experience are normally applicable to the transactions of this
type contemplated by this Agreement;
(ii) assuming that the Underwriters are purchasing
Shares without notice of adverse claim, delivery of the Shares
to be sold by BTM pursuant to this Agreement against payment
thereof, all in accordance with Sections 3 and 5 hereof, will
pass title to such Shares free and clear of any security
interests, claims, liens, equities and other encumbrances;
PROVIDED, HOWEVER, that such counsel need not opine to any
security interests, claims, liens, equities and other
encumbrances arising under Japanese law; and
(iii) such counsel has no reason to believe that (except
for financial statements and schedules and other financial and
statistical data as to which such counsel need not express any
belief) the Selling Shareholder information in the
Registration Statement at the time it became effective
contained any untrue statement of a material fact or omitted
to state a material fact
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required to be stated therein or necessary to make the
statements therein not misleading and has no reason to believe
that (except for financial statements and schedules and other
financial and statistical data as to which such counsel need
not express any belief) the Selling Shareholder information in
the Prospectus, as of its date and as of the date such opinion
is delivered, contained or contains any untrue statement of a
material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(f) The Underwriters shall have received on the Closing Date
an opinion of Hamada & Matsumoto, Japanese counsel for BTM, dated
the Closing Date, to the effect that:
(i) this Agreement has been duly authorized, executed
and delivered by or on behalf of BTM;
(ii) the execution and delivery by BTM of, and the
performance by BTM of its obligations under, this Agreement
will not contravene any provision of applicable Japanese law,
or the organizational documents of BTM, or, to the best of
such counsel's knowledge, any agreement or other instrument
binding upon BTM or, to the best of such counsel's knowledge,
any judgment, order or decree of any Japanese governmental
body, agency or court having jurisdiction over BTM, and no
consent, approval, authorization or order of, or qualification
with, any Japanese governmental body or agency is required for
the performance by BTM of its obligations under this Agreement;
(iii) BTM has valid title to the Shares to be sold by BTM
and the legal right and power, and all authorization and
approval required by law, to enter into this Agreement and to
sell, transfer and deliver the Shares to be sold by BTM; and
(iv) assuming that the Underwriters are purchasing
Shares without notice of adverse claim, delivery of the Shares
to be sold by BTM pursuant to this Agreement, against payment
thereof, all in accordance with Sections 3 and 5 hereof, will
pass title to such Shares free and clear of any security
interests, claims, liens, equities and other encumbrances;
PROVIDED, HOWEVER, that such counsel need not opine to any
security interests, claims, liens,
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<PAGE>
equities and other encumbrances arising under the laws of the
United States or any state thereof.
(g) The Underwriters shall have received on the Closing Date
an opinion of Davis Polk & Wardwell, special counsel for the
Underwriters, dated the Closing Date with respect to such matters
as the Underwriters may reasonably request.
With respect to Section 6(c) hereof, Skadden, Arps,
Slate, Meagher & Flom LLP and Davis Polk & Wardwell, and with
respect to Section 6(e)(iii) hereof, Paul, Weiss, Rifkind,
Wharton & Garrison, may state that their opinion and belief
are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or
supplements thereto (other than the documents incorporated by
reference) and review and discussion of the contents thereof
(including documents incorporated therein by reference), but
are without independent check or verification, except as
specified.
With respect to Section 6(c) hereof, Skadden Arps,
Slate, Meagher, & Flom LLP may rely, with respect to factual
matters and to the extent such counsel deems appropriate, upon
the representations of UNBC contained herein and in other
documents and instruments. With respect to Sections 6(e) and
6(f) hereof, Paul, Weiss, Rifkind, Wharton & Garrison and
Hamada & Matsumoto, respectively, may rely, (i) with respect
to factual matters and to the extent such counsel deems
appropriate, upon the representations of BTM contained herein
and in other documents and instruments and (ii) with respect
to matters involving the application of, in the case of Paul,
Weiss, Rifkind, Wharton & Garrison, of Japanese law, or in the
case of Hamada & Matsumoto, of U.S. law, and to the extent
such counsels deem proper and to the extent specified in such
opinion, upon the opinion of each other firm delivered to you
pursuant to Sections 6(f) and 6(e) hereof, respectively.
The opinions of Skadden, Arps, Slate, Meagher & Flom
LLP and Paul, Weiss, Rifkind, Wharton & Garrison described in
Section 6(c) and 6(e) hereof, respectively, above shall be
rendered to the Underwriters at the request of UNBC and shall
so state therein.
