-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KjPOQjCf8GyQAT13gI6M/XnJVnAoRsJaJHqaecogiPamiK0e4TDGXxY9FVmsN+/8 jENKUEUmzNyD3DTHVK63Dw== 0000912057-96-026360.txt : 19961118 0000912057-96-026360.hdr.sgml : 19961118 ACCESSION NUMBER: 0000912057-96-026360 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIONBANCAL CORP CENTRAL INDEX KEY: 0001011659 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 941234979 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28118 FILM NUMBER: 96664039 BUSINESS ADDRESS: STREET 1: 350 CALIFORNIA ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104-1476 BUSINESS PHONE: 4157057350 MAIL ADDRESS: STREET 1: 400 CALIFORNIA ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104-1476 10-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-28118 UNIONBANCAL CORPORATION (FORMERLY NAMED UNION BANK) State of Incorporation: California I.R.S. Employer Id. No. 94-1234979 350 California Street San Francisco, California 94104 Telephone: (415) 705-7350 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Number of shares of Common Stock outstanding at October 31, 1996: 54,758,570 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNIONBANCAL CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
PAGE NUMBER ------------- PART I FINANCIAL INFORMATION Consolidated Financial Highlights..................................................................... 2 Item 1. Financial Statements: Condensed Consolidated Balance Sheets............................................................... 4 Condensed Consolidated Statements of Income......................................................... 5 Condensed Consolidated Statements of Cash Flows..................................................... 6 Condensed Consolidated Statements of Shareholders' Equity........................................... 7 Notes to Condensed Consolidated Financial Statements................................................ 8 Item 2. Management's Discussion and Analysis: Introduction........................................................................................ 11 Summary............................................................................................. 11 Table 1 -- Analysis of Earnings................................................................... 12 Net Interest Income................................................................................. 13 Table 2 -- Consolidated Average Balance Sheets, Net Interest Income and Interest Rates.............................................................................. 14 Noninterest Income.................................................................................. 17 Table 3 -- Noninterest Income..................................................................... 17 Noninterest Expense................................................................................. 17 Table 4 -- Noninterest Expense.................................................................... 18 Merger Expenses..................................................................................... 19 Income Taxes........................................................................................ 19 Loans Outstanding................................................................................... 19 Table 5 -- Loans Outstanding...................................................................... 20 Allowance for Loan Losses........................................................................... 20 Table 6 -- Allowance for Loan Losses.............................................................. 21 Asset Quality....................................................................................... 22 Table 7 -- Nonperforming and Renegotiated Assets.................................................. 22 Table 8 -- Loans 90 Days or More Past Due and Still Accruing...................................... 23 Liquidity........................................................................................... 23 Capital............................................................................................. 23 Table 9 -- Risk-Based Capital..................................................................... 24 Table 10 -- Other Capital Measures................................................................ 25 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.............................................................. 26 Signatures............................................................................................ 27
PART I. FINANCIAL INFORMATION UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (UNAUDITED)
THREE MONTHS ENDED ----------------------------------------------------- INCREASE (DECREASE) SEPTEMBER 30, SEPTEMBER 30, --------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 AMOUNT PERCENT - -------------------------------------------------------------------------- ------------- ------------- ---------- --------- RESULTS OF OPERATIONS: Net interest income (1)................................................. $ 292,677 $ 288,663 $ 4,014 1.39% Provision for loan losses............................................... 10,000 12,000 (2,000) (16.67) Noninterest income...................................................... 107,280 98,622 8,658 8.78 Noninterest expense, excluding merger and integration expense........... 258,523 236,228 22,295 9.44 ------------- ------------- ---------- --------- Income before merger and integration expense and income taxes (1)............................................................. 131,434 139,057 (7,623) (5.48) Merger and integration expense.......................................... 25,552 -- 25,552 -- ------------- ------------- ---------- --------- Income before income taxes (1).......................................... 105,882 139,057 (33,175) (23.86) Taxable-equivalent adjustment........................................... 1,089 2,529 (1,440) (56.94) Income tax expense...................................................... 42,810 52,675 (9,865) (18.73) ------------- ------------- ---------- --------- Net income.............................................................. $ 61,983 $ 83,853 $ (21,870) (26.08)% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- NET INCOME APPLICABLE TO: Common stock............................................................ $ 55,745 $ 76,686 $ (20,941) (27.31)% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- Parent direct interest in bank subsidiary............................... $ 3,411 $ 4,341 $ (930) (21.42)% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- RECAP OF EARNINGS: Net income.............................................................. $ 61,983 $ 83,853 $ (21,870) (26.08)% Merger and integration expense (after-tax).............................. 15,025 -- 15,025 -- ------------- ------------- ---------- --------- Pro forma earnings, excluding merger and integration expense............ $ 77,008 $ 83,853 $ (6,845) (8.16)% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- Net income applicable to common stock................................... $ 55,745 $ 76,686 $ (20,941) (27.31)% Merger and integration expense (after-tax, applicable to common stock)................................................................ 14,128 -- 14,128 -- ------------- ------------- ---------- --------- Pro forma earnings applicable to common stock, excluding merger and integration expense................................................... $ 69,873 $ 76,686 $ (6,813) (8.88)% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- PER AVERAGE COMMON SHARE: Net income.............................................................. $ 1.02 $ 1.40 $ (0.38) (27.14)% Pro forma earnings, excluding merger and integration expense............ 1.28 1.40 (0.12) (8.57) Dividends (2)........................................................... 0.35 0.35 -- -- Book value (end of period).............................................. 40.04 38.52 1.52 3.95 Common shares outstanding (end of period)............................... 54,758,560 54,641,415 117,145 0.21 Weighted average common shares outstanding.............................. 54,758,530 54,641,107 117,423 0.21 BALANCE SHEET (END OF PERIOD): Total assets............................................................ $28,679,646 $27,033,151 $1,646,495 6.09% Total loans............................................................. 20,946,765 19,408,524 1,538,241 7.93 Nonperforming and renegotiated assets................................... 180,657 270,683 (90,026) (33.26) Deposits................................................................ 20,909,390 18,893,343 2,016,047 10.67 Subordinated capital notes.............................................. 415,000 584,624 (169,624) (29.01) Shareholders' equity.................................................... 2,454,219 2,394,967 59,252 2.47 BALANCE SHEET (PERIOD AVERAGES): Total assets............................................................ $27,981,894 $25,979,948 $2,001,946 7.71% Total loans (3)......................................................... 20,651,457 19,079,020 1,572,437 8.24 Shareholders' equity.................................................... 2,435,622 2,360,664 74,958 3.18 FINANCIAL RATIOS: Return on average assets (4)............................................ 0.88% 1.28% (0.40)% Pro forma return on average assets, excluding after-tax merger and integration expense (4)........................................... 1.09 1.28 (0.19) Return on average common equity (5)..................................... 10.19 14.67 (4.48) Pro forma return on average common equity, excluding after-tax merger and integration expense (5)........................................... 12.77 14.67 (1.90) Efficiency ratio (6).................................................... 71.20 61.25 9.95 Pro forma efficiency ratio, excluding merger and integration expense (6)................................................................... 64.81 61.25 3.56 Net interest margin (1)................................................. 4.72 4.96 (0.24) Tier 1 risk-based capital ratios........................................ 9.04 9.42 (0.38) Total risk-based capital ratios......................................... 11.16 11.88 (0.72) Leverage ratio.......................................................... 8.43 8.75 (0.32) Allowance for loan losses to total loans................................ 2.55 2.92 (0.37) Allowance for loan losses to nonaccrual loans........................... 362.10 247.01 115.09 Net loans charged off to average total loans (7)........................ 0.39 0.40 (0.01) Nonperforming and renegotiated assets to total loans and foreclosed assets................................................................ 0.86 1.39 (0.53) Nonperforming and renegotiated assets to total assets................... 0.63 1.00 (0.37) Average shareholders' equity to average total assets.................... 8.70 9.09 (0.39)
- ------------------------------ (1) Fully taxable-equivalent. (2) Amounts prior to merger are based on Union Bank only and do not include the dividend of $145 million paid to Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. (3) Average balances on loans outstanding include all nonperforming and renegotiated loans. (4) Based on annualized net income. (5) Based on annualized net income applicable to common stock. (6) Noninterest expense excludes foreclosed assets expense. (7) Annualized. 2 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED) (UNAUDITED)
