-----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, Hs68VaeWtkLpeKT2FVM9C5l4Z1XTxSetxb3C1mStTUpl4LlTDeRY3QwSPFlMqLoV K7uJokOoB7Hvp5R2ns7PXQ== 0000912057-97-017209.txt : 19970514 0000912057-97-017209.hdr.sgml : 19970514 ACCESSION NUMBER: 0000912057-97-017209 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 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: 97602311 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES 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 MARCH 31, 1997 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 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 April 30, 1997: 54,773,341 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNIONBANCAL CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
PAGE NUMBER ------------- PART I FINANCIAL INFORMATION Consolidated Financial Highlights..................................................................... 2 Item 1. Financial Statements: Condensed Consolidated Statements of Income......................................................... 3 Condensed Consolidated Balance Sheets............................................................... 4 Condensed Consolidated Statements of Cash Flows..................................................... 5 Condensed Consolidated Statements of Shareholders' Equity........................................... 6 Notes to Condensed Consolidated Financial Statements................................................ 7 Item 2. Management's Discussion and Analysis: Introduction........................................................................................ 8 Summary............................................................................................. 9 Analysis of Earnings................................................................................ 10 Net Interest Income................................................................................. 11 Noninterest Income.................................................................................. 13 Noninterest Expense................................................................................. 14 Merger and Integration Expense...................................................................... 14 Income Tax Expense.................................................................................. 15 Loans............................................................................................... 15 Allowance for Credit Losses......................................................................... 16 Nonperforming Assets................................................................................ 18 Liquidity........................................................................................... 19 Regulatory Capital.................................................................................. 20 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.............................................................. 21 Signatures............................................................................................ 21
PART I. FINANCIAL INFORMATION UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (UNAUDITED)
THREE MONTHS ENDED ----------------------------------------------------- INCREASE (DECREASE) MARCH 31, MARCH 31, --------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 AMOUNT PERCENT - -------------------------------------------------------------------------- ------------- ------------- ---------- --------- RESULTS OF OPERATIONS: Net interest income (1)................................................. $ 295,452 $ 297,795 $ (2,343) (0.79)% Provision for credit losses............................................. -- 10,000 (10,000) (100.00) Noninterest income...................................................... 114,786 102,874 11,912 11.58 Noninterest expense, excluding merger and integration expense (2)....... 247,101 252,024 (4,923) (1.95) ------------- ------------- ---------- --------- Income before merger and integration expense and income taxes (1)(2).......................................................... 163,137 138,645 24,492 17.67 Merger and integration expense.......................................... 6,037 -- 6,037 -- ------------- ------------- ---------- --------- Income before income taxes (1).......................................... 157,100 138,645 18,455 13.31 Taxable-equivalent adjustment........................................... 1,421 2,128 (707) (33.22) Income tax expense...................................................... 63,177 53,251 9,926 18.64 ------------- ------------- ---------- --------- Net income.............................................................. $ 92,502 $ 83,266 $ 9,236 11.09% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- NET INCOME APPLICABLE TO: Common stock............................................................ $ 84,291 $ 76,768 $ 7,523 9.80% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- Parent direct interest in bank subsidiary............................... $ 5,385 $ 3,672 $ 1,713 46.65% ------------- ------------- ---------- --------- ------------- ------------- ---------- --------- PER COMMON SHARE: Net income.............................................................. $ 1.54 $ 1.40 $ 0.14 10.00% Pro forma earnings, excluding after-tax merger and integration expense (2)................................................................... 1.60 1.40 0.20 14.29 Dividends (3)........................................................... 0.35 0.35 -- -- Book value (end of period).............................................. 41.76 39.07 2.69 6.89 Common shares outstanding (end of period)............................... 54,770,421 54,735,210 35,211 0.06 Weighted average common shares outstanding.............................. 54,764,518 54,690,215 74,303 0.14 BALANCE SHEET (END OF PERIOD): Total assets............................................................ $ 29,423,537 $ 28,167,638 $1,255,899 4.46% Total loans............................................................. 21,099,926 20,341,335 758,591 3.73 Nonperforming assets.................................................... 167,045 228,200 (61,155) (26.80) Subordinated capital notes.............................................. 282,000 495,369 (213,369) (43.07) Preferred stock......................................................... 135,000 135,000 -- -- Common equity........................................................... 2,287,062 2,138,631 148,431 6.94 BALANCE SHEET (PERIOD AVERAGE): Total assets............................................................ $ 28,790,401 $ 27,428,721 $1,361,680 4.96% Total loans............................................................. 21,068,822 20,188,426 880,396 4.36 Common equity........................................................... 2,261,603 2,209,688 51,915 2.35 Earning assets.......................................................... 25,448,021 24,394,015 1,054,006 4.32 FINANCIAL RATIOS: Return on average assets (4)............................................ 1.30% 1.22% 0.08% pts. Pro forma return on average assets, excluding after-tax merger and integration expense (2)(4)........................................ 1.35 1.22 0.13 Return on average common equity (5)..................................... 15.12 13.97 1.15 Pro forma return on average common equity, excluding after-tax merger and integration expense (2)(5)........................................ 15.71 13.97 1.74 Efficiency ratio (6).................................................... 61.60 62.08 (0.48) Pro forma efficiency ratio, excluding merger and integration expense (2)(6)................................................................ 60.13 62.08 (1.95) Net interest margin (1)................................................. 4.69 4.91 (0.22) Tier 1 risk-based capital ratio......................................... 9.15 9.00 0.15 Total risk-based capital ratio.......................................... 10.85 11.32 (0.47) Leverage ratio.......................................................... 8.60 8.35 0.25 Allowance for credit losses to total loans.............................. 2.48 2.69 (0.21) Allowance for credit losses to nonaccrual loans......................... 382.56 285.38 97.18 Net loans charged off to average total loans (7)........................ 0.02 0.35 (0.33) Nonperforming assets to total loans and foreclosed assets............... 0.79 1.12 (0.33) Nonperforming assets to total assets.................................... 0.57 0.81 (0.24)