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(h) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance
satisfactory to the Underwriters, from Deloitte & Touche LLP,
independent public accountants, containing statements and
information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the
Registration Statement and the Prospectus; PROVIDED that the letter
delivered on the Closing Date shall use a "cut-off date" not
earlier than the date hereof.
(i) The "lock-up" agreements, each substantially in the form
of Exhibit C hereto, between you and the directors and certain
officers of
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UNBC listed on Exhibit D hereto relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full
force and effect on the Closing Date.
(j) The repurchases of shares of Common Stock shall have been
consummated as described in the Prospectus.
(k) The several obligations of the U.S. Underwriters to
purchase Additional Shares hereunder are subject to the delivery to
the U.S. Representatives on the Option Closing Date of such
documents as they may reasonably request with respect to the good
standing of UNBC, certain matters related to the sale of the
Additional Shares.
7. COVENANTS OF UNBC. In further consideration of the agreements of
the Underwriters herein contained, UNBC covenants with each Underwriter as
follows:
(a) To furnish to you, without charge, ten conformed copies
of the Registration Statement (including exhibits thereto and, upon
request, documents incorporated therein by reference) and for
delivery to each other Underwriter a conformed copy of the
Registration Statement (without exhibits thereto but, upon request,
including documents incorporated therein by reference) and to
furnish to you in New York City, without charge, prior to 10:00
a.m. New York City time on the second business day next succeeding
the date of this Agreement and during the period mentioned in
Section 7(c) hereof, as many copies of the Prospectus, and any
supplements and amendments thereto or to the Registration Statement
as you may reasonably request. The terms "SUPPLEMENT" and
"AMENDMENT" and "AMEND" as used in this Agreement shall include all
documents subsequently filed by UNBC with the Commission pursuant
to the Exchange Act that are deemed to be incorporated by reference
in the Prospectus.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object promptly
after reasonable notice thereof, and to file with the Commission
within the applicable period specified in Rule 424(b) under the
Securities Act any prospectus required to be filed pursuant to such
Rule.
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(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the
Underwriters (which counsel shall be reasonably acceptable to UNBC;
PROVIDED that Davis Polk & Wardwell shall be acceptable to UNBC),
the Prospectus is required by law to be delivered in connection
with sales by an Underwriter or dealer, any event shall occur or
condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered
to a purchaser, not misleading, or if it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith
to prepare, file with the Commission and furnish, at its own
expense, to the Underwriters and to the dealers (whose names and
addresses you will furnish to UNBC) to which Shares may have been
sold by you on behalf of the Underwriters and to any other dealers
upon request, either amendments or supplements to the Prospectus so
that the statements in the Prospectus as so amended or supplemented
will not, in the light of the circumstances when the Prospectus is
delivered to a purchaser, be misleading or so that the Prospectus,
as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale
under the securities or Blue Sky laws of such jurisdictions in the
United States as you shall reasonably request; PROVIDED that in
connection therewith, UNBC shall not be required to qualify as a
foreign corporation or to file a general consent to service of
process in any jurisdiction.
(e) To make generally available to UNBC's security holders
and to you as soon as practicable an earning statement covering the
twelve-month period ending March 31, 2000 that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(f) Not to waive its rights under any "lock-up" or similar
agreement between UNBC and any shareholder of UNBC without the
prior written consent of Morgan Stanley & Co. Incorporated on
behalf of the Underwriters.
8. EXPENSES. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, each of UNBC and BTM,
jointly and severally, agree to pay or cause to be paid all expenses incident to
the performance of its obligations under this Agreement, including: (i) the
fees, disbursements and expenses of UNBC's counsel, UNBC's accountants and
counsel for BTM in connection with the registration and delivery of the Shares
under the Securities Act and all other fees or expenses in connection with the
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preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 7(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc., (v) all costs and expenses, if any, incident to
listing the Shares on the Nasdaq National Market or the New York Stock Exchange,
(vi) the cost of printing certificates representing the Shares, (vii) the costs
and charges of any transfer agent, registrar or depositary, (viii) the costs and
expenses of UNBC relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the Shares,
including, without limitation, expenses associated with the production of road
show slides and graphics, fees and expenses of any consultants engaged in
connection with the road show presentations with the prior approval of UNBC,
travel and lodging expenses of the representatives and officers of UNBC and any
such consultants, and the cost of any aircraft chartered in connection with the
road show, and (ix) all other costs and expenses incident to the performance of
the obligations of UNBC hereunder for which provision is not otherwise made in
this Section 8. It is understood, however, that except as provided in this
Section 8, Section 9 hereof and the last paragraph of Section 11 hereof, the
Underwriters will pay all of their costs and expenses, including fees and
disbursements of their counsel, stock transfer taxes payable on resale of any of
the Shares by them and any advertising expenses connected with any offers they
may make.