NINE MONTHS ENDED ----------------------------------------------------- INCREASE (DECREASE) SEPTEMBER 30, SEPTEMBER 30, --------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 AMOUNT PERCENT - -------------------------------------------------------------------------- ------------- ------------- ---------- --------- RESULTS OF OPERATIONS: Net interest income (1)................................................. $ 880,735 $ 853,813 $ 26,922 3.15% Provision for loan losses............................................... 30,000 44,500 (14,500) (32.58) Noninterest income...................................................... 315,704 291,497 24,207 8.30 Noninterest expense, excluding merger and integration expense........... 763,065 725,830 37,235 5.13 ------------- ------------- ---------- --------- Income before merger and integration expense and income taxes (1)....... 403,374 374,980 28,394 7.57 Merger and integration expense.......................................... 86,818 -- 86,818 -- ------------- ------------- ---------- --------- Income before income taxes (1).......................................... 316,556 374,980 (58,424) (15.58) Taxable-equivalent adjustment........................................... 5,241 8,209 (2,968) (36.16) Income tax expense...................................................... 121,658 142,212 (20,554) (14.45) ------------- ------------- ---------- --------- Net income.............................................................. $ 189,657 $ 224,559 $ (34,902) (15.54)% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- NET INCOME APPLICABLE TO: Common stock............................................................ $ 171,608 $ 203,460 $ (31,852) (15.66)% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- Parent direct interest in bank subsidiary............................... $ 9,569 $ 12,620 $ (3,051) (24.18)% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- RECAP OF EARNINGS: Net income.............................................................. $ 189,657 $ 224,559 $ (34,902) (15.54)% Merger and integration expense (after-tax).............................. 53,348 -- 53,348 -- ------------- ------------- ---------- --------- Pro forma earnings, excluding merger and integration expense............ $ 243,005 $ 224,559 $ 18,446 8.21% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- Net income applicable to common stock................................... $ 171,608 $ 203,460 $ (31,852) (15.66)% Merger and integration expense (after-tax, applicable to common stock)................................................................ 50,164 -- 50,164 -- ------------- ------------- ---------- --------- Pro forma earnings applicable to common stock, excluding merger and integration expense................................................... $ 221,772 $ 203,460 $ 18,312 9.00% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- PER AVERAGE COMMON SHARE: Net income.............................................................. $ 3.14 $ 3.73 $ (0.59) (15.82)% Pro forma earnings, excluding merger and integration expense............ 4.05 3.73 0.32 8.58 Dividends (2)........................................................... 1.05 1.05 -- -- Book value (end of period).............................................. 40.04 38.52 1.52 3.95 Common shares outstanding (end of period)............................... 54,758,560 54,641,415 117,145 0.21 Weighted average common shares outstanding.............................. 54,733,777 54,505,317 228,460 0.42 BALANCE SHEET (END OF PERIOD): Total assets............................................................ $28,679,646 $27,033,151 $1,646,495 6.09% Total loans............................................................. 20,946,765 19,408,524 1,538,241 7.93 Nonperforming and renegotiated assets................................... 180,657 270,683 (90,026) (33.26) Deposits................................................................ 20,909,390 18,893,343 2,016,047 10.67 Subordinated capital notes.............................................. 415,000 584,624 (169,624) (29.01) Shareholders' equity.................................................... 2,454,219 2,394,967 59,252 2.47 BALANCE SHEET (PERIOD AVERAGES): Total assets............................................................ $27,681,548 $25,182,429 $2,499,119 9.92% Total loans (3)......................................................... 20,416,806 18,682,270 1,734,536 9.28 Shareholders' equity.................................................... 2,455,227 2,298,045 157,182 6.84 FINANCIAL RATIOS: Return on average assets (4)............................................ 0.92% 1.19% (0.27)% Pro forma return on average assets, excluding after-tax merger and integration expense (4)........................................... 1.17 1.19 (0.02) Return on average common equity (5)..................................... 10.50 13.50 (3.00) Pro forma return on average common equity, excluding after-tax merger and integration expense (5)........................................... 13.56 13.50 0.06 Efficiency ratio (6).................................................... 70.75 63.47 7.28 Pro forma efficiency ratio, excluding merger and integration expense (6)................................................................... 63.49 63.47 0.02 Net interest margin (1)................................................. 4.76 5.09 (0.33) Tier 1 risk-based capital ratio......................................... 9.04 9.42 (0.38) Total risk-based capital ratio.......................................... 11.16 11.88 (0.72) Leverage ratio.......................................................... 8.43 8.75 (0.32) Allowance for loan losses to total loans................................ 2.55 2.92 (0.37) Allowance for loan losses to nonaccrual loans........................... 362.10 247.01 115.09 Net loans charged off to average total loans (7)........................ 0.33 0.29 0.04 Nonperforming and renegotiated assets to total loans and foreclosed assets................................................................ 0.86 1.39 (0.53) Nonperforming and renegotiated assets to total assets................... 0.63 1.00 (0.37) Average shareholders' equity to average total assets.................... 8.87 9.13 (0.26)
- ------------------------------ (1) Fully taxable-equivalent. (2) Amounts prior to merger are based on Union Bank only and do not include the dividend of $145 million paid to Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. (3) Average balances on loans outstanding include all nonperforming and renegotiated loans. (4) Based on annualized net income. (5) Based on annualized net income applicable to common stock. (6) Noninterest expense excludes foreclosed assets expense. (7) Annualized. 3 ITEM 1. FINANCIAL STATEMENTS UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1996 1995 1995 - --------------------------------------------------------------------- ------------- ------------ ------------- ASSETS Cash and due from banks.............................................. $ 2,359,879 $ 2,274,088 $ 1,769,317 Interest bearing deposits in banks................................... 831,710 761,310 1,032,757 Federal funds sold and securities purchased under resale agreements.......................................................... 471,641 317,025 818,670 ------------- ------------ ------------- Total cash and cash equivalents.................................. 3,663,230 3,352,423 3,620,744 Trading account securities........................................... 452,613 322,283 379,073 Investment securities available for sale............................. 2,007,074 1,960,551 1,525,838 Investment securities held to maturity (market value of $289,029 at September 30, 1996, $376,100 at December 31, 1995 and $896,373 at September 30, 1995)................................................. 283,566 363,287 880,444 Loans................................................................ 20,946,765 20,226,089 19,408,524 Less: Allowance for loan losses...................................... 535,087 555,149 566,812 ------------- ------------ ------------- Net loans........................................................ 20,411,678 19,670,940 18,841,712 Premises and equipment, net.......................................... 426,856 421,921 419,569 Customers' acceptance liability...................................... 772,893 719,681 638,417 Goodwill and intangible assets....................................... 94,476 104,529 107,878 Other real estate owned.............................................. 32,882 36,453 39,754 Other assets......................................................... 534,378 594,791 579,722 ------------- ------------ ------------- Total assets..................................................... $28,679,646 $ 27,546,859 $27,033,151 ------------- ------------ ------------- ------------- ------------ ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits in domestic offices: Noninterest bearing................................................ $ 6,963,233 $ 7,036,969 $ 6,344,758 Interest bearing................................................... 12,316,319 10,885,810 10,620,385 Deposits in foreign offices: Noninterest bearing................................................ 346,814 342,430 313,022 Interest bearing................................................... 1,283,024 1,389,834 1,615,178 ------------- ------------ ------------- Total deposits................................................... 20,909,390 19,655,043 18,893,343 Federal funds purchased and securities sold under repurchase agreements.......................................................... 714,998 1,195,058 1,302,835 Commercial paper..................................................... 1,674,254 1,389,870 1,569,752 Other borrowed funds................................................. 1,184,199 1,065,058 1,039,422 Acceptances outstanding.............................................. 772,893 719,681 638,417 Other liabilities.................................................... 554,693 536,688 609,791 Subordinated capital notes........................................... 415,000 501,369 584,624 ------------- ------------ ------------- Total liabilities................................................ 26,225,427 25,062,767 24,638,184 ------------- ------------ ------------- SHAREHOLDERS' EQUITY Parent direct interest in equity of bank subsidiary.................. 126,599 159,996 154,981 Preferred stock: 8 3/8% Noncumulative, Series A, 5,400,000 depositary shares, authorized and issued............................................ 135,000 135,000 135,000 Common stock -- $5 stated value, authorized 100,000,000 shares, issued 54,758,560 as of September 30, 1996, 54,670,283 as of December 31, 1995 and 54,641,415 as of September 30, 1995........... 273,793 273,351 273,207 Additional paid-in capital........................................... 1,312,821 1,309,094 1,305,525 Retained earnings.................................................... 598,139 583,283 517,357 Cumulative translation adjustment.................................... (2,393) (972) (760) Net unrealized gain on investment securities available for sale...... 10,260 24,340 9,657 ------------- ------------ ------------- Total shareholders' equity....................................... 2,454,219 2,484,092 2,394,967 ------------- ------------ ------------- Total liabilities and shareholders' equity....................... $28,679,646 $ 27,546,859 $27,033,151 ------------- ------------ ------------- ------------- ------------ -------------
See accompanying notes to condensed consolidated financial statements. 4 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- ------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1996 1995 - ----------------------------------------------------------------- --------- --------- ----------- ----------- INTEREST INCOME Loans, including fees.......................................... $ 419,988 $ 407,489 $ 1,252,902 $ 1,189,311 Investment securities -- taxable............................... 33,900 32,433 98,762 86,818 Investment securities -- tax exempt............................ 2,479 3,034 7,879 9,606 Interest bearing deposits in banks............................. 12,489 15,993 38,583 45,137 Federal funds sold and securities purchased under resale agreements................................................... 6,028 4,731 21,843 12,411 Trading account securities..................................... 6,431 4,848 18,015 13,947 --------- --------- ----------- ----------- Total interest income...................................... 481,315 468,528 1,437,984 1,357,230 --------- --------- ----------- ----------- INTEREST EXPENSE Deposits in domestic offices................................... 116,273 96,080 331,932 252,731 Deposits in foreign offices.................................... 18,339 23,206 53,749 75,065 Federal funds purchased and securities sold under repurchase agreements................................................... 10,419 22,047 38,310 60,972 Commercial paper............................................... 22,687 21,890 66,650 63,727 Other borrowed funds........................................... 14,517 8,488 48,233 25,773 Subordinated capital notes..................................... 7,492 10,683 23,616 33,358 --------- --------- ----------- ----------- Total interest expense..................................... 189,727 182,394 562,490 511,626 --------- --------- ----------- ----------- NET INTEREST INCOME.............................................. 291,588 286,134 875,494 845,604 Provision for loan losses........................................ 10,000 12,000 30,000 44,500 --------- --------- ----------- ----------- Net interest income after provision for loan losses........ 281,588 274,134 845,494 801,104 NONINTEREST INCOME Service charges on deposit accounts............................ 26,799 23,835 75,827 70,984 Trust fees..................................................... 24,098 21,529 69,655 63,785 International services and foreign exchange.................... 18,761 22,515 59,179 66,915 Credit card merchant fees...................................... 13,721 12,461 38,224 34,273 Investment securities gains (losses), net...................... 628 (348) 3,865 (1,668) Other.......................................................... 23,273 18,630 68,954 57,208 --------- --------- ----------- ----------- Total noninterest income................................... 107,280 98,622 315,704 291,497 --------- --------- ----------- ----------- NONINTEREST EXPENSE Salaries and employee benefits................................. 138,007 133,011 420,322 400,942 Net occupancy.................................................. 35,439 22,877 81,664 69,552 Equipment...................................................... 14,003 13,803 41,152 40,462 Foreclosed asset expense (income).............................. (696) (995) 3,445 (1,127) Merger and integration......................................... 25,552 -- 86,818 -- Other.......................................................... 71,770 67,532 216,482 216,001 --------- --------- ----------- ----------- Total noninterest expense.................................. 284,075 236,228 849,883 725,830 --------- --------- ----------- ----------- Income before income taxes....................................... 104,793 136,528 311,315 366,771 Income tax expense............................................... 42,810 52,675 121,658 142,212 --------- --------- ----------- ----------- NET INCOME....................................................... $ 61,983 $ 83,853 $ 189,657 $ 224,559 --------- --------- ----------- ----------- --------- --------- ----------- ----------- NET INCOME APPLICABLE TO: Common stock................................................... $ 55,745 $ 76,686 $ 171,608 $ 203,460 --------- --------- ----------- ----------- --------- --------- ----------- ----------- Parent direct interest in bank subsidiary...................... $ 3,411 $ 4,341 $ 9,569 $ 12,620 --------- --------- ----------- ----------- --------- --------- ----------- ----------- NET INCOME PER AVERAGE COMMON SHARE.............................. $ 1.02 $ 1.40 $ 3.14 $ 3.73 --------- --------- ----------- ----------- --------- --------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES (IN THOUSANDS).................... 54,759 54,641 54,734 54,505 --------- --------- ----------- ----------- --------- --------- ----------- -----------
