-----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, M0HmauhPTNSEA2/W5pDz8tF6uyBXZHTBSaWZONuxTJjQPXyAMLaty6Jd3Tzts7I2 qGjjxrxd6bVSOBIjgf2zsQ== 0001047469-98-041799.txt : 19981120 0001047469-98-041799.hdr.sgml : 19981120 ACCESSION NUMBER: 0001047469-98-041799 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19981119 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-K/A SEC ACT: SEC FILE NUMBER: 333-03040 FILM NUMBER: 98755547 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-K/A 1 10-K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. COMMISSION FILE NUMBER 0-28118. UNIONBANCAL CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA 94-1234979 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.)
350 CALIFORNIA STREET, SAN FRANCISCO, CA 94104-1476 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (415) 765-2126 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock 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. __X__ Yes ______ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of October 31, 1998, the aggregate market value of voting stock held by nonaffiliates of the registrant was $995,421,730. The aggregate market value was computed by reference to the last sales price of such stock. As of October 31, 1998, the number of shares outstanding of the registrant's common stock was 58,403,188.
DOCUMENTS INCORPORATED BY REFERENCE - -------------------------------------------------------------------------------------------- LOCATION IN FORM 10-K INCORPORATED DOCUMENT - --------------------------------------------- --------------------------------------------- Part III Portions of the Proxy Statement for the May 27, 1998 Annual Meeting of Shareholders
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INDEX PART I PAGE --------- 2 ITEM 1. BUSINESS 2 General 2 Banking 3 Subsidiaries 3 Employees 3 Competition 4 Monetary Policy 4 Supervision and Regulation 5 ITEM 2. PROPERTIES 5 ITEM 3. LEGAL PROCEEDINGS 5 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6 EXECUTIVE OFFICERS OF THE REGISTRANT PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER 8 MATTERS 8, F-1 ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 8, F-1 RESULTS OF OPERATIONS ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 8, F-25 MARKET RISK 8, F-29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 8 FINANCIAL DISCLOSURE PART III 9 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 9 ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 9 AND MANAGEMENT 9 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV 10 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K SIGNATURES II-1
PART I ITEM 1. BUSINESS GENERAL UnionBanCal Corporation (UNBC) is a commercial bank holding company incorporated in the State of California in 1952 and is among the oldest banks on the West Coast, having roots as far back as 1864. UNBC was formed as a result of the combination of Union Bank with BanCal Tri-State Corporation on April 1, 1996. The combination was effected by the issuance of 18,134,027 shares of Union Bank common stock in exchange for all the outstanding shares of BanCal Tri-State Corporation. On August 10, 1998, UNBC and its consolidated subsidiaries (the Company) exchanged 3.4 million shares of its common stock for 2.4 million shares of Union Bank of California, N.A. (the Bank) common stock owned directly by the Bank of Tokyo-Mitsubishi, Ltd. (BTM). This share exchange provides the Company with a 100 percent ownership interest in the Bank. In addition, it increases BTM's ownership percentage of the Company to 82 percent from 81 percent. The exchange of shares was accounted for as a reorganization of entities under common control. Accordingly, amounts previously reported as Parent Direct Interest in Bank Subsidiary, including the proportionate share of net income, dividends, and other comprehensive income have been reclassified to combine them with the corresponding amounts attributable to the Company's common shareholders for all periods presented. At December 31, 1997, the Company was the third largest bank holding company in California and among the thirty largest in the United States, based on total assets of $30.6 billion. UNBC is 82 percent owned by BTM and 18 percent owned by other shareholders. UNBC's principal subsidiary, the Bank, is wholly owned by UNBC. The Company provides a wide range of financial services to consumers, small businesses, middle market companies and major corporations, primarily in California, Oregon, and Washington, but nationally and internationally as well. BANKING COMMUNITY BANKING The Community Banking Group serves consumers, smaller businesses, and government and nonprofit institutions through its 245 branch offices in California, Oregon, and Washington. It provides a wide variety of loan products and deposit services with an emphasis on quality customer service. In addition, its deposit customers are linked with greatly expanded automated teller and point-of-sale debit services through its founding membership in the Star System-Registered Trademark-, the largest shared ATM network in the Western United States. The group has been a leader in providing alternative delivery systems which enable customers to conduct their banking 24 hours a day via telephone or personal computer. The group also operates more than 44 full-service branches within retail establishments, primarily supermarkets. Additionally, it provides Priority Banking-Registered Trademark- services to affluent customers and professional service firms. COMMERCIAL FINANCIAL SERVICES The Commercial Financial Services Group provides a wide variety of financial services to commercial customers, primarily in the western states. The services provided include loans, mortgages and construction financing on residential and commercial properties, asset-based financing, project financing, trade financing, and customized cash management services. Customized credit products and financial services are provided to major communications, media, entertainment, energy, utility and environmental services customers nationwide. In addition, specialized 2 depository services are offered to domestic financial institutions, government agencies, bankruptcy trustees and other customers with significant deposit volumes. These deposit services provide the Bank with a low cost source of funds and generate noninterest income. INTERNATIONAL BANKING The International Banking Group provides trade finance and payment-related products and services to banks. The group also extends credit that is primarily of a short-term nature to commercial banks, agencies, and domestic and foreign corporations engaged in international business. TRUST AND PRIVATE FINANCIAL SERVICES GROUP The Trust and Private Financial Services Group provides fiduciary, private banking, investment, and asset management services for individuals and institutions globally through offices in California, Oregon, and Washington. Services provided include private banking, personal trust services, trusteeship and administration for employee benefit plans, investment management, domestic and global custody, securities lending, trusteeship for bond issues, retail brokerage, and origination and distribution of debt instruments. The group also advises and markets a proprietary mutual fund family, the HighMark Funds. SUBSIDIARIES UNBC has eleven active nonbank subsidiaries that provide various types of services to it and its customers. Bankers Commercial Corporation, UNBC Leasing, Inc. and UnionBanCal Leasing Corporation engage in equipment leasing and other lease related financing. Cal First Properties, Inc. holds and manages various properties used by the Company. UnionBanCal Venture Corporation is a small business investment company licensed under the Small Business Investment Act of 1958. UnionBanCal Commercial Funding Corporation sells commercial paper and invests the proceeds in eurodollar placements with the Bank. UnionBanCal Equities, Inc. invests in equity securities of other companies. Mills-Ralston, Inc. and SBS Realty, Inc. were established to hold and dispose of problem assets, including other real estate owned (OREO). Stanco Properties, Inc. engages in custodian activities in connection with tax-deferred exchanges of real property under Section 1031 of the Internal Revenue Code. UnionBanCal Mortgage Corporation acts as trustee under deeds of trust on behalf of UNBC. The Bank has two active subsidiaries, UBOC Investment Services, Inc. (UBOCIS) and Union Bank of California International (UBOCI). UBOCIS, a registered securities broker-dealer and member of the National Association of Securities Dealers (NASD), offers a wide range of investment products. These products include a wide range of securities, including publicly traded stocks, treasury and government agency issues, stock options, corporate and municipal bonds and mutual funds. In addition, it provides a wholesale investment program to other financial institutions. UBOCI is an Edge Act subsidiary supporting the Bank's international correspondent banking business. EMPLOYEES At December 31, 1997, the Company had 9,753 full-time-equivalent employees. COMPETITION Banking is a highly competitive business. The Company competes actively for loan, deposit, and other financial services business in California, Oregon, and Washington, as well as nationally and internationally. The Company's competitors include a large number of state and national banks and major foreign-affiliated or foreign banks, as well as many financial and nonfinancial firms which offer services similar to those offered by the Company or its subsidiaries. 3 The Company believes that continued emphasis on enhanced services and distribution systems, an expanded customer base, increased productivity and strong credit quality, together with an established capital base, will position it to meet the challenges provided by this competition. MONETARY POLICY The operations of bank holding companies and their subsidiaries are affected by the credit and monetary policies of the Federal Reserve Board (FRB). The FRB influences financial performance through its management of the discount rate, the money supply, and reserve requirements on bank deposits. Monetary policies of the FRB have had and will continue to have a significant effect on the operating results of financial institutions, including the Company. SUPERVISION AND REGULATION The Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (BHCA), which subjects it to requirements for filing reports with the Board of Governors of the Federal Reserve System and for undergoing regular inspections by the Federal Reserve Bank of San Francisco. Generally, the BHCA restricts any investment that the Company may make to no more than 5% of the voting shares of any non-banking entity, and the Company may not acquire more than 5% of the voting shares of any domestic bank without the prior approval of the bank regulatory authorities. The Company's activities are limited, with some exceptions, to banking, the business of managing or controlling banks, and activities which the regulatory authorities deem to be so closely related to banking as to be a "proper incident thereto." The Bank and most of its subsidiaries are regulated by the Office of the Comptroller of the Currency (OCC). The Company's subsidiaries are also subject to extensive regulation, supervision and examination by various federal and state regulatory agencies. In addition, the Bank and its subsidiaries are subject to certain restrictions under the Federal Reserve Act, including restrictions on affiliate transactions. Dividends payable by the Bank to the Company are subject to a formula imposed by the OCC unless express approval is given to deviate from the formula. For more information regarding restrictions on loans and dividends by the Bank to its affiliates and on transactions with affiliates, see Notes 15 and 20 to the Consolidated Financial Statements included in this Form 10-K/A. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) imposed stricter capital requirements on banks. FDICIA requires federal bank regulatory authorities to take "prompt corrective action" in dealing with inadequately capitalized banks. FDICIA established five tiers of capital measurement ranging from "well capitalized" to "critically undercapitalized". It is the Company's policy to maintain risk-based capital ratios for both the Company and the Bank at or above the required minimum capital adequacy levels. At December 31, 1997, management believes the Bank met the requirements of a "well capitalized" institution. Furthermore, the activities of UBOCIS are subject to the rules and regulations promulgated by the Securities and Exchange Commission and the NASD, as well as other securities regulators at the state level. There are additional requirements and restrictions in the laws of the United States and the states of California, Oregon and Washington, as well as other states in which the Bank and its subsidiaries may conduct operations which may include restrictions on the amount of loans and the nature and amount of investments, as well as activities as an underwriter of securities, the opening and closing of branches and the acquisition of other financial institutions. The activities of the Bank in the international arena may be subject to the laws and regulations of the jurisdiction where business is being conducted which may change from time to time and affect the business opportunities and competitiveness of the Bank in these jurisdictions. Furthermore, due to the controlling 4 ownership of the Company by BTM, regulatory requirements adopted or enforced by the Government of Japan may have an effect on the activities and investments of the Company and the Bank in the future. The trend followed in recent years by the United States Congress has been to make major legislative changes which, in turn, lead to major regulatory changes, which affect the Company, the Bank and its subsidiaries, as well as the financial services industry in general. Such changes can be expected to occur in the future. Generally, the effect of such changes has been to increase competition and narrow the functional distinctions among different types of financial institutions. In some cases, these changes create opportunities for the Company and the Bank, as well as the financial services industry, to compete in financial markets on a more general basis with less regulation. However, these changes also lead to new and major competitors in geographic and product markets which have historically been limited by law and regulation to depository institutions, such as the Bank. Changes in the laws, regulations, or policies that impact the Company and the Bank cannot necessarily be predicted and may have a material affect on the business and earnings thereof. ITEM 2. PROPERTIES At December 31, 1997, the Company operated 240 full service branches and 33 limited service offices in California, 5 full service branches in Oregon and Washington, and 18 overseas branches and business offices. The Company owns the property occupied by 87 of the domestic offices and leases the remaining properties for periods of five to twenty years. The Company owns 3 administrative facilities in San Francisco and 3 in San Diego. Other administrative offices in Los Angeles, Portland, Seattle, and New York operate under long-term leases expiring in three to fifteen years. Rental expense for branches and administrative premises are included in Note 4 to the Company's Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS The Company is subject to various pending and threatened legal actions which arise in the normal course of business. The Company maintains reserves for losses from legal actions which are both probable and estimable. In the opinion of management, the disposition of claims currently pending will not have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 5 EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS - ---------------------------- --------- ----------------------------------------------------------------------------- Tamotsu Yamaguchi........... 67 Mr. Yamaguchi has served as Chairman of the Company and the Bank since April 1996. He served as Chairman of the former Union Bank from September 1992 until March 1996. Mr. Yamaguchi has served as a director of the Company since September 1992. Takahiro Moriguchi.......... 53 Mr. Moriguchi has served as President and Chief Executive Officer of the Company and the Bank since May 1997. He served as Vice Chairman and Chief Financial Officer of the Company and the Bank from April 1996 to May 1997. He served as Vice Chairman and Chief Financial Officer of the former Union Bank from June 1993 until March 1996. He served as General Manager of the former Bank of Tokyo, Ltd.'s Capital Markets Division 2 from May 1992 to May 1993. He has served as a director of BTM since April 1996 and as a director of the former Bank of Tokyo, Ltd. prior thereto. Mr. Moriguchi has served as a director of the Company since June 1993. Minoru Noda................. 51 Mr. Noda has served as Deputy Chairman, Chief Credit Officer, and Chief Financial Officer of the Company and the Bank since May 1997. He served as Vice Chairman and Chief Credit Officer of the Company and the Bank from April 1996 to May 1997. He served as Vice Chairman, Credit and Finance, and Director of the former BanCal Tri-State Corporation and the former Bank of California, N.A. from August 1993 until March 1996. He served as Executive Vice President for Regional Banking of the former Bank of California, N.A. from July 1992 through June 1993. Mr. Noda has served as a director of the Company since April 1996. Richard C. Hartnack......... 52 Mr. Hartnack has served as Vice Chairman and head of the Community Banking Group of the Company and the Bank since April 1996. He served as Vice Chairman of the former Union Bank from June 1991 until March 1996. Mr. Hartnack has served as a director of the Company since June 1991. Robert M. Walker............ 56 Mr. Walker has served as Vice Chairman and head of the Commercial Financial Services Group for the Company and the Bank since April 1996 and head of the Corporate and Real Estate Banking Group for the Company and the Bank since July 1996. He served as Vice Chairman and head of the Commercial Financial Services Group of the former Union Bank from July 1992 until March 1996. Mr. Walker has served as a director of the Company since July 1992. Peter R. Butcher............ 57 Mr. Butcher has served as Executive Vice President, Credit Management Group, of the Company and the Bank since April 1996. He served as Executive Vice President and Chief Credit Officer of the former BanCal Tri-State Corporation and former Bank of California, N.A. from July 1993 until March 1996. He served as Executive Vice President of Society National Bank from March 1992 to July 1993. Yoichi Kambara.............. 49 Mr. Kambara has served as Executive Vice President and head of the Trust & Private Financial Services Group of the Company and the Bank since July 1997. He served as Executive Vice President and Trust Executive Officer of the Trust and Investment Management Group of the Bank from April 1996 to June 1997. He served in the same capacity at the former Bank of California, N.A. from April 1995 to March 1996. He served as General Manager of the Investments Division, from November 1993 to March 1996, and as Senior Vice President and Deputy General Manager, from April 1993 to March 1995, of the Trust and Investment Management Group of the former Bank of California, N.A.
6
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS - ---------------------------- --------- ----------------------------------------------------------------------------- David I. Matson............. 53 Mr. Matson has served as Executive Vice President and Director of Finance of the Company and the Bank since August 1997. He served as Executive Vice President and head of the Institutional and Deposit Markets Division from April 1996 until July 1997. He served in the same capacity at the former Union Bank from January 1994 until March 1996. He served as Senior Vice President of the former Union Bank for more than five years prior thereto. Magan C. Patel.............. 60 Mr. Patel has served as Executive Vice President and head of the International Banking Group of the Company and the Bank since April 1996. He served as Executive Vice President of the former BanCal Tri-State Corporation and the former Bank of California, N.A. for more than five years prior thereto. Charles L. Pedersen......... 54 Mr. Pedersen has served as Executive Vice President and head of the Systems, Technology and Item Processing Group of the Company and the Bank since April 1996. He served as Executive Vice President and head of the Bank Operations & Automation Group of the former Union Bank from September 1992 until March 1996. Michael A. C. Spilsbury..... 48 Mr. Spilsbury has served as Executive Vice President and head of the Operations and Services Group of the Company and the Bank since April 1996. He served as Executive Vice President, Resources and Services, with the former BanCal Tri-State Corporation and the former Bank of California, N.A. from January 1992 through March 1996. Ikuzo Sugiyama.............. 48 Mr. Sugiyama has served as Executive Vice President and head of the Pacific Rim Corporate Group of the Company and the Bank, and General Manager of the Los Angeles Branch of BTM since July 1997. He served as Chief Manager, Corporate Banking Division No. 3 under Corporate Banking Group No. 1 of BTM from April 1996 to July 1997. From April 1994 to March 1996, he served as Deputy General Manager of the Marunonchi Office of the former Bank of Tokyo, Ltd. From May 1991 to March 1994, he served as Deputy General Manager of the Los Angeles Agency of the former Bank of Tokyo, Ltd. and as Senior Vice President of the Japanese Corporate Department-LA of the former Union Bank. Philip M. Wexler............ 59 Mr. Wexler has served as Executive Vice President and head of the Specialized Lending Group of the Company and the Bank since April 1996. He served as Executive Vice President and General Manager of the Specialized Lending Group of the former Union Bank from October 1987 through March 1996.
The term of office of the executive officer extends until the officer resigns, is removed, retires, or is otherwise disqualified for service. There is no family relationship among any such officers. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock is traded on the Nasdaq National Market under the symbol UNBC. As of October 31, 1998, the Company's common stock was held of record by approximately 2,255 shareholders, and approximately 82 percent of the Company's common stock was held by BTM. During 1997 and 1996, the average daily trading volume of the Company's common stock was approximately 34,970 shares and 35,633 shares, respectively. At December 31, 1997, 1996 and 1995, the Company's common stock closed at $107.50 per share, $53.00 per share and $54.25 per share, respectively. The following table presents stock quotations for each quarterly period for the two years ended December 31, 1997.
1997 1996 -------------------- -------------------- HIGH LOW HIGH LOW --------- --------- --------- --------- First quarter............................................................... 63 52 3/4 57 1/2 50 3/4 Second quarter.............................................................. 77 7/8 50 3/4 55 1/2 46 1/2 Third quarter............................................................... 88 1/2 71 3/4 53 1/4 46 1/4 Fourth quarter.............................................................. 107 1/2 83 1/2 56 49
The following table presents quarterly per share cash dividends declared for 1997 and 1996:
1997 1996 --------- --------- First quarter............................................................... $ 0.35 $ 0.35 Second quarter.............................................................. 0.35 0.35 Third quarter............................................................... 0.42 0.35 Fourth quarter.............................................................. 0.42 0.35
The Company offers a dividend reinvestment plan that allows shareholders to reinvest dividends in the Company's common stock at 5 percent below the market price. At December 31, 1997, BTM was not a participant in the plan. The availability of retained earnings of the Company for the payment of dividends is affected by certain legal restrictions. See Note 15 to the Company's Consolidated Financial Statements. In addition, the Company has a dividend reinvestment and stock purchase plan. For further information about these plans, see Note 11. ITEM 6. SELECTED FINANCIAL DATA See page F-1 of this Form 10-K/A. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See pages F-1 through F-28 of this Form 10-K/A. ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See pages F-25 through F-28 of this Form 10-K/A. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See pages F-29 through F-76 of this Form 10-K/A. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the Company's Proxy Statement for the May 27, 1998 Annual Meeting of Shareholders for incorporation of information concerning directors and persons nominated to become directors of the Company. Information concerning executive officers of the Company as of February 28, 1998 is included in Part I above in accordance with Instruction 3 to Item 401(b) of Regulation S-K. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated by reference from the text under the caption "Compensation and Other Transactions with Management and Others" in the Proxy Statement for the May 27, 1998 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning ownership of the equity stock of UNBC by certain beneficial owners and management is incorporated by reference from page 1 and the text under the caption "Election of Directors" in the Proxy Statement for the May 27, 1998 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions with officers, directors, and BTM is incorporated by reference from the text under the caption "Transactions with Management and Others" in the Proxy Statement for the May 27, 1998 Annual Meeting of Shareholders. 9 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS The Consolidated Financial Statements of the Company, the Management Statement, and the independent auditors' reports are set forth on pages F-30 through F-76. (See index on page F-29). (a)(2) FINANCIAL STATEMENT SCHEDULES All schedules to the Consolidated Financial Statements are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or accompanying notes. (a)(3) EXHIBITS
INCORPORATED BY REFERENCE TO REPORT ON FORM --------------------------------- 10-K NO. DESCRIPTION FILED HEREWITH DATED 8-K DATED EXHIBIT NO. - --------- ------------------------------------------------------------------- --------------- --------- --------- ----------- 3.1 Restated Articles of Incorporation of the Registrant, as amended 4-1-96 3.1 3.2 By-laws of the Registrant, as amended 4-1-96 3.2 4.1.a Certificate of Determination of the Preferred Stock of the 3-27-98 4.1.a Registrant, as amended 10.1 Management Stock Plan. (As restated effective June 1, 1997)* 3-27-98 10.1 10.2 Union Bank of California Deferred Compensation Plan. (January 1, 3-28-97 10.2 1997, Restatement, as amended November 21, 1996)* 10.3 Union Bank of California Senior Management Bonus Plan. (Effective 3-27-98 10.3 January 1, 1997)* 10.4 Richard C. Hartnack Employment Agreement (Effective June 4, 1991) 4-1-96 10.6 and Amendment to Employment Agreement. (Dated February 24, 1992)* 10.5 Robert M. Walker Employment Agreement. (Effective July 1, 1992)* 4-1-96 10.7 10.6 Union Bank of California Supplemental Executive Retirement Plan. 3-27-98 10.6 (Effective January 1, 1988) (Amended and restated as of January 1, 1997)* 10.7 Union Bank Executive Wellness Plan. (Effective January 1, 1994)* 4-1-96 10.12 10.8 Union Bank Financial Services Reimbursement Program. (Effective 4-1-96 10.14 January 1, 1996)* 10.9 Performance Share Plan. (Effective January 1, 1997)* 3-27-98 10.9 10.10 Service Agreement Between Union Bank of California and The Bank of 3-27-98 10.10 Tokyo-Mitsubishi, LTD. (Effective October 1, 1997)* 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and 3-27-98 12.1 Preferred Stock Dividend Requirements 21.1 Subsidiaries of the Registrant 3-28-97 21.1 23.1 Consent of Deloitte & Touche LLP X 23.2 Consent of Arthur Andersen LLP X 27.1 Financial Data Schedule X 27.2 Financial Data Schedule X 27.3 Financial Data Schedule X
- ------------- * Management contract or compensatory plan, contract or arrangement. (b) REPORTS ON FORM 8-K None 10 UNIONBANCAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993 - -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- RESULTS OF OPERATIONS: Net interest income (taxable-equivalent)(1)..... $ 1,237,010 $ 1,175,302 $ 1,152,777 $ 1,007,789 $ 986,411 Provision for credit losses..................... -- 40,000 53,250 73,000 151,000 Noninterest income.............................. 463,001 418,676 395,319 359,831 405,965 Noninterest expense(2).......................... 1,044,665 1,134,904 978,101 1,036,349 1,055,020 ----------- ----------- ----------- ----------- ----------- Income before income taxes and cumulative effect of accounting change(1)....................... 655,346 419,074 516,745 258,271 186,356 Taxable-equivalent adjustment................... 5,328 6,724 10,444 12,566 14,734 Income tax expense.............................. 238,722 162,892 193,359 120,356 63,966 ----------- ----------- ----------- ----------- ----------- Income before cumulative effect of accounting change........................................ 411,296 249,458 312,942 125,349 107,656 Cumulative effect of accounting change(3)....... -- -- -- -- 192,793 ----------- ----------- ----------- ----------- ----------- Net income...................................... $ 411,296 $ 249,458 $ 312,942 $ 125,349 $ 300,449 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK(4).......... $ 403,696 $ 238,152 $ 301,637 $ 114,045 $ 289,174 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- PER COMMON SHARE: Net income-basic(4)(5).......................... 6.93 4.10 5.21 2.00 5.20 Net income-diluted(4)(5)........................ 6.91 4.09 5.20 2.00 5.20 Pro forma earnings (basic), excluding after-tax merger and integration expense and cumulative effect of accounting change(2)(4)(5).......... 6.99 5.33 5.21 2.00 1.73 Pro forma earnings (diluted), excluding after-tax merger and integration expense and cumulative effect of accounting change(2)(4)(5)............................... 6.97 5.32 5.20 2.00 1.73 Pro forma net income (basic), to reflect 3 for 1 stock split(6)................................ 2.31 1.37 1.74 0.67 1.73 Pro forma net income (diluted), to reflect 3 for 1 stock split(6).............................. 2.30 1.36 1.73 0.67 1.73 Dividends(7).................................... 1.54 1.40 1.40 1.40 1.40 Book value (end of period)(4)................... 45.95 40.58 40.46 35.65 34.92 Common shares outstanding (end of period)(4).... 58,305,891 58,152,534 58,060,164 57,347,872 56,663,276 Weighted average common shares outstanding-basic(3)(4)....................... 58,227,779 58,130,349 57,935,433 57,029,770 55,619,055 Weighted average common shares outstanding-diluted(3)(4)..................... 58,396,359 58,261,188 58,033,080 57,049,910 55,639,085 Pro forma weighted average common shares outstanding-basic, restated to reflect 3 for 1 stock split(6)................................ 174,683,338 174,391,048 173,806,300 171,089,311 166,857,166 Pro forma weighted average common shares outstanding-diluted, restated to reflect 3 for 1 stock split(6).............................. 175,189,078 174,783,565 174,099,241 171,149,731 166,917,256 BALANCE SHEET (END OF PERIOD): Total assets.................................... $30,585,265 $29,234,059 $27,546,859 $24,569,042 $24,005,530 Total loans..................................... 22,741,408 21,049,787 20,431,683 18,065,650 17,759,181 Nonperforming assets............................ 129,809 156,784 246,871 421,227 1,193,450 Total deposits.................................. 23,296,374 21,532,960 19,655,043 17,409,737 16,978,347 Subordinated capital notes...................... 348,000 382,000 501,369 655,859 725,859 Preferred stock................................. -- 135,000 135,000 135,000 135,000 Common equity(4)................................ 2,679,299 2,359,933 2,349,092 2,044,202 1,978,455 BALANCE SHEET (PERIOD AVERAGE): Total assets.................................... $29,692,992 $27,899,734 $25,564,843 $23,692,560 $23,926,924 Total loans..................................... 21,855,911 20,727,577 18,974,540 17,616,002 18,219,288 Earning assets.................................. 26,291,822 24,717,326 22,849,129 21,046,600 21,176,396 Total deposits.................................. 22,067,155 20,101,544 17,969,972 16,826,443 17,160,129 Common equity(4)................................ 2,514,610 2,325,437 2,197,476 1,980,577 1,917,530 FINANCIAL RATIOS: Return on average assets........................ 1.39% 0.89% 1.22% 0.53% 1.26% Pro forma return on average assets, excluding after-tax merger and integration expense and cumulative effect of accounting change(2)..... 1.40 1.15 1.22 0.53 0.45 Return on average common equity(4).............. 16.05 10.24 13.73 5.76 15.08 Pro forma return on average common equity, excluding after-tax merger and integration expense and cumulative effect of accounting change(2)(4).................................. 16.20 13.33 13.73 5.76 5.03 Efficiency ratio(8)............................. 61.53 71.02 63.39 70.39 66.92 Pro forma efficiency ratio, excluding merger and integration expense(2)(8)..................... 61.17 63.65 63.39 70.39 66.92 Net interest margin(1).......................... 4.70 4.75 5.05 4.79 4.66 Tier 1 risk-based capital ratio................. 8.96 9.08 9.35 9.24 8.88 Total risk-based capital ratio.................. 11.05 11.17 11.70 12.03 12.07 Leverage ratio.................................. 8.53 8.41 8.70 8.67 8.26 Allowance for credit losses to total loans...... 1.99 2.49 2.72 3.12 3.90 Allowance for credit losses to nonaccrual loans......................................... 413.12 408.48 266.56 161.08 84.82 Net loans charged off to average total loans.... 0.33 0.34 0.32 1.15 1.37 Nonperforming assets to total loans, real estate ventures and foreclosed assets................ 0.57 0.74 1.21 2.32 6.58 Nonperforming assets to total assets............ 0.42 0.54 0.90 1.71 4.97