- ------------------------------ (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) See page 8, "Introduction", for a description of merger accounting and pro forma earnings presentations. (3) The dividend amount for the first quarter of 1996 is based on Union Bank only and does not include a dividend of $145 million paid to The Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. (4) Based on annualized net income. (5) Based on annualized net income applicable to common stock. (6) The efficiency ratio is noninterest expense, excluding foreclosed asset expense, as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset expense was $0.4 million in the first quarter of 1997 and $3.3 million in the first quarter of 1996. (7) Annualized. 2 ITEM 1. FINANCIAL STATEMENTS UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, -------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 - --------------------------------------------------------------------------------------------- --------- --------- INTEREST INCOME Loans, including fees...................................................................... $ 420,472 $ 419,805 Investment securities -- taxable........................................................... 35,829 32,754 Investment securities -- tax-exempt........................................................ 2,218 2,726 Interest bearing deposits in banks......................................................... 11,199 14,277 Federal funds sold and securities purchased under resale agreements........................ 9,840 8,419 Trading account securities................................................................. 5,473 5,087 --------- --------- Total interest income.................................................................. 485,031 483,068 --------- --------- INTEREST EXPENSE Deposits in domestic offices............................................................... 126,405 108,598 Deposits in foreign offices................................................................ 17,909 17,742 Federal funds purchased and securities sold under repurchase agreements.................... 10,391 15,637 Commercial paper........................................................................... 19,853 20,737 Other borrowed funds....................................................................... 10,939 16,453 Subordinated capital notes................................................................. 5,503 8,234 --------- --------- Total interest expense................................................................. 191,000 187,401 --------- --------- NET INTEREST INCOME.......................................................................... 294,031 295,667 Provision for credit losses.................................................................. -- 10,000 --------- --------- Net interest income after provision for credit losses.................................. 294,031 285,667 --------- --------- NONINTEREST INCOME Service charges on deposit accounts........................................................ 27,121 23,961 Trust fees................................................................................. 23,898 22,248 International commissions and fees......................................................... 15,079 16,278 Credit card merchant fees.................................................................. 13,044 11,598 Merchant banking fees...................................................................... 8,380 9,248 Investment securities gains, net........................................................... 471 616 Other...................................................................................... 26,793 18,925 --------- --------- Total noninterest income............................................................... 114,786 102,874 --------- --------- NONINTEREST EXPENSE Salaries and employee benefits............................................................. 140,788 142,351 Occupancy.................................................................................. 19,630 21,955 Equipment.................................................................................. 13,687 13,813 Communications............................................................................. 10,268 8,687 Credit card processing..................................................................... 9,722 8,369 Data processing............................................................................ 6,423 5,318 Printing and office supplies............................................................... 6,169 6,098 Advertising and public relations........................................................... 6,009 6,993 Foreclosed asset expense................................................................... 411 3,274 Merger and integration..................................................................... 6,037 -- Other...................................................................................... 33,994 35,166 --------- --------- Total noninterest expense.............................................................. 253,138 252,024 --------- --------- Income before income taxes................................................................... 155,679 136,517 Income tax expense........................................................................... 63,177 53,251 --------- --------- NET INCOME................................................................................... $ 92,502 $ 83,266 --------- --------- --------- --------- NET INCOME APPLICABLE TO: Common stock............................................................................... $ 84,291 $ 76,768 --------- --------- --------- --------- Parent direct interest in bank subsidiary.................................................. $ 5,385 $ 3,672 --------- --------- --------- --------- NET INCOME PER AVERAGE COMMON SHARE.......................................................... $ 1.54 $ 1.40 --------- --------- --------- --------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (IN THOUSANDS).................................... 54,765 54,690 --------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements. 3 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (UNAUDITED) MARCH 31, DECEMBER 31, MARCH 31, (DOLLARS IN THOUSANDS) 1997 1996 1996 - ----------------------------------------------------------------------- ------------ ------------ ------------ ASSETS Cash and due from banks................................................ $ 2,172,478 $2,268,771 $ 1,936,184 Interest bearing deposits in banks..................................... 681,308 1,131,216 696,867 Federal funds sold and securities purchased under resale agreements.... 650,790 537,710 1,475,558 ------------ ------------ ------------ Total cash and cash equivalents.................................... 3,504,576 3,937,697 4,108,609 Trading account securities............................................. 642,684 617,464 409,634 Investment securities available for sale............................... 2,244,233 2,164,197 2,010,992 Investment securities held to maturity (market value of $262,568 at March 31, 1997, $274,405 at December 31, 1996, and $304,891 at March 31, 1996)............................................................. 259,430 268,196 295,019 Loans.................................................................. 21,099,926 20,898,105 20,341,335 Less: Allowance for credit losses...................................... 522,835 523,946 547,401 ------------ ------------ ------------ Net loans.......................................................... 20,577,091 20,374,159 19,793,934 Customers' acceptance liability........................................ 948,064 778,378 656,440 Premises and equipment, net............................................ 411,424 410,621 422,779 Intangible assets...................................................... 87,784 91,129 101,177 Other assets........................................................... 748,251 592,218 369,054 ------------ ------------ ------------ Total assets....................................................... $ 29,423,537 $29,234,059 $ 28,167,638 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits in domestic offices: Noninterest bearing.................................................. $ 7,612,287 $7,381,078 $ 6,526,785 Interest bearing..................................................... 12,620,106 12,607,691 11,889,671 Deposits in foreign offices: Noninterest bearing.................................................. 296,692 274,031 301,346 Interest bearing..................................................... 1,514,840 1,270,160 1,424,896 ------------ ------------ ------------ Total deposits..................................................... 22,043,925 21,532,960 20,142,698 Federal funds purchased and securities sold under repurchase agreements............................................................ 809,846 1,322,654 1,191,997 Commercial paper....................................................... 1,427,588 1,495,463 1,406,118 Other borrowed funds................................................... 796,929 758,251 1,599,715 Acceptances outstanding................................................ 948,064 778,378 656,440 Other liabilities...................................................... 560,909 469,420 278,361 Subordinated capital notes............................................. 282,000 382,000 495,369 ------------ ------------ ------------ Total liabilities.................................................. 26,869,261 26,739,126 25,770,698 ------------ ------------ ------------ SHAREHOLDERS' EQUITY Parent direct interest in equity of bank subsidiary.................... 132,214 128,689 123,309 Preferred stock: Authorized 5,000,000 shares, issued 1,350,000 shares 8 3/8% Noncumulative, Series A............................................ 135,000 135,000 135,000 Common stock--$5 stated value: Authorized 100,000,000 shares, issued 54,770,421 as of March 31, 1997, 54,762,653 as of December 31, 1996, and 54,735,210 as of March 31, 1996..................................................... 273,852 273,813 273,676 Additional paid-in capital............................................. 1,311,083 1,310,813 1,309,852 Retained earnings...................................................... 700,894 635,180 542,689 Cumulative translation adjustment...................................... (3,703) (2,752) (892) Net unrealized gain on securities available for sale................... 4,936 14,190 13,306 ------------ ------------ ------------ Total shareholders' equity......................................... 2,554,276 2,494,933 2,396,940 ------------ ------------ ------------ Total liabilities and shareholders' equity......................... $ 29,423,537 $29,234,059 $ 28,167,638 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to condensed consolidated financial statements. 4 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, ------------------------ (DOLLARS IN THOUSANDS) 1997 1996 - --------------------------------------------------------------------------------------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................................... $ 92,502 $ 83,266 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses........................................................ -- 10,000 Depreciation, amortization and accretion........................................... 