See accompanying notes to condensed consolidated financial statements. 5 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------ (DOLLARS IN THOUSANDS) 1996 1995 - --------------------------------------------------------------------------------------- ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net Income........................................................................... $ 189,657 $ 224,559 Adjustments to reconcile net income to net cash: Provision for loan losses.......................................................... 30,000 44,500 Depreciation and amortization...................................................... 48,182 44,993 Provision for deferred income taxes................................................ 16,991 39,618 (Gain) loss on sales of investment securities available for sale................... (3,702) 1,789 Gain on sale of assets, net........................................................ (4,591) (180) Accretion of loan fees............................................................. (18,649) (14,121) Deferral of loan costs............................................................. (8,353) (6,227) Proceeds from sale of loans held for sale.......................................... 66,196 48,548 Increase in loans held for sale.................................................... (37,999) (35,597) Increase in trading account securities............................................. (47,762) (123,760) Increase (decrease) in interest payable............................................ (25,840) 24,228 (Increase) decrease in interest receivable......................................... 24,513 (16,832) Increase (decrease) in accrued expense............................................. (115,729) 129,161 Other, net......................................................................... 15,228 (116,963) ----------- ----------- Total adjustments................................................................ (61,515) 19,157 ----------- ----------- Net cash provided by operating activities............................................ 128,142 243,716 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale...................... 12,695 159,120 Proceeds from matured and called investment securities available for sale............ 721,813 558,208 Purchase of investment securities available for sale................................. (726,561) (1,089,432) Proceeds from sales of investment securities held to maturity........................ -- 506 Proceeds from matured and called investment securities held to maturity.............. 79,089 96,683 Purchase of investment securities held to maturity................................... -- (123,886) Net increase in loans................................................................ (784,576) (1,374,107) Purchase of premises and equipment................................................... (43,284) (54,829) Proceeds from sales of OREO and other assets......................................... 24,918 36,408 ----------- ----------- Net cash used in investing activities.............................................. (715,906) (1,791,329) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits............................................................. 1,254,347 1,483,606 Net decrease in federal funds purchased and securities sold under repurchase agreements......................................................................... (1,112,356) (179,610) Net increase in other borrowed funds................................................. 1,035,821 777,858 Maturity and redemption of subordinated capital notes and long-term debt............. (86,369) (71,239) Dividend reinvestment................................................................ 1,193 17,564 Dividends paid....................................................................... (203,722) (28,674) ----------- ----------- Net cash provided by financing activities.......................................... 888,914 1,999,505 ----------- ----------- Net increase in cash and cash equivalents.............................................. 301,150 451,892 Cash and cash equivalents at beginning of period....................................... 3,352,423 3,153,713 Foreign exchange revaluation gain...................................................... 9,657 15,139 ----------- ----------- Cash and cash equivalents at end of period............................................. $ 3,663,230 $ 3,620,744 ----------- ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Loans transferred to OREO............................................................ $ 30,253 $ 28,401 In-substance foreclosures reclassified from OREO to loans............................ -- 7,180 CASH PAID DURING THE PERIOD FOR: Interest............................................................................. $ 536,650 $ 519,575 Income taxes......................................................................... 120,399 79,228
See accompanying notes to condensed consolidated financial statements. 6 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
NET UNREALIZED PARENT GAIN(LOSS) DIRECT ON INVESTMENT INTEREST IN ADDITIONAL CUMULATIVE SECURITIES BANK PREFERRED COMMON PAID-IN RETAINED TRANSLATION AVAILABLE FOR (DOLLARS IN THOUSANDS) SUBSIDIARY STOCK STOCK CAPITAL EARNINGS ADJUSTMENT SALE - -------------------------------- ----------- ----------- ----------- ----------- --------- ----------- ------------- Balance at December 31, 1994.... $ 141,607 $ 135,000 $ 269,790 $1,288,662 $ 353,417 $ (849) $ (8,425) Dividend reinvestment plan...... 3,025 14,539 Stock options exercised......... 13 56 Deferred compensation -- restricted stock............... 379 2,268 (1,318) Dividends declared on preferred stock.......................... (8,480) Dividends declared on common stock.......................... (38,201) Net income...................... 12,620 211,939 Change in unrealized net losses, after taxes.................... 744 18,082 Change in translation adjustment..................... 10 89 ----------- ----------- ----------- ----------- --------- ----------- ------------- Balance at September 30, 1995... $ 154,981 $ 135,000 $ 273,207 $1,305,525 $ 517,357 $ (760) $ 9,657 ----------- ----------- ----------- ----------- --------- ----------- ------------- ----------- ----------- ----------- ----------- --------- ----------- ------------- Balance at December 31, 1995.... $ 159,996 $ 135,000 $ 273,351 $1,309,094 $ 583,283 $ (972) $ 24,340 Dividend reinvestment plan...... 120 1,073 Stock options exercised......... 110 559 Deferred compensation -- restricted stock............... 212 2,095 (627) Dividends declared on preferred stock.......................... (8,480) Dividends declared on common stock.......................... (42,313) (156,125) Net income...................... 9,569 180,088 Change in unrealized net gains, after taxes.................... (549) (14,080) Change in translation adjustment..................... (104) (1,421) ----------- ----------- ----------- ----------- --------- ----------- ------------- Balance at September 30, 1996... $ 126,599 $ 135,000 $ 273,793 $1,312,821 $ 598,139 $ (2,393) $ 10,260 ----------- ----------- ----------- ----------- --------- ----------- ------------- ----------- ----------- ----------- ----------- --------- ----------- ------------- (DOLLARS IN THOUSANDS) TOTAL - -------------------------------- --------- Balance at December 31, 1994.... $2,179,202 Dividend reinvestment plan...... 17,564 Stock options exercised......... 69 Deferred compensation -- restricted stock............... 1,329 Dividends declared on preferred stock.......................... (8,480) Dividends declared on common stock.......................... (38,201) Net income...................... 224,559 Change in unrealized net losses, after taxes.................... 18,826 Change in translation adjustment..................... 99 --------- Balance at September 30, 1995... $2,394,967 --------- --------- Balance at December 31, 1995.... $2,484,092 Dividend reinvestment plan...... 1,193 Stock options exercised......... 669 Deferred compensation -- restricted stock............... 1,680 Dividends declared on preferred stock.......................... (8,480) Dividends declared on common stock.......................... (198,438) Net income...................... 189,657 Change in unrealized net gains, after taxes.................... (14,629) Change in translation adjustment..................... (1,525) --------- Balance at September 30, 1996... $2,454,219 --------- ---------
See accompanying notes to condensed consolidated financial statements. 7 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The unaudited condensed consolidated financial statements of UnionBanCal Corporation and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnote disclosures necessary for complete financial statements in conformity with GAAP. 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 revenue and expense during the reporting period. Actual results could differ from those estimates. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in Union Bank's Annual Report on FDIC Form F-2 for the year ended December 31, 1995 included as an exhibit to the Company's Form 8-K filed on April 1, 1996. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments considered necessary for a fair presentation of the Company's financial condition as of September 30, 1996 and 1995, and December 31, 1995, the results of operations for the three months and nine months ended September 30, 1996 and 1995 and the statements of cash flows for the nine months ended September 30, 1996 and 1995. Primary and fully diluted earnings per share are computed based on the weighted average number of common shares and equivalent common shares outstanding during the period. Both the Stock Options and the Restricted Stock are common stock equivalents. For the periods presented, the Stock Options and the Restricted Stock did not have a dilutive effect and are not included in the Company's earnings per share calculation. NOTE 2 -- MERGER; COMBINATION OF UNION BANK AND BANCAL TRI-STATE CORPORATION The combination of Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The Bank of California, N.A., was completed on April 1, 1996, resulting in UnionBanCal Corporation and its banking subsidiary now known as Union Bank of California, N.A. The merger was effected by the issuance of 18,134,027 shares of Union Bank common stock in exchange for all the outstanding common shares of BanCal Tri-State Corporation. UnionBanCal Corporation is a bank holding company with consolidated assets of $28.7 billion at September 30, 1996 and maintains its headquarters in San Francisco, California. Its primary banking subsidiary is Union Bank of California, N.A., which has more than 235 banking offices in California, 5 banking offices in Oregon and Washington and 16 overseas facilities. UnionBanCal Corporation is 81 percent owned by The Bank of Tokyo-Mitsubishi, Ltd., and 19 percent owned by other shareholders. Union Bank of California, N.A., is 94 percent owned by UnionBanCal Corporation and 6 percent directly owned by The Bank of Tokyo-Mitsubishi, Ltd. The combination was accounted for as a reorganization of entities under common control (similar to a pooling of interests). Accordingly, all historical financial information has been restated as if the combination had been in effect for all periods presented. In connection with the merger, $26 million of merger and integration expenses were recognized in the third quarter of 1996. These expenses included severance, retention, and other employee related expenses ($9 million); charges incurred in connection with the planned disposition of certain facilities ($9 million); professional fees ($1 million); and other merger and integration related expenses ($7 million). For the nine 8 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 (UNAUDITED) NOTE 2 -- MERGER; COMBINATION OF UNION BANK AND BANCAL TRI-STATE CORPORATION (CONTINUED) months ended September 30, 1996, $87 million of merger and integration expenses were recognized. These expenses included severance, retention, and other employee related expenses ($30 million), charges incurred in connection with the planned disposition of certain facilities ($37 million), professional fees ($7 million), and other merger and integration related expenses ($13 million). It is expected that additional merger-related costs which do not qualify for current recognition will be incurred over the next two quarters. These costs will also be classified as merger and integration expense when incurred. For additional information in regard to the combination refer to Union Bank's Proxy Statement dated January 8, 1996, included as an exhibit to the Company's Form 8-K filed with the Securities and Exchange Commission on April 1, 1996. The following presents certain financial data pertaining to the combination of Union Bank with BanCal Tri-State Corporation for the first quarter of 1996:
