SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
April 15, 1998
------------------------------------------------
Date of Report (Date of Earliest Event Reported)
ZIONS BANCORPORATION
------------------------------------------------------
(Exact Name of Registrant As Specified In Its Charter)
UTAH
----------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-2610 87-0227400
- ------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
One South Main, Suite 1380
Salt Lake City, Utah 84111
--------------------------------------------------
(Address of Principal Executive Offices)(Zip Code)
(801) 524-4787
----------------------------------------------------
(Registrant's Telephone Number, including Area Code)
-------------------------------------------------------------
(Former Name or Former Address, If Changed Since Last Report)
<PAGE>
Item 5. Other Events.
On March 25, 1998, Zions Bancorporation ("Zions") entered into an
Agreement and Plan of Merger (the "Merger Agreement"), by and among Zions, SBC
Acquisition Corp. ("SBC") and The Sumitomo Bank of California, pursuant to which
SBC, an indirect wholly owned subsidiary of Zions, will merge with and into
Sumitomo (the "Merger").
In connection therewith, Zions hereby files (i) The Sumitomo Bank of
California's audited balance sheets for the years ended December 31, 1997 and
1996 and The Sumitomo Bank of California's audited statements of income, changes
in shareholders' equity and cash flows for the years ended December 31, 1997,
1996 and 1995; and (ii) unaudited summary pro forma condensed balance sheet and
income statement information for the Merger.
The historical and pro forma financial information appear as Exhibits
99.1 and 99.2 to this report and are incorporated herein by reference. The
foregoing summary is qualified in its entirety by reference to such documents.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Not Applicable.
(b) Not Applicable.
(c) Exhibits
The following exhibits are filed with this Current Report on Form 8-K:
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
23.1 Consent of Arthur Anderson LLP.
99.1 Audited balance sheets for the years ended December 31, 1997 and 1996
and audited statements of income, changes in shareholders' equity and
cash flows for the years ended December 31, 1997, 1996 and 1995 of
The Sumitomo Bank of California.
99.2 Unaudited summary pro forma condensed balance sheet and income
statement information for the Merger.
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: April 15, 1998
ZIONS BANCORPORATION
By: /s/ Dale M. Gibbons
--------------------------------------
Name: Dale M. Gibbons
Title: Executive Vice President and
Chief Financial Officer
3
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- ---------------------------------------------------------------------
23.1 Consent of Arthur Anderson LLP.
99.1 Audited balance sheets for the years ended December 31, 1997 and 1996
and audited statements of income, changes in shareholders' equity and
cash flows for the years ended December 31, 1997, 1996 and 1995 of
The Sumitomo Bank of California.
99.2 Unaudited summary pro forma condensed balance sheet and income
statement information for the Merger.
4
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 16, 1998 on Sumitomo Bank of California's 1997 financial
statements included in this Form 8-K, into Zions Bancorporation's previously
filed S-8 Registration Statement File Nos. 333-36205, 333-36207, 033-58855,
033-58845, 33-57963, 33-53743, 33-52878, 33-52796, 33-15951.
Arthur Andersen LLP
San Francisco, California,
April 13, 1998
Financial Statements Exhibit 99.1
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Year Ended December 31,
------------------------------------------------
(Dollar amounts in thousands, except per share data) 1997 1996 1995
------------ ----------------- -------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and lease financings.................. $315,373 $307,565 $ 347,079
Interest on investment securities:
U.S. Treasury securities................................ 9,049 14,428 19,739
U.S. government agencies................................ 24,590 25,569 13,339
States and political subdivisions*...................... 191 650 1,112
Interest on deposits with other banks............................ 35,282 25,784 12,292
Interest on federal funds sold................................... 2,405 3,347 2,573
------------ ----------------- -------------
Total interest income.......................... 386,890 377,343 396,134
------------ ----------------- -------------
INTEREST EXPENSE
Interest on deposits............................................. 169,873 161,161 175,061
Interest on short-term borrowings................................ 3,640 3,405 6,629
Interest on long-term debt....................................... 9,516 9,723 10,415
------------ ----------------- -------------
Total interest expense.................................. 183,029 174,289 192,105
------------ ----------------- -------------
NET INTEREST INCOME....................................................... 203,861 203,054 204,029
Provision for credit losses...................................... 16,500 20,000 209,300
------------ ----------------- -------------
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR CREDIT LOSSES.............. 187,361 183,054 (5,271)
------------ ----------------- -------------
OTHER OPERATING INCOME
Service charges on deposit accounts.............................. 4,976 4,804 4,738
Trust fees and commissions....................................... 3,733 3,821 3,415
Investment securities gains...................................... 61 - 168
Other income..................................................... 15,476 14,854 11,222
------------ ----------------- -------------
Total other operating income............................ 24,246 23,479 19,543
------------ ----------------- -------------
OTHER OPERATING EXPENSE
Salaries......................................................... 63,134 57,428 53,558
Employee benefits................................................ 18,192 16,210 14,641
------------ ----------------- -------------
Total staff expense..................................... 81,326 73,638 68,199
Net occupancy expense............................................ 15,889 15,618 15,250
Equipment expense................................................ 7,649 7,172 7,219
Other expense.................................................... 45,172 39,730 86,516
------------ ----------------- -------------
Total other operating expense........................... 150,036 136,158 177,184
------------ ----------------- -------------
Income (loss) before income taxes................................ 61,571 70,375 (162,912)
Income tax expense (benefit)..................................... 20,384 25,276 (56,011)
------------ ----------------- -------------
NET INCOME (LOSS)......................................................... $41,187 $45,099 $(106,901)
============ ================= =============
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK.............................. $35,093 $39,005 $(112,995)
------------ ----------------- -------------
Average common shares outstanding................................ 16,415,444 16,402,130 12,833,986
EARNINGS (LOSS) PER COMMON SHARE $2.14 $2.38 $(8.80)
<FN>
* Interest exempt from federal income taxes.
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31,
(Dollar amounts in thousands) 1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks................................................ $200,760 $197,557
Interest-bearing deposits with other banks............................. 466,000 518,779
Investment securities:
Held-to-maturity (Fair value of $150,586 and $239,736 as of
December 31, 1997 and 1996, respectively)........................... 150,307 239,300
Available-for-sale................................................... 375,787 310,084
Federal funds sold..................................................... - 40,000
Loans and lease financings............................................. 3,891,863 3,659,512
Less: Unearned income................................................ (12,038) (12,959)
Allowance for credit losses.................................... (116,753) (126,171)
-------------- --------------
Net loans.......................................................... 3,763,072 3,520,382
Bank premises and equipment, net....................................... 31,640 30,261
Customers' acceptance liability........................................ 4,390 1,721
Other assets........................................................... 109,616 115,744
-------------- --------------
Total assets....................................................... $5,101,572 $4,973,828
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Domestic offices:
Non-interest-bearing deposits................................... $671,590 $650,213
Savings deposits................................................ 297,500 228,842
Interest-bearing transaction accounts........................... 677,270 682,516
Time deposits................................................... 2,613,105 2,593,720
Foreign office deposits............................................. 95,612 113,468
-------------- --------------
Total deposits.................................................. 4,355,077 4,238,759
Federal funds purchased and repurchase agreements...................... 93,100 39,345
Other short-term borrowings............................................ 25,031 8,854
Acceptances outstanding................................................ 4,390 1,721
Long-term debt......................................................... 65,534 152,099
Other liabilities...................................................... 55,092 52,521
-------------- --------------
Total liabilities............................................. 4,598,224 4,493,299
-------------- --------------
Commitments and contingencies (Note 18)
Shareholders' equity:
Preferred stock, no par............................................. 75,000 75,000
Authorized 5,000,000 shares
Outstanding 1997-750,000 shares
1996-750,000 shares
Common stock, $5 par value.......................................... 82,099 82,043
Authorized 25,000,000 shares
Outstanding 1997-16,419,733 shares
1996-16,408,570 shares
Surplus............................................................. 267,484 267,197
Undivided profits................................................... 78,290 56,959
Net unrealized gains (losses) on available-for-sale securities...... (155) (670)
-------------- --------------
Total shareholders' equity.......................................... 503,348 480,529
-------------- --------------
Total liabilities and shareholders' equity.......................... $5,101,572 $4,973,828
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year Ended December 31,
(Dollar amounts in thousands, except per share data) 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
PREFERRED STOCK
Balance at beginning of period.................................. $ 75,000 $ 75,000 $ 75,000
----------- ----------- -----------
Balance at end of period............................... $ 75,000 $ 75,000 $ 75,000
----------- ----------- -----------
COMMON STOCK
Balance at beginning of period.................................. $ 82,043 $ 81,969 $ 45,549
Dividend reinvested............................................. 56 74 592
Issuance of common stock........................................ - - 35,828
----------- ----------- -----------
Balance at end of period............................... $ 82,099 $ 82,043 $ 81,969
----------- ----------- -----------
SURPLUS
Balance at beginning of period.................................. $ 267,197 $ 266,907 $ 121,086
Dividend reinvested............................................. 287 290 2,193
Issuance of common stock........................................ - - 143,628
----------- ----------- -----------
Balance at end of period............................... $ 267,484 $ 267,197 $ 266,907
----------- ----------- -----------
UNDIVIDED PROFITS
Balance at beginning of period.................................. $ 56,959 $ 31,077 $ 154,306
Net income (loss)............................................... 41,187 45,099 (106,901)
Cash dividends declared on:
Common stock at $0.80 per share in 1997, 1996 and 1995. (13,132) (13,123) (10,234)
Preferred stock........................................ (6,094) (6,094) (6,094)
----------- ----------- -----------
Balance at end of period...................... $ 78,920 $ 56,959 $ 31,077
----------- ----------- -----------
NET UNREALIZED GAINS (LOSSES) ON AVAILABLE-FOR-SALE SECURITIES
Balance at beginning of period.................................. $ (670) $ 972 $ (2,335)
Change in net unrealized gains (losses)......................... 515 (1,642) 3,307
----------- ----------- -----------
Balance at end of period............................... $ (155) $ (670) $ 972
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY AT END OF PERIOD............ $ 503,348 $ 480,529 $ 455,925
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended December 31,