- ----------------- (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Merger and integration expense was $6 million and $117 million in 1997 and 1996, respectively. See page F-2 "Merger Accounting" for a description of merger accounting and pro forma earnings presentation. After-tax merger and integration expense was $4 million and $72 million in 1997 and 1996, respectively. (3) 1993 net income includes the cumulative effect of the adoption of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Both 1993 basic and diluted earnings per share for income before cumulative effect of accounting change were $1.73 and $0.58 per pro forma share when adjusted to reflect the 3 for 1 stock split declaration. (4) All periods have been restated to give retroactive effect to the exchange on August 10, 1998 of 3.4 million shares of the Company's common stock for the Bank of Tokyo-Mitsubishi, Ltd's direct ownership interest in Union Bank of California. (5) Basic and diluted earnings per share above are calculated according to SFAS No. 128, "Earnings per Share"; 1996 and prior periods have been restated. (6) See Note 23 of accompanying notes to Consolidated Financial Statements for information on stock split declaration. (7) Dividends per share reflect dividends declared on the Company's common stock outstanding as of the declaration date. Amounts prior to the merger are based on Union Bank only and do not include the dividend of $145 million paid to The Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. (8) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset expense (income) was $(1.3) million, $2.9 million, $(3.2) million, $73.7 million, and $123.3 million for 1997 through 1993, respectively. F-1 Management's discussion and analysis (MD&A) of the consolidated financial position and results of operations of the Company for the years ended December 31, 1997, 1996 and 1995 should be read in conjunction with the Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements. Averages as presented in the following tables are substantially all based upon daily average balances. 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. MERGER ACCOUNTING The combination of Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The Bank of California, N.A., was completed on April 1, 1996, (the Merger) resulting in UnionBanCal Corporation (UNBC) and its banking subsidiary, Union Bank of California, N.A. (the Bank). 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 Selected Financial Data table on page F-1 includes certain pro forma earnings disclosures and ratios. These presentations supplement the Consolidated Statements of Income on page F-30 (which are prepared in accordance with generally accepted accounting principles), 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 information in this table and in the MD&A which follows, that presents income before merger and integration expense and income taxes and related pro forma ratio and per share calculations. On August 10, 1998, UNBC and its consolidated subsidiaries (the Company) exchanged 3.4 million shares of its common stock for the 2.4 million shares of the Bank's common stock owned directly by the Bank of Tokyo-Mitsubishi, Ltd. (BTM). This share exchange provides the Company with a 100 percent ownership interest in the Bank. In addition, it increases BTM's ownership percentage of the Company to 82 percent from 81 percent. The exchange of shares was accounted for as a reorganization of entities under common control. Accordingly, amounts previously reported as Parent Direct Interest in Bank Subsidiary, including the proportionate share of net income, dividends, and other comprehensive income have been reclassified to combine them with the corresponding amounts attributable to the Company's common shareholders for all periods presented. OVERVIEW Net income in 1997 was $411 million, including $4 million (after-tax) of merger and integration related expense. Net income in 1996 was $249 million, including $72 million (after-tax) of merger and integration related expense. Net income applicable to common stock was $404 million, or $6.91 per diluted common share, in 1997 compared with $238 million, or $4.09 per diluted common share, in 1996. Excluding after-tax merger and integration expense, pro forma earnings for 1997 were $415 million, an increase of 29 percent from $321 million a year earlier. Pro forma earnings applicable to common stock were $407 million, or $6.97 per diluted common share, in 1997 compared with $310 million, or $5.32 per diluted common share, in 1996. This increase of 31 percent over the comparable figures for 1996 was due to a 5 percent increase in net interest income, an 11 percent increase in noninterest income, a decrease in the effective income tax rate, and a $40 million reduction in the provision for credit losses, partially offset F-2 by a 2 percent increase in noninterest expense (excluding merger and integration expense). Other highlights for 1997 include: - Net interest income, on a taxable-equivalent basis, was $1,237 million in 1997, an increase of $62 million, or 5 percent, over 1996 primarily due to a $1.6 billion, or 6 percent, increase in average earning assets, resulting primarily from a $1.1 billion, or 5 percent, increase in average loans and largely funded by an $851 million, or 13 percent, increase in average demand deposits. Partially offsetting the positive impact of the growth in earning assets and demand deposits on net interest income was a 5 basis point decline in the net interest margin to 4.70%. The decline in net interest margin was primarily due to a 14 basis point decrease in the spread between the average yield on earning assets and the average rate paid on interest bearing liabilities. - No provision for credit losses was recorded in 1997 compared with $40 million in 1996, reflecting improvement in the quality of the Company's loan portfolio and a reduction in nonaccrual loans. Nonperforming assets declined $27 million, or 17 percent, from December 31, 1996 to $130 million at December 31, 1997. Nonperforming assets as a percent of total assets declined to 0.42% at December 31, 1997 compared with 0.54% a year earlier. Total nonaccrual loans were $109 million at December 31, 1997 compared with $128 million at year-end 1996, resulting in a reduction in the ratio of nonaccrual and renegotiated loans to total loans from 0.61% at December 31, 1996 to 0.48% at year-end 1997. The allowance for credit losses was $452 million, or 413% of total nonaccrual loans, at December 31, 1997 compared with $524 million, or 408% of total nonaccrual loans, at December 31, 1996. - Noninterest income was $463 million in 1997, an increase of $44 million, or 11 percent, over 1996. Service charges on deposit accounts grew $13 million, or 12 percent, reflecting growth in deposit balances while trust and investment management fees increased $14 million, or 15 percent, on growth in trust accounts and assets under management. - Excluding merger and integration expense, noninterest expense was $1,039 million in 1997, an increase of $21 million, or 2 percent, over 1996. This increase was primarily attributable to an increase of $14 million, or 3 percent, in personnel-related expense, a significant portion of which was due to severance payments related to realignment of departments and to higher performance-related incentive compensation, and an increase of $14 million, or 25 percent, in other expenses. These increases were partially offset by a decline of $18 million in net occupancy expense, reflecting a $12 million charge recorded in 1996 related to former banking facilities, as well as merger efficiencies realized in 1997. Excluding the $12 million charge in 1996 and merger and integration expense, noninterest expense increased $33 million over 1996. - The effective tax rate for 1997 was 37% compared with 40% for 1996. Excluding the $25 million after-tax refund from the State of California Franchise Tax Board (FTB), the effective tax rate in 1997 was 41%. Excluding a $5 million after-tax benefit from the settlement of a unitary tax issue with the FTB, the effective tax rate in 1996 was also 41%. - The return on average assets for 1997 increased to 1.39% compared to 0.89% for 1996. Excluding the after-tax effect of merger and integration expense, the pro forma return on average assets was 1.40% for 1997 compared to 1.15% for 1996. The return on average common equity for 1997 was 16.05% compared to 10.24% for 1996. Excluding the after-tax effect of merger and integration expense, the pro forma return on average common equity was 16.20% for 1997 compared to 13.33% for 1996. - Total loans at December 31, 1997 were $22.7 billion, an increase of $1.7 billion, or 8 percent, over year-end 1996, primarily from growth in the commercial, financial and industrial loan portfolio. - At December 31, 1997, the Tier 1 risk-based capital ratio was 8.96% and the total risk-based capital ratio was 11.05%, exceeding the minimum regulatory guidelines for bank holding companies of 4% and 8%, respectively. The Tier 1 and total risk-based capital ratios for the Bank at December 31, 1997 exceeded the regulatory guidelines for "well-capitalized" banks. The Company's leverage ratio was 8.53% at December 31, 1997, exceeding the minimum regulatory guideline for bank holding companies. F-3 NET INTEREST INCOME The table below shows the major components of net interest income and net interest margin.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------- 1997 1996 -------------------------------------- --------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) - ---------------------------------------------- ------------ ----------- ----------- ------------ ----------- ------------ ASSETS Loans: (2) Domestic.................................... $ 20,332,494 $ 1,672,006 8.22% $ 19,328,752 $ 1,604,799 8.30% Foreign(3).................................. 1,523,417 92,420 6.07 1,398,825 84,693 6.05 Securities--taxable(4)........................ 2,521,339 158,950 6.30 2,138,282 133,170 6.23 Securities--tax-exempt(4)..................... 124,174 12,669 10.20 151,970 15,451 10.17 Interest bearing deposits in banks............ 968,966 56,748 5.86 911,575 52,709 5.78 Federal funds sold and securities purchased under resale agreements..................... 466,321 26,079 5.59 547,547 30,246 5.52 Trading account assets........................ 355,111 19,917 5.61 240,375 12,960 5.39 ------------ ----------- ------------ ----------- Total earning assets...................... 26,291,822 2,038,789 7.75 24,717,326 1,934,028 7.82 ----------- ----------- Allowance for credit losses................... (503,126) (544,806) Cash and due from banks....................... 2,006,038 1,926,050 Premises and equipment, net................... 411,302 425,943 Other assets.................................. 1,486,956 1,375,221 ------------ ------------ Total assets.............................. $ 29,692,992 $ 27,899,734 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Domestic deposits: Interest bearing............................ $ 5,340,661 151,768 2.84 $ 5,001,060 135,821 2.72 Savings and consumer time................... 2,970,370 112,808 3.80 2,837,198 105,350 3.71 Large time.................................. 4,652,293 256,007 5.50 4,095,222 218,959 5.35 Foreign deposits(3)........................... 1,589,303 75,398 4.74 1,504,067 71,437 4.75 ------------ ----------- ------------ ----------- Total interest bearing deposits........... 14,552,627 595,981 4.10 13,437,547 531,567 3.96 ------------ ----------- ------------ ----------- Federal funds purchased and securities sold under repurchase agreements................. 1,097,707 58,544 5.33 933,433 47,095 5.05 Subordinated capital notes.................... 354,575 22,850 6.44 458,966 30,104 6.56 Commercial paper.............................. 1,637,070 89,912 5.49 1,620,087 87,411 5.40 Other borrowed funds.......................... 635,900 34,492 5.42 1,119,051 62,549 5.59 ------------ ----------- ------------ ----------- Total borrowed funds...................... 3,725,252 205,798 5.52 4,131,537 227,159 5.50 ------------ ----------- ------------ ----------- Total interest bearing liabilities........ 18,277,879 801,779 4.39 17,569,084 758,726 4.32 ----------- ----------- Demand deposits............................... 7,514,528 6,663,997 Other liabilities............................. 1,295,728 1,206,216 ------------ ------------ Total liabilities......................... 27,088,135 25,439,297 SHAREHOLDERS' EQUITY Preferred stock............................... 90,247 135,000 Common equity(5).............................. 2,514,610 2,325,437 ------------ ------------ Total shareholders' equity................ 2,604,857 2,460,437 ------------ ------------ Total liabilities and shareholders' equity.................................. $ 29,692,992 $ 27,899,734 ------------ ------------ ------------ ------------ Net interest income/margin (taxable-equivalent basis)...................................... 1,237,010 4.70% 1,175,302 4.75% Less: taxable-equivalent adjustment........... 5,328 6,724 ----------- ----------- Net interest income....................... $ 1,231,682 $ 1,168,578 ----------- ----------- ----------- ----------- 1995 --------------------------------------- INTEREST AVERAGE AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) - ---------------------------------------------- ------------ ----------- ------------ ASSETS Loans: (2) Domestic.................................... $ 17,783,993 $ 1,540,694 8.66% Foreign(3).................................. 1,190,547 76,723 6.44 Securities--taxable(4)........................ 2,055,504 120,210 5.85 Securities--tax-exempt(4)..................... 185,934 18,984 10.21 Interest bearing deposits in banks............ 930,999 58,201 6.25 Federal funds sold and securities purchased under resale agreements..................... 368,684 22,247 6.03 Trading account assets........................ 333,468 20,578 6.17 ------------ ----------- Total earning assets...................... 22,849,129 1,857,637 8.13 ----------- Allowance for credit losses................... (573,648) Cash and due from banks....................... 1,617,715 Premises and equipment, net................... 411,794 Other assets.................................. 1,259,853 ------------ Total assets.............................. $ 25,564,843 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Domestic deposits: Interest bearing............................ $ 4,955,750 129,860 2.62 Savings and consumer time................... 2,738,588 99,215 3.62 Large time.................................. 2,474,685 128,974 5.21 Foreign deposits(3)........................... 1,806,820 96,109 5.32 ------------ ----------- Total interest bearing deposits........... 11,975,843 454,158 3.79 ------------ ----------- Federal funds purchased and securities sold under repurchase agreements................. 1,384,762 78,908 5.70 Subordinated capital notes.................... 615,868 42,538 6.91 Commercial paper.............................. 1,448,739 86,695 5.98 Other borrowed funds.......................... 731,759 42,561 5.82 ------------ ----------- Total borrowed funds...................... 4,181,128 250,702 6.00 ------------ ----------- Total interest bearing liabilities........ 16,156,971 704,860 4.36 ----------- Demand deposits............................... 5,994,129 Other liabilities............................. 1,081,267 ------------ Total liabilities......................... 23,232,367 SHAREHOLDERS' EQUITY Preferred stock............................... 135,000 Common equity(5).............................. 2,197,476 ------------ Total shareholders' equity................ 2,332,476 ------------ Total liabilities and shareholders' equity.................................. $ 25,564,843 ------------ ------------ Net interest income/margin (taxable-equivalent basis)...................................... 1,152,777 5.05% Less: taxable-equivalent adjustment........... 10,444 ----------- Net interest income....................... $ 1,142,333 ----------- -----------
- --------------- (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming and renegotiated loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (3) Foreign loans and deposits are those loans and deposits originated in foreign branches. (4) Yields on securities available for sale were based on fair value. The difference between these yields and those based on amortized cost was not significant. (5) Amounts restated to give retroactive effect to the exchange referred to in Note 1 of the accompanying notes to Consolidated Financial Statements. F-4 Net interest income is interest earned on loans and investments less interest expense on deposit accounts and borrowings. Primary factors affecting the level of net interest income include the margin between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, as well as the volume and composition of average interest earning assets and average interest bearing liabilities. Excluding the provision for credit losses, net interest income on a taxable-equivalent basis was $1,237 million in 1997, compared with $1,175 million in 1996. The increase of $62 million, or 5 percent, was primarily attributable to a $1.6 billion, or 6 percent, increase in average earning assets largely funded by an $851 million, or 13 percent, increase in average demand deposits. Partially offsetting the positive impact of the growth in earning assets and demand deposits on net interest income was a 5 basis point decline in the net interest margin to 4.70%, primarily as a result of both a 14 basis point increase in the cost of interest bearing deposits due to a 25 basis point increase in the Federal Funds rate in March 1997, and a decrease in the average yield on domestic loans of 8 basis points. Average earning assets were $26.3 billion in 1997 compared with $24.7 billion in 1996. This growth was primarily attributable to a $1.1 billion, or 5 percent, increase in average loans and a $355 million, or 16 percent, increase in average securities. Average commercial, financial and industrial loans, which increased $582 million, and average commercial mortgage loans, which increased $437 million, contributed most of the loan growth. See "Loans" at F-11 for additional commentary on loan portfolio growth. The increase in primarily fixed rate securities reflected interest rate risk management actions to reduce the Company's exposure to declines in interest rates. The $1.6 billion, or 6 percent, increase in average earning assets over 1996 was primarily funded by increases in average demand deposits and average interest bearing core deposits. Increases in these categories were: demand deposits $851 million, or 13 percent; interest bearing domestic deposits $340 million, or 7 percent; and savings and consumer time deposits $133 million, or 5 percent. The increase in demand deposits in 1997 was partially due to an influx of new customer relationships, arising from the recent merger and acquisition activities of other financial institutions in the California market during the year. F-5 ANALYSIS OF CHANGES IN NET INTEREST INCOME The following table shows the changes in the components of net interest income on a taxable-equivalent basis. The changes in net interest income between periods have been reflected as attributable either to volume or rate changes. For purposes of this table, changes which are not solely due to volume or rate changes are allocated to rate.
YEARS ENDED DECEMBER 31, -------------------------------------------------------------------- 1997 VERSUS 1996 1996 VERSUS 1995 -------------------------------- ---------------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO CHANGE CHANGE IN IN -------------------------------- ---------------------------------- AVERAGE AVERAGE NET AVERAGE AVERAGE (DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE NET CHANGE - ------------------------------------------- ---------- --------- --------- ---------- ---------- ---------- CHANGES IN INTEREST INCOME: Loans: Domestic................................. $ 83,311 $ (16,104) $ 67,207 $ 133,776 $ (69,671) $ 64,105 Foreign(1)............................... 7,538 189 7,727 13,413 (5,443) 7,970 Securities--taxable........................ 23,856 1,924 25,780 4,843 8,117 12,960 Securities--tax-exempt (2,826) 44 (2,782) (3,468) (65) (3,533) Interest bearing deposits in banks......... 3,317 722 4,039 (1,214) (4,278) (5,492) Federal funds sold and securities purchased under resale agreements................... (4,484) 317 (4,167) 10,785 (2,786) 7,999 Trading account assets..................... 6,184 773 6,957 (5,744) (1,874) (7,618) ---------- --------- --------- ---------- ---------- ---------- Total earning assets................... 116,896 (12,135) 104,761 152,391 (76,000) 76,391 ---------- --------- --------- ---------- ---------- ---------- CHANGES IN INTEREST EXPENSE: Domestic deposits: Interest bearing......................... 9,237 6,710 15,947 1,187 4,774 5,961 Savings and consumer time................ 4,941 2,517 7,458 3,572 2,563 6,135 Large time............................... 29,803 7,245 37,048 84,458 5,527 89,985 Foreign deposits(1)........................ 4,049 (88) 3,961 (16,104) (8,568) (24,672) ---------- --------- --------- ---------- ---------- ---------- Total interest bearing deposits........ 48,030 16,384 64,414 73,113 4,296 77,409 ---------- --------- --------- ---------- ---------- ---------- Federal funds purchased and securities sold under repurchase agreements............... 8,296 3,153 11,449 (25,718) (6,095) (31,813) Subordinated capital notes................. (6,848) (406) (7,254) (10,837) (1,597) (12,434) Commercial paper........................... 916 1,585 2,501 10,254 (9,538) 716 Other borrowed funds....................... (27,006) (1,051) (28,057) 22,526 (2,538) 19,988 ---------- --------- --------- ---------- ---------- ---------- Total borrowed funds................... (24,642) 3,281 (21,361) (3,775) (19,768) (23,543) ---------- --------- --------- ---------- ---------- ---------- Total interest bearing liabilities..... 23,388 19,665 43,053 69,338 (15,472) 53,866 ---------- --------- --------- ---------- ---------- ---------- Changes in net interest income......... $ 93,508 $ (31,800) $ 61,708 $ 83,053 $ (60,528) $ 22,525 ---------- --------- --------- ---------- ---------- ---------- ---------- --------- --------- ---------- ---------- ----------
- ------------- (1) Foreign loans and deposits are those loans and deposits originated in foreign branches. Interest income on a taxable-equivalent basis increased $105 million in 1997, primarily due to growth in interest income from domestic loans and securities, which reflected higher average balances outstanding, partially offset by a lower average yield primarily on domestic loans. Interest expense increased $43 million in 1997 due to higher interest expense on interest bearing deposits, primarily reflecting higher average deposit balances and higher average rates. Interest expense on borrowed funds declined $21 million in 1997, reflecting lower volumes, offset by a 2 basis point increase in the average rate paid. F-6 NONINTEREST INCOME
INCREASE (DECREASE) ---------------------------------------------- YEARS ENDED DECEMBER 31, ---------------------------------------------- YEARS ENDED DECEMBER 31, 1997 VERSUS 1996 1996 VERSUS 1995 ---------------------------------- ---------------------- ---------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT - ------------------------------------ ---------- ---------- ---------- --------- ----------- --------- ----------- Service charges on deposit accounts........................... $ 114,647 $ 101,975 $ 95,177 $ 12,672 12% $ 6,798 7% Trust and investment management fees............................... 107,527 93,479 87,743 14,048 15 5,736 7 International commissions and fees.............................. 66,122 66,108 68,621 14 -- (2,513) (4) Credit card merchant fees........... 57,128 49,778 45,767 7,350 15 4,011 9 Merchant banking fees............... 24,924 23,929 24,483 995 4 (554) (2) Foreign exchange trading gains, net................................ 16,268 13,255 19,043 3,013 23 (5,788) (30) Brokerage commissions and fees...... 15,569 12,932 9,270 2,637 20 3,662 40 Securities gains (losses), net...... 2,711 4,502 (702) (1,791) (40) 5,204 nm Other............................... 58,105 52,718 45,917 5,387 10 6,801 15 ---------- ---------- ---------- --------- --------- Total noninterest income........................ $ 463,001 $ 418,676 $ 395,319 $ 44,325 11% $ 23,357 6% ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- ---------
- ------------ nm = not meaningful Noninterest income in 1997 was $463 million, an increase of $44 million, or 11 percent, over 1996. This included a $13 million increase in revenue from service charges on deposit accounts, a $14 million increase in trust and investment management fees, a $7 million increase in credit card merchant fees, a $3 million increase in foreign exchange trading gains, net, a $3 million increase in brokerage commissions and fees, and a $5 million increase in other noninterest income, partially offset by a $2 million decrease in securities gains, net. Revenue from service charges on deposit accounts was $115 million in 1997, an increase of 12 percent over 1996. The increase was primarily attributable to an increase in the volume of non-credit services provided. Trust and investment management fees were $108 million in 1997, 15 percent higher than in 1996, primarily due to an increase in assets under management, which resulted in higher mutual fund management fees and personal trust fees. Credit card merchant fees were $57 million in 1997, an increase of 15 percent over 1996. The increase was primarily due to an increase in the volume of credit card drafts deposited by merchants. Foreign exchange trading gains, net increased $3 million, or 23 percent, in 1997, primarily due to more volatility in the foreign exchange markets in 1997. Brokerage commissions and fees were $16 million in 1997, an increase of 20 percent over 1996. The increase was primarily attributable to brokerage commissions on non-proprietary mutual fund sales. Other noninterest income in 1997 was $5 million, or 10 percent, higher than in 1996. Included in other noninterest income in 1997 was an $8 million gain related to a real estate joint venture, compared with gains of $2 million related to a real estate joint venture and $2 million related to a non-recurring insurance refund recognized in 1996. F-7 NONINTEREST EXPENSE
INCREASE (DECREASE) ---------------------------------------------- YEARS ENDED DECEMBER 31, ---------------------------------------------- YEARS ENDED DECEMBER 31, 1997/1996 1996/1995 ----------------------------------- ---------------------- ---------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT - ---------------------------------- ----------- ----------- --------- --------- ----------- --------- ----------- Salaries and other compensation... $ 461,915 $ 448,793 $ 432,581 $ 13,122 3% $ 16,212 4% Employee benefits................. 109,729 108,454 104,090 1,275 1 4,364 4 ----------- ----------- --------- --------- --------- Personnel-related expense....... 571,644 557,247 536,671 14,397 3 20,576 4 Net occupancy..................... 85,630 103,335 92,863 (17,705) (17) 10,472 11 Equipment......................... 56,137 55,942 55,056 195 -- 886 2 Communications.................... 42,372 40,133 35,806 2,239 6 4,327 12 Credit card processing............ 42,274 37,091 31,288 5,183 14 5,803 19 Advertising and public relations.. 28,664 28,788 20,911 (124) -- 7,877 38 Professional services............. 28,075 24,342 26,197 3,733 15 (1,855) (7) Data processing................... 25,973 22,140 18,557 3,833 17 3,583 19 Printing and office supplies...... 24,098 27,085 22,626 (2,987) (11) 4,459 20 Software.......................... 16,562 15,895 13,839 667 4 2,056 15 Travel............................ 15,763 14,936 12,183 827 6 2,753 23 Intangible asset amortization..... 13,352 13,335 13,353 17 -- (18) -- Armored car....................... 12,209 13,296 13,792 (1,087) (8) (496) (4) Regulatory authority assessments.. 5,778 4,048 23,431 1,730 43 (19,383) (83) Foreclosed asset expense (income)......................... (1,268) 2,889 (3,213) (4,157) nm 6,102 nm Other............................. 71,365 56,938 64,741 14,427 25 (7,803) (12) ----------- ----------- --------- --------- --------- Noninterest expense, excluding merger and integration expense....................... 1,038,628 1,017,440 978,101 21,188 2 39,339 4 Merger and integration expense.... 6,037 117,464 -- (111,427) (95) 117,464 nm ----------- ----------- --------- --------- --------- Total noninterest expense..... $ 1,044,665 $ 1,134,904 $ 978,101 $ (90,239) (8)% $ 156,803 16% ----------- ----------- --------- --------- --------- ----------- ----------- --------- --------- ---------
- ------------ nm = not meaningful Noninterest expense, excluding merger and integration expense, was $1,039 million in 1997, an increase of $21 million, or 2 percent, over 1996. This included a $14 million increase in personnel-related expense, a $5 million increase in credit card processing expense, a $4 million increase in data processing expense, and a $14 million increase in other noninterest expense, partially offset by an $18 million decrease in net occupancy expense and a $4 million decrease in foreclosed asset expense. Personnel-related expense was $572 million in 1997, an increase of $14 million, or 3 percent, compared to 1996. This increase was primarily due to the increase in salaries and other compensation expense, a significant portion of which was due to severance payments related to realignment of departments and to higher performance-related incentive compensation. Credit card processing expense was $42 million in 1997, an increase of $5 million, or 14 percent, over 1996 due to higher merchant volumes. Data processing expense was $26 million in 1997, an increase of $4 million, or 17 percent, over 1996 due to increased activity in data processing systems supporting the growth in deposits. Other noninterest expense increased $14 million in 1997. Of the total increase, $7.5 million reflected additional expenses incurred to support higher deposit volumes. Net occupancy expense was $86 million in 1997, $18 million, or 17 percent, lower than the previous year. The decrease in net occupancy expense was primarily due to a $12 million charge related to former F-8 banking facilities in 1996. Excluding this charge, net occupancy expense in 1997 declined 6 percent due to merger-related efficiencies realized in 1997. Foreclosed asset expense decreased $4 million in 1997. The decrease was primarily due to lower writedowns and maintenance and selling expenses, reflecting a 28 percent reduction in the portfolio of foreclosed assets. YEAR 2000 The Year 2000 issue is a computer programming situation that may affect many electronic data processing systems. In order to minimize the length of data fields, most computer programs eliminated the first two digits in the year date field. This problem could affect date-sensitive calculations that treat "00" as the year 1900, rather than 2000. Secondly, years that end in "00" are not leap years, except for the anomaly in the year 2000. This anomaly could result in miscalculations when processing critical date-sensitive information after December 31, 1999. The Company has prepared a project plan, identified all the major application and processing systems, and sought external and internal resources to replace and test the systems. Purchased software and systems supported by external parties will be tested as part of the formal project plan. In addition, customers and vendors who have significant relationships with the Company will be evaluated to determine whether they are preparing for the Year 2000. The failure of those customers to adequately prepare will be incorporated into the credit review process. However, there can be no guarantee that the systems of vendors or customers with which the Company does business will be completed on a timely basis. The Company plans to complete the Year 2000 project well in advance of December 31, 1999. Of the estimated total project cost of $40 million, the remaining amount to be incurred for the Year 2000 project is $38 million and will be funded by normal operating cash and staffed by external resources as well as internal staff redeployed from less time-sensitive assignments. Approximately $10 million of the remaining cost is attributable to the purchase of new hardware and software, which will be capitalized and expensed over the useful lives of those assets. The remaining $28 million, which will be expensed as incurred over the next two years, is not expected to have a material effect on the results of operations, liquidity or capital resources. During 1997, the Company incurred and expensed approximately $2 million related to its assessment of the Year 2000 issue and its preliminary efforts in implementing the Year 2000 project plan. As with all financial institutions, there is a high degree of reliance being placed on the systems of other institutions to properly settle transactions. Their inability to process transactions properly or the Company's inability to complete its plan on time could have a material adverse effect on the Company. The cost of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing a number of assumptions of future events including the continued availability of internal and external resources, third party modifications and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ. MERGER AND INTEGRATION EXPENSE Merger and integration expense of $124 million in total was recorded in 1997 and 1996 to cover $38 million of personnel expense for severance, retention and other employee related costs, $54 million for facilities expense related to redundant banking facilities and $32 million in professional services and other expense as a result of the Merger. F-9 The following table presents merger and integration expense provisions in 1997 and 1996, the cash and noncash utilization of those expense provisions during the periods, and the resulting liability balances as of December 31, 1997 and 1996.