FIRST QUARTER (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1996 - ---------------------------------------------------------------------- ------------- Net interest income and noninterest income: Union Bank, as originally reported.................................. $ 284.3 BanCal Tri-State Corporation........................................ $ 114.2 UnionBanCal Corporation............................................. $ 398.5 Net income: Union Bank, as originally reported.................................. $ 60.5 BanCal Tri-State Corporation........................................ $ 22.8 UnionBanCal Corporation............................................. $ 83.3 Net income per average common share: Union Bank, as originally reported.................................. $ 1.58 BanCal Tri-State.................................................... $ 1.05 UnionBanCal Corporation............................................. $ 1.40
NOTE 3 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS On January 1, 1996, the Company adopted three recently issued Statements of Financial Accounting Standards ("SFAS"). The standards and their impact on the Company are described below. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" addresses the accounting for the impairment of long-lived assets, such as premises, furniture and equipment, certain identifiable intangibles and goodwill related to those assets. Long-lived assets and certain identifiable intangibles are to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the sum of the future cash flows expected from the use of the asset and its eventual disposition (undiscounted and without interest charges) is less than the carrying amount of the asset. The Statement also requires that long-lived assets and identifiable intangibles, except for assets of a discontinued operation held for disposal, be accounted for at the lower of cost or fair value less cost to sell. The Company has implemented SFAS No. 121 and, except for the effects of the writedown of certain assets and leases in connection with the recognition of merger and integration costs, has determined that the measurement of impairment loss is not material. 9 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 (UNAUDITED) NOTE 3 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) SFAS No. 122, "Accounting for Mortgage Servicing Rights," an amendment of SFAS No. 65, requires that the Company recognize as separate assets the rights to service mortgage loans for others, however those servicing rights are acquired. Previously, only purchased servicing rights were capitalizable as an asset, whereas internally originated servicing rights were expensed. The Statement also requires that capitalized excess servicing receivables be assessed for impairment based on fair value. This Statement did not have a material impact on the Company's financial condition, results of operations, cash flows or related disclosures. SFAS No. 123, "Accounting for Stock-Based Compensation" prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock and stock appreciation rights. The Statement defines a "fair value-based method" of accounting for employee stock options and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation for those plans using the "intrinsic value-based method" under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (Opinion No. 25). Substantially all of the Company's stock options have no intrinsic value at grant date, and under Opinion No. 25 no compensation cost is recognized for them. Compensation cost is recognized for other types of stock-based compensation plans under Opinion No. 25, including plans with variable, usually performance-based, features. SFAS No. 123 requires that an employer's financial statements include certain disclosures about stock-based compensation arrangements regardless of the method used to account for them. An employer that continues to apply the accounting provisions of Opinion No. 25 will disclose pro forma amounts that reflect the difference between compensation cost, if any, included in net income and the related cost measured by the fair value-based method, including tax effects, that would have been recognized in the income statement if the fair value-based method had been used. The Company will continue to apply Opinion No. 25 in accounting for stock-based compensation plans. In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued. This Statement establishes standards for when transfers of financial assets, including those with continuing involvement by the transferor, should be considered a sale. SFAS No. 125 also establishes standards for when a liability should be considered extinguished. This statement is effective for transfers of assets and extinguishments of liabilities after December 31, 1996, applied prospectively. Earlier adoption or retroactive application of this statement is not permitted. Management will be considering this statement during the remainder of 1996 to determine its effect on the Company's financial statements. NOTE 4 -- INCOME TAXES During the second quarter of 1996, a reduction of $5 million was recorded in income tax expense reflecting a favorable settlement of a unitary tax issue with the State of California. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The combination of Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The Bank of California, N.A., was completed on April 1, 1996, resulting in UnionBanCal Corporation and its banking subsidiary now known as Union Bank of California, N.A. The combination was accounted for as a reorganization of entities under common control (similar to a pooling of interests). Accordingly, all historical financial information has been restated as if the combination had been in effect for all periods presented. To facilitate the discussion of the results of operations, Table 1 -- Analysis of Earnings is included on page 12. This analysis supplements the Condensed Consolidated Statements of Income on Page 5 (which are prepared in accordance with GAAP) primarily with respect to the treatment of merger and integration expense. Management believes that it is meaningful to understand the operating results and trends excluding these expenses and, therefore, has included this table which presents income before merger and integration expense and income taxes. In addition, the Table includes net income, net income applicable to common stock, and net income per average common share including merger and integration expenses and on a proforma basis excluding merger and integration expenses (after-tax). SUMMARY For the third quarter of 1996, net income was $62 million after $15 million of merger and integration related expenses (after-tax) recorded in connection with the April 1, 1996 combination of Union Bank and BanCal Tri-State Corporation. This compared with net income of $84 million in the third quarter of 1995. Pro forma earnings, excluding merger and integration expense (after-tax), was $77 million, an 8 percent decrease from the comparable quarter a year ago. Other comparisons between the third quarter of 1996 and the comparable quarter a year ago are as follows: Pro forma earnings per average common share, excluding after-tax merger and integration expense, decreased from $1.40 to $1.28. Income before merger and integration expense and income taxes was $131 million, an $8 million, or 5 percent, decrease. Gross revenue (on a taxable-equivalent basis) was $400 million, a $13 million, or 3 percent, increase. Noninterest expense, excluding merger and integration expense, was $259 million, a $22 million, or 9 percent, increase. More than half the increase ($12 million) resulted from a charge related to former banking facilities. Excluding the after-tax effect of merger and integration expense, the pro forma return on average assets decreased to 1.09 percent from 1.28 percent, while the pro forma return on average common equity decreased to 12.77 percent from 14.67 percent. Period-end loans increased by 8 percent. Total nonperforming and renegotiated assets dropped by $90 million and the ratio to total assets decreased to 0.63 percent from 1.00 percent. The Tier 1 and Total risk-based capital ratios were 9.04 percent and 11.16 percent, respectively, compared with 9.42 percent and 11.88 percent, respectively. For the nine months ended September 30, 1996, net income was $190 million, compared with $225 million in the first nine months of 1995. Pro forma earnings, excluding the after-tax effect of merger and integration expense, was $243 million, an 8 percent increase over the first nine months of 1995. Other comparisons between the two periods include: Pro forma earnings per average common share, excluding after-tax merger and integration expense, increased from $3.73 to $4.05. Income before merger and integration expense and income taxes was $403 million, a $28 million, or 8 percent, increase. Gross revenue (on a taxable-equivalent basis) was $1.20 billion, a $51 million, or 4 percent, increase. Noninterest expense, excluding merger and integration expense, was $763 million, a $37 million, or 5 percent, increase. Approximately one-third of this increase ($12 million) resulted from a charge related to former banking facilities. Excluding after-tax merger and integration expense, the pro forma return on average assets declined to 1.17 percent from 1.19 percent, while the pro forma return on average common equity increased to 13.56 percent from 13.50 percent. 11 TABLE 1 -- ANALYSIS OF EARNINGS
FOR THE THREE MONTHS ENDED ------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, DATA) 1996 1996 1996 1995 1995 - ---------------------------------------- ------------- -------- --------- ------------ ------------- EARNINGS SUMMARY Interest income (1)................... $482,404 $475,625 $485,196 $494,399 $471,057 Interest expense...................... 189,727 185,362 187,401 193,127 182,394 ------------- -------- --------- ------------ ------------- Net interest income (1)............... 292,677 290,263 297,795 301,272 288,663 Provision for loan losses............. 10,000 10,000 10,000 8,750 12,000 Noninterest income.................... 107,280 105,550 102,874 100,981 98,622 Noninterest expense, excluding merger and integration expense............. 258,523 252,518 252,024 251,737 236,228 ------------- -------- --------- ------------ ------------- Income before merger and integration expense and income taxes (1)........ 131,434 133,295 138,645 141,766 139,057 Merger and integration expense........ 25,552 61,266 -- -- -- ------------- -------- --------- ------------ ------------- Income before income taxes (1)........ 105,882 72,029 138,645 141,766 139,057 Taxable-equivalent adjustment......... 1,089 2,024 2,128 2,234 2,529 Income tax expense.................... 42,810 25,597 53,251 51,149 52,675 ------------- -------- --------- ------------ ------------- Net income............................ $ 61,983 $ 44,408 $ 83,266 $ 88,383 $ 83,853 ------------- -------- --------- ------------ ------------- ------------- -------- --------- ------------ ------------- Net income applicable to:............. Common stock........................ $ 55,745 $ 39,096 $ 76,768 $ 80,736 $ 76,686 ------------- -------- --------- ------------ ------------- ------------- -------- --------- ------------ ------------- Parent direct interest in bank subsidiary........................ $ 3,411 $ 2,486 $ 3,672 $ 4,821 $ 4,341 ------------- -------- --------- ------------ ------------- ------------- -------- --------- ------------ ------------- RECAP OF EARNINGS Net income............................ $ 61,983 $ 44,408 $ 83,266 $ 88,383 $ 83,853 Merger and integration expense (after-tax)......................... 15,025 38,323 -- -- -- ------------- -------- --------- ------------ ------------- Pro forma earnings, excluding merger and integration expense............. $ 77,008 $ 82,731 $ 83,266 $ 88,383 $ 83,853 ------------- -------- --------- ------------ ------------- ------------- -------- --------- ------------ ------------- Net income applicable to common stock............................... $ 55,745 $ 39,096 $ 76,768 $ 80,736 $ 76,686 Merger and integration expense (after-tax), applicable to common stock............................... 