(In thousands) 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................................... $ 41,187 $ 45,099 $ (106,901)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for credit losses....................................... 16,500 20,000 209,300
Depreciation and amortization..................................... 6,008 5,550 5,453
Provision (benefit) for deferred income taxes..................... 1,710 20,668 (23,889)
Benefit for current income taxes not received..................... - - (28,839)
Writedown of other real estate owned.............................. 46 666 22,981
(Gain) loss on sales of other real estate owned................... (1,972) (2,896) 15,993
Amortization of investment security premiums
and discounts.................................................... (977) (4,714) (7,759)
Investment securities gains....................................... (61) - (168)
(Increase) decrease in interest receivable........................ (7,587) 5,188 (5,238)
(Increase) decrease in prepaid expenses........................... (1,188) 3,579 (2,784)
Increase (decrease) in interest payable........................... 616 (4,639) (1,196)
Increase (decrease) in accrued expenses........................... 2,757 10,527 (649)
Other, net........................................................ 149 27,646 (1,005)
----------- ----------- -----------
Net cash provided by operating activities.................... $ 57,188 $ 126,674 $ 75,299
----------- ----------- -----------
INVESTING ACTIVITIES
Held-to-maturity securities:
Maturities/calls.................................................... $ 89,602 $ 197,870 $ 164,417
Purchases........................................................... - (250,935) (70,000)
Available-for-sale securities:
Sales............................................................... 58,234 - -
Maturities/calls.................................................... 181,243 373,911 482,628
Purchases........................................................... (303,958) (196,749) (667,515)
Net (increase) decrease in interest-bearing deposits
with other banks...................................................... 52,779 (124,029) (304,750)
Net (increase) decrease in federal funds sold.......................... 40,000 28,000 (47,000)
Net (increase) decrease in loans and lease financings.................. (264,091) (189,052) (439,637)
Proceeds from sales of other real estate owned......................... 18,789 15,636 78,635
Purchase of premises and equipment..................................... (7,388) (5,721) (4,382)
----------- ----------- -----------
Net cash provided (used) by investing activities.................... $ (134,790) $ (151,069) $ 71,670
----------- ----------- -----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits.................................... $ 116,319 $ 144,066 $ (294,211)
Net increase (decrease) in short-term borrowings....................... 69,932 (55,505) 11,901
Net decrease in long-term debt......................................... (565) (579) (1,907)
Redemption of long-term debt........................................... (86,000) - -
Proceeds from issuance of common stock................................. 343 364 182,241
Cash dividends paid.................................................... (19,224) (19,213) (14,871)
----------- ----------- -----------
Net cash provided (used) by financing activities.................... $ 80,805 $ 69,133 $ (116,847)
----------- ----------- -----------
NET INCREASE IN CASH AND DUE FROM BANKS $ 3,203 $ 44,738 $ 30,122
Cash and due from banks at beginning of year............................... 197,557 152,819 122,697
----------- ----------- -----------
CASH AND DUE FROM BANKS AT END OF YEAR..................................... $ 200,760 $ 197,557 $ 152,819
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (refunded) during the year for:
Interest.......................................................... $ 182,413 $ 178,929 $ 193,301
Income taxes...................................................... 19,877 (31,870) (3,281)
Non-cash investing and financing activities:
Transfer of loans to other real estate owned...................... 4,901 25,444 34,153
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Sumitomo Bank of California (the Bank) has conducted the business of a
commercial bank since 1952. The Bank operates forty-seven offices in California,
primarily centered in the San Francisco and Los Angeles metropolitan areas. The
Bank provides a full range of banking services, primarily to consumers and small
and medium size businesses.
The Bank's majority shareholder is The Sumitomo Bank, Limited (SBL), which
owns 85.2% of the Bank's common shares outstanding as of December 31, 1997. In
December 1997, SBL announced the possibility of selling its ownership interest
in the Bank and certain other unrelated U.S. banking operations.
The accounting and reporting policies and practices of the Bank conform
with generally accepted accounting principles and general practices within the
banking industry. A description of those accounting policies and practices of
particular significance follows.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles 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.
INVESTMENT SECURITIES - The Bank classifies investment securities in three
categories: held-to-maturity, available-for-sale and trading. Trading securities
are bought and held principally for the purpose of selling in the near term.
Held-to-maturity securities are those securities which the Bank has the intent
and ability to hold until maturity. All other securities not included in trading
or held-to-maturity are classified as available-for-sale. In 1997 and 1996, the
Bank had no trading securities.
Investment securities classified as held-to-maturity are reported at cost,
adjusted for amortization of premium and accretion of discount. Investment
securities classified as available-for-sale are reported at fair value with the
change in unrealized gains and losses, net of tax, included in shareholders'
equity.
Premium or discount is amortized or accreted over the life of the related
investment security on a straight-line basis, which approximates the effective
interest method. Realized gains and losses or writedowns in carrying value of
securities are computed on the specific identification method.
LOANS - Interest income is accrued principally on a simple interest basis.
Interest income on discounted loans is deferred and subsequently credited to
income by the sum-of-months digits method which approximates the effective
interest method over the outstanding period of the related loans.
LOAN FEES - Origination fees and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of the
loan as a yield adjustment.
ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses is maintained at a
level considered adequate to provide for estimated probable credit losses
resulting from loans and leases, included "impaired" loans as defined below. To
determine the level of the allowance required, management,
-5-
<PAGE>
including the Loan Administration Division and the Loan Examination Department,
performs continuous credit reviews of the loan portfolio, considering (1)
historical credit loss experience; (2)the Bank's internal loan grading system
and estimates of potential loss exposure; (3) trends in delinquent, nonaccrual
and impaired loans; (4) concentration of credits; and (5) present and
prospective economic conditions. Changes in the allowance can result from
changes in economic events or changes in the creditworthiness of the borrowers.
The allowance is reviewed periodically, and as adjustments become necessary,
they are charged to operations in the period that they become known.
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
(SFAS 114) and Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosure" (SFAS
118). Under these statements, a loan is impaired when it is probable that the
Bank will be unable to collect all amounts due according to the contractual
terms of the loan agreement. SFAS 114 requires that impaired loans be measured
based on the present value of expected cash flows discounted at the loan's
effective interest rate, or alternatively at the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent. When
the measure of the impaired loan is less than the recorded investment in the
loan, the impairment is recorded through a valuation allowance.
The Bank had previously measured the allowance for credit losses using
methods similar to those prescribed by SFAS 114. As a result of adopting these
statements, no additional allowance for credit losses was required as of January
1, 1995.
NONACCRUAL LOANS - Loans on which the accrual of interest has been discontinued
are designated as nonaccrual loans. Loans are placed on nonaccrual status when
reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by 90 days or more with
respect to interest or principal. When loans are 90 days past due, but in
management's judgment are well secured and in the process of collection, they
are not classified as nonaccrual. When a loan is placed on nonaccrual status,
all interest previously accrued but not collected is reversed. Income on
nonaccrual loans is recognized only to the extent that cash is received and
where the future collection of principal is probable. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation expense is computed principally
using the straight-line method over the estimated useful life of each asset.
Bank premises are depreciated over 40 years and equipment over 3 to 10 years.
Leasehold improvements are amortized over the lesser of the terms of the
respective leases or the estimated useful lives.
OTHER REAL ESTATE OWNED - Other real estate owned (OREO) consists of properties
acquired by the Bank through foreclosure and is carried in other assets on the
balance sheet at the lower of cost or net realizable value. At the time of
foreclosure, the value of the underlying loan is written down to the net
realizable value (fair value of the property to be acquired reduced by estimated
disposition costs) by a charge to the allowance for credit losses, when
necessary. Any subsequent reductions in the property's net realizable value are
recorded as a valuation allowance with a charge to other expense in the
statement of income along with OREO related operating costs and losses on
disposition. OREO income and net gains on disposition are recorded in other
operating income.
-6-
<PAGE>
FOREIGN CURRENCY TRANSLATIONS - Foreign currency positions are translated into
U.S. Dollars using rates of exchange at the reporting date. Gains or losses
arising from translation are included in other income.
DERIVATIVE FINANCIAL INSTRUMENTS - The Bank uses derivative financial
instruments, which include foreign exchange contracts offered to its customers
and those traded for its own account. The Bank also employs interest rate swap
agreements to enhance risk management activities.
Derivative financial instruments used in asset and liability management
activities, principally interest rate swaps, are required to meet specific
criteria. Such interest rate swaps, designated as hedging derivatives, are
linked to and adjust the interest rate sensitivity of a specific asset,
liability, firm commitment, or anticipated transaction or a specified pool of
similar transactions, and have the effect of reducing the Bank's structural
interest rate risk at inception. Interest rate swaps that do not meet these
criteria are designated as derivatives used in trading activities.
Derivative instruments used for trading purposes, primarily foreign
exchange contracts, are recorded at fair value at the reporting date. Realized
and unrealized changes in fair values are recognized as foreign exchange profits
in other income in the period in which changes occur.
Interest rate swaps used to hedge certain fixed interest-rate sensitive
assets and liabilities are accounted for primarily on an accrual basis. Amounts
to be paid or received under interest rate swap agreements are recognized as
interest income or expense, as appropriate, in the periods in which they accrue.
Gains and losses related to contracts that are effective hedges are deferred and
recognized as income in the same period as gains and losses on the hedged item.
Gains and losses on early terminations of contracts that modify the
characteristics of specified assets or liabilities are deferred and amortized as
an adjustment to the yield of the hedged assets or liabilities over their
remaining lives.
INCOME TAXES - The Bank uses the liability method of accounting for income
taxes. Under this method, the net deferred tax liability or asset is determined
based on the tax effects of the differences between the book and tax bases of
the various balance sheet assets and liabilities. Under this method, the
computation of the net deferred tax liability or asset gives current recognition
to changes in tax laws and rates.
RECLASSIFICATIONS - Certain amounts in prior years' financial statements have
been reclassified to conform with the current financial statement presentation.
These reclassifications had no impact on previously reported net income or
shareholders' equity.