YEARS ENDED DECEMBER 31, --------------------- (DOLLARS IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------------------------- --------- ---------- Balance, accrued merger and integration expense, beginning of period....................... $ 54,344 $ -- Provision for merger and integration costs................................................. 6,037 117,464 Utilization for the period: Cash..................................................................................... 35,809 40,155 Noncash.................................................................................. 1,642 22,965 --------- ---------- Total utilization...................................................................... 37,451 63,120 --------- ---------- Balance, accrued merger and integration expense, end of period............................. $ 22,930 $ 54,344 --------- ---------- --------- ----------
At December 31, 1997, the liability balance included amounts primarily for severance payments that are being paid on a periodic basis and for lease payments that are continuing over the expected term of the leases. INCOME TAX EXPENSE
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------------------------- ---------- ---------- ---------- Income before income taxes................................................... $ 650,018 $ 412,350 $ 506,301 Income tax expense........................................................... 238,722 162,892 193,359 Effective tax rate........................................................... 37% 40% 38%
The Company's effective tax rate in 1997 was 37% compared with 40% in 1996. The lower 1997 effective tax rate was the result of an after-tax refund from the FTB of approximately $25 million to settle litigation, administration, and audit disputes covering the years 1975-1987. Excluding the FTB refund, the effective tax rate for 1997 was 41%. Excluding a $5 million after-tax benefit recognized in 1996 from a settlement with the FTB for 1985 and 1986, the effective tax rate in 1996 was also 41%. CREDIT RISK MANAGEMENT The Company's principal business activity is the extension of credit in the form of loans or other credit substitutes to individuals and businesses. The Company's policies and applicable laws and regulations governing the extension of credit require risk analysis as well as ongoing portfolio and credit management through loan product diversification, lending limit constraints, credit review and approval policies, and extensive internal monitoring. The Company manages and controls credit risk through diversification of the portfolio by type of loan, industry concentration, dollar limits on multiple loans to the same borrower, geographic distribution and type of borrower. Geographic diversification of loans originated through the Company's branch network is generally within California, Oregon and Washington, which the Company considers to be its principal markets. In addition, the Company will continue to originate and participate in lending activities outside these states, as well as internationally. In analyzing the Company's existing loan portfolios, the Company applies specific monitoring policies and procedures which vary according to the relative risk profile and other characteristics of the loans within the various portfolios. The Company's residential and consumer loans are relatively homogeneous and no single loan is individually significant in terms of its size or potential risk of loss. Therefore, the Company reviews its residential and consumer portfolios by analyzing their performance as a pool of loans. In contrast, the Company's monitoring process for the commercial, financial and industrial; construction; F-10 commercial mortgage; and foreign loan portfolios includes a periodic review of individual loans. Loans that are performing but have shown some signs of weakness are subjected to more stringent reporting and oversight. The Company reviews these loans to assess the ability of the borrowing entity to continue to service all of its interest and principal obligations and as a result may adjust the risk grade accordingly. In the event that the Company believes that full collection of principal and interest is not reasonably assured, the loan will be appropriately downgraded and, if warranted, placed on nonaccrual status, even though the loan may be current as to principal and interest payments. The Company has a Credit Policy Forum, composed of the Chief Credit Officer, senior credit officers, and appropriate line officers who establish policy, credit quality criteria, portfolio guidelines and other controls. Credit Administration together with a series of loan committees, have the responsibility for administering the credit approval process, as well as the implementation and administration of the Company's credit policies and lending practices and procedures. These policies require an extensive evaluation of credit requests and continuing review of existing credits in order to promptly identify, monitor and quantify evidence of deterioration of asset credit quality or potential loss. As another part of the control process, an independent internal credit review and examination function provides quality assurance that loans and commitments are made and maintained as prescribed by the Company's credit policies and that the assets are appropriately and timely risk graded. This includes a review of compliance with the Company's underwriting policies when the loan is initially extended and subsequent on-site examinations to ensure continued compliance. LOANS The following table shows loans outstanding at year-end by loan type. Loans outstanding by loan type as a percentage of total loans is shown for 1997 through 1993.
DECEMBER 31, ----------------------------------------------------------------------------- (DOLLARS IN MILLIONS) 1997 1996 1995 1994 1993 - ------------------------------ ------------- ------------- ------------- ------------- ------------- Domestic: Commercial, financial and industrial................ $10,747 47% $ 9,496 45% $ 9,684 47% $ 8,547 47% $ 8,135 46% Construction................ 293 1 358 2 370 2 464 3 877 5 Mortgage: Residential............... 2,961 13 2,961 14 2,642 13 2,253 12 1,964 11 Commercial................ 2,952 13 2,598 12 2,143 10 1,778 10 2,088 12 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Total mortgage.......... 5,913 26 5,559 26 4,785 23 4,031 22 4,052 23 Consumer: Installment............... 2,091 9 2,063 10 1,812 9 1,644 9 1,351 8 Home equity............... 993 5 1,113 5 1,222 6 1,222 7 1,302 7 Credit card and other lines of credit......... 270 1 303 1 309 2 219 1 207 1 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Total consumer.......... 3,354 15 3,479 16 3,343 17 3,085 17 2,860 16 Lease financing............. 875 4 800 4 845 4 829 5 831 4 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Total loans in domestic offices............... 21,182 93 19,692 93 19,027 93 16,956 94 16,756 94 Loans originated in foreign branches..................... 1,559 7 1,358 7 1,405 7 1,110 6 1,004 6 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Total loans............. $22,741 100% $21,050 100% $20,432 100% $18,066 100% $17,759 100% ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ----
F-11 The Company's lending activities are predominantly domestic, with such loans comprising approximately 93 percent of the portfolio at December 31, 1997. Total loans at December 31, 1997 were $22.7 billion, an increase of $1,691 million, or 8 percent, from one year earlier. The increase was primarily attributable to growth in the commercial, financial and industrial loan portfolio, which increased $1,251 million from 1996, and to growth in the commercial mortgage loan portfolio, which increased $354 million. COMMERCIAL, FINANCIAL AND INDUSTRIAL LOANS Commercial, financial and industrial loans represent the largest category in the loan portfolio. These loans are extended principally to major corporations, middle market businesses, and small businesses, with no industry concentration exceeding ten percent of total commercial, financial and industrial loans. The Company's commercial market lending originates primarily through its banking office network. These offices, which rely extensively on relationship oriented banking, provide many services including cash management services, lines of credit, accounts receivable and inventory financing. Separately, the Company originates or participates in a wide variety of financial services to major corporations. These services include traditional commercial banking and specialized financing tailored to the needs of each customer's specific industry. Presently, the Company is active in the communications and media, energy related services, retailing and financial services industries. At December 31, 1997, the commercial, financial and industrial loan portfolio was $10,747 million, or 47 percent, of the total loan portfolio. The increase of $1,251 million, or 13 percent, from the previous year-end was primarily attributable to loans extended to large corporations in industries where the Bank has specialized lending expertise. CONSTRUCTION AND COMMERCIAL MORTGAGE LOANS The Company engages in nonresidential real estate lending which includes commercial mortgage loans and construction loans secured by deeds of trust. Construction loans are made primarily to residential builders and to commercial property developers. At December 31, 1997, construction loans were $293 million, $65 million lower than at the end of the previous year. Commercial mortgage loans were $2,952 million, an increase of $354 million, or 14 percent, from a year earlier. This increase was primarily attributable to a strong recovery in the California real estate market reflecting the continuing improvement in the West Coast economy, particularly in the real estate sector. RESIDENTIAL MORTGAGE LOANS The Company originates residential loans through its branch network in California, Oregon, and Washington, and periodically purchases loans in its market area. At December 31, 1997, residential loans were $2,961 million, unchanged from the prior year. CONSUMER LOANS Through its branch network, the Company originates consumer loans, such as vehicle-secured installment loans, home equity lines where advances are generally secured by second deeds of trust on residential real estate, and credit card loans. At December 31, 1997, consumer loans were $3,354 million, or 15 percent of total loans, compared with $3,479 million, or 16 percent of total loans, at year-end 1996. LEASE FINANCING The Company enters into direct financing and leveraged leases through an agreement with a subsidiary of BTM. In addition, the Company originates auto leases. At December 31, 1997, lease financing outstandings were $875 million, an increase of $75 million from the end of 1996. F-12 LOANS ORIGINATED IN FOREIGN BRANCHES The Company's loans originated in foreign branches consist primarily of short-term credit extensions to financial institutions located primarily in Asia and short-term commercial and industrial loans to major Japanese, Korean, and Taiwanese corporations. At December 31, 1997, loans originated in foreign branches totaled $1,559 million, or 7 percent of the total loan portfolio, compared with $1,358 million, or 7 percent of total loans, at December 31, 1996. CROSS-BORDER OUTSTANDINGS The Company's cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth the Company's cross-border outstandings as of December 31, 1997, 1996 and 1995 for each country where such outstandings exceeded one percent of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading securities, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. The amounts outstanding for each country exclude local currency outstandings. The Corporation does not have significant local currency outstandings to the individual countries listed in the following table that are not hedged or are not funded by local currency borrowings.
PUBLIC CORPORATIONS FINANCIAL SECTOR AND OTHER TOTAL (DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS - -------------------------------------------------------------- ----------- ----------- ------------ ------------ December 31, 1997 Japan......................................................... $ 401 $ -- $ 438 $ 839 Korea......................................................... 561 10 257 828 Thailand...................................................... 320 -- -- 320 December 31, 1996 Japan......................................................... 1,373 -- 452 1,825 Korea......................................................... 574 8 330 912 December 31, 1995 Japan......................................................... 1,111 -- 567 1,678 Korea......................................................... 641 -- 269 910
The economic condition and the ability of some countries, to which the Company has cross-border exposure, to manage their external debt obligations have been impacted by the Asian economic crisis beginning in the second half of 1997. The events leading to the crisis included currency devaluations, business failures, principally caused by excessive debt levels and overcapacity, and some loss of confidence in the banking system in the affected countries, resulting mainly from past lending practices and the associated impact of internal and external economic conditions. The crisis resulted in a substantial erosion of international confidence, rapid declines in stock market valuations, steep increases in interest rates and further pressure on the debt structures of the corporate and financial market participants. International Monetary Fund programs have been established or are in the process of being established which, in co-operation with steps being taken by the local governments and other global institutions, are designed to restore confidence. The success of these programs is still being evaluated. The Company is managing its exposures in these and other impacted countries very cautiously with a view to minimizing risk and supporting its long term and viable customer relationships. High risk situations are being identified and reduced where possible, and additional reserves against potential credit losses have been identified and allocated, as determined by management at year end. None of the Company's cross-border exposure has been subject to the recently announced debt restructuring program with South Korea. Although management cannot predict the ultimate impact of the crisis on the Company's financial position and results of operations since much depends on the effect of the stabilizing activities already under way, management believes that the continuation of internal supervision, monitoring and portfolio risk management practices will be effective in minimizing the impact over and above that already F-13 identified. Increases in non-accrual loans, together with some related increases in charge-off activity, may occur as events unfold. Management, in accordance with its established risk management practices, will also continue to review the impact of the crisis on the stability of other countries and the potential impact on domestic business activities, particularly in our core West Coast markets. 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 possible credit losses is adequate, future provisions will be subject to continuing evaluation of inherent risk in the loan portfolio. Based on the process of evaluation described above, the Company has not provided a provision for credit losses for the last four quarters. The following table sets forth the allocation of the allowance for credit losses. The percentages reflect the allowance allocated to each respective loan category at period end, as a percentage of the total period end balance of that loan category, as set forth in the "Loans" table at F-11.
DECEMBER 31, ------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------- --------------------- --------------------- --------------------- Domestic: Commercial, financial and industrial............. $ 123,610 1.15% $ 166,100 1.75% $ 174,146 1.80% Construction..................................... 3,221 1.10 5,700 1.59 24,752 6.69 Mortgage: Residential.................................... 2,700 0.09 4,000 0.14 5,466 0.21 Commercial..................................... 60,680 2.06 39,000 1.50 59,931 2.80 ---------- ---------- ---------- Total mortgage............................... 63,380 1.07 43,000 0.77 65,397 1.37 Consumer: Installment.................................... 11,400 0.55 10,400 0.50 13,200 0.73 Home equity.................................... 3,600 0.36 4,900 0.44 5,532 0.45 Credit card and other lines of credit.......... 30,500 11.30 34,000 11.22 32,799 10.61 ---------- ---------- ---------- Total consumer............................... 45,500 1.36 49,300 1.42 51,531 1.54 Lease financing.................................. 4,862 0.56 5,300 0.66 1,300 0.15 ---------- ---------- ---------- Total domestic allowance..................... 240,573 1.14 269,400 1.37 317,126 1.67 Foreign allowance.................................. 39,313 2.52 9,394 0.69 13,968 0.99 Unallocated........................................ 171,806 245,152 224,055 ---------- ---------- ---------- Total allowance for credit losses............ $ 451,692 1.99% $ 523,946 2.49% $ 555,149 2.72% ---------- ---------- ---------- ---------- ---------- ----------
F-14 Allowance for Credit Losses (Continued)
DECEMBER 31, -------------------------------------------- (DOLLARS IN THOUSANDS) 1994 1993 - ------------------------------------------------------------------------ --------------------- --------------------- Domestic: Commercial, financial and industrial.................................. $ 146,784 1.72% $ 205,398 2.52% Construction.......................................................... 69,787 15.04 106,398 12.13 Mortgage: Residential......................................................... 23,581 1.05 31,409 1.60 Commercial.......................................................... 70,130 3.94 139,303 6.67 ---------- ---------- Total mortgage.................................................... 93,711 2.32 170,712 4.21 Consumer: Installment......................................................... 12,500 0.76 13,100 0.97 Home equity......................................................... 7,143 0.58 6,062 0.47 Credit card and other lines of credit............................... 17,101 7.81 15,171 7.33 ---------- ---------- Total consumer.................................................... 36,744 1.19 34,333 1.20 Lease financing....................................................... 10,000 1.21 12,500 1.50 ---------- ---------- Total domestic allowance.......................................... 357,026 2.11 529,341 3.16 Foreign allowance....................................................... 15,330 1.38 14,293 1.42 Unallocated............................................................. 190,786 148,950 ---------- ---------- Total allowance for credit losses................................. $ 563,142 3.12% $ 692,584 3.90% ---------- ---------- ---------- ----------
At December 31, 1997, the Company reallocated a portion of the allowance for credit losses to foreign exposures which include off-balance sheet instruments. The increase to $39 million at December 31, 1997 from $9 million at December 31, 1996 was primarily precautionary in nature, in light of the recent volatility in the Asian financial markets. As is the case with the allowance in general, amounts may be reallocated as circumstances change. F-15 The following table sets forth a reconciliation of changes in the Company's allowance for credit losses.
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - ------------------------------------------------------- ---------- ---------- ---------- ---------- ---------- Balance, beginning of year............................. $ 523,946 $ 555,149 $ 563,142 $ 692,584 $ 790,479 Loans charged off: Commercial, financial and industrial............... 58,664 42,134 47,524 105,774 99,280 Construction....................................... 120 3,249 9,401 32,151 58,835 Mortgage........................................... 5,058 13,483 29,330 100,613 113,791 Consumer........................................... 55,336 56,361 44,627 31,806 39,576 Lease financing.................................... 3,601 2,623 2,422 2,940 11,432 Foreign(1)......................................... -- 1,250 295 533 201 ---------- ---------- ---------- ---------- ---------- Total loans charged off.......................... 122,779 119,100 133,599 273,817 323,115 Recoveries of loans previously charged off: Commercial, financial and industrial............... 23,371 22,341 39,178 39,177 41,552 Construction....................................... 9,054 132 3,195 5,868 2,955 Mortgage........................................... 3,292 12,277 18,500 16,228 6,201 Consumer........................................... 14,946 12,906 10,924 8,915 8,872 Lease financing.................................... 351 368 311 435 3,353 Foreign(1)......................................... -- -- 295 627 11,229 ---------- ---------- ---------- ---------- ---------- Total recoveries of loans previously charged off............................................ 51,014 48,024 72,403 71,250 74,162 ---------- ---------- ---------- ---------- ---------- Net loans charged off.......................... 71,765 71,076 61,196 202,567 248,953 Provision for credit losses............................ -- 40,000 53,250 73,000 151,000 Foreign translation adjustment and other net additions (deductions).......................................... (489) (127) (47) 125 58 ---------- ---------- ---------- ---------- ---------- Balance, end of year................................... $ 451,692 $ 523,946 $ 555,149 $ 563,142 $ 692,584 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Allowance for credit losses to total loans............. 1.99% 2.49% 2.72% 3.12% 3.90% Provision for credit losses to net loans charged off........................................... -- 56.28 87.02 36.04 60.65 Recoveries of loans to loans charged off in the previous year......................................... 42.83 35.95 26.44 22.05 24.38 Net loans charged off to average loans outstanding..... 0.33 0.34 0.32 1.15 1.37 Allowance for credit losses to nonaccrual loans........ 413.12 408.48 266.56 161.08 84.82
- ----------------- (1) Foreign loans are those loans originated in foreign branches. At December 31, 1997, the Company's allowance for credit losses was $452 million, or 1.99% of the total loan portfolio, and 413% of total nonaccrual loans. This compares with an allowance for credit losses of $524 million, or 2.49% of the total loan portfolio, and 408% of total nonaccrual loans at December 31, 1996. At year-end 1997, the unallocated portion of the allowance for credit losses was $172 million compared with $245 million at the end of 1996. During 1997, the Company recorded no provision for credit losses, a decrease of $40 million from 1996. The decline in the provision for credit losses reflected the improvement in the quality of the Company's loan portfolio, including a 15 percent reduction in nonaccrual loans. During 1997, the Company had net loans charged off of $72 million compared to net loans charged off of $71 million in 1996. Recoveries of loans previously charged off increased by $3 million, and the percentage of current year recoveries to loans charged off in the previous year increased from 35.95% in 1996 to 42.83% in 1997. Loans charged off in 1997 increased by $4 million primarily due to a $17 million increase in commercial, financial and industrial loans charged off, partially offset by a $8 million decrease in mortgage loans charged off. F-16 NONPERFORMING ASSETS Nonperforming assets consist of nonaccrual loans, renegotiated loans, and foreclosed assets. Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 to the Company's Consolidated Financial Statements. Renegotiated loans are those accruing loans for which, for reasons related to the borrower's financial difficulties, the Company has amended the terms of the original loan agreement and the borrower is performing according to the renegotiated terms. Foreclosed assets includes property where the Company acquired title through foreclosure or "deed in lieu" of foreclosure. On an ongoing basis, foreclosed asset values are reviewed and any decline in value is recognized as noninterest expense in the current period. The following table sets forth an analysis of nonperforming assets.
DECEMBER 31, ------------------------------------------------------------ (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - --------------------------------------------------- ---------- ---------- ---------- ---------- ------------ Commercial, financial and industrial............... $ 46,392 $ 56,864 $ 84,336 $ 106,447 $ 145,907 Construction....................................... 4,071 7,349 40,026 73,643 231,148 Mortgage: Residential...................................... 954 11,214 19,220 17,020 61,809 Commercial....................................... 57,921 52,593 63,836 145,207 367,072 ---------- ---------- ---------- ---------- ------------ Total mortgage............................. 58,875 63,807 83,056 162,227 428,881 Other.............................................. -- 247 849 7,285 7,288 Foreign(1)......................................... -- -- -- -- 3,331 ---------- ---------- ---------- ---------- ------------ Total nonaccrual loans..................... 109,338 128,267 208,267 349,602 816,555 Renegotiated loans................................. -- -- 1,612 14,843 4,617 Nonperforming real estate ventures................. -- -- -- -- 23,256 Foreclosed assets.................................. 20,471 28,517 36,992 56,782 349,022 ---------- ---------- ---------- ---------- ------------ Total nonperforming assets................. $ 129,809 $ 156,784 $ 246,871 $ 421,227 $ 1,193,450 ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Allowance for credit losses........................ $ 451,692 $ 523,946 $ 555,149 $ 563,142 $ 692,584 ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------ Nonaccrual and renegotiated loans to total loans... 0.48% 0.61% 1.03% 2.02% 4.62% Nonaccrual loans to allowance for credit losses.... 24.21 24.48 37.52 62.08 117.90 Nonperforming assets to total loans, real estate ventures and foreclosed assets.................... 0.57 0.74 1.21 2.32 6.58 Nonperforming assets to total assets............... 0.42 0.54 0.90 1.71 4.97
- --------------- (1) Foreign loans are those loans originated in foreign branches. The following table sets forth an analysis of loans contractually past due 90 days or more as to interest or principal, but not included in nonaccrual loans above.