16,288 15,938 Provision for deferred income taxes................................................ 8,401 5,557 Gain on sale or call of investment securities available for sale, net.............. (471) (616) Other, net......................................................................... (93,827) (86,328) ----------- ----------- Total adjustments................................................................ (69,609) (55,449) ----------- ----------- Net cash provided by operating activities............................................ 22,893 27,817 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of investment securities available for sale....................... 594 3,649 Proceeds from matured and called investment securities available for sale............ 45,840 114,618 Purchase of investment securities available for sale................................. (138,044) (183,708) Proceeds from matured and called investment securities held to maturity.............. 8,871 68,396 Net increase in loans................................................................ (214,495) (159,063) Other, net........................................................................... (8,830) 11,047 ----------- ----------- Net cash used by investing activities.............................................. (306,064) (145,061) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits............................................................. 510,965 487,655 Net decrease in federal funds purchased and securities sold under repurchase agreements......................................................................... (512,808) (3,061) Net increase (decrease) in commercial paper and other borrowed funds................. (29,197) 646,380 Maturity and redemption of subordinated capital notes................................ (100,000) (6,000) Dividends paid....................................................................... (23,089) (160,494) Repayment of borrowing to support corporate owned life insurance..................... -- (95,475) Other, net........................................................................... 710 739 ----------- ----------- Net cash provided (used) by financing activities................................... (153,419) 869,744 ----------- ----------- Net increase (decrease) in cash and cash equivalents................................... (436,590) 752,500 Cash and cash equivalents at beginning of period....................................... 3,937,697 3,352,423 Foreign exchange revaluation gain...................................................... 3,469 3,686 ----------- ----------- Cash and cash equivalents at end of period............................................. $ 3,504,576 $ 4,108,609 ----------- ----------- ----------- ----------- CASH PAID DURING THE PERIOD FOR: Interest............................................................................. $ 191,870 $ 199,713 Income taxes......................................................................... 502 15,110 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Loans transferred to foreclosed assets............................................... $ 7,821 $ 8,058
See accompanying notes to condensed consolidated financial statements. 5 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
NET PARENT UNREALIZED DIRECT GAIN INTEREST IN ADDITIONAL CUMULATIVE ON SECURITIES BANK PREFERRED COMMON PAID-IN RETAINED TRANSLATION AVAILABLE FOR (DOLLARS IN THOUSANDS) SUBSIDIARY STOCK STOCK CAPITAL EARNINGS ADJUSTMENT SALE - --------------------------------- ----------- ----------- ----------- ----------- --------- ----------- ------------- BALANCE AT DECEMBER 31, 1995..... $ 159,996 $ 135,000 $ 273,351 $1,306,697 $ 585,680 $ (972) $ 24,340 Decrease in unrealized gain on securities available for sale, net of taxes.................... (447) (11,034) Net income....................... 3,672 79,594 Dividend reinvestment plan....... 72 673 Dividends on common stock ($0.35 per share)(1)................... (12,795) Dividends on preferred stock..... (2,826) Dividend to MBL(2)............... (39,890) (105,000) Deferred compensation--restricted stock awards.................... 215 2,182 (1,964) Stock options exercised.......... 38 300 Change in translation adjustment...................... (22) 80 ----------- ----------- ----------- ----------- --------- ----------- ------------- BALANCE AT MARCH 31, 1996........ $ 123,309 $ 135,000 $ 273,676 $1,309,852 $ 542,689 $ (892) $ 13,306 ----------- ----------- ----------- ----------- --------- ----------- ------------- ----------- ----------- ----------- ----------- --------- ----------- ------------- BALANCE AT DECEMBER 31, 1996..... $ 128,689 $ 135,000 $ 273,813 $1,310,813 $ 635,180 $ (2,752) $ 14,190 Decrease in unrealized gain on securities available for sale, net of taxes.................... (584) (9,254) Net income....................... 5,385 87,117 Dividend reinvestment plan....... 1 (35) Dividends on common stock ($0.35 per share)...................... (1,217) (19,169) Dividends on preferred stock..... (2,826) Deferred compensation--restricted stock awards.................... (5) (34) 592 Stock options exercised.......... 43 339 Change in translation adjustment...................... (59) (951) ----------- ----------- ----------- ----------- --------- ----------- ------------- BALANCE AT MARCH 31, 1997........ $ 132,214 $ 135,000 $ 273,852 $1,311,083 $ 700,894 $ (3,703) $ 4,936 ----------- ----------- ----------- ----------- --------- ----------- ------------- ----------- ----------- ----------- ----------- --------- ----------- ------------- (DOLLARS IN THOUSANDS) TOTAL - --------------------------------- --------- BALANCE AT DECEMBER 31, 1995..... $2,484,092 Decrease in unrealized gain on securities available for sale, net of taxes.................... (11,481) Net income....................... 83,266 Dividend reinvestment plan....... 745 Dividends on common stock ($0.35 per share)(1)................... (12,795) Dividends on preferred stock..... (2,826) Dividend to MBL(2)............... (144,890) Deferred compensation--restricted stock awards.................... 433 Stock options exercised.......... 338 Change in translation adjustment...................... 58 --------- BALANCE AT MARCH 31, 1996........ $2,396,940 --------- --------- BALANCE AT DECEMBER 31, 1996..... $2,494,933 Decrease in unrealized gain on securities available for sale, net of taxes.................... (9,838) Net income....................... 92,502 Dividend reinvestment plan....... (34) Dividends on common stock ($0.35 per share)...................... (20,386) Dividends on preferred stock..... (2,826) Deferred compensation--restricted stock awards.................... 553 Stock options exercised.......... 382 Change in translation adjustment...................... (1,010) --------- BALANCE AT MARCH 31, 1997........ $2,554,276 --------- ---------
- ------------------------------ (1) Based on historical Union Bank common cash dividends declared and does not include a $145 million dividend paid to The Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. (2) The Mitsubishi Bank, Limited. See accompanying notes to condensed consolidated financial statements. 6 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION AND NATURE OF OPERATIONS 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 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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 1996. In the opinion of management, all adjustments (comprised of normal accruals) considered necessary for a fair presentation of the Company's interim financial statements have been included. Primary and fully diluted earnings per share are computed based on net income after preferred dividends and parent direct interest in bank subsidiary, and use the weighted average number of common shares and equivalent common shares outstanding during the period. Stock options are a common stock equivalent but, for the periods presented, did not have a dilutive effect and are, therefore, not included in the Company's earnings per share calculations. NOTE 2 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1996, Statement of Financial Accounting Standards ("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. In December 1996, the Financial Accounting Standards Board ("FASB") reconsidered certain provisions of SFAS No. 125 and issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" to defer for one year the effective date of implementation for transactions related to repurchase agreements, dollar-roll repurchase agreements, securities lending and similar transactions. Management determined that the effect of adoption of SFAS No. 125 on the Company's financial statements was not material and believes that the effect of adoption of SFAS No. 127 will also not be material. In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". This Statement simplifies the standards for computing earnings per share ("EPS") and makes them comparable to international EPS standards. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. In addition, all entities with complex capital structures are required to provide a dual disclosure of basic and diluted EPS on the face of the income statement and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. This Statement applies to entities with publicly held common stock or potential common stock and is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period EPS data presented. The following table provides pro forma disclosure of basic and diluted EPS in accordance with SFAS No. 128:
THREE MONTHS ENDED MARCH 31, -------------------- 1997 1996 --------- --------- Pro forma basic EPS....................................................................... 1.54 1.40 Pro forma diluted EPS..................................................................... 1.53 1.40