-7-
<PAGE>
2. INVESTMENT SECURITIES
The Amortized cost and fair value of investment in debt securities were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES:
U.S. TREASURY...................................... $ 110,307 $ 291 $ - $ 110,598
U.S. GOVERNMENT AGENCIES........................... 40,000 - 12 39,988
-------------- -------------- -------------- ----------------
TOTAL........................................ $ 150,307 $ 291 $ 12 $ 150,586
-------------- -------------- -------------- ----------------
AVAILABLE-FOR-SALE SECURITIES:
U.S. TREASURY...................................... $ 19,987 $ 69 $ - $ 20,056
U.S. GOVERNMENT AGENCIES........................... 356,038 267 574 355,731
-------------- -------------- -------------- ----------------
TOTAL........................................ $ 376,025 $ 336 $ 574 $ 375,787
-------------- -------------- -------------- ----------------
TOTAL INVESTMENT SECURITIES........................ $ 526,332 $ 627 $ 586 $ 526,373
============== ============== ============== ================
December 31, 1996
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- ----------------
Held-to-maturity securities:
U.S. Treasury $ 159,403 $ 298 $ $ 159,701
U.S. government agencies 71,709 76 - 71,785
States and political subdivisions 81,188 62 - 8,250
-------------- -------------- -------------- ----------------
Total $ 249,300 $ 436 $ $ 239,736
-------------- -------------- -------------- ----------------
Available-for-sale securities:
U.S. Treasury $ 19,967 $ 89 $ $ 20,056
U.S. government agencies 291,148 239 1,359 290,028
-------------- -------------- -------------- ----------------
Total $ 311,115 $ 328 $ 1,359 $ 310,084
-------------- -------------- -------------- ----------------
Total investment securities $ 550,415 $ 764 $ 1,359 $ 549,820
============== ============== ============== ================
</TABLE>
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<PAGE>
The amortized cost and fair value of debt securities by contractual
maturity are shown in the following table. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
DECEMBER 31, 1997
-----------------------------------
AMORTIZED FAIR
COST VALUE
--------------- ---------------
(In thousands)
Held-to-maturity securities:
Due in one year or less.................. $ 90,986 $ 91,036
Due after one year through five years.... 59,321 59,550
--------------- ---------------
$ 150,307 $ 150,586
--------------- ---------------
Available-for-sale Securities:
Due in one year or less.................. $ 19,987 $ 20,056
Due after one year through five years.... 186,211 186,288
Due after five years through ten years... 36,799 36,550
Due after ten years...................... 133,028 132,893
--------------- ---------------
$ 376,025 $ 375,787
--------------- ---------------
Total................................. $ 526,332 $ 526,373
=============== ===============
During 1997, sales of investment securities resulted in a $49,000 realized
gain. During 1996 and 1995, there were no sales of investment securities. Gross
realized gains from securities that were called or sold prior to maturity were
$61,000, $0, and $168,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Investment securities carried at $130.3 million and $149.1 million as of
December 31, 1997 and 1996, respectively, were pledged to secure trust deposits
and other public deposits as required by law.
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The loan portfolio at December 31, 1997 and 1996 consisted of the following
(in thousands):
1997 1996
--------------- ---------------
Commercial $ 1,283,931 $ 997,371
Real estate-construction................... 3,401 8,182
Real estate-residential.................... 1,091,490 845,399
Real estate-commercial and other........... 1,343,352 1,697,603
Installment................................ 49,660 53,096
Lease financings........................... 38,834 31,154
Foreign.................................... 81,195 26,707
--------------- ---------------
Total............................. $ 3,891,863 $ 3,659,512
=============== ===============
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<PAGE>
The activity in the allowance for credit losses during the years ended
December 31, 1997, 1996 and 1995 was as follows (in thousands):
1997 1996 1995
--------- --------- ---------
Balance at beginning of year...... $126,171 $122,583 $120,284
Provision for credit losses....... 16,500 20,000 209,300
Recoveries........................ 13,171 16,143 9,169
Charge-offs....................... (39,089) (32,555) (216,170)
--------- --------- ---------
Balance at year end............... $116,753 $126,171 $122,583
========= ========= =========
In each of the past three years, the Bank has disposed of certain loans,
primarily commercial real estate related loans. In 1997, loan sales totaled
approximately $108.8 million resulting in charge-offs of $23.5 million. In 1996,
loan sales were approximately $20.8 million resulting in $0.4 million in
charge-offs. During 1995, the Bank disposed of, through a series of asset sales
and charge-offs, $467.7 million of loans and $79.3 million of OREO. Net losses
on these sales and charge-offs totaled $229.0 million. A total of $187.0 million
of these losses was recorded as a charge-off to the allowance for credit losses.
A total of $37.9 million of OREO writedowns and expenses was recorded in other
expense in the statement of income. The remaining $4.1 million of interest
charge-offs was recorded as a reduction of interest income.
As of December 31, 1997 and 1996, the Bank's recorded investment in
impaired loans and related valuation allowance calculated under SFAS 114 were as
follows (in thousands):
1997
---------------------------------
RECORDED VALUATION
INVESTMENT ALLOWANCE
------------ ------------
Impaired loans:
Valuation allowance required........... $ 59,460 $ 15,764
No valuation allowance required........ 55,109 -
------------ -------------
Total loans........................ $ 114,569 $ 15,764
============ ============
1996
---------------------------------
Recorded Valuation
Investment Allowance
------------ ------------
Impaired loans:
Valuation allowance required........... $ 114,625 $ 28,545
No valuation allowance required........ 52,386 -
------------ -------------
Total loans........................ $ 167,011 $ 28,545
============ ============
This valuation allowance at December 31, 1997 and 1996 is included in the
allowance for credit losses shown above for the respective period. The average
recorded investment in impaired loans was $192.7 million, $251.3 million and
$256.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Interest payments received on impaired loans are recorded as
interest income unless collection of the remaining recorded investment is
doubtful at which time payments received are recorded
-10-
<PAGE>
as reductions of principal. The Bank recognized interest income on impaired
loans of $16.0 million, $20.4 million and $15.3 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
4. NONPERFORMING ASSETS
The Bank's nonaccrual loans at December 31, 1997 and 1996 were comprised of the
following (in thousands):
1997 1996
---------- ---------
Loans secured primarily by real estate............ $ 7,287 $ 24,535
Commercial........................................ 582 -
---------- ---------
Total loans.................................. $ 7,869 $ 24,535
========== =========
These nonaccrual loans were classified as impaired as of December 31, 1997
and 1996 and included in the recorded investment in impaired loans for the
respective year as shown in Note 3.
Previously accrued but uncollected interest related to nonaccrual loans of
$2.4 million, $2.5 million, and $8.2 million was reversed against interest
income during 1997, 1996 and 1995, respectively. Additional interest of $3.2
million, $5.0 million and $7.0 million, related to nonaccrual loans, was due but
not accrued as income during 1997, 1996 and 1995, respectively. Loans 90 days
past due not on nonaccrual were $4.0 million as of December 31, 1997 and $7.1
million as of December 31, 1996. Interest income accrued but not collected on
such loans totaled $0.2 million in each of the years 1997, 1996 and 1995.
The carrying value of OREO, net of the related valuation allowance of $10.2
million and $11.4 million, was $6.0 million and $18.0 million as of December 31,
1997 and 1996, respectively. During 1997 and 1996, the Bank incurred $0.9
million and $2.2 million, respectively, of OREO net operating costs, which is
recorded as other operating expense in the statement of income. See Note 3
regarding sales and writedowns of OREO during 1995.
5. BANK PREMISES AND FACILITIES MANAGEMENT
Bank premises and equipment were composed of the following (in thousands):
DECEMBER 31, 1997
---------------------------------------------
ACCUMULATED
DEPRECIATION/ NET
COST AMORTIZATION BOOK VALUE
----------- ------------- -----------
Land.............................. $ 4,112 - $ 4,112
Buildings......................... 26,064 17,113 8,951
Furniture and equipment........... 46,882 34,729 12,153
Leasehold improvements............ 25,188 18,764 6,424
----------- ------------- -----------
Total........................ $ 102,246 $ 70,606 $ 31,640
=========== ============= ===========
-11-
<PAGE>
December 31, 1996
---------------------------------------------
Accumulated
Depreciation/ Net
Cost Amortization Book Value
----------- ------------- -----------
Land.............................. $ 4,112 - $ 4,112
Buildings......................... 2,598 16,283 9,615
Furniture and equipment........... 41,485 31,857 9,628
Leasehold improvements............ 24,363 17,457 6,906
----------- ------------- -----------
Total........................ $ 95,858 $ 65,597 $ 30,261
=========== ============= ===========
Total rent expense for premises, other rent expense, and depreciation and
amortization expense charged to operating expense were as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Rent expense of premises..................................... $ 8,899 $ 8,168 $ 7,883
Less: Rental income of premises............................. 693 715 716
-------- -------- --------
Net rent expense of premises....................... 8,206 7,453 7,167
======== ======== ========
Other rent expense (primarily for equipment)................. $ 1,592 $ 1,696 $ 1,663
======== ======== ========
Depreciation and amortization of premises and equipment...... $ 6,008 $ 5,550 5453
======== ======== ========
</TABLE>
A schedule for future minimum operating lease payments, together with the
present value of the net minimum lease payments for capital leases, as of
December 31, 1997, follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ---------
<S> <C> <C>
Year ending December 31,:
1998................................................................ $ 744 $ 8,490
1999................................................................ 560 8,140
2000................................................................ 472 6,617
2001................................................................ 422 5,239
2002................................................................ 422 4,944
Thereafter............................................................. 1,505 9,360
--------- ---------
Total minimum lease payments........................................... $ 4,125 $ 42,790
=========
Less: Amount representing interest..................................... 1,168
Present value of net minimum capital lease payments.................... $ 2,957
=========
Minimum rental income due in the future under non-cancelable
subleases, not included in the above net minimum lease payments..... $ 44 $ 8
========= =========
</TABLE>
Minimum lease payments do not include future contingent rents which may be
paid under certain property leases on the basis of a percentage change in the
consumer price index.