14,128 36,036 -- -- -- ------------- -------- --------- ------------ ------------- Pro forma earnings applicable to common stock, excluding merger and integration expense................. $ 69,873 $ 75,132 $ 76,768 $ 80,736 $ 76,686 ------------- -------- --------- ------------ ------------- ------------- -------- --------- ------------ ------------- PER AVERAGE COMMON SHARE Net income (2)........................ $ 1.02 $ 0.71 $ 1.40 $ 1.48 $ 1.40 Merger and integration expense (after-tax) (2)..................... 0.26 0.66 -- -- -- ------------- -------- --------- ------------ ------------- Pro forma earnings, excluding merger and integration expense (2)......... $ 1.28 $ 1.37 $ 1.40 $ 1.48 $ 1.40 ------------- -------- --------- ------------ ------------- ------------- -------- --------- ------------ ------------- Dividends (3)......................... $ 0.35 $ 0.35 $ 0.35 $ 0.35 $ 0.35 Book value (end of period)............ 40.04 39.29 39.07 40.04 38.52 Weighted average common shares outstanding (4)..................... 54,759 54,752 54,690 54,665 54,641 FOR THE NINE MONTHS ENDED ----------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE SEPTEMBER 30, SEPTEMBER 30, DATA) 1996 1995 - ---------------------------------------- ------------- ------------- EARNINGS SUMMARY Interest income (1)................... $1,443,225 $1,365,439 Interest expense...................... 562,490 511,626 ------------- ------------- Net interest income (1)............... 880,735 853,813 Provision for loan losses............. 30,000 44,500 Noninterest income.................... 315,704 291,497 Noninterest expense, excluding merger and integration expense............. 763,065 725,830 ------------- ------------- Income before merger and integration expense and income taxes (1)........ 403,374 374,980 Merger and integration expense........ 86,818 -- ------------- ------------- Income before income taxes (1)........ 316,556 374,980 Taxable-equivalent adjustment......... 5,241 8,209 Income tax expense.................... 121,658 142,212 ------------- ------------- Net income............................ $ 189,657 $ 224,559 ------------- ------------- ------------- ------------- Net income applicable to:............. Common stock........................ $ 171,608 $ 203,460 ------------- ------------- ------------- ------------- Parent direct interest in bank subsidiary........................ $ 9,569 $ 12,620 ------------- ------------- ------------- ------------- RECAP OF EARNINGS Net income............................ $ 189,657 $ 224,559 Merger and integration expense (after-tax)......................... 53,348 -- ------------- ------------- Pro forma earnings, excluding merger and integration expense............. $ 243,005 $ 224,559 ------------- ------------- ------------- ------------- Net income applicable to common stock............................... $ 171,608 $ 203,460 Merger and integration expense (after-tax), applicable to common stock............................... 50,164 -- ------------- ------------- Pro forma earnings applicable to common stock, excluding merger and integration expense................. $ 221,772 $ 203,460 ------------- ------------- ------------- ------------- PER AVERAGE COMMON SHARE Net income (2)........................ $ 3.14 $ 3.73 Merger and integration expense (after-tax) (2)..................... 0.91 -- ------------- ------------- Pro forma earnings, excluding merger and integration expense (2)......... $ 4.05 $ 3.73 ------------- ------------- ------------- ------------- Dividends (3)......................... $ 1.05 $ 1.05 Book value (end of period)............ 40.04 38.52 Weighted average common shares outstanding (4)..................... 54,734 54,505
- ------------------------------ (1) Includes amounts to convert tax-exempt income, primarily municipal securities income, to a taxable-equivalent basis. (2) Based on net income applicable to common stock. (3) Amounts prior to merger are based on Union Bank only and do not include the dividend of $145 million paid to Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. (4) In thousands. 12 NET INTEREST INCOME The Company's operating results depend primarily on net interest income (the difference between the interest earned on loans and investments less interest expense on deposit accounts and borrowings). Primary factors affecting the level of net interest income include the margin between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, as well as the volume and composition of average interest earning assets and interest bearing liabilities. Net interest income before the provision for loan losses on a fully taxable-equivalent basis was $293 million for the third quarter of 1996 and $289 million for the third quarter of 1995. This increase of $4 million was primarily attributable to an increase in the volume of loans the Bank has originated and a reduction in the level of nonperforming and renegotiated assets in comparison to a year ago, partly offset by the effect of a decrease in the net interest margin from 4.96 percent to 4.72 percent. This net interest margin decrease was primarily attributable to a decrease in the proportion of funding provided by noninterest bearing and lower cost (interest bearing, savings and consumer time) sources of funds and to an increase in the cost of such funding sources while other rates declined. The proportion of funding of earning assets provided by noninterest bearing and other lower cost sources of funds decreased from 63 percent in the third quarter of 1995 to 61 percent in the third quarter of 1996, primarily due to a higher growth rate for loans than for noninterest bearing and other lower cost sources of funds. Net interest income before the provision for loan losses on a fully taxable-equivalent basis was $881 million for the first nine months of 1996 and $854 million for the first nine months of 1995. The increase of $27 million was primarily attributable to an increase in the volume of loans the Bank has originated and a reduction in the level of nonperforming and renegotiated assets in comparison to a year ago, partly offset by the effect of a decrease in the net interest margin from 5.09 percent to 4.76 percent. This decrease was primarily attributable to a decrease in the proportion of funding provided by noninterest bearing and lower cost (interest bearing, savings and consumer time) sources of funds and to an increase in the cost of such funding sources while other rates declined. The proportion of funding provided by noninterest bearing and other lower cost sources of funds decreased from 64 percent in the first nine months of 1995 to 60 percent in the first nine months of 1996, primarily due to a higher growth rate for loans than for noninterest bearing and other lower cost sources of funds. 13 TABLE 2 -- CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES
FOR THE THREE MONTHS ENDED --------------------------------------------------------- SEPTEMBER 30, 1996 JUNE 30, 1996 ------------------------------ ------------------------ INTEREST AVERAGE INTEREST AVERAGE INCOME/ RATE AVERAGE INCOME/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE (1) BALANCE EXPENSE - ----------------------------------------------------------------- ----------- -------- ------- ----------- ----------- ASSETS Loans: (2) Domestic....................................................... $19,508,311 $401,481 8.19% $19,273,264 $ 396,804 Foreign........................................................ 1,143,146 18,390 6.40 1,114,212 16,850 Investment securities: Taxable........................................................ 2,119,276 33,909 6.37 2,082,598 32,099 Tax-exempt..................................................... 147,623 3,682 9.92 157,246 4,065 Interest bearing deposits in banks............................... 864,087 12,489 5.75 834,149 11,827 Federal funds sold and securities purchased under resale agreements...................................................... 433,494 6,028 5.53 547,527 7,396 Trading account securities....................................... 439,227 6,425 5.82 483,769 6,584 ----------- -------- ----------- ----------- Total earning assets......................................... 24,655,164 482,404 7.78 24,492,765 475,625 -------- ----------- Allowance for loan losses........................................ (543,646) (546,744) Cash and due from banks.......................................... 1,937,016 1,920,112 OREO............................................................. 35,046 32,641 Premises and equipment, net...................................... 425,019 431,592 Other assets..................................................... 1,473,295 1,467,835 ----------- ----------- Total assets................................................. $27,981,894 $27,798,201 ----------- ----------- ----------- ----------- LIABILITIES Deposits in domestic offices: Interest bearing............................................... $ 5,038,546 34,143 2.70 $ 4,809,139 32,135 Savings and consumer time...................................... 2,851,566 23,828 3.32 2,945,632 26,773 Large time..................................................... 4,252,826 58,302 5.45 3,724,593 48,173 Deposits in foreign offices...................................... 1,398,989 18,339 5.22 1,488,980 17,687 ----------- -------- ----------- ----------- Total interest bearing deposits.............................. 13,541,927 134,612 3.95 12,968,344 124,768 ----------- -------- ----------- ----------- Federal funds purchased and securities sold under repurchase agreements...................................................... 817,236 10,419 5.07 1,016,997 11,544 Subordinated capital notes....................................... 452,211 7,492 6.59 495,369 7,889 Other borrowed funds............................................. 2,759,563 37,204 5.36 3,038,532 41,161 ----------- -------- ----------- ----------- Total borrowed funds......................................... 4,029,010 55,115 5.44 4,550,898 60,594 ----------- -------- ----------- ----------- Total interest bearing liabilities........................... 17,570,937 189,727 4.30 17,519,242 185,362 -------- ----------- Demand deposits.................................................. 6,640,131 6,599,174 Other liabilities................................................ 1,335,204 1,253,318 ----------- ----------- Total liabilities............................................ 25,546,272 25,371,734 SHAREHOLDERS' EQUITY............................................. 2,435,622 2,426,467 ----------- ----------- Total liabilities and shareholders' equity................... $27,981,894 $27,798,201 ----------- ----------- ----------- ----------- Net interest income/margin (3)................................... 292,677 4.72% 290,263 Less taxable-equivalent adjustment............................... 1,089 2,024 -------- ----------- Net interest income.......................................... $291,588 $ 288,239 -------- ----------- -------- ----------- AVERAGE RATE (DOLLARS IN THOUSANDS) (1) - ----------------------------------------------------------------- ------- ASSETS Loans: (2) Domestic....................................................... 8.28% Foreign........................................................ 6.08 Investment securities: Taxable........................................................ 6.20 Tax-exempt..................................................... 10.40 Interest bearing deposits in banks............................... 5.70 Federal funds sold and securities purchased under resale agreements...................................................... 5.43 Trading account securities....................................... 5.47 Total earning assets......................................... 7.81 Allowance for loan losses........................................ Cash and due from banks.......................................... OREO............................................................. Premises and equipment, net...................................... Other assets..................................................... Total assets................................................. LIABILITIES Deposits in domestic offices: Interest bearing............................................... 2.69 Savings and consumer time...................................... 3.66 Large time..................................................... 5.20 Deposits in foreign offices...................................... 4.78 Total interest bearing deposits.............................. 3.87 Federal funds purchased and securities sold under repurchase agreements...................................................... 4.57 Subordinated capital notes....................................... 6.41 Other borrowed funds............................................. 5.45 Total borrowed funds......................................... 5.36 Total interest bearing liabilities........................... 4.26 Demand deposits.................................................. Other liabilities................................................ Total liabilities............................................ SHAREHOLDERS' EQUITY............................................. Total liabilities and shareholders' equity................... Net interest income/margin (3)................................... 4.77% Less taxable-equivalent adjustment............................... Net interest income..........................................