DECEMBER 31, ------------------------------------------------------------ (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - --------------------------------------------------- ---------- ---------- ---------- ---------- ------------ Commercial, financial and industrial............... $ 450 $ 4,527 $ 3,752 $ 3,690 $ 12,116 Construction....................................... -- -- 1,063 5,735 10,711 Mortgage: Residential...................................... 10,170 8,969 8,479 2,123 14,602 Commercial....................................... 1,660 168 3,592 -- 35,071 ---------- ---------- ---------- ---------- ------------ Total mortgage............................. 11,830 9,137 12,071 2,123 49,673 Consumer and other................................. 7,712 10,028 8,854 8,573 8,481 ---------- ---------- ---------- ---------- ------------ Total loans 90 days or more past due and still accruing........................... $ 19,992 $ 23,692 $ 25,740 $ 20,121 $ 80,981 ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ------------
F-17 At December 31, 1997, nonaccrual loans totaled $109 million, a decrease of $19 million, or 15 percent, from year-end 1996. The decline was primarily attributable to a $10 million reduction in nonaccrual commercial, financial and industrial loans and a $10 million reduction in nonaccrual residential mortgage loans. Foreclosed assets, primarily other real estate owned, decreased by $8 million due to sales of individual assets. Nonaccrual and renegotiated loans as a percentage of total loans were 0.48% at December 31, 1997 compared with 0.61% one year earlier. Nonperforming assets as a percentage of total loans, real estate ventures and foreclosed assets improved to 0.57% at year-end 1997 from 0.74% at December 31, 1996. At December 31, 1997, approximately 58 percent of nonaccrual loans were real estate related. Total loans 90 days or more past due and still accruing were $20 million at December 31, 1997 compared with $24 million at December 31, 1996. At December 31, 1997, impaired loans were $108 million and the associated impairment allowance was $9 million compared with $114 million and $21 million, respectively, at December 31, 1996. INTEREST FOREGONE Interest foregone during 1997 and 1996 for loans that were on nonaccrual status at December 31, 1997 and 1996 was $6 million and $9 million, respectively. The Company recognized interest income during 1997 and 1996 for loans that were on nonaccrual status at December 31, 1997 and 1996 of $3 million and $5 million, respectively. F-18 SECURITIES The following tables summarize the composition of the securities portfolio and the gross unrealized gains and losses within the portfolio. SECURITIES AVAILABLE FOR SALE
DECEMBER 31, -------------------------------------------------------------------------------------------------------------- 1997 1996 ------------------------------------------------ ------------------------------------------------ 1995 GROSS GROSS GROSS GROSS ---------- (DOLLARS IN AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR FAIR THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE VALUE - ------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- U.S. Treasury..... $ 987,374 $10,793 $ 170 $ 997,997 $1,137,992 $ 4,993 $1,933 $1,141,052 $ 994,492 Other U.S. government....... 709,536 6,005 67 715,474 687,717 4,993 779 691,931 364,584 Mortgage-backed securities....... 679,692 3,331 265 682,758 193,531 400 274 193,657 448,173 State and municipal........ 90,937 13,236 -- 104,173 101,006 13,749 -- 114,755 132,698 Corporate debt securities....... 2,698 311 1 3,008 -- -- -- -- -- Equity securities....... 28,881 1,596 672 29,805 19,041 2,553 -- 21,594 16,539 Foreign securities....... 5,132 39 -- 5,171 1,136 72 -- 1,208 4,065 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total securities available for sale.......... $2,504,250 $35,311 $1,175 $2,538,386 $2,140,423 $26,760 $2,986 $2,164,197 $1,960,551 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SECURITIES HELD TO MATURITY
DECEMBER 31, --------------------------------------------------------------------------------------------------------- 1997 1996 ---------------------------------------------- ---------------------------------------------- 1995 GROSS GROSS GROSS GROSS --------- AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE COST - ----------------------- --------- ----------- ----------- --------- --------- ----------- ----------- --------- --------- U.S. Treasury.......... $ 40,092 $ 1,333 $ -- $ 41,425 $ 50,109 $ 1,735 $ -- $ 51,844 $ 51,125 Other U.S. government.. 99,520 2,568 -- 102,088 139,188 4,412 -- 143,600 138,816 Mortgage-backed securities............ 24,477 1,745 14 26,208 41,985 2,019 68 43,936 124,375 State and municipal.... 24,686 75 1,367 23,394 36,914 310 2,199 35,025 48,971 --------- ----------- ----------- --------- --------- ----------- ----------- --------- --------- Total securities held to maturity........ $ 188,775 $ 5,721 $ 1,381 $ 193,115 $ 268,196 $ 8,476 $ 2,267 $ 274,405 $ 363,287 --------- ----------- ----------- --------- --------- ----------- ----------- --------- --------- --------- ----------- ----------- --------- --------- ----------- ----------- --------- ---------
Management of the securities portfolio involves the maximization of return while maintaining prudent levels of quality and liquidity. At December 31, 1997, approximately 98 percent of total securities were investment grade. During the quarter ended December 31, 1995, in accordance with guidance issued by the Financial Accounting Standards Board (FASB), the Company reclassified from securities held to maturity to securities available for sale approximately $285 million at amortized cost of U.S. Treasury Notes (fair value $285 million) and $64 million at amortized cost of municipal bonds (fair value $72 million). F-19 ANALYSIS OF SECURITIES PORTFOLIO The following tables show the remaining contractual maturities and expected yields of the securities portfolio. SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1997 --------------------------------------------------------------------------------------------------- MATURITY ----------------------------------------------------------------------------- AFTER ONE YEAR AFTER FIVE YEARS WITHIN AND WITHIN AND WITHIN AFTER TOTAL ONE YEAR FIVE YEARS TEN YEARS TEN YEARS AMORTIZED COST ----------------- ------------------- ---------------- ---------------- ------------------- (DOLLARS IN THOUSANDS) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) - ------------------------- -------- ------- ---------- ------- ------- ------- ------- ------- ---------- ------- U.S. Treasury............ $150,048 6.22% $ 837,326 6.31% $ -- -- % $ -- -- % $ 987,374 6.30% Other U.S. government.... 99,940 6.49 609,596 6.38 -- -- -- -- 709,536 6.40 Mortgage-backed securities(1)........... 53,108 6.82 626,584 6.41 -- -- -- -- 679,692 6.44 State and municipal(2)... 14,944 10.49 26,409 9.90 12,971 11.09 36,613 11.33 90,937 10.74 Corporate debt securities.............. -- -- 1,432 17.31 1,266 12.42 -- -- 2,698 15.02 Equity securities(3)..... -- -- -- -- -- -- -- -- 28,881 -- Foreign securities....... 3,419 14.30 -- -- 1,713 6.29 -- -- 5,132 11.63 -------- ---------- ------- ------- ---------- Total securities available for sale............... $321,459 6.69% $2,101,347 6.41% $15,950 10.68% $36,613 11.33% $2,504,250 6.48% -------- ---------- ------- ------- ---------- -------- ---------- ------- ------- ----------
SECURITIES HELD TO MATURITY
DECEMBER 31, 1997 -------------------------------------------------------------------------------------------------- MATURITY -------------------------------------------------------------------------------------------------- AFTER ONE YEAR AFTER FIVE YEARS WITHIN AND WITHIN AND WITHIN AFTER ONE YEAR FIVE YEARS TEN YEARS TEN YEARS ---------------------- ---------------------- ------------------------ ------------------------ (DOLLARS IN THOUSANDS) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) - ---------------------------- --------- ----------- --------- ----------- ----------- ----------- ----------- ----------- U.S. Treasury............... $ -- --% $ 40,092 7.56% $ -- --% $ -- --% Other U.S. government....... 10,000 8.00 89,520 7.72 -- -- -- -- Mortgage-backed securities(1).............. 3,622 4.88 20,855 9.03 -- -- -- -- State and municipal(2)...... 9,077 9.19 -- -- 2,596 6.35 13,013 5.77 --------- --------- ----------- ----------- Total securities held to maturity.............. $ 22,699 7.98% $ 150,467 7.86% $ 2,596 6.35% $ 13,013 5.77% --------- --------- ----------- ----------- --------- --------- ----------- ----------- TOTAL AMORTIZED COST ---------------------- (DOLLARS IN THOUSANDS) AMOUNT YIELD(4) - ---------------------------- --------- ----------- U.S. Treasury............... $ 40,092 7.56% Other U.S. government....... 99,520 7.75 Mortgage-backed securities(1).............. 24,477 8.42 State and municipal(2)...... 24,686 7.09 --------- Total securities held to maturity.............. $ 188,775 7.71% --------- ---------
- ------------ (1) Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations, with or without call or prepayment penalties. (2) Yields on tax-exempt municipal securities are presented on a taxable-equivalent basis using the current federal statutory rate of 35 percent. (3) Equity securities do not have a stated maturity and are included in the total column only. (4) Yields are based on amortized cost. F-20 LOAN MATURITIES The following table presents the Company's loans by maturity.
DECEMBER 31, 1997 ------------------------------------------------------- AFTER ONE YEAR WITHIN AND WITHIN AFTER (DOLLARS IN THOUSANDS) ONE YEAR FIVE YEARS FIVE YEARS TOTAL - -------------------------------------------------------- ------------ ------------ ------------ ------------- Domestic: Commercial, financial and industrial.................. $ 4,102,910 $ 4,477,317 $ 2,166,952 $ 10,747,179 Construction.......................................... 173,504 119,829 -- 293,333 Mortgage: Residential......................................... 4,230 32,000 2,925,003 2,961,233 Commercial.......................................... 228,955 1,085,913 1,636,939 2,951,807 ------------ ------------ ------------ ------------- Total mortgage.................................... 233,185 1,117,913 4,561,942 5,913,040 Consumer: Installment......................................... 136,264 1,801,620 152,868 2,090,752 Home equity......................................... 2,816 38,570 951,530 992,916 Credit card and other lines of credit............... 270,045 52 -- 270,097 ------------ ------------ ------------ ------------- Total consumer.................................... 409,125 1,840,242 1,104,398 3,353,765 Lease financing....................................... 83,478 606,904 184,478 874,860 ------------ ------------ ------------ ------------- Total loans in domestic offices................... 5,002,202 8,162,205 8,017,770 21,182,177 Loans originated in foreign branches.................... 1,515,844 25,627 17,760 1,559,231 ------------ ------------ ------------ ------------- Total loans....................................... $ 6,518,046 $ 8,187,832 $ 8,035,530 22,741,408 ------------ ------------ ------------ ------------ ------------ ------------ Allowance for credit losses..................... 451,692 ------------- Loans, net........................................ $ 22,289,716 ------------- ------------- Total fixed rate loans due after one year............... $ 5,353,709 Total variable rate loans due after one year............ 10,869,653 ------------- Total loans due after one year.................... $ 16,223,362 ------------- -------------
CERTIFICATES OF DEPOSIT OF $100,000 AND OVER The following table presents domestic certificates of deposit of $100,000 and over by maturity.
DECEMBER 31, (DOLLARS IN THOUSANDS) 1997 - ---------------------------------------------------------------------------------------------------- ------------ Three months or less................................................................................ $2,684,438 Over three months through six months................................................................ 1,163,014 Over six months through twelve months............................................................... 261,739 Over twelve months.................................................................................. 154,948 ------------ Total domestic certificates of deposit of $100,000 and over..................................... $4,264,139 ------------ ------------
The Company offers certificates of deposit of $100,000 and over at market rates of interest. Many of these certificates are issued to customers, both public and private, who have done business with the Company for an extended period. The Company expects that as these deposits come due, the majority will continue to be renewed at market rates of interest. Substantially all of the Company's deposits in foreign branches are certificates of deposit of $100,000 and over and mature in less than one year. F-21 BORROWED FUNDS The following table presents information on the Company's borrowed funds.
DECEMBER 31, ---------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------ ------------ ------------ ------------ Federal funds purchased and securities sold under repurchase agreements with weighted average interest rates of 5.38%, 5.09% and 4.96% at December 31, 1997, 1996 and 1995, respectively......................... $ 1,335,884 $ 1,322,654 $ 1,195,058 Commercial paper, with weighted average interest rates of 5.64%, 5.34% and 5.75% at December 31, 1997, 1996 and 1995, respectively............ 966,575 1,495,463 1,389,870 Other borrowed funds, with weighted average interest rates of 6.23%, 5.66% and 5.78% at December 31, 1997, 1996 and 1995, respectively...... 476,010 749,422 1,064,472 ------------ ------------ ------------ Total borrowed funds................................................ $ 2,778,469 $ 3,567,539 $ 3,649,400 ------------ ------------ ------------ ------------ ------------ ------------ Federal funds purchased and securities sold under repurchase agreements: Maximum outstanding at any month end.................................. $ 1,575,930 $ 1,322,654 $ 1,517,999 Average balance during the year....................................... 1,097,707 933,433 1,384,762 Weighted average interest rate during the year........................ 5.33% 5.05% 5.70% Commercial paper: Maximum outstanding at any month end.................................. $ 1,876,135 $ 1,854,576 $ 1,591,712 Average balance during the year....................................... 1,637,070 1,620,087 1,448,739 Weighted average interest rate during the year........................ 5.49% 5.40% 5.98% Other borrowed funds: Maximum outstanding at any month end.................................. $ 851,694 $ 1,697,236 $ 1,319,444 Average balance during the year....................................... 635,900 1,119,051 731,759 Weighted average interest rate during the year........................ 5.42% 5.59% 5.82%
CAPITAL ADEQUACY AND DIVIDENDS The Company's principal capital objectives are to support future growth, to protect depositors, to absorb any unanticipated losses and to comply with various regulatory requirements. Management believes that the Company has retained its capital at a level which supports the risk structure of the Company, as well as providing for anticipated growth of current business activities and strategic expansion. Total shareholders' equity was $2,679 million at December 31, 1997, an increase of $184 million from year-end 1996. This change was primarily a result of $411 million of net income for 1997, offset by the redemption of $135 million in preferred stock and dividends on common and preferred stock of $97 million. The Company offers a dividend reinvestment plan that allows shareholders to reinvest dividends in the Company's common stock at 5 percent below the market price. At December 31, 1997, BTM was not a participant in the plan. Capital adequacy depends on a variety of factors including asset quality and risk profile, liquidity, stability of earnings, competitive and economic conditions, and management. The Company believes that the current level of profitability, coupled with a prudent dividend policy, is adequate to support normal growth in operations while meeting regulatory capital guidelines. F-22 The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios for the Company.
DECEMBER 31, MINIMUM ------------------------------------------------------------------------- REGULATORY (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 REQUIREMENT - ------------------------- ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL COMPONENTS Tier 1 capital........... $ 2,587,071 $ 2,395,580 $ 2,355,057 $ 2,070,554 $ 1,952,045 Tier 2 capital........... 601,102 551,074 591,266 626,903 702,652 ------------- ------------- ------------- ------------- ------------- Total risk-based capital................. $ 3,188,173 $ 2,946,654 $ 2,946,323 $ 2,697,457 $ 2,654,697 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Risk-weighted assets..... $ 28,862,340 $ 26,390,288 $ 25,179,489 $ 22,419,516 $ 21,992,647 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Quarterly average assets.................. $ 30,334,507 $ 28,496,355 $ 27,073,158 $ 23,868,729 $ 23,624,622 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL RATIOS Total risk-based capital................. 11.05% 11.17% 11.70% 12.03% 12.07% 8.0% Tier 1 risk-based capital................. 8.96 9.08 9.35 9.24 8.88 4.0 Leverage ratio(1)........ 8.53 8.41 8.70 8.67 8.26 4.0
- --------------- (1) Tier 1 capital divided by quarterly average assets (excluding intangible assets). For regulatory purposes, the Company's capital computations are based on risk-adjusted Tier 1 and total capital. The Company's Tier 1 and total risk-based capital ratios were 8.96% and 11.05%, respectively, at December 31, 1997 compared to 9.08% and 11.17%, respectively, at December 31, 1996. The decrease in the capital ratios was attributable to the redemption of $135 million of preferred stock in the third quarter of 1997, partly offset by retained earnings growing faster than both risk-weighted assets and average assets. As of December 31, 1997, management believes the capital ratios of the Bank met all regulatory minimums of a "well-capitalized" institution. COMPARISON OF 1996 VERSUS 1995 Net income in 1996 was $249 million compared with $313 million in 1995. Excluding the effects of the $72 million after-tax charge for merger-integration expense, net income improved as a result of higher net interest income, higher noninterest income, and lower credit loss provision expense than in 1995. Net income applicable to common stock was $238 million, or $4.09 per diluted common share, in 1996 compared with $302 million, or $5.20 per diluted common share, in 1995. The return on average assets was 0.89% in 1996 versus 1.22% in 1995. The return on average common equity was 10.24% in 1996 compared with 13.73% in 1995. Net interest income on a taxable-equivalent basis increased by $23 million, or 2 percent, over 1995. Average loans increased $1,753 million, or 9 percent, and the net interest margin decreased 30 basis points to 4.75%. Noninterest income increased by $23 million, or 6 percent, over 1995. Service charges on deposits, trust and investment management fees, credit card merchant fees, brokerage commissions and fees, securities gains, and other revenue collectively grew 11 percent and accounted for $32 million of the growth in noninterest income. This increase was partially offset by a $6 million decrease in foreign exchange trading gains. F-23 The provision for credit losses was $40 million in 1996, $13 million, or 25 percent, lower than in 1995, reflecting the improved quality of the loan portfolio. Noninterest expense, excluding merger and integration expense, increased by $39 million, or 4 percent, from 1995. Personnel-related expense increased $21 million, or 4 percent, due partially to increased contract labor used to augment staffing requirements as a residual effect of the merger. Net occupancy expense increased $10 million, or 11 percent, due to a $12 million one-time charge in 1996 related to former banking facilities. This was offset by a 2 percent decrease in net occupancy expense due to the closure of 20 branches late in the third quarter of 1996. Credit card processing expense increased $6 million, or 19 percent, in 1996 due to higher merchant volumes. Advertising and public relations expense increased $8 million, or 38 percent, over 1995 due primarily to expanded activities in 1996 to increase awareness of the Bank, following the April 1, 1996 combination of Union Bank and BanCal Tri-State Corporation and its subsidiary. In 1996, regulatory authority assessments expense declined $19 million, or 83 percent, primarily because the Federal Deposit Insurance Corporation decided to eliminate insurance assessments for all of 1996. Merger and integration expense was $117 million in 1996. Income tax expense was $30 million lower in 1996 than in 1995, primarily due to lower taxable income. The effective rate increased from 38% in 1995 to 40% in 1996 primarily due to a $3 million after-tax benefit recognized in 1995 from a favorable settlement of an Internal Revenue Service examination of 1989 and 1990. Total loans at December 31, 1996 were $21.0 billion, an increase of $0.6 billion, or 3 percent, over year-end 1995. Commercial, financial and industrial loans declined $188 million, or 2 percent, from the previous year, primarily due to planned reductions from a portfolio overlap arising from the merger and a reduction in certain low margin lending. At year-end 1996, construction loans decreased $12 million, or 3 percent, while commercial mortgages increased $455 million, or 21 percent, from 1995. This increase in commercial mortgages reflected the continuing improvement in the West Coast economy, particularly the real estate sector. It was primarily attributable to new originations of mini-perm loans, ranging in size from $1 million to $10 million, resulting from a vigorous marketing program. At December 31, 1996 residential loans were $319 million, or 12 percent, higher than the previous year as the favorable interest rate environment and a stronger housing market continued to generate significant opportunities for residential mortgage lenders. Consumer loans increased $136 million, or 4 percent, from 1995 due primarily to increases in direct and indirect auto loans for used vehicles, partially offset by a decrease in home equity balances. Total nonperforming assets were $157 million at December 31, 1996, $90 million, or 36 percent, lower than one year earlier. The decline was primarily attributable to a $27 million, or 33 percent, reduction in nonaccrual commercial, financial and industrial loans and a $33 million, or 82 percent, reduction in nonaccrual construction loans, due to a combination of note sales, payoffs, and upgrades. Foreclosed assets, primarily other real estate owned, decreased by $8 million, or 23 percent, from 1995, due to sales of individual assets. Net loan charge-offs in 1996 were $71 million compared to net loans charged off of $61 million in 1995. Recoveries of loans previously charged off decreased by $24 million, despite an increase in the percentage of recoveries in 1996 to loans charged off in the previous year from 26.44% in 1995 to 35.95% in 1996. Loans charged off in 1996 decreased by $14 million due to a reduction in new nonperforming assets in 1996 and a reduction in nonaccrual and underperforming loans, partly offset by a $12 million increase in consumer loans charged off, primarily attributable to credit card loans. At December 31, 1996, the Tier 1 risk-based capital ratio was 9.08% and the total risk-based capital ratio was 11.17% compared with ratios of 9.35% and 11.70%, respectively, at December 31, 1995. F-24 RECENT ACCOUNTING DEVELOPMENTS In addition to the new accounting pronouncements disclosed in Note 1 to the Consolidated Financial Statements, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" in February 1998. The Standard revises the disclosure requirements for pensions and other postretirement benefits. This Statement is effective for fiscal years beginning after December 15, 1997. Adoption of this Statement will not impact the Company's consolidated financial position, results of operations, or cash flows, and any effect will be limited to the form and content of its disclosures. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK GENERAL Market risk is the risk of loss to future earnings, to fair values, or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments. Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits, borrowings, as well as derivative instruments. The Company's exposure to market risk is a function of its asset and liability management activities, its trading activities for its own account, and its role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of the Company's earnings and equity to loss and to reduce the volatility inherent in certain financial instruments. The management of market risk is governed by policies reviewed and approved annually by the Company's Board of Directors (Board). The Board delegates responsibility for market risk management to the Asset & Liability Management Committee (ALCO), who reports quarterly to the Board on activities related to the management of market risk. As part of the management of the Company's market risk, the ALCO may direct changes in the mix of assets and liabilities and the use of derivative instruments such as interest rate swaps, caps and floors. The ALCO also reviews and approves all major funding, market risk-management programs, and market risk limits. The Chief Financial Officer (CFO), as chairman of the ALCO, is responsible for companywide management of market risk. The Treasurer is responsible for implementing funding, investment, and hedging strategies designed to manage this risk. On a day-to-day basis, the oversight of market risk management takes place at a centralized level within the Risk Monitoring Unit (RMU). The RMU is responsible for measuring risks to ensure compliance with all market risk limits and guidelines incorporated within the policies and procedures established by the ALCO. The RMU reports monthly to the ALCO on the effectiveness of the Company's hedging activities, on trading risk exposures, and on compliance with policy limits. In addition, periodic reviews by internal audit, regulators and independent accountants provide further evaluation of controls over the risk management process. The Company has separate and distinct methods for managing the market risk associated with its trading activities and its asset and liability management activities, as described below. INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING) The Company engages in asset and liability management activities with the objective of reducing adverse changes in earnings as a result of changes in interest rates. The management of interest rate risk relates to the timing and magnitude of the repricing of assets compared to liabilities and has, as its objective, the control of risks associated with movements in interest rates. The Asset & Liability Management (ALM) Policy approved by the Board requires monthly monitoring of interest rate risk by ALCO. As part of the management of the Company's interest rate risk, ALCO may direct changes in the composition of the balance sheet and the extent to which the Company utilizes off-balance sheet derivative instruments such as interest rate swaps, floors, and caps. F-25 The Company's balance sheet is "asset-sensitive", which means that assets generally reprice more quickly than liabilities. An asset-sensitive balance sheet tends to reduce net interest income when interest rates decline and to increase net interest income when interest rates rise. One method of measuring interest rate risk is by measuring the interest rate sensitivity gap, which is the difference between earning assets and liabilities maturing or repricing within specified periods. The table on F-28 presents such an analysis, which reflects certain assumptions as to the rate sensitivity of deposits without contractual maturities or repricing dates. These include demand deposits, money market demand accounts, and savings deposits. Additional assumptions such as prepayment estimates for residential mortgages and mortgage-backed securities are made to reflect the probable behavior of those assets. The section of the table on F-28 entitled Interest Rate Risk Management Positions presents the effects of the securities portfolio and of derivatives used for hedging, such as interest rate swaps and floors, in reducing the interest rate sensitivity gap primarily for LIBOR-based loans. The table on F-28 shows that the Company's assets that are rate sensitive within one year exceeded liabilities within that same period by $4.9 billion at December 31, 1997. Adjusted for the effects of the securities portfolio and derivatives used for hedging, this cumulative gap was reduced to $2.5 billion. Gap analysis has significant limitations as a method for measuring interest rate risk since changes in interest rates do not affect all categories of assets and liabilities in the same way. To address these limitations, the Company uses a simulation model to quantify the impact of changing interest rates on net interest income (NII). A frequency distribution of simulated 12-month NII outcomes based on rate scenarios produced through a Monte Carlo rate generation process is prepared monthly to determine statistically the mean NII. The amount of Earnings at Risk (EaR), defined as the potential negative change in NII, is measured at a 97.5 percent confidence level and is managed within the limit established in the Board's ALM Policy at 5 percent of mean NII. Based on the December 31, 1997 balance sheet, the EaR was $23.0 million or 1.80% of mean NII. An additional limit established by the Board's ALM Policy is that the negative change in simulated net interest income for 12 months under single interest rate shock scenarios, up or down 200 basis points, must be no more than 8 percent of the mean NII. Based on the December 31, 1997 balance sheet, the negative change for a downward shock of 200 basis points was $51.8 million or 4.05% of mean NII. TRADING ACTIVITIES The Company enters into trading account activities primarily as a financial intermediary for customers, and, to a lesser extent, for its own account. By acting as a financial intermediary, the Company is able to provide its customers with access to a wide range of products from the securities, foreign exchange, and derivatives markets. In acting for its own account, the Company may take positions in some of these instruments with the objective of generating trading profits. These activities expose the Company to two primary types of market risk: interest rate and foreign currency exchange risk. In order to manage interest rate and foreign currency exchange risk associated with its trading activities, the Company utilizes a variety of non-statistical methods including: position limits for each trading activity, daily marking of all positions to market, daily profit and loss statements, position reports, and independent verification of all inventory pricing. Additionally, the RMU reports positions and profits and losses daily to the Treasurer and trading managers and weekly to the CFO. ALCO is provided reports on a monthly basis. The Company believes that these procedures, which stress timely communication between the RMU and senior management, are the most important elements of the risk management process. The Company uses a form of Value at Risk (VaR) methodology to measure the overall market risk inherent in its trading account activities. Under this methodology, management statistically calculates, with 97.5 percent confidence, the potential loss in fair value that the Company might experience if an adverse F-26 shift in market prices were to occur within a period of 5 business days. The amount of VaR is managed within limits well below the maximum limit established by Board policy at 0.5% of shareholders' equity. The VaR model incorporates a number of key assumptions, including assumed holding period and historical volatility based on 3 years of historical market data updated quarterly. During 1997 the Company's foreign exchange trading VaR averaged $73 thousand and peaked at $147 thousand. The low VaR was $32 thousand. Correspondingly, the Company's securities trading VaR averaged $558 thousand and peaked at $717 thousand. The low VaR was $439 thousand. The Company's interest rate derivatives contracts include $2.4 billion of derivative contracts entered into as an accommodation for customers. The Company acts as an intermediary and matches these contracts at a profit with contracts with BTM or other dealers, thus neutralizing the related market risk. The Company maintains responsibility for the credit risk associated with these contracts. LIQUIDITY RISK Liquidity risk represents the potential for loss as a result of limitations on 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 ALM Policy approved by the Board requires quarterly reviews of the Company's liquidity by the ALCO, which is composed of bank senior executives. The Company's liquidity draws upon the strength of its extensive retail and commercial market business franchise, coupled with the ability to obtain funds for various terms in a variety of domestic and international money markets. Liquidity is managed through the funding and investment functions of the Treasury Division. Core deposits provide the Company with a sizable source of relatively stable and low-cost funds. The Company's average core deposits, which include demand deposits, money market demand accounts, and savings and consumer time deposits, combined with average common shareholder's equity, funded 61 percent of average total assets of $29.7 billion for the year ended December 31, 1997. Most of the remaining funding was provided by short-term borrowings in the form of negotiable certificates of deposit, foreign deposits, federal funds purchased and securities sold under repurchase agreements, commercial paper and other borrowings. Liquidity may also be provided by the sale or maturity of assets. Such assets include interest bearing deposits in banks, federal funds sold and securities purchased under resale agreements, and trading account securities. The aggregate of these assets averaged $1.8 billion during 1997. Additional liquidity may be provided by investment securities available for sale which amounted to $2.5 billion at December 31, 1997, and by loan maturities. At December 31, 1997, $6.5 billion of loans were scheduled to mature within one year. F-27 The following table summarizes the Company's interest rate sensitivity based on expected repricings in the time frames indicated for the balance sheet and interest rate derivatives as of December 31, 1997.