-12-
<PAGE>
Effective January 1998, the Bank contracted with a third party provider
("Servicer") whereby the Servicer will manage the Bank's technology operations
(including applications development and maintenance, desktop and distributed
systems management, voice and data communications, data center management, and
item processing) over the next 10 years. Minimum fees payable to the Servicer
under the contract average approximately $12.3 million annually. This contract
also provides for annual adjustments in fees paid for changes in the level of
service provided and certain penalties to be charged to the Bank in the event of
termination of the contract prior to 2003.
In addition to the activities described above, the Servicer will also
provide assistance to the Bank in addressing Year 2000 issues related to certain
existing systems. Estimated fees payable to the Servicer under the contract for
Year 2000 remediation activities are approximately $8.3 million over the next
two years.
6. TIME DEPOSITS
The aggregate amount of time deposit accounts, each with a minimum
denomination of $100,000, was approximately $1,161.1 million and $922.3 million
at December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of time deposits were as
follows (in thousands):
Scheduled
Maturities
------------
1998................................... $ 2,465,957
1999................................... 100,423
2000................................... 27,427
2001................................... 8,742
2002 and thereafter.................... 10,556
------------
Total............................. $ 2,613,105
============
7. INTEREST ON DEPOSITS
The detail of interest expense on deposits were as follows (in thousands):
Year Ended December 31,
-------------------------------------
1997 1996 1995
--------- --------- ----------
Savings Deposits......................... $ 5,828 $ 4,792 $ 5,034
Interest-bearing transaction accounts.... 19,465 17,735 16,927
Time deposits under $100,000............. 84,879 92,730 87,041
Time deposits of $100,000 or more........ 53,972 40,601 40,121
Foreign office deposits.................. 5,729 5,303 25,938
--------- --------- ----------
Total............................... $ 169,873 $ 161,161 $ 175,061
========= ========= ==========
-13-
<PAGE>
8. SHORT-TERM BORROWINGS
The following table shows the distribution of the Bank's short-term borrowings
and the weighted average interest rates thereon at the end of each of the last
two years. Also provided are the maximum amount of borrowings, the average
amount of borrowings and the weighted average interest rate during 1997 and 1996
(dollar amounts in thousands):
Federal Funds
Purchased and Other Short-
Repurchase Term
Agreements Borrowings
------------- ------------
Year ending December 31,:
1997......................................... $ 93,100 $ 25,031
1996......................................... 39,345 8,854
Weighted average interest rate at year end:
1997......................................... 5.54% 3.42%
1996......................................... 5.96 7.24
Maximum amount outstanding at any month's end:
1997......................................... $ 103,310 $ 49,941
1996......................................... 98,270 29,483
Average amount outstanding during the year:
1997......................................... $ 57,360 $ 10,945
1996......................................... 55,940 7,717
Weighted average interest rate during the year:
1997......................................... 5.47% 4.36%
1996......................................... 5.33 5.28
Information concerning the Bank's repurchase agreements is summarized as follows
(in thousands):
1997 1996
------- -------
Average balance during the year................... $ - $ 553
Maximum month-end balance during the year......... - -
9. LONG-TERM DEBT
The following is a listing of the long-term notes, debentures, mortgages
and capital leases of the Bank (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Luxembourg Franc note, due 3/24/98............................... $ 22,577 $ 22,577
Capital note, floating rate, due 12/21/2000...................... - 25,000
Capital note, floating rate, due 5/15/2001....................... - 21,000
Capital note, floating rate, due 5/15/2002....................... - 40,000
Capital note, floating rate, due 9/4/2002........................ 40,000 40,000
Obligations under capital leases and mortgages (Note 5).......... 2,957 3,522
Revolving line of credit with The Sumitomo Bank, Ltd............. - -
-------- --------
Total....................................................... $ 65,534 $152,099
======== ========
</TABLE>
-14-
<PAGE>
The Luxembourg Franc (LCF) note of 750,000,000 LCF (U.S. $22,576,760) was
issued with a 9.00% fixed interest rate and is due March 24, 1998. At the time
of the issuance, the Bank entered into an Interest Rate and Currency Exchange
Agreement (Cross-currency Swap) with Sumitomo Finance International plc (SFI) to
hedge the interest rate and currency exchange risks on this note. Under the
Cross-currency Swap, SFI pays the 9.00% fixed-rate interest semi-annually on a
principal note of 750,000,000 LCF. The principal is paid upon maturity. The Bank
pays a floating rate of six-month LIBOR plus 0.481% semi-annually on a principal
denominated in U.S. Dollars of $22,576,760. The principal is paid upon maturity.
In accordance with generally accepted accounting principles, the Bank recorded
the note in U.S. Dollars in the amount of $22,576,760. Interest expense is
recorded net of the Cross-currency Swap impact. At December 31, 1997, the rate
of net interest paid was 6.29%.
The $25,000,000 floating rate subordinated capital note, due December 21,
2000, paid interest as adjusted quarterly at the three-month LIBOR rate plus
0.55%. On December 22, 1997, the Bank redeemed the note at carrying value.
The $21,000,000 floating rate subordinated capital note, due May 15, 2001,
paid interest at the appropriate LIBOR rate plus 0.65%, which was adjustable
monthly, quarterly, semi-annually or annually at the Bank's option. On December
16, 1997, the Bank redeemed the note at carrying value.
The two $40,000,000 floating rate subordinated capital notes are due May
15, 2002 and September 4, 2002, respectively. Interest on the notes is paid and
adjusted semi-annually at the six-month LIBOR rate plus 0.70% and 0.85%,
respectively. On November 17, 1997, the Bank redeemed the note due May 15, 2002
at carrying value. At December 31, 1997, the rate on the note due September 4,
2002 was 6.69%. The note is subject to redemption at the Bank's option.
The notes are subordinated to the claims of all depositors and creditors of
the Bank.
The Bank has secured a $100.0 million revolving line of credit with the San
Francisco Branch of SBL. The interest rate is SBL's prime rate. The Bank also
pays an annual commitment fee of 0.20% on the unused portion of the line of
credit. The line of credit is renewed annually. The current line of credit will
expire February 22, 1998, but is expected to be renewed. During 1997 and 1996,
the Bank had no outstandings on this line of credit.
10. SHAREHOLDERS' EQUITY
In March 1993, the Bank issued 750,000 shares of noncumulative preferred
stock (the Preferred Stock). Holders of the Preferred Stock are entitled to a
quarterly noncumulative dividend at a rate of 8.125% per annum, if and when
declared by the Board of Directors. The Preferred Stock is not redeemable prior
to April 30, 1998.
As of December 31, 1997, the Bank had 25,000,000 shares of common stock
authorized, 16,419,733 shares outstanding. The Bank had 25,000,000 common shares
authorized, 16,408,570 shares outstanding on December 31, 1996. SBL's ownership
percentage at December 31, 1997 was approximately 85.2%.
Holders of the Bank's common stock who elect to participate in the Bank's
Dividend Reinvestment Plan reinvest their dividends in the Bank's common stock.
During 1997, 1996 and 1995, 11,163 shares, 14,674 shares, and 118,463 shares,
respectively, were issued by the Bank under the Dividend
-15-
<PAGE>
Reinvestment Plan. The decrease in shares issued from 1995 to 1996 was due to
SBL's decision to discontinue its participation in the Dividend Reinvestment
Plan.
Dividends on the Bank's common stock will be paid if and when declared by
the Board of Directors out of undivided profits. The Bank is regulated by the
Federal Deposit Insurance Corporation (FDIC) and the State of California
Department of Financial Institutions (DFI). California banking laws limit the
Bank's ability to pay dividends to the lesser of (1) undivided profits or (2)
net income for the last three fiscal years, less cash distribution paid during
such period, without prior consent of the DFI.
11. REGULATORY CAPITAL MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and 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 Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets and of Tier I capital
to average assets. Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation 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 I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------------------
TO BE "WELL
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ---------------------------- -------------------------
(Dollar amounts in thousands) Amount Ratio Amount Ratio Amount Ratio
--------- -------- ---------- ---------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets)............ $ 575,213 14.07% $ 327,128 greater than $ 408,910 greater than or
or equal to 8.0% equal to 10.0%
Tier I capital (to risk-weighted assets)........... 491,289 12.01 163,564 greater than 245,346 greater than or
or equal to 4.0% equal to 6.0%
Tier I capital (to average assets)-Leverage ratio.. 491,289 9.50 206,771 greater than 258,464 greater than or
or equal to 4.0% equal to 5.0%
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------------------
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ---------------------------- -------------------------
(Dollar amounts in thousands) Amount Ratio Amount Ratio Amount Ratio
--------- -------- ---------- ---------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets)............ $ 615,180 16.72% $ 294,363 greater than $ 367,954 greater than or
or equal to 8.0% equal to 10.0%
Tier I capital (to risk-weighted assets)........... 451,881 12.28 147,182 greater than 220,772 greater than or
or equal to 4.0% equal to 6.0%
Tier I capital (to average assets)-Leverage ratio.. 451,881 9.27 195,087 greater than 243,859 greater than or
or equal to 4.0% equal to 5.0%
</TABLE>
12. OTHER OPERATING INCOME AND OTHER OPERATING EXPENSE
The information related to other operating income and other operating
expense contained in the tables shown in the Other Operating Income and Other
Operating Expense sections of Management's Discussion and Analysis of Earnings
and Financial Position on pages 9 and 10 of this report are incorporated by
reference.
13. TRADING ACTIVITIES
The Bank enters into a variety of derivative financial instruments in its
trading activities. Derivatives used by the Bank for trading purposes included
foreign exchange contracts, and interest rate futures and options contracts. The
following table represents the results of the Bank's trading activities,
summarized by category of instrument. Net trading gains (losses) are included in
the statements of income as part of other operating income.