- ------------------------------ (1) Yields on loans, tax-exempt securities, net interest income and net yield on earning assets are presented on a fully taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming and renegotiated loans. Included in interest income on loans is the amortized portion of net loan origination fees (costs), representing an adjustment to the yield. (3) Fully taxable-equivalent basis. 14 TABLE 2 -- CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES (CONTINUED)
FOR THE THREE MONTHS ENDED -------------------------------------------------------------------------------------------------- MARCH 31, 1996 DECEMBER 31, 1995 SEPTEMBER 30, 1995 -------------------------------- ------------------------------ ------------------------------ INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE (DOLLARS IN THOUSANDS) BALANCE EXPENSE (1) BALANCE EXPENSE (1) BALANCE EXPENSE (1) - ------------------------------ ----------- ---------- ------- ----------- -------- ------- ----------- -------- ------- ASSETS Loans: (2) Domestic.................... $18,993,197 $ 401,441 8.50% $18,586,389 $407,763 8.70% $17,940,324 $390,656 8.64% Foreign..................... 1,200,601 19,173 6.42 1,219,905 19,553 6.36 1,138,696 17,784 6.20 Investment securities: Taxable..................... 2,114,805 32,754 6.23 2,213,092 33,517 6.01 2,162,511 32,399 5.94 Tax-exempt.................. 161,818 4,136 10.28 169,879 4,348 10.15 182,245 4,642 10.11 Interest bearing deposits in banks........................ 968,414 14,267 5.93 838,765 13,064 6.18 1,031,802 15,993 6.15 Federal funds sold and securities purchased under resale agreements............ 603,083 8,419 5.61 657,534 9,836 5.93 310,897 4,731 6.04 Trading account securities.... 352,097 5,006 5.72 414,307 6,318 6.05 318,644 4,852 6.04 ----------- ---------- ----------- -------- ----------- -------- Total earning assets...... 24,394,015 485,196 8.00 24,099,871 494,399 8.14 23,085,119 471,057 8.10 ---------- -------- -------- Allowance for loan losses..... (554,717) (562,656) (574,509) Cash and due from banks....... 1,859,210 1,867,042 1,642,240 OREO.......................... 38,354 39,044 40,556 Premises and equipment, net... 424,530 421,470 419,591 Other assets.................. 1,267,329 1,314,033 1,366,951 ----------- ----------- ----------- Total assets.............. $27,428,721 $27,178,804 $25,979,948 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES Deposits in domestic offices: Interest bearing............ $ 4,797,823 31,863 2.67 $ 4,865,000 33,245 2.71 $ 4,782,958 31,772 2.64 Savings and consumer time... 2,916,873 26,897 3.71 2,884,856 27,174 3.74 2,880,631 26,780 3.69 Large time.................. 3,753,599 49,818 5.34 3,175,021 45,033 5.63 2,656,523 37,528 5.60 Deposits in foreign offices... 1,497,434 17,723 4.76 1,624,207 20,782 5.08 1,753,074 23,206 5.25 ----------- ---------- ----------- -------- ----------- -------- Total interest bearing deposits................ 12,965,729 126,301 3.92 12,549,084 126,234 3.99 12,073,186 119,286 3.92 ----------- ---------- ----------- -------- ----------- -------- Federal funds purchased and securities sold under repurchase agreements........ 1,205,614 16,347 5.45 1,276,551 18,385 5.71 1,534,413 22,047 5.70 Subordinated capital notes.... 497,413 8,235 6.66 528,206 9,180 6.90 614,521 10,683 6.90 Other borrowed funds.......... 2,659,468 36,518 5.52 2,677,286 39,328 5.83 2,066,116 30,378 5.83 ----------- ---------- ----------- -------- ----------- -------- Total borrowed funds...... 4,362,495 61,100 5.63 4,482,043 66,893 5.92 4,215,050 63,108 5.94 ----------- ---------- ----------- -------- ----------- -------- Total interest bearing liabilities............. 17,328,224 187,401 4.35 17,031,127 193,127 4.50 16,288,236 182,394 4.44 ---------- -------- -------- Demand deposits............... 6,462,654 6,516,502 6,137,218 Other liabilities............. 1,133,896 1,196,528 1,193,830 ----------- ----------- ----------- Total liabilities......... 24,924,774 24,744,157 23,619,284 SHAREHOLDERS' EQUITY.......... 2,503,947 2,434,647 2,360,664 ----------- ----------- ----------- Total liabilities and shareholders' equity.... $27,428,721 $27,178,804 $25,979,948 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income/margin (3).......................... 297,795 4.91% 301,272 4.96% 288,663 4.96% Less taxable-equivalent adjustment................... 2,128 2,234 2,529 ---------- -------- -------- Net interest income....... $ 295,667 $299,038 $286,134 ---------- -------- -------- ---------- -------- --------
- ------------------------------ (1) Yields on loans, tax-exempt securities, net interest income and net yield on earning assets are presented on a fully taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming and renegotiated loans. Included in interest income on loans is the amortized portion of net loan origination fees (costs), representing an adjustment to the yield. (3) Fully taxable-equivalent basis. 15 TABLE 2 -- CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES (CONTINUED)
FOR THE NINE MONTHS ENDED ------------------------------------------------------------------- SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 -------------------------------- -------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE (DOLLARS IN THOUSANDS) BALANCE EXPENSE (1) BALANCE EXPENSE (1) - ---------------------------------------- ----------- ---------- ------- ----------- ---------- ------- ASSETS Loans: (2) Domestic.............................. $19,259,531 $1,199,726 8.30% $17,540,142 $1,136,983 8.67% Foreign............................... 1,157,275 54,413 6.26 1,142,128 55,625 6.51 Investment securities: Taxable............................... 2,105,609 98,762 6.25 1,999,383 86,693 5.80 Tax-exempt............................ 155,533 11,883 10.19 194,359 14,637 10.07 Interest bearing deposits in banks...... 888,793 38,583 5.70 962,082 45,137 6.27 Federal funds sold and securities purchased under resale agreements...... 527,690 21,843 5.44 271,342 12,411 6.12 Trading account securities.............. 428,844 18,015 5.52 300,562 13,953 6.21 ----------- ---------- ----------- ---------- Total earning assets................ 24,523,275 1,443,225 7.82 22,409,998 1,365,439 8.15 ---------- ---------- Allowance for loan losses............... (548,351) (577,352) Cash and due from banks................. 1,900,179 1,543,228 OREO.................................... 35,368 41,622 Premises and equipment, net............. 424,324 412,142 Other assets............................ 1,346,753 1,352,791 ----------- ----------- Total assets........................ $27,681,548 $25,182,429 ----------- ----------- ----------- ----------- LIABILITIES Deposits in domestic offices: Interest bearing...................... $ 4,882,407 98,141 2.69 $ 4,846,894 93,648 2.58 Savings and consumer time............. 2,904,497 77,498 3.56 2,850,221 75,119 3.52 Large time............................ 3,913,343 156,293 5.33 2,238,930 83,964 5.01 Deposits in foreign offices............. 1,461,572 53,749 4.91 1,845,999 75,065 5.44 ----------- ---------- ----------- ---------- Total interest bearing deposits..... 13,161,819 385,681 3.90 11,782,044 327,796 3.72 ----------- ---------- ----------- ---------- Federal funds purchased and securities sold under repurchase agreements....... 1,012,567 38,310 5.04 1,421,229 60,972 5.74 Subordinated capital notes.............. 481,556 23,616 6.53 641,820 33,358 6.95 Other borrowed funds.................... 2,820,227 114,883 5.43 2,015,942 89,500 5.94 ----------- ---------- ----------- ---------- Total borrowed funds................ 4,314,350 176,809 5.47 4,078,991 183,830 6.03 ----------- ---------- ----------- ---------- Total interest bearing liabilities....................... 17,476,169 562,490 4.29 15,861,035 511,626 4.31 ---------- ---------- Demand deposits......................... 6,540,717 5,871,790 Other liabilities....................... 1,209,435 1,151,559 ----------- ----------- Total liabilities................... 25,226,321 22,884,384 SHAREHOLDERS' EQUITY.................... 2,455,227 2,298,045 ----------- ----------- Total liabilities and shareholders' equity............................ $27,681,548 $25,182,429 ----------- ----------- ----------- ----------- Net interest income/margin (3).......... 880,735 4.76% 853,813 5.09% Less taxable-equivalent adjustment...... 5,241 8,209 ---------- ---------- Net interest income................. $ 875,494 $ 845,604 ---------- ---------- ---------- ----------
- ------------------------------ (1) Yields on loans, tax-exempt securities, net interest income and net yield on earning assets are presented on a fully taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming and renegotiated loans. Included in interest income on loans is the amortized portion of net loan origination fees (costs), representing an adjustment to the yield. (3) Fully taxable-equivalent basis. 16 NONINTEREST INCOME During the third quarter of 1996, the Company had noninterest income of $107 million compared with $99 million for the same period in 1995. This increase of $9 million was primarily due to $4 million of non-recurring gains (in other) in the third quarter of 1996 and a $3 million increase in service charges on deposit accounts, a $3 million increase in trust fees, a $2 million increase in fees from investment services, partially offset by a $3 million decrease in foreign exchange income. For the nine months ended September 30, 1996, noninterest income increased to $316 million from $291 million for the same period in 1995. This increase of $24 million was primarily due to a $6 million increase in trust fees, a $5 million increase in service charges on deposit accounts, a $6 million increase in net gains on the sale of investment securities and a $9 million increase in other noninterest income, (including $4 million of non-recurring gains in the third quarter of 1996) partially offset by a $5 million decrease in foreign exchange income. TABLE 3 -- NONINTEREST INCOME
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED ------------------------------------------------------------------ ---------------------------- SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1996 1996 1996 1995 1995 1996 1995 - ------------------------- ------------- --------- ----------- ------------ ------------- ------------- ------------- Service charges on deposit accounts........ $ 26,799 $ 25,067 $ 23,961 $ 23,957 $ 23,835 $ 75,827 $ 70,984 Trust fees............... 24,098 23,309 22,248 23,315 21,529 69,655 63,785 International commissions and fees................ 16,120 17,124 16,278 17,422 17,017 49,522 51,776 Credit card merchant fees.................... 13,721 12,905 11,598 11,494 12,461 38,224 34,273 Merchant banking fees.... 4,729 5,234 9,248 6,665 5,631 19,211 17,818 Investment services...... 5,225 4,714 4,259 4,491 3,693 14,198 12,350 Foreign exchange......... 2,641 3,330 3,686 3,904 5,498 9,657 15,139 Investment securities gains (losses), net..... 628 2,621 616 966 (348) 3,865 (1,668) Other.................... 13,319 11,246 10,980 8,767 9,306 35,545 27,040 ------------- --------- ----------- ------------ ------------- ------------- ------------- Total noninterest income............... $ 107,280 $ 105,550 $ 102,874 $ 100,981 $ 98,622 $ 315,704 $ 291,497 ------------- --------- ----------- ------------ ------------- ------------- ------------- ------------- --------- ----------- ------------ ------------- ------------- -------------
NONINTEREST EXPENSE Noninterest expense, excluding merger and integration expense of $26 million, was $259 million for the third quarter of 1996, compared with $236 million for the comparable quarter in 1995. This increase of $22 million or 9 percent, included a $12 million charge related to former banking facilities. Other expense increases primarily reflected expansion of the community banking business, including the opening of 6 new offices and 11 new in-store locations in the past year, as well as regular increases in salaries. Since the merger-related consolidation of 20 branches occurred in September 1996, savings related to this action are not reflected in third quarter 1996 results. Total noninterest expense, excluding $87 million of merger and integration expense, increased to $763 million for the nine months ended September 30, 1996 from $726 million for the same period in 1995. The same factors discussed above in the quarterly comparison accounted for most of this increase. In addition, there were increases of $4 million in credit card processing expense (roughly offset by non-interest revenue from the growth in activity) and $5 million in foreclosed asset expense (due primarily to write-downs and expenses in the first quarter of 1996), offset by a $19 million decrease in regulatory authority assessment expense (principally FDIC deposit assessment expense). 17 TABLE 4 -- NONINTEREST EXPENSE
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED ------------------------------------------------------------------ ---------------------------- SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1996 1996 1996 1995 1995 1996 1995 - ------------------------ ------------- ---------- ---------- ------------ ------------- ------------- ------------- Salaries................ $ 116,146 $ 117,725 $ 115,178 $ 115,885 $ 111,400 $ 349,049 $ 327,174 Employee benefits....... 21,861 22,239 27,173 19,036 21,611 71,273 73,768 ------------- ---------- ---------- ------------ ------------- ------------- ------------- Salaries and employee benefits............ 138,007 139,964 142,351 134,921 133,011 420,322 400,942 Net occupancy........... 35,439 24,270 21,955 23,390 22,877 81,664 69,552 Equipment............... 14,003 13,336 13,813 14,540 13,803 41,152 40,462 Credit card processing............. 9,619 10,038 8,369 8,187 8,401 28,026 23,563 Communications.......... 7,684 8,309 7,726 8,139 7,616 23,719 22,379 Advertising and public relations.............. 5,508 6,702 6,993 5,628 5,240 19,203 16,496 Printing and office supplies............... 7,939 6,434 6,098 6,242 5,765 20,471 16,389 Professional services... 6,144 6,592 5,869 5,608 7,129 18,605 19,757 Armored car............. 5,487 5,196 5,046 4,987 4,952 15,729 14,484 Data processing......... 5,568 4,689 5,318 4,963 4,380 15,575 13,594 Software................ 3,966 3,678 3,676 4,335 3,628 11,320 9,503 Intangible asset amortization........... 3,338 3,338 3,338 3,338 3,338 10,014 10,014 Travel.................. 3,553 3,822 3,074 3,342 3,192 10,449 8,816 Net operating reserves............... 1,979 2,148 2,330 9,089 3,533 6,457 7,129 Foreclosed asset expense (income)............... (696) 867 3,274 (2,035) (995) 3,445 (1,127) Regulatory authority assessments............ 956 312 959 2,579 179 2,227 20,852 Other................... 10,029 12,823 11,835 14,484 10,179 34,687 33,025 ------------- ---------- ---------- ------------ ------------- ------------- ------------- Noninterest expense, excluding merger and integration expense............. 258,523 252,518 252,024 251,737 236,228 763,065 725,830 Merger and integration expense................ 25,552 61,266 -- -- -- 86,818 -- ------------- ---------- ---------- ------------ ------------- ------------- ------------- Total noninterest expense............. $ 284,075 $ 313,784 $ 252,024 $ 251,737 $ 236,228 $ 849,883 $ 725,830 ------------- ---------- ---------- ------------ ------------- ------------- ------------- ------------- ---------- ---------- ------------ ------------- ------------- -------------
18 MERGER EXPENSES In connection with the merger, $26 million of merger and integration expenses were recognized in the results of the third quarter of 1996. These costs included severance, retention, and other employee related costs ($9 million); costs incurred in connection with the planned disposition of certain facilities ($9 million); professional fees ($1 million); and other merger and integration related expenses ($7 million).