The provisions of this Section 8 shall not supersede or otherwise affect
any agreement that UNBC and BTM may otherwise have for the allocation of such
expenses among themselves.
9. INDEMNITY AND CONTRIBUTION. (a) Each of UNBC and BTM, jointly
and severally, agrees to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any
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legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if UNBC shall have furnished any
amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to UNBC in writing by such Underwriter
through you expressly for use therein; PROVIDED, HOWEVER, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if UNBC shall have furnished any amendments or supplements thereto)
was not sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage or liability, unless such failure is the result of non-
compliance by UNBC with Section 7(a) hereof.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless UNBC, BTM, the directors of UNBC, the officers of
UNBC who sign the Registration Statement and each person, if any, who
controls UNBC or BTM within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from UNBC and BTM to such Underwriter, but only with
reference to information relating to such Underwriter furnished to UNBC in
writing by such Underwriter through you expressly for use in the Registration
Statement, any preliminary prospectus, the Prospectus or any amendments or
supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 9(a) or 9(b) hereof, such person
(the "INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in such
proceeding and shall pay the fees and disbursements of such counsel related
to such proceeding. In any such proceeding,
18
<PAGE>
any indemnified party shall have the right to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such indemnified
party unless (i) the indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying
party shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for (i) the fees and expenses of more than one
separate firm (in addition to any local counsel) for all Underwriters and all
persons, if any, who control any Underwriter within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, (ii) the
fees and expenses of more than one separate firm (in addition to any local
counsel) for UNBC, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the UNBC within the meaning
of either such Section and (iii) the fees and expenses of more than one
separate firm (in addition to any local counsel) for BTM and all persons, if
any, who control BTM within the meaning of either such Section, and that all
such fees and expenses shall be reimbursed as they are incurred. In the case
of any such separate firm for the Underwriters and such control persons of
any Underwriters, such firm shall be designated in writing by Morgan Stanley
& Co. Incorporated. In the case of any such separate firm for UNBC, and such
directors, officers and control persons of UNBC, such firm shall be
designated in writing by UNBC. In the case of any such separate firm for BTM
and such control persons of BTM, such firm shall be designated in writing by
BTM. The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and
expenses of counsel as contemplated by the second and third sentences of this
paragraph and the indemnifying party is not disputing in good faith the
reasonableness of such fees and expenses of counsel, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more than
30 days after receipt by such indemnifying party of the aforesaid request and
(ii) such indemnifying party shall not have reimbursed the indemnified party
in accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such
19
<PAGE>
indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such proceeding.
(d) To the extent the indemnification provided for in Section
9(a) or 9(b) hereof is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein,
then each indemnifying party under such paragraph, in lieu of indemnifying
such indemnified party thereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages
or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party or parties on the one
hand and the indemnified party or parties on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 9(d)(i) above is
not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause 9(d)(i) above
but also the relative fault of the indemnifying party or parties on the one
hand and of the indemnified party or parties on the other hand in connection
with the statements or omissions that resulted in such losses, claims,
damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by UNBC and BTM on the one
hand and the Underwriters on the other hand in connection with the offering
of the Shares shall be deemed to be in the same respective proportions as the
net proceeds from the offering of the Shares (before deducting expenses)
received by BTM and the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover of
the Prospectus, bear to the aggregate Public Offering Price of the Shares.
The relative fault of UNBC and BTM on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by UNBC or BTM or by the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations
to contribute pursuant to this Section 9 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
(e) UNBC, BTM and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 9 were determined
by PRO RATA allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 9(d) hereof.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably
20
<PAGE>
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 9, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 9 are
not exclusive and shall not limit any rights or remedies which may otherwise
be available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in
this Section 9 and the representations, warranties and other statements of
UNBC contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, BTM or any person controlling BTM, or UNBC, its
officers or directors or any person controlling UNBC and (iii) acceptance of
and payment for any of the Shares.