Year Ended December 31,
-------------------------------------
(In thousands) 1997 1996 1995
------------ ----------- ----------
Interest rate futures/options........ $ (4) $ (119) $ (44)
Foreign exchange contracts........... 1,046 1,125 917
14. INCOME TAXES
The components of income tax expense (benefit) were as follows (in
thousands):
Year Ended December 31,
-------------------------------------
(In thousands) 1997 1996 1995
------------ ----------- ----------
Current tax expense (benefit):
Federal $ 20,614 $ 3,608 $ (33,122)
State (1,940) 1,000 1,000
Deferred tax expense (benefit):
Federal 1,710 20,668 (23,889)
Total income tax expense (benefit) $ 20,384 $ 25,276 $ (56,011)
-17-
<PAGE>
Not included in the preceding table are deferred taxes (benefits) related
to changes in net unrealized gains (losses) on available-for-sale securities
that are recorded directly as an adjustment to shareholders' equity. These taxes
(benefits) of $0.3 million, $(0.9) million, and $1.8 million in 1997, 1996 and
1995 respectively, related to changes in value of the available-for-sale
securities that were recorded directly to shareholders' equity.
Although not affecting the total expense, current income tax payments
subsequent to December 31, 1997 may differ from the amounts shown as current, as
a result of final determinations of the timing of certain income and deductions.
Deferred taxes arise from temporary differences in the recognition of
revenues and expenses for tax and financial reporting purposes. The principal
temporary differences affecting deferred taxes are differences in accounting for
credit losses, loan fees, OREO writedowns and state franchise tax.
The components of the Bank's federal net deferred tax assets as of
December 31, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Federal deferred tax assets:
Allowance for credit losses............................... $(40,864) $(44,160)
Net operating loss and credit carryforward................ - (199)
Taxable loan fee income................................... (1,165) (1,222)
OREO writedowns........................................... (4,295) (4,592)
State franchise tax....................................... (1,382) (2,787)
Depreciation.............................................. (1,443) (1,233)
Net unrealized losses on available-for-sale securities.... (83) (361)
Other..................................................... (6,735) (5,126)
--------- ---------
Total federal deferred tax assets................ $(55,967) $(59,680)
--------- ---------
Federal deferred tax liabilities:
Equipment leasing......................................... 1,738 2,788
Retirement benefits....................................... 551 1,177
Other..................................................... 891 940
--------- ---------
Total federal deferred tax liabilities........... $3,180 $ 4,905
--------- ---------
Net federal deferred tax assets......... $(52,787) $(54,775)
========= =========
</TABLE>
The following table presents an analysis of the effective tax rates
(dollar amounts in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1997 1996 1995
---------------------- -------------------------- ---------------------------
Amount Rate Amount Rate Amount Rate
--------- ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax........................... $ 21,550 35.0% $ 24,631 35.0% $ (57,019) (35.0)%
Net effects of:
State income taxes, net
of federal income tax benefit........... (1,261) (2.0) 650 0.9 650 0.4
Tax-exempt interest income................ (77) (0.1) (238) (0.3) (454) (0.3)
Other..................................... 172 0.2 233 0.3 812 0.5
--------- ----------- ------------ ------------ ------------ -------------
Effective tax rate 20,384 33.1% 25,276 35.9% (56,011) (34.4)%
========= =========== ============ ============ ============ =============
</TABLE>
-18-
<PAGE>
Under the California tax law, the Bank is required to compute its
California tax by apportioning a share of the Sumitomo group's total income to
California. Consequently, the California tax may not be proportional to the
Bank's California income.
The reduction in total income tax expense in 1997 related to state income
taxes is due to a revision of the Bank's current and prior years estimated
California income tax liability.
15. RETIREMENT AND PROFIT SHARING PLANS
The Bank's Pension Plan (the Plan) provides for employees' retirement at
age 65, with benefits based on years of service and past compensation. Pension
costs are accrued as actuarially determined under the Projected Unit Credit Cost
Method.
The Bank makes annual contributions to fund the current service costs and
to amortize the unfunded prior service liability of the Plan to the extent that
the contributions are generally within the range of the minimum required and the
maximum deductible contributions.
In determining the projected benefit obligation, the weighted average
assumed discount rate used was 7.0% and 7.5% in 1997 and 1996, respectively,
while the rate of increase on future salary levels was 4.5% for both 1997 and
1996. The expected long-term rate of return on assets used in determining net
periodic pension cost was 8.5% for both 1997 and 1996.
The following table sets forth the Plan's funded status at December 31,
1997 and 1996 (in thousands):
December 31,
----------------------------------
1997 1996
------------- ------------
Actuarial present value of
benefit obligations:
Vested............................... $28,279 $20,045
Nonvested............................ 772 536
------------- ------------
Total accumulated
benefit obligations............ 29,051 20,581
Effect of projected future
compensation levels............ 11,153 8,344
------------- ------------
Projected benefit obligation......... 40,204 28,925
Plan assets at fair value................ 27,596 22,481
------------- ------------
Projected benefit obligation
in excess of Plan assets............ (12,608) (6,444)
Unamortized transition obligation........ 150 250
Unrecognized net loss.................... 10,854 6,802
Unrecognized prior service cost.......... 149 572
------------- ------------
Prepaid (accrued) pension costs.......... $(1,455) $1,180
============= ============
The Plan's assets consist primarily of insurance contracts with the
Prudential Asset Management Company, Inc.
-19-
<PAGE>
The net periodic pension cost for 1997, 1996 and 1995 included the
following components (in thousands):
1997 1996 1995
--------- ---------- ---------
Service cost.......................... $2,146 $1,797 $1,330
Interest cost on projected
benefit obligations.................. 2,420 1,954 1,899
Actual return on Plan assets,
net of deferrals..................... (4,111) (2,177) (3,159)
Net amortization...................... 3,230 1,424 1,801
Settlement cost....................... - - 794
--------- ---------- ---------
Net periodic pension cost............. $3,685 $2,998 $2,665
During 1995, a settlement cost of $0.8 million related to the Bank's 1994
Early Retirement program was recorded as pension cost.
The Bank also has a 401(k) Profit Sharing and Retirement Savings Plan
(Savings Plan). The Savings Plan is a long-term savings and investment program
which allows employees to save up to 8% of their before-tax base pay. The Bank
matches at least 50% of employees' contributions up to 6% of their base pay. The
amount charged to operating expenses under the provisions of the Savings Plan
was $1.4 million for each of the years ended December 31, 1997, 1996 and 1995,
respectively.
In January 1998, the Bank adopted a severance benefit program designed as
an "employee welfare benefit plan" as defined by the Employee Retirement Income
Security Act of 1974 as amended (ERISA).
The severance program was established to provide financial assistance to
eligible employees in the event the Bank is sold and corresponding jobs are
eliminated. Severance payments are based upon the eligible employees' years of
service and base salary.
16. OTHER POST-RETIREMENT BENEFITS
Employees retiring from the Bank upon attaining age 65 who have rendered at
least 10 continuous years of service to the Bank are entitled to post-retirement
health care, life insurance and dental benefit plan coverage. These benefits are
subject to deductibles, copayment provisions and other limitations. The Bank may
amend or change the plans periodically.
The following table sets forth the accumulated post-retirement benefit
obligation as of December 31, 1997 and 1996, respectively (in thousands):
1997 1996
------------ -------------
Accumulated post-retirement
benefit obligation (APBO):
Retirees................................. $ (6,270) $(5,489)
Active employees......................... (8,175) (6,716)
------------ -------------
Total APBO............................ (14,445) (12,205)
------------ -------------
Unamortized transition obligation............ 7,053 7,858
Unamortized net gain......................... (3,411) (5,104)
------------ -------------
Net post-retirement benefit liability........ (10,803) (9,451)
============ =============
-20-
<PAGE>
The net periodic post-retirement benefit cost for 1997, 1996, and 1995
included the following components (in thousands):
1997 1996 1995
---------- ---------- ----------
Service cost........................ $ 582 $ 558 $ 501
Interest cost....................... 960 899 899
Amortization of
transition obligation............. 549 549 549
Net amortization.................... (255) (206) (163)
---------- ---------- ----------
Net periodic post-retirement
benefit cost...................... $ 1,836 $ 1,800 $ 1,786
========== ========== ==========
For measurement purposes, a 9.0%, 7.0% and 6.5% annual increase in the cost
of covered medical indemnity, medical HMO and dental benefits, respectively, was
assumed for 1998. This rate is assumed to decrease gradually to 5%, 4% and 5%
for medical indemnity, medical HMO and dental benefit costs, respectively, by
2006, 2004, and 2002, respectively, and remain at that level thereafter. The
trend rate assumption has a significant effect on the expense reported. An
increase in the trend rate by 1% would increase the accumulated post-retirement
benefit obligation as of December 31, 1997 by $2.4 million and the aggregate of
the service and interest cost components of the net periodic post-retirement
benefit cost for the year then ended by $0.3 million. The weighted average
discount rate used in determining the accumulated post-retirement benefit
obligation was 7.5% in 1997 and 8.0% in 1996.
The Bank adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Post-Retirement Benefits Other Than Pensions" (SFAS
106) on January 1, 1993 and is amortizing the discounted present value of the
post-retirement benefit obligation on adoption date (transition obligation) over
a twenty-year period.
17. EARNINGS PER SHARE
The Bank adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128) on January 1, 1997. SFAS 128 replaces primary
and fully diluted earnings per share with basic and diluted earnings per share
calculations. Basic earnings per share is computed by dividing net income by the
weighted average shares outstanding. Diluted earnings per share is computed by
dividing net income by the weighted average shares outstanding including the
dilutive effects of potential common shares (e.g., stock options). The Bank has
no potentially dilutive common shares. As a result, the Bank has no diluted
earnings per share.
Basic earnings per share calculations result in the same earnings per share
previously reported by the Bank. The Bank's basic earnings per share for the
years ended December 31, 1997, 1996 and 1995 were as follows (in thousands,
except per share data):
Year Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- ----------
Net income (loss) $ 41,187 $ 45,099 $ (106,901)
Less: Preferred stock
dividends (6,094) (6,094) (6,094)
----------- ----------- ----------
Income available to
common shareholders 35,093 39,005 (112,995)
----------- ----------- ----------
Weighted average shares 16,415,444 16,402,130 12,833,986
Basic earnings per share $ 2.14 $ 2.38 $ (8.80)
=========== =========== ==========
-21-
<PAGE>
18. COMMITMENTS AND CONTINGENCIES
The Bank is a defendant in various actions. Management, after reviewing
these suits with counsel, believes that resolution of any pending litigation
will not materially affect the Bank's financial position or results of
operations.