DECEMBER 31, 1997 ---------------------------------------------------------- AMOUNTS MATURING OR REPRICING IN ---------------------------------------------------------- (DOLLARS IN THOUSANDS) 0-12 MONTHS >1-5 YEARS AFTER 5 YEARS TOTAL - ----------------------------------------------------- ------------- ------------- ------------- ------------- ASSETS Federal funds sold and securities purchased under resale agreements................................... $ 24,335 $ -- $ -- $ 24,335 Interest bearing deposits in banks................... 633,421 -- -- 633,421 Trading account assets............................... 394,313 -- -- 394,313 Loans................................................ 17,320,010 3,926,152 1,495,246 22,741,408 Other assets(1)(2)................................... 1,217,060 1,111,518 1,736,049 4,064,627 ------------- ------------- ------------- ------------- Total assets (except securities)................. 19,589,139 5,037,670 3,231,295 27,858,104 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing deposits: Interest bearing checking(1)(3).................... 180,074 1,260,520 -- 1,440,594 Money market demand accounts(1)(3)................. 1,353,636 2,671,392 -- 4,025,028 Savings(1)(3)...................................... 166,562 1,165,932 -- 1,332,494 Other time deposits(1)............................. 7,208,342 434,309 6,063 7,648,714 Federal funds purchased and securities sold under repurchase agreements............................... 1,335,884 -- -- 1,335,884 Other borrowed funds................................. 1,442,585 -- -- 1,442,585 Subordinated capital notes........................... 348,000 -- -- 348,000 Demand deposit accounts(1)(4)........................ 2,654,863 6,194,681 -- 8,849,544 Other liabilities(1)(2).............................. -- -- 1,483,123 1,483,123 Shareholders' equity(2).............................. -- -- 2,679,299 2,679,299 ------------- ------------- ------------- ------------- Total liabilities and shareholders' equity....... $ 14,689,946 $ 11,726,834 $ 4,168,485 $ 30,585,265 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Gap before risk management positions................. $ 4,899,193 $ (6,689,164) $ (937,190) $ (2,727,161) Cumulative gap before risk management positions...... $ 4,899,193 $ (1,789,971) $ (2,727,161) INTEREST RATE RISK MANAGEMENT POSITIONS Securities(1)...................................... 366,467 2,214,199 146,495 2,727,161 Interest rate swaps................................ (425,000) 425,000 -- -- Interest rate floors(5)............................ (2,350,000) 2,350,000 -- -- ------------- ------------- ------------- ------------- Gap adjusted for risk management positions........... $ 2,490,660 $ (1,699,965) $ (790,695) $ -- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Cumulative gap adjusted for risk management positions........................................... $ 2,490,660 $ 790,695 $ -- $ -- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
- --------------- (1) Certain balance sheet classifications used for interest rate sensitivity analysis do not conform to the Consolidated Balance Sheets on F-31. (2) Items that neither reprice nor mature are included in the "After 5 years" column. (3) Interest rate sensitivity of non-maturity deposit accounts are based on assumptions for a declining interest rate scenario since the Company's balance sheet is asset-sensitive. (4) 70 percent of the demand deposit account balance is assumed to be "core" deposits, which are not sensitive to interest rate changes. (5) Floors purchased affect interest rate sensitivity in a declining interest rate scenario. F-28 UNIONBANCAL CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995.......................................................................... F-30 Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... F-31 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.......................................................................... F-32 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.......................................................................... F-33 Notes to Consolidated Financial Statements................................................................. F-34 Management Statement....................................................................................... F-74 Independent Auditors' Reports.............................................................................. F-75
F-29 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE --------------------------------------------- DATA) 1997 1996 1995 - ---------------------------------------- ------------- ------------- ------------- INTEREST INCOME Loans................................... $ 1,763,277 $ 1,687,977 $ 1,613,376 Securities.............................. 167,440 143,412 132,802 Interest bearing deposits in banks...... 56,748 52,709 58,201 Federal funds sold and securities purchased under resale agreements...... 26,079 30,246 22,247 Trading account assets.................. 19,917 12,960 20,567 ------------- ------------- ------------- Total interest income............... 2,033,461 1,927,304 1,847,193 ------------- ------------- ------------- INTEREST EXPENSE Domestic deposits....................... 520,583 460,130 358,049 Foreign deposits........................ 75,398 71,437 96,109 Federal funds purchased and securities sold under repurchase agreements....... 58,544 47,095 78,908 Commercial paper........................ 89,912 87,411 86,695 Subordinated capital notes.............. 22,850 30,104 42,538 Other borrowed funds.................... 34,492 62,549 42,561 ------------- ------------- ------------- Total interest expense.............. 801,779 758,726 704,860 ------------- ------------- ------------- NET INTEREST INCOME..................... 1,231,682 1,168,578 1,142,333 Provision for credit losses............. -- 40,000 53,250 ------------- ------------- ------------- Net interest income after provision for credit losses.................. 1,231,682 1,128,578 1,089,083 ------------- ------------- ------------- NONINTEREST INCOME Service charges on deposit accounts..... 114,647 101,975 95,177 Trust and investment management fees.... 107,527 93,479 87,743 International commissions and fees...... 66,122 66,108 68,621 Credit card merchant fees............... 57,128 49,778 45,767 Merchant banking fees................... 24,924 23,929 24,483 Securities gains (losses), net.......... 2,711 4,502 (702) Other................................... 89,942 78,905 74,230 ------------- ------------- ------------- Total noninterest income............ 463,001 418,676 395,319 ------------- ------------- ------------- NONINTEREST EXPENSE Salaries and employee benefits.......... 571,644 557,247 536,671 Net occupancy........................... 85,630 103,335 92,863 Equipment............................... 56,137 55,942 55,056 Foreclosed asset expense (income)....... (1,268) 2,889 (3,213) Merger and integration.................. 6,037 117,464 -- Other................................... 326,485 298,027 296,724 ------------- ------------- ------------- Total noninterest expense........... 1,044,665 1,134,904 978,101 ------------- ------------- ------------- Income before income taxes.............. 650,018 412,350 506,301 Income tax expense...................... 238,722 162,892 193,359 ------------- ------------- ------------- NET INCOME.............................. $ 411,296 $ 249,458 $ 312,942 ------------- ------------- ------------- ------------- ------------- ------------- NET INCOME APPLICABLE TO COMMON STOCK(1)............................... $ 403,696 $ 238,152 $ 301,637 ------------- ------------- ------------- ------------- ------------- ------------- NET INCOME PER COMMON SHARE -- BASIC(1)............................... $ 6.93 $ 4.10 $ 5.21 ------------- ------------- ------------- ------------- ------------- ------------- NET INCOME PER COMMON SHARE -- DILUTED(1)............................. $ 6.91 $ 4.09 $ 5.20 ------------- ------------- ------------- ------------- ------------- ------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- BASIC(1)................ 58,228 58,130 57,935 ------------- ------------- ------------- ------------- ------------- ------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- DILUTED(1).............. 58,396 58,261 58,033 ------------- ------------- ------------- ------------- ------------- ------------- PRO FORMA NET INCOME PER COMMON SHARE -- BASIC(2)............................... $ 2.31 $ 1.37 $ 1.74 ------------- ------------- ------------- ------------- ------------- ------------- PRO FORMA NET INCOME PER COMMON SHARE -- DILUTED(2)............................. $ 2.30 $ 1.36 $ 1.73 ------------- ------------- ------------- ------------- ------------- ------------- PRO FORMA WEIGHTED AVERAGE COMMON SHARE OUTSTANDING -- BASIC(2)................ 174,683 174,391 173,806 ------------- ------------- ------------- ------------- ------------- ------------- PRO FORMA WEIGHTED AVERAGE COMMON SHARE OUTSTANDING -- DILUTED(2).............. 175,189 174,784 174,099 ------------- ------------- ------------- ------------- ------------- -------------
- ----------------- (1) Amounts restated to give retroactive effect to the exchange referred to in Note 1 of the accompanying notes to Consolidated Financial Statements. (2) See Note 23 of accompanying notes to the Consolidated Financial Statements for information on stock split declaration. See accompanying notes to consolidated financial statements. F-30 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT SHARE ------------------------ DATA) 1997 1996 - ---------------------------------------- ----------- ----------- ASSETS Cash and due from banks................. $ 2,541,699 $ 2,268,771 Interest bearing deposits in banks...... 633,421 1,131,216 Federal funds sold and securities purchased under resale agreements...... 24,335 537,710 ----------- ----------- Total cash and cash equivalents..... 3,199,455 3,937,697 Trading account assets.................. 394,313 465,782 Securities available for sale........... 2,538,386 2,164,197 Securities held to maturity (market value: 1997, $193,115; 1996, $274,405).............................. 188,775 268,196 Loans (net of allowance for credit losses: 1997, $451,692; 1996, $523,946).............................. 22,289,716 20,525,841 Due from customers on acceptances....... 773,339 778,378 Premises and equipment, net............. 406,299 410,621 Other assets............................ 794,982 683,347 ----------- ----------- Total assets........................ $30,585,265 $29,234,059 ----------- ----------- ----------- ----------- LIABILITIES Domestic deposits: Noninterest bearing................... $ 8,574,515 $ 7,381,078 Interest bearing...................... 12,666,458 12,607,691 Foreign deposits: Noninterest bearing................... 275,029 274,031 Interest bearing...................... 1,780,372 1,270,160 ----------- ----------- Total deposits...................... 23,296,374 21,532,960 Federal funds purchased and securities sold under repurchase agreements....... 1,335,884 1,322,654 Commercial paper........................ 966,575 1,495,463 Other borrowed funds.................... 476,010 749,422 Acceptances outstanding................. 773,339 778,378 Other liabilities....................... 709,784 478,249 Subordinated capital notes.............. 348,000 382,000 ----------- ----------- Total liabilities................... 27,905,966 26,739,126 ----------- ----------- Commitments and contingencies SHAREHOLDERS' EQUITY(1) Preferred stock: Authorized 5,000,000 shares 8 3/8% Noncumulative, Series A, issued 1,350,000 shares in 1996............ -- 135,000 Common stock -- $5 stated value: Authorized 100,000,000 shares, issued 58,305,891 shares in 1997 and 58,152,534 shares in 1996........... 291,529 290,762 Additional paid-in capital.............. 1,422,680 1,413,076 Retained earnings....................... 957,662 645,214 Accumulated other comprehensive income................................. 7,428 10,881 ----------- ----------- Total shareholders' equity.......... 2,679,299 2,494,933 ----------- ----------- Total liabilities and shareholders' equity............................. $30,585,265 $29,234,059 ----------- ----------- ----------- -----------
- --------------- (1) Amounts restated to give retroactive effect to the exchange referred to in Note 1 of the accompanying notes to Consolidated Financial Statements and the adoption of SFAS No. 130, "Reporting Comprehensive Income". See accompanying notes to consolidated financial statements. F-31 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY(1)
YEARS ENDED DECEMBER 31, ---------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - ---------------------------------------- ------------ ------------ ------------ PREFERRED STOCK Balance, beginning of year.............. $ 135,000 $ 135,000 $ 135,000 Redemption of preferred stock........... (135,000) -- -- ------------ ------------ ------------ Balance, end of year.................. $ -- $ 135,000 $ 135,000 ------------ ------------ ------------ COMMON STOCK............................ Balance, beginning of year.............. $ 290,762 $ 290,300 $ 286,739 Dividend reinvestment plan.............. 6 121 3,103 Deferred compensation -- restricted stock awards........................... 279 207 379 Stock options exercised................. 482 134 79 ------------ ------------ ------------ Balance, end of year.................. $ 291,529 $ 290,762 $ 290,300 ------------ ------------ ------------ ADDITIONAL PAID-IN CAPITAL Balance, beginning of year.............. $ 1,413,076 $ 1,408,960 $ 1,390,925 Dividend reinvestment plan.............. (43) 1,041 15,238 Deferred compensation -- restricted stock awards........................... 3,478 2,148 2,268 Stock options exercised................. 6,169 927 529 ------------ ------------ ------------ Balance, end of year $ 1,422,680 $ 1,413,076 $ 1,408,960 ------------ ------------ ------------ RETAINED EARNINGS Balance, beginning of year.............. $ 645,214 $ 626,172 $ 376,468 Net income(2)........................... 411,296 249,458 312,942 Dividends on common stock(3)(4)......... (89,848) (73,932) (50,989) Dividends on preferred stock............ (7,600) (11,306) (11,305) Dividend to MBL......................... -- (144,890) -- Deferred compensation -- restricted stock awards........................... (1,400) (288) (944) ------------ ------------ ------------ Balance, end of year.................. $ 957,662 $ 645,214 $ 626,172 ------------ ------------ ------------ ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of period............ $ 10,881 $ 23,660 $ (9,930) Net income(2)........................... 411,296 249,458 312,942 Other comprehensive income.............. (3,453) (12,779) 33,590 ------------ ------------ ------------ Total comprehensive income.............. 418,724 260,339 336,602 Less: net income included in retained earnings............................... (411,296) (249,458) (312,942) ------------ ------------ ------------ Balance, end of period................ $ 7,428 $ 10,881 $ 23,660 ------------ ------------ ------------ TOTAL SHAREHOLDERS' EQUITY $ 2,679,299 $ 2,494,933 $ 2,484,092 ------------ ------------ ------------ ------------ ------------ ------------
- --------------- (1) Amounts restated to give retroactive effect to the exchange referred to in Note 1 of the accompanying notes to Consolidated Financial Statements and the adoption of SFAS No. 130, "Reporting Comprehensive Income". (2) Includes income applicable to preferred shareholders of $7.6 million in 1997 and $11.3 million in 1996 and 1995, respectively. (3) Dividends per share in 1996 were based on historical Union Bank common cash dividends declared and did not include the $145 million dividend paid to The Mitsubishi Bank, Limited (MBL) in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. (4) Dividends per share were $1.54 in 1997 and $1.40 in 1996 and 1995, respectively, and are based on the Company's shares outstanding at the declaration date. See accompanying notes to consolidated financial statements. F-32 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - ---------------------------------------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................ $ 411,296 $ 249,458 $ 312,942 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses......... -- 40,000 53,250 Depreciation, amortization and accretion......................... 65,469 65,092 61,767 Provision for deferred income taxes............................. 59,814 50,658 50,841 (Gain) loss on sales of securities available for sale................ (2,711) (4,502) 801 Merger and integration costs in excess of (less than) cash utilized.......................... (31,414) 54,344 -- Other, net.......................... 226,449 (307,133) 239,785 ---------- ---------- ---------- Net cash provided by operating activities.......................... 728,903 147,917 719,386 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale.................. 171,629 19,536 240,731 Proceeds from matured and called securities available for sale....... 587,034 757,463 764,853 Purchase of securities available for sale................................ (1,112,080) (995,479) (1,452,339) Proceeds from matured and called securities held to maturity......... 79,828 95,829 213,337 Purchase of securities held to maturity............................ -- -- (123,886) Net increase in loans................. (1,788,179) (741,335) (2,478,608) Other, net............................ (56,584) (54,120) (34,902) ---------- ---------- ---------- Net cash used by investing activities........................ (2,118,352) (918,106) (2,870,814) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits.............. 1,763,414 1,877,917 2,245,306 Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements......... 13,230 127,596 (287,387) Net increase (decrease) in commercial paper and other borrowed funds...... (797,464) (201,214) 623,612 Redemption and maturity of subordinated debt................... (234,000) (119,369) (154,490) Proceeds from issuance of subordinated debt................................ 200,000 -- -- Redemption of preferred stock......... (135,000) -- -- Dividends paid........................ (93,303) (222,533) (62,044) Repayment of borrowing to support corporate owned life insurance...... -- (95,475) (10,638) Other, net............................ (2,661) (882) 485 ---------- ---------- ---------- Net cash provided by financing activities........................ 714,216 1,366,040 2,354,844 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents............................ (675,233) 595,851 203,416 Cash and cash equivalents at beginning of year................................ 3,937,697 3,352,423 3,153,713 Effect of exchange rate changes on cash and cash equivalents................... (63,009) (10,577) (4,706) ---------- ---------- ---------- Cash and cash equivalents at end of year................................... $3,199,455 $3,937,697 $3,352,423 ---------- ---------- ---------- ---------- ---------- ---------- CASH PAID DURING THE YEAR FOR: Interest.............................. $ 820,355 $ 764,327 $ 739,300 Income taxes.......................... 113,588 172,451 91,717 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Loans transferred to foreclosed assets (OREO).............................. $ 23,114 $ 44,557 $ 48,397 Securities transferred from held to maturity to available for sale...... -- -- 348,717 Dividends declared but unpaid......... 24,528 20,383 12,788
See accompanying notes to consolidated financial statements. F-33 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS UnionBanCal Corporation (the Company) is a commercial bank holding company, 82 percent owned by The Bank of Tokyo-Mitsubishi, Ltd. (BTM) and 18 percent owned by other shareholders. On April 1, 1996, the Company was created by the combination of Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The Bank of California, N.A. The combination was accounted for as a reorganization of entities under common control (similar to a business combination under the pooling of interests method). Accordingly, all historical financial information has been restated as if the combination had been in effect for all periods presented. The merger was effected by the issuance of 18,134,027 shares of Union Bank common stock in exchange for all the outstanding common shares of BanCal Tri-State Corporation. Information pertaining to merger and integration expense is presented in Note 7. On August 10, 1998, the Company exchanged 3.4 million shares of its common stock for 2.4 million shares of Union Bank of California, N.A. (the Bank) common stock owned directly by BTM. This share exchange provides the Company with a 100 percent ownership interest in the Bank. In addition, it increases BTM's ownership percentage of the Company to 82 percent from 81 percent. The exchange of shares was accounted for as a reorganization of entities under common control. Accordingly, amounts previously reported as Parent Direct Interest in Bank Subsidiary, including the proportionate share of net income, dividends, and other comprehensive income have been reclassified to combine them with the corresponding amounts attributable to the Company's common shareholders for all periods presented. The Company provides a wide range of financial services to consumers, small businesses, middle market companies and major corporations, primarily in California, Oregon and Washington, but also nationally and internationally. BASIS OF FINANCIAL STATEMENT PRESENTATION The accounting and reporting policies of the Company conform to generally accepted accounting principles (GAAP) and general practice within the banking industry. Those policies that materially affect the determination of financial position, results of operations, and cash flows are summarized below. The Consolidated Financial Statements include the accounts of the Company. All material intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts for prior periods have been reclassified to conform with current financial statement presentation. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest bearing deposits in banks and federal funds sold and securities purchased under resale agreements, substantially all of which have maturities less than 90 days. F-34 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) TRADING ACCOUNT ASSETS Trading account assets are those financial instruments that management acquires with the intent to hold for short periods of time in order to take advantage of anticipated changes in market values. Substantially all of these assets are securities with a high degree of liquidity and a readily determinable market value. Interest earned, paid or accrued, on trading account assets is included in interest income using a method that generally produces a level yield. Realized gains and losses from the close out of trading account positions and unrealized market value adjustments are recognized in noninterest income. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY The Company's securities portfolios consist of debt and equity securities that are classified either as securities available for sale or securities held to maturity. Debt securities for which the Company has the positive intent and ability to hold until maturity are classified as securities held to maturity and carried at amortized cost. Debt securities and equity securities with readily determinable market values that are not classified as either held to maturity securities or trading account assets are classified as securities available for sale and carried at fair value, with the unrealized gains or losses reported net of taxes as a separate component of shareholders' equity until realized. Realized gains and losses arising from the sale of securities are based upon the specific identification method and included in noninterest income as securities gains (losses), net. Interest income on debt securities includes the amortization of premiums and the accretion of discounts using the effective interest method and is included in interest income on securities. Dividend income on equity securities is included in noninterest income. LOANS Loans are reported at the principal amounts outstanding, net of unamortized nonrefundable loan fees and related direct loan origination costs. Deferred net fees and costs are recognized in interest income over the loan term using a method that generally produces a level yield on the unpaid loan balance. Nonrefundable fees and direct loan origination costs related to loans held for sale are deferred and recognized as a component of the gain or loss on sale. Interest income is accrued principally on a simple interest basis. Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest. Interest accruals are continued for certain small business loans that are processed centrally, consumer loans, credit cards, and one-to-four family residential real estate loans. These loans are charged off or written down to their net realizable value based on delinquency time frames that range from 120 to 270 days, depending on the type of credit that has been extended. Interest accruals are also continued for loans that are both well secured and in the process of collection. For this purpose, loans are considered well F-35 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) secured if they are collateralized by property having a net realizable value in excess of the amount of principal and accrued interest outstanding or are guaranteed by a financially responsible and willing party. Loans are considered "in the process of collection" if collection is proceeding in due course either through legal action or other actions that are reasonably expected to result in the prompt repayment of the debt or in its restoration to current status. When a loan is placed on nonaccrual, all previously accrued but uncollected interest is reversed against current period operating results. All subsequent payments received are first applied to unpaid principal and then to uncollected interest. Interest income is accrued at such time as the loan is brought fully current as to both principal and interest, and, in management's judgment, such loans are considered to be fully collectible. However, Company policy also allows management to continue the recognition of interest income on certain loans designated as nonaccrual. This portion of the nonaccrual portfolio is referred to as "Cash Basis Nonaccrual" loans. This policy only applies to loans that are well secured and in management's judgment are considered to be fully collectible. Although the accrual of interest is suspended, any payments received may be applied to the loan according to its contractual terms and interest income recognized accordingly. Loans are considered impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including interest payments. Impaired loans are carried at the lower of the recorded investment in the loan, the estimated present value of total expected future cash flows, discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement. Excluded from the impairment analysis are large groups of smaller balance homogeneous loans such as consumer and residential mortgage loans. Renegotiated loans are those in which the Company has formally restructured a significant portion of the loan. The remaining portion is normally charged off, with a concession either in the form of below market rate financing, or debt forgiveness on the charged off portion. Loans that have been renegotiated and have not met specific performance standards for payment are classified as renegotiated loans within the classification of nonperforming assets. Upon payment performance, such loans may be transferred from nonperforming status to accrual status. The Company offers two types of leases to customers: 1) direct financing leases where the assets leased are acquired without additional financing from other sources, and 2) leveraged leases where a substantial portion of the financing is provided by debt with no recourse to the Company. Direct financing leases are carried net of unearned income, unamortized nonrefundable fees and related direct costs associated with the origination or purchase of leases. Leveraged leases are carried net of nonrecourse debt. ALLOWANCE FOR CREDIT LOSSES The Company's allowance for credit losses is maintained at a level considered by management to be adequate to absorb estimated credit losses and other credit-related charges. The allowance for credit losses is increased by the provision for credit losses, which is charged against current period operating results and decreased by the amount of credit losses, net of recoveries. Losses are fully or partially charged against the F-36 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) allowance for credit losses when, in management's judgment, the uncollectible portion of a loan's principal balance is determined. While management has segmented the allowance to various credit-related products, the allowance is general in nature and is available for all extension of credits, including off-balance sheet instruments. In evaluating the adequacy of the allowance for credit losses, management estimates the amount of the potential risk of loss for each loan that has been identified as having more than standard credit risk. Those estimates give consideration to general economic conditions and their effects on the borrower's industry, financial and management abilities and to current valuations of collateral where appropriate. An estimate for potential credit loss content is calculated for all loans not so identified based upon the risk characteristics of particular categories of loans and historical loss experience in the portfolio, adjusted, as appropriate, for the estimated effects of current economic conditions. Further consideration for the allocation is based on credit risk concentrations in the portfolio and commitments and contingent obligations under off-balance sheet commercial and standby letters of credit. For analytical purposes only, management attributes portions of the allowance for credit losses to individual loans or groups of loans. Although the allowance for credit losses is allocated to various portfolio segments, it is general in nature and is available for the loan portfolio in its entirety. Although management believes that the allowance for possible credit losses is adequate, future provisions will be subject to continuing evaluation of inherent risk in the loan portfolio and other credit exposures. A loan is considered impaired when management determines that it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Impairment is measured by the difference between the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount) and the estimated present value of total expected future cash flows, discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent. An impairment is recognized by adjusting an allocation of the existing allowance for credit losses. PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful life of each asset. Lives of premises range from ten to forty years; lives of furniture and equipment range from three to eight years. Leasehold improvements are amortized over the term of the respective lease or 10 years, whichever is shorter. OTHER ASSETS Goodwill represents the excess of purchase price over the fair value of identifiable net assets of acquired companies and is reported as intangible assets. Goodwill is amortized using the straight-line method, generally over 15 years. Other real estate owned (OREO) represents the collateral acquired through foreclosure in full or partial satisfaction of the related loan. OREO is recorded at the lower of the loan's unpaid principal balance or its fair value as established by a current appraisal, adjusted for disposition costs. Any writedown at the date of transfer is charged to the allowance for credit losses. On an ongoing basis, OREO values, F-37 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) recorded in other assets, are reviewed annually and any decline in value is recognized as foreclosed asset expense in the current period. The net operating results from these assets are included in the current period in noninterest expense as foreclosed asset expense (income). DERIVATIVE INSTRUMENTS HELD FOR TRADING OR CUSTOMER ACCOMMODATION The Company enters into a variety of interest rate derivative contracts, primarily swaps and options and foreign exchange contracts, which include spot, futures, forward, swap and option positions either for trading purposes, based on management's intent at inception, or as an accommodation to customers. Derivatives held or issued for trading or customer accommodation are carried at fair value, with realized and unrealized changes in fair values on contracts included in noninterest income in the period in which the changes occur. Unrealized gains and losses are reported gross and included in trading account assets and other liabilities, respectively. Cash flows are reported net as operating activities. DERIVATIVE INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING The Company enters into a variety of derivative contracts as a means of reducing the Company's interest rate and foreign exchange exposures. At inception these contracts are evaluated in order to determine if they qualify for hedge accounting treatment and are accounted for either on a deferral, accrual or market value basis, depending on the nature of the Company's hedge strategy and the method used to account for the hedged item. Hedge criteria include demonstrating the manner in which the hedge will reduce risk, identifying the specific asset, liability or firm commitment being hedged, and citing the time horizon being hedged. A monthly evaluation is performed to ensure that continuing correlation exists between the hedge and the item being hedged. Net interest settlements on interest rate swap, cap and floor agreements are recognized on an accrual basis as interest income or expense of the related asset or liability over the lives of the agreements. Premiums paid or received for interest rate caps and floors are amortized either to interest income or to expense of the related asset or liability over the lives of the agreements. If an agreement is terminated early, any resulting gain or loss is deferred and amortized as interest income or expense of the related asset or liability over the remaining life of the original agreement. Net settlement amounts are reported gross as other assets and other liabilities. Cash flows are reported net as operating activities. FOREIGN CURRENCY TRANSLATION Assets, liabilities and results of operations for foreign branches are recorded based on the functional currency of each branch. Since the functional currency of the branches is the local currency, the net assets are remeasured into U.S. dollars using a combination of current and historical exchange rates. The resulting gains or losses are included in shareholders' equity, on a net of tax basis. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES On January 1, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The Statement establishes standards for when transfers of financial assets, including those with continuing F-38 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) involvement by the transferor, should be considered a sale. SFAS No. 125 also establishes standards for when a liability should be considered extinguished. This statement is effective for transfers of assets and extinguishments of liabilities occurring after December 31, 1996 and has been applied prospectively. Certain provisions of SFAS No. 125 have been postponed under SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125". Also see "PENDING ACCOUNTING PRONOUNCEMENTS". INCOME TAXES The Company files consolidated federal and combined state income tax returns. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes. Under this method, the computation of the net deferred tax liability or asset gives current recognition to changes in the tax laws. NET INCOME PER COMMON SHARE Basic earnings per share (EPS) is computed by dividing net income after preferred dividends by the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the dilutive effect of common stock equivalents outstanding on an average basis during the period. Stock options (see Note 12) are a common stock equivalent. The Company adopted the provisions of SFAS No. 128, "Earnings per Share", for the year ended December 31, 1997. As required by the provisions of the Statement, all prior period and interim period EPS data presented have been restated. This Statement simplifies the standards for computing EPS and makes them comparable to international EPS standards. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. In addition, all entities with complex capital structures are required to provide a dual disclosure of basic and diluted EPS on the face of the income statement and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Also see Note 17. COMPREHENSIVE INCOME The Company has retroactively adopted SFAS No. 130, "Reporting Comprehensive Income", which requires that an enterprise report and display, by major components and as a single total, the change in its net assets during the period from non-owner sources. The adoption of this Statement resulted in a change in the financial statement presentation, but did not have an impact on the Company's consolidated financial position, results of operations or cash flows. EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS The Company provides a variety of benefit and incentive compensation plans for eligible employees and retirees. Provisions for the costs of these employee benefit and incentive plans and postretirement benefit plans are accrued and charged to expense when the benefit is earned. F-39 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) STOCK-BASED COMPENSATION The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", on January 1, 1996. SFAS No. 123 establishes accounting and disclosure requirements using a fair value-based method of accounting for stock-based compensation plans. As allowed under the provisions of SFAS No. 123, the Company has chosen to continue to recognize compensation expense using the intrinsic value-based method of valuing stock options prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. Under the intrinsic value-based method, compensation cost is measured as the amount by which the quoted market price of the Company's stock at the date of grant exceeds the stock option exercise price. Compensation cost associated with the Company's unvested restricted stock issued under the management stock plan is measured based on the market price of the stock at the grant date and is expensed over the vesting period. PENDING ACCOUNTING PRONOUNCEMENTS In December 1996, the Financial Accounting Standards Board (FASB) issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", which defers the implementation of SFAS No. 125 for transactions related to repurchase agreements, dollar-roll repurchase agreements, securities lending and similar transactions until January 1, 1998. Management believes that the effect of adoption of SFAS No. 125, for those transactions covered under SFAS No. 127, on the Company's Consolidated Financial Statements will not be material. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. Adoption of this Statement will not impact the Company's consolidated financial position, results of operations, or cash flows, and any effect will be limited to the form and content of its disclosures. The Statement is effective with the year-end 1998 financial statements. F-40 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 2 -- SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities are presented below. SECURITIES AVAILABLE FOR SALE