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION UnionBanCal Corporation is a San Francisco, California-based bank holding company with consolidated assets of $29.4 billion at March 31, 1997. Its primary banking subsidiary is Union Bank of California, N.A., which had 237 banking offices in California, 5 banking offices in Oregon and Washington and 18 overseas facilities at March 31, 1997. 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. THIS DOCUMENT MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED. FOR A DISCUSSION OF FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER, PLEASE SEE THE DISCUSSION CONTAINED HEREIN AND IN THE COMPANY'S PUBLICLY AVAILABLE SECURITIES AND EXCHANGE COMMISSION FILINGS AND PRESS RELEASES. The interim financial information should be read in conjunction with the Company's Form 10-K for the year ended December 31, 1996. Certain amounts for prior periods have been reclassified to conform with current financial statement presentation. MERGER ACCOUNTING UnionBanCal Corporation was formed from the combination of Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The Bank of California, N.A., on April 1, 1996. 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. 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, the Consolidated Financial Highlights on page 2 and the Analysis of Earnings on page 10 include certain pro forma earnings disclosures. These presentations supplement the Condensed Consolidated Statements of Income on page 3 (which are prepared in accordance with GAAP) with respect to the treatment of merger and integration expense. Management believes that it is meaningful to review the operating results trends excluding merger and integration expense and, therefore, has included information in the Consolidated Financial Highlights and the Analysis of Earnings which presents earnings before and after income taxes, as well as certain financial ratios, excluding merger and integration expense. 8 SUMMARY Net income in the first quarter of 1997 was $93 million, after $4 million of after-tax merger and integration expense recorded in connection with the April 1, 1996, combination of Union Bank and BanCal Tri-State Corporation. Net income applicable to common stock was $84 million, or $1.54 per common share, in the first quarter of 1997, compared with $77 million, or $1.40 per common share, in the first quarter of 1996. Pro forma earnings, excluding after-tax merger and integration expense, were $96 million, an increase of 14 percent from a year earlier. Pro forma earnings applicable to common stock were $88 million, or $1.60 per common share, an increase of 14 percent over the first quarter of 1996. Other comparisons of the first quarter of 1997 with the first quarter of 1996 are as follows: - Net interest income on a taxable-equivalent basis was $295 million in the first quarter of 1997, a $2 million, or 1 percent, decrease from one year earlier. The net interest margin declined 22 basis points to 4.69 percent, largely due to lower loan yields. - No provision for credit losses was recorded, compared with $10 million in the first quarter of 1996, reflecting improvement in the quality of the loan portfolio. Nonperforming assets were $167 million at March 31, 1997, a decrease of $61 million, or 27 percent, from March 31, 1996. Total nonaccrual loans at March 31, 1997 and 1996, were $137 million and $192 million, respectively. This decrease caused a drop in the ratio of nonaccrual and renegotiated loans to total loans from 0.95% to 0.65%. The allowance for credit losses was $523 million, or 383 percent of total nonaccrual loans, at March 31, 1997, compared with an allowance of $547 million, or 285 percent of total nonaccrual loans, at March 31, 1996. Net loans charged off in the first quarter of 1997 were $1 million, or 0.02% of average loans outstanding, compared with $18 million, or 0.35% of average loans outstanding, in the same period a year ago. - Noninterest income was $115 million, an increase of $12 million over the first quarter of 1996, due primarily to an $8 million gain from a real estate joint venture. - Noninterest expense, excluding $6 million of merger and integration expense, was $247 million, a $5 million, or 2 percent, decrease from the first quarter of 1996. A decrease of $4 million in personnel-related and occupancy expense was the result of consolidations stemming from the merger. In addition, foreclosed asset expense declined $3 million. These decreases were partially offset by increases in credit card and data processing expense. - The return on average assets increased to 1.30% from 1.22%. The return on average common equity increased to 15.12% from 13.97%. Excluding the after-tax effect of merger and integration expense, the pro forma return on average assets increased to 1.35% from 1.22%, while the pro forma return on average common equity increased to 15.71% from 13.97%. - Total loans at March 31, 1997, were $21.1 billion, an increase of $759 million, or 4 percent, over March 31, 1996, due primarily to growth in the commercial mortgage portfolio. - The Tier 1 and Total risk-based capital ratios were 9.15% and 10.85% at March 31, 1997, compared with 9.00% and 11.32% at March 31, 1996. The decrease in the Total risk-based capital ratio was due to the redemption of subordinated debt in the first quarter of 1997. The first quarter 1997 leverage ratio was 8.60%, compared with 8.35% for the first quarter of 1996. 9 ANALYSIS OF EARNINGS
FOR THE THREE MONTHS ENDED -------------------------------------------------------------- MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1996 1996 1996 - ---------------------------------------------------- ----------- ------------ ------------- -------- --------- EARNINGS SUMMARY Interest income (1)............................... $ 486,452 $ 490,803 $482,404 $475,625 $485,196 Interest expense.................................. 191,000 196,236 189,727 185,362 187,401 ----------- ------------ ------------- -------- --------- Net interest income (1)........................... 295,452 294,567 292,677 290,263 297,795 Provision for credit losses....................... -- 10,000 10,000 10,000 10,000 Noninterest income................................ 114,786 102,972 107,280 105,550 102,874 Noninterest expense, excluding merger and integration expense(2).......................... 247,101 254,375 258,523 252,518 252,024 ----------- ------------ ------------- -------- --------- Income before merger and integration expense and income taxes (1)(2)............................. 163,137 133,164 131,434 133,295 138,645 Merger and integration expense(2)................. 6,037 30,646 25,552 61,266 -- ----------- ------------ ------------- -------- --------- Income before income taxes (1).................... 157,100 102,518 105,882 72,029 138,645 Taxable-equivalent adjustment..................... 1,421 1,483 1,089 2,024 2,128 Income tax expense................................ 63,177 41,234 42,810 25,597 53,251 ----------- ------------ ------------- -------- --------- Net income........................................ $ 92,502 $ 59,801 $ 61,983 $ 44,408 $ 83,266 ----------- ------------ ------------- -------- --------- ----------- ------------ ------------- -------- --------- Net income applicable to:......................... Common stock.................................... $ 84,291 $ 53,472 $ 55,745 $ 39,096 $ 76,768 ----------- ------------ ------------- -------- --------- ----------- ------------ ------------- -------- --------- Parent direct interest in bank subsidiary....... $ 5,385 $ 3,503 $ 3,411 $ 2,486 $ 3,672 ----------- ------------ ------------- -------- --------- ----------- ------------ ------------- -------- --------- RECAP OF EARNINGS Net income........................................ $ 92,502 $ 59,801 $ 61,983 $ 44,408 $ 83,266 Merger and integration expense (after-tax)(2)..... 3,550 18,570 15,025 38,323 -- ----------- ------------ ------------- -------- --------- Pro forma earnings, excluding merger and integration expense(2).......................... $ 96,052 $ 78,371 $ 77,008 $ 82,731 $ 83,266 ----------- ------------ ------------- -------- --------- ----------- ------------ ------------- -------- --------- Net income applicable to common stock............. $ 84,291 $ 53,472 $ 55,745 $ 39,096 $ 76,768 Merger and integration expense (after-tax) applicable to common stock(2)................... 3,338 17,460 14,128 36,036 -- ----------- ------------ ------------- -------- --------- Pro forma earnings applicable to common stock, excluding merger and integration expense(2)..... $ 87,629 $ 70,932 $ 69,873 $ 75,132 $ 76,768 ----------- ------------ ------------- -------- --------- ----------- ------------ ------------- -------- --------- PER COMMON SHARE Net income........................................ $ 1.54 $ 0.98 $ 1.02 $ 0.71 $ 1.40 Merger and integration expense (after-tax) (2).... 0.06 0.32 0.26 0.66 -- ----------- ------------ ------------- -------- --------- Pro forma earnings, excluding merger and integration expense (2)......................... $ 1.60 $ 1.30 $ 1.28 $ 1.37 $ 1.40 ----------- ------------ ------------- -------- --------- ----------- ------------ ------------- -------- --------- Dividends (3)..................................... $ 0.35 $ 0.35 $ 0.35 $ 0.35 $ 0.35 Book value (end of period)........................ 41.76 40.74 40.04 39.29 39.07 Weighted average common shares outstanding (in thousands)...................................... 54,765 54,760 54,759 54,752 54,690
- -------------------------- (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) See page 8, "Introduction", for a description of merger accounting and pro forma earnings presentations. (3) The dividend amount for the first quarter of 1996 is based on Union Bank only and does not include a dividend of $145 million paid to The Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. 10 NET INTEREST INCOME The table below shows the major components of net interest income and net interest margin.