In accordance with Federal Reserve Board regulations, the Bank is required
to maintain certain minimum balances with the Federal Reserve Bank based on the
types and amounts of deposits received. At December 31, 1997 and 1996, the Bank
was required to maintain balances of $39.9 million and $50.8 million,
respectively.
The Bank has a number of outstanding commitments to extend credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, total commitment amounts do not necessarily represent
future cash requirements.
The Bank is exposed to credit loss for the contract amount of the
commitment in the event of nonperformance by the borrower. The Bank uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments and evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank, is
based on management's credit evaluation of the borrower. Collateral held varies
but may include accounts receivable, inventory, property, plant and equipment,
and real property.
Standby letters-of-credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
borrowing arrangements. Most of these guarantees are short-term commitments
expiring in 1998 and are not expected to be drawn upon. The credit risk involved
in issuing letters-of-credit is essentially the same as that involved in
extending loan facilities to customers. The Bank holds collateral as deemed
necessary as described above.
The contract amounts of the credit commitments as of December 31, 1997
and 1996 were as follows (in thousands):
Contract Amount
---------------------------------------
1997 1996
--------------- -------------------
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit....... $ 1,181,554 $ 900,983
Standby letters-of-credit.......... 73,957 66,347
Financial guarantees............... 16,444 8,750
19. CONCENTRATIONS OF CREDIT RISK
Most of the Bank's lending activity is with customers located within
California. As of December 31, 1997, residential mortgage loans, at $930.4
million, or 23.9% of total loans, represented the Bank's largest concentration
of credit risk. This risk is mitigated, however, through geographic
-22-
<PAGE>
diversification throughout the state, low loan-to-value ratios, and the fact
that residential mortgage lending is generally considered to be among the least
risky sectors. The Bank's next largest loan concentration was loans to and
guarantees of obligations of companies in the hotel-motel industry, at $274.9
million, or 7.1% of total loans.
20. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. The Bank primarily
utilizes interest rate swaps and foreign exchange contracts to enhance risk
management activities. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheet.
In conjunction with this activity, the Bank adheres to well-defined market
and credit risk limits and control procedures. Counterparty risk is considered
in assessing the overall adequacy of the Bank's allowance for credit losses.
The Bank's balance sheet exposure for interest rate swaps and foreign
exchange contracts includes the amount of recognized gains in the market
valuation of those contracts. These amounts fluctuate as a function of changes
in interest rates and foreign exchange rates.
Foreign exchange contracts call for delayed delivery of foreign currency in
which the seller generally agrees to deliver the foreign currency at a specified
future date at a specified price. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
foreign currency rates.
The Bank enters into interest rate swap transactions as part of its asset
and liability management. The Bank typically becomes a principal in the exchange
of fixed and floating rate interest payment obligations with another party and,
therefore, is exposed to loss should one of the other parties default.
The following table represents the aggregate notional principal amounts of
the Bank's outstanding derivatives at December 31, 1997 and 1996, as well as the
estimated credit exposure on those contracts. The Table includes all contracts
with third parties, including dealer and end-user positions. Notional principal
amounts are used as a point of reference to monitor business activity. However,
notional amounts do not reflect amounts subject to market risk, credit risk, nor
to what extent positions may offset one another. The credit exposure of
derivatives is represented by the fair value of contracts with a positive fair
value at the reporting date.
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
(In thousands) NOTIONAL/ CREDIT Notional/ Credit
CONTRACT VALUE EXPOSURE Contract Value Exposure
-------------- --------- -------------- ---------
<S> <C> <C> <S> <C>
Foreign exchange contracts $71,660 $877 $106,301 $2,100
Interest rate swaps 204,000 3,768 249,000 1,685
</TABLE>
-23-
<PAGE>
21. BANKING RELATIONSHIPS WITH DIRECTORS, OFFICERS AND AFFILIATES
In the ordinary course of business, the Bank has granted loans to principal
officers and certain directors and the companies with which they are associated.
All such loans and commitments were made under terms which are consistent with
the Bank's normal lending policies. As of December 31, 1997 and 1996, the Bank
had loans outstanding to directors and principal officers and their affiliates
of $23,000 and $45,000 respectively.
The Bank also purchases and sells loans and participations in loans,
accepts deposits and enters into other banking transactions with the Bank's
parent, the Sumitomo Bank, Limited (SBL) and the parent's other financial
subsidiaries and affiliates. The Bank has numerous borrowers and depositors who
also maintain banking relationships with the parent and its affiliates. The
Bank's purchased participations and demand deposits from the parent and
affiliates did not constitute a material amount of the Bank's total assets
during 1997 and 1996. It is management's opinion that all such loans,
participations, deposits and other transactions were made at prevailing rates,
terms and conditions.
The Bank also receives fees and reimbursements from affiliates for placing
letters-of-credit and handling other banking transactions. Fees and
reimbursements received were $1.0 million, $1.3 million and $0.8 million for
1997, 1996 and 1995, respectively. Fees paid to affiliates were $0.2 million in
each of the years 1997, 1996 and 1995.
The Bank has secured a $100.0 million revolving line of credit with the San
Francisco Branch of SBL. Although this line has not been used, it provides the
Bank with an alternative source of temporary funds.
22. FOREIGN OPERATIONS
The Bank considers its foreign operations to represent business conducted
by its foreign office in Nassau and international transactions handled by its
administrative headquarters and certain branches. Assets are considered related
to foreign operations on the basis of the country of domicile of the obligor.
Deposit liabilities attributable to foreign operations are identified on the
basis of the location of the foreign office.
Because of the integrated nature of the Bank's international and domestic
operations, the distinction between international and domestic business is in
part arbitrary. Therefore, it is impossible to segregate precisely the
respective contributions to income from international and domestic operations.
Based on internal cost allocations, which involve estimates and certain
subjective assumptions, income and expenses primarily relating to funding and
overhead expenses are allocated between international and domestic operations.
Subject to the above limitations, presented below is an estimate of
international operations' contribution, in amounts and percentages, to the
Bank's operating revenue, income before taxes and net income.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------
(Dollar amounts in thousands) AMOUNT PERCENT Amount Percent Amount Percent
----------- --------- ---------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Total operating revenue $ 45,741 11.1% $ 29,533 7.4% $ 29,499 7.1%
Income before taxes 6,575 10.7 4,100 5.8 2,451 n/a
Net income 3,901 9.5 2,486 5.5 1,412 n/a
</TABLE>
-24-
<PAGE>
Income and expenses are not compiled on a country-by-country basis within the
Bank. Therefore, the Bank is unable to distribute total operating revenue,
income before taxes or net income to individual countries and geographical
areas.
The following table shows an analysis of the Bank's foreign loan portfolio,
all of which is handled by administrative headquarters and certain branches.
December 31,
---------------------------
(In thousands) 1997 1996
--------- ---------
Commercial............................. $ 15,090 $ 15,915
Real estate-commercial................. 63,333 10,104
Real estate-mortgage................... 2,772 688
--------- ---------
Total.................................. $ 81,195 $ 26,707
========= =========
The following table reflects a distribution of foreign loans and
interest-bearing deposits with other banks, classified by domicile of the
borrower; interbranch cash in foreign offices is excluded:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
----------------------------- ----------------------------
INTEREST-BEARING Interest-Bearing
DEPOSITS Deposits
(In thousands) LOANS WITH BANKS Loans With Banks
---------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Asia and the Pacific.................................. $ 64,653 $ 45,000 $ 9,328 $ 24,000
Europe................................................ 5,024 67,000 5,000 33,000
Caribbean, Central and South America.................. 1,518 - 1,464 -
North America......................................... 10,000 354,000 10,915 461,779
---------- ---------------- --------- ----------------
Total................................................. $ 81,195 $ 466,000 $ 26,707 $ 518,779
========== ================ ========= ================
</TABLE>
A geographic distribution of total foreign assets is not available, however,
interbranch cash, foreign loans and interest-bearing deposits with other banks
represented substantially all of such total foreign assets.
Deposits by type of depositor in the Bank's foreign office were as follows:
December 31,
---------------------------
(In thousands) 1997 1996
--------- ---------
Deposits of banks...................... $ 34,000 $ 22,000
Other deposits......................... 61,612 91,468
--------- ---------
Total $ 95,612 $ 113,468
========= =========
For years ended December 31, 1997, 1996 and 1995, average assets in foreign
offices to average total assets were 11.8%, 9.3% and 8.5%, respectively. Average
liabilities in foreign offices to average total liabilities for the comparable
periods were 2.5%, 2.2% and 9.6%, respectively.
-25-
<PAGE>
The Bank's foreign exchange transactions are conducted primarily in money
markets and encompass all types of spot and forward transactions in currencies
for which a general market exists. These activities are to provide a service to
regular banking customers and to meet the Bank's own needs arising from foreign
currency loan and deposit activities. Foreign exchange transactions resulted in
net gains of $2.2 million, $2.3 million and $2.3 million in 1997, 1996 and 1995,
respectively.
23. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods of assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. Cash and due from banks, interest-bearing deposits with other banks,
accrued interest receivable and payable, and short-term borrowings are
considered short-term instruments. For these short-term instruments, their
carrying amount approximates their fair value.
INVESTMENT SECURITIES
The fair value of investment securities is estimated using quoted market
prices, if available. If quoted market prices are not available, fair value is
estimated using quoted market prices for similar securities, adjusted for
differences between the quoted instruments and the instruments being valued. The
fair value of investment securities is presented in Note 2.
LOANS AND LEASE FINANCINGS
Fair values of loans and lease financings are estimated for portfolios of
loans with similar financial characteristics. Loans are categorized by type such
as commercial, real estate, installment, lease financing and foreign. These
categories include performing loans and nonperforming loans; performing loans
are further segmented into fixed and adjustable rate interest terms.
The fair value of performing loans is calculated by using a simulated
pricing model. The model calculates the fair value of the loans by discounting
the scheduled cash flows through maturity using current discount rates that
reflect the credit and interest rate risks inherent in the loan.