SEVERANCE, RETENTION AND OTHER EMPLOYEE FACILITIES PROFESSIONAL (DOLLARS IN THOUSANDS) RELATED COSTS COSTS FEES OTHER TOTAL - -------------------------------------------------- --------------- --------- ----------- --------- --------- Provision for merger and integration costs........ $ 30,500 $ 36,929 $ 6,876 $ 12,513 $ 86,818 Utilization for the period Cash............................................ 5,880 1,095 6,876 9,496 23,347 Noncash......................................... -- 5,000 -- 1,690 6,690 ------- --------- ----------- --------- --------- Total......................................... 5,880 6,095 6,876 11,186 30,037 ------- --------- ----------- --------- --------- Liability balance, September 30, 1996............. $ 24,620 $ 30,834 $ 0 $ 1,327 $ 56,781 ------- --------- ----------- --------- --------- ------- --------- ----------- --------- ---------
It is expected that additional merger-related expenses which do not qualify for current recognition will be incurred over the next two quarters. These expenses will also be classified as merger and integration expense when incurred. INCOME TAXES The effective tax rates for the three months ended September 30, 1996 and 1995 were 41.1 percent and 38.6 percent respectively. The increase in the effective tax rate was primarily attributable to an increase in the effective California tax rate as a result of the combination of Union Bank with BanCal Tri-State Corporation and of their parents, The Bank of Tokyo, Ltd. and The Mitsubishi Bank, Limited. LOANS OUTSTANDING The Company's lending activities are predominantly domestic, with such loans comprising approximately 94 percent of the portfolio at September 30, 1996 and December 31, 1995. Overall the Company's loan portfolio at September 30, 1996 increased by $721 million compared to December 31, 1995 and $1.54 billion in comparison to September 30, 1995. The increase from September 30, 1995, was primarily attributable to the commercial and residential mortgage portfolio, which grew by $1.22 billion. The Company attributes this growth to the continuing improvement in the California economy, particularly in the real estate sector. Commercial, financial and industrial loans represent the largest category in the loan portfolio. These loans are principally to major corporations, middle market businesses, and small businesses, with no concentration exceeding ten percent in any one business segment. At September 30, 1996, December 31, 1995 and September 30, 1995, the commercial, financial and industrial loan portfolio was $9.3 billion or 44 percent of the total loan portfolio, $9.6 billion or 48 percent and $9.1 billion or 47 percent, respectively. The Company's construction portfolio totaled $364 million or 2 percent of total loans at September 30, 1996 as compared to $394 million or 2 percent at December 31, 1995 and $435 million or 2 percent at September 30, 1995. Mortgage loans represented $6.2 billion or 30 percent of total loans at September 30, 1996, $5.3 billion or 26 percent at December 31, 1995 and $5.0 billion or 26 percent at September 30, 1995. The mortgage portfolio consists of loans on commercial and industrial projects and loans secured by one to four family residential properties, primarily in California. Consumer loans totaled $3.0 billion or 14 percent of total loans at September 30, 1996 as compared to $2.9 billion or 14 percent at December 31, 1995 and $2.9 billion or 15 percent at September 30, 1995. This portfolio is primarily comprised of installment loans and home equity loans. 19 Lease financing totaled $840 million or 4 percent of total loans at September 30, 1996 as compared to $845 million or 4 percent at December 31, 1995 and $821 million or 4 percent at September 30, 1995. Foreign loans totaled $1.3 billion or 6 percent of total loans at September 30, 1996 as compared to $1.2 billion or 6 percent at December 31, 1995 and $1.2 billion or 6 percent at September 30, 1995. TABLE 5 -- LOANS OUTSTANDING
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1996 1996 1996 1995 1995 - ------------------------------------- ------------- ------------- ------------- ------------- ------------- DOMESTIC: Commercial, financial and industrial....................... $ 9,292,972 $ 9,395,499 $ 9,456,070 $ 9,614,069 $ 9,111,128 Construction....................... 364,497 387,309 410,608 394,472 435,139 Mortgage: Residential...................... 3,931,255 3,876,344 3,726,642 3,406,873 3,202,832 Commercial....................... 2,274,726 1,951,957 1,870,576 1,871,489 1,785,764 ------------- ------------- ------------- ------------- ------------- Total mortgage................. 6,205,981 5,828,301 5,597,218 5,278,362 4,988,596 Consumer: Installment...................... 1,639,034 1,502,731 1,421,179 1,393,859 1,356,699 Home equity...................... 982,657 1,011,937 1,031,199 1,064,972 1,086,805 Credit card and other lines of credit......................... 364,275 416,286 412,385 427,680 409,728 ------------- ------------- ------------- ------------- ------------- Total consumer................. 2,985,966 2,930,954 2,864,763 2,886,511 2,853,232 Lease financing.................... 839,868 830,888 830,098 845,170 820,677 ------------- ------------- ------------- ------------- ------------- Total domestic loans........... 19,689,284 19,372,951 19,158,757 19,018,584 18,208,772 Loans originated in foreign offices............................. 1,257,481 1,107,727 1,182,578 1,207,505 1,199,752 ------------- ------------- ------------- ------------- ------------- Total loans.................... 20,946,765 20,480,678 20,341,335 20,226,089 19,408,524 Allowance for loan losses............ 535,087 545,345 547,401 555,149 566,812 ------------- ------------- ------------- ------------- ------------- Net loans outstanding.......... $ 20,411,678 $ 19,935,333 $ 19,793,934 $ 19,670,940 $ 18,841,712 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level considered appropriate by management and is based on an ongoing assessment of the risks inherent in the loan and lease portfolio, both disbursed and undisbursed. The allowance is increased by the provision for loan losses, which is charged against current period operating results, and is decreased by the amount of net loan charge-offs during the period. In evaluating the adequacy of the allowance for loan losses, management incorporates such factors as collateral value, portfolio composition and concentrations, trends in local and national economic conditions and the impact of such trends on the financial strength of its borrowers. Allocation of the allowance for loan losses by loan category is based on management's assessment of past loan loss experience for particular loan categories adjusted to take into account current and prospective economic conditions. While reserves are segmented by broad portfolio categories to analyze the adequacy of the allowance for loan losses, the allowance is general in nature and is available for the portfolio in its entirety. Although management believes that the allowance for loan losses is adequate, future provisions will be subject to continuing evaluation of inherent risk in the loan portfolio. At September 30, 1996, the Company's allowance for loan losses was $535 million or 2.55 percent of the total loan portfolio. This compares with an allowance for loan losses of $555 million or 2.74 percent of the total loan portfolio at December 31, 1995. During the first nine months of 1996, the Company recorded a provision for loan losses of $10 million in each quarter compared with $9 million for the fourth quarter of 1995 and $12 million for the third quarter of 1995. 20 The decline in the provision for loan losses in comparing the third quarter of 1996 to the third quarter of 1995 reflects the improvement in the quality of the Company's loan portfolio. During the third quarter of 1996, the Company had net loan charge offs of $20 million, compared to net loan charge offs of $19 million for the quarter ended September 30, 1995. An $8 million reduction in total loans charged off was offset by a $9 million reduction in total loan loss recoveries. The Company continues to evaluate its loan portfolio for impairment as defined by Statement of Financial Accounting Standard No. 114, as amended. At September 30, 1996, total impaired loans were $123 million and the associated impairment allowance was $10 million. This compares to impaired loans of $173 million and an associated impairment allowance of $16 million at December 31, 1995. TABLE 6 -- ALLOWANCE FOR LOAN LOSSES
FOR THE THREE MONTHS ENDED ------------------------------------------------------------------ SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1996 1996 1996 1995 1995 - ------------------------------------------------- ------------- ---------- ---------- ------------ ------------- Balance, beginning of period..................... $ 545,345 $ 547,401 $ 555,149 $ 566,812 $ 573,971 Loans charged off: Domestic: Commercial, financial and industrial......... 10,289 6,628 11,937 18,658 7,130 Construction................................. -- 806 67 4 3,610 Mortgage..................................... 5,086 2,621 4,070 5,932 12,854 Consumer..................................... 12,293 12,162 13,823 12,694 13,620 Lease financing.............................. 716 577 647 1,005 277 Foreign........................................ 1,256 61 58 36 259 ------------- ---------- ---------- ------------ ------------- Total loans charged off.................... 29,640 22,855 30,602 38,329 37,750 Loan loss recoveries: Domestic: Commercial, financial and industrial......... 4,030 4,271 6,153 6,296 10,754 Construction................................. -- 129 1 38 6 Mortgage..................................... 2,230 3,097 2,640 7,746 4,897 Consumer..................................... 3,027 3,147 3,946 3,759 2,846 Lease financing.............................. 95 143 86 70 62 Foreign........................................ -- 12 28 7 26 ------------- ---------- ---------- ------------ ------------- Total loan loss recoveries................. 9,382 10,799 12,854 17,916 18,591 ------------- ---------- ---------- ------------ ------------- Net loans charged off.................... 20,258 12,056 17,748 20,413 19,159 Provision for loan losses........................ 10,000 10,000 10,000 8,750 12,000 ------------- ---------- ---------- ------------ ------------- Balance, end of period........................... $ 535,087 $ 545,345 $ 547,401 $ 555,149 $ 566,812 ------------- ---------- ---------- ------------ ------------- ------------- ---------- ---------- ------------ ------------- Allowance for loan losses to total loans......... 2.55% 2.66% 2.69% 2.74% 2.92% Provision for loan losses to net loans charged off............................................. 49.36 82.95 56.34 42.86 62.63 Recoveries of loans to loans charged off in the previous period................................. 41.05 35.29 33.54 47.46 54.03 Net loans charged off to average loans outstanding for the period (1).................. 0.39 0.24 0.35 0.41 0.40