FOR THE THREE MONTHS ENDED --------------------------------------------------------------- MARCH 31, 1997 DECEMBER 31, 1996 ------------------------------ ------------------------------ INTEREST AVERAGE INTEREST AVERAGE INCOME/ YIELD/ INCOME/ YIELD/ AVERAGE EXPENSE RATE AVERAGE EXPENSE RATE (DOLLARS IN THOUSANDS) BALANCE (1) (1) BALANCE (1) (1) - ----------------------------------------------------- ----------- -------- ------- ----------- -------- ------- ASSETS Loans: (2) Domestic........................................... $19,818,799 $401,456 8.19% $19,632,870 $404,481 8.20% Foreign............................................ 1,250,023 19,307 6.26 1,210,820 18,864 6.20 Investment securities--taxable (3)................... 2,312,482 35,829 6.24 2,234,788 34,408 6.14 Investment securities--tax-exempt (3)................ 134,157 3,348 9.98 142,155 3,568 10.04 Interest bearing deposits in banks................... 802,784 11,199 5.66 980,076 14,126 5.73 Federal funds sold and securities purchased under resale agreements.................................. 733,499 9,840 5.44 606,687 8,403 5.51 Trading account securities........................... 396,277 5,473 5.60 488,505 6,953 5.66 ----------- -------- ----------- -------- Total earning assets............................. 25,448,021 486,452 7.73 25,295,901 490,803 7.72 -------- -------- Allowance for credit losses.......................... (531,621) (534,247) Cash and due from banks.............................. 2,032,209 2,020,856 Premises and equipment, net.......................... 416,582 430,765 Other assets......................................... 1,425,210 1,378,108 ----------- ----------- Total assets..................................... $28,790,401 $28,591,383 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits in domestic offices: Interest bearing................................... $ 5,212,126 35,961 2.80 $ 5,121,292 35,806 2.78 Savings and consumer time.......................... 2,918,508 27,025 3.76 2,892,147 27,342 3.76 Large time......................................... 4,755,047 63,419 5.41 4,759,405 65,018 5.43 Deposits in foreign offices.......................... 1,540,546 17,909 4.71 1,486,542 17,720 4.74 ----------- -------- ----------- -------- Total interest bearing deposits.................. 14,426,227 144,314 4.06 14,259,386 145,886 4.07 ----------- -------- ----------- -------- Federal funds purchased and securities sold under repurchase agreements.............................. 819,980 10,391 5.14 692,535 8,784 5.05 Subordinated capital notes........................... 343,111 5,503 6.51 391,685 6,489 6.59 Other borrowed funds................................. 2,291,772 30,792 5.45 2,521,206 35,077 5.53 ----------- -------- ----------- -------- Total borrowed funds............................. 3,454,863 46,686 5.48 3,605,426 50,350 5.56 ----------- -------- ----------- -------- Total interest bearing liabilities............... 17,881,090 191,000 4.33 17,864,812 196,236 4.37 -------- -------- Demand deposits...................................... 7,102,730 7,030,556 Other liabilities.................................... 1,279,767 1,220,071 ----------- ----------- Total liabilities................................ 26,263,587 26,115,439 SHAREHOLDERS' EQUITY................................. 2,526,814 2,475,944 ----------- ----------- Total liabilities and shareholders' equity....... $28,790,401 $28,591,383 ----------- ----------- ----------- ----------- Net interest income/margin (taxable-equivalent basis)............................................. 295,452 4.69% 294,567 4.63% Less: taxable-equivalent adjustment.................. 1,421 1,483 -------- -------- Net interest income.............................. $294,031 $293,084 -------- -------- -------- --------
- ------------------------------ (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) The amortized portion of net loan origination fees (costs) is included in interest income on loans. (3) Yields on investment securities available for sale were based on fair value. The difference between these yields and those based on amortized cost was not significant. 11 NET INTEREST INCOME (CONTINUED)
FOR THE THREE MONTHS ENDED ----------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1996 JUNE 30, 1996 MARCH 31, 1996 ------------------------------ --------------------------------- -------------------------------- INTEREST AVERAGE AVERAGE INTEREST AVERAGE INCOME/ YIELD/ INTEREST YIELD/ INCOME/ YIELD/ AVERAGE EXPENSE RATE AVERAGE INCOME/ RATE AVERAGE EXPENSE RATE (DOLLARS IN THOUSANDS) BALANCE (1) (1) BALANCE EXPENSE (1) (1) BALANCE (1) (1) - ---------------------------- ----------- -------- ------- ----------- ----------- ------- ----------- ---------- ------- ASSETS Loans: (2) Domestic.................. $19,453,079 $402,143 8.22% $19,235,527 $ 396,344 8.29% $18,952,230 $ 401,462 8.52% Foreign................... 1,198,378 17,847 5.92 1,146,364 17,272 6.06 1,236,196 19,071 6.20 Investment securities-- taxable (3)................ 2,119,276 33,909 6.38 2,082,706 32,099 6.18 2,115,504 32,754 6.21 Investment securities-- tax-exempt (3)............. 147,623 3,735 10.12 157,139 4,024 10.24 161,118 4,124 10.24 Interest bearing deposits in banks...................... 864,087 12,485 5.75 833,804 11,821 5.70 968,391 14,277 5.93 Federal funds sold and securities purchased under resale agreements.......... 433,494 6,028 5.53 547,527 7,396 5.43 603,083 8,419 5.61 Trading account securities.. 439,227 6,257 5.67 489,698 6,669 5.48 357,493 5,089 5.73 ----------- -------- ----------- ----------- ------- ----------- ---------- Total earning assets.... 24,655,164 482,404 7.78 24,492,765 475,625 7.81 24,394,015 485,196 8.00 -------- ----------- ---------- Allowance for credit losses..................... (543,646) (546,744) (554,716) Cash and due from banks..... 1,918,643 1,911,415 1,852,328 Premises and equipment, net........................ 425,019 427,181 420,765 Other assets................ 1,526,714 1,513,584 1,316,329 ----------- ----------- ----------- Total assets............ $27,981,894 $27,798,201 $27,428,721 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits in domestic offices: Interest bearing.......... $ 5,037,400 34,137 2.70 $ 4,924,269 33,148 2.71 $ 4,919,560 32,730 2.68 Savings and consumer time.................... 2,854,894 26,294 3.66 2,816,501 25,695 3.67 2,784,453 26,019 3.76 Large time................ 4,137,305 55,932 5.38 3,724,302 48,160 5.20 3,752,113 49,849 5.34 Deposits in foreign offices.................... 1,512,042 18,244 4.80 1,504,478 17,731 4.74 1,513,311 17,742 4.72 ----------- -------- ----------- ----------- ----------- ---------- Total interest bearing deposits.............. 13,541,641 134,607 3.95 12,969,550 124,734 3.87 12,969,437 126,340 3.92 ----------- -------- ----------- ----------- ----------- ---------- Federal funds purchased and securities sold under repurchase agreements...... 817,236 10,466 5.09 1,022,271 12,208 4.80 1,205,613 15,637 5.22 Subordinated capital notes...................... 452,211 7,492 6.59 495,369 7,889 6.40 497,413 8,235 6.66 Other borrowed funds........ 2,759,849 37,162 5.36 3,032,052 40,531 5.38 2,655,761 37,189 5.63 ----------- -------- ----------- ----------- ----------- ---------- Total borrowed funds.... 4,029,296 55,120 5.44 4,549,692 60,628 5.36 4,358,787 61,061 5.63 ----------- -------- ----------- ----------- ----------- ---------- Total interest bearing liabilities........... 17,570,937 189,727 4.30 17,519,242 185,362 4.26 17,328,224 187,401 4.35 -------- ----------- ---------- Demand deposits............. 6,640,131 6,560,900 6,420,636 Other liabilities........... 1,335,204 1,291,592 1,175,914 ----------- ----------- ----------- Total liabilities....... 25,546,272 25,371,734 24,924,774 SHAREHOLDERS' EQUITY........ 2,435,622 2,426,467 2,503,947 ----------- ----------- ----------- Total liabilities and shareholders' equity.. $27,981,894 $27,798,201 $27,428,721 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income/margin (taxable-equivalent basis)..................... 292,677 4.72% 290,263 4.77% 297,795 4.91% Less: taxable-equivalent adjustment................. 1,089 2,024 2,128 -------- ----------- ---------- Net interest income..... $291,588 $ 288,239 $ 295,667 -------- ----------- ---------- -------- ----------- ----------