10. TERMINATION. This Agreement shall be subject to termination by
notice given by you to UNBC and BTM, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date (i) trading generally shall
have been suspended or materially limited on or by, as the case may be, any
of the New York Stock Exchange, the American Stock Exchange, the National
Association of Securities Dealers, Inc., the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii)
trading of any securities of UNBC shall have been suspended on any exchange
or in any over-the-counter market, (iii) a general moratorium on commercial
banking activities in New York shall have been declared by either Federal or
New York State authorities or (iv) there shall have occurred any outbreak or
escalation of hostilities or any change in financial markets or any calamity
or crisis that, in your judgment, is material and adverse and (b) in the case
of any of the events specified in clauses (i) through (iv) above, such event,
singly or together with any other such event, makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
11. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares
that it
21
<PAGE>
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate
number of the Shares to be purchased on such date, the other Underwriters
shall be obligated severally in the proportions that the number of Firm
Shares set forth opposite their respective names in Schedule I or Schedule II
bears to the aggregate number of Firm Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; PROVIDED
that in no event shall the number of Shares that any Underwriter has agreed
to purchase pursuant to this Agreement be increased pursuant to this Section
11 by an amount in excess of one-ninth of such number of Shares without the
written consent of such Underwriter. If, on the Closing Date, any Underwriter
or Underwriters shall fail or refuse to purchase Firm Shares and the
aggregate number of Firm Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Firm Shares to be purchased,
and arrangements satisfactory to you, UNBC and BTM for the purchase of such
Firm Shares are not made within 36 hours after such default, this Agreement
shall terminate without liability on the part of any non-defaulting
Underwriter, UNBC or BTM. In any such case that does not result in
termination, either you, UNBC or BTM shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and in the Prospectus
or in any other documents or arrangements may be effected. If, on the Option
Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase in the absence of such default. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of UNBC or BTM to comply
with the terms or to fulfill any of the conditions of this Agreement, or if
for any reason UNBC or BTM shall be unable to perform its obligations under
this Agreement, UNBC and BTM will reimburse the Underwriters or such
Underwriters as have so terminated this Agreement with respect to themselves,
severally, for all out-of-pocket expenses (including the fees and
disbursements of their counsel) reasonably incurred by such Underwriters in
connection with this Agreement or
22
<PAGE>
the offering contemplated hereunder, but UNBC and BTM shall then be under no
further liability to any Underwriter except as provided in Sections 8 and 9
hereof.
12. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
13. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
14. HEADINGS. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
23
<PAGE>
Very truly yours,
UNIONBANCAL CORPORATION
By:
---------------------------------
Name:
Title:
THE BANK OF TOKYO-MITSUBISHI, LTD.
By:
---------------------------------
Name:
Title:
Accepted as of the date hereof
MORGAN STANLEY & CO.
INCORPORATED
LEHMAN BROTHERS INC.
J.P. MORGAN SECURITIES INC.
SALOMON SMITH BARNEY INC.
Acting severally on behalf of themselves
and the several U.S. Underwriters named
in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
----------------------------------------
Name:
Title:
<PAGE>
MORGAN STANLEY & CO.
INTERNATIONAL LIMITED
LEHMAN BROTHERS INTERNATIONAL
(EUROPE)
J.P. MORGAN SECURITIES LTD.
SALOMON BROTHERS INTERNATIONAL
LIMITED
TOKYO-MITSUBISHI INTERNATIONAL PLC.
Acting severally on behalf of themselves and the
several International Underwriters named in
Schedule II hereto.
By: Morgan Stanley & Co. International Limited
By:
--------------------------------------------
Name:
Title:
<PAGE>
SCHEDULE I
U.S. UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES TO
UNDERWRITER BE PURCHASED
<S> <C>
Morgan Stanley & Co. Incorporated . . . . . .
Lehman Brothers Inc.. . . . . . . . . . . . .
J.P. Morgan Securities Inc. . . . . . . . . .
Salomon Smith Barney Inc. . . . . . . . . . .
[NAMES OF OTHER U.S. UNDERWRITERS]. . . . . .
Total U.S. Firm Shares . . . . . . . . .
</TABLE>
<PAGE>
SCHEDULE II
INTERNATIONAL UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES TO BE
UNDERWRITER PURCHASED
<S> <C>
Morgan Stanley & Co. International Limited. .