DECEMBER 31, -------------------------------------------------------------------------------------------------- 1997 1996 ------------------------------------------------ ------------------------------------------------ GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE - ------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- U.S. Treasury............ $ 987,374 $10,793 $ 170 $ 997,997 $1,137,992 $ 4,993 $1,933 $1,141,052 Other U.S. government.... 709,536 6,005 67 715,474 687,717 4,993 779 691,931 Mortgage-backed securities.............. 679,692 3,331 265 682,758 193,531 400 274 193,657 State and municipal...... 90,937 13,236 -- 104,173 101,006 13,749 -- 114,755 Corporate debt securities.............. 2,698 311 1 3,008 -- -- -- -- Equity securities........ 28,881 1,596 672 29,805 19,041 2,553 -- 21,594 Foreign securities....... 5,132 39 -- 5,171 1,136 72 -- 1,208 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total securities available for sale... $2,504,250 $35,311 $1,175 $2,538,386 $2,140,423 $26,760 $2,986 $2,164,197 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SECURITIES HELD TO MATURITY
DECEMBER 31, -------------------------------------------------------------------------------------------------- 1997 1996 ------------------------------------------------ ------------------------------------------------ GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE - ------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- U.S. Treasury............ $ 40,092 $ 1,333 $-- $ 41,425 $ 50,109 $ 1,735 $-- $ 51,844 Other U.S. government.... 99,520 2,568 -- 102,088 139,188 4,412 -- 143,600 Mortgage-backed securities.............. 24,477 1,745 14 26,208 41,985 2,019 68 43,936 State and municipal...... 24,686 75 1,367 23,394 36,914 310 2,199 35,025 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total securities held to maturity.......... $ 188,775 $ 5,721 $1,381 $ 193,115 $ 268,196 $ 8,476 $2,267 $ 274,405 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
F-41 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 2 -- SECURITIES (CONTINUED) The amortized cost and fair value of securities, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties. MATURITY SCHEDULE OF SECURITIES
SECURITIES SECURITIES AVAILABLE FOR SALE HELD TO MATURITY ---------------------- -------------------- DECEMBER 31, 1997 DECEMBER 31, 1997 ---------------------- -------------------- AMORTIZED FAIR AMORTIZED FAIR (DOLLARS IN THOUSANDS) COST VALUE COST VALUE - ---------------------------------------- ---------- ---------- --------- -------- Due in one year or less................. $ 321,459 $ 322,592 $ 22,699 $ 22,801 Due after one year through five years... 2,101,347 2,122,154 150,467 156,069 Due after five years through ten years.................................. 15,950 18,508 2,596 2,536 Due after ten years..................... 36,613 45,327 13,013 11,709 Equity securities....................... 28,881 29,805 -- -- ---------- ---------- --------- -------- Total securities.................... $2,504,250 $2,538,386 $188,775 $193,115 ---------- ---------- --------- -------- ---------- ---------- --------- --------
During the years ended December 31, 1997 and 1996, there were no sales or transfers from the securities held to maturity portfolio. During the quarter ended December 31, 1995, in accordance with guidance issued by the FASB, the Company reclassified from securities held to maturity to securities available for sale approximately $285 million at amortized cost of U.S. Treasury Notes (fair value $285 million) and $64 million at amortized cost of municipal bonds (fair value $72 million). In 1997, proceeds from sales of securities available for sale were $172 million with gross realized gains of $3 million and no gross realized losses. In 1996, proceeds from sales of securities available for sale were $20 million with gross realized gains of $5 million and no gross realized losses. In 1995, proceeds from sales of securities available for sale were $241 million with gross realized gains of $2 million and gross realized losses of $3 million. F-42 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES A summary of loans net of unearned interest and fees of $128 million and $150 million at December 31, 1997 and 1996, respectively, is as follows:
DECEMBER 31, ---------------------------- (DOLLARS IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------- ------------- ------------- Domestic: Commercial, financial and industrial................................... $ 10,747,179 $ 9,495,592 Construction........................................................... 293,333 357,817 Mortgage: Residential.......................................................... 2,961,233 2,960,908 Commercial........................................................... 2,951,807 2,597,616 ------------- ------------- Total mortgage..................................................... 5,913,040 5,558,524 Consumer: Installment.......................................................... 2,090,752 2,063,434 Home equity.......................................................... 992,916 1,113,269 Credit card and other lines of credit................................ 270,097 303,235 ------------- ------------- Total consumer..................................................... 3,353,765 3,479,938 Lease financing........................................................ 874,860 800,048 ------------- ------------- Total loans in domestic offices.................................... 21,182,177 19,691,919 Loans originated in foreign branches..................................... 1,559,231 1,357,868 ------------- ------------- Total loans........................................................ 22,741,408 21,049,787 Allowance for credit losses...................................... 451,692 523,946 ------------- ------------- Loans, net......................................................... $ 22,289,716 $ 20,525,841 ------------- ------------- ------------- -------------
Changes in the allowance for credit losses were as follows:
YEARS ENDED DECEMBER 31, ------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------- ----------- ----------- ----------- Balance, beginning of year..................................... $ 523,946 $ 555,149 $ 563,142 Loans charged off.............................................. (122,779) (119,100) (133,599) Loan loss recoveries........................................... 51,014 48,024 72,403 ----------- ----------- ----------- Total net loans charged off................................ (71,765) (71,076) (61,196) Provision for credit losses.................................... -- 40,000 53,250 Foreign translation adjustment and other net deductions........ (489) (127) (47) ----------- ----------- ----------- Balance, end of year........................................... $ 451,692 $ 523,946 $ 555,149 ----------- ----------- ----------- ----------- ----------- -----------
Nonaccrual loans totaled $109 million and $128 million at December 31, 1997 and 1996, respectively. A significant portion of these loans were real estate related. There were no renegotiated loans at December 31, 1997 and 1996. Interest foregone on loans designated as nonaccrual at December 31, 1997, 1996 and 1995 was $6 million, $9 million and $18 million, respectively. F-43 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 3 -- LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED) LOAN IMPAIRMENT Impaired loans of the Company include commercial, financial and industrial, construction and commercial mortgage loans designated as nonaccrual. When the value of an impaired loan is less than the recorded investment in the loan, a portion of the Company's allowance for credit losses is allocated as an impairment allowance. Effective January 1, 1995, the Company's policy for recognition of interest income, charge-offs of loans, and application of payments on impaired loans is the same as the policy applied to nonaccrual loans. The following table sets forth information about the Company's impaired loans at the dates indicated.
DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------------------------- ---------- ---------- ---------- Impaired loans with an allowance............................................. $ 59,351 $ 69,886 $ 58,584 Impaired loans without an allowance(1)....................................... 49,033 43,962 114,611 ---------- ---------- ---------- Total impaired loans(2).................................................. $ 108,384 $ 113,848 $ 173,195 ---------- ---------- ---------- ---------- ---------- ---------- Allowance for impaired loans................................................. $ 9,418 $ 21,260 $ 15,837 Average balance of impaired loans during the year............................ $ 120,096 $ 145,351 $ 277,955 Interest income recognized on nonaccrual loans during the year............... $ 2,506 $ 4,795 $ 10,685
- ------------ (1) These loans do not require an allowance for credit losses since the fair values of the impaired loans equal or exceed the recorded investments in the loans. (2) This amount was evaluated for impairment using three measurement methods as follows: $27 million, $38 million, and $64 million was evaluated using the present value of the expected future cash flows at December 31, 1997, 1996 and 1995, respectively; $53 million, $45 million, and $95 million was evaluated using the fair value of the collateral at December 31, 1997, 1996 and 1995, respectively; and $28 million, $31 million, and $14 million was evaluated using historical loss factors at December 31, 1997, 1996 and 1995, respectively. RELATED PARTY LOANS The Company in some cases makes loans to related parties including its directors, executive officers and their affiliated companies. At December 31, 1997, related party loans outstanding to individuals who served as directors or executive officers at anytime during the year totaled $38 million as compared to $79 million at December 31, 1996. In the opinion of management, these related party loans were made on substantially the same terms, including interest rates and collateral requirements, as those terms prevailing at the date these loans were made. During 1997 and 1996, there were no loans to related parties which were charged off. Additionally, at December 31, 1997 and 1996, there were no loans to related parties which were nonperforming. F-44 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 4 -- PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation and amortization. As of December 31, 1997 and 1996, the amounts were:
DECEMBER 31, ---------------------------------------------------------------------------------------- 1997 1996 ------------------------------------------- ------------------------------------------- ACCUMULATED ACCUMULATED DEPRECIATION AND NET BOOK DEPRECIATION AND NET BOOK (DOLLARS IN THOUSANDS) COST AMORTIZATION VALUE COST AMORTIZATION VALUE - ------------------------------------ ----------- ----------------- ----------- ----------- ----------------- ----------- Land................................ $ 69,290 $ -- $ 69,290 $ 73,309 $ -- $ 73,309 Premises............................ 253,752 101,997 151,755 264,545 98,785 165,760 Leasehold improvements.............. 135,609 80,019 55,590 124,065 75,264 48,801 Furniture, fixtures and equipment... 400,774 271,110 129,664 362,063 239,312 122,751 ----------- ----------------- ----------- ----------- ----------------- ----------- Total............................. $ 859,425 $ 453,126 $ 406,299 $ 823,982 $ 413,361 $ 410,621 ----------- ----------------- ----------- ----------- ----------------- ----------- ----------- ----------------- ----------- ----------- ----------------- -----------
Rental, depreciation and amortization expense were as follows:
YEARS ENDED DECEMBER 31, ------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------- --------- --------- --------- Rental expense of premises....................................................... $ 46,556 $ 66,189 $ 53,493 Less: rental income.............................................................. 11,049 11,904 11,050 --------- --------- --------- Net rental expense............................................................. $ 35,507 $ 54,285 $ 42,443 --------- --------- --------- --------- --------- --------- Other net rental expense, primarily for equipment................................ $ 298 $ 2,218 $ 2,705 --------- --------- --------- --------- --------- --------- Depreciation and amortization of premises and equipment.......................... $ 53,652 $ 51,821 $ 49,036 --------- --------- --------- --------- --------- ---------
Future minimum operating lease payments are as follows.
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997 - ----------------------------------------------------------------------------------------------- ----------------- Years Ending December 31, 1998....................................................................................... $ 48,156 1999....................................................................................... 46,564 2000....................................................................................... 38,078 2001....................................................................................... 33,793 2002....................................................................................... 23,654 Later years................................................................................ 127,654 -------- Total minimum operating lease payments......................................................... $ 317,899 -------- -------- Minimum rental income due in the future under noncancellable subleases......................... $ 36,349 -------- --------
Included in other liabilities in the accompanying December 31, 1997 Consolidated Balance Sheet is $13 million of future operating lease payments accrued in connection with the Merger (also see Note 7). A majority of the leases provide for the payment of taxes, maintenance, insurance and certain other expenses applicable to the leased premises. Many of the leases contain extension provisions, escalation F-45 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 4 -- PREMISES AND EQUIPMENT (CONTINUED) clauses and purchase options. There are no restrictions on paying dividends, incurring additional debt or negotiating additional leases under the terms of the present lease agreements. NOTE 5 -- DEPOSITS At December 31, 1997, the Company had $155 million in domestic interest bearing time deposits exceeding $100,000 with a remaining term of greater than one year. Maturity information for those deposits is summarized below.
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997 - ------------------------------------------------------------------------------------- ----------------- Due after one year through two years................................................. $ 82,707 Due after two years through three years.............................................. 30,064 Due after three years through four years............................................. 21,854 Due after four years through five years.............................................. 17,642 Due after five years................................................................. 2,681 -------- Total............................................................................ $ 154,948 -------- --------
Substantially all of the foreign interest bearing time deposits exceeding $100,000 mature in less than one year. NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS RETIREMENT PLANS Between April 1, 1996 and December 31, 1996, the Company maintained two retirement plans, one covering former Union Bank employees and the other covering former BanCal Tri-State Corporation employees. Effective January 1, 1997, the Union Bank Retirement Plan was amended and renamed the Union Bank of California, N.A. Retirement Plan (the Plan). In addition, the plan covering former BanCal Tri-State Corporation employees was terminated and all account balances became fully vested. Employees of the former BanCal Tri-State Corporation entered the Plan on January 1, 1997. The Plan is a noncontributory defined benefit plan that provides retirement benefits based on years of credited service and the final average compensation amount, as defined in the Plan. Employees become eligible for this plan after one year of service and become fully vested after five years of service. Prior Bank of California participants received credited service from date of hire for vesting, eligibility and early retirement purposes, but only received service from January 1, 1997 for benefit purposes. The Company's funding policy is to make contributions equal to the maximum deductible amount as allowed by the Internal Revenue Code. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future. Plan assets are invested in U.S. government securities, corporate bonds, and commingled investment funds. F-46 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) The following sets forth the funded status of the Plan and the amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1997 and 1996.
DECEMBER 31, ------------------------ (DOLLARS IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------------ ----------- ----------- Accumulated benefit obligation: Actuarial present value of benefits for services rendered to date: Vested.................................................................... $ (297,646) $ (241,188) Non-vested................................................................ (30,858) (27,821) ----------- ----------- Total................................................................... $ (328,504) $ (269,009) ----------- ----------- ----------- ----------- Projected benefit obligation.................................................. $ (400,958) $ (323,646) Fair value of plan assets..................................................... 460,501 381,194 ----------- ----------- Projected benefit obligation less than plan assets.......................... 59,543 57,548 Prior service cost not yet recognized in net periodic pension cost............ 12,915 5,165 Unrecognized net gain due to change of assumptions and experience different from assumptions made........................................................ (37,717) (29,660) Unrecognized transition asset at January 1, 1986, being recognized over 13.4 years........................................................................ (210) (359) ----------- ----------- Prepaid pension costs included in other assets.......................... $ 34,531 $ 32,694 ----------- ----------- ----------- -----------
The following items are components of net pension expense.
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - -------------------------------------------------------------------- ---------- ---------- ---------- Service cost -- present value of benefits earned.................... $ 20,667 $ 12,651 $ 10,516 Interest cost on projected benefit obligation....................... 25,049 22,043 19,637 Less return on plan assets: Actual gain....................................................... (66,819) (44,210) (63,304) Gains in excess of expected return on plan assets................. 39,700 20,333 42,286 ---------- ---------- ---------- Expected return on plan assets.................................. (27,119) (23,877) (21,018) Amortization of prior service cost.................................. 3,175 2,108 2,108 Amortization of transition asset.................................... (149) (149) (149) ---------- ---------- ---------- Net pension expense............................................. $ 21,623 $ 12,776 $ 11,094 ---------- ---------- ---------- ---------- ---------- ----------
F-47 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) The following summarizes the assumptions used in computing the present value of the accumulated benefit obligation, the present value of the projected benefit obligation and the net pension expense.
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Discount rate in determining expense.......................................... 7.50% 7.50% 7.50% Discount rate in determining benefit obligations at year end.................. 7.00 7.50 7.50 Rate of increase in future compensation levels for determining expense........ 5.50 5.50 5.50 Rate of increase in future compensation levels for determining benefit obligations at year end...................................................... 5.00 5.50 5.50 Expected return on plan assets................................................ 8.25 8.25 8.25
The former BanCal Tri-State Corporation retirement plan, which was terminated effective January 1, 1997, was a defined contribution plan. The Company's expense for pension contributions for the years ended December 31, 1996 and 1995 was $5 million and $6 million, respectively. EXECUTIVE SUPPLEMENTAL BENEFIT PLANS The Company has several Executive Supplemental Benefit Plans (ESBP) which provide eligible employees with supplemental retirement benefits. The plans are unfunded. The accrued liability for ESBP's included in other liabilities in the Consolidated Balance Sheets was $39 million at December 31, 1997 and $35 million at December 31, 1996. The Company's expense relating to the ESBP's was $4 million for each of the years ended December 31, 1997 and 1996 and $3 million for the year ended December 31, 1995. SECTION 401(K) SAVINGS PLANS The Company has a defined contribution plan authorized under Section 401(k) of the Internal Revenue Code. All benefits-eligible employees with at least one year of service are eligible to participate in the plan. Employees may contribute up to 16 percent of their pre-tax covered compensation or up to 10 percent of their after-tax covered compensation through salary deductions. The Company contributes 50 percent of every pre-tax dollar an employee contributes up to the first 6 percent of the employee's pre-tax covered compensation. Effective January 1, 1997, employees are fully vested in the employer's contributions immediately. In addition, the Company may make a discretionary annual profit-sharing contribution up to 2.5 percent of an employee's pay. This profit-sharing contribution is for all eligible employees, regardless of whether an employee is participating in the 401(k) plan, and depends on the Bank's annual financial performance. All employer contributions are tax deductible by the Company. The Company's combined matching contribution expense was $13 million, $9 million and $9 million for the years ended December 31, 1997, 1996 and 1995, respectively. F-48 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) OTHER POSTRETIREMENT BENEFITS The Company provides certain health care and life insurance benefits for its retired employees. The health care cost is shared between the Company and the retiree. The life insurance plan is noncontributory. The accounting for the health care plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's intent to maintain a level of cost-sharing at approximately 25 percent. Assets set aside to cover such obligations are primarily invested in mutual funds. The following table sets forth the plan's combined funded status recognized.
DECEMBER 31, -------------------------- (DOLLARS IN THOUSANDS) 1997 1996 - --------------------------------------------------------------------------- ------------ ------------ Accumulated postretirement benefit obligation: Retirees................................................................. $ (48,519) $ (48,747) Fully eligible plan participants......................................... (12,208) (11,876) Other active plan participants........................................... (18,581) (19,651) ------------ ------------ Accumulated postretirement obligation.................................. (79,308) (80,274) Fair value of plan assets.................................................. 31,136 21,703 ------------ ------------ Accumulated postretirement obligation in excess of plan assets........... (48,172) (58,571) Unrecognized net gain due to change in assumption and experience different from assumptions made..................................................... (21,119) (14,829) Unrecognized transition obligation......................................... 59,813 63,800 ------------ ------------ Accrued postretirement benefit cost.................................... $ (9,478) $ (9,600) ------------ ------------ ------------ ------------
The following table sets forth the components of postretirement benefit expense.
YEARS ENDED DECEMBER 31, ---------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------ ------------ ------------ ------------ Service cost................................................ $ 3,123 $ 1,741 $ 1,792 Interest cost............................................... 5,150 5,581 6,091 Actual return on plan assets................................ (4,445) (2,590) (3,337) Net amortization and deferral............................... 4,826 4,397 5,559 ------------ ------------ ------------ Net periodic postretirement benefit cost.................. $ 8,654 $ 9,129 $ 10,105 ------------ ------------ ------------ ------------ ------------ ------------ Postretirement benefit claims paid for the year............. $ 3,787 $ 3,808 $ 5,309 ------------ ------------ ------------ ------------ ------------ ------------
The unrecognized transition obligation recorded on January 1, 1993 is being amortized over 20 years. For 1997, the Company assumed a 9 percent annual rate of increase in the per capita cost of postretirement medical benefits for the indemnity plan and a 4 percent annual rate of increase was assumed for the health maintenance organization (HMO) plan. For future periods, the rate for the indemnity plan was expected to gradually decrease from 9 percent to 5.5 percent in 2007 and remain at F-49 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 6 -- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) that level thereafter. The rate for the HMO plan was expected to increase after one year of being at a low rate and then gradually decrease to 5.5 percent in the year 2007 and thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by $11 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $1 million. For 1996, the Company assumed a 9 percent annual rate of increase in the per capita cost of postretirement medical benefits for the indemnity plan and a 4 percent annual rate of increase was assumed for the HMO plan. For future periods the assumed rate for the indemnity plan gradually decreased from 9 percent to 5.5 percent in 2007 and remained level thereafter. The assumed rate of change on the HMO plan increased to 7 percent in 1997 and then gradually decreased to 5.5 percent in the year 2007 and thereafter. For 1995, the former Union Bank assumed a 9 percent annual rate of increase in the per capita cost of postretirement medical benefits for the indemnity plan and a 4 percent annual rate of increase was assumed for the HMO plan. For future periods the assumed rate for the indemnity plan gradually decreased from 9 percent to 5.5 percent in 2007 and remained level thereafter. The assumed rate of change on the HMO plan increased for the remainder of the decade, then gradually decreased to 5.5 percent in the year 2007 and thereafter. For 1995, former BanCal Tri-State Corporation assumed an 11.5 percent annual rate of increase in the per capita cost of postretirement medical benefits for the indemnity plan. For future periods, the assumed rate for the indemnity plan gradually decreased from 11.5 percent to 5.5 percent in 2003 and remained level thereafter. The discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 7.00% as of December 31, 1997 and 7.50% as of December 31, 1996 and 1995. The estimated rate of return on plan assets was 8.00% as of December 31, 1997, 1996 and 1995. F-50 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 7 -- OTHER EXPENSES The detail of other expenses is as follows:
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------- ---------- ---------- ---------- Communications..................................................... $ 42,372 $ 40,133 $ 35,806 Credit card processing............................................. 42,274 37,091 31,288 Advertising and public relations................................... 28,664 28,788 20,911 Professional services.............................................. 28,075 24,342 26,197 Data processing.................................................... 25,973 22,140 18,557 Printing and office supplies....................................... 24,098 27,085 22,626 Regulatory assessments............................................. 5,778 4,048 23,431 Other.............................................................. 129,251 114,400 117,908 ---------- ---------- ---------- Total other expenses........................................... $ 326,485 $ 298,027 $ 296,724 ---------- ---------- ---------- ---------- ---------- ----------
Merger and integration expense of $6 million and $117 million, as summarized in the following table, was incurred in 1997 and 1996, respectively, in connection with the Merger.
YEARS ENDED DECEMBER 31, --------------------- (DOLLARS IN THOUSANDS) 1997 1996 - --------------------------------------------------------------------------------- --------- ---------- Balance, accrued merger and integration expense, beginning of period............. $ 54,344 $ -- Provision for merger and integration costs....................................... 6,037 117,464 Utilization: Cash........................................................................... 35,809 40,155 Noncash........................................................................ 1,642 22,965 --------- ---------- Total utilization............................................................ 37,451 63,120 --------- ---------- Balance, accrued merger and integration expense, end of period................... $ 22,930 $ 54,344 --------- ---------- --------- ----------
Total merger and integration expense of $124 million was recorded to cover $38 million of personnel expense for severance, retention and other employee related costs, $54 million for facilities expense related to redundant banking facilities, and $32 million in professional services and other expense. At December 31, 1997, the liability balance included amounts primarily for severance payments that are being paid on a periodic basis and for operating lease payments related to redundant banking facilities which are continuing over the expected term of the leases. F-51 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 8 -- INCOME TAXES The components of income tax expense were as follows:
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------- ---------- ---------- ---------- Taxes currently payable: Federal.......................................................... $ 168,375 $ 86,159 $ 96,732 State............................................................ 8,441 23,180 42,356 Foreign.......................................................... 2,092 2,895 3,430 ---------- ---------- ---------- Total currently payable........................................ 178,908 112,234 142,518 ---------- ---------- ---------- Taxes deferred: Federal.......................................................... 49,437 47,575 34,839 State............................................................ 10,499 3,455 16,005 Foreign.......................................................... (122) (372) (3) ---------- ---------- ---------- Total deferred................................................. 59,814 50,658 50,841 ---------- ---------- ---------- Total income tax expense....................................... $ 238,722 $ 162,892 $ 193,359 ---------- ---------- ---------- ---------- ---------- ----------
The components of the net deferred tax balances of the Company were as follows:
DECEMBER 31, ---------------------- (DOLLARS IN THOUSANDS) 1997 1996 - -------------------------------------------------------------------------------- ---------- ---------- Deferred tax assets: Allowance for credit losses................................................... $ 169,769 $ 195,128 Accrued income & expense...................................................... 21,987 31,964 Accrued merger expense........................................................ 15,641 22,051 Deferred state taxes.......................................................... 21,063 13,572 Other......................................................................... 7,585 2,567 ---------- ---------- Total deferred tax assets................................................... 236,045 265,282 ---------- ---------- Deferred tax liabilities: Leasing....................................................................... 297,891 276,922 Depreciation.................................................................. 17,192 13,809 Unrealized gain on securities available for sale.............................. 13,536 9,711 ---------- ---------- Total deferred tax liabilities.............................................. 328,619 300,442 ---------- ---------- Net deferred tax liability................................................ $ 92,574 $ 35,160 ---------- ---------- ---------- ----------
F-52 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 8 -- INCOME TAXES (CONTINUED) The following table is an analysis of the effective tax rate.
YEARS ENDED DECEMBER 31, --------------- 1997 1996 1995 --- --- --- Federal income tax rate..................................... 35% 35% 35% Net tax effects of: State income taxes, net of federal income tax benefit..... 2 4 5 Tax-exempt interest income................................ (1) (1) (1) Amortization of intangibles............................... 1 1 1 Other..................................................... -- 1 (2) --- --- --- Effective tax rate...................................... 37% 40% 38% --- --- --- --- --- ---
During 1997 the Company received a refund from the State of California Franchise Tax Board of approximately $25 million (net of federal taxes of $17 million) in settlement of litigation, administration and audit disputes covering the years 1975-1987. The refund was recorded as a reduction to state income tax expense. Federal and state tax returns for several years are under or subject to examination by the respective taxing authorities. Although the ultimate outcome of such examinations cannot be determined at this time, management believes that the resolution of issues that have been or may be raised will not have a material adverse effect on the Company's consolidated financial position or results of operations. F-53 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 9 -- BORROWED FUNDS The following is a summary of the major categories of borrowed funds.