- ------------------------------ (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) The amortized portion of net loan origination fees (costs) is included in interest income on loans. (3) Yields on investment securities available for sale were based on fair value. The difference between these yields and those based on amortized cost was not significant. 12 NET INTEREST INCOME (CONTINUED) Net interest income is interest earned on loans and investments less interest expense on deposit accounts and borrowings. Primary factors affecting the level of net interest income include the margin between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, as well as the composition of average interest earning assets and average interest bearing liabilities. Net interest income on a taxable-equivalent basis was $295 million for the first quarter of 1997 and $298 million for the first quarter of 1996. This decrease of $3 million was primarily attributable to a decrease in the net interest margin from 4.91% to 4.69%, largely offset by growth in earning assets. The decline in the net interest margin resulted from an increase in the cost of lower cost sources of funds and a decrease in the average yield on assets. The cost of domestic interest bearing core deposits (excluding large time) increased by 7 basis points, while the yield on domestic loans dropped by 33 basis points. The negative effect of these factors on the net interest margin was partly offset by an increase in the proportion of funding provided by demand deposits and interest bearing core deposits. Average earning assets were $25.4 billion in the first quarter of 1997, compared with $24.4 billion in the first quarter of 1996. Average loans were up $880 million, or 4 percent, while average investment securities were $170 million higher. See "Loans" for additional commentary on growth in the loan portfolio. The increase in investment securities reflected interest rate risk management actions to reduce the Company's exposure to declines in interest rates. The $1.0 billion, or 4 percent, growth in average earning assets from the first quarter of 1996 to the first quarter of 1997 was funded primarily by increases in demand deposits and interest bearing core deposits. Increases in these categories were: demand deposits $682 million, or 11 percent; interest bearing deposits $293 million, or 6 percent; and savings and consumer time deposits $134 million, or 5 percent. Since these categories of deposits all grew faster than earning assets, the average proportion of funding provided by non-interest bearing and interest bearing core deposits increased from 61 percent in the first quarter of 1996 to 62 percent in the same period of 1997. NONINTEREST INCOME
FOR THE THREE MONTHS ENDED --------------------------------------------------------------- MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, (DOLLARS IN THOUSANDS) 1997 1996 1996 1996 1996 - -------------------------------------------------- ---------- ------------ ------------- ---------- ---------- Service charges on deposit accounts............... $ 27,121 $ 26,148 $ 26,799 $ 25,067 $ 23,961 Trust fees........................................ 23,898 23,824 24,098 23,309 22,248 International commissions and fees................ 15,079 16,586 16,120 17,124 16,278 Credit card merchant fees......................... 13,044 11,554 13,721 12,905 11,598 Merchant banking fees............................. 8,380 4,718 4,729 5,234 9,248 Investment services............................... 4,979 5,182 5,225 4,714 4,259 Foreign exchange.................................. 3,469 3,598 2,641 3,330 3,686 Investment securities gains, net.................. 471 637 628 2,621 616 Other............................................. 18,345 10,725 13,319 11,246 10,980 ---------- ------------ ------------- ---------- ---------- Total noninterest income........................ $ 114,786 $ 102,972 $ 107,280 $ 105,550 $ 102,874 ---------- ------------ ------------- ---------- ---------- ---------- ------------ ------------- ---------- ----------
In the first quarter of 1997, the Company had noninterest income of $115 million, compared with $103 million for the same period in 1996. This increase of $12 million was primarily due to $8 million of gains from a real estate-related joint venture (included in "Other"), a $3 million increase in service charges on deposits arising from an increase in the volume of non-credit services provided, a $2 million increase in trust fees due to growth in the Company's proprietary mutual funds, and a $1 million increase in credit card fees, resulting from increased merchant volume. 13 NONINTEREST EXPENSE
FOR THE THREE MONTHS ENDED --------------------------------------------------------------- MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, (DOLLARS IN THOUSANDS) 1997 1996 1996 1996 1996 - -------------------------------------------------- ---------- ------------ ------------- ---------- ---------- Salaries and other compensation................... $ 108,601 $ 109,201 $ 113,416 $ 114,281 $ 111,895 Employee benefits................................. 32,187 27,724 24,591 25,683 30,456 ---------- ------------ ------------- ---------- ---------- Personnel-related expense....................... 140,788 136,925 138,007 139,964 142,351 Occupancy......................................... 19,630 21,671 35,439 24,270 21,955 Equipment......................................... 13,687 14,790 14,003 13,336 13,813 Communications.................................... 10,268 9,203 8,713 9,334 8,687 Credit card processing............................ 9,722 9,065 9,619 10,038 8,369 Data processing................................... 6,423 6,565 5,568 4,689 5,318 Printing and office supplies...................... 6,169 6,614 7,939 6,434 6,098 Advertising and public relations.................. 6,009 9,585 5,508 6,702 6,993 Software.......................................... 4,729 4,575 3,966 3,678 3,676 Professional services............................. 4,719 5,737 6,144 6,592 5,869 Intangible asset amortization..................... 3,338 3,321 3,338 3,338 3,338 Travel............................................ 3,195 4,487 3,553 3,822 3,074 Armored car....................................... 3,113 4,778 4,458 4,171 4,085 Foreclosed asset expense (income)................. 411 (556) (696) 867 3,274 Other............................................. 14,900 17,615 12,964 15,283 15,124 ---------- ------------ ------------- ---------- ---------- Noninterest expense, excluding merger and integration expense........................... 247,101 254,375 258,523 252,518 252,024 Merger and integration expense.................... 6,037 30,646 25,552 61,266 -- ---------- ------------ ------------- ---------- ---------- Total noninterest expense....................... $ 253,138 $ 285,021 $ 284,075 $ 313,784 $ 252,024 ---------- ------------ ------------- ---------- ---------- ---------- ------------ ------------- ---------- ----------
Noninterest expense, excluding merger and integration expense of $6 million, was $247 million for the first quarter of 1997, compared with $252 million for the first quarter of 1996. This decrease of $5 million, or 2 percent, resulted principally from a $2 million decrease in personnel-related expense (due to a decline in full-time equivalent employees from 10,002 to 9,444 during the last twelve months and a reduction in contract labor), a decrease in occupancy expense of $2 million resulting from consolidation of administrative functions and closure of 20 banking offices, and a decrease of $3 million in foreclosed asset expense. These expense reductions were partly offset by an increase of $3 million in outside credit card and data processing services, which directly supported a $4 million increase in revenue from non-credit services. MERGER AND INTEGRATION EXPENSE In connection with the merger, $6 million of merger and integration expense was recognized in the first quarter of 1997. These costs included severance, retention, and other employee-related costs ($1 million); professional fees ($1 million); and other merger and integration related expenses ($4 million). Since the combination of Union Bank and BanCal Tri-State Corporation on April 1, 1996, merger and integration expense totaling $124 million has been recorded. No further merger and integration charges are expected in connection with the merger. 14 MERGER AND INTEGRATION EXPENSE (CONTINUED) The table that follows presents merger and integration expense provisions in 1996 and the first quarter of 1997, the cash and noncash utilization of those expense provisions during the periods, and the resulting liability balances as of March 31, 1997, and December 31, 1996.