Fair value of significant nonperforming loans is valued on a loan-by-loan
basis. The factors considered in determining an appropriate allowance for credit
losses are also used to determine the effects of changes in credit risk when
estimating fair value. Assumptions regarding credit risk, cash flows and
discount rates are judgmentally determined using available market information
and specific borrower information.
-26-
<PAGE>
The following table presents information for loans (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
------------------------------ ------------------------------
CARRYING Carrying
AMOUNT FAIR VALUE Amount Fair Value
------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Commercial............................................ $ 1,283,931 $ 1,286,636 $ 997,371 $ 995,947
Real Estate:
Construction....................................... 3,401 3,395 8,182 8,184
Residential........................................ 1,091,490 1,108,357 845,399 879,942
Commercial and other............................... 1,343,352 1,347,775 1,697,603 1,677,227
Installment........................................... 49,660 49,756 53,096 $ 52,967
Lease financings...................................... 38,834 38,274 31,154 30,847
Foreign............................................... 81,195 81,994 26,707 26,686
Less:
Allowance for credit losses........................ (116,753) - (126,171) -
------------ ---------------- ----------- ----------------
Total........................................... $ 3,775,110 3,916,187 3,533,341 3,671,800
------------ ================ ----------- ================
Unearned income....................................... (12,038) (12,959)
------------ -----------
Net loans.......................................... $ 3,763,072 $3,520,382
============ ===========
</TABLE>
DEPOSITS
The fair value of deposits with no stated maturity, such as
non-interest-bearing demand deposits, savings and interest-bearing transaction
accounts, is equal to the amount payable on demand as of December 31, 1997 and
1996. The fair value of time deposits and foreign office deposits is estimated
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits with similar remaining
maturities.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
------------------------------ ------------------------------
CARRYING Carrying
(In thousands) AMOUNT FAIR VALUE Amount Fair Value
------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Non-interest-bearing deposits......................... $ 671,590 $ 671,590 $ 620,213 $ 620,213
Savings deposits...................................... 297,500 297,500 228,842 228,842
Interest-bearing transaction accounts................. 677,270 677,270 682,516 682,516
Time deposits under $100,000.......................... 1,451,956 1,448,598 1,671,389 1,670,582
Time deposits of $100,000 or more..................... 1,161,149 1,159,675 922,331 $ 923,127
Foreign office deposits............................... 95,612 95,473 113,468 113,498
------------ ---------------- ----------- ----------------
Total........................................... $ 4,355,077 $ 4,350,106 $4,238,759 4,238,778
============ ================ =========== ================
</TABLE>
LONG-TERM DEBT
As of December 31, 1997, the Bank had two floating-rate capital notes (see
Note 9) with various maturities. The interest rates of these notes are
periodically adjusted to market rates; therefore, the fair value of these notes
approximates the carrying amount.
-27-
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
For derivative financial instruments used in trading activities, the
estimated fair values are based on quoted market prices as well as pricing and
valuation models on a present value basis using current market information.
For derivative financial instruments used for trading purposes, the fair
value at December 31, 1997 and 1996, and on average during those years are as
follows (in thousands):
1997 1996
------------------ -------------------
YEAR END AVERAGE Year End Average
-------- ------- -------- -------
Foreign exchange contracts:
Assets.......................... $ 877 $951 $ 2,100 $ 1,371
Liabilities..................... 1,038 968 1,804 1,264
The fair value of interest rate swap agreements, used for hedging purposes,
is the estimated amount that the Bank would receive or pay to terminate the
agreements at the reporting date, taking into account current interest rates
and, when appropriate, the current creditworthiness of the swap counterparties.
The notional or contract amount and estimated fair value of interest rate
swap agreements are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
-------------------------- -------------------------
CONTRACT Contract
AMOUNT FAIR VALUE Amount Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest rate swap agreements:
Assets........................ $ 79,000 $ 3,768 $ 109,000 $ 1,685
Liabilities................... (125,000) (3,342) (140,000) (3,244)
</TABLE>
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS-OF-CREDIT, AND FINANCIAL
GUARANTEES
The fair value of commitments to extend credit is estimated using the fees
currently charged to others to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair value of guarantees and letters-of-credit is based on
fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at
the reporting dates.
The contract amount and estimated fair value for commitments to extend
credit, standby letters-of-credit, and financial guarantees written are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
-------------------------- -------------------------
CONTRACT Contract
AMOUNT FAIR VALUE Amount Fair Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commitments to extend credit........ $1,181,554 $ 1,657 $ 900,983 $ 1,195
Standby letters-of-credit........... $ 73,957 1,479 66,347 1,397
Financial guarantees................ 16,444 21 8,750 11
</TABLE>
-28-
<PAGE>
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Bank has a substantial Trust Department
that contributes net fee income annually. The Trust Department is not considered
a financial instrument, so its value has not been incorporated into the fair
value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include core deposits and other
intangibles, bank premises and equipment, obligations under capital leases and
deferred tax assets and liabilities. In addition, tax ramifications related to
the realization of unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
24. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the results of operations for the four
quarters of 1997 and 1996 and is unaudited; however, in the opinion of
management, it reflects all adjustments (which include only normal recurring
adjustments) necessary to present fairly the summarized results for such
periods.
<TABLE>
<CAPTION>
1997 QUARTER ENDED
-------------------------------------------------------------------
(Dollar amounts in thousands, except per share) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income......................................... $ 94,305 $ 97,222 $ 97,376 $ $97,987
Interest expense........................................ (43,191) (45,817) (46,566) (47,455)
------------- ------------- ------------- -------------
Net interest income..................................... 51,114 51,405 50,810 50,532
Provisions for credit losses............................ (5,000) (4,500) (5,000) (2,000)
Other operating income.................................. 6,175 6,774 5,896 5,401
Other operating expense................................. (37,143) (36,393) (37,602) 38,898
------------- ------------- ------------- -------------
Income before income taxes.............................. 15,146 17,286 14,104 15,035
Income tax expense...................................... (5,473) (6,222) (5,134) (3,555)
------------- ------------- ------------- -------------
Net income.............................................. $ 9,673 $ 11,064 $ 8,970 $ 11,480
============= ============= ============= =============
Net income applicable to common stock................... $ 8,149 $ 9,541 $ 7,446 $ 9,957
------------- ------------- ------------- -------------
Average common shares outstanding.............. 16,410,882 16,414,312 16,417,213 16,419,257
Earnings per common share............................... $.50 $0.58 $0.45 $0.61
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
1996 Quarter Ended
-------------------------------------------------------------------
(Dollar amounts in thousands, except per share) March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income $ 96,634 $ 93,931 $ 94,544 $ 95,234
Interest expense (43,798) (43,516) (43,450) (43,525)
------------- ------------- ------------- -------------
Net interest income 49,836 50,415 51,094 51,709
Provisions for credit losses (5,000) (5,000) (5,000) (5,000)
Other operating income 6,562 4,952 5,060 6,905
Other operating expense (33,139) (33,762) (33,993) (35,264)
------------- ------------- ------------- -------------
Income before income taxes 18,259 16,605 17,161 18,350
Income tax expense (6,531) (5,962) (6,178) (6,605)
------------- ------------- ------------- -------------
Net income $ 11,728 $ 10,643 $ 10,983 $ 11,745
============= ============= ============= =============
Net income applicable to common stock $ 10,205 $ 9,120 $ 9,459 $ 10,221
------------- ------------- ------------- -------------
Average common shares outstanding 16,396,571 16,400,247 16,403,991 16,407,631
Earnings per common share $0.62 $0.56 $0.58 $0.62
</TABLE>
-30-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
The Sumitomo Bank of California:
We have audited the accompanying balance sheets of The Sumitomo Bank of
California (a California banking corporation) as of December 31, 1997 and 1996,
and the related statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Sumitomo Bank of
California as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
SIG
Arthur Anderson LLP
San Francisco California,
January 16, 1998
Exhibit 99.2
ZIONS BANCORPORATION AND THE SUMITOMO BANK OF CALIFORNIA
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(unaudited)
The following unaudited pro forma condensed combined financial statements
were prepared to give effect to the acquisition of The Sumitomo Bank of
California (Sumitomo) by Zions Bancorporation (Zions) and the related common
stock issuance using the purchase method of accounting and the assumptions
described in the accompanying notes. The unaudited pro forma condensed combined
balance sheet is based upon the consolidated balance sheet of Zions and the
balance sheet of Sumitomo as of December 31, 1997, assuming the acquisition had
occurred on that date. The unaudited pro forma condensed combined statement of
income is based on the consolidated statement of income of Zions and the
statement of income of Sumitomo for the year ended December 31, 1997, assuming
the acquisition had occurred on January 1, 1997.
The pro forma combined financial statements do not give effect to expected
reductions in deposits and planned dispositions of certain assets and reductions
in borrowings in connection with the acquisition. Total deposits are expected to
decrease approximately $1 billion, with the decrease being mainly in
interest-bearing deposits. Total combined assets are expected to be reduced by
approximately $2 billion, from the sale of approximately $1 billion in loans and
a reduction of approximately $1 billion in investment securities from maturity
and repayment of the portfolio. Zions also plans on reducing its short-term
borrowings by approximately $1 billion. Plans also include Sumitomo's long-term
debt being reduced by approximately $63 million and the $75 million of
outstanding preferred stock of Sumitomo being redeemed prior to the consummation
date of the acquisition. After the consummation of the acquisition, issuance of
common stock and the aforementioned reductions in assets, it is anticipated that
Zions and its California banking subsidiary will maintain "risk-based capital"
of not less than the "well-capitalized" threshold, as defined by banking
regulators. The pro forma financial statements also do not give effect to merger
costs related to the transaction or anticipated cost savings resulting from the
consolidation of operational functions.
For purposes of the pro forma condensed combined financial statements, it
has been assumed that the net book value of Sumitomo's assets minus liabilities
approximates fair value. When the transaction is consummated Sumitomo's asset
and liabilities will be recorded at their fair values which will change the
allocation of the purchase price and the related amortization from that
reflected in the pro forma condensed combined financial statements.