Lehman Brothers International (Europe). . . .
J.P. Morgan Securities Ltd. . . . . . . . . .
Salomon Brothers International Limited . . .
Tokyo-Mitsubishi International plc. . . . . .
[NAMES OF OTHER INTERNATIONAL CO-MANAGERS]. .
Total International Firm Shares . . . .
</TABLE>
<PAGE>
EXHIBIT 5.1
[Letterhead of UnionBanCal Corporation]
February 17, 1999
UnionBanCal Corporation
400 California Street
San Francisco, CA 94104
Ladies and Gentlemen:
I am General Counsel of UnionBanCal Corporation, a California
corporation (the "Company"), and have acted in such capacity in connection
with the sale of up to 25,300,000 shares (including any shares sold pursuant
to the over-allotment option, the "Shares") of common stock of the Company by
The Bank of Tokyo-Mitsubishi, Ltd.
This opinion is being furnished in accordance with the
requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of
1933, as amended (the "Act").
In connection with this opinion, I have examined originals or
copies, certified or otherwise identified to my satisfaction, of (i) the
Registration Statement on Form S-3 (File No. 333-67579) as filed with the
Securities and Exchange Commission (the "Commission") on November 19, 1998,
under the Act; (ii) Amendment No. 1 thereto, filed with the Commission on
January 11, 1999; Amendment No. 2 thereto, filed with the Commission on
February 1, 1999; Amendment No. 3 thereto, filed with the Commission on
February 8, 1999; and Amendment No. 4 thereto, filed with the Commission on
February 9, 1999 (the Registration Statement as so amended, the "Registration
Statement"); (iii) the Amended and Restated Articles of Incorporation and the
Bylaws of the Company, as currently in effect; and (iv) certain resolutions
of the Board of Directors of the Company. I have also examined originals or
copies, certified or otherwise identified to my satisfaction, of such records
of the Company and such agreements, certificates of public officials,
certificates of officers or other representatives of the Company and others,
and such other documents, certificates and records as I have deemed necessary
or appropriate as a basis for the opinions set forth herein.
<PAGE>
February 17, 1999
Page 2
In my examination, I have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to me as originals, the conformity to original documents
of all documents submitted to me as certified, conformed or photostatic
copies and the authenticity of the originals of such latter documents. In
making my examination of executed or to be executed documents, I have assumed
that the parties thereto, other than the Company, had the power, corporate or
other, to enter into and perform all obligations thereunder, and I have also
assumed the due authorization by all requisite action, corporate or other,
and execution and delivery by such parties of such documents and the validity
and binding effect thereof on such parties. As to any facts material to the
opinions expressed herein which I have not independently established or
verified, I have relied upon oral or written statements and representations
of officers and other representatives of the Company and others.
I am admitted to the bar of the State of California, and I do not
express any opinion as to any laws other than the General Corporation Law of
the State of California.
Based upon and subject to the foregoing, I am of the opinion that
the Shares were duly authorized and validly issued and are fully paid and
nonassessable.
I hereby consent to the filing of this opinion with the Commission
as an exhibit to the Registration Statement. I also consent to the reference
to me in the Registration Statement under the caption "Legal Matters." In
giving this consent, I do not thereby admit that I am included in the
category of persons whose consent is required under Section 7 of the Act or
the rules and regulations of the Commission. This opinion is expressed as of
the date hereof, and I disclaim any undertaking to advise you of any
subsequent changes in the facts stated or assumed herein or of any subsequent
changes in applicable law.
Very truly yours,
/s/ JOHN H. McGUCKIN, JR.
- ----------------------------
John H. McGuckin, Jr.
Executive Vice President and
General Counsel
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion and incorporation by reference in this Amendment No.
5 to Registration Statement No. 333-67579 of UnionBanCal Corporation of our
report dated February 2, 1999 appearing herein and in Form 8-K of UnionBanCal
Corporation dated February 5, 1999, and to the reference to us under the heading
"Experts" in the Prospectus, which is a part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 16, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use 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 Amendment No. 5 to Form S-3 Registration Statement File No.
333-67579 and to the incorporation by reference of said report, included in Form
8-K of UnionBanCal Corporation dated February 5, 1999, in said Form S-3
Registration Statement. 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.
/s/ ARTHUR ANDERSEN LLP
San Francisco, California
February 17, 1999