THREE MONTHS ENDED TWELVE MONTHS ENDED (DOLLARS IN THOUSANDS) MARCH 31, 1997 DECEMBER 31, 1996 - ----------------------------------------------------------------------- ------------------- -------------------- Balance, accrued merger and integration expense, beginning of period... $ 54,344 $ -- Provision for merger and integration costs............................. 6,037 117,464 Utilization: Cash................................................................. 15,360 40,155 Noncash.............................................................. -- 22,965 ------- ------- Total utilization.................................................. 15,360 63,120 ------- ------- Balance, accrued merger and integration expense, end of period......... $ 45,021 $ 54,344 ------- ------- ------- -------
The Company's liquidity has not been significantly affected by these cash outlays, and future cash outlays are not expected to impact liquidity. INCOME TAX EXPENSE The effective tax rates for the three months ended March 31, 1997 and 1996, were 40.6 percent and 39.0 percent, respectively. The increase in the effective tax rate was primarily attributable to an increase in the effective state tax rates 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, on April 1, 1996. LOANS
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, (DOLLARS IN THOUSANDS) 1997 1996 1996 1996 1996 - ------------------------------------- ------------- ------------- ------------- ------------- ------------- Domestic: Commercial, financial and industrial....................... $ 9,676,131 $ 9,492,255 $ 9,603,845 $ 9,439,260 $ 9,538,015 Construction....................... 331,149 357,817 362,324 365,946 384,792 Mortgage: Residential...................... 2,973,411 2,960,908 3,005,167 3,026,548 2,881,026 Commercial....................... 2,650,511 2,597,616 2,485,963 2,301,144 2,204,438 ------------- ------------- ------------- ------------- ------------- Total mortgage................. 5,623,922 5,558,524 5,491,130 5,327,692 5,085,464 Consumer: Installment...................... 2,061,883 2,063,434 2,038,849 1,943,889 1,840,078 Home equity...................... 1,064,357 1,113,269 1,137,454 1,166,428 1,185,188 Credit card and other lines of credit......................... 284,009 303,235 296,131 298,798 295,112 ------------- ------------- ------------- ------------- ------------- Total consumer................. 3,410,249 3,479,938 3,472,434 3,409,115 3,320,378 Lease financing.................... 824,325 800,048 823,082 830,889 830,098 ------------- ------------- ------------- ------------- ------------- Total loans in domestic offices...................... 19,865,776 19,688,582 19,752,815 19,372,902 19,158,747 Loans originated in foreign branches............................ 1,234,150 1,209,523 1,193,950 1,107,776 1,182,588 ------------- ------------- ------------- ------------- ------------- Total loans.................... $ 21,099,926 $ 20,898,105 $ 20,946,765 $ 20,480,678 $ 20,341,335 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
15 LOANS (CONTINUED) The Company's lending activities are predominantly domestic, with such loans comprising approximately 94 percent of the portfolio at March 31, 1997. Total loans at March 31, 1997, were $21.1 billion, an increase of $759 million, or 4 percent, from March 31, 1996. The increase was primarily attributable to growth in the residential and commercial mortgage portfolio, which increased $538 million. 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 industry concentration exceeding ten percent of the total. At March 31, 1997 and 1996, the commercial, financial and industrial loan portfolio was $9.7 billion, or 46 percent of total loans, and $9.5 billion, or 47 percent of total loans, respectively. The construction loan portfolio totaled $331 million, or 2 percent of total loans, at March 31, 1997, compared with $385 million, or 2 percent of total loans, at March 31, 1996. Mortgage loans were $5.6 billion, or 27 percent of total loans, at March 31, 1997, and $5.1 billion, or 25 percent of total loans, at March 31, 1996. The mortgage loan portfolio consists of loans on commercial and industrial projects and loans secured by one to four family residential properties, primarily in California. Commercial mortgages increased $446 million from March 31, 1996, primarily due to originations of mini perm loans ranging from $1 million to $10 million. Consumer loans totaled $3.4 billion, or 16 percent of total loans, at March 31, 1997, compared with $3.3 billion, or 16 percent of total loans, at March 31, 1996. This portfolio is primarily comprised of installment loans and home equity loans. Installment loans increased $222 million from March 31, 1996, due to increases in automobile lending. Lease financing totaled $824 million, or 4 percent of total loans, at March 31, 1997, compared with $830 million, or 4 percent of total loans, at March 31, 1996. Loans originated in foreign branches totaled $1.2 billion, or 6 percent of total loans, at March 31, 1997 and 1996. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is maintained at a level considered appropriate by management and is based on an ongoing assessment of the risks inherent in the credit and lease portfolio, including commitments to provide financing. The allowance is increased by the provision for credit losses, which is charged against current period operating results, and is decreased by the amount of net loans charged off during the period. In evaluating the adequacy of the allowance for credit losses, management incorporates such factors as collateral value, portfolio composition and concentration, and trends in local and national economic conditions and the related impact on the financial strength of the Company's borrowers. While the allowance is segmented by broad portfolio categories to analyze its adequacy, the allowance is general in nature and is available for the portfolio in its entirety. Although management believes that the allowance for credit losses is adequate, without any provision for credit losses in the first quarter of 1997, future provisions will be subject to continuing evaluation of inherent risk in the loan portfolio. 16 ALLOWANCE FOR CREDIT LOSSES (CONTINUED) The table below sets forth a reconciliation of changes in the allowance for credit losses.
FOR THE THREE MONTHS ENDED --------------------------------------------------------------- MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, (DOLLARS IN THOUSANDS) 1997 1996 1996 1996 1996 - ----------------------------------------------- ---------- ------------ ------------- ---------- ---------- Balance, beginning of period................... $ 523,946 $ 535,087 $ 545,345 $ 547,401 $ 555,149 Loans charged off: Commercial, financial and industrial....... 5,175 13,280 10,289 6,628 11,937 Construction............................... -- 2,376 -- 806 67 Mortgage................................... 1,888 1,706 5,086 2,621 4,070 Consumer................................... 12,539 18,083 12,293 12,162 13,823 Lease financing............................ 969 683 716 577 647 Loans originated in foreign branches....... -- 42 1,256 49 30 ---------- ------------ ------------- ---------- ---------- Total loans charged off.................. 20,571 36,170 29,640 22,843 30,574 Recoveries of loans previously charged off: Commercial, financial and industrial....... 7,540 7,887 4,030 4,271 6,153 Construction............................... 6,891 2 -- 129 1 Mortgage................................... 1,474 4,310 2,230 3,097 2,640 Consumer................................... 3,481 2,786 3,027 3,147 3,946 Lease financing............................ 74 44 95 143 86 Loans originated in foreign branches....... -- -- -- -- -- ---------- ------------ ------------- ---------- ---------- Total recoveries of loans previously charged off............................ 19,460 15,029 9,382 10,787 12,826 ---------- ------------ ------------- ---------- ---------- Net loans charged off.................. 1,111 21,141 20,258 12,056 17,748 Provision for credit losses.................... -- 10,000 10,000 10,000 10,000 ---------- ------------ ------------- ---------- ---------- Balance, end of period......................... $ 522,835 $ 523,946 $ 535,087 $ 545,345 $ 547,401 ---------- ------------ ------------- ---------- ---------- ---------- ------------ ------------- ---------- ---------- Allowance for credit losses to total loans..... 2.48% 2.51% 2.55% 2.66% 2.69% Provision for credit losses to net loans charged off................................... -- 47.30 49.36 82.95 56.34 Recoveries of loans to loans charged off in the previous period............................... 53.80 50.71 41.07 35.28 33.46 Net loans charged off to average loans outstanding for the period (1)................ 0.02 0.40 0.39 0.24 0.35