The pro forma condensed combined financial statements should be read in
conjunction with the consolidated historical financial statements of Zions,
including the respective notes thereto, which are incorporated by reference, and
the historical financial statements of Sumitomo, including the respective notes
thereto, which are included in Sumitomo's December 31, 1997 Annual Report on
Form 10-K included in this filing. The pro forma information is presented for
comparative purposes only and is not necessarily indicative of the combined
financial position or results of operations in the future. The pro forma
information is also not necessarily indicative of the combined financial
position or results of operations which would have been realized had the
acquisition been consummated during the period or as of the date for which the
pro forma financial statements are presented.
-1-
<PAGE>
<TABLE>
<CAPTION>
ZIONS BANCORPORATION AND THE SUMITOMO BANK OF CALIFORNIA
PRO FORMA CONDENSED COMBINED BALANCE SHEET
December 31, 1997 (A)
(unaudited)
Historical
-------------------------------
The Sumitomo
Zions Bank of Pro Forma Pro Forma
(In millions) Bancorporation California Adjustments Combined
-------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 627 $ 201 $ - $ 828
Money market investments 814 466 (369) (B) 911
Investment securities: -
Held to maturity, at cost 2,143 150 - 2,293
Available for sale, at market 486 376 - 862
Trading 83 - - 83
Loans, net of unearned 4,871 3,880 - 8,751
Allowance for loan losses 80 117 - 197
-------------- ----------- ----------- -------------
Net loans 4,791 3,763 - 8,554
Purchase premium 159 - 138 (C) 297
Other assets 419 146 (20) (C) 545
-------------- ----------- ----------- -------------
Total assets $ 9,522 $ 5,102 $ (251) $ 14,373
============== =========== =========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $ 1,783 $ 672 $ - $ 2,455
Interest-bearing deposits 5,072 3,683 - 8,755
-------------- ----------- ----------- -------------
Total deposits 6,855 4,355 - 11,210
Federal funds purchased and securities
sold under repurchase agreements 1,271 93 - 1,364
Other short-term borrowings 105 25 - 130
Federal Home Loan Bank advances and other
borrowings over one year 211 - - 211
Long-term debt 258 66 - 324
Other liabilities 167 60 109 (B) 336
-------------- ----------- ----------- -------------
Total liabilities 8,867 4,599 109 13,575
-------------- ----------- ----------- -------------
Shareholders' equity:
Preferred stock - 75 (75) (B) -
Common stock 122 82 61 (B) 265
Surplus - 267 (267) -
Net unrealized holding gain on securities
available for sale 3 - - 3
Retained earnings 530 79 (79) 530
-------------- ----------- ----------- -------------
Total shareholders' equity 655 503 (360) 798
-------------- ----------- ----------- -------------
Total liabilities and shareholders'
equity $ 9,522 $ 5,102 $ (251) $ 14,373
============== =========== =========== =============
</TABLE>
See Notes to Pro Forma Condensed Combined Financial Statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
ZIONS BANCORPORATION AND THE SUMITOMO BANK OF CALIFORNIA
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1997 (A)
(unaudited)
Historical
-------------------------------
The Sumitomo
Zions Bank of Pro Forma Pro Forma
(In millions, except per share amounts) Bancorporation California Adjustments Combined
-------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans and leases $ 426.3 $ 315.4 $ - $ 741.7
Interest on money market investments 84.6 37.7 (21.6) (B) 100.7
Interest on securities 171.4 38.8 - 205.2
---------- ----------- ---------- ------------
Total interest income 682.3 386.9 (21.6) 1,047.6
---------- ----------- ---------- ------------
Interest expense:
Interest on deposits 180.4 169.9 - 350.3
Interest on borrowed funds 150.1 13.1 - 163.2
---------- ----------- ---------- ------------
Total interest expense 330.5 183.0 - 513.5
---------- ----------- ---------- ------------
Net interest income 351.8 203.9 (21.6) 534.1
Provision for loan losses 6.2 16.5 - 22.7
---------- ----------- ---------- ------------
Net interest income after
provision for loan losses 345.6 187.4 (21.6) 511.4
---------- ----------- ---------- ------------
Noninterest income:
Service charges on deposit accounts 43.7 5.0 - 48.7
Other service charges, commissions and fees 38.3 2.1 - 40.4
Trust income 6.8 3.7 - 10.5
Loan sales and servicing income 38.8 - - 38.8
Other 15.6 13.4 - 29.0
---------- ----------- ---------- ------------
Total noninterest income 143.2 24.2 - 167.4
---------- ----------- ---------- ------------
Noninterest expense:
Salaries and employee benefits 160.0 81.3 - 241.3
Occupancy, net 16.9 15.9 - 32.8
Furniture and equipment 23.7 7.6 - 31.3
Amortization of goodwill and core
deposit intangibles 5.9 - 8.5 (C) 14.4
Other 94.7 45.2 2.3 (B) 142.2
---------- ----------- ---------- ------------
Total noninterest expense 301.2 150.0 10.8 462.0
---------- ----------- ---------- ------------
Income before income taxes 187.6 61.6 (32.4) 216.8
Income taxes 65.2 20.4 (10.5) 75.1
---------- ----------- ---------- ------------
Net income $ 122.4 $ 41.2 $ (21.9) $ 141.7
========== =========== ========== ============
Net income applicable to common stock $ 122.3 $ 35.1 $ (21.9) $ 135.5
========== =========== ========== ============
Net income per common share
Basic $ 1.92 $ 2.14 $ 2.03
========== =========== ============
Diluted $ 1.89 $ 2.14 $ 2.00
========== =========== ============
Weighted-average common shares outstanding
during the year (in thousands) 63,868 16,415 66,868 (B)
========== =========== ============
Weighted-average common and common-equivalent
shares outstanding during the year
(in thousands) 64,629 16,415 67,629 (B)
========== =========== ============
</TABLE>
See Notes to Pro Forma Condensed Combined Financial Statements.
-3-
<PAGE>
ZIONS BANCORPORATION AND THE SUMITOMO BANK OF CALIFORNIA
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
NOTE A: BASIS OF PRESENTATION
The unaudited pro forma condensed combined balance sheet combines the
historical consolidated balance sheet of Zions Bancorporation and subsidiaries
(Zions) and the historical balance sheet of The Sumitomo Bank of California
(Sumitomo) as if the acquisition and issuance of shares had been effective on
December 31, 1997. The pro forma condensed combined statement of income for the
year ended December 31, 1997 combines the historical consolidated statement of
income for Zions and the historical statement of income for Sumitomo as if the
acquisition had been effective on January 1, 1997.
The acquisition reflected in the pro forma financial statements will be
accounted for as a purchase. Under this method of accounting, assets and
liabilities of Sumitomo will be adjusted to their estimated fair value and
combined with the recorded values of the assets and liabilities of Zions. For
purposes of the pro forma financial statements, it has been assumed that the net
book value of Sumitomo's assets minus liabilities approximates fair value.
NOTE B: PURCHASE PRICE AND FUNDING
The purchase price is based upon cash consideration of approximately $546
million to be paid for the outstanding shares of Sumitomo. Sumitomo's parent,
The Sumitomo Bank, Limited, will receive approximately $453 million ($32.36 per
share) and other shareholders will receive approximately $93 million ($38.25 per
share).
The transaction is to be financed through a combination of existing
resources, the sale of a minority interest in Sumitomo and the proceeds from the
issuance of securities in the capital markets as follows: (in millions)
Issuance of Zion's common stock for cash, net of
estimated issuance costs of $7 $143
Reduction of money market investment balances 369
Proceeds from sale of minority interest in Sumitomo 34
------
Total purchase price $546
======
Zions has agreed to sell a minority interest of Sumitomo to a Director of
Zions at its cost basis. Proceeds from the sale of the minority interest will be
approximately $34 million for an approximate 11.5% common equity interest in
Sumitomo after the payment of a planned $250 million dividend by Sumitomo to
Zions. The pro forma condensed combined statement of income includes a pro forma
adjustment of $2.3 million to other noninterest expense for the minority
shareholder's estimated 11.5% portion of Sumitomo's pro forma net income
applicable to common stock. Pro forma adjustments to the condensed combined
balance sheet include an increase in other liabilities of $109 million,
consisting of the $34 million minority
-4-
<PAGE>
ZIONS BANCORPORATION AND THE SUMITOMO BANK OF CALIFORNIA
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Continued)
(unaudited)
interest discussed above and the minority interest represented by the $75
million of Sumitomo preferred stock.
Money market investments have been reduced on the pro forma condensed
combined balance sheet by $369 million representing a portion of the total pro
forma cash purchase price. Interest on money market investments in the pro forma
condensed combined statement of income has been reduced by $21.6 million
representing the lost interest on the money market investments determined using
the combined average rate earned on money market investments during 1997 of
5.86%.
Pro forma weighted average common shares outstanding during the year and
pro forma weighted average common and common-equivalent shares outstanding
during the year have been increased to reflect the issuance of approximately
3,000,000 shares of Zions common stock to finance a portion of the acquisition.
The estimated number of shares to be issued is based upon the $150 million in
gross proceeds expected from the issuance divided by an estimated Zion's common
stock price of $50 per share.
NOTE C: PURCHASE PREMIUM
The purchase premium resulting from the acquisition reflected in the
accompanying pro forma condensed combined balance sheets was determined as
follows: (in millions)
Total cash consideration paid for common stock of Sumitomo $546
Common shareholders' equity of Sumitomo 428
-----
Purchase premium $118
=====
For purposes of these pro forma financial statements, it has been assumed
that the net book value of Sumitomo's assets minus liabilities approximates fair
value. Accordingly the cost of the acquisition in excess of Sumitomo's common
equity is reflected in the accompanying pro forma condensed combined balance
sheet as purchase premium. The purchase premium in the accompanying pro forma
condensed combined balance sheet has been increased and net deferred tax assets
decreased by $20 million to tax effect the estimated portion of the premium
allocable to core deposit premium. The amortization of the purchase premium in
the pro forma condensed combined statement of income in the amount of $8.5
million has been determined using an estimated blended amortization life of
approximately 16 years. Certain matters are still pending that will have an
effect on the ultimate allocation of the purchase price. Accordingly, the
allocation of the purchase price has not been finalized.
-5-