- ------------------------------ (1) Annualized. 21 ASSET QUALITY At September 30, 1996, total nonperforming and renegotiated loans were $148 million or 0.71 percent of total loans outstanding compared with $210 million or 1.04 percent and $231 million or 1.19 percent at December 31, 1995 and September 30, 1995, respectively. The decrease of $83 million from September 30, 1995 to September 30, 1996, was primarily the result of decreases of $40 million in the construction portfolio and $34 million in the mortgage portfolio. TABLE 7 -- NONPERFORMING AND RENEGOTIATED ASSETS
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1996 1996 1996 1995 1995 - -------------------------------------------- ------------- ---------- ---------- ------------ ------------- NONACCRUAL LOANS: Domestic: Commercial, financial and industrial.... $ 70,920 $ 94,303 $ 81,028 $ 84,336 $ 77,276 Construction............................ 10,670 10,974 30,630 40,026 50,976 Mortgage: Residential (1)....................... 10,577 16,083 17,961 19,220 18,228 Commercial............................ 54,904 66,911 61,108 63,836 80,879 ------------- ---------- ---------- ------------ ------------- Total mortgage...................... 65,481 82,994 79,069 83,056 99,107 Other................................. 704 3,223 1,089 849 2,111 ------------- ---------- ---------- ------------ ------------- Total nonaccrual loans.............. 147,775 191,494 191,816 208,267 229,470 Renegotiated loans.......................... -- 681 1,385 1,612 1,459 ------------- ---------- ---------- ------------ ------------- Total nonperforming and renegotiated loans............................. 147,775 192,175 193,201 209,879 230,929 Foreclosed assets........................... 32,882 35,998 34,999 36,992 39,754 ------------- ---------- ---------- ------------ ------------- Total nonperforming and renegotiated assets.............................. $ 180,657 $ 228,173 $ 228,200 $ 246,871 $ 270,683 ------------- ---------- ---------- ------------ ------------- ------------- ---------- ---------- ------------ ------------- Nonperforming and renegotiated loans to total loans................................ 0.71% 0.94% 0.95% 1.04% 1.19% Nonperforming and renegotiated assets to total loans and foreclosed assets.......... 0.86 1.11 1.12 1.22 1.39 Nonperforming and renegotiated assets to total assets............................... 0.63 0.81 0.80 0.90 1.00
- ------------------------------ (1) These loans primarily consist of loans secured by single family residential development projects and apartment buildings. Since foreclosed assets remained relatively constant over the past five quarters, the changes in total nonperforming and renegotiated assets were primarily the result of the changes in nonaccrual loans discussed above. Total nonperforming and renegotiated assets of $181 million at September 30, 1996 reflected a 33 percent decrease from a year earlier. 22 TABLE 8 -- LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1996 1996 1996 1995 1995 - ---------------------------------------------- ------------- --------- ----------- ------------ ------------- Domestic: Commercial, financial and industrial........ $ 521 $ 1,800 $ 3,756 $ 3,752 $ 1,170 Construction................................ 2,325 188 1,716 1,063 2,577 Mortgage: Residential............................... 9,838 7,110 12,208 8,479 3,157 Commercial................................ 16,372 117 2,949 3,592 12,664 ------------- --------- ----------- ------------ ------------- Total mortgage.......................... 26,210 7,227 15,157 12,071 15,821 Consumer and other.......................... 13,643 6,867 7,786 8,854 7,736 ------------- --------- ----------- ------------ ------------- Total loans 90 days or more past due and still accruing........................ $ 42,699 $ 16,082 $ 28,415 $ 25,740 $ 27,304 ------------- --------- ----------- ------------ ------------- ------------- --------- ----------- ------------ -------------
The Company's level of loans 90 days or more past due and still accruing was $43 million at September 30, 1996, compared with $26 million at December 31, 1995 and $27 million at September 30, 1995. LIQUIDITY Liquidity refers to the Company's ability and financial flexibility to adjust its future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost-effective basis. The Company's liquidity management draws upon its strengths, which include an extensive retail and middle market business banking franchise and an ability to obtain funds for various terms in a variety of domestic and international money markets. Core deposits (demand, interest bearing savings, and consumer time deposits) have provided the Company with a sizable source of relatively stable and low-cost funds. In the third quarter of 1996 these sources, together with other noninterest bearing funds (primarily common shareholders' equity) funded 61 percent of average earning assets. CAPITAL Total shareholders' equity decreased $30 million from December 31, 1995 to September 30, 1996. This change was primarily a result of $190 million of net income for the first nine months of 1996, offset by dividends on common stock of $198 million (including $145 million paid to The Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A.). For regulatory purposes, the Company's capital adequacy is based on risk-adjusted Tier 1 and Total capital guidelines, as well as a leverage ratio. Under these guidelines the Company's Tier 1 and Total risk-based capital ratios were 9.04 percent and 11.16 percent, respectively, at September 30, 1996, as compared to 9.35 percent and 11.70 percent, and 9.42 percent and 11.88 percent at December 31, 1995 and September 30, 1995, respectively. The decreases in the ratios from December 31, 1995 are primarily attributable to the $145 million dividend paid to The Mitsubishi Bank, Limited in the first quarter of 1996. As of September 30, 1996 the Company's subsidiary bank, Union Bank of California, N.A., met all regulatory minimums of a well-capitalized bank. 23 TABLE 9 -- RISK-BASED CAPITAL
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1996 1996 1996 1995 1995 - ----------------------------------------- ------------- ------------- ------------- ------------- ------------- CAPITAL COMPONENTS: Common shareholders' equity.............. $ 2,182,360 $ 2,145,496 $ 2,125,532 $ 2,164,516 $ 2,095,318 Parent direct interest in bank subsidiary.............................. 126,599 125,320 123,308 159,996 154,981 8 3/8% Noncumulative preferred stock, Series A................................ 135,000 135,000 135,000 135,000 135,000 Less: Core deposit intangible (1)........ 6,177 6,343 6,546 6,748 6,950 Goodwill............................. 88,299 91,435 94,632 97,707 100,928 Disallowed deferred tax assets.............................. -- -- -- -- 13,981 ------------- ------------- ------------- ------------- ------------- Tier 1 capital................... 2,349,483 2,308,038 2,282,662 2,355,057 2,263,440 ------------- ------------- ------------- ------------- ------------- Eligible portion of the allowance for loan losses (2)......................... 327,523 324,503 319,973 317,712 303,565 Subordinated capital notes (3)........... 225,600 270,874 270,874 274,200 287,600 ------------- ------------- ------------- ------------- ------------- Tier 2 capital................... 553,123 595,377 590,847 591,912 591,165 Less: Unconsolidated subsidiary.......... 355 466 585 646 145 ------------- ------------- ------------- ------------- ------------- Total risk-based capital......... $ 2,902,251 $ 2,902,949 $ 2,872,924 $ 2,946,323 $ 2,854,460 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Risk-weighted balance sheet and off-balance sheet assets................ $ 26,201,833 $ 26,048,566 $ 25,597,852 $ 25,416,926 $ 24,299,214 Less: Disallowed deferred tax assets.............................. -- -- -- -- 13,981 Allowance for loan losses not included in Tier 2 capital............................. 207,564 220,842 227,428 237,437 263,247 ------------- ------------- ------------- ------------- ------------- Risk-weighted assets............. $ 25,994,269 $ 25,827,724 $ 25,370,424 $ 25,179,489 $ 24,021,986 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL RATIOS Tier 1 risk-based capital................ 9.04% 8.94% 9.00% 9.35% 9.42% Total risk-based capital................. 11.16 11.24 11.32 11.70 11.88
- ------------------------------ (1) The amount of core deposit intangible deducted in Tier 1 capital is the unamortized portion of a premium paid for the assumption of core deposits resulting from the purchase of retail banking offices. (2) The allowance for loan losses included in Tier 2 capital is limited to 1.25% of risk-weighted balance sheet and off-balance sheet assets. (3) The amount of term subordinated debt included in Tier 2 capital is limited to 50% of Tier 1 capital. 24 TABLE 10 -- OTHER CAPITAL MEASURES
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, 1996 1996 1996 1995 1995 ----------------- ----------- ------------- --------------- ----------------- LEVERAGE RATIO (1)............................. 8.43% 8.33% 8.35% 8.70% 8.75% OTHER CAPITAL RATIOS (END OF PERIOD): Tangible common equity to total assets....... 7.32% 7.31% 7.16% 7.57% 7.39% Total equity to total assets................. 8.56 8.58 8.42 9.02 8.86 Tangible common equity to average total assets...................................... 7.50 7.39 7.43 7.67 7.69 Total equity to average total assets......... 8.77 8.68 8.74 9.14 9.22
- ------------------------------ (1) Tier 1 capital divided by quarterly average total assets. 25 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: None (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the 3rd quarter. 26 SIGNATURES 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 thereto duly authorized. UNIONBANCAL CORPORATION (Registrant) By /s/ TAKAHIRO MORIGUCHI ------------------------------------ Takahiro Moriguchi VICE CHAIRMAN OF THE BOARD AND CHIEF FINANCIAL OFFICER By /s/ DAVID W. EHLERS ------------------------------------ David W. Ehlers EXECUTIVE VICE PRESIDENT AND DIRECTOR OF FINANCE By /s/ DAVID W. DOBON ------------------------------------ David W. Dobon SENIOR VICE PRESIDENT AND CONTROLLER Dated: November 13, 1996 27 (THIS PAGE INTENTIONALLY LEFT BLANK) EX-27 2 EX-27
9 THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND THE ACCOMPANYING TABLES OF FORM 10-Q. INFORMATION HEREIN IS QUALIFIED BY REFERENCE TO SUCH STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 2,359,879 831,710 471,641 452,613 2,007,074 283,566 289,029 20,946,765 535,087 28,679,646 20,909,390 3,573,451 554,693 415,000 0 135,000 273,793 2,045,426 28,679,646 1,252,902 106,641 78,441 1,437,984 385,681 562,490 875,494 30,000 3,865 849,883 311,315 189,657 0 0 189,657 3.14 3.14 4.76 147,776 42,699 0 0 555,149 83,097 33,035 535,087 259,462 14,154 261,471
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