- ------------------------------ (1) Annualized. At March 31, 1997, the Company's allowance for credit losses was $523 million, or 2.48 percent of total loans, and 383 percent of total nonaccrual loans, compared with an allowance for credit losses of $547 million, or 2.69 percent of total loans, and 285 percent of total nonaccrual loans at March 31, 1996. During the first three months of 1997, the Company recorded no provision for credit losses. This resulted from management's regular quarterly assessment of overall credit quality and economic conditions in relation to the level of the allowance for credit losses. Future quarterly provisions will be subject to the same evaluation process. During the first quarter of 1997, the Company had net loans charged off of $1 million, compared with $18 million in the first quarter of 1996. Loans charged off in the first quarter of 1997 were lower than in any quarter in 1996. In addition, there were $19 million in recoveries during the first quarter of 1997, including a recovery of $7 million on one construction loan. Net loans charged off as a percentage of average total loans for the first quarter of 1997 dropped to 0.02%, compared with 0.35% for the same quarter a year ago. 17 ALLOWANCE FOR CREDIT LOSSES (CONTINUED) The Company evaluates its loan portfolio for impairment as defined by Statement of Financial Accounting Standard No. 114, as amended. At March 31, 1997, total impaired loans were $125 million, and the associated impairment allowance was $15 million, compared with total impaired loans of $158 million and an associated impairment allowance of $13 million, at March 31, 1996. NONPERFORMING ASSETS
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, (DOLLARS IN THOUSANDS) 1997 1996 1996 1996 1996 - ----------------------------------------------- ---------- ------------ ------------- ---------- ---------- Nonaccrual loans: Commercial, financial and industrial....... $ 70,778 $ 56,864 $ 70,920 $ 94,303 $ 81,028 Construction............................... 5,009 7,349 10,670 10,974 30,630 Mortgage: Residential.............................. 3,244 11,214 10,577 16,083 17,961 Commercial............................... 57,636 52,593 54,904 66,911 61,108 ---------- ------------ ------------- ---------- ---------- Total mortgage......................... 60,880 63,807 65,481 82,994 79,069 Other...................................... -- 247 704 3,223 1,089 ---------- ------------ ------------- ---------- ---------- Total nonaccrual loans................. 136,667 128,267 147,775 191,494 191,816 Renegotiated loans............................. -- -- -- 681 1,385 Foreclosed assets.............................. 30,378 28,517 32,882 35,998 34,999 ---------- ------------ ------------- ---------- ---------- Total nonperforming assets............... $ 167,045 $ 156,784 $ 180,657 $ 228,173 $ 228,200 ---------- ------------ ------------- ---------- ---------- ---------- ------------ ------------- ---------- ---------- Allowance for credit losses.................... $ 522,835 $ 523,946 $ 535,087 $ 545,345 $ 547,401 ---------- ------------ ------------- ---------- ---------- ---------- ------------ ------------- ---------- ---------- Nonaccrual and renegotiated loans to total loans ........................................ 0.65% 0.61% 0.71% 0.94% 0.95% Nonaccrual loans to allowance for credit losses .............................................. 26.14 24.48 27.62 35.11 35.04 Nonperforming assets to total loans and foreclosed assets ............................ 0.79 0.75 0.86 1.11 1.12 Nonperforming assets to total assets .......... 0.57 0.54 0.63 0.81 0.81
At March 31, 1997, nonaccrual and renegotiated loans totaled $137 million, a decrease of $57 million, or 29 percent, from a year earlier. The decrease was primarily the result of reductions of $26 million in nonaccrual construction loans, $15 million in nonaccrual residential mortgage loans, and $10 million in nonaccrual commercial, financial and industrial loans. Foreclosed assets declined $5 million due to sales of individual assets. Nonperforming assets increased $10 million from December 31, 1996, primarily due to the addition of a single nonaccrual commercial, financial and industrial loan of $17 million. Nonaccrual loans as a percentage of total loans were 0.65% at March 31, 1997, compared with 0.95% at March 31, 1996. Nonperforming assets as a percentage of total loans and foreclosed assets were 0.79% at March 31, 1997, compared with 1.12% at March 31, 1996. 18 LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, (DOLLARS IN THOUSANDS) 1997 1996 1996 1996 1996 - ------------------------------------------------- ----------- ------------ ------------- --------- ----------- Commercial, financial and industrial............ $ 4,419 $ 4,527 $ 521 $ 1,800 $ 3,756 Construction................................... 5,081 -- 2,325 188 1,716 Mortgage: Residential.................................. 10,952 8,969 9,838 7,110 12,208 Commercial................................... 13,742 168 16,372 117 2,949 ----------- ------------ ------------- --------- ----------- Total mortgage............................. 24,694 9,137 26,210 7,227 15,157 Consumer and other............................. 11,865 10,028 13,643 6,867 7,786 ----------- ------------ ------------- --------- ----------- Total loans 90 days or more past due and still accruing........................... $ 46,059 $ 23,692 $ 42,699 $ 16,082 $ 28,415 ----------- ------------ ------------- --------- ----------- ----------- ------------ ------------- --------- -----------
Total loans 90 days or more past due and still accruing were $46 million at March 31, 1997, compared with $28 million at March 31, 1996. Included in the March 31, 1997, balance was a single commercial mortgage loan of $11 million, which was repaid in April 1997, and a single construction loan of $5 million, which was placed on nonaccrual status in April 1997. LIQUIDITY Liquidity refers to the Company's ability to adjust its future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost-effective basis. The Company's liquidity management draws upon the strengths of its extensive retail and commercial market business franchise, coupled with its ability to obtain funds for various terms in a variety of domestic and international money markets. Core deposits provide the Company with a sizable source of relatively stable and low-cost funds. In the first quarter of 1997, lower cost sources of funds, which include demand deposits and interest bearing core deposits, funded 62 percent of average earning assets. Most of the remaining funding was provided by short-term borrowing in the form of negotiable certificates of deposit, foreign deposits, federal funds purchased and securities sold under repurchase agreements, commercial paper, and other borrowings. 19 REGULATORY CAPITAL
MINIMUM MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, REGULATORY (DOLLARS IN THOUSANDS) 1997 1996 1996 1996 1996 REQUIREMENT - ----------------------- ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL COMPONENTS Tier 1 capital......... $ 2,467,312 $ 2,395,580 $ 2,349,483 $ 2,308,038 $ 2,282,662 Tier 2 capital......... 458,135 551,074 552,768 594,911 590,262 ------------- ------------- ------------- ------------- ------------- Total risk-based capital............... $ 2,925,447 $ 2,946,654 $ 2,902,251 $ 2,902,949 $ 2,872,924 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Risk-weighted assets... $ 26,963,265 $ 26,390,288 $ 25,994,269 $ 25,827,724 $ 25,370,424 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Quarterly average assets................ $ 28,702,616 $ 28,496,355 $ 27,885,645 $ 27,699,256 $ 27,326,426 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL RATIOS Tier 1 risk-based capital............... 9.15% 9.08% 9.04% 8.94% 9.00% 4.0% Total risk-based capital............... 10.85 11.17 11.16 11.24 11.32 8.0 Leverage ratio (1)..... 8.60 8.41 8.43 8.33 8.35 4.0
- ------------------------------ (1) Tier 1 capital divided by quarterly average assets. The Company and the Company's subsidiary bank, Union Bank of California, N.A. (the "Bank") are subject to various regulations issued by Federal banking agencies, including minimum capital requirements. The Company and the Bank are required to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (the "leverage ratio"). Compared with one year earlier, the company's Tier 1 risk-based capital ratio at March 31, 1997, increased 15 basis points to 9.15%, the total risk-based capital ratio declined 47 basis points to 10.85%, and the leverage ratio increased 25 basis points to 8.60%. The increase in the Tier 1 risk-based capital and leverage ratios was due to retained earnings growing faster than risk-weighted assets and average assets, respectively. The decline in the total capital ratio was primarily due to the redemption of $100 million of subordinated debt in the first quarter of 1997, which had the positive effect of increasing net interest income. As of March 31, 1997, management believes the capital ratios of the Bank met all regulatory minimums of a well-capitalized bank. 20 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Index:
NO. DESCRIPTION - --------- --------------------------- 27 Financial Data Schedule
(b) Reports on Form 8-K: There were no reports on Form 8-K filed during the first quarter of 1997. 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, thereunto 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: May 13, 1997 21 EX-27 2 EXHIBIT 27 FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND THE ACCOMPANYING TABLES OF FORM 10-Q. INFORMATION HEREIN IS QUALIFIED BY REFERENCE TO SUCH STATEMETS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 2,172,478 681,308 650,790 642,684 2,244,233 259,430 262,568 21,099,926 522,835 29,423,537 22,043,925 3,033,637 560,909 282,726 0 135,000 273,852 2,145,424 29,423,537 420,472 38,047 26,512 485,031 144,314 191,000 294,031 0 471 253,138 155,679 92,502 0 0 92,502 1.54 1.54 4.69 136,667 46,059 0 0 523,946 20,571 19,460 522,835 283,059 9,429 230,347
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