DECEMBER 31, ------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 - ---------------------------------------- -------------- -------------- Federal funds purchased and securities sold under repurchase agreements with weighted average interest rates of 5.38% and 5.09% at December 31, 1997 and 1996, respectively................. $ 1,335,884 $ 1,322,654 Commercial paper, with weighted average interest rates of 5.64% and 5.34% at December 31, 1997 and 1996, respectively........................... 966,575 1,495,463 Other borrowed funds, with weighted average interest rates of 6.23% and 5.66% at December 31, 1997 and 1996, respectively........................... 476,010 749,422 -------------- -------------- Total borrowed funds................ $ 2,778,469 $ 3,567,539 -------------- -------------- -------------- --------------
Federal funds purchased and securities sold under repurchase agreements: Maximum outstanding at any month end................................. $ 1,575,930 $ 1,322,654 Average balance during the year....... 1,097,707 933,433 Weighted average interest rate during the year............................ 5.33% 5.05% Commercial paper: Maximum outstanding at any month end................................. $ 1,876,135 $ 1,854,576 Average balance during the year....... 1,637,070 1,620,087 Weighted average interest rate during the year............................ 5.49% 5.40% Other borrowed funds: Maximum outstanding at any month end................................. $ 851,694 $ 1,697,236 Average balance during the year....... 635,900 1,119,051 Weighted average interest rate during the year............................ 5.42% 5.59%
F-54 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 10 -- SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK The following is a summary of capital notes which are subordinated to other obligations of the Company.
DECEMBER 31, ---------------------- (DOLLARS IN THOUSANDS) 1997 1996 - -------------------------------------------------------------------------------- ---------- ---------- Floating rate notes due June 2007. These notes bear interest at 0.325% above 3-month London Interbank Offered Rate (LIBOR) and are payable to the holder of the note (BTM at December 31, 1997)............................................ $ 200,000 $ -- Floating rate notes due July 2000. These notes bear interest at 0.30% above 3-month LIBOR.................................................................. 98,000 98,000 Floating rate notes due July 1997 and July 1998. These notes bear interest at 0.25% above 3-month LIBOR and are payable to BTM............................... 50,000 100,000 8.00% fixed rate notes due February 2002. The notes were called at par on February 25, 1997.............................................................. -- 100,000 6.67% fixed rate notes due August 2002. The notes were called at par on August 20, 1997....................................................................... -- 50,000 Fixed rate and floating rate notes matured in October 1997, with $23,000 bearing interest at fixed rates of 10.05% to 10.14% and notes totaling $11,000 bearing interest at 0.375% above 3-month LIBOR......................................... -- 34,000 ---------- ---------- Total subordinated capital notes............................................ $ 348,000 $ 382,000 ---------- ---------- ---------- ----------
All of the above notes qualify as Tier 2 risk-based capital under the Federal Reserve guidelines for assessing regulatory capital. For the total risk-based capital ratio, the amount of notes which qualify as capital is reduced as the notes approach maturity. At December 31, 1997 and 1996, $239 million and $219 million, respectively, of the notes qualified as risk-based capital. Provisions of several of the notes restrict the use of the Company's property as security for borrowings, and place limitations on leases, indebtedness, distributions to shareholders, mergers, sales of certain assets, transactions with affiliates and changes in majority stock ownership of the Company. The following table presents the maturities of subordinated capital notes.
(DOLLARS IN THOUSANDS) DECEMBER 31, 1997 - --------------------------------------------------------------------------- ----------------- Years ending December 31, 1998..................................................................... $ 50,000 2000..................................................................... 98,000 Years after 2002......................................................... 200,000 -------- Total.................................................................. $ 348,000 -------- --------
At December 31, 1996, the Company had outstanding 1,350,000 shares (or 5,400,000 depositary shares) of 8 3/8% Noncumulative Preferred Stock, Series A (Preferred Stock) totaling $135 million. On September 3, 1997, the Company redeemed all 1,350,000 outstanding shares of its Preferred Stock, reducing shareholders' equity by $135 million. The redemption price was equal to the stated value of $100 per share of Preferred Stock (equivalent to $25 per depositary share), plus $2 million in accrued and F-55 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 10 -- SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK (CONTINUED) unpaid dividends to the redemption date. The redemption was funded by proceeds from the issuance of $200 million in subordinated capital notes in June 1997. NOTE 11 -- DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The Company has a dividend reinvestment and stock purchase plan for shareholders. The plan allows shareholders to automatically reinvest all or part of their dividends in additional shares of the Company's common stock at a cost of 5 percent below the market price. Participating shareholders also have the option of purchasing additional shares at the full market price with cash payments of $25 to $3,000 per quarter. The Company obtains shares required for reinvestment through open market purchases or by the issuance of new shares from its authorized but unissued stock. During 1997, 1996 and 1995, 43,709, 51,908 and 620,678 shares, respectively, were required for dividend reinvestment purposes, of which 1,229, 23,902 and 620,678 shares were considered new issuances during 1997, 1996 and 1995, respectively. BTM discontinued its participation in the plan after the quarter ended March 31, 1995 and did not participate in the plan as of December 31, 1997. NOTE 12 -- MANAGEMENT STOCK PLAN The Company has a management stock plan (the Stock Plan) which has 2,200,000 shares of the Company's common stock authorized to be awarded to key employees and outside directors of the Company and its subsidiaries at the discretion of the Executive Compensation and Benefits Committee of the Board of Directors (the Committee). The combined number of shares that are granted under the Stock Plan cannot exceed 2,200,000 shares of the Company's common stock. Committee members and employees on rotational assignment from BTM are not eligible for stock awards. The Committee determines the term of each stock option grant, up to a maximum of ten years from the date of grant. The exercise price of the options issued under the Stock Plan shall not be less than the fair market value on the date the option is granted. Unvested restricted stock issued under the Stock Plan is shown as a reduction to retained earnings. The value of the restricted shares at the date of grant is amortized to compensation expense over its vesting period. All cancelled or forfeited options and restricted stock become available for future grants. In 1997, 1996 and 1995, the Company granted options to various key employees, including principal officers, under the Stock Plan. The stock options vest pro rata on each anniversary of the grant date and become fully exercisable three years from the grant date, provided that the employee has completed the specified continuous service requirement. They vest earlier if the employee dies, is permanently and totally disabled, or retires under certain grant, age and service conditions. F-56 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED) The following is a summary of stock option transactions under the Stock Plan.
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------ ------------------------------ ------------------------------ NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ----------- ----------------- ----------- ----------------- ----------- ----------------- Options outstanding, beginning of year.... 421,269 $ 36.38 360,702 $ 31.25 246,834 $ 29.82 Granted............. 147,300 66.38 92,400 54.88 129,700 33.75 Exercised........... (96,343) 32.53 (26,832) 32.06 (15,832) 29.49 Forfeited........... (6,500) 66.38 (5,001) -- -- -- ----------- ----------- ----------- Options outstanding, end of year.......... 465,726 $ 46.24 421,269 $ 36.38 360,702 $ 31.25 ----------- ----------- ----------- ----------- ----------- ----------- Options exercisable, end of year.......... 237,369 $ 34.49 228,715 $ 31.15 135,822 $ 29.34 ----------- ----------- ----------- ----------- ----------- -----------
The weighted-average fair value of options granted was $20.82 during 1997, $18.01 during 1996, and $9.38 during 1995. The following table summarizes information about stock options outstanding.
OPTIONS OUTSTANDING AT DECEMBER 31, 1997 OPTIONS EXERCISABLE AT ------------------------------------------------ DECEMBER 31, 1997 WEIGHTED-AVERAGE ------------------------------ RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ------------------- ----------- ---------------- ----------------- ----------- ----------------- $20.00 - 27.25 89,136 5.0 years $ 25.02 89,136 $ 25.02 33.75 - 38.50 152,038 6.2 35.29 116,289 35.76 54.88 83,752 7.7 54.88 27,944 54.88 66.38 140,800 9.1 66.38 4,000 66.38 ----------- ----------- 465,726 237,369 ----------- ----------- ----------- -----------
In 1997, 1996 and 1995, the Company also granted 59,440, 44,480 and 77,070 shares, respectively, of restricted stock to key officers, including executive officers, under the Stock Plan. The awards of restricted stock vest pro rata on each anniversary of the grant date and become fully vested four years from the grant date, provided that the employee has completed the specified continuous service requirement. They vest earlier if the employee dies, is permanently and totally disabled, or retires under certain grant, age and service conditions. Restricted shareholders have the right to vote their restricted shares and receive dividends. F-57 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED) The following is a summary of restricted stock transactions under the Stock Plan.
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------ ------------------------------ ------------------------------ WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF GRANT DATE NUMBER OF GRANT DATE NUMBER OF GRANT DATE SHARES FAIR VALUE SHARES FAIR VALUE SHARES FAIR VALUE ----------- ----------------- ----------- ----------------- ----------- ----------------- Restricted stock awards outstanding, beginning of year............... 388,940 $ 30.12 348,317 $ 26.96 272,536 $ 24.74 Granted.............. 59,440 66.54 44,480 54.88 77,070 34.84 Cancelled............ (2,641) 60.24 (3,857) 32.33 (1,289) 29.15 ----------- ----------- ----------- Restricted stock awards outstanding, end of year.................. 445,739 $ 34.78 388,940 $ 30.12 348,317 $ 26.96 ----------- ----------- ----------- ----------- ----------- ----------- Restricted stock awards vested, end of year... 314,246 $ 27.50 254,890 $ 25.06 189,483 $ 23.43 ----------- ----------- ----------- ----------- ----------- -----------
At December 31, 1997, 1996 and 1995, 1,121,862, 319,461 and 447,483 shares, respectively, were available for future grants as either stock options or restricted stock under the Stock Plan. The Company follows the intrinsic value based method in accounting for its employee stock-based compensation plan. Accordingly, no compensation cost has been recognized for its stock option grants. Had compensation cost for the Company's stock-based plan been determined based on the fair value at the grant dates for awards under that plan consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income and net income per share would have decreased to the pro forma amounts indicated in the following table. Options that were granted prior to January 1, 1995 with vesting periods in 1995 and later are excluded from the pro forma results indicated for 1996 and 1995 in the following table.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 - ------------------------------------------------------------------------- ---------- ---------- ---------- Net income............................................... As reported $ 411,296 $ 249,458 $ 312,942 Pro forma 410,068 248,874 312,691 Net income applicable to common stock(1)................. As reported $ 403,696 $ 238,152 301,637 Pro forma 402,468 237,568 301,386 Net income per common share -- basic(1).................. As reported $ 6.93 $ 4.10 $ 5.21 Pro forma 6.91 4.09 5.20 Net income per common share -- diluted(1)................ As reported $ 6.91 $ 4.09 $ 5.20 Pro forma 6.89 4.08 5.19
- ------------ (1) Amounts restated to give retroactive effect to the exchange referred to in Note 1 of the accompanying notes to Consolidated Financial Statements. F-58 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 12 -- MANAGEMENT STOCK PLAN (CONTINUED) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants made in 1997, 1996 and 1995: risk-free interest rates of 6.6% in 1997, 6.3% in 1996 and 7.1% in 1995; expected volatility of 26% in 1997, 28% in 1996 and 28% in 1995; expected lives of 6, 7 and 7 years for 1997, 1996 and 1995, respectively, and expected dividend yields of 2.1% in 1997, 2.6% in 1996 and 4.2% in 1995. Effective January 1, 1997, the Company established a Performance Share Plan. Eligible participants may earn performance share awards to be redeemed in cash three years after the date of grant. Performance shares are linked to shareholder value in two ways: (1) the market price of the Company's common stock, and (2) return on assets, a performance measure closely linked to value creation. Eligible participants generally receive grants of performance shares annually. The total number of performance shares granted under the plan cannot exceed 200,000 and in 1997 the Company granted 4,800 shares. The value of a performance share is equal to the market price of the Company's common stock. All cancelled or forfeited performance shares become available for future grants. NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. All of the fair values presented below have been made under this definition of fair value unless otherwise disclosed. It is management's belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of December 31, 1997 and 1996, as more fully described below. It should be noted that the operations of the Company are managed on a going concern basis and not a liquidation basis. As a result, the ultimate value realized for the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of an institution's inherent value is its capitalization and franchise value. Neither of these components have been given consideration in the presentation of fair values which follow. F-59 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The table below presents the carrying value and fair value of the specified assets and liabilities held by the Company.
DECEMBER 31, ------------------------------------------------------------ 1997 1996 ----------------------------- ----------------------------- (DOLLARS IN THOUSANDS) CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE - --------------------------------------------------- -------------- ------------- -------------- ------------- ASSETS Cash and cash equivalents.......................... $ 3,199,455 $ 3,199,455 $ 3,937,697 $ 3,937,697 Trading account assets............................. 394,313 394,313 465,782 465,782 Securities available for sale...................... 2,538,386 2,538,386 2,164,197 2,164,197 Securities held to maturity........................ 188,775 193,115 268,196 274,405 Loans, net of allowance for credit losses.......... 22,289,716 22,511,510 20,525,841 20,803,651 LIABILITIES Deposits: Noninterest bearing.............................. 8,849,544 8,849,544 7,655,109 7,655,109 Interest bearing................................. 14,446,830 14,453,029 13,877,851 13,885,504 -------------- ------------- -------------- ------------- Total deposits................................. 23,296,374 23,302,573 21,532,960 21,540,613 Borrowed funds..................................... 2,778,469 2,775,531 3,567,539 3,567,836 Subordinated capital notes......................... 348,000 348,000 382,000 388,388
The Company is also a party to financial instruments that are not reflected on the balance sheet but represent obligations of the Company in the normal course of business. For information regarding the fair value of off-balance sheet financial instruments, see Note 14. The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate that value. CASH AND CASH EQUIVALENTS: The book value of cash and cash equivalents is considered a reasonable estimate of fair value. TRADING ACCOUNT ASSETS: Trading account assets are short term in nature and valued at market based on quoted market prices or dealer quotes. If a quoted market price is not available, the recorded amounts are estimated using quoted market prices for similar securities. Thus, carrying value is considered a reasonable estimate of fair value for these financial instruments. SECURITIES: The fair value of securities is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Available for sale securities are carried at their aggregate fair value, while held to maturity securities are carried at amortized cost. LOANS: The fair value for performing fixed and non-reference rate loans was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities and where available, discount rates were based on current market rates. F-60 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The fair value of performing loans tied to the Company's reference rate with normal credit risk is assumed to approximate their book value. The fair value for these floating rate loans with increasing credit risk was estimated by calculating their present value using a yield the Company would currently require for loans with similar terms to borrowers with similar credit quality. Loans which are on nonaccrual status were not included in the loan valuation methods discussed previously. The fair value of these assets was estimated assuming these loans were sold on a liquidation basis. The fair value of performing mortgage loans was based on quoted market prices for loans with similar credit and interest rate risk characteristics. The fair value of performing credit card loans and credit lines is assumed to approximate their book value. The fair value was estimated for credit card loans and credit lines which were past due at December 31, 1997 and 1996 by segregating them according to their past due status and then discounting them based on the Company's historical probability of loss. NONINTEREST BEARING DEPOSITS: The fair value of noninterest bearing deposits is the amount payable on demand at the reporting date. The fair value of the demand deposit intangible has not been estimated. INTEREST BEARING DEPOSITS: The fair value of savings accounts and certain money market accounts is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit was estimated using rates currently being offered on certificates with similar maturities. BORROWED FUNDS: The book values of federal funds purchased, securities sold under repurchase agreements and other short-term borrowings are assumed to approximate their fair value due to their limited duration characteristics. The fair value for commercial paper and term federal funds purchased was estimated using market quotes. SUBORDINATED CAPITAL NOTES: The fair value of fixed-rate subordinated capital notes was estimated using discounted cash flows based on market rates for A-rated bank borrowings. The book values for variable-rate subordinated capital notes are assumed to approximate fair market value. NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to certain derivative and other financial instruments that are not reflected on the balance sheet but represent obligations or assets of the Company in the normal course of business. These financial instruments are used for trading activities of the Company, to meet the needs of customers and to reduce the impact on the Company's operating results due to market fluctuations in currency or interest rates. These financial instruments involve, to varying degrees, elements of credit and market risk which are not recognized on the balance sheet. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract which exceeds the value of the existing collateral, if any. Market risk is the possibility that future changes in market conditions may make the financial instrument less valuable. F-61 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) DERIVATIVE INSTRUMENTS The fair value of the derivative financial instruments was calculated based on quoted market prices where available or if quoted market prices were not available, the Company used the estimated amount it would receive or pay to offset or terminate the agreements at December 31, 1997 based upon the terms of such contracts relative to prevailing interest rates. TRADING ACTIVITIES IN DERIVATIVE INSTRUMENTS The following table reflects the Company's positions relating to trading activities in derivative instruments. Trading activities include both activities for the Company's own account and for customers. At December 31, 1997 and 1996, the majority of the Company's derivative transactions for customers are hedged with essentially offsetting contracts with other counterparties. The average fair value of derivatives held or written for trading purposes during the year is not significant. The notional amount of derivative instruments reflects the extent of the Company's involvement in these instruments. For interest rate swap, cap and floor agreements, notional amounts do not represent exposure to credit or market risk. Notional amounts are not exchanged, but serve as a point of reference for calculating payments. The following is a summary of derivative instruments held or written for trading purposes.
DECEMBER 31, ---------------------------------------------------------------------- 1997 1996 ----------------------------------- --------------------------------- NOTIONAL CREDIT ESTIMATED NOTIONAL CREDIT ESTIMATED (DOLLARS IN THOUSANDS) AMOUNTS RISK(1) FAIR VALUE AMOUNTS RISK(1) FAIR VALUE - --------------------------------------------------- ----------- --------- ----------- --------- --------- ----------- HELD OR WRITTEN FOR TRADING PURPOSES AND CUSTOMER ACCOMMODATIONS Foreign exchange forward contracts: Commitments to purchase.......................... $ 531,330 $ 366 $ (34,304) $ 403,602 $ 2,813 $ (11,735) Commitments to sell.............................. 709,512 40,671 40,274 530,923 18,958 14,759 Foreign exchange OTC options: Options purchased................................ 46,533 -- (634) -- -- -- Options written.................................. 46,533 637 637 -- -- -- Currency swap agreements: Commitments to pay............................... 55,725 -- (5,971) 64,817 4,821 3,193 Commitments to receive........................... 55,725 5,971 5,971 38,417 1,628 1,595 Interest rate contracts: Caps purchased................................... 1,189,791 796 796 994,605 1,858 1,837 Floors purchased................................. 119,000 612 612 147,250 1,149 1,149 Caps written..................................... 1,189,791 -- (796) 994,605 21 (1,838) Floors written................................... 119,000 -- (612) 147,250 -- (1,149) Swap contracts: Pay variable/receive variable.................. 58,000 301 -- 10,000 28 1 Pay fixed/receive variable..................... 976,180 364 (29,579) 788,165 1,064 (17,592) Pay variable/receive fixed..................... 976,180 30,240 29,926 788,165 19,623 18,674
- --------------- (1) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. F-62 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) ASSET AND LIABILITY MANAGEMENT DERIVATIVE INSTRUMENTS Derivative positions are integral components of the Company's designated asset and liability management activities. Therefore, the Company does not believe it is meaningful to separately analyze the derivatives component of its risk management activities in isolation from related positions. The Company uses interest rate derivative instruments as part of its management of asset and liability positions. Derivatives are used to manage interest rate risk relating to specified groups of assets and liabilities, including LIBOR based commercial loans, deposit liabilities and certain subordinated capital notes. The Company uses foreign currency forward contracts as a means of managing foreign exchange rate risk associated with assets or liabilities denominated in foreign currencies. The following table reflects summary information on derivative contracts used to hedge or modify the Company's risk as of December 31, 1997 and 1996. Amounts included in the fair value column do not include gains or losses from changes in the value of the underlying asset or liability being hedged. Notional amounts are not exchanged, but serve as a point of reference for calculating payments. For interest rate swap, cap and floor agreements, notional amounts do not represent exposure to credit or market risk.
DECEMBER 31, ------------------------------------------------------------------------------------------------------ 1997 1996 -------------------------------------------------- -------------------------------------------------- UNAMORTIZED UNAMORTIZED NOTIONAL PREMIUM PAID CREDIT ESTIMATED NOTIONAL PREMIUM PAID CREDIT ESTIMATED (DOLLARS IN THOUSANDS) AMOUNTS (RECEIVED) RISK(1) FAIR VALUE AMOUNTS (RECEIVED) RISK(1) FAIR VALUE - -------------------------- ----------- ------------- --------- ----------- ----------- ------------- --------- ----------- HELD FOR ASSET AND LIABILITY MANAGEMENT PURPOSES Foreign exchange forward contracts: Commitments to purchase.............. $ 341,298 $ -- $ 862 $ (5,055) $ 129,264 $ -- $ 1,628 $ (2,286) Commitments to sell..... 51,754 -- 35 (822) 4,142 -- 52 22 Currency swap agreements: Commitments to pay...... 26,400 -- 2,590 2,590 -- -- -- -- Interest rate contracts: Caps purchased.......... 15,420 -- -- -- 15,740 -- -- -- Floors purchased........ 3,550,000 11,730 4,040 15,770 2,050,000 6,309 9,750 16,059 Caps written............ 250,000 (335) 273 (62) 250,000 (709) -- (200) Floors written.......... 1,850,000 (534) -- (1,843) 500,000 (1,016) -- (625) Swap contracts: Pay fixed/receive variable............ -- -- -- -- 114,086 -- 241 (851) Pay variable/receive fixed............... 575,000 -- 2,302 2,302 847,000 -- 3,775 2,398
- --------------- (1) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by counterparties. F-63 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Commitments to extend credit are legally binding agreements to lend to a customer provided there are no violations of any condition established in the contract. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee or maintenance of compensatory balances. Such fees are deferred and, upon partial or full exercise of the commitment, amortized over the life of the loan or, if exercise is deemed remote, amortized over the commitment period. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. With respect to commitments to extend credit and letters of credit, the Company's exposure to credit risk in the event of nonperformance by customers is represented by the contractual amount of those instruments. Standby letters of credit are provided to customers to assure their performance to a third party, generally in the production of goods and services or under contractual commitments in the financial markets. Commercial letters of credit are issued to customers to facilitate foreign or domestic trade transactions. The Company charges fees for the issuance of standby and commercial letters of credit. The majority of these type of commitments have terms of one year or less and any fees charged are recognized as noninterest income upon extension of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers and is represented by the contractual amount of those instruments. When deemed necessary, the Company holds appropriate collateral supporting those commitments. Management does not anticipate any material losses as a result of these transactions. The Company uses the same credit underwriting policies in granting or accepting such commitments or contingent obligations as it does for on-balance sheet instruments, by evaluating customers' credit-worthiness. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's evaluation of the customer. The nature of the collateral varies but may include deposits held in financial institutions, marketable securities, accounts receivable, inventory, property, equipment and real estate. The Company also provides for potential losses from either commitments to extend credit or standby letters of credit as a component of its evaluation in determination of the adequacy of its allowance for credit losses and resulting level of provision charged against current period earnings. The Company's pricing of these financial instruments is based on the credit quality and other covenants or requirements. Management believes that the current fees assessed on these off-balance sheet items represent market rates which would be charged for similar agreements. Based on this belief, the Company feels that the carrying amounts are reasonable estimates of the fair value of these financial instruments. At December 31, 1997 and 1996, fair value represents management's estimate of the F-64 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 14 -- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) unamortized fee income associated with these instruments. The following is a summary of other financial instruments with off-balance sheet risk.
DECEMBER 31, -------------------------------------------------- 1997 1996 ------------------------ ------------------------ CONTRACTUAL FAIR CONTRACTUAL FAIR (DOLLARS IN THOUSANDS) AMOUNTS VALUE AMOUNTS VALUE - -------------------------------------------------------------- ------------- --------- ------------- --------- Commitments to extend credit.................................. $ 15,111,062 $ 7,476 $ 12,500,677 $ 6,185 Standby letters of credit..................................... 2,289,878 5,776 2,610,123 2,808 Other letters of credit....................................... 314,594 -- 336,101 --
The Company conducts securities lending transactions for institutional customers as a fully disclosed agent, and, at times, indemnifies its customers against counterparty default. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnification was $1,268 million and $1,170 million at December 31, 1997 and 1996, respectively. The market value of the associated collateral was $1,294 million and $1,195 million at December 31, 1997 and 1996, respectively. NOTE 15 -- RESTRICTIONS ON CASH AND DUE FROM BANKS, SECURITIES, LOANS AND DIVIDENDS Federal Reserve Board regulations require the Bank to maintain reserve balances based on the types and amounts of deposits received. Average reserve balances were approximately $339 million and $291 million for the years ended December 31, 1997 and 1996, respectively. As of December 31, 1997 and 1996, securities carried at $1.7 billion for each of the years, and loans of $2.7 billion and $1.8 billion, respectively, were pledged as collateral for borrowings, to secure public and trust department deposits, and for repurchase agreements as required by contract or law. The Federal Reserve Act restricts the extension of credit by the Bank to BTM and affiliates and to UnionBanCal Corporation and its non-bank subsidiaries and requires that such loans be secured by certain types of collateral. At December 31, 1997, such extensions of credit were not material. The payment of dividends by the Bank to UnionBanCal Corporation is subject to the approval of the Office of the Comptroller of the Currency (OCC) if the total of all dividends declared in any calendar year exceeds certain calculated amounts. The payment of dividends is also limited by minimum capital requirements imposed on national banks by the OCC. At December 31, 1997, the Bank could have declared dividends aggregating $170 million without prior regulatory approval. NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies, including minimum capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's Consolidated Financial Statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the F-65 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS (CONTINUED) Company's and Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and the Bank's prompt corrective action classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1997 and 1996, the most recent notification from the OCC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and the Bank's capital amounts and ratios are presented in the following tables.
FOR CAPITAL ACTUAL ADEQUACY PURPOSES ----------------------- -------------------------- (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------- ------------ --------- --------------- --------- CAPITAL RATIOS FOR THE COMPANY: As of December 31, 1997: Total capital (to risk-weighted assets)....................... $ 3,188,173 11.05% 3$2,308,988 38.0% Tier 1 capital (to risk-weighted assets)...................... 2,587,071 8.96 3 1,154,494 34.0 Tier 1 capital (to quarterly average assets)(1)............... 2,587,071 8.53 3 1,213,381 34.0 As of December 31, 1996: Total capital (to risk-weighted assets)....................... $ 2,946,654 11.17% 3$2,111,223 38.0% Tier 1 capital (to risk-weighted assets)...................... 2,395,580 9.08 3 1,055,612 34.0 Tier 1 capital (to quarterly average assets)(1)............... 2,395,580 8.41 3 1,139,855 34.0
- ------------ (1) Excludes intangible assets F-66 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 16 -- REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------------- ------------------------- ------------------------- (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - -------------------------------------- ------------ --------- -------------- --------- -------------- --------- CAPITAL RATIOS FOR THE BANK: As of December 31, 1997: Total capital (to risk-weighted assets)......... $ 3,025,030 10.58% 3$2,286,296 38.0% 3$2,857,870 310.0% Tier 1 capital (to risk-weighted assets)......... 2,527,468 8.84 3 1,143,148 34.0 3 1,714,722 3 6.0 Tier 1 capital (to quarterly average assets)(1)........................ 2,527,468 8.35 3 1,210,898 34.0 3 1,513,622 3 5.0 As of December 31, 1996: Total capital (to risk-weighted assets)......... $ 2,746,285 10.51% 3$2,090,910 38.0% 3$2,613,638 310.0% Tier 1 capital (to risk-weighted assets)......... 2,208,392 8.45 3 1,045,455 34.0 3 1,568,183 3 6.0 Tier 1 capital (to quarterly average assets)(1)........................ 2,208,392 7.76 3 1,138,211 34.0 3 1,422,764 3 5.0
- ------------ (1) Excludes intangible assets. NOTE 17 -- EARNINGS PER SHARE Basic EPS is computed by dividing net income after preferred dividends by the weighted average number of common shares outstanding during the period. Diluted EPS is computed based on the weighted average number of common shares outstanding adjusted for common stock equivalents, which include F-67 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 17 -- EARNINGS PER SHARE (CONTINUED) stock options. The following table presents a reconciliation of basic and diluted EPS for the years ended December 31, 1997, 1996 and 1995 in accordance with SFAS No. 128:
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- 1997 1996 1995 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE ---------------------- ---------------------- ---------------------- DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- Net Income.............................. $ 411,296 $ 411,296 $ 249,458 $ 249,458 $ 312,942 $ 312,942 Less: Preferred stock dividends............. (7,600) (7,600) (11,306) (11,306) (11,305) (11,305) ---------- ---------- ---------- ---------- ---------- ---------- Income available to common shareholders(1)....................... $ 403,696 $ 403,696 $ 238,152 $ 238,152 $ 301,637 $ 301,637 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding(1)........................ 58,228 58,228 58,130 58,130 57,935 57,935 Additional shares due to: Assumed conversion of dilutive stock options............................. -- 168 -- 131 -- 98 ---------- ---------- ---------- ---------- ---------- ---------- Adjusted weighted average common shares outstanding(1)........................ 58,228 58,396 58,130 58,261 57,935 58,033 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income per share(1)................. $ 6.93 $ 6.91 $ 4.10 $ 4.09 $ 5.21 $ 5.20 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- ------------ (1) Amounts restated to give retroactive effect to the exchange referred to in Note 1 of the accompanying notes to Consolidated Financial Statements. Options to purchase 92,400 shares of common stock at $55 per share were outstanding but not included in the computation of diluted EPS in 1996 because the options were anti-dilutive. F-68 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 18 -- COMPREHENSIVE INCOME The following is a summary of the components of accumulated other comprehensive income:
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------ ---------- ---------- ---------- Net unrealized gain (loss) on available for sale securities, net of reclassification adjustment: Beginning balance........................................................... $ 14,064 $ 24,900 $ (8,838) Net unrealized gain (loss) on available for sale securities during the year, before tax................................................................ 11,908 (13,409) 53,890 Income tax (expense) benefit................................................ (4,370) 5,297 (20,586) Less: reclassification adjustment for net realized (gain) loss on available for sale securities included in net income during the year, before tax.... (2,711) (4,502) 702 Plus: income tax expense (benefit).......................................... 995 1,778 (268) ---------- ---------- ---------- Net activity.................................................................. 5,822 (10,836) 33,738 ---------- ---------- ---------- Ending balance................................................................ 19,886 14,064 24,900 ---------- ---------- ---------- Foreign currency translation adjustments: Beginning balance........................................................... (3,183) (1,240) (1,092) Foreign currency translation adjustments during the year, before tax................................................................ (14,652) (3,212) (239) Income tax benefit.......................................................... 5,377 1,269 91 ---------- ---------- ---------- Net activity.................................................................. (9,275) (1,943) (148) ---------- ---------- ---------- Ending balance................................................................ (12,458) (3,183) (1,240) ---------- ---------- ---------- Other comprehensive income.................................................... $ (3,453) $ (12,779) $ 33,590 ---------- ---------- ---------- ---------- ---------- ---------- Accumulated other comprehensive income........................................ $ 7,428 $ 10,881 $ 23,660 ---------- ---------- ---------- ---------- ---------- ----------
NOTE 19 -- CONTINGENCIES The Company is subject to various pending and threatened legal actions which arise in the normal course of business. The Company maintains reserves for losses from legal actions which are both probable and estimable. In the opinion of management, the disposition of claims currently pending will not have a material adverse effect on the Company's financial position or results of operations. NOTE 20 -- TRANSACTIONS WITH AFFILIATES The Company has had, and expects to have in the future, banking transactions and other transactions in the ordinary course of business with BTM and with its affiliates and associates. During the years ended December 31, 1997, 1996 and 1995, such transactions included, but were not limited to, origination, participation, servicing and remarketing of loans and leases, purchase and sale of acceptances and interest rate derivatives, foreign exchange transactions, funds transfers, custodianships, electronic data processing, investment advice and management, deposits and credit examination, and trust services. In the opinion of management, such transactions were made at prevailing rates, terms and conditions and do not involve more than the normal risk of collectibility or present other unfavorable features. In addition, some compensation for services rendered to the Company is paid to the expatriate officers from BTM, and reimbursed by the Company to BTM under a services agreement. F-69 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS
DECEMBER 31, -------------------------- (DOLLARS IN THOUSANDS) 1997 1996 - -------------------------------------------------------------------------------------- ------------ ------------ ASSETS Cash and due from banks............................................................. $ 66,872 $ 103,742 Investment in and advances to subsidiaries(1)....................................... 2,879,898 2,503,706 Other assets........................................................................ 7,971 9,161 ------------ ------------ Total assets.................................................................. $ 2,954,741 $ 2,616,609 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Subordinated capital notes.......................................................... $ 250,000 $ 100,000 Other liabilities................................................................... 25,442 21,676 ------------ ------------ Total liabilities............................................................. 275,442 121,676 Shareholders' equity(1)............................................................. 2,679,299 2,494,933 ------------ ------------ Total liabilities and shareholders' equity.................................... $ 2,954,741 $ 2,616,609 ------------ ------------ ------------ ------------
- --------------- (1) Amounts restated to give retroactive effect to the exchange referred to in Note 1 of the accompanying notes to Consolidated Financial Statements. CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------------------------- ---------- ---------- ---------- INCOME: Dividends from bank subsidiary(1).......................................... $ 85,660 $ 271,879 $ 25,062 Dividends from nonbank subsidiaries........................................ -- 421 343 Interest income on advances to subsidiaries and deposits in bank........... 12,217 24,366 52,289 Other income............................................................... 1,040 959 -- ---------- ---------- ---------- Total income......................................................... 98,917 297,625 77,694 EXPENSE: Interest expense........................................................... 11,174 22,220 54,133 Other expense, net......................................................... 1,583 1,072 (212) ---------- ---------- ---------- Total expense........................................................ 12,757 23,292 53,921 ---------- ---------- ---------- Income before income taxes and equity in undistributed net income of subsidiaries................................................................ 86,160 274,333 23,773 Income tax expense (benefit)................................................. 204 889 (694) ---------- ---------- ---------- Income before equity in undistributed net income of subsidiaries............. 85,956 273,444 24,467 Equity in undistributed net income (loss) of subsidiaries: Bank subsidiary(1)(2)...................................................... 314,739 (34,111) 285,053 Nonbank subsidiaries....................................................... 10,601 10,125 3,422 ---------- ---------- ---------- NET INCOME................................................................... $ 411,296 $ 249,458 $ 312,942 ---------- ---------- ---------- ---------- ---------- ----------
- --------------- (1) Amounts restated to give retroactive effect to the exchange referred to in Note 1 of the accompanying notes to Consolidated Financial Statements. (2) In 1996 the amount represents dividends distributed by the Bank in excess of its 1996 net income. F-70 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 21 -- CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income(1)............................................................ $ 411,296 $ 249,458 $ 312,942 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed (earnings) losses of subsidiaries(1)............. (325,340) 23,986 (288,475) Other, net............................................................... 1,059 (3,772) 2,800 ----------- ----------- ----------- Net cash provided by operating activities.......................... 87,015 269,672 27,267 CASH FLOWS FROM INVESTING ACTIVITIES: Advances to subsidiaries................................................. (127,352) -- -- Repayment of advances to subsidiaries.................................... 76,104 70,000 70,000 Sales and maturities of securities....................................... -- 322 11,650 ----------- ----------- ----------- Net cash provided (used) by investing activities................... (51,248) 70,322 81,650 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in short term borrowings......................... -- (632,296) 366 Proceeds from reduction of investment in subsidiary equity............... -- 3,966 -- Proceeds from issuance of subordinated capital notes..................... 200,000 -- -- Repayments of subordinated capital notes and long term debt.............. (50,000) (70,000) (70,000) Redemption of preferred stock............................................ (135,000) -- -- Dividends paid(1)........................................................ (93,303) (183,869) (62,044) Other, net............................................................... 5,666 5,034 36,982 ----------- ----------- ----------- Net cash used by financing activities.............................. (72,637) (877,165) (94,696) ----------- ----------- ----------- Net increase (decrease) in cash and due from banks....................... (36,870) (537,171) 14,221 Cash and due from banks at beginning of year............................. 103,742 640,913 626,692 ----------- ----------- ----------- Cash and due from banks at end of year............................. $ 66,872 $ 103,742 $ 640,913 ----------- ----------- ----------- ----------- ----------- ----------- CASH PAID (RECEIVED) DURING THE YEAR FOR: Interest................................................................. $ 9,814 $ 25,785 $ 52,847 Income taxes............................................................. 1,148 (198) (2,030) SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Dividends declared but unpaid(1)......................................... $ 24,528 $ 20,383 $ 12,788
- --------------- (1) Amounts restated to give retroactive effect to the exchange referred to in Note 1 of the accompanying notes to Consolidated Financial Statements. F-71 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 22 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Certain amounts in the following unaudited quarterly financial information have been reclassified to conform with current presentation. In the opinion of management, all adjustments necessary to fairly present the results of operations have been made.
1997 QUARTERS ENDED ----------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 - ----------------------------------------------------------- ------------ ------------- --------- ------------- Interest income............................................ $ 523,530 $ 520,237 $ 504,663 $ 485,031 Interest expense........................................... 205,149 207,983 197,647 191,000 ------------ ------------- --------- ------------- Net interest income........................................ 318,381 312,254 307,016 294,031 Provision for credit losses................................ -- -- -- -- Noninterest income......................................... 120,374 116,820 111,021 114,786 Noninterest expense........................................ 282,457 253,317 255,753 253,138 ------------ ------------- --------- ------------- Income before income taxes................................. 156,298 175,757 162,284 155,679 Income tax expense......................................... 63,853 45,953 65,739 63,177 ------------ ------------- --------- ------------- Net income................................................. $ 92,445 $ 129,804 $ 96,545 $ 92,502 ------------ ------------- --------- ------------- ------------ ------------- --------- ------------- Net income applicable to common stock(1)................... $ 92,445 $ 127,857 $ 93,718 $ 89,676 ------------ ------------- --------- ------------- ------------ ------------- --------- ------------- Net income per common share -- basic(1).................... $ 1.59 $ 2.19 $ 1.61 $ 1.54 ------------ ------------- --------- ------------- ------------ ------------- --------- ------------- Net income per common share -- diluted(1).................. $ 1.58 $ 2.19 $ 1.61 $ 1.54 ------------ ------------- --------- ------------- ------------ ------------- --------- ------------- Dividends per common share(3).............................. $ 0.42 $ 0.42 $ 0.35 $ 0.35 ------------ ------------- --------- ------------- ------------ ------------- --------- -------------
1996 QUARTERS ENDED ----------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 - ----------------------------------------------------------- ------------ ------------- --------- ------------- Interest income............................................ $ 489,320 $ 481,315 $ 473,601 $ 483,068 Interest expense........................................... 196,236 189,727 185,362 187,401 ------------ ------------- --------- ------------- Net interest income........................................ 293,084 291,588 288,239 295,667 Provision for credit losses................................ 10,000 10,000 10,000 10,000 Noninterest income......................................... 102,972 107,280 105,550 102,874 Noninterest expense........................................ 285,021 284,075 313,784 252,024 ------------ ------------- --------- ------------- Income before income taxes................................. 101,035 104,793 70,005 136,517 Income tax expense......................................... 41,234 42,810 25,597 53,251 ------------ ------------- --------- ------------- Net income................................................. $ 59,801 $ 61,983 $ 44,408 $ 83,266 ------------ ------------- --------- ------------- ------------ ------------- --------- ------------- Net income applicable to common stock(1)................... $ 56,975 $ 59,156 $ 41,582 $ 80,440 ------------ ------------- --------- ------------- ------------ ------------- --------- ------------- Net income per common share -- basic(1).................... $ 0.98 $ 1.02 $ 0.72 $ 1.38 ------------ ------------- --------- ------------- ------------ ------------- --------- ------------- Net income per common share -- diluted(1).................. $ 0.98 $ 1.02 $ 0.71 $ 1.38 ------------ ------------- --------- ------------- ------------ ------------- --------- ------------- Dividends per common share(2)(3)........................... $ 0.35 $ 0.35 $ 0.35 $ 0.35 ------------ ------------- --------- ------------- ------------ ------------- --------- -------------
- --------------- (1) Amounts restated to give retroactive effect to the exchange referred to in Note 1 of the accompanying notes to Consolidated Financial Statements. (2) Amounts prior to merger are based on Union Bank only and do not include the dividend of $145 million paid to The Mitsubishi Bank, Limited in the first quarter of 1996 by BanCal Tri-State Corporation and The Bank of California, N.A. (3) Dividends per share for 1997 and 1996 are based on the Company's common stock outstanding as of the declaration date. F-72 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997, 1996 AND 1995 NOTE 23 -- SUBSEQUENT EVENT AND PRO FORMA INFORMATION On November 18, 1998, the Company's Board of Directors approved the declaration of a 3 for 1 stock split effective for shareholders of record on December 7, 1998. The following table presents a retroactive reconciliation of the pro forma basic and diluted EPS for the years ended December 31, 1997, 1996 and 1995 assuming that the stock split has occurred:
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- 1997 1996 1995 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE ---------------------- ---------------------- ---------------------- DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- Net Income.............................. $ 411,296 $ 411,296 $ 249,458 $ 249,458 $ 312,942 $ 312,942 Less: Preferred stock dividends............. (7,600) (7,600) (11,306) (11,306) (11,305) (11,305) ---------- ---------- ---------- ---------- ---------- ---------- Income available to common shareholders.......................... $ 403,696 $ 403,696 $ 238,152 $ 238,152 $ 301,637 $ 301,637 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma weighted average common shares outstanding........................... 174,683 174,683 174,391 174,391 173,806 173,806 Pro forma additional shares due to: Assumed conversion of dilutive stock options............................. -- 506 -- 393 -- 293 ---------- ---------- ---------- ---------- ---------- ---------- Pro forma adjusted weighted average common shares outstanding............. 174,683 175,189 174,391 174,784 173,806 174,099 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net income per share.......... $ 2.31 $ 2.30 $ 1.37 $ 1.36 $ 1.74 $ 1.73 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
F-73 UNIONBANCAL CORPORATION MANAGEMENT STATEMENT The management of UnionBanCal Corporation (the Company) is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in this annual report. The financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on informed judgments and estimates made by management. The Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. Management recognizes that even a highly effective internal control system has inherent risks, including the possibility of human error and the circumvention or overriding of controls, and that the effectiveness of an internal control system can change with circumstances. However, management believes that the internal control system provides reasonable assurance that errors or irregularities that could be material to the financial statements would be prevented or detected on a timely basis and corrected through the normal course of business. As of December 31, 1997, management believes that the internal controls are in place and operating effectively. The Audit and Examining Committee of the Board of Directors is comprised entirely of outside directors who are independent of the Company's management; it includes members with banking or related financial management expertise and who are not large customers of the Bank. The Audit and Examining Committee has access to outside counsel. The Audit and Examining Committee is responsible for recommending to the Board of Directors the selection of independent auditors. It meets periodically with management, the independent auditors, and the internal auditors to ensure that they are carrying out their responsibilities. The Audit and Examining Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing the Company's financial reports. The independent auditors and internal auditors have full and free access to the Audit and Examining Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters which they believe should be brought to the attention of the Audit and Examining Committee. The financial statements have been audited by Deloitte & Touche LLP, independent auditors, who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the Board of Directors and committees of the Board. Management believes that all representations made to the independent auditors during their audit were valid and appropriate. The independent auditors' report is presented on Page F-75. /s/ TAKAHIRO MORIGUCHI -------------------------------------- Takahiro Moriguchi President and Chief Executive Officer /s/ MINORU NODA -------------------------------------- Minoru Noda Deputy Chairman, Chief Financial Officer and Chief Credit Officer /s/ DAVID I. MATSON -------------------------------------- David I. Matson Executive Vice President and Director of Finance /s/ DAVID A. ANDERSON -------------------------------------- David A. Anderson Senior Vice President and Controller January 30, 1998 F-74 INDEPENDENT AUDITORS' REPORT To the Shareholders and Directors of UnionBanCal Corporation: We have audited the accompanying consolidated balance sheets of UnionBanCal Corporation and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements give retroactive effect to the merger of BanCal Tri-State Corporation and Union Bank on April 1, 1996, which has been accounted for as a pooling of interests as described in Note 1 to the consolidated financial statements. We did not audit the consolidated statements of income, changes in shareholders' equity, and cash flows of Union Bank and subsidiaries for the year ended December 31, 1995, which statements reflect total net interest income and net income of $832 million and $207 million, respectively. These statements were audited by other auditors whose report has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Union Bank for 1995, is based solely upon the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based upon our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of UnionBanCal Corporation and its subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. [SIG] Deloitte & Touche LLP San Francisco, California January 30, 1998 (November 18, 1998 as to the exchange of common shares referred to in Note 1, paragraphs 3 and 4, the adoption of SFAS No. 130, "Reporting Comprehensive Income", referred to in Notes 1 and 18, and the stock split referred to in Note 23.) F-75 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Union Bank: We have audited the consolidated statement of income of Union Bank, a California state chartered bank and a 71% owned subsidiary of The Bank of Tokyo, Ltd., and subsidiaries ("the Bank") and the related consolidated statements of shareholders' equity and cash flows for the year ended December 31, 1995 (not presented herein). These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows for the year ended December 31, 1995, of Union Bank and subsidiaries, in conformity with generally accepted accounting principles. [SIG] Arthur Andersen LLP San Francisco, California January 24, 1996 F-76 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Company 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 PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: November 18, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated below.
SIGNATURE TITLE - ------------------------------------------------------ --------------------------------------------------------- /s/RICHARD D. FARMAN ------------------------------------------- Director Richard D. Farman /s/STANLEY F. FARRAR ------------------------------------------- Director Stanley F. Farrar /s/HERMAN E. GALLEGOS ------------------------------------------- Director Herman E. Gallegos /s/JACK L. HANCOCK ------------------------------------------- Director Jack L. Hancock /s/RICHARD C. HARTNACK ------------------------------------------- Director Richard C. Hartnack /s/KAORU HAYAMA ------------------------------------------- Director Kaoru Hayama /s/HARRY W. LOW ------------------------------------------- Director Harry W. Low /s/MARY S. METZ ------------------------------------------- Director Mary S. Metz /s/RAYMOND E. MILES ------------------------------------------- Director Raymond E. Miles
II-1
SIGNATURE TITLE - ------------------------------------------------------ --------------------------------------------------------- /s/TAKAHIRO MORIGUCHI ------------------------------------------- Director Takahiro Moriguchi /s/J. FERNANDO NIEBLA ------------------------------------------- Director J. Fernando Niebla /s/SIDNEY R. PETERSEN ------------------------------------------- Director Sidney R. Petersen /s/CARL W. ROBERTSON ------------------------------------------- Director Carl W. Robertson /s/YOSHIHIKO SOMEYA ------------------------------------------- Director Yoshihiko Someya /s/HENRY T. SWIGERT ------------------------------------------- Director Henry T. Swigert /s/TSUNEO WAKAI ------------------------------------------- Director Tsuneo Wakai /s/ROBERT M. WALKER ------------------------------------------- Director Robert M. Walker /s/HIROSHI WATANABE ------------------------------------------- Director Hiroshi Watanabe ------------------------------------------- Director Blenda J. Wilson ------------------------------------------- Director Kenji Yoshizawa Dated: November 18, 1998
II-2 EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-3-3040 on Form S-3 and Registration Statement Nos. 33-3-3042, 33-3-3044 and 333-27987 on Form S-8 of UnionBanCal Corporation of our report dated January 30, 1998 (November 18, 1998 as to the exchange of common stock referred to in Note 1, paragraphs 3 and 4, the adoption of SFAS No. 130, "Reporting Comprehensive Income" referred to in Notes 1 and 18, and the stock split referred to in Note 23), appearing in this Annual Report on Form 10-K/A of UnionBanCal Corporation for the year ended December 31, 1997. [SIG] DELOITTE & TOUCHE LLP San Francisco, California November 19, 1998 EX-23.2 3 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 24, 1996 on the consolidated financial statements of Union Bank and subsidiaries for the year ended December 31, 1995 (not presented herein), included in the Annual Report on Form 10-K/A of UnionBanCal Corporation and subsidiaries, in the previously filed Form S-3 Registration Statement File No. 33-3-3040 and Form S-8 Registration Statement File Nos. 33-3-3042, 33-3-3044 and 33-3-27987. It should be noted that we have not audited any financial statements of Union Bank and subsidiaries subsequent to December 31, 1995 or performed any audit procedures subsequent to the date of our report. [SIG] ARTHUR ANDERSEN LLP San Francisco, California November 16, 1998 EX-27.1 4 EXHIBIT 27.1
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND ACCOMPANYING TABLES OF FORM 10-K, INFORMATION HEREIN IS QUALIFIED BY REFERENCE TO SUCH STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 2,541,699 633,421 24,335 394,313 2,538,386 188,775 193,115 22,741,408 451,692 30,585,265 23,296,374 2,827,770 709,784 298,699 0 0 291,529 2,387,770 30,585,265 1,763,277 167,440 102,744 2,033,461 595,981 801,779 1,231,682 0 2,711 1,044,665 650,018 411,296 0 0 411,296 6.93 6.91 4.70 109,338 19,992 0 0 523,946 122,779 51,014 451,692 240,573 39,313 171,806
EX-27.2 5 EXHIBIT 27.2
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND THE ACCOMPANYING TABLES OF FORM 10-Q, INFORMATION HEREIN IS QUALIFIED BY REFERENCE TO SUCH STATEMENTS. 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 2,172,478 2,340,247 2,086,873 681,308 919,040 1,064,858 650,790 262,700 762,978 496,556 402,842 496,254 2,244,233 2,531,733 2,625,490 259,430 247,809 232,388 262,568 252,188 237,102 21,246,054 22,129,118 22,297,724 522,835 502,114 478,454 29,423,537 30,171,952 30,982,479 22,043,925 22,352,919 22,974,188 3,118,363 3,482,736 3,867,721 560,909 597,648 638,935 198,000 398,718 148,708 0 0 0 135,000 135,000 0 290,801 291,283 291,414 2,128,475 2,213,574 2,323,913 29,423,537 30,171,952 30,982,479 422,518 861,497 1,311,337 38,047 78,849 123,075 24,466 49,348 75,519 485,031 989,694 1,509,931 144,314 289,208 441,855 191,000 388,647 596,630 294,031 601,047 913,301 0 0 0 471 552 2,098 253,138 508,891 762,208 155,679 317,963 493,720 92,502 189,047 318,851 0 0 0 0 0 0 92,502 189,047 318,851 1.54 3.15 5.35 1.54 3.15 5.33 4.69 4.72 4.70 136,667 146,140 109,758 46,059 27,352 25,582 0 0 0 0 0 0 523,946 523,946 523,946 20,571 49,043 86,585 19,460 27,245 41,219 522,835 502,114 478,454 283,059 273,404 275,335 9,429 9,390 8,866 230,347 219,320 194,253
EX-27.3 6 EXHIBIT 27.3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND THE ACCOMPANYING TABLES OF FORMS 10-K AND 10-Q. INFORMATION HEREIN IS QUALIFIED BY REFERENCE TO SUCH STATEMENTS. 1,000 YEAR 3-MOS 6-MOS 9-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 2,268,771 1,936,184 1,951,582 2,359,879 1,131,216 696,867 914,087 831,710 537,710 1,475,558 488,240 471,641 465,782 409,634 544,551 452,613 2,164,197 2,010,992 1,917,089 2,007,074 268,196 295,019 309,712 283,566 274,405 304,891 314,203 289,029 21,049,787 20,341,335 20,480,678 20,946,765 523,946 547,401 545,345 535,087 29,234,059 28,167,638 28,114,916 28,679,646 21,532,960 20,142,698 19,965,508 20,909,390 3,751,539 4,197,830 3,838,400 3,573,451 478,249 934,801 1,403,621 1,327,586 198,000 495,369 495,369 415,000 0 0 0 0 135,000 135,000 135,000 135,000 290,462 290,625 290,738 290,742 2,069,171 1,971,315 1,986,280 2,028,477 29,234,059 28,167,638 28,114,916 28,679,646 1,687,977 419,805 832,796 1,252,902 143,412 35,480 70,209 106,641 95,915 27,783 53,664 78,441 1,927,304 483,068 956,669 1,437,984 531,567 126,340 251,074 385,681 758,726 187,401 372,763 562,490 1,168,578 295,667 583,906 875,494 40,000 10,000 20,000 30,000 4,502 616 3,237 3,865 1,134,904 252,024 565,808 849,883 412,350 136,517 206,522 311,315 249,458 136,517 206,522 311,315 0 0 0 0 0 0 0 0 249,458 83,266 127,674 189,657 4.10 1.38 2.10 3.12 4.09 1.38 2.09 3.11 4.75 4.91 4.84 4.76 128,267 191,816 191,494 147,775 23,692 28,415 16,082 42,699 0 0 0 0 0 0 0 0 555,149 555,149 555,149 555,149 119,227 30,574 53,417 83,057 48,024 12,826 23,613 32,995 523,946 547,401 545,345 535,087 269,400 273,584 265,271 259,462 9,394 13,372 14,083 14,154 245,152 260,445 265,991 261,471
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